Since the turn of the year, Lloyds Banking Group’s [LLOY] share price has been on a roll, gaining near 20% in the first ten weeks of the year. A share buy-back scheme now looks set to bring in £1.75bn of additional revenue.Lloyds 1-year share price performance, CMC Markets, as at 13 March 2019
But criticism of the bank’s new overdraft charge system by the UK Parliament treasury select committee, headed up by conservative MP Nicky Morgan, did last week coincide with a stutter in momentum for the bank’s stock.
The changes mean that customers borrowing less than £4,100 will come in for increased charges. The newly introduced tiered overdraft scheme was described by Morgan as appearing to “fly in the face” of Financial Conduct Authority [FCA] regulations to ease the pressure on so-called ‘overdraft prisoners’.
The news appeared to hit Lloyds share price, knocking confidence over the course of last week, with the share price dipping by 2.6%. Certainly not a drastic fall but one that the bank will be keen to address.
And it will no doubt be hoping a newly launched share buy-back scheme will be an ideal way to do so.
Lloyds CEO António Horta-Osório has said that the sole purpose of this move is to reduce the ordinary share capital of the company when the plan was unveiled on 2 February, drafting in Morgan Stanley and UBS to act as joint advisers in the deal. Investors will see dividend returns of 3.21p, representing a 5% uplift from the previous year’s sum. By initiating this scheme, Lloyds will have increased its revenue return 26% from 2017’s £3.2bn to 2018’s £4bn.
Increase in revenue return from 2017 to 2018
Concern for overdraft charges
Former City lawyer Morgan has been at the helm of the Treasury Select Committee since the 2017 General Election and has been an outspoken critic of perceived unfair business tactics.
Her views on the changes proposed by Lloyds were put in no uncertain terms.
“The FCA's proposals seek to simplify overdrafts by banning tiered charging systems as early as December,” said Morgan. "It's puzzling, therefore, that whilst welcoming the FCA's simplification proposals, LLOY has introduced such a complex tiered system for – potentially – a relatively short period of time.
"Lloyds' new overdraft fees appear to fly in the face of the FCA's attempts to make overdrafts clearer and more transparent.”
“Lloyds' new overdraft fees appear to fly in the face of the FCA's attempts to make overdrafts clearer and more transparent.” - Nicky Morgan, chairman of the Treasury Select Committee
Horta-Osório was quick to counter Morgan’s allegations. His assertion that the ban had already moved to help customers in this bracket by abolishing higher charges on unarranged overdrafts was in accordance with recent FCA pledges. The bank became the first major lender to do so in 2017.
A company spokesperson said: “We have been working closely with the Financial Conduct Authority and other stakeholders on overdrafts and we are fully participating in the FCA's consultation process.
"Overdrafts are an important issue and we will continue to listen to the views of the FCA and other stakeholders on the need to bring more clarity and transparency.”
What’s next for Lloyds shares?
Though this rhetoric from Morgan’s office will have undoubtedly been a factor in the share price’s difficult week, Credit Suisse offered up a silver lining.
|PE ratio (TTM)||11.26|
Lloyds stock vitals, Yahoo finance, as at 13 March 2019
The investment bank reaffirmed its confidence in LLOY’s share price, rating the bank’s shares as ‘outperform’ before reducing its price target by a single penny from 84p to 83p.
This does however represent an increase of more than 30% from its current level. If 2019 continues as it has, the bank will be in a strong position to make this happen. What it can’t do is allow many more weeks like the one we’ve just seen become the norm. Investor confidence is high and it’s a wave that needs riding if Lloyds is to fulfil its potential in this calendar year.