The Lloyds share price is lower this morning as the bank revealed a third-quarter statutory loss after tax of £238 million – a stark difference from the £1.42 billion in the same period last year. The bank posted a pre-tax profit of £50 million, which undershot the £163 million consensus estimate. 

More PPI woes for Lloyds share price

Profit in the three-month period was essentially wiped out as Lloyds made yet another provision for the mis-selling of payment protection insurance (PPI) of £1.8 billion – which was near the top end of a recent guidance. Lloyds has been by far the worst offender when it comes to PPI provisions, as the group’s costs are in excess of £21 billion, and this morning the Lloyds share price has born the brunt of this. August was the deadline to claim for PPI, so you would imagine that Lloyds can now draw a line under the fiasco, but as we saw with the credit crisis, provisions can keep rolling. 

Underperformance in Q3

Even when you strip out the PPI cost the firm still underperformed, as underlying profit was £1.82 billion, while traders were expecting £1.98 billion. Impairments relating to corporate lending were cited for the miss on underlying earnings. The hit seems to have been a one-off, but the timing isn’t great when you consider the PPI charge, and this is reflected in the Lloyds share price.  

Banking net interest margin for the three-month period was 2.88%, which was a 0.05% decline on the year. Given the moves in gilt yields in recent months, it’s not a surprise that lending margins are under pressure. The cost-to-income ratio crept higher too, but the firm now expects annual operating costs to be below the £7.9 billion guidance. The yearly cost-to-income ratio is tipped to drop below the 2018 level. With lending margins being squeezed, the firm will need to trim expenses just to keep things ticking along and keep the Lloyds share price on track.    

A challenging year so far

Lloyds found trading tough in the first six months. In the period, the bank posted a 7% fall in pre-tax profit to £2.9 billion, while analysts were expecting £3.45 billion. Underlying profit only slipped by 1%, which wasn’t as bad as traders had expected. In the second quarter the bank took a hit of £550 million in relation to the mis-selling of PPI. Lloyds lowered its full-year guidance for return on tangible equity to approximately 12%, while the previous guidance was 14-15%. This news may well have had a negative impact on the Lloyds share price.

Net interest margin edged lower in the second quarter to 2.9% from 2.91% in the first quarter. It is worth noting that the figure was 2.93% in the same quarter last year. A move lower isn’t ideal as lending is a major sector of the business, but at least the move was small. 

Lloyds share price: the Brexit impact

Lending margins are likely to be squeezed in the near-to-medium term as the Brexit uncertainty has flattened the gilt yield curve. Banks tend to make more money in a higher interest rate environment, and in turn, lending margins are usually squeezed in lower rate environments. Tying in with the Brexit uncertainty, is the general sense of economic caution. Consumer activity as well as investment spending have suffered, and Lloyds have expressed concerns about the ‘continued economic uncertainty’.

The Lloyds share price hit a five-month high earlier this month on the back of the announcement that Boris Johnson reached a deal with the EU. The drawn out political process has hung over the British economy, and now it seems like things are finally entering the final phase of the process, which could act as a floor to the Lloyds share price.                 


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