Lloyds Banking Group Just May Be Able to Exit Bank Bailout
The prospect for Lloyds Banking Group (LLOY) escaping the UK Goverment’s bank bailout scheme have gotten a boost from a new research report on the UK banking sector from Execution analyst Joseph Dickerson.
The Independent reports that Dickerson issued a “buy” recommendation on Lloyds, arguing that the bank would be better off without the asset protection scheme (APS), which he said was a “sub-optimal way to recapitalise the sector and should be reconsidered”.
He hopes that the group opts for a rights issue instead, suggesting that “banks with substantial government ownership have a higher cost of capital than those that do not”. Reduced funding costs would benefit the net interest margin, which in turn would boost earnings, Mr Dickerson explained.
“Lloyds has an opportunity to change this by not participating at all,” he said. “£15bn of net (we forecast £16bn including a £1bn termination fee to [the Treasury]) non-Government capital is likely to reduce Lloyds’s cost of funding substantially.”
For those worried about whether Lloyds could raise the amount required, he added that a “£16bn capital raise is not a big ask because, if [the Treasury] takes up its rights, the amount of capital needed from the market is [around] £9bn”. ”
FT Alphaville offers further analysis, adding that based on Dickerson’s calculations “Lloyds would emerge with a fortress balance sheet and a leverage multiple in-line with the major US banks.”
The FT’s Lex was skeptical on Sep 18 about LLoyd’s chances of pulling off such a deal:
“Lloyds is thought to need at least £15bn-£20bn to avoid the APS altogether, maybe more. But that is a tall order. Even if it raised £6bn by selling Scottish Widows and Clerical Medical, that would leave a shortfall of £14bn – more than HSBC’s record rights issue. A small cash call might be feasible. Yet it is fanciful to believe that Lloyds could raise any equity without the APS, let alone any of the other alternatives Mr Daniels seems so keen to pursue.”
The Scotsman reported that most analysts think Lloyds will have to raise money to reduce the amount of assets in the APS, and hence the government’s stake in the bank, but not exit it altogether.
“The idea of Lloyds exiting the APS is unlikely primarily because raising £15bn to £20bn isn’t a viable option,” said Exane BNP Paribas analyst Ian Gordon.
Also bullish on Lloyds is UBS, which reiterated its “buy” rating on Sep 8. Analyst John-Paul Crutchley argues that the bank is” fundamentally an undervalued company. ”
“On the basis of normalised earnings, around two years out, we see Lloyds as worth around 180p-200p/share, making the company worth around £80bn. In our view, the debate around the APS comes down to how this value is carved up between the
UK Government and private shareholders.”
West LB’s Neil Smith see the bank as a “valuable UK franchise, if not spoiled by state aid disposals,” but maintains a Neutral rating pending resolution of the APS issue.
ING’s Andreas Mavrikakis also is taking a wait-and-see approach, maintaining a Hold status. “On normalised EPS we see up to 100% upside in the long term and more limited downside. However, we believe LLOY will underperform short term especially if the plan works, despite management’s signal that impairments peaked in 1H09.”
CreditSights on Sep 18 said “we felt the most likely alternatives for Lloyds would be a renegotiation of the terms of GAPS and/or a reduction in the assets to be covered by GAPS, in conjunction with a capital raising exercise, rather than a full withdrawal from the scheme.”
For the latest analyst comment on Lloyds, see Alacra Street Pulse.
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