We would love to hear your thoughts about our site and services, please take our survey here.
I wonder how much of the negative forward guidance on NIM is driven by political sensitivity rather than pure commercial assessment? The banks are beneficiaries of the higher interest rate environment and must sensitive to reporting ever higher profits at a time when the wider UK economy is struggling to cope with the new 'real' interest rate environment. With a high chance of a Labour Government within 12 months, the banking sector's natural inclination will be to talk down future prospects to show they are "sharing the pain" in the sincere hope they will avoid the spectre of a new windfall tax. If I am right, the forward looking gloom will repeated tomorrow by LBG and on Thursday by Nat West.
Better to take a hit on the SP now rather than promote the yourself as a prime target for the windfall tax.
Trotsky
Excellent analysis of the position. I hope your counsel is followed and people keep calm heads.
As with all news items, none of this is helped by a worldwide media that like to dramatise and exaggerate. They are only interested in making the news "exciting" to increase ratings without any reference or consideration to the damage their puerile reporting will render to peoples' lives.
Perfectly reasonable to have an expectation of 70p. We all know LBG is under-valued. But the combination of the financial crisis (and everything that flowed from it), PPI, Brexit and Covid have been and, in part, remain, major disruptors. As you know, the total cost of PPI to LBG was circa £22bn or five years post tax profit. No surprise market confidence has been rocked and you do get an element of "what will be next"?
But that really is the point that the more bullish amongst us are making - the assumption that what happens next will not be a rewind of what has been an awful decade for both the banking industry and LBG in particular. All LBG needs to do is enter calmer waters and keep improving margins. If that happens over the medium term the shares will get re-rated. Hopefully that will begin this year but IMHO the markets will remain nervous waiting for the next thing. Let's hope it doesn't arrive!
In the current political and economic climate it's not surprising for the LBG Board to be concerned about a potential windfall tax. The Chancellor gives the impression of someone who wants to grab tax wherever and whenever he can and there is public opinion upside in having a go at the banks.
So it seems a good idea for LBG to up the impairment provisions and play back to the Chancellor his continuing pessimism on the economy. I suspect the pessimism is considerably over-cooked but that's fine, LBG can release the provisions next year when the entrenched pessimism has been proved to be over-stated.
Underlying profit before Impairment £8,958m - 46% up on 2021 -very positive advance and above expectations. Shares are being marked down because of the higher than expected impairment provision of £1.510m. At the same time the bank is saying that it is seeing "very modest evidence of deterioration" in its credit book.
LBG has form in being very prudent on forward provisions and I would predict that the £1,510m provided will prove to be considerably over the top. How much of that is down to extreme prudency or simply window dressing the results down to counter any campaign for a further windfall tax, we will never know.
Personally, I will focus on the profit before impairment as that reflects the business performance and longer term value.
Understand all the disappointment and I am no great fan of buy-backs. But this is a big buy back - at current pricing 4.2bn shares- equivalent to 6% of the issued equity. That will have significant impact as the year rolls on. Hope they get going early and take advantage of current pricing.
I forget who on this board predicted some days ago that Russia would invade this morning but well done on the forward look!
When the dust settles these results won't look too bad IMHO. The shares remain significantly under-valued.
Theosus - Agree entirely. But whatever the JPM Chase ambitions are the cost of winning new accounts in the UK and the time it takes to build real volume makes me wonder about the business plan? Given that groups such as LBG are trading at such low valuations (especially on international comparisons) wouldn't they be better off meeting their objectives through acquisition? Organic growth is fine but inherently slow.
Interesting piece in the Times Money Section yesterday with some useful analysis on the reality of the competitive threat (or lack thereof) from the Challenger Banks. Some key stats:
LBG Loan Book 30.09.21 £451bn
Monzo Loan Book 28.02.21 £87.1m
Starling Loan Book 30.06.21 £2.3bn
So Monzo and Starling combined have a loan book equivalent to 0.5% of the LBG book.
95% of Starling's loan book is Government backed - £2.2bn of Coronavirus support loans.
FCA research indicates that only one in four challenger bank accounts is used as someone's main account.
Unsurprisingly the Big 4 have reacted to the digital innovation of the starter banks and have largely caught up.
So next time you see a bearish analysis with dire threats of what the starter banks will do to LBG you might like to question the author's motive and his or her connection to the starter banks.
Thanks Bertram
Big difference between PPI and the HBOS acquisition -PPI had no upside just a massive cost that rumbled on for nine years - pure incompetence at every level.
