Just a few short weeks ago, I was planning to hold onto my Lloyds (LSE: LLOY) shares forever. Today, I’m not so sure. It’s not just that they’ve fallen in recent weeks, it’s the reason they’ve fallen.
Many investors, me included, continue to see Lloyds Banking Group as a defensive core portfolio holding. A stock that can deliver a high and rising dividend income stream, plus a spot of share price growth when conditions are right.
As someone who lived through (and reported on) the financial crisis, I can see how irrational it is to believe that. Lloyds would have gone bust in 2008 but for the taxpayer. Then its shares took the best part of 15 years to recover.
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This FTSE 100 bank is surprisingly volatile
Perhaps my attitude is skewed because I’ve had such a good run since buying the shares last year. At one point, I was enjoying a total turn of around 50% in just over a year. I should have known it was too good to last.
The financial crisis isn’t the only major blow Lloyds has suffered. It also got slammed by the PPI mis-selling scandal. This cost the big banks a staggering £50bn in compensation – of which £23bn was paid by, that’s right, Lloyds.
The thing is, I wasn’t surprised. As a personal finance journalist, if I was ever looking for an example of sneaky small print or a rotten return on a legacy account, Lloyds was my go-to bank. I would never dream of taking out one of its products.
Yet, in a bizarre way, I was happy to hold its shares. Subconsciously, I assumed that such a sharp operator must be a profit machine. Which kind of serves me right.
Now my Lloyds shares are plunging as markets absorb the impact of the latest mis-selling scandal, this time for motor finance. No prizes for guessing which FTSE 100 bank is on the hook for the biggest potential compensation payouts.
Yes, it’s Lloyds, and its shares have plunged 15% since 24 October as a result. Worse, this is happening as a time when Barclays and NatWest are booming. They’re both up almost 10% over the same period.
The board deserves what it gets
Over 12 months, Barclays and NatWest shares are up 90% and 80%, respectively. The Lloyds share price is up a modest 25.77%. Basically, it’s blown a once-in-a-decade banking stock surge. I have a big stake in Lloyds and this is a blow I could have done without.
RBC Capital reckons Lloyds is on the hook for £3.2bn in compensation. Or possibly £3.9bn. That’s more than all the rest put together. The board was planning a £2bn share buyback this year. Now it’s likely to slash that in half.
I’m seriously unhappy. While Lloyds now looks cheap trading at 7.3 times earnings while yielding a handsome 5.2%, I’m thinking of selling up. Failing to treat customers fairly isn’t just bad for customers, it’s bad for business too. This is a big decision so I’ll need time to think it over. But right now I want out. And if I do sell, I won’t be back.
