Shareholders in Lloyds Banking must be hoping that the bank's chief executive, António Horta-Osório, has fully recovered from the stress-related illness that struck him down last year - because the bank he runs still faces many stress-related challenges. After all, the eurozone crisis remains very much alive after Spain's banks had to be bailed out, while the next jolt to confidence could come this weekend when the Greeks vote in parliamentary elections. At worst, that could begin the process of Greece's exit from the euro. And Lloyds, with its large exposure to some of the eurozone's weakest members, looks especially vulnerable.
- Significant eurozone exposure
- Low-quality Irish loan book
- Exposed to weakening UK economy
- Facing margin pressure
- Decent capital cushion
- Group bad debt charge is falling
True, Lloyds isn't the most exposed of the UK's lenders to Europe's most troubled economies. Barclays' exposure to Spain at end-March had reached £25.7bn, while RBS's Spanish exposure was £16.6bn. Then again, Lloyds is a smaller bank than those two, with just £47bn-worth of equity, and its exposure to Spain was £6.5bn at end-March. That's significant, especially as it also has a £14.9bn exposure to Ireland and, in total, a £23bn exposure to the five weakest eurozone nations. That's chunky enough for a further slide in sentiment towards the eurozone's weaklings to be a problem for Lloyds.
It's Ireland where Lloyds is hurting most. The grim economic backdrop has left 67 per cent of the bank's Irish property loans classed as impaired, although the bad debt charge against loans to Ireland dropped from £711m in the final quarter of 2011 to £526m in the first quarter of 2012. In fact, the total Irish bad debt charge had reached £3.2bn by the end of 2011, compared with an Irish loan book of £14.7bn, and accounted for 39 per cent of the group's impairments in 2011. Lloyds is struggling in Australia, too, where it only has £8.1bn-worth of loans, but has had to make impairment charges of £1.03bn.
LLOYDS BANKING (LLOY) | ||||
|---|---|---|---|---|
| ORD PRICE: | 28.1p | MARKET VALUE: | £19.8bn | |
| TOUCH: | 28.1-28.2p | 12-MONTH HIGH: | 51.2p | LOW: 21.7p |
| DIVIDEND YIELD: | nil | PE RATIO: | 70 | |
| NET ASSET VALUE: | 67p | |||
| Year to 31 Dec | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|
| 2008 | 0.76 | 6.7 | 11.4 |
| 2009 | 1.04 | 7.5 | nil |
| 2010 | 0.28 | -0.5 | nil |
| 2011 | -3.54 | -4.1 | nil |
| 2012* | 0.72 | 0.4 | nil |
| % change | – | – | – |
Normal market size: 70,000 Matched bargain trading Beta: 2.0 *Investec Securities estimates | |||
True, the bank's credit quality overall appears to be improving; its impairment charge fell 26 per cent in 2011. But that progress could grind to a halt should misery in the eurozone trigger deeper recession in the UK, where Lloyds' lending is focused. At least at the end of March Lloyds had so-called 'tier-one' capital (basically, equity) equal to 11 per cent of its risk-weighted assets. Of the London-listed banks, only Standard Chartered boasts a plumper cushion of capital.
Lloyds' funding position also needs watching. Unlike some banks, such as Standard Chartered, Lloyds can't fund its lending entirely from cheap customer deposits. Its deposits at end-March stood at £418bn compared with loans of £538bn. That leaves Lloyds relying on the wholesale money markets for the balance, especially as cheap emergency funding from the Bank of England, dating back to 2008-09's financial crisis, is being repaid. Accordingly, the bank's net interest margin (the difference between its lending and borrowing rates) has fallen to 1.95 per cent in the first quarter of 2012 from 2.16 per cent a year earlier and more margin pressure looks likely. Moreover, should banks grow fearful of lending to each other as the eurozone crisis deepens, then wholesale funding could get pricier, although support from various central banks has enabled lenders to avoid that problem so far.
