Just saying the word “bank” should be enough to send the average prospective investor rushing to the hills. Such are the uncertainties (Brexit and the outlook for the economy is but one of them) that the risks are obviously high.
Are they too high? And what of Lloyds Banking Group in this? On the one hand, it’s about as exposed to the British economy as it can get, comprising roughly 97 per cent of its business; on the other, the shares are cheap, trading at a little more than 13 times earnings, and the dividend yield is an enticingly juicy 5.2 per cent. Those unafraid of risk, and of Brexit, could quickly build a case.
The roots of Lloyds Banking Group date back as far as 1695 and the creation of Bank of Scotland. It was established in its present form in 2009, when Lloyds saved HBOS from the brink of collapse at the height of the financial crisis. It still operates the Bank of Scotland brand, as well as Halifax, Lloyds and Scottish Widows. The group has more than 2,000 branches across the UK, more than 30 million customers and about 75,000 staff.
As well as offering the traditional array of current and savings accounts, loans, cards and mortgages, it also sells insurance, has a commercial lending business and is keen to get more into the wealth management market, particularly catering to the “mass affluent” and the beneficiaries of pensions freedoms introduced by George Osborne.
It has come a long way since the government injected £20 billion in an emergency bailout in 2008 and took a 43 per cent stake. Its finances are restored, as is the dividend, which was put on hold after the rescue. As of last year, the government is no longer on the register. In February, it began a three-year plan aimed at increasing profits, cutting costs, lifting return on equity and bolstering dividend payments.
Against the backdrop of its plan to increase its financial planning and retirement assets by £50 billion by 2020, yesterday the bank confirmed that it had begun talks with Schroders about establishing a joint venture in wealth management.
Although it could amount to naught, Lloyds probably would inject its £13 billion of wealth management business into the venture, hoping to benefit from Schroders’ investments expertise. It also would get a 19.9 per cent stake in Cazenove Capital, part of Schroders, and thereby access to its highly wealthy clients. Schroders would get the lion’s share of the contract to manage £109 billion of Scottish Widows assets for Lloyds.
On paper, the venture looks a good idea and full of potential. It means that Lloyds, which has only a 1 per cent of the market for managing money for the mass affluent, is throwing itself into the business of providing financial advice, for a fee. In particular, it is chasing those who choose to take charge of investing their pension savings or to liberate some of the money that they have sitting in their retirement pots when they reach 55.
Taken with Lloyds’ plan to lend a further £8 billion to small and mid-sized businesses by 2020, it shows the extent of the bank’s growth ambitions, which are laudable.
The financial health of Lloyds isn’t really in doubt, but the future wellbeing of the economy, particularly if there is a hard Brexit (and the prospect of a recession that would freeze consumer and business spending and possibly drive up bad debts) is. Ironically, given that, shares in all four of the big listed banks, including Lloyds, are all higher than before the referendum in June 2016.
Lloyds shares are by some stretch the cheapest and highest-yielding. Were it not for Brexit uncertainty, they would be a sure-fire buy.
Advice Avoid
Why The bank’s growth ambitions look interesting, but Brexit uncertainties make it too much of a risk
Acacia Mining
Acacia Mining has a $190 billion problem. That is the extraordinary bill for unpaid taxes and attached penalties from the government of Tanzania that has been weighing on the goldminer since July 24, 2017.
Acacia’s shares have lost just over 70 per cent since the dispute began to emerge the previous March and the company must live in a world of uncertainty until this dispute is resolved.
This is unfortunate, as Acacia’s underlying business performance is rather strong. Acacia Mining was set up by Barrick Gold, the Canadian miner, when it started prospecting for gold in Tanzania in 2000 and was spun off with its own listing in 2010, changing its name to Acacia Mining four years later. It is the biggest goldminer in Tanzania, operating three mines: North Mara, a high-grade pit with likely reserves of 2.3 million ounces; Bulyanhulu, with proven and probable reserves of 4.5 million ounces; and Buzwagi, a gold-processing operation with an estimated life of three years.
Life changed for Acacia on March 3 last year when the Tanzanian government banned the export of gold and copper concentrates.
This primarily hit Bulyanhulu, which was immediately put on limited production. Acacia susbsequently found out that the government believed that it had considerably understated the value of its exported concentrates, followed by the absurdly high bill in July.
Barrick, which still owns 63.9 per cent, intervened and thrashed out a framework deal with the Tanzanians under which Acacia could pay only$300 million, but no firm agreement has been forthcoming.
Yesterday’s third-quarter update — in which Acacia upgraded its full-year production target to more than 500,000 ounces from the previous maximum of 475,000 ounces — was rare good news. The shares rose more than 7 per cent, or 10¾p, to 155p.
The problem will be resolved — Tanzania is missing out on tax revenues and cannot possibly expect to secure a sum that is more than 240 times Acacia’s market value — but how and when is anyone’s guess.
Advice Avoid
Why Too much of a question mark until its Tanzania dispute is resolved
