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Stable start to the year for the Black Horse

Lloyds Banking Group has had a good start to this year after the company posted a 6% rise in underlying pre-tax profit of £2 billion for the first quarter, which was slightly below the £2.08 billion analysts were expecting.

The statutory profit-before-tax jumped by 23% to £1.6 billion. The gap between underlying profit and statutory profit is narrowing, and this indicates there are fewer one-off items, which have typically been provisions or asset write-downs.

The bank has undergone a rigorous cost-cutting regime in recent years, and that continues to be the case as costs fell by 5%. Running on a lower cost base and trimming the headcount has been a common theme for Lloyds, and it is showing no signs of letting up.

The balance sheet is improving too, as the common equity tier 1 (CET1) ratio came in at 14.4%, up from 13% last year. This tells us the financial stability of the bank is improving, and underlines the fact the bank can stand on its own two feet.

The bank set aside £90 million for the mis-selling of payment protection insurance (PPI). In the grand scheme of things, it isn’t too much, and points to a further decline in the amount they are setting aside.

Impairments for the period were £258 million, and it was widely known that Lloyds had exposure to Carillion, which collapsed in January. Last year the impairment charge for the first-quarter was £127 million, but the Carillion case was unique.

Lloyds said it had a strong start to the year and foresees the UK economy performing well. There were no declines in asset values and credit quality is strong. The robust business model is clearly paying off.

Within retail banking the net interest margin is a key barometer of a bank’s profitability, as it measures the difference between how much interest it pays out on savings and how much interest it charges on loans. For the first-quarter the net interest margin was 2.93%, up from 2.86% last year.

In February, Lloyds posted its highest annual profit since 2006, after cutting costs and increasing shareholder returns. Lloyds required state assistance during the credit crisis to shore up its balance sheet and instil some confidence into the British banking sector. The government disposed of its final stake in the previously bailed-out bank in 2017.

Lloyds is now confidently emerging from the shadow of the credit crisis, and its turnaround has been impressive. The financial institution has slimmed down in size, reduced its head count, and introduced policies to improve efficiency. The restructuring is still ongoing, with the bank announcing plans to close 49 branches and cut 305 jobs last week. This is part of its plan to invest £3 billion to enhance efficiency, which involves raising customer service standards and becoming technology-focused.  

In its last financial year, pre-tax profit increased by 24% to £5.3 billion, which was a touch below analysts’ estimates of £5.7 billion. A further £600 million was set aside for the mis-selling of PPI, bringing the total amount to over £19 billion. On the bright side, these provisions appear to be dwindling, as the bank set aside £1.6 billion in the previous year. The deadline to claim compensation for mis-sold PPI has been set as August 2019, and as soon as a line is drawn under it the better.

Lloyds are trying to woo shareholders with attractive payouts. The dividend was increased by 20% and it is proceeding with a £1 billion share buyback scheme. This is additional proof the bank’s financial health is improving, as it has a comfortable enough cash position to return funds to investors.

When the Bank of England (BoE) hiked interest rates in November 2017, Lloyds were quick to pass the increase on to clients. There is speculation the BoE will raise rates in May. A higher interest-rate environment suits the banking system, so Lloyds could see their net interest margin rate increase in the near term.

The share price has been broadly pushing higher since June 2016, and if it clears 69.93p (200-week moving average) it could target the 74p area. Support may be found at 61.85p.


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