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Lloyds weathers the storm

In the face of a lost lawsuit, a rumoured £100m PPI fine, and as George Osborne finally plans to put the firm back in the hands of investors, will Lloyds shares remain buoyant?

Lloyds
Source: Bloomberg

Today’s rumours of an impending announcement of a record £100 million PPI fine from the Financial Conduct Authority have topped off an interesting month for the money house.

The firm is well and truly in the spotlight of late, following the announcement from George Osborne that the government will expand its current share sale scheme to incorporate retail investors in the next 12 months. Seven years after the £20 billion government bailout and Lloyds Banking Group is finally looking ahead to becoming a fully autonomous and private firm yet again, the prospect of which appears to have investors overlooking temporary indiscretions.

This week saw focus fall on Lloyds for different reasons, with the firm losing a battle against a group of investors whose high interest bonds were the subject of discussion. Lloyds’ attempted to enforce the sale of those bonds back to the bank at their face value ahead of their maturity dates of between 2019 and 2029. Ultimately, this case is estimated to have cost Lloyds approximately £1 billion in higher interest fees.

Today’s rumours have centred around yet another fine for misselling PPI products in what appears to be a never-ending saga for the banks. This time, the £100million speculated to be levied at the firm in the coming days represents the largest fine to date. This has led to the markets seeing approximately 0.8p written off the share price, amounting to around -0.90%.

Despite both these recent indiscretions, the chart still looks overwhelmingly bullish. This is despite the prospect of a substantial amount of shares being injected into the market under the government selloff plans. Why is this?

Ultimately it all comes down to control. In the face of the crisis, Lloyds and RBS decided to advocate government intervention as a means to ensure the future of the firm. However, Barclays were also in a similarly bad state and their funding decision said a lot about their perception of what it means to have the government meddling in your business.

Barclays ultimately decided to borrow over £7 billion from middle eastern investors particularly from the likes of Qatar and Abu Dhabi, sacrificing greater interest payments in exchange of complete autonomy going forward.

Lloyds will finally be in that same position of autonomy some seven years later. The bank can once more be associated with greater risk taking and investments that are more keenly targeted at corporate profitability without the watchful eye of the government and taxpayer.

The chart has looked undeniably bullish since the election result last month, with the news of a Tory victory leading to a significant gap higher, pushing price above the 86.7p resistance level. We have since seen price range between 86.7p and 89.3p, as previous resistance turns to support. With the stock’s ability to remain above this key support level – despite the existence of two significant bad news stories this week – points to inherent strength in the company going forward.

With that in mind, any move back towards 86-87p would be seen as an opportunity to buy in at a better price. Only if price moves below 86p would things start to take a somewhat less bullish tone.

I do expect us to move higher in the near future, with 100p likely to be reached in 2015. Alternately, the 102p target taken from the projection of the recent flag pattern provides somewhat more of a bullish reading.

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