Hargreaves Lansdown clients would participate in Lloyds sell-off, but broker says why not buy traded shares now

20th June 2013

A survey of Hargreaves Lansdown clients has shown that 65% would participate in a Lloyds Banking Group IPO but only 43% in an RBS one.

An Initial Public Offering (IPO) is expected perhaps as early as the autumn, with shares offered initially to institutional investors and then subsequently retail investors. A privatisation of RBS seems much further off.

Richard Hunter, Head of Equities at Hargreaves Lansdown says: “Lloyds Banking Group is already back making profits; it has cut costs and largely repaired its balance sheet. The time seems right for an IPO and the share price is now back to around the same level that it was when it was bailed out in 2008.

“Since it was the taxpayer who stepped in during Lloyd’s hour of need, it is only right that the taxpayer should have the opportunity to share in the Bank’s recovery via a retail offering. The recent Direct Line and Esure IPOs have shown there is significant investor appetite for share offers of this type and we expect there to be considerable interest from clients.”

The HL client survey asked if the shares were made available to the public via a Share Offer tomorrow:

Would you be interested in applying for Lloyds shares?                 65% said Yes                       35% said No

Would you be interested in applying for RBS shares?                      44% said Yes                       56% said No

Hunter adds: “Of course investors don’t necessarily have to wait: if investors believe in the Lloyds Banking Group recovery story, they could buy shares now and then benefit from any increased interest and any share price growth over the summer in anticipation of an autumn IPO. And, indeed, some have – Lloyds is the most actively traded stock this year amongst our clients.”

Hargreaves has also issued a note with the following thoughts from Hunter on Lloyds and RBS

Lloyds

“With Lloyds, it is difficult to imagine that there would not be a retail offering at some point along the line, especially if the share price were to continue to recover from here, although at the time of writing Lloyds are standing at 61.8p, almost exactly equal to the reported “breakeven” price of 61.2p.

“Whether the shares are offered to the public (and at what discount) remains to be seen, but it could conceivably be at a higher price than the one we see today, even with a discount, and the Treasury will be keen to recoup as much money for its coffers as possible. For investors who really buy into the Lloyds story, therefore, a much simpler alternative may be simply to buy the shares on the open market without waiting for a government announcement.

“The current market consensus for Lloyds is a strong hold. It is considered to be a UK economy play, since its fortunes are largely tied to what is happening here, as opposed to some of the other UK banks which have a significantly higher global presence. The lack of a dividend payment is notable in the current interest rate environment, particularly of course for income seeking investors.

Of more interest – certainly from an investment perspective – was the RBS part of the speech. Indeed, in some ways, it was also rather more surprising.

The Chancellor promised an “urgent investigation” into whether a restructuring of the bank was necessary – into the well-reported “good bank” (existing businesses) and “bad bank” (where toxic loans, such as exposures to UK and Irish commercial property loans would be hived off). Regarding the “bad bank”, he commented “We will establish a Bad Bank if it meets our three objectives: if it supports the British economy; if it’s in the interests of taxpayers – and if it accelerates the return to private ownership.”

RBS

“It seems that the bank is simply not ready to be floated. This flies in the face of recent speculation that a late 2014 flotation was being considered and, realistically, means that a pre-election sale is now unlikely. Of course, before such investigations are complete, the notion of a sale of the government’s 81% is fanciful. This is quite apart from the fact that the current share price of 316p (down 1% on the open of trading following the announcement) is a country mile from the “breakeven” price of 500p.

“Investors had been front running the Chancellor’s announcement, with the market consensus of the shares coming in at a sell. The current uncertainty regarding the “good bank/bad bank” debate adds to a share with few friends. The shares were slammed in early May as its first quarter trading update fell strongly short of expectations, (as with Lloyds) the lack of a dividend payment is negative, and government interference (which is disliked by investors) seems to have resulted in the departure of the Chief Executive at a crucial strategic time for the bank.

“For RBS, a return to grace in the eyes of the market, let alone a sale of the majority stake, seems a little further off than before.”

27 thoughts on “Hargreaves Lansdown clients would participate in Lloyds sell-off, but broker says why not buy traded shares now”

  1. Paul C says:

    Hi Shaun, an interest rate rise, you must be joking. If it comes it will be small 25 points seems right and according to Newsnight last night, no where near the election for fear of “politicisation” so there we have 0.25 % in November.

    This of couree just a fig leaf to attempt to suggest that the old rules still apply, lreGFC

    1. dutch says:

      ‘The fact is that no Western economy can stand “normal” interest rates
      anymore. Banks couldn’t live with them, Govts neither. No the only way
      is for market/wonga rates for the masses and free money for those near
      London.’

