Lloyds Banking Group shares tumble 31pc on nationalisation fears

Shares in Lloyds Banking Group, the owner of Lloyds TSB and Halifax, fell by almost a third yesterday amid fears that it could be nationalised.

More than £9bn has been wiped off the value of the newly-created banking giant since shares in the bank – created from Lloyds TSB’s rescue takeover of HBOS – listed on the stock market on Monday.

Shares closed down 20.2p at 44.8p putting a value of £7.3bn on the group last night.

Barclays fell 17pc to 72.9p and Royal Bank of Scotland, which fell 67pc on Monday, lost another 11pc, closing at 10.3p yesterday after another tumultuous day.

Lloyds was battered after analysts at Merrill Lynch estimated the bank required £10bn of extra capital, saying its core tier 1 ratio, a key measure of its financial strength, could be just 6.2pc at the end of 2008, “which is not enough of a cushion to withstand the coming wave of bad debts”, according to the note.

Ratings agency Standard & Poor’s warned that, because of the erosion of confidence in banks, the Government’s latest rescue package may not be enough. “Full nationalisation of some banks remains a possibility,” S&P said.

Yesterday large shareholders attacked the Financial Services Authority for lifting the ban on short selling of financial shares on Friday and pointed out falls in banking stocks were on very thin trading, suggesting the turmoil would not cause a repeat of the stock market bloodbath of September and October, which prompted the first emergency bailout.

However, Lloyds’ shareholders also expressed anger over the HBOS takeover. One said: “We said at the time this was a pointlessly risky deal and so it has proved”. Another accused Eric Daniels, Lloyds’ chief executive, of “hubris”.

Lloyds rejected an offer from the Government to swap £4bn in preference shares for ordinary equity, as it would increase state ownership of the bank from 43pc to over 50pc. Lloyds said yesterday it wanted to repay the preference shares, which will allow it to start paying dividends again next year.

Lloyds also said its capital position was “robust”. It attempted to scotch rumours that part of the Government’s urgency to hammer out its second bailout of the banks was because of new heavy losses at HBOS, saying there had been “no significant change” from a trading statement in December.

Banks were also seeking clarification of the cost of the Government’s latest rescue, including the fees for insuring banks’ toxic debt and for swapping new mortgages for tradeable Government securities. A source said it was “disappointing” the Government did not reduce the cost of the guarantee on banks’ debt, as equivalent schemes in other countries are cheaper.

Meanwhile, the Dutch foreign minister said the government may buy back parts of ABN Amro which were bought by RBS, largely reversing the controverisal break-up of the bank.

In the wake of Royal Bank’s record £28bn slump into the red revealed on Monday Moody’s Investors Service yesterday cut its ratings on the bank by two notches and flagged a further downgrade because exposure to bad loans and weak commercial property was likely to trigger further losses.