Lloyds Banking Group’s profits are back at pre-crisis level, there’s a new, digital-heavy three-year plan and enough surplus cash to spend £1bn buying back shares. Very good, but the chief executive, António Horta Osório, has a more interesting boast. Lloyds, he said, is “completely aligned” with Jeremy Corbyn’s vision that banks should serve the “real economy”.
You can see what Horta Osório means, of course. Since the crisis, Lloyds has jettisoned almost all its overseas operations and presents itself these days as a patriotic servant of “the people, businesses and communities in the UK”. Its logo is a stylised union jack in green. It parades its flattering statistics at every opportunity: £47bn lent to first-time buyers in the last four years, support for 440,000 startups and the No 1 spot among UK corporate taxpayers.
Horta Osório, lest we forget, has become extremely rich in the process: last year’s £6.4m pay packet is absurd and won’t be cheered by politicians of any stripe. Meanwhile, the group’s behaviour in investigating the fraud at HBOS Reading may have been seriously poor – the regulator’s view is keenly awaited.
But, those qualifications aside, what does the Labour leader make of Lloyds? Is it his kind of bank, or one that he’d prefer to break up?
It would be useful to know because Corbyn, in his speech to the EEF, the manufacturers trade body, on Tuesday painted the financial landscape with such a broad brush that it was impossible to guess what policies are being contemplated. “Banks should be helping the real economy, not suffocating it,” he said. And later: “We need a fundamental rethink of whom finance should serve and how it should be regulated.”
What does that mean in practice? Was Corbyn merely bemoaning (fairly) some of the socially useless activities of investment banks? Or was he saying that ring-fencing and fatter capital ratios – the post-crisis reforms of which Lloyds is the poster child – are inadequate?
Horta Osório has laid down a good challenge. The UK’s biggest bank claims it is putting Corbyn’s view of banking into action. Does the Labour leader agree? A clear answer would be more revealing than a speech that made big claims about the sins of modern finance but didn’t name the culprits. Does he view Lloyds as part of the problem or the solution?
AA on the road to nowhere?
The AA, after a 28% fall in its share price, is a company worth £500m towing a £2.7bn caravan of debt. This lop-sided arrangement is the legacy of too many years under private equity ownership (CVC and Permira, take a bow) and the fund managers who foolishly agreed to provide an exit via flotation in 2014. The share price then was 250p v 84p today, offering a vivid illustration of why the AA should never have been allowed to list with this capital structure.
Whistling cheerfully, the chief executive, Simon Breakwell, reckons the heavy debt load won’t impede his plans to reinvigorate the group. The covenants are supposedly light, the average cost of debt is 4.5% and the risk of default is described as “very low” because, even after a hefty profits warning, top-line trading profits are forecast to be £340m-ish this year.
Well, maybe, but it still feels early to be predicting a return to profit growth next year. In attempting to get bigger in car insurance, and to sell policies to non-members for the first time, the AA is pitching itself further into a highly competitive market. The other half of the plan is called “connected car” and involves selling technology devices that detect faults with an engine. Maybe breakdown prevention, as opposed to assistance, really is the future. But since the gadgets have been fitted to only 5,000 cars so far it’s impossible to tell whether this is the advertised game-changer.
Suffering shareholders do know, however, that the AA has been pressing the growth accelerator for years and getting little response. A total of 3.39 million members is a decent base, but the figure is 100,000 lower than three years ago.
The dividend is being cut from 9p a share to just 2p until further notice, demonstrating that bond holders are in the driving seat. The token payment seems to be a peace offering to income funds, including the one run by poor old Neil Woodford, who was there at the AA’s float and whose shocking run goes on. No fancy technology is required to discern the problem in this case: don’t buy shares in simple companies that have been overly complicated by financial engineers.