If the Chancellor sells the Lloyds holdings too cheaply, it may make it a buy for investors

20th June 2013


Maybe the Treasury has taken note of criticisms such as that voiced by Justin Urquhart Stewart on MindfulMoney earlier this week. Urquhart Stewart had compared an early sell-off of the banks simply to get money into the Treasury coffers as comparable to Gordon Brown’s notorious gold sell off at the bottom of the market. That and other similar criticisms in City circles will not have been welcome in the Treasury’s Parliament Street  offices.

Now the Chancellor George Osborne has outlined a new plan. He wants to return the Government’s Lloyds Bank shareholdings to private ownership by 2015. But in the case of RBS, he wants to look at breaking up the institution into a good and bad bank and then consider returning the good half to the market while presumably managing down the other book.

This would, eventually, return another fully functioning banking player back to the British High Street hopefully with a beneficial outcome for the country’s small businesses and other borrowers.

At the very least, the Treasury cannot be accused of employing unseemly haste in RBS’s case. In the process, it is also accepting one major recommendation of this week’s Parliamentary Commission on Banking Standards which wanted the good bank, bad bank proposal given some serious thought.

In fact, though it is not widely remembered the UK already has a bad bank. UK Asset Resolution (UKAR) holds £68.7 billion of loans. This includes, among other grizzly items some toxic loans from the now defunct Bradford & Bingley – though it may have bought some of those books of loans from other lenders, and from the poorly run (under its previous management) Northern Rock. In the case of the former, the good bit of B&B is now contained within Santander.  Northern Rock’s good bits are now part of Virgin Money. Now, of course, not all of even those supposedly poor quality loans are toxic. But it would leave the UK with either one very large bad bank or two medium bad banks. And we don’t know what happens when interest rates shoot up because some of those loans and borrowers must be vulnerable.

Back to Lloyds though. It is still possible that Government could be accused of rushing to return the 40 odd per cent stake in the Lloyds HBoS group and underpricing the investment.

However if you are one of the prospective buyers there are a host of things to think about. Among other things, you will want to consider the impact of the sell-off of TSB branches (once destined to end up with another bank that got itself in a little difficulty Co-operative). There is that interest rate/end of QE risk again although that may be mitigated at little by an economic recovery even if it is a sluggish one.

In addition, as the BBC reports today and possibly lost amid the other headlines is the fact that  the Prudential Regulatory Authority wants a host of banks to hold more capital.

Barclays, Lloyds Banking Group and Royal Bank of Scotland (RBS) account for much of what the PRA says is a capital shortfall though Nationwide is mentioned as well. The state -backed RBS alone must find £13.6 billion, with Lloyds lacking £8.6 billion in capital. Barclays must boost its capital by £3 billion.

The BBC’s business correspondent Robert Peston suggests that it is Barclays and Nationwide which will be most miffed because they have been doing what the Government wants them to do and are lending more only for another admittedly arms length arm of government the PRA to require them to hold more capital as a result.

So if you are thinking about scooping up some Lloyds investment, you need to ask what exactly has and has not been priced in.

You may decide it is best to leave bank investing to specialist financials or recovery play fund managers. If you are investing personally, don’t expect investing in the high street banks to be a ‘normal’ investment for some while to come.

Of course, if the Chancellor is being hasty as an owner of LLoyds (through the Government’s holdings) you may be getting short-changed, but if the price is lower than it might be, then as a private investor it might be a good buy.

* For an entirely different take on things, this is video about what a good bank looks like held at St Pauls earlier this month and featuring among others, the Archbishop of Canterbury Justin Welby.

12 thoughts on “If the Chancellor sells the Lloyds holdings too cheaply, it may make it a buy for investors”

  1. Anonymous says:

    Great column, Shaun. The inflation rate would certainly be higher if it properly accounted for housing prices and excluded council taxes. Council tax and rates only rose by 0.9% in July, much less than inflation in general. The RPI ex mortgage interest ex council tax rose by 2.7% in July. For some reason, although the RPIJ was brought in as a national statistic last March, and the RPI is no longer classified as one, ONS continues to provide the most detailed breakdown of the RPI and not for the RPIJ. However, if one takes the 0.7 percentage points difference between RPI and RPIJ as also applying to the RPIJ series, then the RPIJ total excluding mortgage interest and council tax series would still be 2.0%. Given the problems with this series, no stamp duty, a smoothed housing price index for the depreciation component, etc. the actual inflation rate has to be higher than 2.0%.

    More people should call for a lowering of the inflation target rate, as you do. The 2% rate was a Canadian thing, introduced as an intermediate target by Governor John Crow in February 1991 on the way to a lower unspecified target. In his memoirs he said he tried, unsuccessfully, to negotiate a 1.5% rate with the Finance Minister, Paul Martin.Two per cent never deserved to become the international standrd that it has. I’m not sure that the Bank of England would want to go as low as 1.5% at least right away, but it really should try out 1.8% or 1.75%. Keep up the great work. Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      That is a good point about the detailed briefing note! I had read it earlier and not thought of it like that but you are entirely correct. For those who have not seen it a link is below.


      If the economic world has changed then so should economic theory and targets so a 1% inflation target would be appropriate. If applied to Europe it would change the disinflation media scares wouldn’t it? I wonder if any of the media pundits ever stop to wonder why they present a 2% target as almost a Holy Grail.

  2. dutch says:

    ‘Even a superficial examination would question an inflation rate
    including housing being at 1.5% lower than the ordinary rate of
    1.6% when the same organisation is reporting house prices rising at an
    annual rate of 10.2%.’

    You’re very diplomatic Shaun.If it looks like a con,sounds like con,then,it’s probably a con.
    It’s funny how when we assess clothing viz inflation we use it’s purchase price,but when we assess the impact of housing,we use the cost of hiring it?

    1. Anonymous says:

      Hi Dutch

      The whole debate about making the consumer inflation index theoretically consistent with the national accounts was the ruse used here. In itself I have no issue with that but as something to be used in the GDP deflator. It does not work for consumer inflation measures when we are looking at issues such as the cost of living.

      You are right to point out that we could rent clothing so why not use that….?

  3. forbin says:

    ( Brent Crude Oil is at US $102 per barrel as I type this)

    long gone are the days of $20 oil and still people wonder why …..

    perhaps we should challenge the fantasy inflation figures

    after all if the PM gets laid and smokes a joint afterwards he’s just increased GDP but did the Creative Price Index impute what he paid for it ?

    the more you read about , the more you realize that garbage in = garbage out


    1. Anonymous says:

      Hi Forbin

      This is the lowest oil price we have seen since early 2013 and if we also factor in a stronger UK Pound £ there will be a disinflationary push on the August inflation numbers if we remain as we are.

      The ECB will not find such thoughts entirely welcome as I would imagine they would want lower inflation readings about as much as Arsenal fans wanted to see Ramsey sent off tonight.

      I will be watching the imputation issue as the CPIH situation should cap imputed rent changes in GDP but as ever there could be a “surprise”.

  4. Noo 2 Economics says:

    Hi Shaun,
    The First Time Buyer thing was always a mirage – if you have a nation suffering from a fetishistic obsession with property and you make money cheaper the nation will rush to load up with more debt to buy a more expensive property. The same will happen if you award immense pay rises. If you increase the price of money and keep wages stagnant property prices will stagnate.

    There are only 2 ways to break this sick relationship:

    1. change the property ownership obsessed culture fed by silly property programmes like location location location and the others whose names I can’t think of. Unfortunately, psychology and sociology indicates it will take 25 – 50 years to effect such a change in the populace and they haven’t got that long.

    2. Outlaw property price increases unless the property has been extended which required planning permission.

    I fear your suggestion of a lower inflation target rate may lead employers to award pay rises 1% or 2% below the new target as they do now, even if that involves pay cuts – I have friends that has happened to. In that scenario the only baseline would be the minimum wage rate which is hardly going to keep the economy going and I read a country IMF report a few weeks ago (I forget which country) where the IMF was recommending a reduction in that country’s minimum wage to improve employment and competitiveness so that could be next for the UK if minimum wage rates got in the way of pay cuts based on a lower inflation target.

    1. Anonymous says:

      Hi Noo2

      It is hard now to think of a time when the TV stations were not full of what you might call property porn isn’t it? But there was a time and I suspect it was the chug-chug-chug of falls in long-term interest-rates which drove it. People took a risk and kept winning. Let’s face it most have won in a credit crunch.

      The race to the bottom on wages is an issue and I take your point about employers gaming the target. That would be harder to do if they had to actually cut wages but someone would be bound to try I guess. However a lower inflation target would be more honest right now.

  5. Paul C says:

    Thanks for the numbers Shaun, I’m just about to change jobs and would like to pin the move on declining real wages ( if my soon to be ex employer bothers to ask why?). For the years 2011, 2012, 2013 what index shall I quote and chart against my abymal pay increments these 3 years? RPIX looks the best bet….

    I’ll keep you all posted what index they prefer to quote in comparison 😉

    It will be my very own “rail” against the system

    Paul C

    1. Anonymous says:

      Hi Paul C

      Firstly good luck with you new job. As to an inflation index I think that there would be a relatively minor difference between RPI and RPIX over this period. As you say the change in RPIX looks a little higher.

  6. Anonymous says:

    Hi Anteos and thank you

    The establishment want to have inflation but want the public not to realise it is happening. Hence their efforts with the various inflation indices!

    You are right about the wage inflation issue but I do not think that our establishment have yet adjusted from the era when real wages exceeded inflation. After all for them and their acolytes be it by salary or expenses/allowances the party has continued. Even if they lose an election there is a high chance they will go to the House of Lords.

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