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What You Were Selling Last Week: Lloyds Banking Group PLC

LloydsOne of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful”. Or, in other words, sell when others are buying and buy when they’re selling.

But we might expect Foolish investors to know that, and looking at what Fools have been selling recently might well provide us with some ideas for investments that may be past their prime

So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service were selling last week, and what might have made them decide to do so.

A rosy picture

Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) has been doing pretty well, as UK banks go. It’s dealt with its legacy of impairments diligently enough, reducing them from £1.81bn in the first six months of 2013, to £758m in the first six months of this year. But it’s been cautious enough to warn that the figure may yet creep back up towards £1bn, despite some analysts suggesting that there’ll actually be a further reduction in the second half.

It’s also been on track to resume paying a dividend, and is still in discussions with the Prudential Regulation Authority (PRA) about getting the necessary permission. Reinstatement of the dividend would send a clear signal to the market that Lloyds has really got its act together, which could push its share price back up to levels last seen at the start of 2014 and beyond.

And Lloyds is certainly taking some bold steps to achieve cost savings. Whilst it’s never nice to present job cuts as “good news” — it’s not for those affected — the laying-off of 9,000 staff and closure of 200 branches will make a big contribution to Lloyds’ target of £1bn of cost savings per year by the end of 2017.

So, given what seems to be a rosy picture of a bank that’s fast returning to health, and with good prospects for the future, what might have persuaded enough people to sell Lloyds last week to put the bank in the number three spot in our latest “Top Ten Sells” list*?

A tremendous run

Well, investors in Lloyds have enjoyed a tremendous run. Over the past 3 years, Lloyds’ share price has risen 125%. And anyone lucky enough to have bought when Lloyds share price dipped under 22p, in November 2011, has seen their stake more than triple in value.

So perhaps people were selling last week to lock in some of their gains, rather because of any fundamental concerns about Lloyds’ prospects.

Stress about stress tests

That said, the sales may have been uncannily prescient, with news emerging this week that Lloyds was the worst performing UK bank in the recent European banking stress tests, with a capital ratio that’s only just above the 5.5% minimum that the European Banking Authority (EBA) requires. The bad news has seen Lloyds’ share price slide around 4% so far this week.

And there could be worse news to come, when the results of the Bank of England’s own stress tests are revealed in December. As one of the largest UK mortgage lenders, Lloyds could find the Bank of England’s stress tests unduly demanding, as they will require provision for even greater property losses (namely, a 35% peak-to-trough fall)  than the EBA ones did.

The ghost of PPI

Any decision from the PRA about whether Lloyds can start paying  dividend again will almost certainly be postponed until after the results of the Bank of England’s stress tests are out — and unless Lloyds gets a “pass”,the PRA’s decision may not be the one that’s hoped for. 

And despite Lloyds’ apparent good progress on impairments, PPI has returned to haunt it (appropriately, just before Halloween). The bank announced this week that it has had allocate an additional £900m to PPI compensation payouts, bringing its total provision for PPI to more than £11bn. And the news obviously raises the spectre that even more money may need to be found to meet PPI compensation claims in the future.

So, with the inevitable benefit of hindsight,  maybe last week was good time to have realised some profit from Lloyds.  

But, of course, whatever anyone was doing last week, only you can decide whether Lloyds Banking Group is a sell right now.

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Jon Wallis 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.

* based on aggregate data from The Motley Fool ShareDealing Service.