Since 2015, Lloyds Bank's share price performance has been nothing short of disappointing, at a time when its total loans and deposits has remained fairly steady, but with a market capitalisation that has fallen from £52bn to around £39bn now.
In the last 12 months the company has reinforced its mortgage portfolio, adding Tesco’s mortgage book for £3.7bn, bringing total assets up to £858.5bn.
Lloyds share price underperformance
The bank has had to deal with its fair share of problems in that time, from the fallout over the 2016 Brexit vote, lower interest rates, as well as more provisions in respect of PPI. However these problems don’t fully explain why the Lloyds share price has underperformed compared to its peers.
Not only have profits improved since 2015, but the dividend has been restored and the government stake was finally offloaded in May 2017, removing once and for all the dead hand of political interference that helped shape the recovery of the bank from one of the darkest chapters in its history.
Under the stewardship of Antonio Horta Osorio, who took over in 2011, progress in turning the business around has been slow, however an increased focus on the UK economy and its retail business has seen profitability improve, even if margins have come under pressure. If anything, the performance of Lloyds' share price since 2015 doesn't do justice to how the bank has performed in the period since then, even if you factor in the PPI provisions which continue to damage the brand.
In 2018, the bank reported a record profit of £5.3bn on net revenue of £20bn. While there has been significant disappointment this year after the bank saw profit slide 97% in Q3, after management took a £1.8bn writedown in respect of last August’s final PPI deadline on top of an earlier £550m hit in the first half, there is evidence that the underlying business is still performing more or less in line with expectations, despite a slowing UK economy at the back end of 2019.
End of PPI provisions offer silver lining
Today’s final numbers for 2019 have confirmed the bank set aside a total of £2.5bn PPI provision for this year alone, a big chunk of change for a bank that has seen its profits squeezed anyway as a result of narrowing interest margins. The upside to all of this is that at least the PPI saga looks to be finally behind them, with no further provisions made in this quarter, so there’s a big silver lining there.
A slowing UK economy in 2019, with three Brexit deal deadline extensions, has seen the banking sector struggle to keep costs under control over the last 12 months, with last week’s disappointing RBS results testament to the challenges facing the sector. A post-election rebound in banking share prices proved remarkably short lived, as investors quickly re-focused their attention back on to the uncertainties facing the UK economy.
In terms of profitability the picture is still positive, with statutory profit-after-tax in the year at £3bn, down from £4.5bn a year ago, a fall of 33%. However, even with the higher PPI provision, the overall numbers were still a little bit short of expectations due to tighter margins. In terms of the internals the slowing UK economy has impacted Lloyds' numbers compared to 2018, with the next interest margin slipping to 2.85% from 2.93% a year ago, and which is expected to slip further in 2020 to 2.75%. The bank has also been cutting costs as it embarks on a digital shake up, with these falling by £290m over the year. The bank also raised the dividend from 3.21p to 3.37p, a rise of 5%. The bank also said that it planned to move to a quarterly dividend policy starting in June 2020.
Last year, Lloyds was perceived as being the one of the most vulnerable to a Brexit-induced shock, according to recent Bank of England stress tests, however the conclusion was that it was still well placed to ride out a disorderly scenario. This year’s findings showed that the bank was much more resilient, but the Bank of England did warn that the bank's ability to ride out any shock was highly dependent on its ability to cut dividends and cut coupon payments at very short notice.
In terms of the future, management stated that it is more promising now that the economic outlook is clearer, and while the share buyback programme is still suspended, CEO Antonio Horta-Osorio said he remained confident that the bank would be able to improve returns to between 12% and 13% after this year’s PPI provisions slashed them to 7.8%.
While one could conclude that today’s full-year numbers are disappointing in terms of overall market expectations, the reality is the bank is in much better shape now than it was at the end of 2015, when its share price was above 70p, it was less profitable, and its operating income was much worse. Whoever said that markets were efficient clearly didn’t have Lloyds in mind.