3rd Jun 2015 09:58
LONDON (Alliance News) - Lloyds Banking Group PLC Wednesday said it is seeking to appeal a court decision that it is unable to refinance costly securities issued in the financial crisis.
Failure to successfully appeal the court's ruling would mean the bank would lose out on a benefit of about GBP200 million a year over the next five years.
Nevertheless, the group said it is confident that its net interest margin, a key drive of profitability, will exceed about 2.55% in 2015, as guided in May.
According to Lloyds, the Chancery Division of the High Court found that a so-called capital disqualification event has not taken place.
Earlier this year, the bank had received permission from Bank of England regulators to redeem some of the enhanced capital notes issued to provide it with an important source of capital during the financial crisis.
About GBP3.3 billion of the notes were left outstanding after GBP5.0 billion of the notes originally issued in 2009 and 2010 were exchanged into additional tier 1 securities and cash in March and April 2014. The GBP8.3 billion of enhanced capital notes were issued in 2009, when the banking group also required a GBP20 billion bailout from the UK government in the wake of its acquisition of HBOS.
The outstanding notes carry rates of interest as high as 16%.
The enhanced capital notes were not taken into account under a stress test undertaken by the Bank of England's Prudential Regulation Authority in 2014, which the group believes was a capital disqualification event.
However, Lloyds said the court judgement concluded that the enhanced capital notes "may still be taken into account for future stress tests", meaning that a capital disqualification event is yet to take place.
Lloyds said the enhanced capital notes were "originally structured with a conversion trigger in excess of the then minimum regulatory requirements". However, changes to what is classified as core capital means that the conversion trigger for the notes is now equivalent to about 1% common equity tier one capital, according to Lloyds, far below regulatory thresholds.
"In his judgement, the Judge agreed with the group's view that it is correct to interpret the definition of core capital for the purposes of the CDE (capital disqualification event) clause based on current regulatory standard. However, the judge concluded that despite the fact that the ECNs were not taken into account for the most recent stress test applied by the PRA, the ECNs may still be taken into account for future stress tests and therefore a CDE had not yet occurred," Lloyds said.
"The group is disappointed with the decision and has sought permission to appeal to the Court of Appeal," Lloyds said in a statement.
Lloyds shares were down 0.4% at 88.28 pence on Wednesday.
By Samuel Agini; [email protected]; @samuelagini
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