Token banking

UK takes needless risk with Lloyds retail sale

The planned retail offer of Lloyds Banking Group is a needless piece of ideological politics. UK Chancellor George Osborne on October 5 said he would sell shares in the UK lender to the British public by next spring. It could backfire, both practically and politically.

The £2 billion ($3 billion) minimum that the UK Treasury plans to offload looks like a token sum - bankers had expected at least double that amount. Based on Lloyds' current share price and the five per cent discount that would be offered to retail punters, it represents about three per cent of the bank's outstanding value. The recent Royal Mail flotation saw retail investors receive almost 20 per cent.

The more modest Lloyds' offer may owe something to the government being able to slash its stake by repeatedly selling small slugs to institutional investors over the past 10 months: it now holds just under 12 per cent, down from 24.9 per cent at the end of last year. UK citizens would have been better off if the government had simply followed this institutional sale process through to its natural conclusion. Bookrunner Morgan Stanley is offering shares to fund managers on a volume-weighted basis, effectively guaranteeing the stock is sold at around the market price.

A retail offer presents several political pitfalls. As the shares are sold at a discount, there is a zero-sum game. If Lloyds' shares rise sharply following the offering - as was the case with Royal Mail - those that subscribe will gain at the expense of more cautious or less financially savvy members of the public. If markets are fickle, retail investors will curse the government and could claim the bonus share awarded for every 10 held for a year or more was a deceptive marketing ploy. And there is a far greater chance of market disruption given that retail offerings can take weeks to complete.

Osborne says he wants to create a "share-owning democracy". It's a nice sound bite. But if the Lloyds sale flops, it is just as likely to turn away a younger generation of investor-voters.