Earlier this year Lloyds Banking Group reported its best annual results in ten years, and the progress continued this morning as the bank posted a 4% increase in first half pre-tax profit to £2.5bn. While this was £400m short of analyst expectations, it still nonetheless compares favourably with its other bailed out peer the Royal Bank of Scotland which is still having to deal with the EU over its own rescue package.

Legacy issues continue to plague Lloyds with the bank setting aside another £1bn in PPI provision taking the total sum to £18bn, while the bank has also set up a compensation scheme to deal with claims around mortgage arrears. 

The banks recent acquisition of credit card business MBNA has continued to bed in and despite last year’s Bank of England rate cut the net interest margin between its lending and borrowing increased to 2.82%, largely down to the fact that financial markets have largely priced out the effects of the rate cut, and are starting to price in a possible reversal.

Despite concerns about high levels of credit card debt, which were recently raised by the Bank of England, who warned of a “spiral of complacency” management stated that they wanted to increase the banks footprint in this area. Lloyds management did set aside a lower than expected loan impairment charge of £141m and this does remain an area of concern given that Lloyds does the majority of its business in the UK, and is looking to enhance its footprint here.

We’ve already seen from US banks that they are setting aside higher provisions for defaults on credit card lending. Given the similarities between the two economies is this sensible planning or an early warning sign of rising distressed credit? If it’s the latter shareholders need to be watchful.

The UK economy has continued to hold up fairly well but there are signs that we are starting to see a soft patch in consumer spending habits, as higher prices weigh on spending.

The improvement in the UK economy has also helped in a significant reduction in the amount of non-performing loans on the banks loan books, which has helped boost profits as bad loan valuations decline, though this might change if some of the slowdown being seen in house prices starts to erode these valuations.

As the Brexit process gets under way in the coming months the outlook for this extremely focussed UK bank is likely to become clearer, however one thing does appear certain, as its legacy issues diminish the bank should be able to keep more and more of its profits which means shareholders are more likely to benefit in the form of more consistent dividends.

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