Tuesday, 3 November 2009

One for the connoisseurs

The wreckage continues. Lloyds today announced a record £13.5 billion rights issue and a divestment of assets to appease EU competition authorities. Together with RBS, Lloyds will have to lose businesses accounting for a very chunky 10% market share in UK retail banking.

If I were a Lloyds shareholder I would be hopping mad. You buy into the bank as you want a safe, steady investment that provides a healthy dividend. When the banking crisis kicks off, you sit back congratulating yourself on your good judgement: Lloyds is relatively unscathed, focusing on the boring business of retail banking rather than converting itself into a hedge fund like some of the other banks. It has a high level of deposits so isn't dangerously reliant on the now-closed wholesale markets. So, all-in-all, well done!

Then one dark Autumnal night your arch-schmoozer Chairman, who prides himself on his high-level Labour Party relationships (he's a former Chairman of Mirror Group), is flattered to be asked by the Saviour of the World to lend a hand. Victor Blank is persuaded by Gordon Brown to rescue the sinking HBOS by buying it. Competition laws would be waived. It's tempting: Blank would not only have helped save the world, he would have moved Lloyds into a commanding position in the UK retail banking market, a position he would otherwise never have been allowed to attain by the competition authorities.

Chief Executive and Board agree, and despite HBOS continuing to sink beneath the weight of its bad debts, shareholders approve. They're warned that to pull out now would endanger the whole financial system. They also take comfort that a well-regarded management must know what they're doing.

Well things turn out badly. The due diligence was inadequate: HBOS is a crock, its bad debts endangering the whole group. A Lloyds share goes from being one of the safest banking stocks to being one of the riskiest - possibly even riskier than the other major troubled UK banking stock RBS, as Lloyds has the additional headache of trying to execute a major merger.

Successive capital raisings - including a forced part-nationalisation - dilute the interest of the original risk-averse Lloyds shareholders. And now the only possible saving grace for the deal - that an increased market share would eventually make for a highly profitable UK retail bank - also dips beneath the waves. A waiver of competition rules? Can be arranged by the Government...in the UK. But Europe? The Commission can spoil it all.

There's talk of Lloyds having to dispose of the C&G, a nice mortgage operation that fits neatly into the group, as well as its Lloyds TSB Scottish business. Established UK banks need not apply as now the priority is to increase competition in retail banking: a poor price is therefore ensured. How fickle is government! OK, they're left with the larger Halifax and Bank of Scotland, but really, it hasn't been anywhere near worth the trouble, let alone the devastation inflicted on the share price. It'll be years before Lloyds recovers, getting back to the comfortable and sensible position of just two years ago. It may never.

If I were a Lloyds shareholder and I had the resources I'd be litigating my tail off: they were sold a pup. Certainly if this chain of events had unrolled in the US there would be lawyers crawling all over the bank's management and even eyeing up the Government. The UK litigation currently underway is, however, low-key and somewhat underpowered. Gordon Brown, along with his unappetising bunch of cronies, has a lot to answer for and in the context of his entire collection of disasters this is a relatively minor one. But it's surely one for the connoisseurs.


worm said...

hmmm, my shares in a certain high street bank might be stuck there for a few years yet methinks....oh well, I don't mind going long as long as they've gone up by double in 2-3 years or so

Gaw said...

You may be disappointed, dear boy.

worm said...

haha oh yes :(