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Analysts say Lloyds could still exit APS

LLOYDS Banking Group could avoid the government&rsquo;s Asset Protection Scheme (APS) altogether if it can raise &pound;16bn via a rights issue, analysts from stockbroker Execution said yesterday.<br /><br />The APS is a &ldquo;sub-optimal way to recapitalise the sector&rdquo;, analysts led by Joseph Dickerson said, adding that rights issue would lower the bank&rsquo;s wholesale funding costs.<br /><br />&ldquo;Our analysis suggests banks with substantial government ownership have a higher cost of capital than those that do not,&rdquo; the analysts said in a note.<br />&ldquo;Lloyds has an opportunity to change this by not participating... at all.&rdquo;<br /><br />The note said &pound;15bn in new capital, including a &pound;1bn termination fee to cancel use of the APS with the Treasury, was not only &ldquo;achievable&rdquo;, but would see Lloyds sufficiently well capitalised to operate independently.<br /><br />The analysts added that the APS made &ldquo;little sense&rdquo;, because it did not incentivise banks to minimise losses and would saddle the Treasury with a &pound;575bn liability.<br /><br />Sources close to the Lloyds board, led by chief executive Eric Daniels, have told City A.M. that the bank has secured sufficient appetite from institutional investors for a significant share placing.<br /><br />Lloyds&rsquo; current agreement would see it insure &pound;260bn worth of risky assets in return for &pound;15.6bn in non-voting &lsquo;B&rsquo; shares that would take the government&rsquo;s stake in the bank to more than 60 per cent.