How to buy and sell Lloyds shares
Thinking of trading Lloyds shares? We go through the basics of the company and explain how to analyse Lloyds and how to buy and sell Lloyds shares.
Understanding Lloyds: a brief history
The Lloyds Banking Group that we know today was only formally established in 2009, when Lloyds TSB acquired HBOS. TSB merged with Lloyds in 1995 and separated in 2013, taking 630 branches with it.
Lloyds Banking Group is the largest retail bank as well as the biggest financial services group in the UK, and home to a number of brands:
- Lloyds Bank: Originally founded in 1765 as a private bank in Birmingham under the name ‘Taylors & Lloyds’, decades of mergers developed it into a national and then international bank. It launched the first cashpoint in the country back in 1972 and merged with TSB in 1995, and then with HBOS in 2009. TSB split off from Lloyds in 2013. Today, Lloyds Bank offers both retail and commercial banking services including current accounts, savings, mortgages, loans, credit cards, private banking and wealth management services. It is the largest provider of start-up finance for small businesses in the UK
- Bank of Scotland: The Bank of Scotland was founded by the Scottish Parliament in 1965, making it the first and now the oldest Scottish bank. The bank was set up to develop Scotland's trade with England and others and was the first European commercial bank to successfully issue a paper currency. Having become part of Lloyds in 2009 as part of the HBOS deal, the bank today offers both retail and commercial banking services
- Halifax: Halifax was set up as an investment and loan society in 1852 that helped communities purchase housing by using surplus funds from other customers. By 1913, it was the world's largest building society and, after merging with Halifax Equitable to become the Halifax Building Society in 1928, it was over five times larger than any of its peers. Halifax moved into personal banking in 1986 and floated on the stock exchange in 1997. Halifax became part of Lloyds in 2009 as part of the HBOS deal
- Scottish Widows: Scottish Widows was set up in 1815 to aide women and children who lost relatives in the Napoleonic Wars. Today it provides services across the UK, including life cover, critical illness, income protection, workplace and individual pensions, annuities as well as savings and investment products. Lloyds purchased Scottish Widows in 2000
- MBNA: MBNA was set up in 1993 and offers specialist credit cards. Lloyds purchased the company in 2017
- Blackhorse: Blackhorse was formed in 2001 but has a much longer history. It is the UK market leader for point of sale motor finance, serving both personal and commercial customers
- LEX Autolease: LEX Autolease was created by the merger of Lex and Lloyds TSB Autolease and helps small and national businesses run their fleet of vehicles
- LDC: LDC was founded in 1981 and is the private equity arm of the business. It claims to be the most active mid-market private equity investor, helping companies grow organically, through acquisition or buy and build strategies and via international expansion
- AMC: The Agricultural Mortgage Corp (AMC) was created in 1928 in response to a crisis in farming following World War 1, and initially owned by the Bank of England. Today, it still provides long term mortgages for land and redeveloping farming and rural based businesses
- Birmingham Midshires: Birmingham Midshires’ is the result of over 50 building societies coming together, with roots stretching back to 1842. Today it offers cash ISAs, easy access savings accounts and fixed-term saving accounts and bonds on-line and by phone, also offering specialist mortgages for buy-to-let and self-build customers through mortgage advisers.
Lloyds financial performance
Although Lloyds has numerous brands under its belt, it only operates under three segments: retail banking, commercial banking, and insurance & wealth. Based on the 2018 results, the three divisions accounted for 58%, 29% and 13% of the bank’s overall underlying profit, respectively. Lloyds is focused on the UK, and its performance is therefore inextricably linked to the health of the UK economy.
Diving a bit deeper into its two banking units, the retail arm is considerably larger than the commercial one. Retail customers have over £100 billion more deposited with the bank than its business customers, and Lloyds lends out more than three times as much to the public than commercial outfits. The retail arm boasted a banking net interest margin of 2.68% in 2018 compared to the 3.27% boasted by its commercial division.
|Lloyds key figures (£Mn, unless stated)||2014||2015||2016||2017||2018|
|Total income, net of insurance claims||16,399||17,421||17,267||18,659||18,626|
|Cost: Income ratio||84.7||88.3||71.1||68||63|
|NAV per share (pence)||60.7p||57.9p||60.2p||60.5p||61.0p|
|Loans and advances||482,704||455,175||457,958||472,498||484,858|
|CET 1 Ratio||12.80%||12.80%||13.60%||14.10%||14.60%|
|Dividend payout ratio||45.1||359.3||104||69.8||57.6|
|Share price at year-end||75.8p||73.1p||62.5p||68.1p||51.9p|
Lloyds key personnel: who manages the bank?
Chairman Norman Blackwell: Blackwell joined the board in 2012 and was the chair of Scottish Widows before taking over as chairman of the wider group in 2014. From 1995 to 1997, Lord Blackwell was head of the prime minister’s policy unit and was appointed a life peer in 1997.
Chief executive Antonio Horta-Osorio: Horta-Osorio became CEO of Lloyds soon after joining the board in 2011, having previously served as the CEO of Santander for four years.
Chief operating officer Juan Colombas: Colombas was the chief risk officer of Lloyds before being promoted to COO in 2017. He too worked at Santander before joining Lloyds, taking charge of the bank’s risk strategy.
