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Goldman shows a preference for Lloyds Banking

June 29, 2009

Too late to save Sir Victor Blank, Goldman Sachs has decided that the prospects for Lloyds banking Group are little short of glittering. Once the current crisis is past, says Goldman, the British banks will clean up.

Anyone trying to borrow right now would say they are cleaning up already. Loans carrying a small margin over Libor are a distant memory for most commercial borrowers, and woe betide any company that breaches a covenant, no matter how technical.

Goldman has noticed “a strong relationship between market share concentration and long-term returns” which was why Blank fell for the HBoS deal in the first place. By 2011, the bank could be earning over 20 per cent on its equity, so Goldman’s analysts have turned the stock into a “conviction buy”.

Well, maybe. But if you lack conviction about the ordinary shares, how about the Halifax 13.625 per cent perpetual subordinated bonds? Brokers Collins Stewart are currently offering these strange creatures at 85 pounds per cent, to give a yield of 16.03 per cent for ever.

Now part of Lloyds’ capital, the stock is rated B by Standard & Poors, because it’s way down the pecking order, and failing to pay the interest is not considered an event of default. Yet if Goldman’s analysts are right, Lloyds will want to pay dividends, and it must pay the bondholders first – and so far, the bank has kept up to date with its preference shares, which rank below all the bonds. Oh, and did I say that the minimum dealing size was 50,000 pounds nominal? So not quite suitable for your tax-sheltered Individual Savings Account, then.

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  • About Neil

    "City Editor, The Daily Telegraph 1986-2005 City Editor, The Sunday Times, 1984-1986 City Editor, Evening Standard, 1979-1984 Director Templeton Emerging Markets Investment Trust plc, Finsbury Growth and Income Trust plc Passion: fly fishing (and wife Julia and seven-year-old twins)"
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