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BAILED-OUT BANKS TO HALT DIVIDENDS

Both Halifax and RBS are among those forced to scrap billions in annual dividend payouts

Tuesday October 14,2008

By Andrew Johnson

ROYAL Bank of Scotland, Lloyds TSB and HBOS have all been forced to scrap billions in annual dividend payouts for years to come following their bail-out by the Government.

Shares in the banks tumbled sharply as investors dumped the stock after learning dividends would be blocked until the three repaid the £9billion the Treasury is investing in return for preference shares.

RBS and HBOS also suffered when they warned profits would be hit by rising bad debts as the economy slowed.

RBS’s new boss Stephen Hester is expected to embark on a radical restructuring, aimed at creating a smaller but safer bank.

Lloyds shares fell 27.5p to 162p, while RBS’s dropped 6p to 65.75p.

RBS, Lloyds and HBOS paid more than £7billion in dividends last year.

They will now be paying the Government £1.08billion a year in return for its 12 per cent investment. Analysts warned the Government might have “cut off its nose to spite its face”.

The lack of dividends makes it much less likely investors will buy the £28billion in new shares being issued by the banks, meaning the Government will have to buy them instead.

And the Treasury will miss out on the taxes the shares generate.

Jeremy Batstone-Carr of broker Charles Stanley warned it was probable the Treasury would have to pump billions more into the banks as the recession deepened, despite yesterday’s injections being based on a worst-case scenario.

RBS raised the prospect of widespread job losses in its investment-banking divisions. It said it would seek to go back to basics and focus on core businesses, such as UK banking and traditional investment services, including risk management and financing.

The bank will embark on a series of disposals. Hester said there were “no sacred cows” when asked if its U.S. business could be sold.

He still expects to sell Direct Line and Churchill insurance. He said the bank would still be a “strong international bank” but would hold less risk.

Hester denied that Government demands for the bank to finance mortgage borrowing and small business lending at 2007 levels would leave it “hobbled”.

Outgoing chief executive Sir Fred Goodwin said he was sad to be going.

He said the only plans he had for the future were for a “long rest”.