20th June 2013
A survey of Hargreaves Lansdown clients has shown that 65% would participate in a Lloyds Banking Group IPO but only 43% in an RBS one.
An Initial Public Offering (IPO) is expected perhaps as early as the autumn, with shares offered initially to institutional investors and then subsequently retail investors. A privatisation of RBS seems much further off.
Richard Hunter, Head of Equities at Hargreaves Lansdown says: “Lloyds Banking Group is already back making profits; it has cut costs and largely repaired its balance sheet. The time seems right for an IPO and the share price is now back to around the same level that it was when it was bailed out in 2008.
“Since it was the taxpayer who stepped in during Lloyd’s hour of need, it is only right that the taxpayer should have the opportunity to share in the Bank’s recovery via a retail offering. The recent Direct Line and Esure IPOs have shown there is significant investor appetite for share offers of this type and we expect there to be considerable interest from clients.”
The HL client survey asked if the shares were made available to the public via a Share Offer tomorrow:
Would you be interested in applying for Lloyds shares? 65% said Yes 35% said No
Would you be interested in applying for RBS shares? 44% said Yes 56% said No
Hunter adds: “Of course investors don’t necessarily have to wait: if investors believe in the Lloyds Banking Group recovery story, they could buy shares now and then benefit from any increased interest and any share price growth over the summer in anticipation of an autumn IPO. And, indeed, some have – Lloyds is the most actively traded stock this year amongst our clients.”
Hargreaves has also issued a note with the following thoughts from Hunter on Lloyds and RBS
“With Lloyds, it is difficult to imagine that there would not be a retail offering at some point along the line, especially if the share price were to continue to recover from here, although at the time of writing Lloyds are standing at 61.8p, almost exactly equal to the reported “breakeven” price of 61.2p.
“Whether the shares are offered to the public (and at what discount) remains to be seen, but it could conceivably be at a higher price than the one we see today, even with a discount, and the Treasury will be keen to recoup as much money for its coffers as possible. For investors who really buy into the Lloyds story, therefore, a much simpler alternative may be simply to buy the shares on the open market without waiting for a government announcement.
“The current market consensus for Lloyds is a strong hold. It is considered to be a UK economy play, since its fortunes are largely tied to what is happening here, as opposed to some of the other UK banks which have a significantly higher global presence. The lack of a dividend payment is notable in the current interest rate environment, particularly of course for income seeking investors.
Of more interest – certainly from an investment perspective – was the RBS part of the speech. Indeed, in some ways, it was also rather more surprising.
The Chancellor promised an “urgent investigation” into whether a restructuring of the bank was necessary – into the well-reported “good bank” (existing businesses) and “bad bank” (where toxic loans, such as exposures to UK and Irish commercial property loans would be hived off). Regarding the “bad bank”, he commented “We will establish a Bad Bank if it meets our three objectives: if it supports the British economy; if it’s in the interests of taxpayers – and if it accelerates the return to private ownership.”
“It seems that the bank is simply not ready to be floated. This flies in the face of recent speculation that a late 2014 flotation was being considered and, realistically, means that a pre-election sale is now unlikely. Of course, before such investigations are complete, the notion of a sale of the government’s 81% is fanciful. This is quite apart from the fact that the current share price of 316p (down 1% on the open of trading following the announcement) is a country mile from the “breakeven” price of 500p.
“Investors had been front running the Chancellor’s announcement, with the market consensus of the shares coming in at a sell. The current uncertainty regarding the “good bank/bad bank” debate adds to a share with few friends. The shares were slammed in early May as its first quarter trading update fell strongly short of expectations, (as with Lloyds) the lack of a dividend payment is negative, and government interference (which is disliked by investors) seems to have resulted in the departure of the Chief Executive at a crucial strategic time for the bank.
“For RBS, a return to grace in the eyes of the market, let alone a sale of the majority stake, seems a little further off than before.”