Can Lloyds shake off its provisions Achilles heel?
Over the past 12 months Lloyds Banking Group shares have outperformed the wider banking sector by quite some distance, hitting their highest levels since 2008 earlier this year, as speculation grows that the government could sell more of its remaining stake in the bailed out lender.
Since the beginning of 2013 the shares are up over 65% which makes you wonder how much upside could possibly be left given that we are now back at levels last seen in 2008.
There had been some optimism that the banks latest numbers would show a return to profit for the year 2013, and last week's pre-announcement of a £6.2bn underlying profit ahead of this week's official numbers would seem to suggest the business is going in the right direction. The headline numbers are expected to show a return to profit for the first time since 2010 when the bank posted a small pre-tax profit of £281m.
The "fly in the ointment" once again has been provisioning with all the major banks announcing last week that they were setting aside more money for PPI and other mis-selling.
Lloyds announced that they were setting aside another £1.8bn, bringing the amount set aside to almost £10bn over the course of the last few years, with no guarantee that number won't increase further.
We've seen these provisions increase quarter on quarter over the past few years with no evidence that we won't see more in the coming quarters either, and this remains a concern, as the drip, drip effect on provisions shows no signs of abating, particularly in light of recent headlines about inquiries into FX rate fixing as well as an alleged new mis-selling scandal concerning a card protection scheme which came to light at the beginning of this month.
If these allegations prove to be accurate then further payouts could well be on the cards in terms of fines to regulators and further compensation to customers mis-sold a range of products ranging from interest rate swaps to card protection insurance.
It therefore seems unlikely, despite the banks wish to pay a dividend that any will be forthcoming while the taxpayer still holds its 33% stake in the bank, and even if it is, it's likely to be small.
It could also be difficult to make a case for the release of further shares when every time you think you've seen how big the provisioning iceberg is, you suddenly find that there's still some way to go before you find out where the bottom of this particular iceberg is.
The recent rise in property prices has helped the bank improve its profitability over the last 12 months but it remains very exposed to the shifting sands of investor sentiment surrounding the UK housing sector and it wouldn't take much for sentiment to shift, particularly if interest rates start to push up.
Of the two state owned banks Lloyds remains the most likely to generate a return for the taxpayer and it does seem that we could see the government look to offload further shares ahead of next year's election. The key question is whether they will be good value, and whether or not having a seller waiting in the wings will cap further gains towards the 100p level.
Another unknown is the effect the imminent flotation of 631 TSB branches will have on the banks future revenues and profitability, when offset against the initial cash injection minus the discount offered to get the float away successfully.
While the shares stay above 70p the uptrend is likely to remain intact but there is a good chance that the big gains have gone, and we could be set for a period of consolidation as investors mull their next move.
The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.