Lloyds' boom-era bosses sue bank for bonuses

Lloyds: three reasons shares are dropping again

30 November

Lloyds Banking Group shares are stubbornly weak at the moment. Bullish predictions in the summer from analysts that saw the stock surging to 100p are looking increasing over-optimistic.

Having peaked this autumn at just 78p per share in late October – already well below the 2015 high of 89p in May – Lloyds shares have spent most of the November around or below the 73p that marks a break-even on the 2008 government bailout.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

This morning they fell back again by more than one per cent to 72.5p, outpacing the slide on the wider FTSE-100. Here are three reasons sentiment on Lloyds has turned.

1. Bank of England stress tests

The latest annual 'stress tests' from the Bank of England, which assess whether the UK's largest lenders could survive a major shock, are due tomorrow.

The Daily Telegraph says all of the institutions involved – which alongside Lloyds includes Barclays, HSBC, Nationwide, Royal Bank of Scotland, Santander UK and Standard Chartered – are expected to pass without needing to raise additional capital.

But there is speculation that those making payouts to investors will be told to limit distributions to accelerate their buffer-building.

"Investors currently expect Lloyds to pay a dividend of 2.5 per cent for 2015, which [analyst Peter Richardson from Berenberg] believes may have to be cut to 1.5 per cent," says the paper.

2. Buy-to-let concerns

Also on Tuesday, the Bank of England will reveal the decisions of the latest meeting of its Financial Policy Committee (FPC), a regulator with powers to protect the financial system against trends that may undermine stability.

The Guardian says there is particular speculation the FPC may decide to hike the capital reserves that must be held against buy-to-let mortgages, which have been rising rapidly in recent years and are said by some to be driving a 'bubble' in property prices.

As well as driving up mortgage rates, this could again have the effect of reducing available capital to pay out dividends.

3. Lloyds is not cheap

Finally, while the current share price is low compared to the summer and is a thorn in the side of those optimistic analysts, it does not mean Lloyds is undervalued – far from it.

In fact, says the Daily Telegraph's Questor column, Lloyds is currently expensive at 20 times expected earnings, with investors paying a 30 per cent premium to net asset value of each share.

While payouts and a retail offer discount could sweeten the price, there are risks to Lloyds future profitability too. It is still facing regulatory action and redress over past wrongdoing – and its mortgage book is massive at £311bn, which exposes it to failures as interest rates begin to rise.

Lloyds pleads with regulators to cap claims sooner

29 October

Lloyds is pleading with regulators to bring forward a prospective deadline for claims relating to one of the country's biggest ever bank mis-selling scandals, as payouts continue to take a toll on performance.

Yesterday Lloyds revealed its underlying profits had fallen as a result of it being forced to set aside a further £500m to compensate customers who were mis-sold payment protection insurance policies.

Its total provision is now £14bn – which The Guardian notes is half of the overall redress bill across the sector – and the bank admitted the bill may rise "if reactive complaint volumes do not decline or the decline is delayed".

It is a major headache for the bank – and a key fly in the ointment for those impressed by the bank's recovery and weighing up an investment. Small wonder, then, that Lloyds is lobbying the UK financial regulator to bring forward a proposed 2018 deadline for new PPI claims in an effort to complete the blood-letting sooner.

"We think a shorter time bar… will get people to act more quickly," said the bank's finance chief George Culmer. He described the period of two years between when the Financial Conduct Authority would require customers to be notified of the impending cut-off next year and the final date for claims as "excessive".

Investors responded negatively to the results announcement and Lloyds shares fell 4.4 per cent on Wednesday, at one point trading below the 73.60p break-even price for government shares acquired during the bank's 2008 bailout.

The stock did move back above this level later on – and for long enough that the investment bank handling the drip-feed disposal of government shares was able to sell another one per cent of the taxpayer's stake.

The public interest in Lloyds is now below ten per cent and the government has recouped £16bn of the initial £20.5bn bailout cost, says Reuters.

The final stage of the privatisation will be a £2bn discounted retail offer similar to that for Royal Mail two years ago, which is due to take place in early 2016.

Lloyds profit rises – so why aren't investors impressed?

28 October

Lloyds reported a statutory pre-tax profit of £958m in the third quarter, 28 per cent higher than the £751m recorded in the same period last year.

But despite the seemingly strong figures, shares fell sharply this morning and were trading more than four per cent lower, close to the bank's 2008 buyout break-even price at 73.8p. It's a far cry from the surge towards 100p many analysts have been predicting, so why are investors so unimpressed?

Most importantly, the bank reported a rise in its provision for past mis-selling of payment protection insurance of £500m, which the Financial Times notes boosts its total provision to £14bn, more than any other bank.

It also added £100m to a pot set aside to cover complaints over other products sold through its branches.

