Lloyds delivers bumper payout as PPI charges fall
Lloyds Banking Group lifted its dividend 5% and proposed a £1.75bn share buyback after a year of "strong strategic and financial delivery".
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FTSE 100
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Lloyds Banking Group
61.64p
15:10 18/10/24
The FTSE 100 lender reported a statutory pre-tax profit of £5.96bn and post-tax of £4.4bn, up 13% and 24% respectively and both ahead of the average City analyst forecast.
Net income was up 2% at £17.8bn and operating costs were virtually unchanged. Net interest margin, a bank's crucial difference between interest rates for loans and savings, crept up from 2.86% to 2.93%, and is expected to stay around this level for the rest of this year. The capital position remained unchanged, with a common equity tier-1 ratio of 13.9%.
Underlying profits, excluding restructuring costs and provisions for PPI misselling, were up 6% to £8.1bn, slightly short of expectations. Another £200m was added to PPI provisions but compared to the previous year were more than halved to £750m, though restructuring charges rose 42% to £879m.
Earnings per share for 2018 of 5.5% were up 27% over the prior year, with the dividend lifted to 3.21p from 3.05p.
Lloyds chief executive António Horta-Osório, who had set out the third stage of his strategic plan at the start of the year, supported by £3bn of investment, with achievements including the launch of the Open Banking regime, the launch of the Lloyds Bank Corporate Markets non ring-fenced bank, "enhanced customer propositions" and the recently agreed wealth management partnership with Schroders, where the bank is targeting 1m new pension customers by the end of 2020.
For 2019, Horta-Osório is still targeting "strong underlying profit and lower below the line charges driving statutory profit growth", with NIM of around 2.9% and operating costs now expected to be less than £8bn, a year earlier than expected. The cost-to-income ratio is seen continuing to fall towards the low-40s by 2020.
MARKET REACTION & ANALYSIS
Lloyds shares, which at the end of last year fell below 50p for the first time in five years, were up almost 4% on Wednesday to 60.61p.
Analyst Laith Khalaf at Hargreaves Lansdown said Lloyds is "in good shape, despite what its share price performance might suggest", with the big jump in profits for 2018 almost all explained by falling charges for PPI compensation, while the bank "has managed to grind some extra income out of a static loan book, and has controlled costs while investing to become more efficient".
With Lloyd's high market share in key banking markets, the main chance for growth is from the strategic shuffle sideways into the financial planning and retirement market, said Khalaf. "This is an ambitious target seeing as the government’s automatic enrolment programme has already prompted a round of company pension switches. However the strategy makes sense to give Lloyds some diversification from its core banking activities, and allow it to spread its wings in another market."
With the share price not much different from when Horta-Osório took the reins in 2011, despite swinging from an annual loss of £260m to a profit of £4.4bn, Khalaf said this was because Lloyds is "indelibly plugged into the UK economy, and the shadow cast by Brexit means the bank’s shares are left out in the cold".
"If there’s a positive resolution to the current political uncertainty, we would expect the shares to rally. That’s of course far from a given, but with a prospective yield of 6%, shareholders are at least being paid to wait."
Shore Capital's Gary Greenwood said that despite the slight profits miss, he expected a positively investor response to the more favourable guidance and the better than expected share buy-back
For 2019 he was forecasting adjusted PBT of £8.5bn versus the City consensus of £7.9bn, with a dividend of 3.6p.
"Our initial take is that consensus earnings may edge up on the better cost and impairment guidance, whereas we may need to trim out forecasts slightly on the lower than we had expected NIM guidance."
Seeing fair value at 80p, Greenwood said the investment case for Lloyds "revolves around its ability sustain profitability while generating surplus capital and distributing this to shareholders by way of dividends and / or share buy backs, which it is currently delivering on. The main downside risk is a disorderly Brexit and the impact this may have on the UK economy, but this is not currently our (or the consensus) central case."