Lloyds investors urged to take action

Shareholders in Lloyds Banking Group should either buy new shares in the bank’s £13.5bn rights issue or sell out altogether, according to private-client stock brokers.

Investors who do not top up their holdings in the record capital-raising that was announced this week could see the value of their existing shares shrink to an “uneconomic” few hundred pounds, they warn.

The rights issue is part of a restructuring that will see Lloyds sell off brands including C&G and TSB while avoiding the government’s “toxic asset” insurance scheme – and which the bank hopes will prove a “milestone” in its recovery.

Investors are set to be offered the new shares at a discounted price, which could in theory be as low as 15p, to be announced on November 24.

Given the huge sum the bank wants to raise, the cash amount that investors will be asked for is expected to be equivalent to more than half the current value of their shareholdings. For the average private investor with 740 shares, worth a total of about £620 currently, this should mean about an extra £360.

Many of Lloyds’s 2.8m investors may be reluctant to put further money into the bank, which owns the Halifax, following heavy losses on the shares over the financial crisis and this week’s confirmation that the bank will not pay a dividend for more than two years.

However, brokers said that a “do nothing” approach could prove the worst choice as the new stock issue is expected to hit the price of existing shares. Paul Kavanagh, partner at Killik & Co, said: “Shareholders should back the fundraising or get out – this is the wrong time to see your investment diluted.”

Investors will be able to sell their rights to the new shares or let them lapse – in which case they should also receive some cash. However, this payout is likely to come at the expense of their existing shareholdings.

Nick Raynor, investment adviser at The Share Centre, the broker, warned: “The lower the rights issue price, the more the dilution [of existing shares] and the greater the likely fall in the [existing] share price.”

The shares could halve in value over coming weeks to reflect the offer’s likely heavy discount, he said.

The price drop could lead to many shareholders being left with a few hundred pounds of shares that gave no real exposure to any recovery in the bank and would be “uneconomic to sell”, said Kavanagh.

Lloyds Banking Group shares have more than doubled since their low earlier in the year. But Justin Urquhart Stewart of Seven Investment Management described the increase as going from “pants to pence”, and said investors would be better off seeking growth elsewhere.

Brokers said that RBS remained a “sell” after this week’s announcement that the government would pump a further £25.5bn into the bank.

Analysts prefer Barclays, which has seen its shares bounce back more than 500 per cent since January.Tuesday’s trading statement may give news of the return of its dividend.

Lloyds and RBS shares closed down this week at, respectively, 84.8p and 37.06p.