Acquisition of MBNA credit card business
Lloyds shares rose 1.3% after announcing it will be acquiring the MBNA credit card business from Bank of America for £1.9bn. The business, which includes airline, football club and other specialist credit cards, has gross assets of £7bn and generated post-tax profits of £123m in the first half of 2016.
The acquisition is expected to complete by the end of the first half of 2017, boosting earnings per share (EPS) by 3% in the first full year, and 5% in the second. On completion, Lloyds' share of the UK credit card market will rise from 15% to 26%.
The deal is being funded entirely through organic capital generation, and is expected to absorb 80 basis points of Common Equity Tier 1 Capital (CET1). Lloyds remains confident that it can deliver a progressive and sustainable dividend in 2016.
Things didn't get any worse for Lloyds over the summer. With headwinds from lower interest rates and post-referendum uncertainty, that's a positive result. 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. Speculation about the terms of the UK's exit from the EU continues caused volatility in Lloyds' share price, contributing to the Chancellor scrapping the proposed retail share offer back in October.
Lloyds has once again reiterated its commitment to a progressive and sustainable ordinary dividend in 2016. The decision to buy MBNA reduces the chance of special dividends this year, with the bank committing half its annual 1.6% capital generation target to the deal. However, MBNA strengthens Lloyds' position in the consumer credit market and should improve the group's ability to generate capital, and thus increase dividends, going forwards.
Lloyds has long had an industry-leading grip on costs, and they continue to fall, with further synergies on offer from the MBNA deal. 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, was previously expected to stay steady at 2.7%, although the MBNA deal will provide a further 0.1% boost.
Looking forwards, the group's low cost-to-income ratio should underpin the ordinary dividend. Before the MBNA acquisition was taken into account, analysts were expecting a prospective yield for 2017 of 5.9%.
Third quarter results - 26 October 2016:
Lloyds 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's 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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