HBOS can still deliver remarkable value if the LBG can truly leverage their enormous scale. They could start with accelerating the rationalisation of the branch organisation where there is still far too much duplication across the group.
I only have one focus - drive the bottom line like hell and distribute the benefit to your long suffering shareholders.
Bertram
Your figures in the final para are broadly right - I am predicting an LBG value in excess of £70bn within two years. And you may also be right that there are much better opportunities out there - I just think this is an opportunity with relatively low risk and a lot of upside.
Perhaps where we may disagree is that PPI was an "oops" moment. IMHO PPI was one of the biggest corporate screw-ups in banking history. Not only in the mis-selling but in the complete surrender to unlimited liability in 2011. My understanding is that our previous CEO led the surrender and made a howling error in not only raising the white flag but he also accepted unqualified liability without time limit. I think it perfectly reasonable to assume that, with more capable negotiation, the authorities would have accepted a time limit cap of five years at the maximum. Golden rule in business never accept open ended liability without time limit. Our CEO broke the rule and we as shareholders incurred a quite horrendous cost.
So I sincerely hope that the PPI type error will never be repeated. If it is I will be the first to the exit.
Bertram
It is interesting to note that in an awful lot of LBG critiques the matter of the 71bn shares is routinely mentioned. This however causes me relatively little concern as long as the profitability comes through. LBG has underlying current profits of circa £8bn and has a current market cap of £32.9bnn which means it is trading at a multiple of 4.1 times its underlying EBITDA. In the PE world I am used to dealing in you routinely see multiples of 10x for an average SME accumulating £3m EBITDA. If you stand back from that it is a market nonsense brought about, in my view, for two primary reasons - firstly interest rates at 0.1% which, whatever way you cut it, will not last much longer and secondly, the sobering fact that this is an organisation that paid away £27bn in cash between 211 and 2020. What would the share price be if PPI hadn't happened and a large part of £27bn had been distributed?
So in looking at the 71bn shares and forming a view on the future, I think you have to divorce a large part of what has gone before because of the enormous cloud of PPI which I trust will not be repeated. I might be a simple fellow but the reason I stick with LBG is that, in my view, it is more than capable of producing underlying profits of £10bn plus in the near term and when the market recognises the future track the shares will be re-rated. IMHO it is quite possible that we will see a market cap of £70bn plus (just 7 times EBITDA of £10bn) and a share price in excess of £1 within two years. DYOR.
https://www.telegraph.co.uk/business/2021/11/05/challengers-failure-disrupt-big-banks-proves-size-really-does/
Interesting analysis by Ben Marlow on the failure of the challenger banks. He rightly identifies the critical issue of scale which is a major advantage for the BIg 4 not only in banking but parallels can be drawn to both the energy and major accounting market. Very different dynamics in those sectors of course but the core issue of scale is the toughest nut to crack for any new entrant and in each of those sectors the challengers have failed to make impact.
So when you read a critic of LBG which questions future growth potential and the risk of new "fleet footed" challengers you may pause to consider the quality of the analysis? IMHO Lloyds has tremendous growth possibilities at the bottom line - cashless society ( reduced costs for handling huge amounts of cash), more credit card commissions, branch closures and the future prospect of higher interest rates and enhanced NIM. Too much of the media focus is on the absence of top line growth. When you have market leading scale you have so many opportunities to drive bottom line enhancement and IMHO LBG is capable of driving bottom line growth to a 40% plus enhancement from where we are now. I have little interest in the top line; I want to see significant cash coming through to long suffering shareholders.
Hardup - interesting analysis from the IC:
"which suggests either he’s bad at communicating his views or there were simply not enough votes for him so he refrained from being a minority voter.”
I don't think he is a bad communicator, I think he screwed up and he knows it. So yes, I think he stepped back from a minority vote which, of course, makes his position look totally inconsistent with his previous guidance. I heard him on Radio 4 this morning trying to make light of it which is the usual refuge for key position holders who really know they have screwed up. I suspect that he has been given a very hard time by his political masters for a performance which is as close as you can get to misleading markets. His reputation is damaged and any repeat performance and the men is suits will be after his head.
Briall - Yep it might take a few years but it might not. If we can have a period of relatively quiet sailing without a financial crisis, PPI, Brexit disruption and Covid, then I think LBG could surprise us all and hit the 80/90 mark within 12 to 18 months. Question is what price a quiet period?
As we all know to our cost, this bank paid out £27bn cash on PPI between 2011 and 2020 - that's around 75% of the current capitalisation. Without that awful drain on resources where would the share price be now? LBG has a lot going for it - huge scale, well timed digital investment, operational savings through the cashless society and closing branches and new entrant competition that's been full of upbeat messages but little substantive delivery. The scope for profit enhancement and dividend delivery within LBG is significant all we need is the quiet period and a management team to get on with it.
