Since the financial crisis, Lloyds Banking Group has transformed from being a bank struggling with enormous payment protection insurance claims, high bad debts and funding pressures to being a giant cash machine.
As the UK’s biggest retail bank, Lloyds can use the benefit of its large market share and diversified approach from branches to internet to generate substantial profits. There are growing expectations for those profits next year to turn into share buybacks worth as much as £2 billion, on top of ordinary dividends, up from £1 billion this year.
It has not always been such a rosy picture. The government only sold its last tranche of shares in May last year, bringing to an end a £20 billion taxpayer bailout that at its peak put 43 per cent of Lloyds in public hands.
Lloyds has had to pay out £19.2 billion in compensation and costs for payment protection insurance, the UK’s biggest mis-selling fiasco. The bank has also been entangled in a criminal investigation into fraud at the Reading branch of HBOS, which it bought in 2008, that led to six people going to prison last year. That problem has not been resolved for Lloyds as the National Crime Agency and Financial Conduct Authority, the City watchdog, are investigating. Lloyds is also awaiting judgment in a court case over whether its directors misled shareholders over the dire state of HBOS when the deal was agreed at the height of the financial crisis.
Largely, though, the big problems of the past decade have been resolved. In some ways, that leaves Lloyds with another problem: how does the bank generate growth?
Lloyds cannot add any more to its share of mainstream retail banking, where it controls about a quarter of the market. In a bold move, it bought the MBNA credit card business last year, boosting its market share, and is pushing further into high margin areas such as car loans.
But for a business as large as Lloyds, such manoeuvrings make a limited difference. Similarly, the bank’s management signed a deal with Schroders this week to create a joint venture to sell more investment products to the bank’s wealthier customers. That is part of a plan to become a top three provider of financial planning, a market where it has a share of only 1.5 per cent. But that initiative, too, is unlikely to make much of an impression on a business with approaching £1 trillion in assets.
Still, being a highly cash-generative bank has its benefits. One is that as well as giving cash back to shareholders, which puts everyone in a good mood, it can also invest substantially in technology. António Horta-Osório, the bank’s chief executive, has taken to making the point that Lloyds is the UK’s biggest digital bank and has committed £3 billion over three years to its development. By comparison, the whole of the UK fintech sector last year attracted £1.7 billion.
There is, of course, one very big cloud over the bank. Brexit has been a dampener on most big banks’ share prices since the 2016 referendum and that is particularly the case for Lloyds, which is regarded as a barometer for the UK economy.
Its management’s central case is that there will be a withdrawal agreement and that the risk of a no-deal exit will be averted. If that proves optimistic, then Lloyds’ shares are bound to be hammered.
Lloyds can do little to avert those fears but continue its current practice of cautious lending. The trouble is, its strong points compared with peers are already reflected in the fact that it trades at a small premium to its book value. The risk in the next few months is that it will have a rockier journey.
ADVICE Avoid
WHY Lloyds faces huge headwinds from final stages of Brexit negotiations and has limited ways to boost growth.
Kaz Group
Kaz Minerals, the FTSE 250 copper miner, has spent years developing two big new copper mines in eastern Kazakhstan (Emily Gosden writes). Kaz’s third- quarter production report yesterday showed both are now performing well. The mines account for almost 80 per cent of its copper output, which rose to 77,200 tonnes in the third quarter from 75,300 a year ago.
Kaz shareholders had been looking forward to reaping the rewards of these investments with an expected dividend bonanza from the cash the mines generate. Then Kaz threw a big Russian spanner in the works.
It announced a $900 million deal in August to acquire the Baimskaya copper project in Russia from a consortium led by Roman Abramovich. The proposed mine could cost $5.5 billion and take eight years to develop, threatening to divert money destined for dividends into a project that brings both execution and political risk. The shares tanked by a quarter.
Kaz was listed in London in 2005 as Kazakhmys, rebranding after a restructuring in 2014. It reported pre-tax profits of $355 million in the first half of this year. As well as its two big new mines, it has three smaller copper mines in Kazakhstan and a copper and gold open-pit mine in neighbouring Kyrgzstan.
Shares in Kaz have not recovered since August, despite the news it would pay its first dividend in six years. Trade fears that have hit the sector haven’t helped, but investors are unconvinced by Baimskaya.
The Baimskaya project could be transformational. It is one of the world’s biggest undeveloped copper assets and has 9.5 million tonnes of a metal that most believe will enjoy strong long-term demand, driven by electrification. It could double Kaz’s total production by 2030.
Big questions include the logistical challenges of getting the necessary power and transport links to the mine, in a remote region with inhospitable weather, and financing. Kaz is generating plenty of cash that could cover much of the cost, though project finance is seen as likely. It could also bring in a partner to split the risk and cost, giving it more scope for shareholder returns.
A recovery in the shares, however, may be some way off.
ADVICE Hold
WHY Await clarity on Baimskaya copper project
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