The Risks Of Investing In Lloyds Banking Group PLC

Today I am highlighting what you need to know before investing in Lloyds Banking Group (LSE: LLloydsLOY) (NYSE: LYG.US).

Legal problems drag on and on

Like the rest of the banking sector, Lloyds remains embroiled in a multitude of courtroom battles over allegations of previous misconduct, and subsequently fears over heavy financial penalties and impact on earnings continue to loom.

Just this month the Daily Mail again highlighted the scale of these shady practices by publishing testimonies from previous employees at the firm, lifting the lid on the bank’s aggressive sales culture and detailing the measures taken by Lloyds to avert rules surrounding to prevent the mis-selling of products such as interest rate swaps.

Most recently, Lloyds was forced to fork out a £217m fine to US regulators in July after admitting to the manipulation of LIBOR interest rates. And according to the London School of Economics, Lloyds has incurred the highest costs of any UK-listed bank as a result of previous misconduct, and has shelled out in excess of £8.9bn for cases dating between 2009 and 2013.

But this remains a running total, and the company could still be in line to face further crushing penalties as more cases come to light and regulators drag the banks over the coals. As for the mis-selling interest rate hedging products alone, many analysts believe the total cost of these misdeeds across the entire banking sector could come close to, or possibly exceed, that seen by the wrongful selling of payment protection insurance (PPI).

Lloyds advised in July that it was forced to set aside a further £600m during April-June to cover the cost of covering PPI claims, taking the total figure to more than £10.4bn. Needless to say the bank is also having to suck up vast administrative costs to mop up these problems, and such expenses accounts for £190 million of the increased second-quarter provision.

But after the Financial Conduct Authority (FCA) ruled last month that up to 2.5 million existing cases would have to be re-examined, on the grounds of previous underpayment or incorrect dismissal, the bank looks set to keep on topping up its provisions.

And who knows what the final bill will ring in at to deal with all the bank’s previous misconduct charges.

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Royston does not own shares in Lloyds.