Lloyds' full year reported profits more than doubled to £4.2bn as exceptional costs drop out, although underlying profits fell slightly to £7.9bn (2015: £8.1bn). The bank has announced a final dividend of 1.7p, taking the full year payment to 2.55p, up 13% on last year, with an additional special dividend of 0.5p.
The shares rose 4% in early trading.
We've previously described Lloyds as a boring bank. Well, boring banking has proven pretty rewarding this morning, with underlying profits ahead of market expectations and dividends up substantially.
There's nothing flashy about what Lloyds has been up to, remaining focussed on UK high street, SME and consumer banking. But a rigid grip on costs, demonstrated again today, means that it's able to turn this bread and butter banking into a healthy profit.
Those low costs and relatively low risk assets allow the group to generate bucket loads of surplus capital every year. The group has previously aimed to return all additional capital above a CET1 (regulatory capital) ratio of around 13% in the form of special dividends. This year management have chosen to hang on to a bit more ahead of the acquisition of MBNA. But the fact that the bank has still been able increase the ordinary dividend and pay a special is an indication of its future dividend paying power.
The dramatic improvement in the group's top line numbers have been supported by the decline in PPI related costs. The mis-selling scandal has cost the bank £17bn so far, including £1bn this year. That's been fuelling the difference between the group's reported and underlying numbers in recent years, but we should hopefully see the two converge from here.
Despite the group's increasingly rosy outlook there are potential headwinds out there. As the UK's leading mortgage provider the bank is more exposed than most to any Brexit related fallout in the UK economy, and after the MBNA acquisition the bank will have a 26% share of the UK credit card market (a notoriously volatile market when times get tough). So far though bad loans remain at very low levels.
With the government's stake in Lloyds now all but sold and PPI charges receding into the past the bank should be able to put the trauma of the financial crisis behind it. It's a very different business from the one the government bailed out in 2008. But for us at least, Lloyds' dividend paying potential, it offers a prospective yield 5.3% in 2017, means boring banking just got interesting.
Full year results
Total income remained broadly flat on the previous year. Income from loans the bank made to customers held steady at £11.4bn (supported by an improved net interest rate margin of 2.71% - the difference between the rate the bank pays on deposits and charges on loans) with other, fee related income of £6.1bn.
Lloyds continues to improve on its already market leading cost:income ratio, hitting 48.7% as operating costs fell 3% to £8.1bn. At the half year the group announced that it would target increased cost savings of £1.4bn by the end of 2017, of which the bank has already achieved £0.9bn.
Organic capital generation, in the form of Common Equity Tier 1 (CET1), over the course of the year was 1.9%. This was ahead of guidance, as a result of a strong underlying performance and lower risk-weighted assets. Lloyds finished the year with a CET1 ratio of 14.9%, falling to 13.8% after dividends are paid.
Conduct charges of £2.1bn in the year (2015: £4.8bn) include a £1bn provision for increased PPI claims. Asset quality remains strong, with no deterioration in the underlying portfolio and an asset quality ratio of 0.15% (representing bad loans as a percentage of total loans for the period).
Lloyds expects a net interest margin above 2.7% in 2017, even before taking into account the positive impact of the MBNA acquisition. However, bad loans are expected to increase, with the asset quality ratio rising to 0.25%. Lloyds expects to generate between 1.7 and 2% CET1 capital per year going forwards.
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