I am pleased to see the investment thesis playing out as I had anticipated. We can expect to see about a third of Lloyds’ market cap being returned to shareholders over the next three years the majority of it through dividends. Furthermore If you compare and contrast Lloyds and HSBC’s results this week you get a very interesting perspective on relative operational performance which is directly opposite to what their share prices have been doing and what valuations would imply.21 February 2018
Lloyds Banking Group is a UK-focused financial services company, formed by the 2009 merger of Lloyds TSB and HBOS. The group, which can trace its heritage back to the seventeenth century, is primarily focused on retail and commercial banking. Lloyds is Britain’s largest mortgage provider and also offers a range of insurance, savings and investment products under the Scottish Widows brand.
In a modern ‘fiat money’ system, banks play a pivotal role in the economy through the creation of credit. When a banking system is functioning normally, credit creation fuels economic growth and the central bank monitors and influences the quantity of credit being created by adjusting base interest rates, as a tool for managing the economic cycle. In a benign economic environment, banks therefore offer leveraged exposure to economic growth.
Investment case summary
Having been a substantial investor in the UK banking industry in the mid-to-late 1990s, Neil Woodford’s view of the sector turned increasingly cautious in the run-up to the global financial crisis, due to increasing levels of leverage at the major British banks and broader macroeconomic concerns.
The extent of leverage was fully exposed during the crisis, with the UK banks proving extremely vulnerable to unfolding events. During this period, we spent a great deal of time and effort trying to understand the nature of the crisis and this helped frame a consistently cautious macroeconomic view in its aftermath, as the banks underwent the necessary and protracted process of rehabilitation – rebuilding capital and slowly crystallising the losses that had been incurred.
Importantly, that process now appears to be largely complete in the UK, as evidenced by the recent pick-up in bank lending activity. This is an important foundation for our renewed confidence in the UK economic outlook, which goes hand in hand with greater confidence in the case for investing in UK banks.
Specifically, we view Lloyds as a well-managed bank with a conservative approach to its balance sheet. Its valuation looks attractive in our view, and it has the ability to generate substantial capital in the years ahead, which will fuel a healthy and growing level of dividend.
|Themes||UK domestic exposure|