Switching to a lower risk, vanilla banking model doesn’t seem to be hurting Lloyds Banking's (LLOY) capital generating ability. The growth rate in this regard increased by 121 basis points through the first half – boosting the common equity tier one ratio (CET1) to 15.1 per cent – and prompting management to upgrade full-year capital generation guidance to 200 basis points, pre-dividend. Part of that was due to the sale of the £4bn Irish mortgage portfolio, but, encouragingly, 111 basis points came via underlying banking profits. Crucially for investors, the capital build has given management confidence to recommend the highest half-year dividend since payments were reinstated four years ago.
Charges for payment protection insurance (PPI) were almost half the prior year at £550m, which boosted pre-tax profits. That sum covers around 13,000 claims a week through to the August deadline, up from the 11,000 initially assumed. Underlying income was up 2 per cent, which, together with a 6 per cent reduction in overall operating costs, meant the cost-to-income ratio declined further to 47.7 per cent, from 51.9 per cent the same time last year. What’s more, despite the asset quality ratio (proportional impairments against loans) increasing 11 basis point to 0.27 per cent – following the inclusion of credit card business MBNA and lower debt sales – management reckons the full-year ratio will come in below 0.25 per cent, substantially better than initial estimates.
At the core retail banking business, the benefits of the higher-margin MBNA and lower funding costs more than offset pricing pressure in the increasingly competitive mortgage market. That meant the banking net interest margin increased 14 basis points to 2.69 per cent, pushing up net interest income 8 per cent in the process. Within the commercial banking business, SME lending was up 2 per cent to £31.5bn, while the asset quality ratio was up marginally on the prior year, but still impressive at just 0.02 per cent. Net interest income rose marginally, helped by a three basis point improvement in the business’s net interest margin to 3.32 per cent.
Analysts at Investec expect net tangible assets of 52.8p at December 2018, compared with 53.3p the same time the prior year.
| LLOYDS BANKING (LLOY) | ||||
| ORD PRICE: | 63.78p | MARKET VALUE: | £45.6bn | |
| TOUCH: | 63.77-63.79p | 12-MONTH HIGH: | 73p | LOW: 61p |
| DIVIDEND YIELD: | 7% | PE RATIO: | 16 | |
| NET ASSET VALUE: | 60p | LEVERAGE: | 21.5 | |
| Half-year to 30 Jun | Total operating income (£bn) | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
| 2017 | 17.3 | 2.54 | 2.0 | 1.00 |
| 2018 | 14.3 | 3.12 | 2.9 | 1.07 |
| % change | -17 | +23 | +45 | +7 |
| Ex-div: | 16 Aug | |||
| Payment: | 26 Sep |
