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Lloyds Banking underwhelms on profits miss

The Black Horse’s results underline how its past is an obstacle to meaningful growth
Lloyds Banking underwhelms on profits miss
  • The HBOS Reading scandal rears its head
  • Profits underwhelmed on a mediocre performance

On a jittery day across all markets, Lloyds Banking's (LLOY) shares suffered the double effect of investors generally running for the exits at the same time as managing to undershoot consensus estimates for its pre-tax profits. These came in at £6.9bn, slightly less than the £7.2bn that the market had been expecting. The culprit was the bank’s usual mix of difficult to control operating costs and legacy issues generating unexpected exceptional charges.

The bank racked up £1.3bn in remediation costs, up from £379mn last year. £790mn of this, alone, was Lloyd’s estimate of its liability to the victims of the HBOS Reading impaired assets scandal. In one of the worst banking fraud scandals in recent years, corrupt HBOS staff working at the impaired assets division of HBOS Reading systematically ripped off hundreds of business owners who had their business improperly designated as impaired, with the assets then illegally seized. Settling the affair is one of Lloyd's most intractable problems.

A change in accounting may also explain the generally sour mood. The bank has been struggling to cut its operating costs meaningfully and, in these results, it announced a change in the method of accounting which will mean that operating costs are forecast at £8.8bn this year, compared with £7.6bn in 2021 under the old treatment. The radical change is because Lloyds will now include all exceptional costs in the operating line, apart from those generated by mergers and acquisitions.

The £2bn share buyback should give some cheer, but investors must be wondering when the "kitchen sink" announcements will eventually end. Lloyds share price currently trades at a PE ratio of 5.5 times Jefferies' estimates. Not expensive, by any means, but it is hard to see the catalyst for a meaningful re-rating. Hold.

Last IC View: Hold, 47.5p, 21 Jul 2021

LLOYDS BANKING GROUP (LLOY)  
ORD PRICE:47.4pMARKET VALUE:£34bn
TOUCH:47.4-47.5p12-MONTH HIGH:56pLOW: 37.5p
DIVIDEND YIELD:4.2%PE RATIO:6
NET ASSET VALUE:75p*LEVERAGE:19
Year to 31 DecTotal operating income (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201734.25.284.403.05
201822.15.965.503.21
201942.44.393.501.12
202029.21.231.200.57
202137.46.907.502.00
% change+28+463+525+251
Ex-div:7 Apr   
Payment:19 May