Lloyds back in private hands - time to buy?

Lloyds Banking Group has returned to full private ownership after the UK government sold off its stake.

At the height of the financial crisis £20.3 billion of taxpayers' money was spent to rescue the lender, amounting to a 43 per cent stake.

Over the past couple of years the government's shareholding has gradually been reduced, recovering more than £18 billion.

The shares have been sold to institutions, as the government has gone back on its promise to press ahead with a public sale. Former chancellor George Osborne pledged to sell £4 billion worth of shares at a 5 per cent discount.

The plan, however, was subsequently delayed by Osborne, who cited 'market volatility', before being completely shelved by his replacement Philip Hammond, the current chancellor.

The share sale had promised to be 'the biggest privatisation in 20 years' in the Conservative Party's 2015 election manifesto.

Time to buy?

Two of Britain's most respected investors - Mark Slater and Neil Woodford - have recently been snapping up shares in Lloyds.

For Slater it is his first bank share purchase for several years. He argues the tougher regulatory environment has arguably made banks a less risky prospect, particularly from an income perspective.

In the next couple of years Slater, manager of the Slater Income, Slater Growth and Slater Recovery funds, expects Lloyds to become more profitable as the June 2019 deadline for protection insurance (PPI) claims draws near. ‘When the money the bank has set aside for payment protection insurance (PPI) provisions drops off the bank’s pre-tax profit, growth will become more significant. The dividend yield (7.9 per cent on a forward price/earnings ratio) is obviously attractive.’

Neil Woodford, manager of the CF Woodford Equity Income fund, has avoided the banking sector for well over a decade, asides from a brief position in HSBC a couple of years ago, which he subsequently sold.

The manager points out that for much of the post-financial crisis period, the UK banking system was not functioning normally, due to it being in a prolonged process of rehabilitation – rebuilding capital and slowly recognising losses that were incurred during the crisis.

But more recently, Woodford argues, the process now appears to be largely complete in the UK, as evidenced by the recent pick-up in bank lending activity.

‘Specifically, we view Lloyds as a well-managed bank with a conservative approach to its balance sheet. Its valuation looks very attractive in our view, and it has the ability to pay a very healthy and growing level of dividend,’ says Woodford.

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