Lloyds have reported an underlying profit of £4.2bn for the first half, down 2% on an ex-TSB basis. The underlying return on equity was 14% (2015: 16.2%), with income down 1% to £8.9bn. An interim dividend of 0.85p was declared, up 13%. With fewer conduct costs this time round, statutory pre-tax profit more than doubled to £2.5bn.
The shares fell 3.5 % following the announcement.
Lloyds have delivered another set of solid results. A low and improving cost/income ratio, robust net interest margin and healthy CET1 (tier 1 common capital) ratio are all signs of a thriving bank. That has allowed Lloyds to boost its interim dividend and continue its commitment to a progressive and sustainable ordinary dividend.
Unfortunately conditions today are very different from just five weeks ago.
The group has said that, although the exact impact of the EU referendum remains dependent on uncertain economic and political outcomes, a deceleration in growth in the UK seems likely. As a result the bank is lowering its expectations for full-year capital generation to 1.6% (versus 2% previously expected).
While the bank remains well-capitalised, with a strong balance sheet, lower capital generation is likely to affect its ability pay dividends. The bank has previously indicated that it would consider capital in excess of 12% CET1, plus an amount broadly equivalent to a further year's ordinary dividend, to be surplus and look at returning it to shareholders. There's no restatement of those numbers in today's results and any fall in capital generation would suggest that future special dividends in particular might be in the firing line.
Cost-cutting continues, with the already market leading cost-to-income ratio continuing to fall this half and expected to be below FY15. Responding to the increasing digitalisation of retail banking Lloyds has announced the closure of a further 200 branches today, cutting 3,000 jobs by the end of 2017. The group's net interest margin, the difference between the price at which it takes in deposits and price it loans out money, is expected to stay steady at 2.7%.
None of this should be taken as writing Lloyds off. It remains a well-capitalised, robustly profitable bank. Going forwards the low cost:income ratio should underpin the ordinary dividend, although falling capital generation will likely hamper specials.
This latest dividend now cuts the government's breakeven price on the Lloyds bailout to just 7.5p, well below the current price of 54p. Private investors are still waiting on tenterhooks to learn if the new chancellor is still planning to go ahead with the public sale on the terms agreed by his predecessor.
Results in detail:
The Group generated 0.5 percentage points of CET1 capital in the first half leaving it with a total CET1 ratio of 13% (13.5% pre dividend). Expectations for CET1 generation for the full year have been reduced to 1.6% following the referendum result. Lloyds leverage ratio at the half year was 4.7%.
Income fell 1% to £8.9bn as a 1% growth in net interest income was outweighed by a 5% fall in other income, predominantly driven by lower insurance income and pressure on fees and commission. Despite lower income the cost:income ratio fell further, to 47.8% (H115: 48.3%) as operating costs fell 3% with further branch closures and job cuts announced today.
Reported profits more than doubled, largely driven by lower conduct charges compared to a year earlier which fell from £1.8bn in H115 to just £460m in H116. Underlying profits fell 2% (excluding TSB) as bad loans and lower income took their toll.
Commenting on the results CEO Antonio Horta-Osorio said: "As a result of the continued successful delivery of our strategy in recent years, we are in a strong position to withstand the uncertainty in our sector and the wider market, both now and in the future."
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