“We always find something, eh Didi, to give us the impression we exist?” asks Estragon in Beckett’s Waiting for Godot, for his co-sufferer Vladimir to answer: “Yes, yes, we’re magicians.” There’s certainly a lot of magic needed to make us believe in the blessings of Brexit. To ditch a club while enjoying full amenities at reduced membership fees, without the obligations of Schengen and the risks of a shared currency, begged the question where grass could ever be greener.
The idea to walk away from the world’s largest trading bloc never looked like good math to economists. Yet for a short while, at the eve of the referendum in 2016, it seemed that the great leap backward could succeed. Under the premises of free trade, good government and a spurt of enthusiasm, losses seemed manageable. Other small countries have survived alone, like Singapore or New Zeeland.
Well, looking back now we know now that the world has changed dramatically. What had looked like a foolish, yet harmless endeavour is now utterly out of place. Free trade is a thing from the past, enthusiasm was never an English forte, and good government is the last thing one can expect from Boris and his destructive coterie.
Burdened with a dithering government, indecisive and ideologically blinkered, the UK economy seems to soon be heading back to the 1980s. After the referendum, the pound sickened and commercial assets dropped in value. Shares, not only in the eyes of relentless Brexit-cheerleaders, started to look undervalued and a reasonable bargain. I felt increasingly tempted to speculate on a possible post-Brexit bounce.
I was hesitant to invest in small and mid-sized UK companies as most advisers would have suggested. I reasoned new regulations, new export procedures, new industrial standards would be more costly for a small firm than large ones. The FTSE stock index of the largest listed companies on the other hand was not a suitable tool to bet on a rebounce. Most companies represented in the index are multinational corporations such as miners, big oil and large consumer goods manufacturers which operate overwhelmingly outside the UK. Their success or failure depends little on the UK economy. To bet on domestic enterprises like builders, commercial real estate, high-street names or pub chains would have been overly optimistic.
I therefore opted for a no-nonsense bank at the heart of the inland economy, servicing exclusively UK households and businesses: the Lloyds Banking Group. After having taken over TSB in the 1990s and, somewhat forced, HBOS in the Great Recession, Lloyds looked like a perfect proxy: a lot of mortgage business, consumer loans and at the service of small firms handling their antiquated cheque books.
Lloyds’ loans are fully covered by bank deposits, making a solvency crunch as experienced after the sub-prime crisis or a bank run unlikely
I bought shares at 58.23 pence, valued comfortably lower than book value – the total of its assets consisting mainly of loans. Lloyds had a near-death experience in 2008 when it had to be bailed out by the taxpayer to the tune of more than 20 billion pounds. In March 2011, Antonio Horta-Osorio, a prominent banker with an impeccable track record was brought in as a new chief executive tasked to clean up a sea of bad debt. After only a few months in the job, he had a nervous breakdown and had to take a four-week break to recover, such was the mess. He brought the bank back to profit and repaid the UK government in 2017 in full – even at a profit of 800 million for the exchequer. The equity base soon recovered to comfort levels.
And now? Well, Lloyds is back into the mess, if not by its own fault. My shares are priced at 27.79 pence at the time of writing – a staggering loss of 52 per cent within a few months. The bank’s financial standing is admittedly less precarious than in 2008. It holds equity of 48.9 billion British pounds, or 5.6 per cent of its total balance.
This translates into more than eleven per cent of its outstanding loans. Tier 1 capital, a measure of soundness taking into account the riskiness of bank assets, cash reserves and quasi-capital subordinated debt, stands at respectable 13.4 per cent.
New accounting rules introduced after the banking crisis of 2008 demand forward-looking loss provisions which have to be booked well before capital buffers drift into a fatal meltdown. And Lloyds’ loans are fully covered by bank deposits, making a solvency crunch as experienced after the sub-prime crisis or a bank run unlikely.
The damage to my failed investment is therefore not immediate bankruptcy but future profitability. The government-ordered lockdown of the economy has left the credit-card-yielding British consumer out of work, and soon out of money, once the fiscal support measures are wound down, as announced. Rental payments by businesses and households are on holiday and the servicing of debt too.
Lloyds had to grant 1.1 million retail customers payment suspension, with no interest charged. This is without doubt good news for the bank’s customers with precipitous overdrafts, with loans or insurance premiums to be paid and credit card debt looming, or burdened with car leasing contracts and 180 billion worth of mortgages.
Yet the future of the bank, working from home bar a few officers manning the branches, looks grim.
For the time busy with Bounce Back Loans, Coronavirus Business Interruption Loans and good corporate-citizen-image polishing, the bank has few prospects to ever earn money again. A first-half-year impairment charge of 3.8 billion pounds, expected to grow to 5.5 billion until the year end, is the pusillanimous beginning.
Lloyds’ loan book, in excess of 400 billion, is threatened by losses of incalculable proportions, losses which are exacerbated by the difficulty to actively earn money. With interest rates at zero, profit margins on loans are shrinking. Lloyds admittedly has a profitable trading business, yet too small when compared with JP Morgan or Goldman Sachs from the US, or Barclays in the UK. Lloyds’ narrow focus on retail business, considered a virtue after the sub-prime-crisis when gambling-style trading threatened to dislodge the banking system, looks now wildly speculative in environs wilfully shrivelled by Brexit.
Our own island, with its various problems and challenges, will look like a sea of calm in comparison.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
Andreas.Weitzer@timesofmalta.com
Andreas Weitzer, independent journalist based in Malta