Investec's Alastair Mundy has sold out of Lloyds in his £1.57bn Cautious Managed and £344m UK Special Situations funds on fears the group runs the risk of becoming a ‘zombie bank'.
Mundy, who has held the group at various stages over a number of years, has highlighted a number of potential problems for the retail bank, including a high loan-deposit ratio.
"Over the last few years, Lloyds Banking Group in its various guises has been rather like an old girlfriend we cannot resist revisiting," Mundy says.
"The allure is the great retail banking franchise which, despite some enforced sell-offs, remains a highly profitable prize.
"This ‘promised land' is offered to shareholders with a few caveats: a loan-deposit ratio that needs to be reduced, a wholesale funding position over reliant on short-term maturities and government guarantees, and a problem loan book which must be managed down."
While Mundy says the banking giant's management is relaxed on the potential pitfalls, the contrarian believes the risks of Lloyds becoming a zombie bank - an institution with negative net worth and reliant on government backings or bailouts to keep operating - is "very genuine".
"Cut-throat competition for deposits seems set to continue, loan reduction through a reduction in good loans is a possible recipe for shrinking to failure, while a reduction in problem loans is much harder to stage manage," he adds.
"While credit investors are more willing to finance banks than a few years ago, there must be a risk that as they are offered longer-term debt they may demand their pound of flesh."
Lloyds' share price has climbed 20% this year, sitting just below 61p.
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From 6 April 2019