In Depth

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Lloyds retail share offer could come in the autumn

7 March

Lloyds shares are continuing to defy the ongoing gloom in the banking sector, raising the prospect that the government could resume selling down its stake in the bank.

Having reduced the taxpayer's holding from more than 43 per cent to just over nine per cent, the "drip-feed" sale, being handled by Morgan Stanley, stalled late last year, when stock dipped well below the 73.6p break-even price on the 2008 bailout.

That all changed at the end of February, after annual results revealed a bumper dividend payout despite falling profits. Shares have since surged around 17 per cent and are up as much as 30 per cent from a 2016 low of 56p to 72.4p this afternoon.

Meanwhile, The Guardian notes that last Wednesday, the price actually surpassed the bailout break-even level and reached as high as 73.8p at one point.

If shares stay above the Treasury's profit line for even a short period, it is expected that Morgan Stanley will again begin selling to institutional investors, says the Daily Telegraph

Selling at the previous rate of one to two per cent of its stock a month, the government could hold a stake as low as four per cent by the summer or shortly thereafter. This would be a "manageable amount to offer to small investors in a final privatisation" in the form of a promised discount retail share sale, continues the Telegraph.

Morgan Stanley's mandate ends in June, so the retail offer needs to take place in either May or, following an extension, the autumn, adds the paper. 

A sale would take around four weeks, meaning the shares would need to be stable for a significant period first, and would be timed around a set of quarterly results "to give potential investors an up-to-date version of the bank’s finances". 

This makes autumn the most likely option, assuming the shares continue to trade well. 

Could Lloyds share sale be back on the agenda?

29 February

Lloyds' annual results last week were, as the government would have hoped, the perfect tonic to reverse a slide in the bank's shares that has coincided with a slump across the wider sector.

From a prevailing low of around 62p per share before the results were announced on Thursday, stock was just a little more than 1p below the government's 73.6p break-even price at the close on Friday. This raises the prospect that the sell-off of taxpayer shares, seemingly kicked into the long grass in January, is back on the agenda.

Brokers generally appear to support that view. Hargreaves Lansdown lists eight analysts that updated ratings in the wake of the results: seven give the stock a positive "buy" or "outperform" rating while the average target price was 86p. In short, the consensus is that Lloyds is underpriced and investors should buy in anticipation of a rise to come.

This turnaround came despite another big provision for PPI mis-selling and an 11 per cent fall in pre-tax profits to £1.6bn for 2015. Investors instead focused on a huge increase in the dividend – a £2bn distribution, including a special top-up payment from excess capital, boosted the total per-share payout to 2.75p, well ahead of expectations.

With capital reserves running at an improved 13.9 per cent and interest margins up and forecast to grow further this year, Ian Gordon, an analyst at Investec, told the Financial Times he has "increased confidence" of a dividend of 5p per share for 2017, representing a bumper yield of eight per cent.

"[Lloyds] is a 'low/no growth' bank but, in our view, offers a very high and clearly visible capital return story," he added.

Some hurdles remain, however. That profit fall cannot be completely ignored and derives in part from stubbornly high costs around £8bn, while a targeted fall in the cost-income ratio to 45 per cent was pushed back by two years. Sentiment could also be hurt if the drip-feed of charges related to past wrongdoing does not dry up soon.

More critically, the Chancellor delayed the promised discount offer to retail investors in part because of worries about market "turbulence". The last thing the government will want is to announce a sell-off only to be derailed by an unexpected shock and market slump.

Overall, therefore, it is likely Osborne will wait a few months even if the price returns to a reasonable level before announcing the offer, to be sure that the share price really has stabilised.

Lloyds shares surge as bumper payout draws focus from profit fall

25 February

Lloyds shares surged by as much as ten per cent this morning, despite profits falling further than expected on the back of a bigger-than-anticipated charge for past wrongdoing.

The bank's end-of-year results showed a pre-tax profit of £1.6bn, down from almost £1.8bn in 2014. The fall was attributed to a fourth-quarter provision of £2.1bn to cover the ongoing costs of compensating customers mis-sold payment protection insurance policies. Most analysts had forecast £2bn.

Lloyds was forced to set aside an additional £4bn for 2015 as a whole and its overall PPI charge has now reached £16bn, which, the Financial Times notes, is almost half of the total across the industry.

Despite this, the bank has followed through on its aim to make an additional payout to investors from excess capital. Investors will receive a final dividend of 1.5p for each share plus a special top-up of 0.5p, making an aggregated distribution of £2bn to give a received income of 2.75p per share for the year as a whole.

Shares surged ten per cent on the open and were still more than nine per cent higher by 9.30am. However, while stock was above 68p, it remains short of the government's 73.6p break-even price from the 2008 bailout that would trigger the disposal of its final shares in the company.

Also helping sentiment was an improvement in underlying profit to £8.1bn, above the £7.8bn for the previous year but modestly below analyst expectations. Lloyds has also issued guidance that its interest - essentially profit - margins and capital generation will increase next year, which will buoy hopes of even better dividends.

This is very important for its prospects, Jason Napier, an analyst at UBS, told the Financial Times. "[Lloyds] must not, however, disappoint on 2015 dividends or 2016 payout guidance… [it is] a dividend not a strong growth story," he said.

Elsewhere in the results, The Guardian says there could be controversy over the remuneration awarded to chief executive Antonio Horta-Osorio, who received a total package worth £8.5m, including an increase in his basic salary of six per cent. This compares to a total staff pay rise of two per cent, although the Portuguese banker pointed out that salaries have increased 13 per cent since he took over in 2011.

