Lloyds and The Mixed-Up Kid

13th August 09 - Lloyds and the mixed-up kid

Confused or what?

Remember that the major UK retail lending bank called Lloyds/TSB bought, without monopoly authority referral, the Halifax/Bank of Scotland banking group. The latter was already a mixed-up kid in that the Bank of Scotland (not to be confused with the RBS) specialised in high-quality lending to businesses and the former was an erstwhile building society. The amalgam is about as mishmash as it is possible to be in the banking world especially considering its dabbling in private equity and the wholesale funding market. Consequently, reading its first six-monthly accounts was never going to be for the reception class children.

Starting with the bottom line, the pre-tax loss was £3.96bn. Shame it couldn’t have been £4bn, at least some of the arithmetic would have been simple. Deep breath. Originally, the taxpayer invested £14.5bn buying a 43% stake in the new Lloyds Banking Group. The price per share was 122.6p. At the instant of writing, these shares are within a whisker of £1 having risen over 18% in the two days following the results. That leaves a paper loss to date of £2.7bn (my own holding after two averaging down purchases stands at £1.84 a share, so like many private shareholders, the state stands to profit before the small guy).

However, what the accounts reveal is that the taxpayer actually owns 62% of the bank because it has spent in the six month period a further £15.6bn to buy "B" shares as consideration for the Asset Protection Scheme (APS) the bank has been forced to accept. So this Lloyds is now mixed up, like its namesake, in the insurance market. And what do we know of the APS in action? The insurance cover is for £260bn of loans. The policy "excess" is £25bn. Of this, £10bn has been written off already. You and I are now left dangling to the tune of the remaining £15bn out of the £250bn left to assess (6%). How safe are you feeling? Glad I wasn’t the FD taking this lot to the board.

By the way, the APS has yet to be signed but the bank is "confident of securing EU state aid approval to complete the negotiations." And what has the EU to do with it? Let’s not confuse matter even more, one extra mixed-up kid may just be one too many. PS, the £3.96bn loss was struck after crediting £3.73bn "fair value unwind" that would not normally be an above-the-line item. But then, these are not normal times.

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