What’s new
■ Modest impairment declines
■ Third-quarter income growth
■ New chief executive appointed
Lloyds' trading update earlier this month was swiftly followed by news that a replacement for retiring chief executive, Eric Daniels, has been found. Former boss of Santander's UK operations, António Horta-Osório, will take Lloyds' helm from 1 March 2011. While considered by banking analysts as a credible choice, Mr Horta-Osório's room for strategic manoeuvre at Lloyds appears limited by the government's 41 per cent stake and the less than inspiring economic backdrop.
That has left the trading statement looking like the more significant announcement. The bank reported decent third-quarter underlying income growth and further overall impairment declines, although within the wholesale unit the wealth and international operations actually saw impairments rise - the grim economic situation in Ireland is a significant factor there. Management expects the retail side to manage only modest falls in second-half impairments compared with last year's second half.
Still, Lloyds is on track to deliver around £1.3bn of synergies from the HBOS acquisition by end-2010 and management expect a run rate of £2bn a year of synergies by end-2011. The bank remains focused on downsizing, too, and is on track to deliver a targeted balance sheet reduction of £200bn by 2014.
Charles Stanley says...
Hold. Lloyds has delivered good underlying income growth in the third quarter. But we remain concerned about the negative impact that Ireland is having and we believe that the market still frets about the significant amount of wholesale funding that matures in the next couple of years. Another worry is the potential impact that a weakening UK economy would have on the group given its significant exposure to both UK retail and commercial customers. So, even though Lloyds has made good progress in 2010, we retain our hold recommendation.
Canaccord says...
Buy. While the business appears to be tracking previous management guidance at the operational level, there is little sign of the incrementally positive news that some may have been expecting either. Indeed, given a lack of visibility on 2011-12 interest margin drivers, we've lowered our EPS estimates by 8 per cent to 6p in 2011 and by 6 per cent to 10p in 2012. We have also cut our full-year 2010 EPS forecast by 30 per cent to 2.3p. The most obvious downside risk for Lloyds would be a larger than expected decline in UK house prices. That said, the target price still comes out at 77p - suggesting that further upside is available.
