Lloyds Banking Group said yesterday that it may increase its capital-raising by £1.5 billion to £22.5 billion because of a clamour by investors to take up its offer to swap debt into equity.

Shares in the beleaguered banking group rose 5 per cent to 89¼p on the latest positive signal from the bank.

Investors are flocking to take up Lloyds’ offer to convert their tier 1 and tier 2 debt into new “contingent capital” because it will guarantee them an income of possibly 10 per cent or more in an annual coupon.

Lloyds and other banks that have received state aid have been banned by the European Commission from paying coupons to certain debtholders.

However, investors have to believe that Lloyds’ business is improving to be enticed by the offer, because it will mean converting their stake into equity that would be wiped out first if Lloyds got into trouble.

Analysts estimate that Lloyds will have to pay between £100 million and £300 million extra a year to pay the coupon on the new contingent capital.

Lloyds, 43 per cent of which is owned by the taxpayer, last week unveiled the details of its capital-raising, which it has been allowed by regulators to do instead of using the Government’s insurance scheme for toxic assets.

At the time, the bank said that it would raise £13.5 billion through a rights issue and £7.5 billion by swapping debt into contingent capital, which converts into ordinary lossabsorbing equity if Lloyds’ core tier 1 ratio falls below 5 per cent.

Lloyds started to market the contingent capital first and said yesterday that it had experienced “high levels of investor interest” in the instruments.

As a result, it may increase the contingent capital-raising from £7.5 billion to £9 billion.

With the rights issue staying at £13.5 billion, that would bring Lloyds’ total capital-raising to £22.5 billion.

In a complex move, Lloyds’ offer to holders of tier 1 and tier 2 debt involves 52 new instruments. Joseph Dickerson, an analyst at Execution, said: “This is incrementally positive as it shows the capital base is improving. This should be received positively in the debt and equity markets.”

Lloyds is still targeting £13.5 billion through a conventional rights issue because it needs to raise its straight equity in order to boost its core tier 1 ratio. The rights issue will be priced on November 24.

Hopes are rising in Government circles that UK Financial Investments, which manages the taxpayer-owned stakes in banks, soon will be able to think seriously about selling part of its stake in Lloyds to the private sector.

Any sale would be in tranches and would have to be at more than 122.6p for the Treasury to make a profit on its stake.

Separately, a report on the banking industry will say today that it could take up to seven years for governments around the world to fully exit the stakes that they have taken in financial firms to avert systemic collapse.

The report, by PricewaterhouseCoopers (PwC), the accountancy, will say that it will take about three years for governments to sell the majority of their stakes and longer to completely exit the banks.

One big challenge is that governments will need to assure investors that they are not at serious risk of more problems emerging, PwC will say.

This may require authorities to provide new guarantees or to orchestrate the hiving-off of toxic assets into separate vehicles, according to the report.

Jeremy Scott, chairman of PwC’s global financial services, said: “To return banks to the private sector they have got to be cleansed so that investors can be confident they will not be shocked or surprised.”

PwC will also argue that states will have to come up with credible plans to cut their deficits as part of their drive to restore the financial sector to health.

Sales-pay link condemned

Unite, the union, has warned that bank workers are struggling to meet unachievable sales targets, many of which have not changed since before the credit crunch and part-nationalisation of the banks.

Unite accused banks yesterday of putting pressure on employees to promote financial products, often to those who can ill-afford them.

The union will announce a campaign today to end the link between sales and staff pay in the financial services industry.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive