LLOYDS may be on the road to recovery, but with the FCA due to publish its findings after a probe into the disastrous takeover of HBOS – and RBS admitting it may be years before it repays taxpayers – the outlook is still challenging, writes Martin Flanagan
THE new year is set to usher in good and bad tidings for taxpayer-backed Lloyds Banking Group. The decision announced last week by UK Financial Investments to further sell down the state’s stake in the bank bailed out in the financial crash is seen as positive for the shares, underlining the headway the group has made towards recovery.
Lloyds will also continue talks in January with the Prudential Regulation Authority about its desire to resume dividend payments with its annual results in February, six years after the divi was banned by the European Union in return for the bank’s £20 billion bailout.
It throws into stark contrast how far the other taxpayer-backed bank, Royal Bank of Scotland, is from seeing its 81 per cent state holding sold down or for it to resume its own dividend payouts.
Ross McEwan, RBS’s chief executive, has always said the timing of a stake selldown is a matter for the UK government as the bank makes progress in improving its profitability.
Simon Willis, banking analyst with broker Daniel Stewart, said he believed it could be a few years at least before UKFI starts selling down the taxpayer stake and RBS paying dividends again.
“Ross McEwan has been quoted as saying it could be five to ten years before the taxpayer gets all its money back, so that suggests we might be looking at a few years before the process begins. And I would think the same applies to a resumption of the divi.”
Less propitious for Lloyds, however, is that the Financial Conduct Authority is due to publish the findings of the regulator’s investigation into the calamitous failure of HBOS in early 2015.
Lloyds’ problems stem from its acquisition of HBOS in the financial crash, a deal ushered through by a panicky Labour government. Complicating matters and taking gloss off the taxpayer stake sale is the fact that the FCA’s findings will be pored over by the shareholders’ action group which is suing the bank and former directors, including chairman Sir Victor Blank and chief executive Eric Daniels. The Lloyds Action Group (LAG), including 150 institutional investors and some 8,000 private shareholders, has launched a group litigation action believed to be worth up to £350 million. It alleges the bank misled them in the takeover prospectus about HBOS’s parlous financial state at the time of the acquisition. Lloyds denies the allegation.
One source close to the legal action said: “The FCA report will be very interesting and could be helpful. But the suing shareholders don’t need it in order to succeed. They believe they have a strong case even without it.”
The FCA probe was launched after an earlier report by the body’s predecessor, the Financial Services Authority, which castigated the culture of HBOS’s commercial lending policy.
That earlier report banned the head of the division, Peter Cummings, from working in the City again. Lawyers for LAG hope the latest report will provide evidence that HBOS was in a much worse state than was portrayed at the time of the acquisition. The FCA report was originally planned to be published before the end of 2014, but is understood to have got bogged down by individuals mentioned in its findings having the right to see and comment on it in advance of its dissemination. “Vast numbers of lawyers are going over it. It’s very complex,” one source said.
Analysts said UKFI, which monitors the taxpayer stakes in banks, had decided on the sale of a further 5 per cent or so of Lloyds because the bank had passed – if narrowly – the Bank of England’s balance sheet stress tests. The sale, which will take the state holding below 20 per cent and raise about £3bn for the taxpayer at current market prices, will be done in a “drip-drip” fashion between January and June rather than in larger tranches.
Chancellor George Osborne has insisted that the shares being sold between the start of 2015 and the early summer must not be below the 73.6p break-even price at which the taxpayer bought into Lloyds.
Richard Hunter, head of equities at stockbrokers Hargreaves Lansdown, said: “It’s good news that the Lloyds shares have recovered sufficiently for UKFI to sell down the government stake for a third time. The most positive thing is it reduces the government shackles on the business, which can be stultifying. The bank is far more able to concentrate on continuing its impressive turnaround with a broader mix of shareholders.”
Hunter said he did not think the legal action against Lloyds would overhang the investment case for the shares. “If that lawsuit had been of great concern to investors I think we would have seen an effect on the shares already, and we haven’t. It is a side issue.
Harcus Sinclair, lawyers for the LAG, have already filed a claim against Lloyds. The deadline for private shareholders to join the action was midnight last Friday, while institutions have until 9 January.
In its 83-page defence document published recently, Lloyds said it did not have a duty to reveal it had granted a £10bn loan facility to HBOS before the takeover, and that HBOS was receiving tens of billions of pounds in emergency funds from the Bank of England and the Federal Reserve.
Lloyds says it was “a matter of public knowledge” that HBOS was accessing a form of BoE liquidity funding in the 2008 financial crash.
A key point of dispute when the case comes to the High Court, probably not before 2016 according to legal experts, will be whether or not being more specific on that liquidity lifeline was a breach of the directors’ duty. One City banking analyst said: “The shareholders will claim that Lloyds at the time may not have been deliberately concealing something, but were being disingenuous in not giving the full, detailed picture on funding.”
RBS is also the subject of four separate legal actions alleging investors were misled about the bank’s financial strength at the time of the £12bn rights issue in 2008 to pay for its disastrous acquisition of ABN-Amro. That case is due to come to court in December 2016.
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