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The UK government is pressing ahead with a retail offer of at least £2bn of shares in Lloyds Banking Group next spring, in what will be a watershed event for the bank after its bailout during the financial crisis.

Lloyds already has about 2.8m private investors on its shareholder register, but the government is offering a series of sweeteners to attract retail buyers to the new offer, including a 5 per cent discount to the market price.

Those who own the stock for more than a year will receive one bonus share for every ten held, up to a value of £200. Investors buying shares worth less than £1,000 will be given priority.

The package attracted more than 60,000 people to register their interest via a dedicated website on its first day — exceeding those who signed up during the entire two-week registration period for the Royal Mail’s initial public offering in 2013. Seperately, investment adviser Hargreaves Landsdown says more than 120,000 of its clients have registered their interest for email updates about the sale.

Aside from the discount and the bonus, is there any reason to buy Lloyds Banking Group shares?

For one, the dividend potential. Once one of the biggest dividend payers in the FTSE 100, Lloyds resumed payouts this year after halting during the financial crisis. Analysts expect the stock to yield 3.5 per cent in 2015, rising to 5 per cent in 2016, although income-hungry investors should be aware this is just a forecast — there are no guarantees.

In growth terms, UK banks are popularly bought as a play on the expansion of the economy. Britain’s economy is forecast to grow by a healthy 2.4 per cent in 2015. UK incomes also rose by 2 per cent in the second quarter, which was the fastest pace in three years.

The City likes Lloyds because of the perceived quality of its loan book and its risk controls. Its shares are valued at 1.3 times its book value (a key measure for understanding the market’s view of banks). On this measure, Lloyds is the best performing share in its sector by a long stretch, with shares in Barclays, HSBC, RBS and Standard Chartered all trading below “book”.

The bank is also profitable, with analysts expecting it to report £1.4bn of adjusted earnings for the three months to September, according to data compiled by Bloomberg.

However, Russ Mould, investment director at AJ Bell, says: “Growth is likely to be limited, as the UK is a mature and tightly regulated market, and cost-cutting can only take the bank so far. The bulk of any returns from the stock are therefore likely to come from its dividend yield.”

Last year, investors had to be on the share register by April 2 to qualify for the dividend.

What are the reasons for saying ‘no thanks’?

All shares come with capital risk, while valuing banks is problematic. Gary Greenwood, banking analyst at Liverpool-based stockbroker Shore Capital, said: “You have general economic uncertainties and broader regulatory uncertainties, so even institutional investors find it hard to get their heads around valuing banks.”

Lloyds’ biggest area of lending is mortgages, Mr Greenwood said, making the bank heavily exposed to the UK property market. However, bad debt charges on Lloyds’ loan book are currently worth just 0.11 per cent of its risk-weighted assets.

That means very few of its customers are failing to repay loans, which is unsurprising given that Bank of England base rates have been low since 2009, but also improves the bank’s profitability because bad debt charges cost lenders money.

Mr Greenwood cautions against buying into a lender when market conditions are so sunny, because “if there is a housing market deterioration or interest rates do rise, you would expect the bad debt charges to increase.”

Another dark cloud over Lloyds’ earnings is that the Bank of England is moving closer to forcing banks to set more of their capital aside to protect them in an economic downturn, instead of lending the money out — a potential drag on profits.

“The investment waters remain hazardous for the [financial] sector in general and banks in particular,” said James Horniman, a partner at James Hambro & Partners, a wealth manager.

Is it a good idea to buy these shares now in the hope that the planned retail offer will give them a ‘pop’ next spring?

Because this is not an initial public offering — Lloyds shares are already on the market — the shares are less likely to undergo the price “pop” that sometimes occurs when shares in a company are first traded. This pattern was taken to an extreme when Royal Mail floated and its shares soared 38 per cent on their first day of trading.

In the case of Lloyds, there is a possibility the price of the shares could fall slightly if investors buy them at the government discount and then sell immediately at the market price. However, the Treasury is seeking to limit this among retail investors by offering a loyalty bonus to people who hold their shares for more than a year.

The share offer will not dilute the holdings of existing shareholders, who have had a tough summer amid market volatility: the shares were down 7 per cent in August and dropped again in September.

What is the government’s history of running asset sales? What could go wrong?

The coalition government was heavily criticised for underpricing the sale of shares in Royal Mail in 2014. Lazard’s asset management arm made an £8m profit from “stagging” the stock — buying shares in a flotation at the offer price and selling them as soon as they rise — even as its investment bank advised the government on the sale.

However, the Lloyds sale cannot be fundamentally mispriced as the stock already has a market value and the government has committed to that 5 per cent discount.

How do I register my interest in buying shares?

The government has set up a website for private investors to register their interest in buying shares — you simply need to enter your email address. Since smaller investors will be given priority, many are seeking to maximise their allocation by making investments of under £1,000 for different family members, says Laith Khalaf, senior analyst at Hargreaves Lansdown. If you’re planning to do this, make sure everyone signs up separately under their own email address.

Are the shares eligible for tax-efficient wrappers?

The government has not yet said what mechanism it will use to sell Lloyds shares, though when it sold shares in Royal Mail, investors were able to buy them either directly from the government or through online platforms such as Hargreaves Lansdown and Barclays Stockbrokers. They were able to use tax-efficient wrappers such as individual savings accounts (Isas), junior Isas and self-invested personal pensions (Sipps).

Investment platforms carry their own charges and have different pricing structures; it is worth checking which platform offers the best value for investments of the size you plan to commit.

Will the offer be oversubscribed?

It looks likely, given the early levels of interest. Lloyds is already the most popular share held by customers of Hargreaves Lansdown, said Mr Khalaf — although many investors opt for funds rather than individual shares. As with Royal Mail, some investors may be scaled back or miss out if demand exceeds supply.

Barclays Stockbrokers said banks were among the largest holdings owned by its retail clients, who have expressed appetite for more access to initial public offerings and share offers. It called the Lloyds deal “compelling”.

“Pensioners in particular are likely to respond to a trusted high street brand with a decent yield when interest rates are so low,” said Mr Khalaf. “High profile public offerings like this one are also an effective way to get first-time investors to save for their future.”

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