Lloyds (LLOY) announced Monday that it had reached an agreement with U.K. and U.S. authorities to settle charges that the bank illegally manipulated Libor and sterling repo rates between 2006 and 2009 for a total of £226 million. The £226 million in fines is less than 9% of our projected 2014 earnings for the bank and does not affect our long-term projections or fair value estimate for the narrow-moat bank.
While many large banks' recent regulatory settlements revealed evidence of widespread misdoing, Lloyds' settlement was quite the opposite. In fact, while regulators said in statements that Lloyds' behaviour was "reprehensible and clearly unlawful" and "serious misconduct," they also noted in public statements that the abuse was "lower than at other firms" and "not pervasive." We're hopeful that this indication of a better-than-average standard of conduct, combined with Lloyds' substantial scaling back of risks since the financial crisis, may mean lower-than-average regulatory charges are ahead for shareholders. Our hopefulness is tempered, however, as we recall the £10 billion that the payment protection insurance scandal has cost Lloyds' shareholders in recent years.
Lloyds nearly destroyed itself in 2008 with its ill-considered acquisition of HBOS, and the U.K. government ended up with 43.5% of the combined group. Now, after years of bailouts and setbacks, the bank has come a long way in righting itself, and the government has begun selling down its stake. We're encouraged that the U.K. recovery is gaining speed, but we think a return to normalcy is years away. Still, we think that Lloyds’ shrinking noncore division and the tapering of scandals mean that shareholders can look forward to improving returns – we expect the bank to materially out earn its 10% cost of equity by 2015.Lloyds has closed HBOS’ worst businesses, wrote down much of its bad assets, and is close to re-emerging as the powerhouse U.K. bank that it once was.
