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Lloyds Tanking Group

28 October 2015 By George Hay

Lloyds Banking Group has made the UK government look silly. Shares in the UK’s biggest mortgage bank on Oct. 28 sank 5 percent after it reported disappointing third-quarter figures. If politicians hadn’t already twigged that selling a chunk of the country’s 10 percent stake in the bank to retail investors is needlessly risky, they should do now.

The backdrop to Lloyds’ results is positive. A UK competition probe said on Oct. 22 the bank wouldn’t have to carve up its dominant 25 percent current account share. The state has introduced a time limit for claims over mis-selling of payment protection insurance (PPI), provisions against which have cost Lloyds a scarcely credible 13.9 billion pounds thus far. The potential for the bank to pay out appreciably above 50 percent of earnings in dividends explains why the mean target price among analysts for Lloyds is 91 pence – against 73 pence now.

Yet banks are never far away from operational risk. In the quarter that ended in September, that came from lower trading activity in the bit of the bank that helps its corporate customers hedge themselves. Non-interest income 17 percent below consensus made overall pre-tax profit miss forecasts as well. And while costs and losses from bad loans were better than anticipated, Lloyds didn’t give any new detail on dividends, despite its core Tier 1 ratio now exceeding the 13 percent level it previously implied would be enough.

The reticence might be about PPI – an admittedly worst-case scenario could see the bank setting aside another 7 billion pounds, Citi estimates. Higher UK bank taxes will hurt, and Lloyds would face a problem if current Basel IV capital reforms make mortgages more capital-intensive. If these obliged Lloyds to lift its average risk-weight from 11 percent to 38 percent, the bank’s core Tier 1 ratio in 2017 could fall to 12 percent from 13.7 percent now, Morgan Stanley analysts reckon.

This kind of uncertainty is par for the course for banks. The risk, underlined by Lloyds’ third-quarter earnings, is that the general public may not be best placed to price it. By eschewing a perfectly decent institutional share sale for a retail offer, the government may find Lloyds stock turns into a political hot potato.


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