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Lloyds counts the costs

Cost-cutting looks like the best hope for a further stock re-rating
Lloyds counts the costs
  • Discount to book value has halved in half a year
  • Cash dividend of 0.57p is maximum allowed

Armed with a clear roadmap out of lockdown and the rapid roll-out of vaccines, the immediate outlook for the UK economy suddenly looks brighter. Might qualified optimism help sustain momentum in bellwether stock Lloyds Banking Group (LLOY)?

As is ever the case with UK bank shares, the answer is complicated. The good news is that the lender has emerged from 2020 with its loans in better shape than initially feared, after £4.2bn of impairments came in below a £4.5bn to £5.5bn forecast range and ensured profits beat market projections.

Capital buffers look stronger than ever, and guidance for the net interest margin to exceed 240 basis points this year is ahead of City predictions for 232bps. But the trend remains downward, income now faces a £400m headwind from a structural hedge, and expected operating costs of £7.5bn suggest fat-trimming is proving tougher than first thought.

Brutal though it may sound, a focus on overheads is shareholders’ best hope for a re-rating. Even Metro Bank (MTRO), which used its full-year results to once again focus on its “differentiated customer proposition” and high street presence rather than heavy losses, has put future “store” expansion under review, with no new branches planned from 2022.

FactSet-compiled forecasts are for a Lloyds’ tangible book value to hit 53.5p per share by December, meaning the forward discount has more than halved to 24 per cent since the outlook was at its nadir at last year’s interim results.

For the share price to equal book value by the end of 2021, chief executive Charlie Nunn may need to get bolder on costs when he takes the reins in August. Hold.

Last IC View: Hold, 28.9p, 29 Oct 2020

LLOYDS BANKING GROUP (LLOY)  
ORD PRICE:40.5pMARKET VALUE:£29bn
TOUCH:40.5-40.6p12-MONTH HIGH:54pLOW: 23.6p
DIVIDEND YIELD:1.4%PE RATIO:34
NET ASSET VALUE:69.7pLEVERAGE20.1
Year to 31 DecTotal operating income (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)*
201639.64.242.92.55*
201734.25.284.43.05
201822.15.965.53.21
201942.44.393.51.12
202029.21.231.20.57
% change-31-72-66-49
Ex-div:15 Apr   
Payment:25 May   
*Excludes special dividend of 0.5p a share in 2016.