Net income fell 4% year-on-year to £17.1bn, with both interest and other income falling. Together with an increase in bad loans that more than offset a decline in operating costs, with the result that underlying profits fell 7% to £7.5bn.
A substantial PPI related charge meant reported earnings per share fell 36% to 3.5p. The bank announced a final dividend of 2.25p, taking the full year payment to 3.37p per share, up 5% year-on-year. The dividend will be paid quarterly in the future.
The bank guided for a relatively benign 2020 despite difficult macro-economic conditions.
The shares were up 1.4% in early trading.
Lloyds has emerged from the crisis in pretty good shape.
Early digitisation has given the bank an industry leading cost:income ratio and it reckons it can go further. That's helped the group build attractive positions in UK retail and SME banking which have been generating attractive returns for shareholders. PPI has been a thorn in the bank's side, but the deadline for claims has now passed so hopefully we've seen the end of that sorry saga.
Unfortunately the final quarter of 2019 suggests things could be tougher going forwards.
Business customers are looking less confident, residual values of cars the group finances have declined and bad loans ticked up. None of these are flashing red lights, but they shouldn't be ignored either. Meanwhile consistently low interest rates and increasing competition in the mortgage market means new loans are less profitable than old ones.
CEO Antonio Horta-Osorio's answer is greater exposure to riskier, but higher returning, loans like auto-finance and unsecured lending as well as increasing the amount lent to SMEs. Lloyds has also banked on a growing Wealth and Retirement business going forwards, through a partnership with Schroders. The market is potentially lucrative but it'll take time to get up and running and so far success has been driven by capital intensive insurance contracts.
If current trends continue we think it will be increasingly difficult for Lloyds to grind out growth. Worse, if conditions deteriorate significantly, this quarter's numbers suggest to us that Lloyds could really struggle.
It doesn't help that all progress already made means there are fewer strings to pull when times turn bad. There's only so far you can push cost savings after all.
Those challenges have resulted in the shares trading on 0.8 times book value, around 14% below the five year average, and offering a prospective yield of 6.4%.
The good news is the bank is well capitalised and expects to generate significant extra capital over the coming year. That should underpin the dividend and could potentially fund a sizeable share buyback programme as well. Nonetheless we think the future for Lloyds looks more stable than sparkling.
Full Year Results
Net interest income fell 3% year-on-year to £12.4bn, as loans to customers fell slightly and bank's net interest margin (the difference between what the bank charges on loans and pays to borrow) declined to 2.88%.
Non-interest income fell 5% in 2019 to £5.7bn. That reflects declines in Commercial Banking and Retail as large corporate clients reduced their activity in a challenging market and the number of car-finance contracts declined. Weaker prices for used cars in the group's Lex-Autolease business also weighed on results.
Operating costs fell 4% over the year to £7.9bn, as the group continued to digitise more repetitive processes. The group's cost:income ratio continues to fall despite the drop in income, and now stands at 48.5%.
Bad loans rose 38% during the year to £1.3bn, that primarily reflects two large commercial customers but also the weakening used car prices.
The bank reported a substantial PPI charge during the year of £2.45bn, up from £750m last year.
Lloyds finished the year with an underlying CET1 ratio (a key measure of banking capitalisation) of 13.8%, down 0.1 percentage points from last year after paying the dividend. The bank generated 0.86 percentage points of capital during the year.
Underlying return on tangible equity fell 0.7 percentage points to 14.8%.
The bank forecast a net interest margin of between 2.75% and 2.80% next year, with operating costs of less than £7.7bn and a cost:income ratio below 2019. The bank expects generate between 1.7 and 2 percentage points of capital.
The author owns shares in Lloyds Banking Group.
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