Not too surprised with this morning's market reaction. With all the media focusing on increased infection rates and the clarion calls for more restrictions, it is perhaps inevitable that LBG and Nat West will get marked down as a weather vane for the UK economy. Market reaction is as usual probably OTT, but IMHO that will soon be corrected once more perspective is gained. The more you delve into the COVID figures the more grounds for future optimism emerge and remember that HMG acknowledged when restrictions were lifted in July that we could rapidly see 100k per day - in fact the figures have been well behind the modellers predictions. And international comparisons are misleading - we are doing far more testing than most European Countries - e.g UK 14 per 100,000 tested - Germany 1.7 per 100,000 and yet the media treat them both as apples. It would help if our media were more searching in their analysis but it doesn't serve their dramatic headlines or breathless reporting of a new crisis.
SE - What you describe is an organisation ripe for acquisition.
Think about it from an acquirer's standpoint:
1. Significant (exceptional) market share and sticky client base;
2. Inflated cost base - duplicated branches all over the country under different group brands still not resolved;
3. Uninspiring management but OK at keeping the retail machine turning;
4. Spending a lot on digital banking but a significant part of that could be saved if a member of a wider global group;
5. Enhance client offerings and service through leverage of existing group products and services;
6. Could clear out a lot of senior management who would not be required probably without disturbing client relationships;
7. Leverage wider corporate client relationships across a global operation; and
8. Significantly undervalued in the current UK market.
Any major acquirer would look at the potential for a restated P&L at probably current EBITDA plus 50%. Regulatory approval would be a tough process given the LBG UK market share but for a major global buyer they would be used to dealing with such issues. There is little doubt that LBG is a significant and attractive cherry to the right acquirer.
https://www.telegraph.co.uk/business/2021/10/02/morrisons-deal-shows-appetite-british-assets/
Article in today's Telegraph looking at the issue of undervalued UK assets on the back of the Morrisons deal. LBG gets a passing mention.
The new CEO needs to focus on getting the share price moving. After the financial crash, PPI, Brexit market disruption and Covid it would seem the LBG management might run out of excuses for poor SP performance. This shouldn't be that complicated - come to market with a cohesive plan and an aggressive dividend policy that will reward shareholders for their incredible patience. If management can't do that the best result for shareholders will be a different owner who can.
Stockready - Agree entirely on the Brand issues. In any normal time LBG would not have been able to acquire the Halifax. The group brand value is huge and again not reflected in the current market price.
We live in very interesting times on LBG and I am more than happy with my holding. In my view the upside possibilities far outweigh and potential downside. And the market has given far too much credence to the new entrant threat - they simply do not understand the nature of retail banking relationships.
Best
WS
Stockready - you raise an interesting issue that I am sure has exercised the minds of a lot of LBG shareholders. All this capital being invested in fintech and new entrant banking when the leading retail bank in the UK is valued at only circa 6.5 times EBITDA. Consider that in the context of small sized acquisitions in Private Equity where a reasonable SME with £2.5m EBITDA will easily attract bids of 8 to 10 times EBITDA. It makes no sense and underlines the fact that LBG is significantly undervalued.
Despite all the noise and bloated valuations around new entrants and fintech one long held principle in retail banking still applies - customer relationships are sticky and getting people to change their bank is hard work. Look under the skin of the new entrants who boast N million accounts and you find that a relatively small fraction of that number represent real change where the customer is using the new entrant as their main bank. So what they have is N million accounts with relatively small deposits and limited activity - in hard commercial terms it means very little.
And the reality of their digital threat doesn't really stand up to scrutiny. LBG has huge embedded scale to leverage any digital investment - get their digital strategy half right and they have significant competitive advantage in a market with sticky client relationships. The competition has to invest so much capital upfront to make any impact only to find they can't keep up with the scale. It's tough on the new entrants but the big guys usually win.
So when I see large operations making moves into UK retail banking it begs the question what will be their customer acquisition cost and where will they be in three years? With the leading player (with huge market share) valued at only 6.5 times EBITDA aren't there more effective ways of entering this market? Obviously any move would trigger a rapid repricing but, working from such a low base, the value argument remains. None of that is rocket science so I would be surprised if the issue wasn't be considered in various boardrooms.
ScandiExpat certainly right about volume traded. It's been above 300m per day twice this week. According to the LSE charts, last time that happened was week ending 27 Feb. Let's hope it continues into next week.