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Lloyds bank

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Re: Lloyds bank


Postby Walkeia » July 16th, 2021, 5:04 pm

TLDR: I've added some Lloyds for income post removal of the dividend suspension. I've left room to top up on weakness - the past decade has seen many headwinds - PPI, bad loans, regulatory fines, technology and low interest rates. I feel most, but not all, are behind us and UK banks can become solid income holdings in a world where it is hard to find similar value.

Full thoughts (excuse any English errors):

A very unusual decision for me to add a single name stock - I own an ETF, investment trust and REIT portfolio.

However after the recent news that the dividend suspension has been lifted for UK banks - Lloyds can potentially return to paying 2.5-3.25p annually / ~5.5 to -7% dividend yield (reference share price 46p). I can understand the accumulated frustration for shareholders owning the bank stocks over the past decade but if I look at the reasons, in my view, for this:

PPI - £36bn total claims by July 2019 when it closed. Not sure any industry could perform well facing this tidal wave of claims. It doesn't matter if you think it was too aggressive against the banks or too lenient - the point is it is finished.

Bad loans / bad banks - I personally felt it wasn't highlighted post financial crisis that RBS's trading operations (the speculators vilified in the press) recovered much of the mark to market losses in 2009 & 2010 (they can arguably still be vilified but more those behind the awful regulatory breaches and massive fines rather than causing the downfall of RBS). The massive longer term damage was reckless lending in the naughties - post financial crisis UK banks became a case of make money from go forward operations - then write down what awful treasury holding (RBS's 1bn Greek bonds from ABN Amro treasury I remember) / loan to some random Irish property development in the middle of no where which is worthless. Again this process was largely complete for LLoyds in the middle of the last decade; for RBS a little later but also complete. Now they are heavily regulated on new lending and I'd argue if their loan books come through the pandemic okay we can expect them to survive more minor economic slowdowns.

Regulatory fines - touched on above - all UK banks struggled from at least one of Libor, mis-selling, FX fixing, European Bond cartel, sanctions breaches etc. The fines were significant and took a long time to go through the courts. Hard to have a share price perform when facing an unknown fine (especially if it is the SEC they were facing) but once again I would argue we are over the worst. I spent some of the last decade working in the financial sector and did see a culture change and an increase of needed oversight.

Increased regulatory oversight - higher costs of business be it reduced over-draft charges, compliance officers, mortgage capital weights, risk weighted assets etc. Largely accommodated now and UK banks are still very profitable and able to sustain solid dividends. The break up and sale of other business units forced on UK banks by the European commission at arguably depressed prices (worldpay, directline, capital one) also now well in the past. Having said this - I did get paid handsomely to move my business account away from RBS to a challenger bank 18 months ago as they agreed to pay 750m to incentivise customers to leave as they accepted isn't wasn't possible to spin off the William's and Glynn brand (after spending 500m on the IT systems trying).

Technology - the rise of Revolut, Wise and challenger banks chipping away at the most profitable businesses of the larger banks. Long term I think this is a real concern but it is a very long term process and is far enough into the future to discount.

Low interest rate environment - something I don't see changing soon which should continue to see NIM under pressure but we have been in this environment for a long time now and banks have adjusted by cutting costs and offering additional services (am I the only one who pays for my current account? - the travel and mobile insurance cover the cost alone). More recently Lloyds has decided to go into the buy to let market with 1,000 homes in Peterborough.

The last point why I have been attracted to UK banks is the pricing of other assets. I feel Lloyds is going to be a reliable 5.5-7% dividend yield with little hassle - this is difficult to beat in the ETF, investment trust universe. That yield is also difficult to beat in residential buy to let; possibly achievable in commercial but this is much higher risk given the state of the high street. Post pandemic I have very happily floated on a rising tide lifting all boats in VWRL and some decent investment trust finds - but from here I do think the UK banks look a decent addition to the portfolio.

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