UPDATE:Lloyds In Advance Talks To Avoid APS; EU Talks Ongoing

Lloyds Banking Group PLC (LYG) acknowledged Thursday that it is in advance talks with the U.K. government on plans to escape an expensive asset-protection scheme, and it said any remedies imposed by the European Commission won't be material to the bank.

"Based on the discussions to date, (Lloyds) is confident that the final terms of its [Commission-mandated] restructuring plan, including any required divestments of assets, will not have a material impact on the group," the bank said.

Analysts said Lloyds' Commission comments provide a big relief to the market, which was expecting massive changes to the bank's operations in line with those announced by Dutch peer ING Groep N.V. (ING).

Like with ING, Lloyds is being pressured to cut market share in areas it is dominant for competitive reasons, in exchange for state aid it received last year. The U.K. bank is 43% owned by the government.

ING was forced to sell major parts of its business to meet competition requirements.

"This basically means Lloyds structure will remain intact. They will have to cut market share in some areas, but the changes won't be anything like ING is facing," said Irfan Younus, a bank analyst at NCB Stockbrokers.

In its first statement after weeks of speculation on how it will work to avoid the government's scheme, Lloyds also said it will have to pay the U.K. Treasury a fee if it doesn't participate in the Government Asset Protection Scheme.

"There can be no certainty at this stage that any alternative to the GAPS will proceed. All options remain open," the U.K. lender, 43%-owned by the government, said.

The scheme was drawn up to ring-fence banks' bad assets, and Lloyds agreed to join in exchange for a fee and a larger government stake.

In Lloyds' case, the government would insure roughly GBP260 billion in risky assets for a fee of GBP15.6 billion, which would be paid in the form of nonvoting shares. The bank would also be responsible for a first loss of GBP25 billion.

Since it agreed on the insurance in March, however, market conditions have improved, and in September the bank said it was considering alternatives to the expensive scheme.

Analysts have said the bank needed to raise about GBP25 billion to avoid it.

Lloyds didn't provide any figures in Thursday's statement, but it said that "any alternative proposals to GAPS would be likely to include a substantial capital raising of core Tier 1 and contingent core Tier 1 capital."

It added that options currently under consideration include a combination of a rights issue and contingent capital raising, and the exchange of existing securities. Contingent capital is a special debt instrument that would convert to equity during times of financial distress.

The capital raising is expected to be fully underwritten and will be subject to shareholder approval, Lloyds said.

The lender declined to comment further on the GAPS plan and talks with the Commission.

Citing sources, Sky News television reported Thursday that Lloyds would sell its Scottish Lloyds TSB Scotland, its 164-branch Cheltenham & Gloucester unit and online operation Intelligent Finance as part of its deal with the E.U.

The bank was hard-hit by the financial crisis, especially following its acquisition in January of ailing mortgage lender HBOS PLC, which was pushed by the government.

The acquisition made Lloyds dominant in some markets in the U.K., leading the Commission to request the bank to cut market share for competitive reasons. The Commission has to approve both the aid the banks received from the U.K. and the insurance program.

Lloyds also said Thursday that its trading performance "has been robust" over the past few months, without providing details.

At 1217 GMT, Lloyds shares were up 5 pence, or 6.6%, at 85 pence. The shares had been up about 3.8% before the company's statement. Royal Bank of Scotland Ltd. (RBS), which is also under pressure from the Commission to make divestments, saw its stock jump after Lloyds' statement, gaining 3 pence, or 8.4%, at 43 pence

Company Web site: www.lloydsbankinggroup.com

-By Patricia Kowsmann, Dow Jones Newswires. Tel [phone], [e-mail]