The controversial redemption, at par, of two series of enhanced capital notes (ECN) issued in 2009 took a £790m chunk out of Lloyds ' (LLOY) first-quarter pre-tax profit, which almost halved to £654m. The good news was that operating costs fell 2 per cent to just shy of £2bn, plus the bank took no further provisions for mis-sold payment protection insurance (PPI). Costs are being trimmed thanks to the bank's simplification programme, which has included investments in technology and a reduction in office locations. Phase II of the programme has generated £495m of annual run-rate savings to date, but management reckons this will increase to £1bn in savings by the end of 2017.
What's new: ■ Underlying quarterly earnings flat on Q415 ■ Early redemption of capital notes ■ Contraction in operating costs |
It was the reduction in costs, rather than any income growth, that improved the cost-to-income ratio by 30 basis points to 47.4 per cent. Total income was down 1 per cent, missing consensus forecasts by the same amount - the fall-away was largely attributable to a weak performance in insurance and fee income. Nevertheless, an improved deposit mix, lower wholesale funding costs and a one-off uplift from the credit cards portfolio meant the net interest margin improved by 14 basis points to 2.74 per cent.
Investec Securities says...
Buy. Lloyds will, we believe, be unique among the FTSE 100 banks in delivering an almost stable year-on-year performance in the first quarter. Underlying pre-tax profit was flat year on year, excluding TSB. Although loan growth remains anaemic - 0.5 per cent in Q1 - it is the only FTSE 100 bank with an expanding net interest margin (10 basis points quarter on quarter to 2.74 per cent). This was courtesy of ongoing liability repricing, ECN redemption and, we believe, its decision to "lead the market higher" in terms of mortgage front-book spreads.
RBC Capital Markets says...
Hold. Lloyds' results are broadly on track with its full-year guidance in our view, with net interest margin and capital generation the two key factors on an underlying basis hitting guidance and supporting our expectation for a 75 per cent payout ratio this year and 5.8 per cent yield. The bank trades at 1.23 times 2016 forecast tangible book value for a 14.7 per cent underlying return on tangible equity. In absolute terms net interest income was up 3 per cent year on year and to hit our first-half numbers needs to grow in Q2 by 1 per cent, which we believe is achievable.
