Lloyds Will Soon be Sold off

Lloyds Banking Group LN in the UK has posted a £2.1 billion profit in the first half of this year. That’s the first time since the financial crisis took hold of it and rung it’s neck almost completely, when the government had to step in and bail it out by taking over 39% of its shares at the time. Just one year ago the bank had made a loss in the first half of 2012 to the tune of £456 million.

However, the news did not come as a surprise to anybody since predictions had already been made that the bank would be returning to a profitable situation after this first half year. The City was also waiting on Lloyds’ plans regarding dividend payments, which until now have been stopped by the EU due to the bail-out.

Shares rose at one point by 5%, then 6% during trading today and now stand at +7.77% (that’s up 5.320 GBp to 73.790 GBp). That will certainly make it easier for the Chancellor of the Exchequer of the UK George Osborne to sell the shares, which he has already alluded to. The Chief Executive Officer António Horta-Osório is in line for a bonus on the sale of the shares owned by the government. The agreement fixed was that he would get the shares to above61p (which is the price that they were bought at in 2008) and that the government would be in a position to sell at least33% of what it held. In the event of this happening Horta-Osório would be able to collect a bonus in 2018 to the value of £1.5 million. The bank had to get rid of 7, 000 people in 2012 after losing £3.5 billion in 2011. There were also plans to cut another 8, 000 staff over another two-year period.

Horta-Osorio

Chief Executive António Horta-Osório wrote a letter to shareholders today immediately on publication of the results in which he stated “We are now far more efficient, having simplified the bank from our customers' point of view, whilst simultaneously reducing costs by over £1 billion. We have reduced our global footprint, so that we can focus on our core UK business, such that by the end of this year we will be operating in around 10 countries, down from 30 countries two years ago.”

Lloyds Banking Group shares have increased by 41% in two years, sinceJune 2011 when a decision was taken to simplify the structure of the bank. The bank has stated that this means that it is the biggest increase in the share price of any bank in the UK. The bank also boasts being in the toptwenty of share-price increases for banks around the world, since its shares have increased by 144% since January 2012 in particular. The EU forced the division of Lloyds and TSB into two separate banks and this will take place in the fall in the UK as TSB start to open. There will be approximately 600 branches throughout the country that will be set up and that will have the TSB name stamped on them. TSB will be sold through an Initial Public Offering.

Lloyds TSB

Lending by Lloyds has increased by 4% each year over the past two years where small and medium sized companies are concerned. The market in general for this sector fell by 4%, going the opposite way.

Shares for Lloyds Banking Group have been above the government-imposed threshold of 61p now for several weeks and it is suspected that the government of the UK will sell off some of the shares as quickly as in the next few days.

But, the image of Lloyds has been marred by a scandal involving insurance. Recent information published by the UK magazine and consumer watchdog ‘Which?’ has estimated that the Lloyds Banking Group and Barclays Bank wrongly sold Payment Protection Insurance to bank clients amounting to double the cost of hosting the 2012 Olympic Games in London. Payment Protection Insurance is the insurance that is provided in case the person taking out a loan or a mortgage cannot make payments due to loss of employment or illness. However, they never informed the clients that the insurance was optional. Other clients that had decided to take it out discovered on making claims that they were excluded from insurance pay-outs by the bank. Lloyds bank has had to put aside £7.3 billion in total to meet these costs. It has put aside another £500 million in this first half year also. Lloyds was fined for having delayed compensation pay-outs to clients of the bank and also having rejected claims that should have been honored. The fine totals £4.3 million and140, 000 clients of the bank are concerned. At one point there were some 2, 000 complaints being made every day to the call center. Eight out of ten complaints have been agreed to be honored by the bank.

Lloyds received a bail-out in 2008 that was a total payment of £20.3 billion. The average market share at the time was61p although the British government ended up agreeing to pay 73.6p per share over a number of days. The difference was written off and became part of the UK national debt quite simply at the time. Bad debts incurred by Lloyds have fallen by 43% to £1.8 billion.

Barclays Bank

At the present time Lloyds Bank has a core Tier 1 ratio which amounts to 9.6%. It will rise to over the threshold of 10% by the end of this year according to bank statements. The Tier 1 ratio is the ability to the bank to be able to ride out any financial upheavals that take place without having to be (theoretically) bailed out by the state again.

While only a few days ago Barclays had an enormous shortfall in finances and had to issue a statement saying that it was going to raise up new capital from shareholders, Lloyds is now going to avoid having to do the same.

However, despite the improvement that brings the bank back into profit and means that it will be able to sell off the shares owned by the government, there are still a great deal of shadow areas that have been detrimental to the image of the bank, notably the bonus of the CEO and the PPI scandal.