Reasonable performance, but PPI bites again
Lloyds today announced an underlying profit of £1.9bn in the third quarter, but statutory profit was reduced to £0.8bn by conduct costs, in particular a further £1bn PPI mis-selling charge.
The bank continues to make progress in its cost-cutting exercise with its cost-income ratio falling to 47.7%, as it shuts branches and reduces its headcount.
Lloyds shares fell 3.2% in early morning trading.
Things haven't got any worse for Lloyds over the summer, which under the circumstances is a positive result, given the headwinds of lower interest rates and post-referendum uncertainty.
Bad loans increased more than some analysts had expected, but remain low as a percentage of the overall portfolio.
Although Lloyds describes the outlook for the UK economy as uncertain, its target for full-year capital generation is unchanged. Recent speculation about a 'hard Brexit' has caused volatility in Lloyds share price of late, which led to the Chancellor scrapping the proposed retail share offer earlier this month
Lloyds reiterated its commitment to a progressive and sustainable ordinary dividend. Special dividends could also still be on the cards, given the bank is is holding to its 1.6% capital generation target, although economic uncertainty mean these likely to be lower than some had previously expected.
The bank has long had an industry-leading grip on costs, and they continued to fall this quarter. Responding to the increasing digitalisation of retail banking, Lloyds announced the closure of a further 200 branches at the half year, 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%.
Looking forwards, the group's low cost-to-income ratio should underpin the ordinary dividend, and even if special dividends fail to materialise, the shares still offer a prospective yield for 2017 of 6.3% (variable, not guaranteed and not an indicator of future performance).
Third quarter results
Lloyds has continued to reduce costs in Q3, down 2%, with the bank's market leading cost to income ratio improving to 47.7%.
Quarterly net interest income moved down 1% to £2.8bn, despite an improved 2.72% net interest margin, as banking assets declined 1% to £436bn. This was offset by an increase in other income, up 4%, which resulted in a 1% increase in total income.
Common Equity Tier 1 capital (CET1), post-dividend, was 13.4% at the end of the quarter, up 0.4 percentage points on Q2.
Full year net interest rate margin is expected to be 2.7%, with the cost to income ratio lower than last year at 49.3. The bank remains on course to generate around 160 basis points of CET1 capital pre-dividend.
Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.
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