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Questor share tip: Sell Lloyds as Government prepares to cut stake
The bank has successfully managed several hurdles but faces yet more. This isn't a time to be buying shares
Lloyds Banking Group
75.37p+0.02p
Questor says SELL
Shares in Lloyds Banking Group are now trading at high enough levels for George Osborne to fire the starting gun on a third sale of the taxpayer’s stake in the lender.
The Treasury will drip-feed shares to the market over the next six-and-a-half months, using a process that gradually reduces the public ownership of the bank via brokers, rather than disposing of a big chunk as it has done in the previous two sales.
With around £3bn worth of shares expected to be sold off by the Treasury in the coming months, investors may ask if this is a good time to buy into Lloyds.
On the face of it, there are some reasons to be positive about the bank.
Lloyds is now largely a UK retail operation, and as a result is benefiting hugely from the UK’s housing and consumer recovery, with little of the painful restructuring that Barclays and Royal Bank of Scotland are going through.
Several potential hurdles that were weighing on investors’ minds – failure in the Bank of England’s stress tests, a tough leverage ratio, a vote for Scottish independence – have not happened.
The bank’s recovery is starting to show in its accounts. Lower impairment costs on bad loans mean underlying profits were up 35pc in the first nine months of the year.
The bank is becoming more secure. Its current capital ratio of 12pc, and its positive (relative to expectations) result in this week’s stress tests, should put it in a position to win approval from the Bank of England to resume dividends next year.
Antonio Horta-Osorio, Lloyds’ chief executive, recently announced a new cost-cutting plan that he says will allow the bank to increase lending, which should boost income and profits.
The market likes Lloyds. Its shares are trading above the 73.6p level at which the Government breaks even on its bail-out six years ago. However, in Questor’s view, they shouldn’t be.
Lloyds is a good bank, is increasing lending and is less exposed to large fines than its peers.
Secondly, political interference is creating danger for the bank. The Chancellor’s recent announcement on reducing banks’ tax relief hit Lloyds – which has £5bn of deferred tax assets – more than others. It also turned the issue into a political football, meaning further, more punishing, measures could be coming.
Add this to a competition inquiry into current accounts, which Lloyds is also the biggest player in, and the continuing issue of PPI compensation, which has dragged on longer than almost anyone expected, and Lloyds is by no means in a comfortable position.
The bank will probably reward shareholders with a token 1p dividend in the new year, but it will still be some time before the payouts return to a normal level. Meanwhile, Lloyds’ shares trade at a much higher premium to the bank’s book than any of its peers.
Lloyds is a well-run bank, but is too pricey for Questor’s liking. Investors should follow Mr Osborne and sell.