Lloyds takes a tumble

By ANDREW OXLADE, COLUMNIST
Updated: 19:00 EST, 14 February 2002

SHARES in Lloyds TSB slumped more than 5% after the company unveiled disappointing results. Investors were concerned by an 8% slump in pre-tax profits and surprise bad debts in Argentina. APR

Although most analysts believe Lloyds remains a solid stock to continue holding, some suggest more bullish investors should switch their money into a bank with better growth prospects. Eden, a City broker, suggests switching to Royal Bank of Scotland. Investment bank Gerrard suggests buying either Royal Bank of Scotland or Abbey National shares.

'The results were slightly disappointing,' said Richard Peirson, manager of the Framlington Financial fund. 'Lloyds remains the same - it's not in the most exciting situation but it's a solid defensive stock. I wouldn't be in a great rush to buy the shares at this level.'

Lloyds was exposed to £100m of bad debts in Argentina after its economy collapsed - £45m more than expected. The bank's pre-tax profits fell 8% to £3.55bn in 2001 at the bottom end of expectations from £3.5bn to £4.5bn. Click here for more on the results.

The market punished the disappointing figures by pushing the shares down 70 1/2p to 734 1/2p.

Lloyds is among the most widely held stocks in the UK. The bank's takeover of former mutuals TSB and Cheltenham & Gloucester in 1995 has left the company with 1.1m shareholders.

In the last year these investors have seen their money grow 10% whilst the wider stock market has fallen 15%. Much of the gains were thanks to a resurgence in bank shares generally, although Lloyds has pushed even higher than its rivals in the past few months - it is perceived as safe-haven whilst other banks are more exposed to the global downturn.

'There was nothing to sustain the recent sector out-performance of the shares,' said Martin Cross of broker Teather & Greenwood. However, he said the bank was among the safest in the sector and offers the second highest dividend yield among the banks at 4.8% yield. He advises holding on to shares.

The main questions following Lloyds' failed attempt to takeover Abbey National last year, are 'can it survive alone?' and 'who will it take over or merge with?'.

The Competition Commission has effectively warned the 'Big Four' banks not to bother bidding for their smaller rivals. Mergers, however, generally add value to businesses and push up share prices. RBS shares, for instance, have been spurred on since the company gobbled up NatWest.

Analysts worry that Lloyds TSB has already had a fruitless search for a takeover target or partner in Europe and wonder where it can go from here. There is also concern about the management with chief executive Peter Ellwood expected to retire in the near future.

Despite these concerns, analysts rate Lloyds a quality defensive stock because 55% of the company's loans are mortgages and it has a 'high element of insurance-related earnings', according to broker SG Securities. Both provide steady, reliable income as opposed to the riskier corporate loans which the likes of Barclays and HSBC are more reliant on.

Comparing company profits to share prices, SG estimates Lloyds is more expensive than Barclays and RBS, both of which could make more cost-savings following the takeovers of Woolwich and NatWest, respectively, in 2000. SG says hold.

Lawrence Peterman of broker Eden, however, suggests cashing in on the recent run. 'The shares have outperformed the banks sector by 7% in past 3 months and I suggest taking profits and switching into our favourite bank, RBOS, which offers greater upside and growth potential in the medium term,' he said.

But Lloyds retains its fans. Investment bank Fox-Pitt, Kelton calls it the 'safest large-cap in Europe'. It believes investors have sold because of poor performance by the bank's Scottish Widows business, which is mainly due to the stock market slump. 'Widows must deliver for sentiment to turn,' added FPK bank analyst Mark Thomas. He advises buying shares and sets a price target of 875p.

According to market research outfit Multex Global Estimates, nearly 60% of analysts rate Lloyds a 'hold' while 34% say 'buy' and 7% predict the stock will underperform the market.

Also in the results, the dividend rose a healthy 10% to give a full-year pay out of 33.7p per share.