Lloyds: What Should Investors Do?

The Government has made a profit of £61 million from selling a 6% stake in Lloyds. Should investors sell up or stay put?

Emma Wall 17 September, 2013 | 9:55AM
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US institutional investors and hedge funds are poised to snap up a stake in Lloyds Banking Group (LLOY) at 75p a share. 

The Government has sold off a slice of its ownership of Lloyds bank - taking its stake from 38.7% to 32.7%. The Government received a stake in Lloyds in October 2008 when it bailed out the failing back to the tune of £21 billion following the disastrous merger with rival bank HBOS. 

The sale is estimated to make the Government a profit of £62 million - although it will be recorded as a paper profit of £586 million as the Lloyds shares are listed in the public purse priced at 61p. The sale has raised £3 billion.

News of the sale pushed up the share price - although it has since fallen back to 75p. What will this mean for private shareholders? Should they sit tight or use this as an opportunity to offload their stocks?

Matthew Beesley, head of global equities, Henderson

In this first tranche what we expect to be a multi-stage process over the next 12-18 month, the Government are selling just 6% of the 27.6 million shares owned. The shares are being sold only to professional, institutional investors. Using a procedure known as an Accelerated Book Offering, the stock brokers appointed by the Government contact large institutional investors and ask them how many shares they would be willing to buy at their suggested price of 75p.

This price, which will have been set by the Government with advice taken from the stock brokers UBS and Barclays compares to the closing price of 77p, the 73p priced paid for the stake and the break-even price for the shares of 61p which takes accounts of other fees earned from Lloyds Bank during the Financial Crisis. So potentially netting the Treasury a small profit against the price paid but a total consideration of around £2bn which will be welcome in helping reduce the overall government deficit which is forecast to be around £120 billion at the end of this year.

It is a foregone conclusion that this book-building process will lead to more demand for shares than there are shares for sale. This is a deliberate ploy by the Chancellor and his advisors. It creates good publicity in showing the appetite for the shares and hopefully stores up demand for future sell-downs. Indeed, it might even lead to some near term disappoint by City institutions with their allocations below what they requested in the book-building process, and as such requiring them to buy further shares that they wanted to own off the open market. This will likely send the shares higher still - which of course guarantees more profits from further share sales that we know are to come.

The fundamental outlook for Lloyds Bank is very good - hence the immense demand for the stock. The debate in the UK is moving from questioning the economic recovery to understanding its magnitude. Not only does the bank benefit as one of the largest commercial lenders in the UK but as the largest mortgage provider, they will of course also be large beneficiaries of the sharp recovery we are witnessing in the UK housing market. Growing economies are great for banks and Lloyds Bank profits will be further swelled by the benefits of the on-going restructuring of the bank being undertaken by their Chief Executive, Antonio Horta-Osorio.

I continue to think Lloyds Banking Group shares are worth at least 100p as we look forward over the next year or two - especially when you consider their ability to pay a very large dividend. So for institutions buying the shares tonight or indeed for anyone buying the shares tomorrow, we think there is still lots of room to make money from the bank's recovery. George Osborne will certainly be hoping that I am right. 

Ed Salvesen, deputy head of equity research, Brewin Dolphin 

UK Financial Investments Ltd has successfully completed the disposal of the Government’s shareholding in Lloyds through an accelerated bookbuild and placing. We see this as a positive step forward – the reduction of the Government holding improves the investment case and the clarity regarding the lock up period should reduce future volatility.

The second placing could be more interesting as it could entail a retail component. There is also the chance that, by that time, a dividend could be around the corner. As a reminder, we expect management to start negotiating with the regulators concerning a dividend once its fully loaded Core Tier one ratio has reached 10%, which we suspect to be in the fourth quarter.

The news out is unequivocally positive and increases the free float for Lloyds. The next catalyst would be any further announcements concerning Help to Buy 2.

Paras Anand, head of European equities, Fidelity Worldwide

Today’s placing is a clear sign of confidence that the bank is well on the road to recovery.  Under current management, the bank is a substantially less complex business, and is today centred around strong franchises in retail and corporate lending. 

The focus on selling non-core businesses as well as cost reduction has improved the bank’s capital position to a point that it could return to distributing dividends to shareholders in the medium term.  Whilst we expect regulatory uncertainty to hang over the sector, Lloyds should be in a position to deliver a good level of shareholder returns looking forward.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Lloyds Banking Group PLC44.29 GBX1.58Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar