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Lloyds Banking Group: A steady performance

Steve Clayton | 28 April 2016 | A A A
Lloyds Banking Group: A steady performance

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Lloyds Banking Group plc Ordinary 10p

Sell: 58.38 | Buy: 58.41 | Change 0.60 (1.04%)
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The UK focussed banks have been among the hardest fallers following the vote to leave the EU. Exactly what Brexit will mean for UK banks remains unclear, but there are a number of concerns that have driven prices down, which we have looked in more detail in our latest article 'Why are the banks suffering the most from Brexit?'

Given the recent market reaction all eyes will be on the banks' next set of results. Half year results are expected on 28 July, when we should get a better idea of exactly what the Bank thinks Thursday's vote means for them.

28 April 2016: Lloyds Banking Group has delivered a Q1 performance very similar to the previous year, in a quarter most notable for the absence of any charges for PPI claims. Income was slightly lower, but costs were lower too. Profits were down 6%, but only because there was a contribution from their stake in TSB, now sold, last year.

Lloyds shares opened two pence lower, in a weak overall market.

Lloyds Banking Group share price, charts and research

Our view on Lloyds:

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 can give the rest back to investors. Lloyds has been assiduously cutting costs for years and is now reaping the benefit. Its 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, because interest rates are low and employment is high. Investors should not expect them to stay this low in the long run . But the combination of low bad debts and Lloyds' strong cost-cutting performance certainly bodes well for earnings in the near term.

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.

Returning cash to shareholders:

Lloyds is strongly capitalised and intends to return any surplus capital generation through special dividends and share buy-backs.

On current consensus forecasts, Lloyds offers a dividend yield of over 6% in the current financial year.

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.

Lloyds Banking Group share price, charts and research

Results in detail:

Capital ratios remain strong, with Tier 1 capital of 13.0% and a total capital ratio of 21.4%. Tangible net assets edged up to 55.2p per share (2015: 52.3p).

Income of £4.4bn was 1% lower, but operating costs of £2.0bn were 2% lower. Impairments fell yet again, from £158m in the prior year to £149m. This represents an asset quality ratio of 14bps, in other words, less than one seventh of one percent of assets were written off as bad debts, on an annualised basis. Lloyds say they expect the full year ratio to be 20bps.

Underlying profits, excluding TSB were flat at £2.054bn (2015: £2.060bn) but statutory profits were halved at £654m (2015: £1214m) due mainly to an £800m charge against the redemption of the Enhanced Capital Notes, which also had the effect of wiping 40bp off the Tier 1 capital.

Loans to customers rose by £2bn over the year, to £457bn and £1bn of additional deposits were raised (£419bn vs £418bn in 2015) leaving the loan to deposit ratio stable at 109%. Net interest margins improved 14bp to 2.74% and the cost: income ratio declined a further 30bp to 47.4% in sharp contrast to the 76% reported by Barclays the day before.

Lloyds is making good progress with its cost reductions, having achieved half the target of £1bn of annualised cost reductions by end 2017 already. The group expects to end 2019 with the cost: income ratio around 45%.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.