Should I Buy Lloyds Banking?

Published in Investing on 19 October 2012

Harvey Jones tots up Lloyds Banking (LSE: LLOY).

It's time to go shopping for shares again, but where to start? Household goodie Unilever (LSE: ULVR)? High street favourite Marks & Spencer (LSE: MKS)? Or cut-price Tesco (LSE: TSCO)?

There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So here's the question I'm asking right now. Should I buy Lloyds Banking (LSE: LLOY) (NYSE: LYG)?

The killing

Every time the Lloyds share price rises, something in me dies. I finally gave up on the stock at the end of last year, selling my entire stake at a price of just 26p, and taking a big loss on the chin.

Almost immediately, the share price bounced back. By mid-March, it was up 43% to 37p. After a summer dip, the part-state-owned bank trades at 42p, and it's killing me.

Flirting with the enemy

If banks were any other company, nobody would touch them. The public hates them. Their customers hate them. Regulators hate them. When they look in the mirror, they even hate themselves.

Worse, their accounts are impenetrable, their working practices dubious (if not downright dishonest), their bonuses vile, and they have bankrupted the UK.

They are, quite understandably, public enemy No. 1.

Only the banks could survive all that, because we need them. Despite their current woes, they will be back. All shareholders have to do is buy at the right price, and be patient. Like I wasn't.

So should I buy Lloyds now?

The big sell-off

There has been some good news for Lloyds lately. It seems likely to be the biggest beneficiary of the Bank of England's funding for lending (FLS) scheme, with at least £22 billion of state support to help it offer lower rates to customers. That compares to £11 billion for Royal Bank of Scotland (LSE: RBS) and £9 billion for Barclays (LSE: BARC).

The Lloyds share price was further boosted after the FSA said the banks didn't need to hold extra capital against loans made under FLS, which means they qualify as risk-free.

Lloyds has also been simplifying its sprawling operations In August, it sold private-equity assets to Coller for £1 billion and is close to selling off another £1.6 billion worth of Irish real-estate loans.

Lloyds also sold 632 branches to the Co-operative Bank, in a forced (and loss-making) sale, and is pulling out of ten countries that it no longer considers are a strategic priority.

Bye-bye PPI

Half-yearly results, published in July, were a mixed bag. Underlying profits rose £715 million to £1.06 billion, but the group reported a statutory loss before tax of £439 million, after having to set aside £700 million in compensation for mis-sold payment protection insurance (PPI) in the second quarter alone (on top of £375 million in the first quarter).

The total estimated cost of PPI redress is a whopping £4.275 billion to date. That's another fine mess that banks have got themselves into.

The big banks face new competition from rivals such as the strengthened Co-op and new entrants such as M&S. They remain targets for ongoing campaigns by angry consumers, and are vulnerable to a eurozone break-up.

Shareholders also have the uncertainty of how and when the UK government will offload its 43% stake in Lloyds.

Pain, no gain

As I discovered to my cost, you can't write off the banks. Given time, they will recover. After all, money is their business. One drawback is that Lloyds won't pay you for waiting. The FSA recently stamped down on its plans to resume a small dividend from 2014, saying it should set aside the money against a possible eurozone break-up.

I don't like Lloyds, you don't like Lloyds. Most of all, I hate myself, for selling at the wrong time. Would I buy now? Not at 42p per share (too painful). One day I might regret that as well.

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> Harvey Jones owns shares in Royal Bank of Scotland. The Motley Fool has recommended shares in Unilever and owns shares in Tesco.

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closetspeculator 19 Oct 2012 , 7:26am

The most sensible (IMO) metric to judge banks on is BV/NTAV. On this measure, LLOY (as well as BARC and RBS) are all trading well under 1. Further, as you point out, the banks have been getting rid of assets that are considered unprofitable and not needed for their core business. So you could argue that the assets they now have are if anything 'safer' than when you sold last year. Might be worth tucking some away in that case.

cairey01 19 Oct 2012 , 10:38am

You were silly the sell early. The rapid drop in Lloyds share price since the state bailed them out is due to investors predicting a financial melt down in the Eurozone. If you think this is going to happen, we are all screwed where ever you put your money. António Horta-Osório isn't stupid and knows the state of Lloyds finances better than anyone. Talks of dividend and state sale shows positive signs. I don't hate the banks. There are many parties to blame is the financial crisis that hit us, governments, self responsibility.

It will take some time, but I'm in it for the long run. Lloyds could be one of those shares that just steadily creep up.

Jonesey12 19 Oct 2012 , 11:23am


Silly, true, and I'm paying the price! I think you're right about this stock steadily creeping up. Wish I was in on the ride.

Harvey Jones

cairey01 19 Oct 2012 , 11:38am

They maybe worth a punt 41p. I don't know for sure, but I think the government are reluctant to put to much pressure on the banks until they get their money back, by that time, any further regulation may not happen because the bank is doing well without the need. The Eurozone is the biggest unknown at the moment.

LastChip 19 Oct 2012 , 4:06pm

If I were in the market for bank shares, I wouldn't worry about paying 42p.

But I'm not, as I bought Barclays right near the depths of depression at a little over 80p and and have been collecting dividends ever since, whilst admiring my capital gain.

Was I cleaver? No, I took a punt on them being the only bank not to accept state aid and came out on top.

Do I have any regrets? Yes, I wish I'd sold some poor performers at a loss and bought bucket loads of Barclays.

The morel of the story, you can sit on your hands forever, but most likely, you'll have missed the boat by the time you realise it.

I'm the first to acknowledge, there's always a time to walk away if you think a share you're interested in is too expensive, but these bank shares aren't expensive by any stretch of the imagination.

Baring another melt down (and I haven't ruled that out yet), I suspect you're looking at a bargain in the long term.

KeyLifeSkills 21 Oct 2012 , 12:28am

Hi LastChip,

I also bought Barclays at 80p and bought a lot more when the price continued to fall - they bottomed out at around 10p. Since 2008, I've bought and sold Barclays many times and I've been fortunate in that I've done extremely well from this stock.

10p - over £4 (2009), is testament to the roller coaster ride this stock has experienced over the past 4 years. Over the long run, I think it likely that Barclays will revisit £4 however, I also think its likely that the twist/turns and bad news saga concerning banks has further to go. Given the yo yo nature of Barclays (and for that matter, many other stocks), I will continue to trade its price range. I last bought Barclays in June at £1.62 and 1.72 and sold our holding at 2.14 and my daughters at 2.27.

I don't expect to buy at the bottom or sell at the top, as long as I can make good profits then I am happy.


LastChip 21 Oct 2012 , 4:23pm

As far as I'm aware, Barclays have never been down to 10p in recent history - at least, not in the last 10 years. The lowest they went to was around 51p on the 19 Jan 2009 and the last time they hit £4 was 12 May 2008.

So I don't know what you're referring to, but I doubt it's Barclays.

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