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Lloyds retail share offer withdrawn

Equity research team | 7 October 2016 | A A A
Lloyds retail share offer withdrawn

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Lloyds Banking Group plc Ordinary 10p

Sell: 58.59 | Buy: 58.63 | Change 2.26 (4.02%)
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The chancellor has announced plans to sell the government's 9.1% stake in Lloyds, returning full ownership of the bank to the private sector. However, the shares will not be sold via a retail offer, with the government instead launching a twelve-month plan to gradually sell down its stake. The share price fell on the news.

The chancellor says that while the plan will ensure that the government re-coups all of the £20.3bn of taxpayers' money that was injected into Lloyds during the financial crisis, but with ongoing market volatility, it is not the right time to proceed with a retail offer.

Our View

Despite current turbulence amid the fallout from the Brexit vote, Lloyds remains a well-capitalised, robustly profitable bank.

Lloyds has said a deceleration in growth in the UK seems likely, although the exact impact of the EU referendum remains uncertain. At its interim results the bank lowered its expectations for full-year capital generation to 1.6% (versus 2% previously). Recent talk of a hard Brexit has also impacted Lloyds, causing much of the volatility the chancellor cited when withdrawing the prospect of a retail offer.

Lloyds recently raised its interim dividend and reiterated its commitment to a progressive and sustainable ordinary dividend. However, lower capital generation likely to affect its ability pay special dividends.

Cost-cutting continues, with the already market-leading cost-to-income ratio continuing to fall. Responding to the increasing digitalisation of retail banking, Lloyds has announced the closure of a further 200 branches, 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 while falling capital generation will likely hamper special dividends, the shares still offer a prospective yield of 5.6%.

Interim 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."

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.

All yield figures are variable and not guaranteed. The information in this article is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned, nor is it a research recommendation. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.

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.