David Prosser: We can still win our money back on the black horse bank

 

Outlook If the Government was forced to "mark to market" its positions on Lloyds Banking Group and Royal Bank of Scotland – the accounting requirement that regulators have imposed upon the banks when it comes to their own assets – the public finances would currently be in the region of £25bn less healthy. The taxpayer paid around £45bn for its stakes in Lloyds and RBS – 41 per cent and 83 per cent respectively – but the holdings combined are worth just £20bn today.

We will hear more from RBS this morning, but Lloyds' first-half update, published yesterday, did not, on the face of it, make terribly happy reading for anyone hoping to see the taxpayer's paper losses start to come down. The headlines were a substantial loss, a nasty exposure to the Irish crisis, only modest interest in buyers for the 600 branches that Lloyds has to sell, and fears of more regulatory pressures to come.

Gloomy stuff then. So much so that one might wonder why the new Lloyds boss, Antonio Horta-Osario, was prepared to make the jump earlier this year from Santander, where he was running a sound bank facing far fewer difficulties (and one set to IPO at some stage over the next 12 months).

Aside from the matter ofpersonal ambition, the answer is that Lloyds is not quite the basket case its lowly market valuation might have you believe – the headlines told a misleading story. Almost all of the £3.3bn loss, for example, consisted of a charge it has taken for the payment protection insurance scandal, a one-off. Bad debts are easing, Lloyds' exposure to the eurozone crisis, Ireland excepted, is relatively small, and even its Irish position does not look as parlous as it did six months ago.

On regulation, unless the Independent Commission on Banking's final report next month includes something shocking, Lloyds will be less affected than rivals with large investment banking arms. It looks to have headed off calls for the ICB to order the full-scale unwinding of its credit crunch-enforced merger with HBOS.

So where does that leave the taxpayer? Well, the first point to make is that taxpayers' biggest exposure to Lloyds comes not through their stake in the bank but via the emergency funding extended to it, chiefly from the Bank of England. And here the story is positive – at its peak, those loans totalled almost £100bn, but today the figure is down to £37bn. Indeed, one of the dampeners on Lloyds' finances is that it has now arranged more expensive private-sector funding to replace the state support.

As for taxpayers' equity stake, let us say this: on almost anyconventional yardstick, Lloyds' share price today significantly undervalues what is now an increasingly profitable bank – one-off charges aside – with market-leading positions in UK banking and mortgages, and scope for cost savings as the Lloyds-HBOS integration continues.

On the downside, realising that value is another matter entirely, chiefly because of the "structural overhang" issue. The Lloyds stake is a vast slice of equity that investors know the Government will have to sell at a discount to the price in the market. So, every time Lloyds' stock starts drifting towards the breakeven price, investors start selling in anticipation of being able to buy more cheaply from the Government. And then the price falls back again.

Still, there are ways round the problem – not least the mechanism promoted earlier this summer by Nick Clegg for handing out shares to all British adults – and it is a technical issue rather than fundamental. Despite some of the gloomy forecasts being made in the wake of Lloyds' update yesterday, there is still every chance of the taxpayer recouping its investment in the end.

News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Sport
Louis van Gaal watches over Nani
transfers
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
PROMOTED VIDEO
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
Sport
New Real Madrid signing James Rodríguez with club president Florentino Perez
transfersColombian World Cup star completes £63m move to Spain
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Travel
Hotel Tour d’Auvergne in Paris launches pay-what-you-want
travelIt seems fraught with financial risk, but the policy has its benefits
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Programme Director - Conduct Risk - London

£850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

Business Analyst (Agile, SDLC, software)

£45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

Finance Manager - Bank - Leeds - £300/day

£250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

£100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

Michael Jamieson: Why weight of pressure rests easy on his shoulders

The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn