Lloyds rights issue looks distinctly unattractive

Lloyds rights issue looks distinctly unattractive

If you're one of Lloyds/Halifax's three million shareholders, you probably received a weighty rights issue document this week. It boils down to this: "You got some Halifax shares when it floated. Now we at Lloyds want you to cough up a couple of hundred quid (we won't tell you the exact sum till later) to keep us afloat and avoid the hideously expensive government protection scheme."

So, should you pay up? The bankruptcy risk that hung over the sector has all but evaporated. Armageddon has gone away. Shares in Lloyds are up 180% since March. On Tuesday, the EU told the bank that in return for state aid, it must sell off C&G and Intelligent Finance. But when it became clear that it could hold on to Halifax's profitable mortgage business, shares in Lloyds motored upwards again.

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The capital raising is massive – a total of £21bn, compared with Lloyds's total market value of £24bn. The City likes it. Lloyds has achieved the extraordinary trick of getting the government (as shareholder) to agree to the rights issue (thereby picking up a further £5.7bn from taxpayers), and using this cash to avoid having to pay the government huge premiums to take part in the asset protection scheme. Big institutional shareholders are understood to be backing the rights issue – which says a lot about how much more forgiving markets are about the banks – and Lloyds will have its money by Christmas.

All this suggests you should join in, too. But let's look at the case against.

Lloyds is banned from paying dividends until 2012. It is still struggling with huge bad debts, many inherited from its ill-fated merger with HBOS. The businesses that will be sold off to meet EU demands earn about £500m a year in profits, and cash-rich buyers (Tesco's not interested) aren't exactly thick on the ground.

In the longer term, we will have a shrunken financial services sector, earning shrunken levels of profit. Right now, Lloyds is far from competitive in mortgages and savings rates, compared with better-capitalised banks such as HSBC, Santander and even Barclays. The banks are being progressively stripped of their ability to sell over-priced but hugely profitable junk (eg PPI) or gouge current account holders with hefty fees. When interest rates rise, as they must, mortgage arrears will soar. Small investors decided last year's HBOS rights issue was throwing good money after bad. They will probably be right to take the same view this time around.

An equitable figurehead

In recruiting Honor Blackman as a Joanna Lumley-esque figurehead, the Equitable Members Action Group has chosen well. With-profits annuitants such as Blackman, who had no choice but to stay with Equitable, have suffered more than any other category of policyholder. The others were given a choice in 2000 to get out with a 10% cut in policy values. Those that didn't take it want compensation galore instead. Are they really that deserving of taxpayer money?

p.collinson@ guardian.co.uk

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