Friday, 22 September 2017
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lloydsIt is likely that some readers of the algarvedailynews may still have shares in Lloyds Banking Group, despite them still being worth significantly less than when Lloyds Bank took over the crippled HBOS during 2008-09.

Most readers will be aware that the process of the then financially-sound Lloyds attempting to save the sinking ship of HBOS led to its collapse and having to itself be “rescued” by the British taxpayer, thus causing the share-price to plummet and dividend payments to be suspended (only resumed in 2014).

Even more interesting is the fact that the Group Chief Executive of Lloyds Banking Group is António Horta-Osório, who is Portuguese. Lloyds recently published its Half-Year Update and now being a Lloyds Bank shareholder myself (my mother decided to gift them to me in April this year) I received a copy through my letterbox late last week – though it can be easily read on-line. The update (just four pages, and the first is just a cover) came with a thousand-word-plus report written by the "honourable" Senhor Horta-Osório.

The “good news” is that the Board have approved an interim dividend payment of 0.75p per share, due to all shareholders which were on the register on 14 August, and will be paid on 28 September this year. That's something to look forward to! Further “good news” is the fact that the British government now only has less than a 14% stake in the bank, down from 43% back in 2009. According to Horta-Osório this has meant that almost £14 billion has been “returned to UK taxpayers”. Unfortunately, most of that has probably gone back to the banks, with the interest per year on the UK debt being £40.4 billion – and still being added to by £1,280 per second!

Horta-Osório stated that the aim of the Lloyds Bank Group is to “have a dividend payment policy that is both progressive and sustainable”. How reassuring! Although not being a fan of Charles Dickens and having only read one Jane Austen novel (Mansfield Park), I am fully confident that word “sustainable” is probably not found once in all the works by these great British authors. Does anyone know what it actually means? The word now seems to appear in virtually every paper by government, financial and other similar organisations without anyone (including the overpaid Horta-Osório) understanding its full significance.

We even find the word appearing in the latest annual review published by the Bank for International Settlements (BIS) in June this year where it states, “In its main economic review of the year, the BIS calls for a longer-term focus in policymaking with the aim of restoring sustainable and balanced growth.” We will return to this report later.

Referring once again to Lloyds' Half-Year Update we find some other interesting figures: the underlying profit for the first of the year was £4.4 billion; and Lloyds apparently helped 1 in 4 first-time buyers get on the property ladder in the first half of this year. The latter figure could be misleading. There is evidence that much of the credit (mortgages being one form) is being given to organisations which can benefit from it (like private equity). Further, the report does not mention that the property market is now severely over-priced, and banks (as shareholders of some private equity organisation) are often helping to fuel the increases! Lend a little with one hand, and grab it back – and more – with another!

A small cloud on the horizon, according to Horta-Osório, is the fact that Lloyds is still being “impacted by conduct provisions for the Payments Protection Insurance (PPI) and have increased our provision for expected PPI costs in the first half by £14 billion”. Horta-Osório finished the paragraph on the PPI section by stating, “We are fully committed to improving our operational procedures and ensuring we do the right thing for the customers”. Are we convinced?

While I have no evidence that Lloyds is currently using a system like the Payments Protection Insurance, some credit card operators have began using similar policies, in particular Vanquis Bank which has a Repayment Option Plan (not too similar from PPI, if you actually break it down). Vanquis Bank is operated by VISA. It seems that many of these financial institutions have found ways to keep using the same methods to get money out of the public by simply using different terms!

The same could be said for credit and loans. As we know, it was the almost unregulated drive to give loans, mortgages and other forms of credit to almost anyone, regardless of their ability to repay, which caused the banking crisis of 2007-10. Have the banks learnt anything? I don't think so!

Horta-Osório states that “the efficient risk management of our lending portfolio has led to lower risk business with reduced impairments and improved resilience.” I am sure if you went back far enough to some of the countless reports and financial statements produced by these organisations during the 2006-08 period you'd find thousands of similar phrases. To be fair to Lloyds, at least during the financial crash mentioned above, the bank was one of the few was that was solvent. However, it was the problems in the wider national and international economy that resulted in the fiasco of Lloyds taking over HBOS. There is simply no assurance that a similar situation will not arise in the near future.

But fast-forwarding to the present we find that the situation is even more precarious. The bank is still not strong enough to stand on its own two feet, being partly still owned by the British government. Further, there are some questions whether its lending policy is as low risked as our Portuguese friend is stating. A detailed analysis is simply not possible but a quick overview should give readers enough of an oversight to form their own opinion.

As long as you have a good credit rating it is easy to get a credit card; in fact, you are often offered more than one by different banks. Lloyds offers its customers several under its own name (I have one), but I have also been offered one under the Halifax banner, which is part of the Lloyds Banking Group, thus immediately doubling my exposure to credit default to the same organisation in one simple step. Couple this with the fact that Lloyds, through it Black Horse Finance operations, lends people substantial loans to buy luxury items such as cars, motorbikes and other significant capital purchases (the website shows a Porsche Carrera) then we can already see the danger of many people quickly becoming over-exposed to credit default payments. A fact underlined by the BIS report.

In the recent annual report published by BIS in June, we find this interesting paragraph in its opening chapter (which is called, Is the unthinkable becoming routine?). Referring to current low interest rates set by central banks we have this, “Such low rates are the most remarkable symptom of a broader malaise in the global economy: the economic expansion is unbalanced, debt burdens and financial risks are still to high, productivity growth too low, and the room for manoeuvre in macroeconomic policy too limited. The unthinkable risks becoming routine and being perceived as the new normal.”

Compare that with Horta-Orório's words in his final Outlook section where he states, “I am proud of what we have achieved and I passionately believe that our simple, low-risk , UK-focused retail and commercial banking model is the right one.” This is at best patronising and simplistic and at worst dishonest and inaccurate. There is, of course, the irony that we should need a Portuguese national heading one of Britain's biggest banks (while having a Canadian heading the Bank of England). At least Portugal has a Portuguese national leading its own central bank, even if it is the corrupt, incompetent buffoon Carlos Costa! A man who should have been retired decades ago (he's only 65).

Another omission from Lloyds' Half-Year Update is the fact that there is no mention of the legal action by some 6,0000 Lloyds shareholders who were none too pleased, for obvious reasons, with Gordon Brown (the then prime minister) and Victor Blank's (then chairman of Lloyds TSB) private little agreement to allow Lloyds to take over HBOS back in 2008, because the combined entity risked breaking monopolies and competition rules. I never bought that ticket; I always thought the whole thing was corrupt. I still do. Whatever the outcome, let's hope they won't need a riot squad, as did the recent incident with disgruntled Banco Espírito Santo depositors in Portugal.

It's ironic (just about) that the while the shareholders of the BIS (who, of course, are paid in Special Drawing Rights [SDR], the IMF's own currency) are given a substantial, detailed analysis, Lloyds shareholders are given a flimsy four-page leaflet with a handful of largely irrelevant figures and a meaningless report which António Horta-Osório possibly wrote in the toilet in his dinner-hour (assuming he takes one). And then we're all supposed to celebrate because we are being given an interim dividend of 0.75p per share. What's that going to buy? Horta-Osório also calmly ignored all the potential problems and pitfalls, not only in the British economy but in the international one, too. I can't wait for the year-end report. Though, on this evidence, perhaps he shouldn't bother; he won't be telling us anything we don't already know...