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Lloyds Banking Group Retail Sale; Part 1

Lloyds Banking Group…what has happened?

The UK government has announced it intends to conduct a retail sale of a £2bn worth of Lloyds shares to the public in “Spring 2016”. The sale proceeds will be used to reduce UK government debt.

Members of the public will get a 5% discount to the Lloyds share price and a bonus share for each share held on the one year anniversary of the retail offer (up to a maximum of £200 in bonus shares). Members of the public who subscribe for up to £1000 worth of shares will be prioritised.

This forms part of a plan to return Lloyds to full public ownership, and follows recent sales of Lloyds shares to institutions as part of a Trading Plan. The plan has intermittently sold 1% stakes in Lloyds during 2015 reducing the UK governments holding from 24.9% when the Trading Plan was announced on 17th December 2014 to 10.95% at present. It is not known whether the intention is the retail sale will comprise the final holding totally exiting the UK government from its stake. This would be very positive as it would mean no overhang post the retail sale. The UK government bought a 43% stake in Lloyds as part of a rescue post its controversial acquisition of HBoS.

We are reserving comment on the merits of the retail sale until nearer the time.

Is it good news for Lloyds Banking Group?

The exit of the UK government from its share register will not change Lloyds operating business. This has benefited from declines in credit impairments and PPI charges, a healthy UK economy and stable net interest margins. Whilst these factors should persist in 2016 investors should bear in mind the changing UK banking landscape, an increased “challenger bank” presence and higher capital levels that will reduce the scope for dividend increases. The outlook for mortgage/ credit demand is uncertain as first time buyers increasingly delay home purchases. There are profound generational shifts under way that will alter UK banks’ ability to profit from the “Millennials”.

The marketing and high profile of the IPO should be well received, market conditions willing. Early press reports have pointed to substantial registrations of interest in the IPO.

Lloyds shares started 2015 at 76p, hence within a penny of current levels. One factor is the UK governments periodic share sales which have created a “share overhang”. Another reason for the “dead money”/ lack of sustained upward movement is the dividend issue. Investors have frequently expected Lloyds to pay substantially higher dividends in recent years than have materialised. It was only in April 2015 that Lloyds returned to the dividend list with a paltry 0.75p final 2014 payment. Lloyds has wanted to pay a higher dividend but had its plans scaled back by the FCA. The board commented at the interims (31 July 2015) that share repurchases and special dividends were “possible”. Investors should take this with a proverbial “pinch of salt” as payouts (normal and special) still require FCA clearance. The dividend consensus outlook is 2.5p in 2015 rising to 4p in 2016, levels that are lower than press commentary recently.

Conclusion

We reserve judgment on the merits of the Lloyds retail sale for now. Should market conditions be poor, we suspect the UK would delay the sale. There is salient information in the sale run-up notably Q3 results in October 2015 and 2015 preliminary results in February 2016. So watch this space as we will provide updates nearer the time.

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