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Irish losses and mis-selling batter Lloyds – steer clear

Lloyds Banking Group has just reported a 2011 first-half net loss of £3.25bn. Its shares have fallen 40% since April, making it the worst-performing UK bank stock this year. David Stevenson looks in to the company, and warns investors to stay away.

In November 2011, wepublished an update to this article. Read David Stevenson's latest takeon Lloyds Banking Group shares here: Keep clear of Lloyds Banking Groupshares

What's new?

Lloyds Banking Group (LBG) has just reported a 2011 first-half net loss of £3.25bn (compared with a £1.3bn profit in H1 2010) after Irish bad loan provisions increased, funding costs rose and £3.2n was set aside to cover claims for mis-sold loan payment protection insurance (PPI). The stock fell 5% when the figures were announced. LBG shares have now fallen 40% since April, when the government-appointed Independent Commission on Banking recommended that the bank sell substantially more assets than the planned sale of 632 branches, making this the worst-performing British bank stock this year.

What is Lloyds Banking Group?

LBG is Britain's largest retail bank and its biggest mortgage lender. It includes Lloyds TSB, Halifax, Bank of Scotland, Birmingham Midshires and Cheltenham & Gloucester. Indeed, "one in three people bank with us", claims LBG. The group also owns the insurance, investment and pensions firms Clerical Medical and Scottish Widows.

What's its history?

Lloyds began in June 1765 as private bank Taylors & Lloyds in Birmingham, where it operated for nearly 100 years from a single office. New rules and a need for more capital led to a stock exchange listing and fast, takeover-driven growth. In 1884 Lloyds absorbed the London bank Barnetts, Hoares, Hanbury & Lloyd, which had inherited the black horse logo from a Lombard Street goldsmith. International expansion followed. But as credit crunch losses mounted, the 2009 tie-up with Britain's top mortgage lender HBOS to form LBG plunged the group deep into trouble. It needed a £17bn bailout: taxpayers now own 41%. Since the merger, 43,000 jobs have been axed.

Who runs Lloyds?

The group's chairman is City ber-grandee Sir Win Bischoff, one-time Schroders and Citigroup CEO. Leading bean counter is ex-Prudential finance director Tim Tookey. The recently arrived new boss is ex-Santander UK chief and former Goldman Sachs employee, Antonio Horta-Osorio. He pocketed a signing-on package worth up to £13.4m.

What did shareholders think of that?

Not a lot. Together with a £2.6m pay off for previous CEO Eric Daniels, Horta-Osorio's deal caused an "embarrassing shareholder revolt" at the most recent AGM, says Sean Farrell in The Independent. Almost 20% of voters didn't support the payments, and outraged shareholders actually booed the board. Meanwhile, Sir Win had to apologise for that PPI mis-selling, for which LBG has set aside £3.2bn (see above).

But otherwise, is LBG on the way back?

To a degree to repay government and Bank of England support, LBG is selling off assets. This year's first half saw £31bn of "non-core" disposals, meaning that the 'core tier 1 capital ratio' a key measure of the bank's reserves now tops 10%. But underlying total income dropped 12% compared with 2010's first six months, while the core business profit fell by 28% to £2.7bn.

The analysts

Of the 33 analysts surveyed by Bloomberg, 42% are bulls, 31% say "hold" and 27% are sellers. The average price target is 60% above today: amongst the latest analyst opinions, the keenest is Robert Law of Nomura with an 80p target. Even the most bearish forecast, from David Grinsztajn at Alphavalue, still sees 23% upside. Our view: We last advised caution in mid-June. And although LBG shares have since plunged by 23%, we see no reason to change our stance. Merryn Somerset Webb's then-view that British banks could "have more loan problems than they're admitting" still applies.

The numbers

11-08-04-Lloyds-Bank

Stockmarket code: LLOYShare price: 37.5pMarket cap:£26bnNet assets (published end-June 2011):£45bnP/E (current year estimate):17.2Yield (consensus prospective):0.3%Geographic shareholdings:UK 77%, US 9%Largest shareholder:UK government (41%)

Directors' dealings

Nothing major to note since our mid-June report on Lloyds.

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