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Lloyds- Gold or Fools' Gold?

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August 10, 2009 – Comments (0) | RELATED TICKERS: LYG

While Lloyds has had a recent run up, and is probably the last of the "big" banks selling at a very depressed price, there are still a lot of problems in its loan protfolio. They posted a first half loss of $6.8 billion, but this was after an impairment charge of $22.8 billion (mostly related to the takeover of HBOS). Without that charge, they would have shown a profit of around $16 billion.

They have indicated that they expect to have an improved second half.

Their dilema now is whether to continue in the Govt guarantee program (at a cost of about $26 billlion in insurance premiums), or to raise new capital through a $25 billion share offering. This would not reduce their Govt share ownership of about 43%, but it would alow them more flexibility in their operations.

Since the UK is part of the EU, they are subject to a lot of extra regulation which could require them to sell off some assets (probably at drastic discounts), and be further hampered in their ability to manuver in the current market place.

In addition to significant share holder dilution, the pool of assets they would give up insurance on is in the $400 lillion range.This is apparently the course being advocated by Win Bishoff, their new Chairman (formerly the Chairman of Citi).

Lloyds has always been a fairly conservative bank, and until they made the ill advised takeover of HBOS (which I have dubbed "Horrible Bank of Scotland), they were probably in the best shape of all the large UK banks. 

Should they "roll the dice" and save the insurance premium, while raising new capital, raise new capital and keep the insurance, keep the insurance and not raise more capital, or some other option?

What do you think? Do they have a future worth investing in, or is it best to pass for now and wait to see what happens?

I am currently long on them, but it is only about 3% of my portfolio.

Would appreciate your thoughts, pro or con. 

 

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