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Treasury may allow Lloyds exit from APS

THE Treasury would consider allowing Lloyds Banking Group to exit the asset protection scheme (APS) if the bank can prove its ability to launch a successful rights issue.<br /><br />Lloyds is still in negotiations with the government over the terms of the APS, despite having agreed in principle to insure &pound;260bn worth of assets at a cost of &pound;15.6bn in B shares, converting at 115p.<br /><br />But chief executive Eric Daniels is keen that the government&rsquo;s stake does not rise above 50 per cent, while analysts estimate that a &pound;15bn capital-raising exercise would give the bank the capital strength it needs to avoid further government support.<br /><br />A well-placed source said yesterday that the option was gaining traction among Treasury officials.<br /><br />But it is understood that while the Treasury backs the idea in principle, it remains sceptical that the bank could pull off such a grand plan.<br /><br />&ldquo;The government doesn&rsquo;t want to insure assets if it doesn&rsquo;t have to. Any solution that achieves financial stability for Lloyds would be satisfactory,&rdquo; said the source.<br /><br />One major shareholder said that exiting the APS was being considered in the Lloyds boardroom, but warned that an independent capital-raising exercise would be risky.<br /><br />&ldquo;It&rsquo;s right that they&rsquo;re exploring all the options, but if we were to get a double-dip recession, Lloyds would be left paddling its own canoe with no insurance at all, threatening not just the bank but also UK financial stability,&rdquo; he said.<br /><br />Another investor said: &ldquo;I think it would be quite surprising if there is that much appetite for Lloyds&rsquo; stock. I really can&rsquo;t see how they could engineer this at all.&rdquo;<br /><br />Lloyds reported last week that impairments had peaked at &pound;13.4bn for the half year, with &pound;10bn of those assets destined for the APS. The improved outlook suggests that it may not need to use the scheme.