Lloyds Banking Group Plc said the terms of a state-backed plan to insure its riskiest assets might alter, and regulators could force it to make disposals, sending its shares down more than 6 percent.
The part-nationalised British bank said on Wednesday it expects to sell or exit from certain parts of its business to win approval from European Union regulators for the British-state backed insurance scheme, which could include core businesses and could be "materially adverse" to the group.
Lloyds agreed in March to insure 260 billion pounds ($402 billion) of risky assets under the government's asset protection scheme (APS), to shield the bank from massive losses if the recession deepens.
"Discussions and negotiations with HM Treasury to finalise the terms of the group's proposed participation are continuing and, although this is not currently expected by the board, may result in changes to the terms announced on 7 March," Lloyds said.
It expects to conclude details "over the next few months".
Lloyds said last month bad debts on corporate loans would be more than 50 percent higher in 2009 than last year, which prompted fears it may have to pay more for the APS as the quality of its assets had worsened.
The bank's takeover of HBOS earlier this year has left it 43 percent owned by the state and exposed to risky corporate and home loans.
HBOS suffered a 10.8 billion pound loss last year and it is likely to drag Lloyds to another loss this year and maybe next, which prompted Chairman Victor Blank to this week announce he will step down in the next year.
STATE AID HURDLES
In a letter to shareholders relating to a 4 billion pound fundraising, Lloyds said the APS is subject to obtaining state aid clearance from the European Commission.
"The group expects to agree a forward plan involving the cessation or disposal of certain parts of the business," the bank said. It expects this to involve non-core businesses, but it could have to divest or exit core businesses, it said.
"The effect of requirements to divest or exit businesses and/or to abide by behavioural restrictions may be materially adverse to the interests of the group," it said.
An offer prospectus typically carries warnings about potential risks.
But the letter highlighted "the political risks associated with government holding a large part of the capital base and … providing substantial liquidity assistance," analysts at Credit Suisse said in a note.
By 0915 GMT Lloyds shares were down 6.3 percent at 71.8 pence, the biggest FTSE 100 faller.
Its price was adjusted down before the open as investors no longer qualify to subscribe for discounted new shares in a share offer. That knocked almost 24p off Tuesday's closing price.
Lloyds is offering shareholders the chance to buy 0.62 shares at 38.43p for each Lloyds share owned, which will see about 10.4 billion new shares issued.
The bank agreed to give the government 15.6 billion pounds in non-voting "B" shares to pay for its participation in the APS, and will take a "first loss" of up to 25 billion pounds on the assets.
