With the U.K. government selling down most of its stake in Lloyds (LLOY) during 2016, its remaining share stood below 5% at the beginning of 2017. With the latest sale, Lloyds is now a fully privately owned bank, leaving Royal Bank of Scotland as the last bank still majority-owned by the government following global financial crises. While this sale was mostly expected by us and the market, this is a positive development, both from the perspective of shareholders and in terms of commercial independence.
We don’t anticipate changes in dividend policy
That said, we believe that it will be business as usual for management, and we don’t anticipate changes either in dividend policy or risk-taking approach after the government exit, which was usually perceived to have had control over management decision making. As Lloyds returning to full private ownership was part of our base case, we're maintaining our fair value estimate and narrow moat rating for the bank. The bank's shares look undervalued at current levels.
With our company report published on March 14, 2017 “Sailing through smoothly: Lloyds is a lean U.K. retail bank with a strong brand umbrella” we had raised our stewardship rating to Exemplary from Standard. This was driven by a great job done by the management turning the bank around and the successful execution of the restructuring which started in 2011 and completed earlier than planned in 2014.
Successful execution, along with good management practices, allowed the government to return the bank to private ownership sooner. Under our base case, as we expect Lloyds’ profitability to continue, we believe the group will maintain its dividend policy of a pay-out ratio of at least 50%.
