Lloyds Banking Group sets aside £1bn more for PPI in third quarter

Net income of £2.85bn in the three months ended 30 September fell 1% from the same period last year, with underlying profits down 3% to £1.91bn as increased impairments offset lower costs and so fell short of the £2.04bn Bloomberg consensus.

Net interest margin, the measure of how well the bank balances the amount it pays out on savings and makes on loans, fell to 2.72 for the first nine months of the year from the 2.74 at the end of the first half, largely as expected due to the low interest environment.

For the full year NIM is expected to be 2.70, with other full year guidance also reaffirmed for the cost-to-income ratio, asset quality and Tier 1 core capital generation.

A highlight of the quarter was the strong capital generation, with net capital generation of 0.6 percentage points meaning common equity tier 1 (CET1) ratio stood at 14.1% pre dividend and 13.4% post dividend.

Chief executive António Horta-Osório's reconfirmed that if the CET1 ratio is over 13% by year end then Lloyds will pay a special dividend.

Yet the new provision taken in the period to cover further operating costs and redress for PPI included the impact of the extended June 2019 deadline, while Lloyds also set aside a further provision of £150m in the third quarter to cover other conduct issues, including £100m for packaged bank accounts, meant statutory profits were reduced to £0.8bn.

The bank's pension scheme has also swung to a deficit of £740m from the previous surplus of £430m due to falling corporate bond yields.

The 'simplification programme' put in place by Horta-Osório, which saw an announcement earlier in October about plans to cut 1,230 jobs, has so far reduced annual run rate costs by £774m and is on track to meet the revised target of £1.4bn of savings by the end of 2017.

"The outlook for the UK economy remains uncertain, however the strength of the recovery in recent years means the UK is well positioned," Horta-Osório said.

"The group's transformation and successful execution of strategy, along with its competitive advantages in costs and risk, also position us well for the future and to achieve our goal of becoming the best bank for customers and shareholders."

Shares in Lloyds fell over 3% in early trade on Wednesday but by lunchtime were in positive territory for the day at 55.68p, versus last year's high of 89p.

RBC Capital said the results beat expectations on capital, with one-off reclassification offsetting negative impacts from conduct and pension impacts.

"The income statement however is less exciting with margin compression, lower assets and higher provisions driving a 6% miss versus consensus, although full year consensus still look manageable in our view."

RBC analysts said it looked on track to meet the consensus forecast for a 0.3p special payout in Q4 plus a 1.75p ordinary dividend - equivalent to a yield of 3.7%, excluding the H1 dividend of 0.85p.

Analyst Gary Greenwood at Shore Capital said the profit performance was largely as expected, with the real highlight being "much stronger than expected" capital generation that allowed guidance to be reiterated. "Capital generation has been a key concern for the market so we think this will be taken well."

Laith Khalaf at Hargreaves Lansdown said that as things had not got any worse for Lloyds over the summer, this was a positive result, with the NIM steady and bad loans at low levels.

"The bank continues to be profitable, and while Brexit has taken a bit of a shine off the bank’s prospects in the latter half of 2016, it looks like the bank is still going to be able to reward investors with a decent dividend at the end of the year."

He added that while the share price has taken a hammering in the wake of the Brexit vote and will take some time to recover its poise, "for the moment things don’t look to shabby".