Lloyds Banking Group: public good

Assume (and it is a big assumption) that the UK's Conservative party wins next week's election and proceeds with its cockamamie plan to sell part of the government's remaining 21 per cent stake in Lloyds Bank via a public share offer. This is a ludicrous idea. Not because the shares would be sold at a 5 per cent discount to the market price (such a discount would also apply to an institutional sale) but because it would impose extra costs on the bank. Lloyds' management should be running the bank, not fulfilling election pledges. And as Lloyds shares are already listed, the public can already buy them.

Still, assume the offer goes ahead. Should the public participate? That 5 per cent discount would be a nice incentive, but should not be the only reason to buy. If the shares remain flat on Friday's 83p, they would be sold at around 1.3 times book value - the highest valuation for a major UK bank. Even though Lloyds is doing well, it is hard to see a big upward re-rating. It is more likely that buyers would be interested in the dividend. The shares trade on a 2016 yield of 5.1 per cent.

That is attractive, but only if Lloyds can afford to pay. Its capital looks solid - common equity tier one capital was 13.4 per cent at the end of the first quarter. But there is still potential for more misconduct charges. No new insurance mis-selling charge disfigured the first-quarter numbers, but the problem has not disappeared. At least the £745m charge for the spin-off of TSB should be the last of its kind.

Ignore that charge, and Lloyds put in the sort of first-quarter performance that suggests the dividend should not be a problem. The net interest margin jumped from 2.3 to 2.6 per cent thanks to better deposit pricing, while impairments fell sharply. And as costs stayed flat, that higher income dropped to the bottom line. True, loan book growth of 2 per cent was unexciting. But the bank should have a decent story to tell retail investors, regardless of whether the Conservatives win.

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