Investors in Lloyds Banking Group are being urged by some stockbrokers to take a “wait and see” approach to its £13.5bn rights issue, after shares in UK banks were hit this week by fears of exposure to Dubai’s debt problems.
Shares in Royal Bank of Scotland and Barclays fell about 8 per cent on Thursday as banks led the UK stock market to its biggest drop for months amid concerns about a possible debt default by the Gulf state.
Lloyds and HSBC were also down about 5 per cent as the FTSE 100 index plunged 170 points.
While the UK market bounced back yesterday, some brokers said that Lloyds investors should hold off deciding whether to put up cash for the bank’s record capital-raising.
“The timing is very unfortunate,” said Nick Raynor, investment adviser at The Share Centre. “Lloyds says it has very little exposure to Dubai, but the problems will hit financials generally.”
Analysts at NCB Stockbrokers said that, among UK banks, Standard Chartered could have the biggest exposure to Dubai’s debt problems, with 7 per cent of its customer loan book in the UAE. HSBC is thought to have the next highest exposure, followed by Barclays and RBS, with Lloyds having less than 1 per cent of its loan book in the emirates.
“The Dubai scenario has injected more uncertainty into the sector,” said Raynor. “The rights issue should be a ‘wait and see’.”
Investors are being offered the opportunity to buy new shares in Lloyds at a discounted price of 37p, compared with yesterday’s closing price of 58.6p.
The deadline for taking up the offer is December 11, although investors who hold their shares through stockbrokers may be subject to earlier closing dates.
Brokers have generally advised shareholders to take up the offer to avoid having their overall stake in the bank being “diluted” by the large number of new shares being issued. But they also point out that, in backing the fundraising, investors are effectively betting on the UK’s economic recovery.
“Lloyds has the least exposure of any major UK bank to Dubai, so those problems shouldn’t affect investors,” said Kristian Overend, partner at Killik & Co. “However, if you believe in the UK recovery story, this is a great play.”
Investors who do not want to put additional cash into Lloyds can also sell their rights to the new shares. These “nil-paid rights” started trading on the stock market yesterday, with the price broadly reflecting the discount of the offer to the existing share price. But because of the drop in Lloyds shares, the rights were also worth less, meaning investors looking to sell their entitlements could be better off waiting. Yesterday the rights closed at 22p.
Raynor said that some Lloyds shareholders might want to buy the new shares for a quick profit, then sell their overall holding and “move on”.
“There’s better growth elsewhere,” he said, adding that of the banks, Barclays was the most attractive. Overend of Killik added that Barclays’ recent share price falls presented an opportunity, with the bank now trading at an estimated 3.5 times next year’s earnings. “But the banks are higher-risk plays,” he warned. Barclays shares closed yesterday at 297.85p.
