Member Info for Hounddog10

Questor is probably broadly right - it will take a little time for share price appreciation to come through and the emphasis is now on dividends. However, the half year analysts call had some quite positive aspects.

Firstly, the structural cash flow hedge. This arcane, but highly important area, is having a big effect on Lloyds because interest rates have risen so rapidly and IFRS fair value accounting is applied. Firstly it has blown a £6bn hole in reserves reducing TNAV by about 10p per share. Secondly, it is contributing to a significant tailwind to net interest income. An extra £800m this year over 2022 and crucially another £800m in 2024 over 2023. This is because large chunks of the hedge are scheduled to mature so they are pretty confident of the figures. Also, as the forward yield curve flattens and start to dip the £6bn loss in reserves should start to reverse. Chalmers said he was thinking TNAV should be around 50p by year end.

Other income. They said that this is rising by about 7% and hinted it should maintain that rate (or better) as the strategic initiatives come through. That should be about £300-400m extra per year.

Volatility and other items. The volatility element has been largely negative for the last 18 months and again it is linked to the forward yield curve and steeply rising rates. If forward rates flatten or drop then we should see limited negative amounts or potentially positive amounts. Volatility was £150m negative in Q2.

So it might be thought that there is an extra £1-1.5bn of income that could come through in 2024 largely connected to base rate rises tailing off (although some of this will likely be offset by lower margin on new mortgages). Also my suspicion is that H2 2023 will be somewhat better than the analysts’ current consensus because volatility will be fairly flat, loan provisions a little less and NII a bit more.

However, there remains some uncertainties for 2023 - resumption of pension fund deficits, HBOS Reading, adverse rulings on PPI cases (one has been stuck in the Supreme Court for over a year) and the £1bn tax case. The ruling on the latter is likely to land this year (although whoever loses will probably appeal given the amount involved). 2024 will be much clearer on these matters even if not entirely resolved.

It is also the case that the effect of the buybacks will probably start to be felt in the next year or two.

The problem is that their communication is consistently bad. In the last two years pre close full year trading updates have had to be downgraded on audit - one time was twice and it was significant. Bristow does not appear on top of the numbers and cannot seem to forecast the business. We are meant to be on a £14m annual revenue run rate by now.

We did not learn much more than that the revenue was £3.6m. That still puts them on course for a £1m annual loss so they will need to up sales significantly to get into profit.

I agree that they were probably holding out in order to announce a commercial deal which has either failed or been delayed.

They are hopeless. Absolutely hopeless. They cannot even get a basic communication out to the market by a time they themselves determined - or issue a RNS that there is going to be a delay. Bristow should go.

Top hat

Absolutely agree with you. If you look through my previous posts I have consistently raised this issue and said that, contrary to some, Lloyds would now be at this (broadly favourable) position on the pension scheme. However, yes, in my post today I failed to mention that some more money might be needed into the pension schemes, It was an omission. It is not clear whether more money will need to go in. However, there are three matters which should be considered. Firstly, it seems that no VARIABLE contribution to the schemes (30% on any capital distribution) was paid on the payment of the final dividend in Q2 as pre-agreed with the Trustees/regulators (that could be viewed to work either way ie either the schemes are anticipated to be sufficiently funded or Lloyds had persuaded everyone of a temporary pause ahead of updated valuations and then has to pay a catch-up). Secondly, I detected in the interims a softening of language around whether deficit contributions would cease. Thirdly, Lloyds has said that overall capital accretion for the year will be 175bps. H1 banking build (ie profits in the core banking division) was 135bps which was knocked down to 75bps after one off charges (including - and mainly - FIXED deficit pension contributions for the WHOLE year). They are quite bullish about H2 so we should at least get another 135bps on banking build but that would take us to 210bps (75bps + 135bps) not 175bps. So they seem to be anticipating sone one off charge(s) going through. Perhaps it is VARIABLE charges on pensions.

Having said all this that 2023 should basically sort out any pension issue - even if there are small amounts they want to stretch out for a bit longer to n subsequent years.

I do think we are now moving away from pensions risk and that the (almost) last one off big risk is the £1bn tax case.

Sorry for the capitals. Done for clarity.

Excess capital is £1.5bn - and that is after taking account of £900m dividend accrual (ie 50%) for total dividends for 2023. Consensus for H2 2023 is c£2.5bn net profit. Knock off the other 50% for dividends ie £900m and should be £1.5bn excess capital for H2. So £3bn in total.

If in 2024 they generate (say) £5.5bn net profit and spend £2bn on dividends then £3.5bn excess capital.

Those sort of numbers. Possible one off costs that will reduce it:

-£1bn tax case which is awaiting judgment

- revival of PPI - legal cases still being heard

- £400m (I think) indemnity on Visa/Mastercard sale

Most excess capital will be returned through buybacks and yes excess capital to be returned based on 2024 numbers ie Feb 2025.

Hardup

I suspect it is this rule that largely conditions the algorithm. It makes it difficult to buy when there is buying pressure in a gradually rising market. It seems that big buyback purchases come with a slowly declining share price or a sudden dip (such as sort of today). I doubt that is the whole story and the algo also has other parameters.

As you point out there are also volume constraints.

