With a Lloyds share offer due in the spring next year, these numbers will be closely examined by investors.
Lloyds share price fell 4% in early trading despite underlying profits for the nine months of £6,355m rising 6%, driven by lower costs, down 1% in cash terms over the last year and leaving the cost:income ratio at 48%. Income growth was flat, reflecting a 4% improvement in net interest income and a 7% decline in other income.
Lending volumes were strongest in Consumer Finance, where balances rose 17%. Mortgage balances rose 1%, with the group focusing on margin, not volume, and lending to SMEs and mid-market corporate customers edged up by £1.5bn.
Bad debt costs have been falling for some time, and are now at very low levels. The charge for the quarter was £157m, down by 33% vs. Q3 2014 and £336m for the nine months, roughly a third of the previous year's equivalent. Lloyds now expects the full year Asset Quality Ratio to come in below 15bps. Net interest margins improved, reaching 2.63% for the nine months versus 2.39% in the prior year.
PPI costs continue to mount; Lloyds has made a further provision of £500m with these figures. This is in line with their earlier guidance on the run rate of claims. Latest data from the FCA shows some reduction in the overall industry experience of PPI claims.
Despite the ongoing drain of PPI, Lloyds further strengthened its capital ratios; the Common Equity Tier One ratio rose to 13.7%, from 12.8% at year end and 13.3% at the half year. The leverage ratio improved to 5.0% from 4.9% at the year end and half year points, whilst total capital has now reached 22.0%.
The underlying return on required equity over the nine months rose by 170bp to 15.7%.
Lloyds' cost cutting programme looks to be making progress. The company is on target to reduce annualised costs by a billion pounds by the end of 2017, having already taken £2bn p.a. out of the cost base, following the merger of Lloyds and HBoS.
Ongoing sales of stock to institutional investors have left the Government's stake at less than 11%.
Looking forward, CEO Antonio Horsa-Osario said Lloyds was "...making strong progress toward becoming the best bank for shareholders and customers... These results, coupled with our simple, low risk business model, underpin our confidence in the Group's future prospects and our strategic direction".
Other banks would like to be where Lloyds now is, PPI apart. The bank has strong market positions in strongly profitable product areas from mortgages to current accounts. Lloyds tends to have the primary financial relationship with its clients; other financial services companies have to try and jostle their way in past the current account and mortgage provider to see what is left on the table.
Capital ratios are strong and the message on the dividend is that there is little need to build ratios up any more, so in future, the bank just needs to set enough capital aside to maintain current levels, as the business grows, and can give the rest back to investors.
The level of bad debts is extraordinarily low, reflecting the ease of servicing debts when interest rates are low and the UK's current strong employment market. The level of bad debt charges is now running at a fraction of what Lloyds have previously described as the typical level and investors should not expect them to stay this low in the long run.
Encouragingly, for Lloyds and other UK banks, the governor of the Bank of England has stated that future interest rate increases are likely to be gradual and modest in scale, with rates settling a little over 2% in a few years' time. That should limit the scale of any increase in bad debts.
Hopefully, when impairments do eventually rise, PPI charges will be falling away. Never before in the field of human finance, has so much been paid by so few, to so many. Lloyds' bill for PPI is now over £13.4bn, with £11.2bn actually paid out to date, at an average of circa £2,000 per upheld complaint. The FCA has now proposed setting a time limit on further PPI complaints. This could lead to an acceleration in their rate in the near term, but it should at least put an end in sight for this sorry chapter.
Lloyds' cost reduction programmes have taken the cost:income ratio down through the 50% level already, with further to go. This raises returns, improves cash generation and creates the opportunity for the surplus cash returns that the group is now talking about.
Lloyds has said that it will aim to pay out at least half of income as ordinary dividends. With 13.7% of core Tier One equity and a total capital ratio of 22.2%, Lloyds should only need to retain modest amounts of the capital it generates from here onwards. Lloyds intend to return any surplus capital generation through special dividends and share buy-backs. PPI is the swing factor in the near term, but Lloyds is now generating a return on required capital of over 15%. If it can maintain that level, future free capital generation should be significant.
Lloyds may not grow that quickly; after all, it has large shares of relatively mature markets. It is a case of a large fish that is going to bump up against the edges of the tank quite often. But if it can keep throwing off cash in the direction of shareholders when it does so, we can live with that. Lloyds remains our favourite amongst the UK's major banking stocks.
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