I'll also be asking whether these negative factors make Lloyds a poor investment today.
PPI mis-selling scandal
The running bill for U.K. banks responsible for mis-selling Payment Protection Insurance (PPI) has ballooned to more than 10 billion pounds. Lloyds is responsible for the lion's share.
When Lloyds announced its Q3 results in November, the volume of complaints was above the level anticipated at the half-year stage, and the bank decided to increase its provision by a further 1 billion to 5.3 billion pounds. The eventual cost remains uncertain.
The bottom line
Lloyds allowed itself to be strong-armed into rescuing the insolvent bank HBOS during the financial crisis of 2008 and then had to be bailed out by the taxpayer to the tune of 20 billion pounds. Impairment charges since then have reached more than 40 billion pounds, the majority being the writing off of HBOS' toxic loans that were the legacy of its incompetent lending before the financial meltdown.
Lloyds' bottom line continues to suffer from the impairments, showing a statutory loss of 3 billion pounds over the past two years and negative earnings per share (EPS) of 4.6 pence. That compares with a profit of 3.3 billion pounds and EPS of 58.3 pence in the pre-crisis year of 2007.
A popular high-yield share before the credit crunch, Lloyds has not declared a dividend since the takeover of HBOS -- indeed, it was banned from doing so until recently.
It's said that Lloyds' chief executive would like to announce a dividend when the company releases its 2013 results in the spring of 2014. Even if that happens, the dividend will be a mere token -- the current analyst consensus is 0.2 pence a share -- and a tiny fraction of the last full-year payout of 35.9 pence for 2007.
A poor investment?
Lloyds' shares have soared 80% over the past year, 10 times the rise of the FTSE 100. The market is forward-looking, and most of the things to loathe about Lloyds are legacy issues that are moving ever closer to resolution.
Impairment charges are falling annually, the banks are negotiating a cut-off date for new PPI claims that could be as early as next summer, and the possibility of Lloyds resuming dividends -- albeit at a low level -- is, at least, now on the horizon.
However, as has been the pattern since the financial crisis, just as things seem to be looking up, a new negative emerges. It was reported this week that U.K. regulators have given Lloyds and Royal Bank of Scotland until March to start getting to grips with a balance-sheet black hole that one member of the Treasury Select Committee claims could be as big as 30 billion pounds.
Balance sheet issues are the main reason why, if I were interested in investing in Lloyds, I would want a good margin of safety in the form of the shares being at a substantial discount to net tangible assets. A year ago, the discount was over 50%, but after the super-charged rise in the share price, it now stands at just 6%.
Ace City investor Neil Woodford famously sold out of banks before the financial crisis... and continues to avoid them. Woodford's 20 billion pound funds have thrashed the FTSE 100 over the past five, 10, and 15 years, so there's a lot private investors like you and I can learn from his approach.
You can now read all about this master investor's methods -- and eight of his current favorite blue chips -- in a free and exclusive Motley Fool report. This report is available to private investors for a limited time only, but you can download it right now: Simply click here.