Can We Ever Trust Lloyds Again?

Published in Company Comment on 5 May 2011

Lloyds Banking Group lets its investors down yet again. What next for the shares?

Holding shares in Lloyds Banking Group (LSE: LLOY) for the long term is rather like trying to re-build the trust in a relationship after one's partner has had an affair.

"For better or for worse, for richer, for poorer, in sickness and in health..." etcetera, but the old conservative, high-yielding bank we all knew and trusted let us down badly when the black horse allowed its head to be turned away from its day to day existence -- to the temptress that was HBoS.

Now all that may be water under the bridge, but it's hard to forgive and forget. And there's been more sickness than health recently.

Last year, though, we were able to breathe a huge sigh of relief. Lloyds had got its act together, was suitably contrite, and seemed to be bringing home the bacon again after a couple of discounted fundraisings to oil the wheels. 

With a profit of £2.2bn, the black horse was back in the running and we could rub our hands at the prospect of big dividends being resumed in the not too distant future.

But the bank's first-quarter statement has put paid to all this kind of hope ... maybe.

Double downward whammy

Lloyds has been hit very hard by the double blows of payment protection insurance (PPI) compensation and a charge of £1.1bn to allow for further falls in commercial property prices in Ireland.

Write-downs of £2.6bn were £500m over the previous estimate. The bank reported an overall loss of £3.5bn for the first quarter and the shares have reacted accordingly, shedding over 7% on the day at the time of writing.

And this comes under the guidance of the new man at the top, Lloyds' new chief Antonio Horta-Osorio, who replaced Eric Daniels on 1 March.

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The former Santander man may not understand the "steady as she goes" ethos us long-suffering owners of the bank first bought into -- and may have no plans to return to such a philosophy. Who really knows what plans the man has?

But there's certainly a slight whiff of the kitchen sink being thrown in, to get the bad news out of the way in one fell swoop as new bosses like to do.

The PPI fiasco has caused Lloyds to make a £3.2bn provision for potential mis-selling claims by customers who took out the insurance following April's judicial review which ruled against the banks. The Irish problems continue and investors are clearly worried over where the bottom is on this problem.

Light at the end of the tunnel

But there was some good news. Lloyds' core business showed growth as customer loans and deposits rose from £842bn to £848bn, and the underlying performance may be showing signs of improvement as the old nag increases market share.

Last month, Independent Commission on Banking singled out Lloyds for more asset disposals causing the bank to accelerate the sale of branches – and the new boss is reportedly keen to sell off the Scottish Widows business.

We'll know more next month when Lloyds reveals its slimming down plans and the new man really lets us know what he has in store for us owners -- who, of course, still include the UK taxpayers to the tune of over 40%.

Before the double-whammy provisions, Lloyds made a profit in the quarter of £284m -- though this was well down on the £1.1bn made in the equivalent period of last year.

For 2012, the brokers anticipate earnings per share of anywhere between less than 6p, or over 12p, and if these highly-paid analysts find it difficult to pin down any kind of valuation on Lloyds, what chance does the private investor have?

The answer, of course, is every chance. By taking a broader view and having the courage to take advantage of such severe weakness in the share price, private investors have the opportunity to beat the market in the long-term -- in my opinion.

But it takes courage and, of course, it takes fresh cash -- so it's understandable if private investors are a little reticent in resuming their trust.

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> David owns shares in Lloyds Banking Group.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Brockasaurus 05 May 2011 , 12:31pm

They are equally as disappointing to their customers. I wonder whether it is much surprise this calamity fest ended up in public hands.

AlysonThomson 05 May 2011 , 2:15pm

And who is David? Was it he who wrote the article? I can't see any indication that it was.
I am a fellow idiot in that I kept hold of my shares in the Lloyds TSB Group for the long term. Couldn't believe that the shares were priced so low given the size of the Group but now, of course, that is going to be reduced.

dunn1960 05 May 2011 , 3:00pm

David Holding - holding by name, holding by nature

Tykethat 05 May 2011 , 3:37pm

This is a classic tale of new CEO comes in, writes off as many bad news stories as he can, as soon as he can.

This time next year..... his plan will be say "look how good I am , turning this sinking ship around"

diddyda 05 May 2011 , 3:39pm

Halifax appear to be making as difficult as practicable to remain a loyal customer. Having asked why the service has deteriorated recently, the reply was, 'We have to standardise our service to that of Lloyds'.

Lloyds made the fatal mistake of listening to Gordon Brown's advice of merging with HBOS. Having wrecked the UK economy and the profitability of the once stalwart of British banking, Lloyds, he is now angling for a position on the IMF. Watch out world. Gordon Brown will be coming to a country near you soon to show you how its done!

Max878 05 May 2011 , 3:58pm

I'm buying.

rober00 05 May 2011 , 5:23pm

Gorden brown. IMF, Not if cameron has anything to do with it!! Thank God.

UncleEbenezer 06 May 2011 , 7:49am

Could PPI be a convenient scapegoat for writing down losses they'd prefer not to admit to? Things like off-balance-sheet vehicles having property interests whose paper values can only exist so long as they never come onto the market?

eccyman 06 May 2011 , 12:03pm

Lloyds was OK, it was when financial genius Gordon Brown got involved and "suggested" they merge with HBOS.

wastedyouth 08 May 2011 , 10:11pm

All will be forgiven at lloyds when the dividend finally appears.

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