First quarter underlying profits rose 8% year-on-year, to £2.2bn, as lower costs and a small increase in total net income boosted results. However, PPI charges and other exceptional expenses meant reported profits were flat.
All full year targets remain unchanged.
The shares fell 2.1% in early trading
Exciting Lloyds is not. But a dominant position on the UK high street and a chunky dividend - analysts are forecasting a prospective yield of 5.4% - are not to be sniffed at.
Recent performance has been driven by more loans to customers, at higher margins and with lower operating costs - in essence doing simple banking well. While first quarter results represent something of a slip-up, CEO Antonio Horta-Osorio's confident of delivering more of the same over the next three years.
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. Small business lending is getting a shot in the arm as well, with management targeting an extra £6bn of net lending by 2020.
If all goes to plan Lloyds' already market leading cost-to-income ratio should continue to fall, reaching the low 40s by 2020, with improvements every year.
The bank'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 in 2018. A partnership with Schroders should provide extra impetus, although breaking with current manager Standard Life Aberdeen is costing the bank a hefty slug of cash up front.
All in, the plan is expected to cost around £3bn, of which £1.2bn has already been spent. 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, due to its increased exposure to more volatile credit card and car finance markets. With competition heating up in the mortgage market as well - where Lloyds is the single largest player - that might explain the group's undemanding valuation.
While investors might be nervous, so far it's difficult to see where Lloyds 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.
First quarter results
Total net income rose 2% year-on-year, to £4.4bn. That's despite a 3% fall in net interest income, as loans to customers fell 1% and net interest margins (NIM) declined slightly to 2.91%. That's largely down to increasing competition in the mortgage market.
The rise in net income reflects a benefit to Other Income, up 7% to £1.5bn, as a result of changes to the investment manager in the insurance and wealth divisions. Lloyds also benefitted from robust used car prices in its car finance unit - with operating lease depreciation costs falling 13% as a result.
Total costs were 4% lower, driven by falling operating costs and remediation charges.
Impairments for bad loans ticked up slightly, although remain low.
The bank's CET1 ratio, a key measure of banking capitalisation, improved to 14.2%. During the quarter regulators reduced the amount of capital the bank was required to hold to 12.5% from 13% - on top of which the bank will hold a 1% management buffer. The bank recognised £100m in PPI expenses during the quarter, with the integration of the MBNA credit card business and exit charges for breaking with Standard Life Aberdeen also incurring costs.
Return on equity in the period rose slightly to 12.5%.
Targets for the full year remain unchanged and include:
- A NIM of around 2.90%
- CET1 build of 1.7 to 2 percentage points
- Lower operating costs as a percentage of income, this year and next
- Return on equity of 14-15%
The author of this article holds shares in Lloyds Banking Group.
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