Lloyds' boom-era bosses sue bank for bonuses

Lloyds shares could rise by 38%, says new report

8 September

Several analysts have already declared themselves members of the Lloyds Bank '100 Club', betting on shares topping 100p, but now one investment bank study has gone even further.

JPMorgan has produced a study ranking European banks based on capital strength and income potential, which places Lloyds among the top six in Europe and the best sector pick in the UK, Interactive Investor reports. It sets a target price of 105p per share, a massive 38 per cent above its current price of around 76p.

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The report, which gives an estimate of how assumed capital reserves might be affected if global regulators succeed in harmonising rules, is unsettling reading for most of the sector. It says the 35 European banks assessed would probably have a shortfall of €137bn (£100bn), which would force them to set aside more money that would otherwise be put to profitable use. Some individual banks will have to find as much as €26bn.

"Thankfully for the British lenders," it continues, this combined shortfall is wholly accounted for by 13 of the lenders – and the vast majority of it is concentrated in "just six". HSBC is the only UK bank that features in the list – and even then it is at the lower end. Lloyds' capital reserves are given a clean bill of health, at 13.3 per cent of assets.

Given that Lloyds has "already said it will consider special dividends and buybacks above 12 per cent" reserves, this bodes well for dividend payouts, which JPMorgan said could be boosted to more than 50 per cent from their current level. This is attractive in itself, but as the bank also trades below the average price to earnings multiple it makes it especially compelling.

The 100 Club is growing, but there are also dissenters advising investors to hold fire. Some simply advocate waiting for a discounted retail share offer that will only add to the return, while others, such as Investec, think the bank, which is still paying out for past wrongdoing, is set for a more modest rise.

Lloyds is currently trading below recent lows, as it makes headlines related to costly legal actions. In one case it is awaiting a Court of Appeal ruling which will decide whether it has the right to cancel bailout-era bonds that will save anything up to £1bn in interest payments (see below).

Lloyds battle with bondholders taken to regulator

7 September

Lloyds' legal battle with thousands of bondholders is becoming increasingly bitter, after it emerged that campaigners have held meetings with the financial regulator seeking to prevent the bank cancelling hundreds of millions of pounds' worth of lucrative loan notes paying up to 16 per cent interest.

Retail investors holding the so-called "enhanced capital notes", which were issued in the wake of the financial crisis and pay hefty interest in return for a clause that would convert them to equity in the event of a capital shortfall, are battling against a plan to buy the bonds back at face value, below the inflated price many would have paid in the secondary market.

Lloyds announced a plan to buy the bonds after they were excluded from regulatory 'stress tests' last year, which it argues acts as a "disqualifying event". Cancelling the bonds could save up to $1bn in interest payments over the life of the policies, but investors argue – and the bank has in effect admitted in court – this is not allowed under the original wording.

The Financial Times says while investors await a verdict of the Court of Appeal, due later this month, several campaigners have held meetings with the Financial Conduct Authority, seeking "reassurance that Lloyds will not cancel the bonds if the bank wins the case".

Mark Taber, who leads a bondholder action group, has said the "'elephant in the room' for the watchdog is whether investors can rely on the content of a prospectus for the offering of bonds or other listed securities". This, he believes, could prompt the FCA to act, even though the Daily Telegraph reports that the watchdog believed the issue came under the purview of the Prudential Regulation Authority, which does not have a remit to consider consumer detriment.

Whether or not the FCA wants to act, or whether it has room to do so in the light of the court verdict, remains to be seen. A spokesman for the regulator confirmed the meetings but said staff "regularly meet with interested parties across a number of issues".

The court action is one of several factors that has dragged Lloyds shares well below recent highs in the past two weeks. They were trading flat at 75.6p on Monday, below the 87p reached in June and July.

Lloyds shares dip ahead of court judgements

4 September

Lloyds shares have dipped below the wider market fall this Friday morning after news emerged that the bank is fighting a second legal case in the same month it is expected to hear a final verdict on an appeal over bond buy-backs that could potentially save millions in interest payments.

Bloomberg reports this morning that Andrew Reed, a former trader who "inputted the bank's submissions to the yen London interbank offered rate", or Libor, is suing the bank for unfair dismissal. He was one of eight staff to be sacked in the wake of an investigation into manipulation of the benchmark, for which it was fined £226m.

A London employment tribunal will hear the case on 16 September. Lloyds said in an emailed statement it considers the "claim to be entirely without merit" and that it will be "vigorously defended". It added Reed was "dismissed following a thorough disciplinary process".

