LONDON - British banks benefiting from the government's 37 billion pound ($65 billion) bailout are seeking to lift the dividend ban imposed as a condition of the cash injection, sources familiar with the matter said.
"There are discussions ongoing to try and reach an accommodation on this point," one source said on Wednesday.
"Conversations are going on," said another.
Analysts said Lloyds was best placed to push for changes because suspending its dividend -- one of the most generous in the FTSE 100 -- could erode its shareholders' support for a government-engineered takeover of rival HBOS.
"This risks Lloyds shareholders not approving the deal," Fox-Pitt, Kelton analyst Leigh Goodwin said of the ban on payouts to investors.
"Reinstating or amending the dividend conditions is a necessary step. It may or may not be sufficient to keep shareholders happy, but it will certainly be very helpful."
The government waived competition rules last month to facilitate Lloyds' takeover of HBOS whose shares had suffered dramatic falls on concerns over its exposure to expensive wholesale funding and a slumping UK property market.
Shares in Lloyds TSB shares were up 7.3 percent at 162.4 pence by 1429 GMT, making them the top riser on a 5.9 percent weaker FTSE 100 share index.
Shares in Royal Bank of Scotland RBS.L were the second-biggest riser, climbing 1.1 percent to 65.7 pence as analysts said the market expected the three participants in the bailout scheme to win concessions from the government.
"The markets are betting on that, thinking there's going to be a change," said Fox-Pitt, Kelton's Goodwin.
Government reluctance
Under the rescue plan, unveiled on Monday, the government will provide up to 17 billion pounds to Lloyds and HBOS, underwriting share issues worth 13 billion pounds and buying preference shares worth a further 4 billion pounds.
RBS stands to get up to 20 billion pounds, through a 15 billion pound issue of ordinary shares, and by selling 5 billion pounds in preference shares to the state.
The banks are also barred from paying dividends on their ordinary shares until the preference stock is repurchased from the government.
A third source familiar with the situation said the banks were only told of the government's intention to suspend dividends on Sunday -- just hours before details of the emergency package were published -- and hoped there was still scope for a renegotiation.
However, one of the other sources said the government appeared to be in no mood to give ground.
"We are where we are and I'm not sure that I can see the government backing down at this stage," the source said.
RBS, Lloyds and HBOS declined to comment.
Asked if talks were taking place the Treasury said the government's bailout plan had put the banks on a stronger footing and would help stabilise the banking system.
"The details were set out clearly by both the government and the individual banks on Monday," a Treasury spokesman said.
Analysts say the suspension of the payout will help preserve the banks' capital but will also enable a government sensitive to the public mood to show that it is not allowing shareholders to profit from the bailout.