Why I Hate Lloyds Banking Group PLC

There is something to love and hate in every stock. Here are five things I hate about Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US).

It is up 200% in two years

That is a whopping growth rate, especially for such a troubled enterprise that doesn’t offer any yield. But it leaves Lloyds trading at around 14.7 times earnings, which is no longer cheap. I would expect a bigger discount for a company that is still 32.7% owned by the taxpayer. Barclays, by comparison, trades at just 7.8 times earnings. That is almost half as much, yet it already yields 2.41%. The real opportunity to buy Lloyds has already passed.

Continuing privatisation uncertainty

The first stage in the privatisation process, when the government sold £3.2 billion worth of stock to institutional investors in September, was hailed as a success. Further sales are set to follow, possibly including a retail offering, and Lloyds could even be fully back in private hands by 2015. Yet since then, its share price hasn’t shifted. It was 75p then, it is 76p today. Could the prospect of a string of multi-stage sell-offs hold down share price growth between now and May 2015?

It’s also a bad bank

There has been a lot of talk lately about the Royal Bank of Scotland good bank/bad bank split, but what about Lloyds? The RBS bad non-core banking portfolio is thought to contain a stinking £54 billion of toxic assets. The Lloyds non-core toxic tank totals more than £70 billion. Lloyds also continues to rack up new PPI compensation costs, with another £750 million charge in the recent quarter. Plus it could face fines for exchange rate fixing. Yes, Lloyds getting better, but it has a long way to go.

The banking crisis could yet return

Not everybody is acting like the banking crisis is over. Joaquin Almunia, vice-president of the European Commission, has just warned that taxpayer-funded bank bailouts remain a possibility, if the latest round of stress tests reveal significant capital shortfalls, or if Europe’s debt crisis flares up again (which I’m convinced it will).

His suggestion that shareholders and bondholders should be first in line to make good any shortfall is worrying for investors. Maybe he’s being alarmist, but looking at peripheral Europe’s debt and deflation figures, you can’t rule out further trouble. Yes, Lloyds is now better capitalised than most, but its stock will still be exposed to any downward shift in investor sentiment.

Lloyds lacks diversity

Lloyds has a strong UK retail operation, but little in the way of international diversification. That may look like a strength today, with the UK forecast to be the fastest-growing western market in 2014, but could look less appealing tomorrow. The UK can’t properly recover until wages start rising faster than prices, and that happy day is still some way off. Recent disappointing retail sales figures are a reminder that the UK still has a long way to go. And so does Lloyds.

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> Harvey holds shares in RBS. He doesn't own any other company mentioned in this article.