Lloyds' boom-era bosses sue bank for bonuses

Lloyds: three reasons to buy into retail share offer - or not

7 October

A major Royal Mail-style retail share offer in Lloyds Banking Group, worth around £2bn and likely to be the final act in the Government's exit from the bank, has now been announced.

Tens of thousands of investors have already registered their interest (see below), suggesting the sale will be a huge success. But should you invest up to £1,000 of your money into the recovering lender? Here are three key benefits of investing - and their drawbacks:

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1. You could earn a £200 payback

Retail investors (with those investing less than £1,000 given priority) will be offered a five per cent discount to whatever Lloyds share price is at the time of the sale, probably next March. Those that hang on for one year will get another bonus share for every ten bought, essentially upping that discount to 15 per cent.

Add all this together with a dividend predicted to rise to five per cent next year and the Daily Mail notes investors are looking at a £200 payout in the first twelve months on an original £1,000 invested - plus the ongoing dividends and future capital growth. That's pretty compelling.

The catch

It's that one year wait. At a time of severe equity volatility there is obviously no guarantee the share value won't be diminished by a market meltdown in that time, or that Lloyds won't suffer some problems that lessen its appeal. If shares fall the value of that loyalty bonus reduces and dividends could be hit.

2. Strong growth prospects

A lot of analysts like Lloyds at the moment (see below), predicting that its improving capital position, decent interest margins and post-crisis de-leveraging will combine to push the share price above 100p. That would equate to a strong return on the current 77p without the offer incentives - with them it's stunning.

The Daily Telegraph notes in particular that latest results put the bank's capital reserves at 13.1 per cent, well above the management target. This increases the chances of additional payouts - a 'special dividend' has already been mooted - that could increase the dividend yield to an impressive eight per cent or more.

The catch

Not everyone is convinced shares growth will be forthcoming. Past wrongdoing is a key concern: Lloyds is, for example, the UK bank with the highest exposure to payment protection insurance, claims for which will continue until 2018.

Predictions that strong competition will come from challenger banks is also hurting the high street 'big four' in the eyes of some.

3. Profitability

This is really an extension of the point about the bank's prospects. Analysts are generally of the opinion that Lloyds is well set relative to its peers, as its capital reserves are high.

The Financial Times points out it is currently trading at 1.3 times its mortgage book value. All of its UK bank peers trade "below book". The bank is profitable, with earnings for the third quarter likely to be around £1.4bn.

Its net interest margins - effectively the profit margin on its lending - are already pretty high and set to surge when an interest rate rise comes. Bolstered profits and margins will encourage investors and boost shares, enhancing that return for retail buyers.

The catch

Again, it is by no means assured that Lloyds will continue to grow its activities and earnings: mortgage and personal loan issuance remains stubbornly below pre-crisis peaks and there is a strong case that they will remain sluggish for a while due to competition, a mortgage market slowdown or wider economic travails.

There are also as many risks as opportunities ahead. While an interest rate rise might boost margins it could also increase defaults in Lloyds' massive £311bn mortgage book, of which around 40 per cent is interest-only.

It saw impairments against bad loans of £3bn two years ago, which shows how easily a major downturn could wipe out profits.

So, given all that, should you invest?

You should look beyond the obvious benefits of the retail sale and take a view on the longer-term prospects. Clearly there is a compelling case for the bank to do well or all those '100 club' analysts wouldn't be predicting shares will soar.

If you agree, the sweeteners only make buying in more lucrative. But do make sure you've properly assessed those downsides.

The Telegraph's Questor column says the premium to the mortgage book at which Lloyds is trading shows it is "not cheap" and that you should "consider a world where impairments are higher… and a housing market that is slightly weaker".

For the record, Questor says on this basis it would "let the opportunity pass".

Lloyds: 62,500 people want shares in 'grubby' sell-off

6 October

More than 62,500 people have expressed an interest in buying shares in Lloyds as the bank is returned to private hands after its 2008 bail-out, says the Treasury. But some observers are not impressed with George Osborne's discount for small investors.

The Chancellor announced yesterday that some £2bn-worth of Lloyds stock, around 3.6 per cent of the total, is to be offered to private investors in a break from the 'drip-feeding' approach it has used so far to return the company to institutional investors.

Since yesterday morning, some 62,500 people expressed an interest in becoming shareholders. One financial analyst told Sky News that the offer looks like "a pretty attractive package".

Laith Khalaf, of Hargreaves Lansdown, told the broadcaster: "Based on £1,000 invested, you could expect a £50 price discount, an anticipated £50 dividend in 2016 - if the market price remains at today's level at the time of the sale - and a further £100 in bonus shares a year down the line."

Small investors will be offered a five per cent discount on the stock and a bonus share for every ten if they hold on to their investment for a full year.

The government has reduced its ownership of Lloyds to just 12 per cent by drip-feeding shares to institutional investors over the past 18 months, writes Nils Pratley in The Guardian.

Pratley is very critical of the change of tack, writing: "The principle is indefensible. Why should some citizens – those with a grand or two in cash and an appetite for filling in forms – receive a discount at the expense of other taxpayers?"

