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Lloyds comes good on divi hike, keeps bears at bay

Lloyds managed to grow its net interest margin and improve its capital ratio but incurred a huge jump in PPI provisions.
February 25, 2016

Investors buying into the Lloyds Banking (LLOY) recovery story were given a big reason to keep the faith after management tripled the banking group's 2015 full-year payout, and added a 0.5p special dividend to boot. With the government's public share sale on pause until markets calm down, management continued its progress on building a simpler, UK-focused retail bank out of the doldrums of the financial crisis. The group's common equity tier-one capital ratio looks good at 13 per cent, or 13.9 per cent prior to those dividends.

IC TIP: Buy at 67.8p

However, provisions relating to the payment protection insurance scandal shot up to £4bn, including £2.1bn in the fourth quarter, depressing pre-tax profit. The Financial Conduct Authority's proposed time limit on claims cannot come soon enough. Underlying profit, excluding PPI payouts, increased 5 per cent to £8.1bn. This was helped by impairment charges, which almost halved to £568m as run-off business reduced significantly.

The group's net interest margin improved 23 basis points to 2.63 per cent, excluding TSB, driven by lower wholesale and deposit funding costs. Management expects this to increase to 2.7 per cent by the end of this year, as the amount of interest it has to pay on customer deposits falls faster than lending rates. But to protect margins in an increasingly competitive environment, Lloyds grew its open mortgage book by just 1 per cent, compared with a 2.5 per cent industry average.

The performance of the group's insurance business was patchier. Bulk annuities performed well, pushing underlying profit up 4 per cent to £962m. But excluding this business, the present value of new premiums in its life insurance division fell by more than a fifth. In the competitive general insurance sector, gross written premiums fell 4 per cent to £1.15bn.

Analysts at Investec Securities expect net tangible assets per share of 57.2p at the end of 2016, compared with 52.3p a year earlier.

LLOYDS BANKING (LLOY)

ORD PRICE:67.8pMARKET VALUE:£48.4bn
TOUCH:67.78-67.82p12-MONTH HIGH:89pLOW: 56p
DIVIDEND YIELD:3.3%PE RATIO:85
NET ASSET VALUE:58pLEVERAGE RATIO:18.6

Year to 31 DecTotal operating income (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201126.8-3.54-4.1nil
201238.9-0.61-2.1nil
201338.00.42-1.2nil
201429.91.761.70.75
201523.21.640.82.25*
% change-23-7-53+200

Ex-div: 7 Apr

Payment: 17 May

*Excludes a special dividend of 0.5p a share