– By Neil Collins –

Dear Lloyds: nobody wants to buy your bank

It was going to be a hard-fought auction. The chance to buy a fully-formed network of bank branches, complete (one supposes) with all the trimmings, rather than just a property portfolio of variable quality, does not come along often. This week, the informal deadline for the sale of 632 Lloyds Banking Group branches passed. Had the parcel been under the hammer at Christies, the auctioneer would have had to buy the lot in.

There is just one bid, miles away from the £2 billion that Lloyds indicated it had in mind, and even that bidder is pretty picky about what he’ll take. He’d rather pass on some of the mortgages, for example, presumably because he doesn’t share Lloyds’ optimism that they will be repaid. “He” in this context is Lord (Peter) Levene, the man who is credited with saving another Lloyd’s, the eponymous insurance market. His special purpose vehicle, NBNK, has indicated that it might pay £1.5 billion for the £36 billion of deposits and pick-of-litter mortgage assets.

Understandably, Lloyds is underwhelmed by this offer, and has extended the deadline, in the despeate hope that Richard Branson, Hugh Osmond or the Co-Op will come riding to the rescue, saddlebags bulging with cash. The brutal truth is that nobody wants to put serious amounts of proper risk capital into banks these days, because of the widespread suspicion that they need much more capital. NBNK’s assets add up to just £38m, and it would need to find takers for all sorts of funny money instruments to scrape together £1.5 billion. Meanwhile, the 2013 deadline ticks ever nearer.

Quite why Lloyds ever thought it could stuff anyone with this lot at anything other than a fire sale price is something of a mystery. The solution is as obvious today as it was when the European Commission ordered the disposal. Lloyds will have to break off enough of its business to comply, and fortunately it has a ready-made brand in the shape of the Halifax. For the vast bulk of customers, the credit crunch, forced merger and subsequent banking crisis will have passed them by. Despite the best efforts of its various owners, Halifax is still a valuable and trusted brand, capable of providing real competition to the banking cartel. Lloyds’ new bosses should forget a sale, and give the business to the bank’s shareholders. One day, Halifax Bank might even become attractive enough for the state to find buyers for its 41 per cent holding.

The Rio boys should stick to mining

Tom Albanese was on bullish form last week. Never mind the collapsing commodity prices, was his message, our order books are full (whatever that means) and the bull case for the red metal remains copper-bottomed (sorry). True, he mentioned in passing, there are signs of demand weakness, clouds no bigger than a man’s hand so to speak, but nothing to worry about. The share price of Rio Tinto, the company he runs, plunged.

Rio may be among the very best in the world at big mining projects, but it is distinctly accident-prone when it comes to finance. More to the point, it hasn’t a clue about valuing its own stock. In his presentation, Albanese reported that the $7bn share buy-back programme was more than half completed, thanks to determined daily buying in the market. As he did not need to add, the programme has enriched the departing shareholders at the expense of those remaining.

In July, for example, Rio was an enthusiastic buyer-in at over £44 a share. The grateful sellers filled the orders and watched the price slump along with everything else. The presence of this large, determined purchaser did nothing to hold up the slide in the stock. The Rio price is now below £30, a level last seen in August 2010, before the buy-back programme got going.

Dare one say it, but at this level it might actually be worthwhile for the company to buy aggressively. Even with a sagging copper price, the cash is pouring in, and the shares sell on perhaps five times next year’s likely earnings. However, given the record, it would make far more sense for Albanese & Co to give the $7bn to us shareholders – it’s about $2.80 a share – and let us decide on the right price for the stock. Of course, that would mean no commission for the trading arms of Rio’s banks, who would also be unable to job against a known, price-blind buyer.

In many ways, Albanese is lucky to find that he is still in charge at Rio. From the ill-judged acquisition of Alcan, and the panicky deal to let in the Chinese and the emergency rights issue of July 2009, to the botched tie-up with BHP Billiton, his reign as ceo is a catalogue of financial errors. Stick to mining, Tom, you’re well enough rewarded. Leave buy-backs toWarren Buffett, and let the shareholders decide what to do with the profits.

A cheap rabbit from Osborne’s hat

The Tory Party conference promises to be hard work for the Chancellor. The economy is barely expanding, the euro crisis promises to make things worse, and the faithful will be showing signs of austerity fatigue (don’t laugh). There’s not a lot he can do to cheer them up; another round of money printing is, in theory, the Bank of England’s decision, and Eric Pickles has stolen one feelgood soundbite.

Those sunlit uplands seem as far away as ever, and they won’t be reached by weekly bin collections or raising the speed limit on motorways, any more than would Labour’s mad idea of dividing companies into good and bad. Growth and employment can only come from making things work better, the so-called supply side reforms, as Christopher Fildes points out this week.

Small businesses are the engine that provides jobs, but the proposals to exempt them from some taxes for taking on new employees are expensive and cumbersome. One simple, cost-free change would be to exempt businesses with fewer than (say) 25 employees from all employment legislation. A single bad employee who exploits the rules can destroy a small business, where freedom of contract between employer and staff would allow the business to survive. Such a move would breach European employment directives, causing more trouble in Brussels, but George Osborne might rather welcome that, with the party in its current eurosceptic mood.

This entry was posted by Neil Collins on Friday, September 30th, 2011 at 22:15 and is filed under Capital markets, Commodities, People. Tagged with bhp billiton, george osborne, Lloyds Banking Group, Lord Levene, nbnk, rio tinto, tom albanese, warren buffett. Edit this entry.