Improved outlook flatters Lloyds

Interims results for Lloyds (LLOY) were flattered by a net £636m credit gain as the bank released capital set aside to cover pandemic-related impairment losses. The fact that the economy didn’t quite go to hell in a handcart, due to a combination of government furlough schemes, business interruption loans and businesses not automatically shut by lockdown adapting their operations, were all positives for Lloyds which, in a move that will cheer investors, also restored its interim dividend.

Given that a re-rating for the shares is dependent, in part, on achieving significant cost savings, these results showed no progress on that front. Operating costs were 1 per cent lower for the half, with restructuring costs of £255m mainly related to increased severance packages and changes in IT infrastructure. That effort looks puny when compared with management guidance for the year that operating costs will be £7.5bn, a figure that has barely budged when compared with last year’s results. Fundamentally, banking is an expensive business when interest rates are low.

The answer from management appears to be that if they can’t stop costs going out, then at least Lloyds can boost the money coming in, mainly by expanding its presence in wealth management. Lloyds announced the £390m acquisition of Embark, an investment and retirement platform business with 410,000 customers and £35bn of assets under management, in a clear push to muscle in on the mass market platform wealth management business.

The root of the problem for Lloyds is that it is an institution that has largely achieved its stated purpose - conceived in a hurry in 2008 by former chairman Wyn Bischoff and chief executive Eric Daniels and facilitated by the generosity of the British taxpayer - of becoming the dominant lender on every high street in the land. That now largely unassailable position leaves it with a series of uncomfortable dilemmas. To begin with, it is now effectively a proxy for the state of the UK economy, hence needing to put capital aside to cover potential impairments related to macro-economic problems. That those impairments largely failed to materialise is a question more of luck than judgement.

Yield hungry investors will appreciate the 5.3 per cent yield the shares earn on their current consensus forecasts for 2022, and likewise the forward P/E of 8 hardly screams over-priced. The reality is that Lloyds is unlikely to shake its image as the banking equivalent of the Civil Service, as its size in relation to the UK economy means it is prevented from expanding much more – as banking regulations largely intend. Hold.

Last IC View: Hold, 40.2p, 24 Feb 2021