Lloyds hikes dividend and margin guidance but PPI marrs first half

Total income in the first six months of the year of £9.3bn was up 4% year on year, with net interest income of up 2% to £5.9bn at an improved NIM of 2.82% up from 2.8% in the first quarter and 2.74% a year ago.

With operating costs trimmed 1% and impairment charges of £268m, underlying profits swelled 8% to £4.5bn, up 8% and ahead of the £4.4bn expected by analysts.

Pleasing its legion of investors, the bank lifted the interim dividend 18% to 1.0p per share.

A £1bn charge against the misselling of personal protection insurance plus £540m of other misconduct charges, meant that statutory profits were only up 3.7% year on year, while a higher effective tax rate reflecting restrictions on deductibility of conduct provisions and the banking surcharge meant the profit for the period was down 12% to £1.6bn.

"Following the successful transformation of the group to become a simple, low risk, UK focused retail and commercial bank, we have delivered another strong set of results with increased underlying and statutory profit and strong capital generation, whilst completing the acquisition of MBNA and returning to full private ownership," said chief executive António Horta-Osório.

Although the Bank of England has grown increasingly concerned about mushrooming levels of consumer credit, Horta-Osório hailed the acquisition of credit card business MBNA as allowing the Consumer Finance part of the business to "significantly increase our participation in the UK prime credit card market within our prudent risk appetite", also growing motor finance and credit card portfolios organically during the period.

The Spaniard increased NIM guidance for the full year now to "close to 2.85%" including MBNA up from 2.8% flagged after the first quarter pre-MBNA, and for asset quality ratio for the full year to less than 20 basis points, including MBNA, having previously guided to "inside existing 25 basis points guidance" before the acquisition.

Capital generation is still expected to be at the top end of the 170-200 basis points ongoing guidance range, with all other longer term guidance remaining unchanged.

"Our differentiated UK focused business model continues to deliver with our cost leadership and lower risk positioning providing competitive advantage, and our updated financial targets reflect our confidence in the future prospects of the group."

PPI AND OTHER CHARGES

PPI provision were increased in the period because Lloyds is receiving more complaints than it had anticipated, currently averaging 9,000 a week.

The total PPI warchest has now been bumped up to £2.6bn, which management hopes will see it through to the claims deadline in August 2019.

Charges also included the costs of a new redress scheme for 590,000 mortgage customers who fell into arrears, announced alongside these results.

A further £155m provision for rectifying arrears management fees takes the total provision to £552m including the new mortgage compensation scheme, with a cost of £283m in compensation payments.

Lloyds shares were down more than 2% to 67.57p by just after 1000 BST on Thursday.

Analyst Laith Khalaf at Hargreaves Lansdown said it was a sign of Lloyds’ strength that it can shrug off £1.6bn of misconduct charges to post a strong rise in profits - though he noted that the bank has chosen not to increase the £100m provision made in the first quarter for compensating victims of the HBOS Reading fraud, despite TV host Noel Edmonds reportedly increasing his claim to £300m.

"Growing revenues at the bank were driven by a good showing from its commercial banking division, and with costs heading downwards, that spells good news for profits, dividends and shareholders," he said.

"Lloyds has two more years of the PPI storm to weather, after which a significant headwind to profitability will have dissipated. The board will be hoping that the provisions it has now made will see the bank through to the end of the claims period in 2019, while prudently expecting that there will still be some incremental charges along the way."

On the BoE worries about credit, he noted that loan impairments remain low, "which suggests that the current inflationary squeeze on consumers has not yet manifested itself in borrowers defaulting on their debts. However the real litmus test for consumer loans will be when interest rates rise, because at current levels there is little pressure on affordability."

In conclusion Khalaf had this caution: "The bank’s fortunes are heavily reliant on the UK economy, which still hangs in the balance as we leave the European Union, though even if we are entering a period of economic weakness, Lloyds is at least doing so from a position of strength."

Rebecca O'Keeffe, head of investment at Interactive Investor, said: “With over two million retail investors, Lloyds is consistently one of the most actively traded stocks on the market, but investors will be slightly disappointed by today’s results.

"Top line results showed increased profits generated from rising income and lower costs, but higher than expected provisions for PPI and other conduct issues have weighed on sentiment and seen the share price fall."

She said the dividend was a ray of sunshine for investors and showed Lloyds was "firmly back to being an income investor favourite".