Update: Lloyds at odds with FSA over APS

Improving economic conditions have prompted part-nationalised bank Lloyds Banking Group to renegotiate its possible participation in the government asset protection scheme (APS).The company issued a statement in response to intense media speculation about its participation in the scheme, with reports suggesting that the bank’s hopes of completely withdrawing from the government's toxic debt insurance scheme have been thwarted by tougher than expected conditions imposed by the Financial Services Authority (FSA).Lloyds said Friday that after examining the results of its loan portfolios and their expected performance it is in talks with the Treasury about possible changes to the commercial terms on which Lloyds might enter into the APS from those announced in March 2009.Lloyds said in March that it would give the government £15.6bn in B shares in return for insuring £260bn worth of toxic loans, opening up the possibility of the government’s 43% stake rising above 60% should the government convert the B shares into ordinary shares.Management at Lloyds is thought to be keen to get the government off the share register as swiftly as possible and Friday’s statement confirmed that the group is also mulling possible alternatives to participation in the APS. These options are being discussed with HM Treasury, UK Financial Investments and the Financial Services Authority.According to press reports Lloyds had submitted to the FSA proposals to raise £15bn through a rights issue, but its proposals failed to meet a series of stress tests run by the regulator.The FSA reportedly believes Lloyds will need more than £20bn in fresh capital to comfortably cover bad debts.If true, that does not necessarily preclude a reduced involvement in GAPS by Lloyds. A reduction in state aid for Lloyds would go down well with the European Commission, which reportedly is poised to undermine the business logic of Lloyds’ controversial takeover of massively indebted rival HBOS by ordering it to sell off the Halifax business as the price for receiving billions of pounds in state aid.Halifax, the former building society, has long been a major player in the UK mortgage market and one of the few redeeming features of the Lloyds-HBOS merger in the view of many long-suffering Lloyds shareholders is the prospect of the merged entity benefiting from clear leadership in the UK mortgage lending market when the housing market picks up.Many investors bought Lloyds’ shares as an income stock, since when Lloyds has come cap in hand asking for shareholders to stump up money to shore its balance sheet. Another massive rights issue might test the patience of institutional investors but could yet be necessary to boost the company’s chances of keeping Halifax in the fold.