Lloyds: five things to look out for in its annual results

24 February

Lloyds Banking Group, the taxpayer-backed lender that the Daily Mirror notes has the largest shareholder base of any UK company, is to announce its annual results tomorrow. Here's what to look out for.

1. Dividends

Obviously a big issue for investors will be how much income they will receive from their shares. Lloyds has been recovering in the recent past and reintroduced its quarterly dividend early last year – and it later hinted it might seek to distribute excess capital above the regulatory minimum in a special end-of-year top-up payment.

The Sunday Times had speculated this could lead to a total distribution of more than £2bn, which would equate to in excess of 2.3p per share. This is by no means guaranteed and depends, among other things, on the amount the banking group has to set aside for past wrongdoing. The Scotsman instead cites a forecast of as low as 1.5p, including no top-up special dividend.

2. Provisions

Lloyds is expected to make a particular additional provision for its mis-selling of payment protection insurance, which has already cost the bank £14bn and could impart another £2bn hit. Whether it can distribute any capital will also depend on whether regulators feel it has set aside adequate reserves to cover the risk of the economy hitting the rocks.

3. Profit

Setting aside more money for mis-selling will also eat into profits, which are broadly expected to have dipped slightly to around £1.7bn. Ian Gordon, a banking analyst at Investec, told The Scotsman he expected Lloyds to have recorded a loss of £465m for the final three months of 2015 and a full-year profit of £1.69bn, down from £1.76bn in 2014.

Anything significantly worse - or, more importantly, a warning that future profits will be subdued - could really hit investor sentiment.

4. Bonuses

In the context of the above considerations, which could weigh on performance, investors will be keen to see evidence of pay restraint – shareholder anger prompted a policy change at HSBC earlier this week. So far, there has been a leak to Sky News that chief executive Antonio Horta-Osorio will take home a bonus of £800,000 as part of a total package worth £8m last year, though this is down on 2014.

5. Share price

Most importantly for shareholders – not least the government, as it awaits the chance to resume selling down its remaining nine per cent interest in the group – will be the effect on the share price. If dividends or profit surprise on the upside, shares could break the torpor that has seen them languish a little above 60p in recent months.

Once they return to the bailout break-even of 73.6p, the government may reschedule its promised discounted share sale, although it is unlikely that tomorrow they will make the required 11p (17.5 per cent) leap from this afternoon's prevailing price of 62.6p unless the bank performs phenomenally well.

Lloyds plans to woo investors with £2bn payout 

22 February

Lloyds Banking Group is planning to woo investors with a bumper payout that could total £2bn or even more as it seeks to boost its share price and get privatisation back on track.

In results due out on Thursday, the bank will confirm whether it has been able to continue with a recently re-introduced quarterly dividend to shareholders, as well as whether it will have enough excess capital to make an additional "special dividend" payment. Last year, it said it would make further distributions to investors if it continued to hold more capital than the regulatory minimum.

According to the Sunday Times the bank is seeking to "win approval" from the Bank of England for a total payout of £2bn, of which £500m would be a special top-up amount. The final figure depends on the amount of additional compensation Lloyds is forced to set aside for payment protection insurance mis-selling and whether regulators believe it is holding enough capital in reserve against the risk of a further economic slowdown.

Analysts at Barclays say the payout could be as much as 3.7p per share, or £2.6bn, but that would imply no provision for PPI mis-selling. It instead predicts a new provision in the low billions and an investor payout of 2.3p, or £1.6bn, says the Daily Mail

A big payout and a decent profit – the consensus forecast is for pre-tax earnings of £1.7bn – could help lift shares that have been in the doldrums of late. Rumours of the payout have already boosted them by two per cent to a little more than 63p this morning. If they go back above the 2008 bailout buy-in price of 73.6p then the government can resume selling down its remaining nine per cent interest and return the bank to the private sector.

The Mail adds that the payout could be part of a wave of investor distributions by big banks in defiance of their share slump and global economic concerns as they seek to curry favour with nervous investors. Today, HSBC confirmed that despite a slight dip in net profits, it still made a big £3.8bn final quarter dividend, well above expectations of £2.7bn.

Lloyds faces another day in court over £3bn bond battle

09 February

Lloyds Banking Group has not yet put behind it a battle with its own bondholders that could boost its earnings by anywhere up to £1bn over the coming half decade.

A group of investors has won permission to appeal to Britain's highest court over the forced redemption of £3.3bn worth of emergency bailout-era loan notes that pay interest of as much as 16 per cent, The Times says. The Supreme Court confirmed that an application brought by the bonds' trustees, BNY Mellon, to appeal an earlier Court of Appeal decision was granted last night.

Lloyds has been battling to redeem the bonds since regulators discounted them for the purposes of capital reserve "stress tests" in 2014. It says this constituted a "capital disqualification event", which gives it the right to force investors to switch to standard bonds paying low single-digit interest rates, saving around £200m a year in interest payments for the next five years.

Bondholders argued successfully in the High Court last year that the prospectus for the loan notes did not allow for such a disqualification. Lloyds countered by saying the omission was merely a mistake and won a unanimous Court of Appeal verdict in December.

The bank does not need to wait for the Supreme Court verdict to proceed – and has said it will not. It confirmed last month it would begin buying back the bonds at a slight premium to their face value today - 9 February - with hold-out investors being forced to trade in without the premium later.

If the Supreme Court finds in favour of the investors, Lloyds has said it will compensate them for losses. But the action group raising money for the appeal has demanded the bank's executives put the redemptions on hold.

"The directors at Lloyds really do need to wake up and start acting with integrity here," Mark Taber told the Daily Telegraph. "The High Court found it did not have the right to redeem and now the Supreme Court has granted leave to appeal, so Lloyds should put redemption on hold pending the outcome of the appeal."

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