When a company has to pay out fines for frauds it has committed, it’s bad enough. When a company is being forced to pay out fines for frauds committed by another company, it’s even worse. This is the situation Lloyds Banking Group (LSE: LLOY) now finds itself in.
Buyer beware
When purchasing a company, you usually take on their obligations as well as assets â both financial and moral. When Lloyds purchased HBOS in 2008 at the height of the financial crisis, Lloyds was unaware that bankers in HBOS’s Reading arm had been conspiring with corrupt external consultants to load companies with large amounts of debt, only to âlootâ them later â the results being scores of small businesses going bust.
Lloyds set up a compensation scheme in 2017, after a trial that resulted in six people being jailed for the fraud. The bank originally set aside a ÂŁ100m provision to cover the costs of the fraud, but after an independent review found that this was not âfair and reasonableâ, the company will be paying out an additional ÂŁ7m on top of this.
HBOS weighs
The HBOS acquisition has been fraught with controversy that continues even after more than 10 years. Approximately 6,000 retail and institutional investors brought a lawsuit against Lloyds, saying the full details of HBOSâs financial state and its emergency funding from the government were not disclosed when shareholders approved the takeover.
In November, a High Court judge found in favour of Lloyds and not the shareholders, saying that while the bank should have disclosed the information, it wouldnât have made a difference to the investors’ decisions anyway.
Specifically, the trial judge Sir Alistair Norris said, âI am not persuaded that the two failures to provide sufficient information were in fact causative of any lossâ.
Brexit in 2020
Brexit, which has been weighing heavily on financial stocks for the past few years, may be the latest big thing to consider when looking at Lloyds. Following the decisive Conservative victory in the general election, it seems almost certain that a Brexit deal will now be passed in the New Year.
I think this will be good for just about every UK stock. The uncertainty about Brexit that has been plaguing the country has been arguably far more trouble in the near term for companies than any changes that will actually come to pass. This is because firms can adapt to changes but find it hard to adapt to the unknown.
Of course the full details of any deal will actually be ironed out over the coming year, and, as my colleague Royston Wild suggests, this will itself leave a lot of uncertainty.
I think the banking industry will be one of the biggest gainers from greater confidence surrounding Brexit, but I also think banks will be among the companies that are most immediately impacted by technical or regulatory changes. I think just about everything about Lloyds is too risky as an investment at the moment.