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Earnings

Lloyds [LLOY] share price: will Q4 earnings see 2019’s gains wiped out?

Lloyds [LLOY] last earnings announcement thrashed analyst expectations by delivering a forecast-beating profit of £3.7bn for the first nine months of the year. Shareholders were rewarded with a 5% growth in earnings per share, up 21% since the previous year. 
 
At the time, CEO António Horta-Osório said: “These results further demonstrate the strength of our business model and the benefits of our low risk, customer focused approach. We have also made a strong start to our 2018 to 2020 strategic plan.” 
 
Investors seem to be buying into Horta-Osório’s plan with the share price up over 14% since the start of the year to trade near £56. 
 
But there’s a still some way to go to recoup 2018’s Brexit-inflicted losses, which saw the stock tumble over 7% in December alone. Right now, shares are down around 14% from this time in February last year when it hit an intraday high of £70.39.
 
 
 
Will fourth-quarter earnings released on 20 February propel the share price higher? That depends if Lloyds stock can withstand some major headwinds.
 
 
What to look out for in the Q4 results
 
 
1.Digital investment starts to pay off
 
In the third-quarter results, Lloyds revealed that it had pumped £0.6bn into improving online customer experience. Already this has seen a 40% reduction in account opening times. But digitisation isn’t cheap and has resulted in a number of the bank’s high street stores shutting down to free up capital. With the digital plan set to accommodate a total of £3bn investment by 2020, investors will want to know how much more has been spent this quarter.
 

$3bn

Total value of Lloyds's digital investment plan

 

2.Profits hold steady

Of course, increased investment in the bank’s online user experience doesn’t come without a price. In the third-quarter profits before tax dropped 7% year-on-year, coming in at £1.82bn, compared to £1.95bn in the third-quarter of 2017. Nervy investors will be keen to know that this isn’t the start of a longer-term trend of diminishing returns as more money is spent internally.

 
 
3.Slowing housing market
 
Given Lloyds position as the UK’s largest mortgage provider, the sluggish growth experienced in the nation’s housing market during the end of 2018 – which the earnings announcement covers – will be of interest to shareholders concerned for Lloyds loan business. 
 
In the three months to December, house prices rose by 1.3% - the weakest growth since 2012. Dispiritingly, January also saw the biggest monthly drop in house prices since April. With potential homebuyers being put off by Brexit, Lloyds could take a hit on revenue.
 
 
4.Sudden rush of PPI claims
 
Investors should also watch out for any upturn in claims for mis-sold payment protection insurance (PPI). Lloyds put an additional £550m aside last August to help settle potential claims, bringing the total up to £19.2bn. With the 29 August PPI deadline now months away, it wouldn’t be a surprise to see a last-minute rush of claims resulting in an even heftier bill for the bank.
 

£19.2bn

Amount Lloyds have allocated to the settling of PPI claims

 
5.Longer-term fallout from Brexit
 
Due to Lloyds’s UK focus, it might have been expected that Brexit would continue to send investors running for the hills. Yet this year the bank has managed to claw back some of 2018’s losses, reflecting increasingly optimistic market sentiment. 
 
Pessimism in the UK economy could be overdone. Wages grew 3.4% in the three months to November – outpacing inflation and the fastest growth rate in a year. There is also potential for consumer confidence to improve once the terms of the UK’s withdrawal are known. Any signals that Lloyds is bullish over the future of the UK economy in the earnings call will be welcome.
 
 
Where next?
 
With Lloyds share price on the rise once again, this month’s earnings announcement will be key if the stock is to mount a longer-term revival in share price.
 
Market cap£41.09bn
PE ratio (TTM)10.13
EPS (TTM)5.70
Lloyds stock vitals, Yahoo finance, as at 11 February 2019
 
 
Compared to other UK banks, the stock is cheap at 10.19 P/E ratio, dropping to an even better value 7.48 forward P/E according to Morningstar – far below the industry and sector average. For the long-term investor, the stock also has an attractive 5.4% forward dividend yield and a 55.71 payout ratio.

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