The hearing could coincide with a verdict from the Court of Appeal over a long running dispute with a group of bondholders, which the Daily Telegraph says should be delivered between 15 and 20 September.

That case stems from a decision by Lloyds to buy back so-called 'enhanced capital notes' that pay interest of up to 16 per cent. These were issued in the wake of the financial crisis in order to raise much-needed funds and were designed to convert to capital in certain circumstances. After the notes were discounted for the purposes of stress tests last year, Lloyds sought to redeem the bonds at their original value, saving millions of pounds in future interest payments and undercutting the premiums at which the bonds were trading.

Business Insider says the notes cost around £200m a year to service and that a verdict in the bank's favour could ultimately save it around £1bn over the life of the policies, some of which run to 2029. The bank lost an earlier High Court ruling and analysts are split on whether it will succeed in overturning the verdict.Lloyds shares were down 1.9 per cent at 75.44p this Friday morning.

Lloyds share sale: why is the '100 club' backing a surge?

28 August

When Investec upgraded its rating on Lloyds Bank shares earlier this week, it declared that it was not a member of the growing '100 club' of analysts that expect the share price to reach 100p this year.

Investec still expects a strong performance. At a target price of 86p this year, it would have achieved an 11 per cent rise on the 78p at which it was trading on Friday morning, with a reinstated regular dividend and the prospect of special payouts boosting total returns. But the company is slightly less bullish than some and still rates some of Lloyds's rivals more highly, including the fellow taxpayer-backed Royal Bank of Scotland.

Others, however, continue to predict a stronger surge, pointing to the improving underlying profitability of the bank, its reinstated dividend and its move back into the private sector. The sale of government-held shares is gathering pace and could be completed before the end of the year.

Although Deutsche Bank reduced its target price earlier this month from the 100p it had set in the spring, after the latest results revealed lower-than-expected capital reserves, the bank is still advising investors to buy, with expectations of the shares hitting 97p. In July, even before Lloyds intimated plans for a special dividend, Nomura was setting a 'buy' rating with a 100p per share target, following a similar move by HSBC in June.

But alongside Investec, there are others who suggest that Lloyds is being overhyped. On The Motley Fool, where Rupert Hargreaves wrote that he had joined the 100 Club in July, Harvey Jones writes that the "100p target could be harder to hit than the fanbase thinks". He cites increasing payouts for past wrongdoing, a potential rise in failures in the bank's loan book amid the ongoing market turmoil, and the rise of challenger banks seeking to take market share.

In common with most analysts, Jones is still positive on the stock – and the sentiment for retail investors is sure to improve if and when the Government moves forward with a wider share sale later this year.

Should you buy Lloyds shares ahead of sale?

26 August

Lloyds shares have fallen significantly in recent weeks, which has persuaded one analyst to upgrade the stock to a "buy". But ahead of a retail sale offer which may now come before the end of the year, should you wait before jumping in?

The upgrade came from Investec, which Citywire says changed its "hold" recommendation on Tuesday in the wake of a prolonged price drop that it believes now makes the bank good value. Shares fell by 17.5 per cent over the 15 weeks to Monday, when it bottomed out at 72p before recovering. It was trading down one per cent at 75.9p on Wednesday morning.

Lloyds' recent decline is not seen to reflect fundamental performance issues. While it missed its capital reserves target and took higher charges for misselling in the last quarter, Interactive Investor says this was seen as the bank simply "making the most of the final window for tax relief against… redress payments". Profit actually surprised on the upside in the three-month period and the group has pledged to continue its recently reinstated dividend – it could even make a special payout on top of that if it beats capital reserve targets.

All of this could persuade investors to buy into a share that, at Investec's below-consensus target price of 86p, could deliver a total return of 12 per cent over the next year. The Motley Fool's Rupert Hargreaves says that, based on current figures, Lloyds "could return £20bn to £25bn to shareholders over the next three years… which is why I’m looking to buy".

But he says he will wait until a retail share offer that most believe will be at a five per cent discount on the prevailing market price. George Osborne pledged to accelerate the Government's exit from the bank this week, which could mean this offer is imminent – or that it could be scrapped altogether.

For those not sure about Lloyds or not moved to act without the added incentive, Investec actually prefers some rivals. It says the upgrade is simply a result of its falling price and that, based on growth potential, it favours Royal Bank of Scotland, HSBC and, its top pick, OneSavings Bank.