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Lloyds Banking Group plc (LLOY) Ordinary 10p

Sell:58.98p Buy:59.01p 0 Change: 0.47p (0.80%)
FTSE 100:0.45%
Market closed Prices as at close on 12 November 2019 Prices delayed by at least 15 minutes | Switch to live prices |
Sell:58.98p
Buy:59.01p
Change: 0.47p (0.80%)
Market closed Prices as at close on 12 November 2019 Prices delayed by at least 15 minutes | Switch to live prices |
Sell:58.98p
Buy:59.01p
Change: 0.47p (0.80%)
Market closed Prices as at close on 12 November 2019 Prices delayed by at least 15 minutes | Switch to live prices |
The selling price currently displayed is higher than the buying price. This can occur temporarily for a variety of reasons; shortly before the market opens, after the market closes or because of extraordinary price volatility during the trading day.

HL comment (31 October 2019)

Net income fell 6% in the third quarter to £4.2bn, reflecting a decline in net interest margins and reduced activity in commercial banking. Underlying profits fell 12% to $1.8bn despite good cost control as bad loans increased.

The bank recognised a £1.8bn charge relating to higher PPI compensation in the quarter, which meant reported profits before tax fell 97% to £50m.

Lloyds shares fell 2.4% in early trading.

View the latest Lloyds share price and how to deal

Our view

Lloyds has done a lot of good work. Early digitisation has given the bank an industry leading cost:income ratio and it reckons it can go further. That's helped it build attractive positions in UK retail and SME banking which have been generating attractive returns for shareholders.

Underlying profits have been ticking along nicely, driven by effective cost control, increased loans to customers and greater exposure to riskier, but higher returning, loans like auto-finance and credit cards. 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.

This operating performance, combined with Brexit nerves, has resulted in the bank's shares trading on a 0.82 times book value, around 15% below the five year average, and offering a prospective yield of 6.1%.

Unfortunately it increasingly looks like economic fears could be turning into economic facts. Business customers are looking less confident, and the residual values of cars the group finances have declined. Neither is a flashing red light, but they shouldn't be ignored either. Consistently low interest rates and increasing competition in the mortgage market means the bank's making less money on the loans it makes than in the past too.

Lloyds has banked on a growing Wealth and Retirement business to deliver more growth going forwards, through a partnership with Schroders. The market is potentially lucrative but it'll take time to get up and running, and the clock is ticking.

If current trends continue 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 the bank's 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.

In Lloyds' favour is the fact it's comfortably capitalised, and as long as things don't become considerably worse, that should underpin the dividend. But, for the first time in a long time, it feels like Lloyds' destiny is out of its hands.

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Third Quarter Results

Net interest income fell 2% in the third quarter, to £3.1bn.Lower net interest margins (the difference between what the bank can charge on loans and what it has to pay on deposits) squeezed revenues despite total loans to customers increasing slightly.

The bank's 'other income' line fell 12% to £1.3bn, as reduced client activity hit results in the Commercial Bank. Insurance and wealth continued to perform well.

Operating costs in the quarter fell 4% to £1.9bn, the group's cost:income ratio improved to 46.5% and guidance for full year costs has improved slightly. However, impairments for bad loans rose 31% to £371m, reflecting issues at a single large corporate client and lower used car prices in the group's auto finance business.

The higher than expected PPI charge slowed CET1 capital growth (a key measure of banking capitalisation) in the quarter - with the group finishing the quarter with a CET1 ratio of 13.5%.

Underlying return on equity during the quarter fell to 14.3%.

Find out more about Lloyds shares including how to invest

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.


Previous Lloyds Banking Group plc updates

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