“In so far as prices are concerned, the issuer must not, when executing trades under a [buy-back programme], purchase shares at a price higher than the higher of the price of the last independent trade and the highest current independent bid on the trading venues where the purchase is carried out.”

https://www.handbook.fca.org.uk/handbook/MAR/1/Annex1.html?date=2016-03-07

If you are looking at end Q2 TNAV (45.7p) to end Q1 TNAV (49.6p) then the explanation is (mainly) the adverse movement on the cash flow hedging reserve combined with recognition and payment of the final dividend. Offset by profit earned.

The structural cash flow hedging is a bit of a menace and has beaten down TNAV substantially over the last 18 months. I don’t entirely understand the hedge as it is poorly explained in the accounts but it seems that it uses interest rate swaps valued on a mark to market basis (based on the forward yield curve) and that when forward rates are rising sharply it leads to substantial losses. However, as forward interest rates top out and then are expected to dip these losses should be reversed. That might start to happen in the next quarter.

Yes, the Mining Act enforcement is my only major worry for this stock. I have never been entirely convinced by Eric’s answers about this in the webinars. One response he had was that it “would not be fair”. Well, that has never stopped governments, particularly in Africa. He said the last meeting on this was April (did not mention what exactly was discussed) and they haven’t heard anything since. So perhaps Ketan Patel, Shanta’s long history (generally of losses) in Tanzania and ESG is keeping the issue at bay. Whether they can continue to do so indefinitely I am somewhat doubtful. It seems every other Tanz mining project is subject to the 16% free carry.

However, increasingly much of Shanta’s value will be from WK (10% free carry per Shanta website). But if Tanz do enforce the 16% I can see them wanting to take 16% of Tanz cash flow if it starts to be flowed into WK in which they will have no stake. The quicker WK is built the better.

The headlines I fear are for 3Q and the full year. This is because this year we have new IFR17 insurance accounting impacting the insurance division. This has had the effect of pushing out revenue recognition reducing near term profits but it also significantly adversely impacts the volatility line. Last year’s numbers have been restated. Not much difference for Q1 and Q2 but in Q3 due to the Truss debacle profit after tax is restated to £494m from £1,209m. Full year profit goes from £5,555m to £3,923m.

https://www.lloydsbankinggroup.com/assets/pdfs/investors/financial-performance/lloyds-banking-group-plc/2023/q1/2023-lbg-ifrs-17-transition-document.pdf

Yes I was wondering that. Not normally in favour of a dual listing as the liquidity normally settles in one place anyway but AIM, and the London markets more generally, are out of favour. Difficult to shake that reputation.

It is worth remembering that Eric said in the last webinar that there was something like a $6m VAT refund that missed (or was not due) at the 30 June cutoff. Can’t remember if he said it had been received post period. But that will knock down net debt further.

In HY1 they put £800m into the pension scheme. They also (along with the other banks) have had to increase the counter cyclical buffer by the equivalent of 1% CET1 by early July - so somewhere closing £2bn. Both of these are key matters in affecting dividend distribution capacity as they deplete the availability of surplus CET 1 regulatory capital.

The better news is that these matters are now effectively behind us. It is also worth mentioning that with taxable profits tax losses get monetised such that they become surplus capital to be distributed. Not that much - but a welcome few hundred million a year at c£5bn pre tax profit.

My guess on interim dividend is 0.90-.95p. At these levels I would like the buyback to be enhanced by say £0.5-0.75bn (they should have the capacity) but Lloyds has been firm that capital distribution decisions are year end matters so I would be very doubtful they will change their view (same with special dividend).

Hang in there. Lloyds gets stronger not weaker - but undoubtedly it is a slow grind.

I would agree on a rocketing gold price - in Africa it could have some difficult consequences. I would prefer a steady but not dramatic rise.

I think it is worth remembering the c£400m Eurobond repayment to be made in July 2024. They have backstopped that with a short term facility, if needed, but it would be a bit strange to pay out a dividend in advance of that if they don’t have the cash and have to rely on the new facility.

My guess is that the new CEO will want to be cautious and feel his/her way in especially as parcel and letter volumes could be quite rocky this year and the impact of revisions/Daventry/Warrington/new parcel machines will take some time to be visible.

BT’s CEO is also off - in part worn down by BT’s culture, unions etc.

Said a lot of good candidates. Would be some sort of holding statement in the interims. Nothing specific.

Tentatively it appears that a mine at Ramula would cost $100-140m and would produce somewhere between Singida and NLGM. So say 60,000 oz. That would, I think, really be just the starting point. No doubt the reason it would cost more than Singida, inflation aside, is that it would have the capacity for considerable expansion.

Current VAT. Not past VAt.

Need to take into account tax. Tax is heavy at 30% plus there seem to be some (rather puzzling) permanent disallowable losses in subsidiaries. Plus any losses on hedging are disallowable as deemed “speculative”!

Randomix

Actually it was rather worse than that. Lloyds had 6bn shares before buying HBOS. In 2009 it issued:

- 2.6bn shares to recapitalise itself. Lloyds did not need to recapitalise much but was forced to by the government. The money raised went into HBOS;

-7.7bn shares to buy HBOS;

- 47bn shares to recapitalise itself with the c£20bn you mention (all the money going into HBOS);

- Small number of shares for other reasons.

So by the end of 2009 it had 63.8bn shares in issue. Over 10x as much as before.

I think we should have had a notification when they went through 10%. Don’t remember one. Anyway, as being said, key question is who has got the shares. It might be sufficiently split that no notification is required.