Lloyds Banking Group Plc, the U.K.’s biggest mortgage lender, may struggle to exit the government asset insurance program as it considers a rights offering to help it avoid further state aid, analysts said.

The bank has submitted a plan to the Financial Services Authority to raise 15 billion pounds ($24 billion) in a share sale, surpassing HSBC Holdings Plc’s record 12.5 billion-pound rights offering in April, said a person familiar with the matter, who declined to be identified because the talks are private. Under the plan, the lender would also sell assets to raise money.

The bank “will struggle to escape the APS altogether, with a marked reduction in participation most likely,” Jonathan Pierce, an analyst at Credit Suisse Group AG, said in a note to investors. “It would be highly unfortunate, not to mention disruptive if Lloyds launched its plan only to find it failed.”

Lloyds said last month it was considering pulling out of the asset protection program. To do so, it would have to raise about 25 billion pounds from the sale of shares and assets such as its Scottish Widows unit, Pierce said. The government, which owns 43 percent of Lloyds, would need to buy more than 6 billion pounds of stock in a 15 billion pound rights offering.

The government hasn’t decided whether to exercise its right to buy stock in the offering, the person said. A final announcement may be made at the end of this month.

“There are enough political reasons for the APS to be retained,” said Richard Champion, who helps manage $2 billion, including Lloyds shares, at Principal Investment Management Ltd. in Sevenoaks, England. “We as investors want some backstop there in case things do turn down.”

FSA Stress Test

Lloyds declined 1.4 percent, or 1.35 pence, to 94.31 pence in London trading. The U.K.’s benchmark FTSE 100 Index climbed 0.9 percent.

“We issued a stock exchange announcement two weeks ago and our position has not changed since then,” Lloyds spokesman Shane O’Riordain said in a telephone interview. “We have a number of options available and we continue to review them.”

At the time of last month’s announcement, Lloyds and the FSA differed on how much cash the bank would need to raise to avoid the asset protection plan, Sky News reported yesterday, without saying where it got the information. Lloyds has since submitted a revised plan to the FSA, offering to raise 25 billion pounds of capital, Sky News said. That amount is about equal to what the FSA says Lloyds needs to raise to withstand a recession, Sky reported.

FSA Stress Tests

“This is partly driven by the stress-testing the FSA has been carrying out,” Peter Snowdon, a partner specializing in financial services at law firm Norton Rose LLP, said in a telephone interview today. “It will be about the quality and sufficiency of the capital” Lloyds holds.

Under the Asset Protection Scheme, the government would insure 260 billion pounds of Lloyds’ assets in return for a 15.6 billion-pound fee. To pay the fee, Lloyds would hand additional shares to the Treasury, boosting the state’s stake to 62 percent.

Lloyds is seeking to reduce the government’s holding because the European Union may force it to sell assets or branches to comply with state aid rules. That would potentially unravel Chief Executive Officer Eric Daniels’ acquisition of HBOS, which was completed in January.

“It’s an intricate puzzle between the government Asset Protection Scheme, EU requirements over possible asset sales, and investor appetite for equity,” said Mike Trippitt, an analyst at Oriel Securities Ltd. in London with a sell rating on the bank.

Discussions with Lloyds

“We are in discussions with Lloyds about participation in the Asset Protection Scheme,” a Treasury spokesman said. “Our priorities of value for money for taxpayers and financial stability remain unchanged.”

A spokeswoman for the FSA declined to comment

. “Opting out of the Asset Protection Scheme would be hugely positive for the group, provided the bank is able to raise adequate capital from the market,” Joe Dickerson, an analyst at Execution Ltd., wrote in a note to investors today. Lloyds’ wholesale funding costs would “decline materially” because fixed-income investors favor banks with little government ownership, Dickerson wrote. He has a “buy” rating on the stock.

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