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Recovery gathers pace at Lloyds

RESULTS: Ignoring fines and PPI-related charged and an improving economic backdrop helped Lloyds' underlying profit to jump almost a third
July 31, 2014

Never mind the reported slide in half-year pre-tax profit at Lloyds (LLOY). A brightening economic backdrop and a further improvement in credit quality pushed the bank’s underlying pre-tax profit - adjusted for such exceptionals as legal redress and PPI-related provisions - up 32 per cent to a consensus-beating £3.82bn. Chief executive António Horta-Osório described that outcome as "beyond our plan" and concluded that Lloyds' reshaping exercise was "now largely complete".

IC TIP: Hold at 74.33p

Those exceptionals, however, were painful. Not only was the PPI redress provision hiked by a further £600m - bringing the cumulative total to an eye-watering £10.4bn - but the bank's recent public shaming over Libor and repo rate-rigging has resulted in fines totalling £226m.

Yet with Lloyds now clearly reaping the benefits of economic recovery, it's difficult to spot any further bad news. Indeed, earnings were boosted by a 58 per cent slide in the impairment charge and the group’s impaired loans as a percentage of the book tumbled 2.7 percentage points year-on-year to 5 per cent. Costs are falling, too: underlying costs fell 2 per cent in the period and Lloyds remains on target to deliver cost savings of £2bn by the year-end.

The capital cushion is also growing. A combination of earnings growth and a 6 per cent fall in assets, weighted for risk, bolstered the bank’s Basel III-basis common equity tier one ratio (comparing its highest quality capital with risk weighted assets) by nearly a percentage point to a healthy 11.1 per cent.

True, the loan book fell almost £4bn in the first six months to £491bn. But Mr Horta-Osório says that’s significantly down to loan repayments in the corporate book, and that Lloyds is making progress with growing market share in its consumer operations.

Moreover, management is hopeful of returning to the dividend list in the second half with a "modest" payout, so Numis Securities expects a full-year dividend of 2p. The broker also forecasts pre-tax profit of £3.6bn, with EPS of 3.4p (2013: £415m and a 1.2p loss per share) and net tangible assets (NTA) of 48.2p.

LLOYDS BANKING (LLOY)

ORD PRICE:74.33pMARKET VALUE:£53.1bn
TOUCH:74.32-74.34p12-MONTH HIGH:88pLOW: 67p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:63p* 

Half-year to 30 JunPre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20132.132.2nil
20140.860.8nil
% change-60-64-

*Includes intangible assets of £9.5bn or 13p a share