The Government is selling 6% of the shares it holds in Lloyds Banking Group at about 75p via a placing. That is marginally more than the shares cost them when it bailed out the company after the disastrous takeover of HBOS, which many shareholders still feel very disgruntled about.
If the Government is selling, should private investors now be looking to buy? After all the shares have doubled in price in the last year, well outpacing most other UK banking stocks. But the Government still has a large holding (32% remaining after the disposal) which it will look to sell no doubt as opportunities arise, so effectively there is a large “share overhang” potentially.
Private investors are likely to still take a pretty dim view of this company. With the dividend yield still being a shadow of its former payout, and the question of trust in banks still being an issue. Will there be more “mis-selling” scandals with large penalties yet to come out of the woodwork, plus more capital raising mandated by regulators to reinforce their balance sheets?
Lastly, during the banking crisis, we all learned that the accounts of banks are not to be trusted. They are adept at concealing losses, and IFRS accounting standards produce figures that cannot be relied upon. In addition, cash flow is concealed making the accounts of banks non-transparent. When they do run into difficulties (as with the Co-op Bank recently), the regulators seem to condone the banks concealing their difficulties in case it causes a panic and a run on the bank. In other words, there is no timely disclosure of price-sensitive information.
At least the subordinated debt holders in the Co-op are putting up a strong fight (the LT2 consortium led by hedge fund Aurelius, have proposed an alternative debt for equity swap instead).
In addition the legislation introduced after the banking crisis means that equity holders have a much increased risk of being prejudiced by Government intervention at the slightest sign of liquidity problems in any bank.
In summary, the rules of the game have changed. Banks are no longer a suitable investment for widows and orphans (i.e. viewed as safe, income producing investments). They are only for the sophisticated folks who really understand all the risks and for short term speculators.
With no transparency, and unclear prospects, I for one will continue to avoid banks as investments (equity or debt) until such issues are resolved