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Lloyds share price: Bank hit by another PPI provision

Lloyds share price: Bank hit by another PPI provision

The performance of the Lloyds share price over the last few months has been disappointing, despite a decent performance in Q1. This appeared to be predicated on the basis that after such a good Q1 the bank would see a bit of a slowdown in Q2.

Notwithstanding Brexit concerns, Q1 was fairly decent as statutory pre-tax profits rose to £1.6bn, slightly below expectations of £1.88bn but still well above the levels seen in Q4, and in line with those in Q1 2018.

The picture for Q2 was always likely to be much more tricky, given that the UK economy slowed quite significantly during April and May, in the wake of the extension of the Brexit deadline at the end of March. This belief has been reflected in the Lloyds share price’s slide from the peaks in April of just above 65p a share. 

Impact of this morning’s results on Lloyds share price

One of the more notable items in the Q1 numbers was a £100m provision in respect of PPI, and with the new deadline fast approaching there was always the prospect of another lumpy provision in the Q2 numbers. 

This has turned out to be the case, though the extent of the provision is somewhat of a surprise at £500m and has taken quite a lump out of its profits for Q2. This brought the statutory pre-tax profit numbers down to £1.294bn, significantly below estimates of £1.76bn sending the Lloyds share price down to six-month lows, however it is important to look at that in the context of the latest PPI provision.

In terms of income we have also seen a modest slowdown, with a decline to £3.06bn from £3.08bn in Q1. The slightly weaker interest rate environment over the last quarter has also seen net interest margin drop to 2.89% from 2.91%, which is still pretty healthy. The bank also announced an increase in the dividend to 1.12p a share, an increase of 5% on a year ago. Overall loan demand has remained steady, as have customer deposits, with mortgage demand slowing slightly from the same period a year ago. 

Another potential factor that could influence the Lloyds share price is that there have been reports that the bank is in discussions with Tesco with respect to taking on its mortgage book, which of course would make the UK-focused bank even more sensitive to the vagaries of the UK economic cycle.

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A decent set of numbers

On balance these are a decent set of numbers with statutory pre-tax profits for the half year at £2.9bn, against a tough economic backdrop, and this should should be reflected in the Lloyds share price given time. Management appears to have adopted a responsible attitude to managing risk with this cautious update. 

This attitude is ebident in the statement, with management acknowledging that business confidence and investment has slowed, and warning that due to higher charges the capital build requirements for the year are likely to be at the lower end of the target range for 2019. 

The bank kept its full-year guidance unchanged, though this was caveated on how the UK economy was likely to fare over the course of the next few months as a new Brexit deadline approaches. It will be interesting to see how the Lloyds share price reacts as the Brexit deadline arrives. 


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