Lloyds have reported an underlying profit of £8.1bn for the year to Dec 31, up 10% on an ex-TSB basis. The underlying return on equity reached 15% (2014: 13.6%), with income up 1% to £17.5bn. A final ordinary dividend of 1.5p was declared, plus an additional special dividend of 0.5p per share, taking the total for the year to 2.75p. After the impact of provisions for PPI and the disposal of TSB, a statutory pre-tax profit of £1.6bn was declared.
The shares surged 9% higher on the news of the above forecast dividend.
Lloyds have raised their guidance for future expected levels of capital generation and have reported a further improvement in their cost:income ratio, down 0.5% to 49.3%. Over time, Lloyds expect to generate around 200bp of additional Common Equity Tier 1 capital each year, before dividends and to reach a cost:income ratio of 45% by the end of the decade.
Lloyds have taken a final "big bath" provision against PPI claims. The FCA is proposing a time limit to future claims and Lloyds have increased provisions against PPI by £4.0bn in 2015, taking the total to £16.0bn. Lloyds expect the provisions to be sufficient to cover all future claims against PPI.
For 2016, Lloyds expect to deliver an increased net interest margin of 270bp (2015: 263bp), an asset quality ratio of around 20bp (up from just 14bp in 2015, but still well below medium term expectations) and a targeted return on required equity in the range of 13.5 to 15.0%.
CEO, Antonio Horta-Osario said that 2015 was a milestone year, during which Lloyds delivered a robust financial performance and is now positioned well in the face of today's economic and political uncertainties. Lloyds expects to deliver "superior and sustainable returns for our shareholders".
Other banks would like to be where Lloyds is, especially now that it looks to have drawn a line under the whole sorry PPI affair. Lloyds tends to have the primary financial relationship with its clients; other players 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 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 bank has been assiduously cutting costs for years and is now reaping the benefit. Their class-leading cost;income ratio and focus on low risk, simple banking products means they have strong cash generation, but little need to retain the cash they create.
Bad debts are extraordinarily low, a fraction of what Lloyds have previously described as typical, because interest rates are low and employment is high. Investors should not expect them to stay this low in the long run. But the Bank of England has suggested that rate increases, when they eventually come, will be gradual and modest in scale. That should limit the scale of any increase in bad debts.
Whilst HSBC and Standard Chartered were beneficiaries of the changes to the banking levy, its reshaping as a tax surcharge on UK bank profit is less helpful to Lloyds, given it has become a robustly profitable UK bank.
Lloyds is strongly capitalised and intends to return any surplus capital generation through special dividends and share buy-backs. It may not grow that quickly; after all, it has large shares of relatively mature markets, so it is a large fish that will 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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