Lloyds (LSE: LLOY) (NYSE: LYG.US) has impressed investors over the past few years, as the bank has rapidly recovered from mistakes made during the financial crisis.
Lloyds has spent the last few years slimming itself down, increasing its capital cushion and reducing exposure to risky assets. As a result, investors have pushed the bank’s shares higher. Since the beginning of 2012, Lloyds’ share price has nearly doubled.
Still, Lloyds’ recovery is not over yet and there are three main risks ahead that could derail the bank’s return to health.
Dividend dangers
Lloyds’ management has stated that the bank is looking to restart dividend payments to shareholders, after clearance from regulators, during the second half of this year. There’s no doubt that a resumption of dividends will be a landmark for Lloyds. However, if the bank fails to get the go ahead from regulators, investors could panic.
Indeed, it’s likely that Lloyds will only be allowed to restart dividend payments if the bank passes the Bank of England’s stress tests, the results of which are set to be released later this year. If the Bank of England, and its regulator, the Prudential Regulation Authority, stop Lloyds from initiating a dividend, there could be something amiss within Lloyds’ balance sheet.
In the worst case scenario, Lloyds could be forced to raise more capital.
Government overhang
It’s hard to forget that Lloyds’ largest shareholder is in fact the government. The government owns around 25% of Lloyds and any one-off sale could produce a sizeable drag on the bank’s share price.
What’s more, with such a large shareholding, the government has an ongoing influence at the bank. As we’ve seen at RBS, politics and banking don’t mix and the outcome is rarely beneficial to any shareholders.
Lacking diversification
Lloyds has been working hard to reduce its international footprint over the last few years. In particular, the bank is now active within less than 20 countries around the world, which makes Lloyds a UK focused bank.
Unfortunately, as Lloyds now has very little international exposure, the bank is dependent upon the success of the UK economy. Luckily, the UK economy is going from strength to strength right now but this growth can’t continue forever.
Further, as one of the UK’s largest mortgage lenders, Lloyds is extremely exposed to the state of the UK property market. Once again, the UK property market is booming right now but any slowdown will hurt Lloyds more than most.
How to value
Only you can decided if Lloyds fits in your portfolio and I’d strongly suggest you look a little closer at the company before making any trading decision.
