Third quarter results showed an 9% uplift in underlying profit before tax, to £2.1bn, driven by income growth, cost control and the MBNA credit cards deal.
The shares were broadly flat following the announcement.
As expected, the third quarter was a fairly straightforward set of results from Lloyds. Income growth and cost control is translating into profits.
Points of interest include an improved net interest margin (the difference between the price the bank pays to borrow money and the rate it charges on loans) and further progress on cost control. Read any Lloyds results from the last year or so and you will find much the same. That's not to undermine the bank's achievements.
Management's decision to move away from flashier finance in the aftermath of the financial crisis has proven good. Focusing on retail and commercial customers is lower risk, and a laser-like focus on cost control means rising income is feeding through to profits. The embarrassment of regulatory nasties that plagued the banking industry after 2007 is finally starting to recede. Although the FCA's multi-million pound advertising campaign to encourage consumers to beat the PPI claim deadline did result in a spike in claims, this was in line with Lloyds' expectations and the bank has a Â£2.3bn war chest to meet future claims.
The bank currently feels it requires a CET1 ratio (a measure of banking capitalisation) of around 13% to meet regulatory requirements and has said that it'll pass surpluses above this level back to shareholders through special dividends or share buybacks. There's potential for substantial returns, but recent regulatory decisions have increased capital requirements, creating upwards pressure on the 13% number.
Like all banks, Lloyds is exposed to wider economic conditions as well as regulatory headwinds. It's done well to keep defaults low so far, but whether it will be able to do so in an economic slump is less clear, especially given its increased exposure to highly cyclical consumer finance products following the acquisition of MBNA.
Lloyds is set to update investors on its strategy alongside full year results in February. Following deal to buy Zurich's UK workplace pensions and savings business, we wouldn't be surprised if Scottish Widows was set for a higher profile position in the group. In the meantime though CEO Antonio Horta-Osorio is continuing to squeeze profit growth from the business and pass the benefits on to shareholders. The stock offers a prospective 6.7% yield for 2018.
Third Quarter Results
Total income of £4.6bn rose 8% in Q3, with a 4 percentage point contribution from the acquired MBNA business and the rest driven by organic net interest income growth. Other income, which includes Commercial Banking, Lex Autolease and insurance, remained unchanged from the prior year.
Organic net interest income reflects an improved net interest margin (NIM) which rose 0.13 percentage points to 2.85% in the first nine months of the year. This was partly offset by a 1% reduction in average interest-earning loans. The improved NIM is being driven by lower interest rates on deposits and cheaper wholesale funding.
The group's cost saving programme continues to deliver results, with operating costs rising at a slower pace than income. Year-to-date, the group's already market-leading cost to income ratio improved to 45.9%.
Impairments (or bad loans) rose in absolute terms, hitting £270m, although fell as a percentage of total loans.
Lloyds generated 0.85 percentage points of capital in the quarter, leaving it with a closing Common Equity Tier 1 ratio of 14.1%.
The bank has upgraded full year guidance, with full year 2017 capital generation expected to be between 2.25 and 2.4 percentage points. Fourth quarter and full year NIM is expected to remain stable at 2.85%, with impairments expected to stay low.
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