      Bang on the money Paul

      1. Anonymous says:

        RBNZ has 3.5% rate, which is higher than recorded inflation.

        Also I’d bet that Germany could cope with base rates going back up to 5%. They don’t do ponzi style housing booms ….

        1. Eric says:

          Absolutely, The difference down here in NZ is that the banks aren’t bust.
          We’re still playing by pre-2007 rules; as long as the Chinese keep buying dairy products and the Auckland housing market doesn’t go ballistic (up or down) things will be fine.

          1. Anonymous says:

            An important difference is the prosecution of the South Canterbury Finance directors. British bank directors don’t fear accountability and do get rewarded with tax payer subsidy for failure.

          2. Eric says:

            Yes – the banks maybe be in better shape here, but many people have lost money in failed Finance Houses. South Canterbury and Hanover being the most notable. Over 20 such firms have gone bust in recent years. There are downsides to living in paradise with only 4 million other people. We don’t have too big to fail but several people have demonstrated that it’s possible to make bad decisions and lose a lot of investors’ money. The Hanover directors have recently been given a Court date (July next year) – which will be 7 years after the company failed. Wherever you are in the world you’re never very far away from financial shenanigans! The 1% have branches in all parts.

  2. Joe says:

    Now the show is properly starting, and we can all enjoy some of the popcorn, as we potentially have a proper discussion happening at the BoE meetings.
    As you say though, the rationale for raising rates was an expected rise in wages, followed very closely by an official release of the ‘disappointing’ numbers – so maybe we’ll see them change their mind next month.
    What would your vote have been this month Shaun?

    1. Anonymous says:

      Hi Joe

      My vote would have been the same as it has been for around the past year which is to look to reduce the amount of the asset purchases or QE from the £375 billion. We have had a couple of maturities which we did not have to rollover we could have let mature and as we are in a recovery we could sell off some of the Gilts held. After all with Germany, France, Spain et al all regularly showing record low bond yields and highs for prices there is demand. If we do not take this chance I think we will regret it as we are likely to find we are selling them at a more difficult time.

      As for Base Rates I am in an awkward position because I would like them to be higher and would have raised them to 1.5% in 2010 ahead of our inflation episode. However because of the past rally in the pound and because I hope to find out more about the behaviour wages I would wait before voting for a rise now.

      1. Noo 2 Economics says:

        Shaun the “plan” is either:

        1. Let the gilts mature over the next 30 – 60 years so redemption at 100 occurs.

        2. Roll over the short/medium gilts into long term holdings while rates are low as the BOE may be expecting yields to go up long term as the UK sinks deeper into the abyss.

  3. dutch says:

    I find it absurd that these ivory tower based economists can’t see what’s happening on planet earth.People are going self employed to get hassle free tax credits,thus the wages are dropping and unlikely to up given that would mean losing their tax credits.
    If they released data on the numbers of self employed claiming TC’s then we’d be talking.
    Instead,they want to talk wage pressures when we’re being swamped with EU migrants,here to graft,send money home.and get their kids in good schools.

    The reason to raise rates in my alternative universe is get the velocity of money rising.Get savers spending their income.

    Unfortunately,that would destroy the ‘housing is wealth’ banking ponzi and we can’t have illusions getting smashed can we?

    1. Anonymous says:

      They can’t raise rates and they never will. We are past the point of no return on housing.

  4. dutch says:

    Sorry back already to vent some more

    The fact that GDP is rising so fast without any siginificant wage pressures would surely make these people question their methodology and reasoning…but not so our central banking class….oh on…far better to sit there on £375 bn of ‘assets’ and whistle dixie

    1. Anonymous says:

      Hi Dutch

      The current plan if you can call it that is for nothing to be done about the £375 billion of QE until after the Bank of England has raised Base Rates a few times. This seems set to maximise losses on the programme to me as such a scenario is one where Gilt prices are likely to fall probably heavily. Also in such a situation sales of the amount required are likely to be difficult.

      Accordingly I consider the plan to be both ill thought out and ill advised.

  5. Anonymous says:

    Shaun,
    Am I too cynical to think no interest rate rise before the next election ( unless Scots vote yes then turmoil ensues) apart from political reasons the £ would strengthen negating current supposed goldilocks scenario (trade deficit increases ?)
    Also current bank rate irrelevant in the real world (as discussed before) so even 0.5% rise would make little difference to loan rates unless bank’s increase rates by greater margin and expect delay in saving rate increases if any!