The drip-feed approach was working "splendidly", says Pratley, maximising proceeds for the taxpayer. Carrying it forward, the bank could have been free of state ownership by summer 2016.

Osborne says he wants to build a "shareholding democracy" but Pratley says this is a "woolly" and unaccountable ambition. The chancellor is "letting up to £200m slip between the cracks needlessly" with this "grubby" new strategy, says Pratley.

Lloyds shares to go on sale at 5% discount

05 October

The government is to sell off its remaining stake in Lloyds bank, offering private investors a five per cent discount on some £2bn worth of shares.

George Osborne announced the move at the Conservative party conference today, calling it the "biggest privatisation in over 20 years" and insisting that all of the money raised would be spent paying off the national debt.

The news made Lloyds stock the most actively-traded on the FTSE 100 in morning trading today, with 14 million shares changing hands, says the BBC. Its share prices rose by 1.4 per cent to 77.6p this morning.

Osborne was keen to stress that it was the last Labour government who bailed out Lloyds during the 2008 global financial crisis, to the tune of £20.5bn. Most of the state's 43 per cent stake has since been sold to institutional investors.

The government now owns just 12 per cent of Lloyds. Private investors – in other words, anyone who wants to apply – are being offered part of that stake. The Chancellor said he hoped the public sale will be over by the end of the financial year in March.

Osborne said: "I don't want all those shares to go to City institutions – I want them to go to members of the public."

The Treasury said there would be a five per cent discount for private investors and added that those seeking to spend £1,000 or less will be given priority.

Those who keep the stock for over 12 months will get a bonus share for every 10 they own - though the value of this will be capped at £200 per investor.

One financial expert told the BBC that the £2bn sell-off equalled a 3.6 per cent stake in the bank, with the five per cent discount equal to 3.8p per share.

Lloyds shares bounce as PPI deadline proposed

02 October

Lloyds shares jumped this morning, leading the way in a buoyant banking sector that's been boosted by proposals from the financial regulator to cap the cost of past misselling of payment protection insurance.

Lloyds Banking Group shares were up 2.3 per cent to 77p in early trading, the highest they have been in nearly a month. Despite the prediction of many analysts that the bank could be set to become a "dividend giant" and shares could reach 100p in the near future (see below), Lloyds has been in a rut of late, amid legal actions and costs over past wrongdoing that are continuing to mount.

The Financial Conduct Authority's plans, published this morning, are calming nerves on this front. The FCA has launched consultation on a cut-off point for claims against PPI policies, which following regulatory intervention in recent years have cost the sector billions of pounds and counting. According to the BBC, Lloyds has the most exposure of all high street lenders.

The Daily Telegraph notes that while there were still 883,043 complaints about PPI in the first six months of this year, this was down 17 per cent on the second half of last year. The FCA has also acknowledged that a "significant proportion" of recent PPI complaints were "unfounded" and a "high and growing proportion" refer to sales made before 2005, where "evidence held by firms and consumers is likely to have significant gaps".

Any deadline will be some time away yet – probably not till the spring of 2018 – and a communications campaign will be put in motion to make sure consumers are aware of the impending cut-off. The fact that the liability will no longer be open-ended will give investors more confidence on the future for banks.

Other major high street banks are also on the rise. Barclays continues to bounce back from recent lows and is up 1.6 per cent at 251p, while Royal Bank of Scotland is up 1.8 per cent to 325p. HSBC was up a more modest 0.8 per cent to 507p.

Lloyds: 'over-priced' or a 'dividend giant' in waiting?

25 September

A growing number of analysts are getting bullish about Lloyds Banking Group.

With several big investment banks declaring themselves members of the '100 Club', predicting a 100p share price in a matter of months, one major fund manager has said he too sees great value in the stock. In fact, he says Lloyds is the top pick in a generally undervalued banking sector, and is set to become a "dividend giant" over the next two years.

Alex Wright, who manages the Fidelity Special Situations and Fidelity Special Values funds once managed by star manager Anthony Bolton, told the Daily Telegraph he is overweight on banks including HSBC and Barclays, but that he expects Lloyds to be the top performer. Wright expects dividend yield to grow from 1.5 per cent now to 4.5 per cent next year and on to seven per cent in 2017, as Lloyds boosts payouts from excess capital.

The bank had been struggling in recent weeks amid a series of legal actions, and its shares dropped below the 2008 bailout price on Tuesday and Wednesday. But a rally on Thursday provided cover for the Treasury to dispose of another £500m worth of shares, which Sky News says takes the taxpayer holding to 12 per cent.

Shares were up again in afternoon trading on Friday to 75.4p, above the 73.6p 'break even' price for the Government.

But there are dissenting voices on a stock that has fallen from a summer high of 87p. Earlier this week, investment bank Berenberg put out a note warning that dividends and revenue would disappoint – and that interest rates could be held for longer, affecting its own interest margins.

The C Suite says analyst James Chappell pointed out consensus revenue expectations for Lloyds imply 3 per cent annual revenue growth, ahead of the two per cent it is currently recording and difficult to meet if it continues to suffer big one-off costs on past wrong doing. He says the bank is "over-priced" and investors should target 55p per share, well below the current level.