Investec and ShoreCap positive on Lloyds, reaffirm buys

Statutory profits at Lloyds took a hit from another £2.1bn provision for payment protection insurance in the last three months of 2015 but the shares were trading at a hefty discount to their 'fair value', Shore Capital said.

The PPI hit was "disappointing" but not "materially out of line with what we had anticipated based on read across from elsewhere (albeit not explicitly reflected in our forecasts)," analyst Gary Greenwood said in a research report sent to clients.

In terms of balance sheet metrics, at year-end the core Tier-1 capital cushion was at 13.0%, again due to the PPI hit.

However, the balance sheet "remains robust", Greenwood said.

On the plus side, at "around 2.70%" management´s new guidance for net interest margins in 2016 was higher than markets had been expecting, the broker added, and more than offset slightly worse than anticipated guidance for the bad debt ratio.

As regards the impact of the recent flattening of the yield curve and the impact that would have on income generation, Greenwood believed management´s decision to push back by one year its target for the required return on equity and that for its cost-to-income ratio had "already been priced in".

ShoreCap´s last published estimate for the lender´s fair value was 82p and the stock was down by 30% since its 89p peak last May.

That estimate was still justifiable, the analyst said, given his projections that Lloyds would sustain earnings per share of approximately 8p and reach a pay-out ratio of about two thirds of earnings.

"We believe Lloyds shares offer good value at current levels and expect them to respond favourably to the good news on dividends this morning."

"It is a ‘low/no growth’ bank but, in our view, offers a very high and clearly visible capital return story." - Ian Gordon

Over at Investec, Ian Gordon said that Lloyd´s earnings recovery story had again been merely "deferred" as opposed to "cancelled".

So while Lloyds was a "low/no growth" lender, capital accretion was now expected to be quicker each year, meaning his estimate for a dividend yield of 8% in 2017 was "improbably high".

Worth noting, Gordon expected the lender would be forced to top up its PPI provisions by a further £1bn.

However, management had 'corrected' its "peculiar" 30% medium-term tax guidance to 27%, enhancing the expected rate of capital build.

"It is a ‘low/no growth’ bank but, in our view, offers a very high and clearly visible capital return story."

Gordon reaffirmed his 'buy' but placed his 78p target price under review.

"Lloyds is the simplest of the UK banks as its activities are purely focussed on UK retail and business lending, with no roulette wheels spinning in the background. It’s easy to see why the public sale was so popular, before it got kicked into the long grass by the Chancellor," said Laith Khalaf, senior analyst at Hargreaves Lansdown.

"[The shares are] still around 10% shy of where they need to be for the government to break even on the bailout. It now seems unlikely the deal will resurface again before the Brexit vote, given the market volatility we could see as we approach the referendum date," Khalaf added.

"Yes you read correctly. Markets are rejoicing at news showing [...] that one of the UK's bailed out banks is offering a special dividend to make up for the fact its shares have fallen too far to be able to be re-privatized by the Chancellor, and it's still paying through the news to make good customers who were mis-sold payment protection insurance," said Mike van Dulken, head of research at Accendo Markets.