Monday 27 July 2009

Privatise the profits: LLoyds Banking Group

Lloyds Banking Group has had a fairly good couple of weeks on the stock market,. The market has gone up 10% in the last two week, Lloyds has gone up 25% in the same time. Why could this be?

Well for one, the bank has been hinting at making a profit in the second half. As one would expect though, there is more to this than meets the eye, as actually profits are being 'brought forward' (what a great new Labour spin term that is!) to help Lloyds now. Later come the losses when hopefully the economy has recovered.

Secondly, the end of the process of putting loans into the Government's Insurance Scheme is nigh. Here Lloyds have made a huge winning bet. All their worst loans are going into this scheme - so most of HBOS in fact. As taxpayer's we are responsible for 90% of the losses. So the most Lloyds could ever lose is £25 billion, but it is likely to be far short of this, even in worst case models.

Thanks to these two events, even the bearish banking broking community is upgrading Lloyds to a buy at 80p odd. taxpayer's are going to lose their shirts and shareholders are going to to well at his rate; therefore if you want to help mitigate your future tax rises, buy some share in Lloyds or RBS!

The losses are being socialised; go private.


roym said...

as the amjority shareholder next year, won't cambourne force lloyds to buy back more of their crap?

CityUnslicker said...

roym: Lloyds and RBS are paying A&O and Linklaters a lot of money to ensure this cannot happen.

Demetrius said...

So who owns Lloyd's shares? And just who benefits? Or is that covered by "privacy" laws?

CityUnslicker said...

no demetrius - anyone who has over 3% has to tell the marker - long or short.

You can find this on the lse website. LLoyds is mostly owned by UK pension funds and foreign equivalents.

Simon Fawthrop said...

"there is more to this than meets the eye, as actually profits are being 'brought forward' "

Wasn't this Enron's buisness model? They'll be suggesting SPV's for the other dodgy loans and businesses next.

CityUnslicker said...

The APS Government scheme is a giant SPV!

Nick Drew said...

GS - the analogy may yield useful insight

Enron was taking mark-to-market profits (initially these were legitimate IMHO) on long-term deals from which the cashflow would take years to catch up

but they couldn't bridge the gap with regular borrowing because they'd have been downgraded to sub investment-grade, at which point no-one would have been willing to do the long-term deals with them

their choice was: forego growth, or move the debt off-BS

but exec compensation was based around the share price, which would have been set back if the growth had slowed ...

these days, MTM rules have been suspended so it's childs play to move profits between time-periods - no-one is even looking !

Mermaid of Moorgate said...

What will happen if the government discovers that banks have been sitting on the gov't loans instead of reinvesting this and bailing out businesses? Will this lead to poorer-than-expected profits?

Also, this is a dumb question probably, but I'd like to know - if the taxpayer is supporting the banks, why would he want to invest as well - isn't this like a double exposure? Or is this a way of offsetting the tax (should profits rise)? I'm a bit confused as to what the real benefits are to the taxpayer, if there are any other than keeping a major UK bank alive.

hovis said...

Mermaid IMHO there is little benefit to the taxpayer. I think the propping up rather than winding down of Banks such as Northern Wreck, RBS and HBOS was at best ill conceived. This is vile Corporatism of the worst kind.

CityUnslicker said...

mermaid - the taxpayers are going to take a hit on the losses. The banks only absorb the first 10%. So the banks survive and share price rises. taxes also rise to pay for the losses.
Best thing to do to mitigate the tax rise is invest money in banks in an isa - that way you get the benefit of the rise in share price to help mitigate the tax costs you will suffer.

I use it as an example of the mad situation we are in than as investment advice!