Lloyds operating costs fall

The PPI bill may be large, but it is not exactly news. Since the lender updated the market in October, no more provisions have been made, leaving Lloyds with £1.6bn to cover the last of the redress. A final agreement with the official receiver has also been reached.

As ever, investors are better served by the group’s forward guidance. On that front, the greatest source of encouragement is to be found in operating costs, which fell 4 per cent to £7.9bn last year, and are expected to drop below £7.7bn in 2020. In turn, that should lower the cost-to-income ratio, which at 48.5 per cent already outshines Lloyds’ UK-listed peers. 

Squeezing every drop out of overheads – including Mr Horta-Osório’s fixed and total pay, both of which drop from 2020 – is critical given the ongoing pressure on profitability.

Last year, Lloyds’ return on risk-weighted assets fell 21 basis points to 3.65 per cent, while the net interest margin again dipped to 2.88 per cent. The latter is expected to come in between 2.75 and 2.8 per cent in 2020, as the bank navigates the dogfight that is the UK mortgage market. Prioritising asset quality means loan growth in small business and motor finance will probably remain selective.

However, with better visibility on painful “below the line items”, the group has maintained its target to build capital by 170 to 200 basis points this year. A targeted statutory return on tangible equity between 12 and 13 per cent may be down on the bullish hopes of a year ago, but comes in well-ahead of UK-focused rival Royal Bank of Scotland.

Analysts at Shore Capital forecast adjusted net tangible assets of 53.9p a share at the December 2020 year-end, rising to 57.4p in 2021.