When the financial crisis kicked off, Lloyds TSB shareholders could have been forgiven for feeling a bit smug.
Their bank had been decried as the dullest in the sector. While its peers threw money into sub-prime derivatives and rampant expansion of mortgage lending, the only thing going for Lloyds TSB was its large dividend payment.
But for a brief moment after the crisis began, Lloyds looked like the place to be. As other banks' share prices fell, their dividend yields shot up but all that meant was that the market was correctly predicting they wouldn't be able to pay them. But sensible old Lloyds was different in fact, it even hiked its interim dividend payout.
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So it's small wonder that shareholders were none too happy when the bank decided to go and get itself a big chunk of exposure to both sub-prime investments, and overly-exuberant mortgage lending, by buying its failing rival HBOS. For one thing, it would mean paying the dividend in shares. For another, it meant taking on a complicated merger deal with a weak rival at a time when every aspect of banking business is set to come under severe pressure from one of the worst recessions we've seen in a generation.
And now the deal is looking even worse for shareholders. Lloyds is taking advantage of the government's big bail-out offer, and plans to raise £5.5bn in total. But among the strings attached to the government's offer of help, is that banks cannot pay dividends to ordinary shareholders until they have fully repaid the preference shares. With Lloyds TSB planning to issue £1bn-worth of those, while HBOS is issuing £3bn, that could take some time. As Colin Morton, a fund manager at Rensburg points out, "Until HBOS, everybody thought Lloyds would pay a cash dividend. It has gone from being one of the two banks with the safest dividend, to paying it in shares, to paying none at all." Regardless of whether the deal has any merit or not, most shareholders own Lloyds TSB for the income, not for the prospect of a huge banking deal. So there's absolutely no guarantee that they'll vote for it.
But it's not just shareholders who should be worried about the deal taxpayers should too. Now that the government has stepped in, there is no need for HBOS to be propped up by a private sector buyer. The new Lloyds-HBOS could conceivably end up with the government as its biggest shareholder, on 43.5%. That's at a time when house prices will be plunging, and bad debts piling up in both the Lloyds and HBOS sides of the business. Yet Lloyds should be able to stand on its own. There will be few enough independent banks left once this crisis is over so why should the taxpayer be paying for a perfectly sound one to be nationalised, particularly when the end result will be less competition for consumers?
Never mind how the shareholders feel the government should be calling a halt to the deal right away.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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