Lloyds Banking Group has made the UK government look silly. Shares in the UK's biggest mortgage bank on October 28 sank five per cent after it reported disappointing third-quarter figures. If politicians hadn't already twigged that selling a chunk of the country's 10 per cent stake in the bank to retail investors is needlessly risky, they should do now.
The backdrop to Lloyds' results is positive. A UK competition probe said on October 22 the bank wouldn't have to carve up its dominant 25 per cent current account share. The state has introduced a time limit for claims over mis-selling of payment protection insurance (PPI), provisions against which have cost Lloyds a scarcely credible £13.9 billion thus far. The potential for the bank to pay out appreciably above 50 per cent of earnings in dividends explains why the mean target price among analysts for Lloyds is 91 pence - against 73 pence now.
Yet banks are never far away from operational risk. In the quarter that ended in September, that came from lower trading activity in the bit of the bank that helps its corporate customers hedge themselves. Non-interest income 17 per cent below consensus made overall pre-tax profit miss forecasts as well. And while costs and losses from bad loans were better than anticipated, Lloyds didn't give any new detail on dividends, despite its core Tier 1 ratio now exceeding the 13 per cent level it previously implied would be enough.
The reticence might be about PPI -an admittedly worst-case scenario could see the bank setting aside another £7 billion, Citi estimates. Higher UK bank taxes will hurt, and Lloyds would face a problem if current Basel IV capital reforms make mortgages more capital-intensive. If these obliged Lloyds to lift its average risk-weight from 11 per cent to 38 per cent, the bank's core Tier 1 ratio in 2017 could fall to 12 per cent from 13.7 per cent now, Morgan Stanley analysts reckon.
This kind of uncertainty is par for the course for banks. The risk, underlined by Lloyds' third-quarter earnings, is that the general public may not be best placed to price it. By eschewing a perfectly decent institutional share sale for a retail offer, the government may find Lloyds stock turns into a political hot potato.
The backdrop to Lloyds' results is positive. A UK competition probe said on October 22 the bank wouldn't have to carve up its dominant 25 per cent current account share. The state has introduced a time limit for claims over mis-selling of payment protection insurance (PPI), provisions against which have cost Lloyds a scarcely credible £13.9 billion thus far. The potential for the bank to pay out appreciably above 50 per cent of earnings in dividends explains why the mean target price among analysts for Lloyds is 91 pence - against 73 pence now.
Yet banks are never far away from operational risk. In the quarter that ended in September, that came from lower trading activity in the bit of the bank that helps its corporate customers hedge themselves. Non-interest income 17 per cent below consensus made overall pre-tax profit miss forecasts as well. And while costs and losses from bad loans were better than anticipated, Lloyds didn't give any new detail on dividends, despite its core Tier 1 ratio now exceeding the 13 per cent level it previously implied would be enough.
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This kind of uncertainty is par for the course for banks. The risk, underlined by Lloyds' third-quarter earnings, is that the general public may not be best placed to price it. By eschewing a perfectly decent institutional share sale for a retail offer, the government may find Lloyds stock turns into a political hot potato.