I love visiting the websites of the worlds largest banks. The messages you get are inspiring. The Lloyds Banking Groups(LSE: LLOY) (NYSE: LYG.US) website, for instance, says things like, Investing in Communities, and Building Better Lives. Anyone would think it was trying to present itself as a philanthropic institution.
The reality of course is that banks charge you for taking money thats rightfully yours (in terms of fees) and have set up an economic system to ensure they own your biggest assets for the majority of your life. You could argue that a financially sound bank is the corner stone of a prosperous economy, but were also all too aware of how much damage the bad banks can cause. Lloyds is one bank that claims to be reformed. What do you think? Lets look at the three Cs again (cash, compliance and confidence).
Lloyds is still licking its wounds from the Great Recession. Its still 25% owned by the government, and it is yet to return to profitability. The upside is that it produced revenues of 4.7 billion in the second quarter of 2014. That was ahead of census forecasts and beat the prior second quarter result by over 4%.
Theres little point at looking at the other metrics of the bank because historical comparisons arent robust enough. Suffice to say that Lloyds expects its net interest margin to be around 2.45% in 2014 thats respectable. It also expects full year statutory pre-tax profit to be significantly ahead of the first half, according to the 2014 half year results presentation.
This is where it gets ugly. Lloyds didnt just cross the line, they stomped all over it. Lloyds has spent many months apologising for its role in the LIBOR scandal (manipulating rates for its benefit). Mark Carney said Such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved,. Lloyds tried to manipulate short term rates, known as repo rates, to reduce its costs. It was actually abusing a scheme that had been set up to try and help it. Poor show. Non-executive director and chairman, Lord Blackwell, described it as, truly shocking conduct, undertaken when the bank was on a lifeline of public support.
The bank has now pledged to clean up its act and is even promoting a conservative risk model but only time will tell how much the banks reputation has suffered.
No one likes getting the sack, but the banks done whats been necessary in recent years to keep itself lean and mean. Thats involved cutting nearly 10,000 employees from its workforce. It also appears that the government may now resume selling its shares in Lloyds given the recent appreciation of the stock price and the reduced operational risks for the bank.
In the meantime you should keep in mind that the Government still owns a quarter of Lloyds and therefore its ability to attract the cream of the crop through executive pay and bonuses is limited. Thats better for the tax payer, but more limiting for the Lloyds shareholder.
Investors were, however, pleased to see the no vote in Scotland last week. The value of Scottish financial companies jumped by about 2 billion on the news. Lloyds Banking Group closed up 1 per cent on the day.
For my mind, Lloyds is in banking rehab. I like its chances if it doesnt relapse.
So how can you tell if a bank has a promising future? One factor that may benefit all banks in the medium term is some movement in the yield curve. That is, when interest rates start to rise. That’s because all banks’ earnings are dependent on their net interest margin. Very basically speaking it’s the difference between what the bank has to pay depositors and what the bank collects from lenders. If you would like to know more about what makes a bank ‘healthy’, or maybe how its net interest margin relates to its share price, I implore you to read this special free report on analysing the banks — written exclusively by the Fools.
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David Taylor has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.