Lloyds profits jump on absence of
fresh PPI provision but shares fall
amid Brexit fears (AND LEGACY ISSUES)
Lloyds has had a strong stretch of profit growth is facing mounting risks from its exposure
to unsecured lending
Lloyds has had a successful turnaround but is now facing headwinds
Lloyds Banking Group PLC (LON:LLOY) achieved a jump in third quarter
profit, supported by the acquisition of credit card business MBNA and the
absence of further provisions for its payment protection insurance misselling
But shares in the bank fell 1.78% to 66.20p as it warned that risks remain
with Brexit uncertainty, an increase in PPI claims and ongoing legacy issues.
“Lloyds has been making solid progress but it now faces some headwinds,”
said Neil Wilson, senior market analyst at ETX Capital.
“After a strong stretch of profit growth it was definitely the star of the UK
banking show, but as we have been flagging there are mounting risks from its
growing exposure to unsecured lending at a time when the economy looks
more likely to hit the skids than deliver a marked improvement.”
Profits rise with no fresh PPI charges
In the three months to 30 September, statutory pre-tax profit came to
£1.9bn, up 141% on the £811mln reported the same period a year ago.
Total income rose 8% to £4.6bn from £4.3bn last year, driven by a 12%
increase in net interest income to £3.1bn from £2.9bn.
Net interest income was boosted by lower deposit and funding costs along
with a contribution from MBNA following the completion of the £1.9bn
takeover of the credit card firm from Bank of America in June.
Full year net interest margins is expected to be close to 2.85%, including
In October the company also announced the acquisition of Zurich
Insurance’s UK workplace pensions and savings business as it expands its
Russ Mould, investment director at AJ Bell, said Lloyds seems to be readying
itself to end its own era austerity following its acqusitions of MBNA and
Zurich’s workplace pensions and savings business. But Mould said investors
would rather own a safe bank that can continue to increase dividend
“While the bank cannot shrink for ever, and the need for a solution to the
UK’s savings crisis is acute, shareholders may be wary of this dash for
growth, especially at this stage of the credit and economic cycle, which is now
getting long in the tooth,” he said.
“All acquisitions bring risk, especially if they are funded by debt, as very few
actually deliver the targets, while the Bank of England and Financial Conduct
Authority both continue to warn about rapid growth in unsecured consumer
PPI claims rise
The lender said there were no additional charges for PPI taken in the third
quarter after putting aside £35mln in the first quarter and £700mln in the
second quarter to cover claims.
However, Lloyds noted that PPI claims increased during the period after the
Financial Conduct Authority’s advertising campaign to raise awareness of the
29 August deadline for making complaints.
Claims reached about 16,000 per week following the launch of the ad ,which
featured a model of actor Arnold Schwarzenegger, in August but have since
reduced to about.11,000 per week – higher than the bank’s assumed run-rate
of about 9,000 per week.
Lloyds also warned about the risks that it faces with the uncertainty
surrounding Brexit negotiations and its potential impact on the economy.
The Brexit vote has already sent the pound lower, causing inflation to reach a
five-year high at 3% in September and putting a strain on disposable
Chief executive António Horta-Osório said: “The UK economy remains
resilient following strong employment and GDP growth in recent years
together with private sector deleveraging and rising house prices.
He added: “Inflation is however now rising above disposable income given
the recent depreciation in sterling and, while this may affect consumption
going forward, the economy should benefit from rising exports and earnings
from foreign assets.”
Laith Khalaf, senior economist at Hargreaves Lansdown said: ‘All the dials
are pointing in the right direction at Lloyds, but the share price is still being
held back by a consensus of angst over Brexit. The bank is heavily plugged
into the domestic economy, and so could sustain collateral damage if Brexit
negotiations prompt a slump in UK growth.”
Lloyds grabbles with legacy issues
In addition to economic uncertainties and PPI claims, Lloyds is in the middle
of a high court trial brought against the bank and five of its former directors
by shareholders over its takeover of HBOS during the height of the financial
crisis in 2008.
The bank, which returned to private hands in May follolwing its taxpayer
bailout shortlyafter the HBOS aquisition, has also set aside £100mln to
compensate victims of fraud at its HBOS Reading branch.
It has missed its self-imposed deadline to make payments before the end of
June but said it was currently undertaking a review of the fraud and is in the
process of paying compensation to the small business owners that suffered
Taking into account its risks, the bank has bolstered its capital buffers,
raising its common tier equity 1 ratio to 14.0% at 30 September from 13.8%
at 31 December. Including an interim dividend of £75 mln, however, the CET
1 ratio fell to 13.5% from 13.8%.
Still the company said it continues to be “strongly capital generative” with
100 basis points of capital in the period.
Lloyds continues to expect capital generation in 2017 at the upper end of the
170-200 basis points ongoing guidance range. It also believes a CET 1 ratio of
13% is sufficient to meet regulatory requirements and cover uncertainties.
Cost savings target for 2017 on track
The bank added that its so-called ‘Simplification’ programme is on track to
achieve targeted £1.4bn of annual run-rate savings by the end of 2017. It has
so far delivered £1.2bn of savings after streamlining its operations, cutting
branches and axing jobs.
“We have announced improved financial targets for 2017, reflecting the
strong financial performance in the year, and we remain on track to deliver
our longer term guidance,” said Horta-Osório.
The next strategy update for 2018