    1. Anonymous says:

      Hi Chris

      I think we know now how banks respond to falls in the Base Rate as we see lending rates falling by less than savings rates. But it has been so long since Base Rates rose there is much more uncertainty about what would happen. For example banks are not making much of an effort for savings, would a Base Rate rise change that much? Also those who saw no interest-rate falls (credit card rates) might be a bit upset if they went up in response.

  6. Anonymous says:

    You just have to look at how they manipulate the media. Yesterday DT had “no rate rises”, then today we have “rates my rise” again. They are just leading people from pillar to post and back again. Now we will have 3 to 6 months speculation on whether the two “unknowns” will join the “rebels”. Of course they won’t – they were picked as unknowns because they said they’d do whatever was asked of them.

    What a joke the whole situation has become. Just step back and ask yourself – why are people trying to divine what the BoE may or may not do? What is this circus? It seems to have no bearing on reality whatsoever. Yet somehow we are trapped in the confines of this debate.

    Good article Shaun but it’s neither here nor there. The UK is going down, 0.5% or 0.75%.

    1. Forbin says:

      “What is this circus?”

      yup – want some popcorn ?

  7. Forbin says:

    Will it bust the banks?

    typically I see that a 90% LVT id 4.2-4.9% for a £200K single bed end of terrace home = 180K

    ( park homes come in at 150K !! )

    at 4.5% then thats £1000 pcm repayment , goes up by 2% means , £1215 pcm

    average wage £27K and thats a real giggle isnt it – net income would be 21.3K or £1775 pcm , so disposable income 775 to 556 with out food fuel and transport…….

    so yes a rate rise will cause a real world of hurt

    just before an election ?

    interesting times indeed !

    Forbin

    1. Paul C says:

      Forbin,

      I like your cold calculation, gulp… Amazingly people are doing it though and its those transactions that feed the beast!

    2. Anonymous says:

      Forbin, how many earning individuals are there in a unit that is paying for a house? I think the average household income is nearer £50k and that such households can easily afford a base rate rise to 2.5%. Of course there are some households with only one income, but those with children do rather nicely from benefits if they have a low income. Tax credits, child benefit…

      1. Noo 2 Economics says:

        “…such households can easily afford a base rate rise to 2.5%.” But can the banks and Government afford it?

  8. Andy Zarse says:

    Hi Shaun, the BoE MPC is of course famously independent of the government of the day. So I think all we need to know about the possibility of a rate rise is that there’s an coming election in nine months time…
    Too cynical?

    1. Anonymous says:

      Hi Andy

      There were more than a few who argued at the time of Mark Carney’s appointment that the Chancellor went to so much trouble to get him because he would do what he wanted! Well he has a chance to prove that wrong and establish some Bank of England independence does he not?

      1. Drf says:

        Not!

  9. dannyboy says:

    Hi Shaun,

    Good blog, at least someone is asking the obvious questions.

    I may be well out here, in which case yourself and your readers can let me know, but here’s my tuppence worth: It seems gdp is continuously distorted, both by its definition and by messing around with inflation figures. Furthermore, as an individual who is paid a wage, gdp is fairly meaningless, but gdp per capita is more likely to provide a more useful comparison to wages and productivity.

    This leads me to 2 thoughts: firstly, any reported growth is distorted 3 times over, by changing gdp definition, changing inflation, and by not accounting for population growth and is therefore incomparable to itself (and therefore wages) over time (at least not consistently), and may therefore be useless for considering interest rate changes at the resolution being touted.

    Secondly, in the fields of mathematical modelling I have experience in, this level of inconsistency would render many models useless, and result in increasing uncertainty of predictions over time, requiring almost constant recalibration to retain any veil of credibility. Shouldn’t economists therefore be seeking consistency in key metrics and seeking to recalibrate models and justify improved understanding against historical data? (As an aside, it may be interesting to test the hypothesis that boe economic modelling ‘accuracy’ has reduced over time.)

    From an outsiders perspective, the economic models used appear to be ‘black box’ in nature, with very little skill, and hence little value.

    Danny

    1. Anonymous says:

      Hi Danny

      I cannot argue with you. In essence economic models only perform well when we have similar of trend behaviour. When you get a fundamental change they get completely wrong-footed as we saw in 2007/08. However the concept of consistency is a genuine problem as things do advance and change and allowing for that is not easy at all. Also the data is unreliable over any useful timescale…

  10. therrawbuzzin says:

    Every household which couldn’t afford a rate rise of any sort, is another bad debt on the books of the lender.

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