You want “BIG”? I’ll give you BIG. Lloyds Banking Group Plc (LYG) is a huge bank with a sprawling range of businesses. It is headquartered in London and has been around since 1695, writes Benj Gallander, president of Contra the Heard.
In many ways, this is a pretty typical financial institution. Besides retail and commercial banking, it is involved in insurance and pensions. Nothing very fancy, to be sure. To get a sense of its scale, note that it has over 26 million customers and more than 63,000 employees. It also has 16 unique brands, including Lloyds, Bank of Scotland, Halifax, Black Horse, and Scottish Widows. It’s evidently been doing something right because it has been profitable for each of the past 10 years.
Alas, it was not always thus. When the US subprime mortgage crisis hit in 2007, things went badly wrong and the company needed a bailout. The UK government ultimately took a 43.4% stake in the business, at a cost of around £17 billion. A few years later, the powers that be injected more money and maintained the taxpayer’s stake at the 43% level.
The government intervention worked out. In 2014, after four straight years of losses, the bank was back in the black and it has stayed there for the past decade. Moreover, the dividend that was eliminated in 2008 was restored as well. Then in 2017, the government sold its stake for more than was paid – a happy ending to an exceedingly difficult story.
Today, there are three key strategies underpinning the bank: Driving revenue growth and diversification, strengthening cost and capital efficiency, and maximizing the potential of its people, technology, and data.
There is one major fly in the ointment going forward with a motor finance review by the Financial Conduct Authority. Lloyds has set aside £450m to cover possible claims related to Personal Contract Purchase (PCP) agreements, but it could prove even more costly. Or not. At our end, it is impossible to know how this will work out. But even if strongly negative, it is likely that it will just cause a short-term negative blip in the earnings.
Lloyds' dividend yield is better than 5%. That is a lovely payout while waiting and hoping for capital appreciation. Perhaps I should jump across the pond to London to investigate my purchase further. Imbibing a warm Guinness at the same time would be lovely.
