Lloyds Banking Group plc Ordinary 10p (LLOY)

Company overview

The bank, formerly known as Lloyds TSB Group before its takeover of HBOS, now holds the largest consumer banking franchise in the UK. The group also has significant operations in corporate and international banking, private banking and investment management, along with both life assurance and general insurance operations.

The bank operates multiple brands enabling it to price and position its services to various segments of the broader market place. The group currently conducts business through six brands covering a range of products and distribution channels. The six brands are further divided between mainly direct high street channels 1) Lloyds TSB 2) Halifax 3) Bank of Scotland and those operated mainly via intermediaries 4) C&G Cheltenham & Gloucester 5) Birmingham Midshires and 6) Scottish Widows. The group is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.

HL Comment (8 November 2011)

While the bank's third quarter update (08Nov2011) did see a repositioning of the group continuing, progress was slow. Adjusted total income fell by 9% to £16.09 billion, reflecting subdued lending demand, continued customer deleveraging and a fall in the net interest margin – the difference between interest made on loans and interest paid on deposits. Furthermore, whilst bad debt provisions continued to fall, a provision taken for the mis-selling of Payment Protection Insurance (PPI) on loans impacted significantly. As a result, a statutory loss before tax of £3.86 billion was generated (first nine months of 2010: profit of £1.97 billion). In addition, just months after outlining medium term financial targets, management appeared to apply a dose of caution, noting "if the current weaker economic conditions persist, the attainment of some of our medium-term financial targets, principally with regard to income related metrics, may be delayed to beyond 2014."

Negative Points:

• A significant provision for mis-selling of Payment Protection Insurance (PPI) has impacted profitability. The group made a statutory loss of £607 million during the third quarter period.
• Given current weak economic conditions, the achievement of certain medium term financial targets may be delayed.
• A leave of absence taken by the Chief Executive provides management uncertainty.
• While overall bad debt provisions reduced, provisions for Ireland increased.
• Unlike some rivals, the shares currently offer no dividend payment. Since 31 January 2010, Lloyds has been prohibited under the terms of an agreement with the European Commission from paying discretionary coupons and dividends on hybrid capital securities issued by the Company and certain of its subsidiaries. This prohibition ends on 31 January 2012.
• The group is being forced to sell branches in return for the £20 billion in state aid it received following the 2008 financial crisis.
• The government's significant shareholding (41%) provides a major overhang - any one-off sale could produce a sizeable drag on the share price.
• A previously announced new strategy potentially makes the bank more dependent on the UK.
• Fears for a stagnant/double-dip recession continue to concern investors, with UK government stimulus measures now having turned to austerity.

Positive Points:

• Impaired loans decreased by 3% compared to December 2010 to £62.5 billion, representing 10.3% of closing advances.
• Plans to cut significant costs were outlined by the new CEO in June. The savings will come from fewer management posts, centralising some functions and withdrawing from more than 15 of its overseas units. The goal is to cut costs by £1.5 billion within three years. During the first nine months of 2011, operating expenses fell by 3% to £7.90 billion, mainly as a result of further integration-related savings.
• The company continues to reduce its balance sheet. Non-core assets reduced to £151.4 billion, down £11.0 billion in the quarter, and £42.3 billion (22%) year-to-date.
• The group maintained a robust core tier 1 capital ratio (financial cushion) of 10.3%, slightly improved since 30 June 2011 and 31 December 2010.
• Despite adding a degree of caution, management still expects to deliver on the financial performance targets incorporated within its 2011 guidance.
• Since 31 January 2010, Lloyds has been prohibited under the terms of an agreement with the European Commission from paying discretionary coupons and dividends. This prohibition ends on 31 January 2012. The Group intends to be in a position to recommence payment of coupons and dividends on these hybrid capital securities after this date.
• The goal of a simpler, more agile and responsive organisation has been set.
• Despite temporary leave, the new Chief Executive, António Horta-Osório, is highly regarded. The Portuguese banker has spent the past four years building Santander UK out of a hotchpotch of lenders – Abbey, Alliance & Leicester and the Bradford & Bingley rump – into the nation's fifth-biggest lender.

Consensus:

On balance, market consensus indicates a strong hold.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.