Past wrongdoing remains the major fly in the ointment for high street lenders from an investor's perspective. Just when it looks like Lloyds has got everything covered and accounted for it adds more to the pot, leading many to be nervous about unpredictable hits to future profit.

Then there are revenues, which came in at £4.24bn for the three months. This was described as "weak" by analyst James Chappell at Berenberg, who had predicted £4.56bn, and will add to fears that growth in the mature markets in which Lloyds operates will remain sluggish.

This is especially the case given the increasing competition from so-called 'challenger banks'.

Searching for positives

For those looking at investing – not least in a £2bn discounted retail offer next year – there are some upsides. A major one of these is the consultation by the regulator on a deadline for PPI claims, which could limit future provisions after 2018 (see below).

In the latest results, positives can be found in the increase in capital reserves from 13.3 per cent to 13.7 per cent. This might indicate that a special dividend is more likely and that payouts are more secure overall, as Lloyds has pledged to increase distributions of capital above the 13 per cent minimum reserves level.

Elsewhere the increase in net interest margin (the difference between the interest rate charged and the cost of funding) from 2.62 per cent to 2.64 per cent is encouraging. A good proxy for profit margin, Lloyds' interest margin was already quite high relative to the rest of the sector, so this is pretty good going.

Why investors can't resist the Lloyds share sale

12 October

The chancellor's latest privatisation is flying.

Having already reduced the government's stake in Lloyds Banking Group to below 11 per cent, registrations from ordinary investors for a slice of a £2bn retail share sale next year have surpassed 250,000 in less than a week. Osborne has pointed out that this is five times the number that registered to buy shares when Royal Mail was sold off two years ago, the Daily Mail notes.

So why are investors so interested? Citing the direct comparison, the Scotsman's Martin Flanagan, says investors were wary of challenges to Royal Mail – people are sending fewer letters than ever and even its growing parcel business is under threat from the likes of Amazon – that "do not apply in the Lloyds retail offer".

He highlights, in particular, the fact that Lloyds has returned to robust profitability (first-half pre-tax earnings rose 15 per cent to £4.4bn), that the bank is not fighting battles with powerful unions like Royal Mail, and that the offer is structured very attractively, with an initial discount and one-year share bonus adding to the payout from regular dividends.

These incentives are the key reason Mark Bridge, a writer for The Times, says he has signed up to potentially participate in the sale. "Based on £1,000 spent, you could expect a £50 discount, a dividend of about £50 in 2016, and a further £100 in bonus shares a year later – a possible easy gain of £200." Thereafter should the dividend yield of five per cent forecast for next year hold up, it will remain an attractive proposition as "the best easy-access savings accounts" are currently offering less than 1.7 per cent.

Bridge does, however, concede that a surge many analysts are forecasting for the share price may not happen, as there are uncertainties around Lloyds's massive mortgage book at a time when interest rates are set to rise. The bank's growth elsewhere could also be curbed by stiff competition in mature markets.

A few observers have warned that these issues, combined with ongoing costs of past wrongdoing, could undermine the case for buying, not least because to take full advantage of the offer, investors would need to have confidence in the bank for at least 12 months.

Clearly most investors harbour no such concerns.

Lloyds share sale: interest is booming

09 October

Just four days after the announcement that the Government is to offer discounted shares in Lloyds Banking Group to the public, one broker has given an indication of the huge scale of interest among private investors.

The Daily Telegraph reports that Hargreaves Lansdown, one of Britain's biggest retail brokers with more than 700,000 people on its books, has already been contacted by more than 120,000 of those clients.

This follows the Treasury's announcement on Tuesday, the day after the sale was announced, that 62,500 people had registered an interest.

Under the terms of the sale, which is expected to go ahead around March 2016, retail investors will be able to buy a total of £2bn-worth of Lloyds shares at a five per cent discount to the prevailing share price.

Those who hold onto the shares for a year will get a one-in-ten share bonus that takes the discount to 15 per cent, with ongoing dividends potentially providing a £200 return on capital for every £1,000 invested in the first 12 months alone.

Analysts broadly agree that the offer is "compelling" (see below). A huge number of investors clearly think so too and the sale is almost guaranteed to be a success.

But some have said prospective buyers should focus less on the discount and more on the bank's long-term prospects.

Given that it has one of the UK's largest mortgage books at a time when a looming interest rates is set to put pressure on existing homeowners – and that it is also still paying for past wrongdoing – the Telegraph's Questor column has said investors should "let the opportunity pass".

The sale is the likely to be the final act in the taxpayer's exit of Lloyds. Having once controlled a stake of 43 per cent, the latest "drip feed" disposal to institutional investors on Thursday took the Government's interest below 11 per cent, The Guardian notes.

Some have criticised the Government for offering discounted shares to retail investors when it is turning a profit for the public from such sales, saying it effectively amounts to the average taxpayer funding a return for a wealthy few with enough disposable income to invest.