- Shares rise as high street bank posts £1bn third-quarter profit
- Impairments in the period were “benign”, though uncertainty reigns
- Cash-hoarding current account holders further boost liquidity
"We are now seeing an encouraging business recovery," proclaimed António Horta-Osório on the publication of Lloyds’ (LLOY) third quarter results.
Several pieces of evidence were offered to support the chief executive’s view. After making just over a fifth of all approvals in the period, the UK’s biggest household lender grew its open mortgage book by £3.5bn. Loan impairments were described as “benign”, suggesting the £3.8bn-worth of credit provisions booked in the first half are more than sufficient to cover the pandemic’s ongoing economic fallout, at least for now.
Owing to state guarantees, Lloyds need not worry as much about impairments to the business support loans it is processing, though an 18 per cent share of those advances to date has been a useful side-line and helped prop up interest income.
Meanwhile, deposits are now up £35bn for the year, as cash-hoarding retail current account holders helped to push the loan-to-deposit ratio from 100 to 98 per cent in the period.
Those customers have never been so electronically engaged, either: mobile app user numbers have spiked, while 85 per cent of all customer needs are now met via digital channels. That’s up from three-quarters in 2019, suggesting the pandemic has at least helped accelerate one important strategic push for the bank.
Helped by other positive movements in capital levels, the return on tangible equity and group net asset value, the market appeared to agree with Mr Horta-Osório’s assessment, pushing up the stock by 4.5 per cent.
Most encouraging, perhaps, was a slight revision to the group’s macroeconomic outlook. Thanks largely to the resilience of house prices, Lloyds actually released £105m of the extra provisions booked to anticipate the damage caused by Covid-19, meaning the £301m of additional charges in the period were entirely in line with pre-pandemic credit forecasts.
That may not answer all concerns around Lloyds’ recognition of consumer credit risk. Analysts at Berenberg reckon credit cards and non-mortgage consumer loans are likely to be a larger overall contributor to eventual losses, if the history of impairments since 2008 are any guide.
Despite this, we think the bear case could now start to soften. Mortgage approvals have been surging, causing industry-wide underwriting capacity and bizarrely enough – given the forward yield curve – a rise in mortgage interest rates. However, none of this means that a relief rally lies ahead, either, as this barometer for the UK economy digests the possibility of a second lockdown, a showdown in Brexit talks, and the threat of negative rates.
Separately, Lloyds confirmed Lord Blackwell will step down as chairman on 1 January 2021. His successor, City veteran Robin Budenberg, joined the board at the start of this month. Hold at 28.9p.
Last IC View: Hold, 26p, 30 Jul 2020
