Okay, this is from someone who would probably describe himself as being ‘cautiously bullish’ on the British banking sector – Tom Raynor at Citi.
Profit warning raises capital concerns — In previous research (Darkest Before the Dawn — 27 January 2009) we estimated that Lloyds Banking Group (LBG) could get through the economic downturn by raising as little as £3bn in equity at 60p per share. Post the trading statement (13 February 2009) we have revised this estimate to £11.2bn, which at 50p would dilute stressed tNAV per share to 67p and potentially increase government ownership to 76%.
The catalyst, of course, was Friday’s “pre-announcement” of Lloyds’ 2008 figures which, post the HBOS credit write-downs and corporate loan impairments, will be ~£6bn worse than Mr Raynor was expecting.
The Citi man is expecting underlying pre-tax losses to rack up to £14bn through until 2010 – so Mr Raynor’s “Buy” recommendation on the stock has given way to a “Hold.” Clearly, in analyst speak, the scale of potential capital issuance means the balance of risk has adversely shifted.
Here are two tables (click to enlarge). The first shows potential impairment charges, the second the effect on Lloyds’ capital ratios, which suggest that Equity Tier 1 could fall to just 1.7 per cent under stress test conditions.
Ouch.
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Related links:
Volatile trading in Lloyds shares – FT
The curious case of Lloyds/HBOS – FT Alphaville