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Lloyds Banking Group Shares Delayed

Lloyds Banking Group IPO…ITS OFF

The Chancellor of the Exchequer has announced the UK government has decided to postpone indefinitely its planned IPO of its 9.2% stake in Lloyds Banking. The announcement was unexpected as an IPO had been flagged for Q1 2016.

The Chancellor has blamed “global market turmoil” for the decision. Chancellor Osborne commented “now is not the right time” which suggests the government has noted the recent move downwards in the Lloyds share price and market conditions since New Year’s Eve.

Had the IPO proceeded near the current share price the government would have realised approximately 53.5p per share against an estimated book price of 73.6p per share. This implies a £1.42bn loss on this tranche of shares. The government had committed to a 5% cash discount and a 10% share bonus for investors holding for 1 year. Shelving the sale neatly gets the government off the hook on these sale terms.

The news comes the day after Royal Bank of Scotland announced significant new provisions for pensions, US residential mortgage backed securities, PPI and private banking impairments totalling £4bn or 30p of tangible net assets per share. There have been suggestions from some quarters of higher of higher credit impairments/ PPI over 2016 for the UK banks. However the RBS move in lowering expectations so early in 2016 gives cause for concern the bank is provisioning very early for a bad year. Recent commentary from RBS CEO “we have a lot of wood to chop” suggests issues remain.

A by-product of recent China/ emerging markets concerns has been a lessening of interest rate expectations. An international GDP slowdown is underway with plenty of currency and commodity related volatility. A problem for many countries is the budgetary and deflationary problems caused by the collapse in crude oil prices. Bank of England Governor, Mark Carney’s commentary about the MPC’s interest rate decision now being “straightforward” suggested base rates on hold for at least six months. This is negative for bank net interest margins generally.

 Conclusion

Whilst understandably the UK government is keen to realise a good price, current market conditions are not conducive, and market volatility is clearly a problem for IPOs to the general public which can require at least a fortnight of marketing lead time.

A delay to at least late summer (assuming an eventual IPO remains policy) is on the cards. By then Lloyds would have published its 2015 results (due 29th Feb 2016) and investors will have a better sight on the sector’s impairment and credit demand trends.

Whilst the Chancellor pointed out the IPO was off, it is a moot point whether or not further Lloyds Banking share sales are stopped altogether – indeed the government could return to its earlier Trading Plan strategy (in place for 2015) which involved the periodic sales of Lloyds shares to major institutions (approximately 1% of Lloyds capital was being sold per month during 2015).

Lloyds shares, already down at 63.5p in a weaker market did not elicit much response. The government overhang remains, but this is possibly a minor point relative to more significant concerns relating to market stability and banking profitability over 2016.

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