Lloyds Banking Group profit increases, on track to meet 2017 targets
Lloyds Banking Group’s first quarter profit increased with the part state-owned bank still on track to meet its 2017 targets.
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Underlying profit increased 1% to £2.08bn compared to last year, and rose 16% compared to the previous quarter, with an underlying return on tangible equity of 15.1%.
Statutory pre-tax profit doubled to £1.3bn from last year, with a return on tangible equity of 8.8%
The bank maintained a strong balance sheet with a CET1 ratio of 14.5% from 13.8% at the end of 2016, and tangible net assets per share increased to 56.5p from 54.8p at December end, driven by strong underlying profit.
The bank is on track to meet its financial targets for the year and it maintained its longer-term guidance. Net interest margin is now expected to be close to 2.8% and open book mortgage balances are expected to stabilise and then grow to close the year in line with 2016’s results.
While the asset quality ratio for 2017 is anticipated to be inside the existing 25 basis points guidance, capital generation will be at the top end of the 170-200 basis points ongoing guidance range and it expects to generate a statutory return on tangible equity of between 13.5% and 15% in 2019.
It also continues to target a cost-to-income ratio of around 45%, exiting 2019 with reductions every year.
The bank stressed that it was “determined that the victims of HBOS Reading are fairly, swiftly and appropriately compensated”.
On Wednesday, Lloyds announced it had appointed a retired High Court Judge to probe the bribery scandal at HBOS’s division in Reading.
It has set aside £100m in its first quarter results to pen compensation to victims of the scandal between 2003 and 2007, before Lloyds rescued the bank in 2009.
Lloyds has already written off about £250m of fraudulent loans made during the scandal, which in February saw two former HBOS employees and four others jailed for a total of 47 years and six months.
Chief executive António Horta-Osório said: “In the first three months of this year we have delivered strong financial performance with increased underlying profit, a significant improvement in statutory profit and returns, and strong capital generation. These results continue to demonstrate the strength of our customer focused, simple and low risk business model and our ability to respond to a challenging operating environment.
“The UK economy continues to benefit from low unemployment and reduced levels of indebtedness, and asset quality remains strong and is stable across the portfolio. We remain committed to supporting the people, businesses and communities in the UK through our Helping Britain Prosper Plan and putting customers first.”
Lloyds' striking comparison to the Royal Bank of Scotland
Neil Wilson, senior market analyst at ETX Capital, said that Lloyd's now looks like it can increase dividends up to 6p this year if the tailwinds are right, which at current valuations would equate to nearly a 9% dividend yield based on Wednesday’s closing price, while the comparison will the Royal Bank Scotland, which was also bailed out during the 2008 financial crisis, is striking.
“While Lloyds is poised to return fully to private ownership, RBS remains largely taxpayer-owned. RBS made a £4bn loss in 2016, while Lloyds generated a £4.2bn statutory profit. The two leading high street lenders could not have fared differently in the last nine years. The government will be able to make a tidy sum as it offloads the rest of its stake in the coming weeks.
“Net interest income rose 1% to £2.9bn, and this should only improve as interest rates are not falling any further. As is the case across the sector, the uplift from rising interest rates should produce a material rise in bank earnings. Lloyds is also make good progress on its ambitious target to achieve a cost/income ratio of 45% as revenues improve. Cost/income ratio dove from 51.7% in the final quarter of 2016 to 47.1%. Lloyds appears on track, let’s see if RBS can follow suit”, Wilson said.
Richard Hunter, head of research at Wilson King Investment Management, said: “The strength of these figures have been achieved despite further provisions totalling £550m (PPI, HBOS, retail conduct issues) and are testament to the increasingly sweet spot in which the bank finds itself.
“For the time being, the resilience of the UK economy is a boon for Lloyds, even though any retrenchment could threaten the situation, particularly in the recently acquired credit card unit. In the meantime, the cost of regulation, both past and present, casts a shadow over the sector in general and the low interest rate environment is not one which banks traditionally enjoy.
Hunter said that the first quarter numbers should provide further comfort as banks finally move away once and for all from the effects of the financial crisis and that the bank’s pedestrian share price performance over the last year looks healthier over the last six months as it added added 21%.
Steve Clayton, manager of the £272m Hargreaves Lansdown Select UK Income Shares fund, said: “Lloyds ability to generate capital, and its limited needs to retain much of that within the bank mean that it has great dividend potential.
“Sure enough, today they have raised their guidance for capital generation which bodes well for the prospects for additional special dividends. On the ordinary dividend alone, Lloyds yields around 3.9% and special dividends later this year could take that higher still. If Lloyds can bring revenues back into growth then the prospects could improve further.”
Shares in Lloyds Banking Group were up 3.14% to 69.52p at 0821 BST.