Lloyds Banking Group: pick a number

Lloyds Banking Group: 

pick a number

There is a lot of noise around the bank

Life used to be so simple. You bought shares for one price, sold for another, and the difference was the profit or loss. Not where the UK government’s 39 per cent stake in Lloyds is concerned. It handed over 74p per share, and has since received 11p in payments from the bank. So the outlay is 63p, right? Wrong. A new bonus plan for chief executive António Horta-Osório is based on the government selling for at least 61p, which was the market price when the shares were bought (it paid over the odds). And if you take off the 11p received since then, the price falls to 50p. Voilà, four different prices at which the government can say it is making a profit.

The entire debate is, of course, irrelevant. What matters is not what the government paid for the shares, but what it can sell them at and here reality is not so flexible. They fell 3 per cent to 53p on Friday.

Poor full-year numbers were partly to blame. Although impairments were lower than expected, the news on margins was disappointing. Net interest margins fell 14 basis points to 1.93 per cent and the recovery will not be as fast as analysts expected. But there was also bad economic news, with a UK manufacturing index showing a decline in February.

This is more significant for Lloyds than for other UK banks as Lloyds is a pure play on the UK economy. It lacks the investment banking buffer (or drag, depending on the markets) of RBS and Barclays, and is the polar opposite of HSBC and Standard Chartered with their focus on cross border trade. Almost two-thirds of its loan book is in UK mortgages. In good times that is a virtue, but if the UK is suffering, so is Lloyds.

There is a lot of noise around the bank. UK regulators might still require it to hold more capital. The EU mandated branch sale, to Co-op, is still not a done deal. 

And another £1.5bn was set aside for insurance mis-selling, bringing the total to £7bn. Despite all the noise, the shares have more than doubled since last summer, so even if it were to sell now the government could say that it is sitting on a gain of sorts. There is no guarantee that it will ever make a profit on its stake, whichever “in” price it chooses. It should stop worrying about past prices, and get on with the business of selling.