Compared with its still largely state-owned rival RBS (RBS), Lloyds (LLOY) - which was also bailed out by the taxpayer following the financial crisis - is recovering well. Significantly, the government has cut it stake in Lloyds to just 24.9 per cent and credit quality is improving fast. But its Scottish registration raises uncertainties given the possible scale of further devolution there. Lloyds has yet to return to the dividend list, either, but its shares trade on the punchiest multiple of any large UK-listed bank.
- Benefiting from economic recovery
- Government staks substantially reduced
- Scottish uncertainties
- Misconduct issues persist
- Still no dividend
- Shares expensively rated for a bank
Sure, last week's referendum vote - rejecting Scottish independence - removes the greatest uncertainties for Scottish-exposed companies: such as continued EU membership or the future of the sterling union. But a significantly increased collection of devolved powers for Scotland is looking unavoidable. The details remain unclear but, along with more powers over such areas as welfare spending, Scotland is highly likely to receive significantly enhanced tax-raising powers. The Scottish Parliament can already alter the income tax rate by up to 3p in the pound and it's thought likely that powers could be granted to allow the rate to be tweaked by up to 10p in the pound.
Such extra tax-related powers could, according to Tom McPhail, head of pensions research at Hargreaves Lansdown, "impact on pensions and other savings plans". That prospect is hardly ideal for a group which includes life assurer Scottish Widows and lender Bank of Scotland. Moreover, and despite the 'no' vote, it has been rumoured that Lloyds may still shift its registration to England - a move that might cost hundreds of millions of pounds. A decision is expected in the new year when the details of enhanced devolution become clearer.
LLOYDS BANKING (LLOY) | ||||
|---|---|---|---|---|
| ORD PRICE: | 75.87p | MARKET VALUE: | £54.2bn | |
| TOUCH: | 75.86-75.87p | 12-MONTH HIGH: | 87p | LOW: 70p |
| FORWARD DIVIDEND YIELD: | 4.0% | FORWARD PE RATIO: | 11 | |
| NET ASSET VALUE: | 63p | |||
| Year to 31 Dec | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|
| 2011 | -3.75 | -4.3 | nil |
| 2012 | -0.60 | -2.1 | nil |
| 2013 | 0.42 | -1.2 | nil |
| 2014* | 2.81 | 2.6 | 1 |
| 2015* | 6.95 | 7.0 | 3 |
| % change | +147 | +169 | +200 |
*Investec Securities forecasts Normal market size: 30,000 Matched bargain trading Beta:1.07 | |||
Exposure to historic misconduct-related issues is another factor that can weigh on sentiment towards Lloyds. The bank was the hardest hit of the big lenders by the PPI mis-selling scandal and claims here show few signs of drying up. Indeed, the lender announced a further £600m provision for this at the half-year stage, bringing the cumulative total set aside by Lloyds for PPI-related claims to an eye-watering £10.4bn. Moreover, the bank was forced to shell out fines totalling £226m earlier this year for its part in the Libor and repo rate-rigging scandals.
True, the pace of the UK's economic recovery - the IMF expects the UK economy to grow by more than 3 per cent during 2014 - is supporting a significant recovery in Lloyds' performance. At the half-year stage, for example, the group's bad debt charge tumbled by 62 per cent, which helped boost the lender's underlying pre-tax profit by a third to £3.82bn. In fact, analysts at broker Investec Securities expects the bank's earnings to recover to 7.9p a share by end-2016 from a loss in 2013. Lloyds' capital cushion looks robust, too, and its Basel III-basis common equity tier one ratio (comparing the highest-quality capital with assets, weighted for risk) reached 11.1 per cent. That leaves Lloyds as one of the best capitalised of the UK’s big banks.