Chief financial officer George Culmer: Culmer joined the board in 2012 and was formerly the CFO of RSA Insurance Group.
What is Lloyds Banking Group’s strategy?
Lloyds launched a new strategy in early 2018 centred on getting the bank ready for the digital age, with over £3 billion of investment planned over the three years to the end of 2020. Lloyds is already the UK’s largest digital bank with nearly 16 million customers online, where it sells three quarters of all new products.
The plan also involves cutting costs and expanding outside of its core retail banking operations. It has announced a strategic partnership with Schroders to create a market leading wealth proposition that Lloyds hopes will make it one of the top three financial planning business in the UK within the first five years. Having built a strong platform to build its financial planning and retirement business by acquiring Zurich’s UK workplace pensions and savings business in 2017, Lloyds aims to add up to one million new pension customers and grow financial planning and retirement open book assets by more than £50 billion by the end of 2020.
Lloyds guidance: what are the bank’s targets?
Lloyds has set a number of targets it wants to meet over the forthcoming years as part of its strategy.
The key metric being used by Lloyds to measure its progress in terms of cutting costs and becoming more efficient is the cost: income ratio, which measures how fast costs are growing relative to income (the lower the better). Lloyds has already brought this down significantly over the last five years and it is aiming to reduce the 49.3% ratio reported in 2018 to the 'low 40s' by the end of 2020, when it is aiming to have annual operating costs of below £8 billion.
Lloyds is also aiming to improve return on tangible equity to 14%-15% from 2019 onwards, having delivered 11.7% in 2018. It is also aiming to achieve a CET1 ratio of 13% from 2019 onwards, having reported 14.6% last year.
Lloyds dividend: what’s the outlook?
Lloyds has promised to deliver a progressive dividend throughout its three-year strategy and return surplus cash to shareholders through buybacks. The bank raised its dividend by 5% in 2018 to 3.21 pence and launched a £1.75 billion share buyback (equal to 2.46p per share), upgrading from its original £1 billion plan.
How to analyse Lloyds
Below are key metrics and areas to monitor when Lloyds releases earnings to the market.
How to analyse Lloyds income statement: key figures
- Net income: The net sum of income made relative the amount it has had to pay its liabilities. Widely used as the top-line figure.
- Underlying profit: The amount of profit made excluding exceptional items, providing a more like-for-like comparison to the previous year.
- Pre-tax profit: The statutory, bottom-line profit the company makes, including any exceptional charges.
- Earnings per share (EPS): The amount of profit made divided by the number of shares in issue, representing how much profit is attributable to each share.
- Dividend and share buybacks: The ordinary dividend is the amount that will be paid to shareholders for each share held, while buybacks are additional sums returned if there is surplus cash.
- Banking net interest margin: The percentage of net interest income it earns on deposits in the bank, calculated using the average gross banking interest-earning assets. The higher the better.
- Average interest-earning banking assets: The value of all assets that the bank can earn interest from, including stocks, bonds, property income, and customer deposits.
- Jaws: The relationship between revenue growth and cost growth is represented by ‘jaws’ – which is positive when revenue grows faster than costs and negative when costs increase faster than revenue. This is another metric shareholders can use to monitor how fast the bank is cutting costs, alongside the cost: income ratio.
- Underlying return on tangible equity: measures the rate of return on the tangible common equity.
- Asset quality ratio: The percentage of average gross loans and advances to customers that have been impaired or written-off. The lower the better.
How to analyse Lloyds balance sheet: key figures
- Customer deposits: The value that customers have deposited in the bank.
- Loans and advances to customers: The amount of credit the bank has supplied to customers.
- Capital build: The value of the bank’s assets minus its liabilities and debts. The rate of growth in capital build reflects the value of assets rising faster than liabilities, and vice versa.
- Risk-weighted assets: This figure is used to calculate what the minimum amount of regulatory capital a bank must hold to maintain solvency. Each type of bank asset is analysed for exposure to risk and, the riskier the asset, the higher the value of the risk-weighted assets, which in turn means the bank has to hold more regulatory capital.
- CET-1 ratio: The CET-1 ratio (also known as the Tier 1 capital ratio) represents the percentage of stock held by a bank or other financial institution.
Lloyds shares: the basics
Lloyds shares are traded on the main market of the London Stock Exchange under the ticker ‘LLOY’. The bank is a member of the FTSE 100 index, as well as the FTSE Eurotop 100, Low Carbon 100 Europe, Stoxx Europe 50, Stoxx UK 50.
There were 71.3 million Lloyds shares in issue at the end of February 2018, which shareholders can use to calculate their own stake in the business. That figure includes shares represented by American Depositary Receipts (ADRs).
How to trade Lloyds shares
There are other ways to trade the Lloyds share price without buying and selling them, by speculating on the future direction of shares. With trading, you do not own the physical asset, but you can go long or short on the position, meaning you can capitalise on opportunities regardless of what direction the share price is headed. This is done through CFDs. This form of rading also allows you to take advantage of leverage, which means you don’t have to put down the full value of the trade upfront and you can get much larger exposure. However, your profit or loss will be based on the full size of your position.
CFD trading Lloyds shares
A CFD is a contract in which you agree to exchange the difference in price of Lloyds shares from when you opened your position to when you close it. You can buy CFDs to go long or sell them to go short.
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