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Why Barclays could be Lloyds' ‘fly in the ointment’

Why Barclays could be Lloyds' ‘fly in the ointment’

Today’s trading update from Lloyds been widely interpreted as paving the way for the bank’s return to the private sector.  

The numbers showed a big swing in performance over the last 12 months, from a loss of £456 million in the first half of 2012 to a profit of £2.9 billion in 2013's first half.  

Other key features on the balance sheet also looked much healthier, with bad debt shrinking by more than 40%.   

Lloyds chief executive António Horta-Osório indicated the time is ripe for the government to sell its 39% stake in the firm: ‘The share price is now in a position where the government can return taxpayers' money at a profit. It's absolutely up to the government now how and when to do it.' 

The market was delighted with the results as shares shot up 5.61p, or 8.19%, to 74.08p by 13.40.  

Shares now sit well above the government’s stated 61p break-even price and more crucially above the average of 73.6p per share it paid when the bank was bailed out in 2009.  

Henderson head of global equities Matt Beesley (pictured) believes the numbers suggest the government is close to initiating the first stage of its plan to reprivatise the bank, with the share price bounce helping influence the decision.  

‘[The] results themselves show a much transformed bank from its travails of late 2011,’ Beesley said.

‘Income growth may only be 2% but costs are down 6% and most importantly bad debts are down 43% reflective of much brighter economic outlook.

‘The result is underlying profit growth of 56%.  Encouragingly the outlook for the rest of the year is very strong and ties in strongly with the confidence we have seen exuding from management in our recent meetings with them.’

While Beesley thinks the appointment of a successor to Lloyds chairman Sir Wim Bischoff, which he had been expecting today, could prove to be a catalyst for privatisation, he suggests the uncertainty in the sector caused by Barclays rights issue could hold things up.

‘If there is one further “fly in the ointment” to be considered, it is the potential distraction of the Barclays Bank rights issue announced on Tuesday.

‘With this £5.8 billion cash call not due for completion until October and the potential for this to be swiftly followed by both Lloyds Bank and Royal Bank of Scotland pushing ahead with the mandated sales of parts of their branch network (with a deadline of November 2013 absent an extension from the EU) – likely via floatation it seems – it could be that the chancellor will choose to bide his time.’  

However, if economic conditions continue to improve and Lloyds carries on posting strong results, Beesley does not expect the government to hang on to its stake for too long.  

‘While the stock has appreciated by over 40% year-to-date, we still see upside to 100p (+37%) with the bank a key beneficiary of a better UK economy and of course a stronger housing market given its dominant share of the UK mortgage market.

‘The expectation of a share sale might constrain any near-term appreciation in the stock, but further strong underlying results such as those reported today will ultimately drive the stock higher. And in doing so, make it more likely that we see the start of the re-privatisation of the bank.’

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Matthew Beesley
Matthew Beesley
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