Half year results from Lloyds showed an 8% uplift in underlying profit before tax, driven by steady income growth and falling operating costs. The interim dividend rises 18% to 1p per share.
Reported profits stumbled slightly, rising just 4% after £1bn of PPI and conduct charges are taken into account.
The shares were broadly flat following the announcement.
There's a sense of déjà vu about today's results. The steady march of growing income and falling costs continues to keep the profit number turning over nicely.
Lloyds' decision to move away from the 'flashier' parts of finance, instead focussing on the UK High Street, SME and consumer banking has made the bank more boring, but also more predictable. Its markets are less volatile than the cut and thrust world of investment banking 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 again, with a further £700m provision put aside in the second quarter. That should cover the bank for claims out to the August 2019 claims deadline and allow the bank to finally put PPI behind it - we've heard that before though. Other conduct charges are unwelcome, but minor by historical standards.
What makes Lloyds stand out for us is the bank's dividend potential, and once again there's 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 1 percentage point this half bodes well.
Many commentators, ourselves included, have worried that bad loans might start creeping up as inflation squeezes consumer incomes. We needn't have worried, impairments (banking jargon for defaults) remain low and aren't expected to rise dramatically this year.
However, with the UK facing a tough economic outlook, bad loans remain a potential headwind - especially since the group has a 26% share of the UK credit card market following the MBNA deal (a notoriously volatile sector in tough times).
As with all banks Lloyds will rise and fall with the economic tide. However, a middle of the road, domestic bank with a prospective dividend of 5.7% and dominant market positions is something of rarity.
Half Year Results
Total income of £9.3bn represents an improvement of 4% on the previous year, with net interest income of £5.9bn and other income up 8% to £3.3bn.
Improved net interest income reflects a stronger net interest margin, the difference between the price at which the banks borrows money and the price it lends it out, of 2.82% as funding costs continued to fall. This was partially offset by 1% fall in interest-earning assets, as contraction in the mortgage book and in lending to large businesses offset ongoing growth in Consumer Finance.
The strong other income performance was the result of an increased number of refinancing and hedging transactions for mid-sized and large businesses, as well as growth from the Lex Autolease car finance business.
Bad loans remain low, with impairments of £268m in the half, while operating costs fell 1% as total Simplification programme saving approached £1.2bn. Lloyds' market leading cost to income ratio has fallen further to 45.8%.
The group generated one percentage point of capital in half, leaving it with a CET1 ratio, a key measure of a bank's capitalisation, of 14%. This falls to 13.5% after the dividend has been paid.
Following the acquisition of credit card business MBNA, net interest margins are expected to close the year around 2.85%, while bad loans are expected to remain low. The group expects capital generation to be at the top end of the 1.7 to 2.0 percent range. All other guidance remains unchanged.
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