International News

By Matt Scuffham

LONDON (Reuters) - Shares in state-backed Lloyds Banking Group rose above the level which the government sees as its break-even price after its 20.5 billion pound rescue of the bank, raising hopes of a sale this year.

Lloyds shares, the top performer in the FTSE-100 last year, rose 2.5 percent to reach 62.5 pence at 13:00 p.m. on Friday, their highest for over two years and passing the 61.2 pence break-even price.

Although the government has not yet set a timetable for a sale, industry sources and analysts have said it wants to start selling when the shares are trading consistently above 61.2 pence a share.

Mike van Dulken, head of research at Accendo Markets, said the government faced a dilemma over whether to hold off on a sale and allow the shares to maintain their current momentum without the drag that selling off a significant portion of them would create in the market.

"It's a big trade off between returning the shares to the markets as quickly as possible (well before the 2015 election anyway), and taking the opportunity to make up for some of the costs taxpayers incurred via forced bailouts," he said.

One source with knowledge of government thinking said it would want the shares to be firmly established at a level comfortably over break-even before it thought about selling.

Britain's finance ministry declined to comment on Friday.

Any sale would be handled by UK Financial Investments (UKFI), which manages the government's shares in Lloyds and Royal Bank of Scotland.

UKFI has a number of options for offloading the shares, which it is likely to sell in small portions. A placing with institutions would not require a prospectus to be written and could be completed quickly. However, if the government wanted to sell some of the shares to members of the public, it would need to create a full prospectus, which would take one or two months to complete, UKFI has said in the past.

It could also look at a structured transaction in which shares are sold at a future date at a predetermined premium to the current share price.

Prime Minister David Cameron is keen to show that Britain's part-nationalised banks are recovering from the financial crisis and a sale of the 39 percent stake in Lloyds, at a profit, would allow him to claim at least partial success.

Shares in Lloyds have risen by 124 percent over the past year, outperforming a 25 percent increase in the FTSE 100, making it the best performing stock in the blue chip index. The bank is now valued at $66 billion, making it the sixth-biggest bank in Europe.

Lloyds Chief Executive Antonio Horta-Osorio told investors at the bank's annual meeting on Thursday that it expected to return to profit this year for the first time since 2010.

Britain pumped a combined 66 billion pounds into RBS and Lloyds to keep them afloat during the financial crisis. Since then, both banks have undertaken massive restructurings under new management and, bowing to pressure from lawmakers, focused on lending to UK households and businesses.

Selling Lloyds shares would be more straightforward for the government than offloading its stake in RBS, which would require selling at a loss or giving the shares away to taxpayers.

Cameron said this week he was 'open to ideas' over the disposal of the RBS shares. Britain is sitting on a loss of 9.2 billion pounds from its investment in the bank.

(Additional reporting by Steve Slater and William James; Editing by Elaine Hardcastle and Helen Massy-Beresford)