European Union Competition regulator Wednesday announced the approval of the restructuring plan of Lloyds Banking Group Plc (LYG), and the approval of the restructuring plan and an illiquid asset back-up facility of Dutch-based financial institution ING (ING) under EC Treaty state aid rules. The European Commission also approved an asset relief and restructuring package for the Belgian KBC Group.
The Lloyds Banking Group was formed following the acquisition of HBOS by Lloyds TSB in January 2009. In 2008, HBOS was close to bankruptcy as a result of risky lending practices and high dependence on wholesale funding. The UK Government facilitated the takeover of HBOS by Lloyds TSB. Under a package of financial support measures approved by the Commission on October 13, 2008, the Lloyds Banking Group received a state recapitalization of GBP 17 billion or about EUR 19 billion, that provide the UK State 43.5% ownership of Lloyds Banking Group.
The approval of the recapitalization was conditional upon the submission of a restructuring plan. The bank submitted the plan to the Commission on July 16, 2009 and contained additional state aid measures.
According to the Commission, having assessed the past and new aid on the basis of the notified plan, and in view of amendments agreed by the UK authorities, the Commission is satisfied that it is in line with its restructuring communication and compatible with EU rules on state aid.
As per Lloyds' plan, it will pay a significant proportion of the restructuring costs, ensure a sustainable future for the bank without continued state support, and there will not be undue distortions of competition.
Commenting on Lloyds' plan, Competition Commissioner Neelie Kroes said, "This plan effectively addresses the Commission's competition concerns and at the same time ensures the return of Lloyds Banking Group to long term viability."
The Commission also said that it found the plan ensures a fair burden sharing of past losses. The bank and its capital providers make a significant contribution to the financing of the restructuring costs. Further, the plan contains a divestment package for Lloyds' UK retail banking. The divested entity, with a network of at least 600 branches, will have a 4.6% market share in the personal current account market.
In addition, the Commission said that the exit fee which will be paid by Lloyds Banking Group for not participating in the Asset Protection Scheme is sufficiently high to compensate for the advantage the bank gained from its announced participation of March 7, 2009.
Announcing the approval of ING's restructuring plan and the illiquid asset back-up facility provided by the Dutch State, the Commission said that it is satisfied with the proposed measures and they are appropriate and proportional to offset the distortions of competition brought about by the aid. The Commission also said that the approval of the facility has become possible after an additional agreement between the Dutch State and ING.
On the basis of the restructuring plan, ING will pay a significant proportion of the restructuring costs, ING's long term commercial viability will be restored, and the aid will not lead to undue distortions of competition. ING, one of the biggest financial institutions in the world, will reduce the risk profile and complexity of its operations and will sell its insurance activities over time. The company will also carve out a business unit, Westland Utrecht Hypotheekbank, or WUH / Interadvies, to step up competition in the Dutch retail banking market, the Commission noted.
ING, which offers banking, insurance and asset management services to over 85 million clients in more than 40 countries, received a capital injection of EUR 10 billion from the Dutch State on October 22, 2008. ING also received EUR 12 billion of liquidity guarantees under the Dutch liquidity guarantee scheme, approved by the Commission in October 2008. In addition, on January 26, 2009, the Dutch Government provided ING with an illiquid asset back-up facility covering 80% of a portfolio of $39 billion.
According to the Commission, the Dutch authorities have made a series of commitments to bring the conditions of the measure in line with the Commission guidelines. The Netherlands has made the commitment to increase the remuneration in relation to the transaction to be paid by ING by EUR 1.3 billion via an additional payment. The Netherlands also committed to temporarily ban ING from acquiring other firms and from exercising price leadership. Further, ING will need formal Commission approval for repaying hybrid and subordinated debt capital instruments. These commitments will stay in place during a 3-year period or until the full amount of the capital injection is repaid to the Dutch State, whatever is shorter.
Approving banking and insurance group KBC's asset relief and restructuring package, the Commission said that the package foresees structural and financial restructuring through the divestment, run-down and listing of various businesses. KBC will pay a significant proportion of the restructuring costs, restore the long-term commercial viability of KBC, and tackle the distortions of competition that result from the state aid.
KBC received three aid measures, a recapitalization of EUR 3.5 billion, a second recapitalization of another EUR 3.5 billion and an asset relief measure on a portfolio containing Collateralized Debt Obligations, or CDOs. The Commission temporarily approved the first recapitalization on December 18, 2008 and the other two measures on June 30, 2009.
The Commission, after an in-depth investigation, concluded that the asset relief measure launched on June 30, 2009 is in line with state aid rules and no doubts remain concerning the valuation and remuneration of the measure.
According to the Commission, the Belgian authorities submitted the restructuring plan for KBC on September 30, 2009. Under the plan, KBC will divest or run-down a significant number of businesses, including in Central and Eastern Europe, particularly those that are not fully in line with its core business model. The company will also divest a banking business, Centea and an insurance business, Fidea in Belgium, which will stimulate competition in the core market. The restructuring plan also sets out how KBC will repay the two capital injections to the Belgian authorities, the Commission noted.
Further, the Commission said that based on its in-depth investigation, the valuation of the CDO portfolio is in line with the Commission's Impaired Asset Communication. In addition, the remuneration paid by KBC to the Belgian authorities is above that required.
LYG is trading at $6.0401, down $0.1099, on a volume of 232,597 shares.
ING is trading at $14.41, down $0.16, on a volume of 755,900 shares.
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