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Lloyds - Profits and dividends continue to climb

Nicholas Hyett | 20 February 2019 | A A A
Lloyds - Profits and dividends continue to climb

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Lloyds Banking Group plc Ordinary 10p

Sell: 55.14 | Buy: 55.19 | Change 1.45 (2.68%)
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A slight improvement in net interest margin, the difference between what Lloyds charges on loans and pays on deposits, saw net income rise 2% year-on-year to £17.8bn. Lower operating and remediation costs meant underlying profit rose 6% to £8.1bn.

A final dividend of 2.14p per share means the total dividend for the year has risen 5%. The board has also announced a £1.75bn share buyback - equivalent to 2.46p per share.

The shares rose 1.5% in early trading.

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Our view

Exciting Lloyds is not. But income growth and a chunky dividend - analysts are forecasting a prospective yield of 5.9% - are not to be sniffed at.

Performance is being driven by more loans to customers, at higher margins and with lower operating costs - in essence doing simple banking well. CEO Antonio Horta-Osorio's plan for the next three years calls for more of the same.

Lloyds is already the UK's biggest digital bank, as well as operating the largest branch network. Further digitalisation aims to improve customer service and reduce costs.

The group's making a land grab into Financial Planning and Retirement too -aiming for £50bn+ of new assets and 1m new clients by 2020. The Scottish Widows business means it already has a foot in the door and early signs are good, with £13bn of inflows this year. A partnership with Schroders should provide extra impetus.

Small business lending is also getting a shot in the arm, with management targeting an extra £6bn of net lending by 2020.

The bank's already market leading cost-to-income ratio should continue to fall, reaching the low 40s by 2020, with improvements every year. Loan defaults are also expected to remain low.

The plan, together with a significant investment in staff, is expected to cost around £3bn. But if Lloyds can pull it off, the rewards could be substantial. Investors could be on the receiving end of a sustainable and growing dividend, with potential for further returns of surplus capital through share buybacks from time to time.

However, it's worth bearing in mind that regulatory or economic curveballs can upset the apple cart with banks. Lloyds is particularly exposed to the fortunes of the UK economy, with increasing exposure to more volatile credit card and car finance markets. With concerns about a painful Brexit weighing on the economy that's not ideal - and might explain the group's undemanding valuation.

So far it's difficult to see where the bank has put a foot wrong. Horta-Osorio's two previous three year plans have taken the bank from financial crisis pariah to one of the strongest players on the high street. It might lack fireworks, but if his next offering delivers more of the same, there won't be many complaints.

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Full Year Results

Net interest income rose 3% to £12.7bn. That was despite total lending remaining broadly unchanged at £444bn, and reflects a net interest margin of 2.93% (2017: 2.86%) as Lloyds continued to put the squeeze on what it pays depositors. Other income of £6bn was 1% lower than last year as a result of reduced client activity in Commercial Banking.

Bad loans rose 18% year-on-year to £937m, following the merger of MBNA credit card business.

Total costs were 3% lower than last year at £8.8bn, as both operating costs and remediation costs fell. As a result, the banks cost to income ratio fell from 51.8% to 49.3%. Lloyds also saw PPI costs fall by more than 55% compared to 2017, setting aside another £750m for customer redress.

The CET1 ratio, an important measure of a bank's capitalisation, remained unchanged year-on-year at 13.9%. The bank's return on tangible equity rose to 11.7% (2017: 8.9%).

In 2019 Lloyds expects to achieve a return on tangible equity of 14-15% and generate 1.7-2 percentage points of CET1 capital. Net interest margins are expected to remain broadly unchanged year-on-year, with costs falling again next year.

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The author of this article holds shares in Lloyds Banking Group.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.