Published: May 28, 2024

By: Benj Gallander

You want “BIG”? We’ll give you BIG. Lloyds Banking Group LYG-N is a huge bank with a sprawling range of businesses that is headquartered in London and has been around since 1695.

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. There are three key strategies underpinning the bank: driving revenue growth and diversification, strengthening cost and capital efficiency, and maximizing the potential of people, technology and data. It all sounds sensible but when the U.S. subprime mortgage crisis hit in 2007, things went badly wrong and the company needed a bailout. The government ultimately took a 43.4-per-cent stake in the business, at a cost of around £17-billion ($29.6-billion). A few years later, the government injected more money to maintain the taxpayer’s stake at 43 per cent.

And it worked out! In 2014, after four straight years of losses, the bank was back in profit and the black bottom line has increased virtually every year. The dividend that was eliminated in 2008 was restored. In 2017, the enterprise reverted to private ownership, with the government selling the shares for more than was paid – a happy ending to an exceedingly difficult story.

In the past quarter, profit fell 28 per cent to £1.6-billion ($2.78-billion), down 28 per cent from the £2.3-billion ($4-billion) the company made last year. Worth noting, though – and therefore skewing the comparison – is that last year was a record for Lloyds.

This enterprise, which is Britain’s largest mortgage lender, took a hit from a very competitive marketplace and a drop in total deposits. Plus, Britain has been in recession, which hurt business and banking demand. Limited growth is expected by the pundits this year.

Group chief executive Charlie Nunn is keen on boosting Lloyds’ growth. One way he is doing this is by slashing risk management jobs as he feels that the company has been overcautious. While on one level that sounds positive, on another that kind of move often leads to problems as there are not enough caretakers looking after the enterprise and too many risks are then taken.

This move could blow up in the bank’s face. It has been our experience that financial institutions seem to lose their way every decade or so as they pursue great growth and a fatter bottom line. Ultimately, that creates major problems not only for the banks but also in the economic system, with governments being forced into bailouts. That is when we taxpayers are ultimately forced to pony up. Very negative to be sure.

Benj jumped to buy his position in Lloyds in 2022 at US$2.01. It has done reasonably well, now trading around US$2.75, with the return buoyed by some dividends. The initial sell target is still far away at US$5.54, so he is hopeful of about a double from this level. As usual, he has no time frame for when the company might reach that goal. Meanwhile, the payouts are being harvested. There is no expectation that the bank will rise above US$45, where it traded in 2007.