Farewell to the bank that did Dull
Neil Collins
This is getting serious — so serious that I’ve done something I may have cause to regret terribly a year or two hence. I have sold my shares in Lloyds TSB. I did so with a heavy heart, and an even heavier loss, since they were bought when the shares were yielding 7 per cent, a rate comfortably in excess of the interest on the bank’s most generous deposit account at the time. They are still yielding 7 per cent, in a manner of speaking, but the shares are sad, shrivelled things, and the extra income I’ve had is a tiny fraction of the capital I’ve lost.
Lloyds was the bank that did Dull. It maintained the dividend when all around were urging it to cut (the finance director cut himself loose instead when the board, under chief executive Peter Ellwood, overruled his recommendation) and for five years the new board under Sir Victor Blank continued to pay the Peter Ellwood Memorial Dividend, even though it absorbed most of the profits.
When things started to go bad last year, we had reason to be grateful, and not just for the cheques. Having paid out so much to shareholders, Lloyds had nothing left to waste on adventures in derivatives, or expensive acquisitions. We were puzzled when the board turned down the chance to take over Northern Rock for a song, but when the truth about the Rock’s balance sheet emerged, and the financial panic got worse, we were grateful for that, too.
We watched while first RBS and then HBOS had to eat humble pie, admitting that their balance sheets were shot and scrapping this year’s dividends even before last year’s final had been paid. How smug we were when, on 30 July, Sir Victor raised the half-time payout by 2 per cent, explaining that ‘this increase demonstrates the strength of the group’s business model’. Lloyds shares had been pasted along with all the other banks, but they were now yielding 12 per cent. Twelve per cent! What a bargain! Surely it wouldn’t be long before everyone else woke up to the strength of the business model and piled in.
Alas the market, as usual, had a better view of the future than the directors, and that splendid yield was an illusion. As HBOS shares plunged, and the absurd prospect of Britain’s biggest mortgage lender going bust suddenly looked like an awful possibility, Lloyds was called in and told to mount a rescue. Sweeping aside such details as due diligence, or the views of the competition authorities in London and Brussels, Lloyds (if the deal goes through) is about to swallow a bigger bank on terms which give the majority of the equity to Lloyds shareholders.
Alas again, the dividend which the management had fought so hard to keep has been swept away in the maelstrom. In its place is the legalistic con-trick of a scrip dividend, which is more trouble than it’s worth to small shareholders.
As if that’s not bad enough, Lloyds has effectively debauched its balance sheet. HBOS owns Halifax, but not even all its vast retail deposits added together are enough to cover its mortgage advances. It is highly dependent on cash from the money markets, and once those pesky short-sellers had got stuck into the stock, the money markets took fright. Whatever you think of shorting, they had a point. HBOS’s reserves will be stretched if house prices go on falling, and mortgages go bad.
What could be worse still is the other half of the HBOS pantomime horse, the Bank of Scotland. It has had a fine old time exploiting the Halifax balance sheet and making big bets on commercial property. Not only has it lent large sums to adventurous borrowers, but it has taken a slice of the equity as well. The problems here have yet to emerge, but everyone expects them to do so before long. The Lloyds balance sheet, by contrast, was reasonably comfortable, but because HBOS is so much bigger, the combination looks much more like stretched HBOS than conservative Lloyds.
In other words, Big Lloyds is going to be short of capital. A fortnight ago, when shares did a bungee-jump bounce, Lloyds nipped in and stuffed the buyers with £760 million of new shares at 270p apiece. Given the chance, they’d do it again, since every little helps. Jonathan Pierce, the banking analyst at Credit Suisse, reckons they need to do it a dozen times more. He thinks Big Lloyds needs £10 billion of new capital, and values the shares at less than £2.
One day, maybe, they will be worth much, much more than that. The new combine so dominates British retail banking that the Competition Commission wants to investigate even though the government has waved the deal through. Its customers will also contribute new capital, by way of lower rates on savings and higher charges for loans. In the meantime, the shareholders can only dream of that strong business model and those wonderful dividends. That was then. The world has changed.
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