Lloyds delivered another set of strong financial results in the first quarter, with underlying profits of £2.1bn up 1% on a year previously.
The shares rose 4.5% following the announcement.
We've come to have certain expectations of Lloyds, and the bank has delivered this quarter. Once again there's no great strategic shift or dramatic upturn, instead the steady march of growing income and falling costs continues to keep the profit number turning over nicely, although past performance is not a guide to the future.
That steady performance is largely a result of Lloyds' move away from the 'flashier' parts of finance, instead focussing on the UK High Street, SME and consumer banking. They're markets that are less volatile and the bank's rigid focus on cost control means that it's been able to steadily improve profitability.
There are a few minor disappointments in the numbers. PPI rears its ugly head once again, which Lloyds had previously thought it had put behind it, but a £350m provision is spare change compared to the billions it has already paid out. Other conduct charges are unwelcome, but similarly minor by historical standards.
What makes Lloyds stand out for us is the bank's dividend potential, and there's more potential good news here. It has previously said that it will look to return all additional capital above a CET1 Capital ratio (a regulatory capital measure) of 13% to shareholders in the form of a special dividend or share buyback - capital generation of 0.7 percentage points this quarter bodes well.
Many commentators, ourselves included, had worries that bad loans might start creeping up this quarter as inflation starts to squeeze consumer incomes. We needn't have worried, impairments (banking jargon for defaults) are lower than previously.
However, should the UK face a serious downturn this remains a potential headwind - especially since the group will have a 26% market share of the UK credit card market when the MBNA deal goes through (a notoriously volatile sector in tough times).
The government is likely to finally exit Lloyds in the coming months, marking the end of the bailout period. The result will be a fairly middle of the road, domestic bank with a prospective dividend of 5.5% - boring maybe, but certainly something for investors to sit up and take notice of. Yields are variable and not a reliable indicator of future income.
First quarter results
Lloyds made steady progress pretty much across the board in the first quarter, with income up 1%, costs falling slightly and bad loan impairments down.
Increased profits, which hit £2.1bn, largely reflects the group's improved net interest margin (NIM) thanks to lower wholesale funding and deposit costs. NIM, the differences between the rate paid on deposits and charged on loans, is now at 2.8, with the improvement more than offsetting a slight decline in the total value of interest bearing loans the bank has made. Other Income also delivered a slight improvement, largely thanks to growth in the Lex Autolease business.
Lloyds retains its tight grip on costs, with operating costs 1% lower than a year earlier. It remains on course to deliver its target £1.4bn of annual savings by the end of 2017, which currently sit at £1.1bn. The bank's cost to income ratio fell to 47.1%, significantly below the 2016 result of 48.7%.
Loan impairments of £127m were 15% lower than a year earlier, and 35% lower than in the three months to December 2016. Credit quality remained strong and stable across the portfolio. Lloyds recognised £550m of conduct charges in the quarter, with £350m relating to revised PPI expectations, £100m relating to the activities of HBOS Reading and £100m relating to Retail conduct matters.
Lloyds' Common Equity Tier 1 (CET1) ratio, a key measure of banking capitalisation, increased to 14.3% as the bank generated 0.7 percentage points of CET1 Capital in the first quarter.
The group now expects capital generation to be at the top end of its previous 1.7-2 percentage point guidance for the full year.
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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