Lloyds Banking Group PLC: A Scottish Opportunity Or Threat?

When economies pick up, banks are normally the first to feel the upward pull of the market. When that’s not the case, something’s very wrong: after all, if extra liquidity isn’t good news for a bank, then who else is meant to benefit from it?

LloydsThe combined upturn of the economy overall during 2014 and the comparative poor performance of Lloyds (LSE: LLOY) (NYSE: LYG.US) should sound alarm bells to investors right now. It appears that the bank has a range of unique problems that makes for buying the shares here a very inadvisable bet to say the least.

Core Incompetencies

It doesn’t inspire confidence that troubles at Lloyd’s begin with product mis-selling scandals. In February, Lloyds posted its fourth consecutive annual loss after earmarking £3.5 billion for fines related to giving bad advice on consumer loans and insurance, as a result ending the year £838 million in the red, 61% wide of analysts expectations.

The bank isn’t paying for bad advice it gave customers five years ago, either: a little over a month ago, Lloyds was named one of the ringleaders in a mis-selling scandal whereby it netted huge commissions via secretly embedding swaps contracts in small business loans, bankrupting a number of its clients when they tried to change lenders. 

A bank that finds itself continually paying the price of mis-selling financial services is no different to a consumer products manufacturer that keeps having to settle lawsuits after its products kill its customers. In other words, Lloyds is essentially a maker of financial cigarettes, bogged down in costly regulatory battles while still attempting to peddle its ever-more replicable product to the guy on the street.

Scottish Political Instability

Then there’s the fact that Lloyds is headquartered in Scotland, the unlikely new centre of western political instability. If Scotland decides to vote “yes” to independence soon – as is increasingly looking more to be the case – the bank will technically become a Scottish bank. Even if that is only in the short term, as management at Lloyds claims, this still means that Lloyds’ credit rating could be called into question amid regulatory and monetary policy changes.

As if that’s not enough to deter you from buying the shares, Italian investment bank Mediobanca now claims that Lloyds and RBS (LSE:RBS) (NYSE:RBS) would fail European Central Bank’s review of asset stress tests. Of the two Scottish banks, Lloyds is clearly the worse-off of the pair. For a start, unlike RBS, Lloyds is still firmly in the red (RBS posted a second quarter gain, sending shares soaring in July).

Second, its loan exposure in Scotland is nearly twice that of RBS, at £26 billion. Further still, any short-term gains in shares of Lloyds such as those of RBS recently are likely to be mauled by selling carried out by the British government, which still owns a 25% stake that it is under political pressure to liquidate.


Get Seriously Rich, Not Severely Ripped

Avoiding overtly benign but potentially calamitous investments such as Lloyds is vital if you want to get seriously rich investing in the stock market, since these sorts of investments can almost single-handedly tear an equity portfolio's returns apart come year-end, as is embracing the ethos of taking on more risk to capitalise on these sorts of market anomalies so that you come out instead in profit.

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Daniel Mark Harrison 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.