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.