ii view: Lloyds Bank benefits amid recovery optimism

This bank has been transformed under the now departing chief executive. Buy, sell or hold?

First-quarter results to 31 March

• Net income down 7% to £3.66 billion
• Pre-tax profit of £1.9 billion, up from £74 million in Q1 last year
• Net impairment credit of £323 million versus loan impairment loss of £1.43 billion in Q1 2020
• Capital cushion of 16.7%, up from 14.2% in Q1 2020

Guidance:

• Operating costs to reduce to £7.5 billion versus costs of £8 billion in 2020
• Intention to accrue dividends and resume progressive and sustainable ordinary dividend policy

Chief executive António Horta-Osório said:

"The coronavirus pandemic continues to have a significant impact on people, businesses and communities in the UK and around the world. Whilst we are seeing positive signs, notably the progress of the vaccine roll-out and the emergence from lockdown restrictions, the outlook remains uncertain.”

ii round-up:

Founded in 1765, Lloyds Banking Group (LSE:LLOY) is today home to household brand names including Lloyds Bank itself, Halifax, MBNA and Schroders personal wealth.

It operates through the three core divisions of Retail, Commercial Banking and Insurance and Wealth.

In 2018, it launched a strategy to transform the bank for success in a digital world and now has over 17 million digitally active customers - the largest in the UK. 

For a round-up of these latest results, please click here.

ii view:

Having transformed since the financial crisis of 2008, Lloyds Banking Group is now largely dependent on the UK economy. Personal and business banking, along with life and non-life insurance activities now provide its core activities. Its controversial acquisition of Halifax bank during the financial crisis added significantly to its mortgage loans, a product arena which it has extended subsequently. 

During this latest quarter, its mortgage book increased by 6% to £283 billion out of a total loan book of £443.5 billion. Small to medium sized corporate lending rose by 28% to £41 billion. Less favourably, credit card lending fell by 19% to £13.5 billion and overdraft lending retreated by a quarter to £900 million.  

For investors, the recent downgrading of the ‘Help to Buy’ scheme offers a degree of caution in relation to future mortgage lending. The bank’s dependency on the now highly indebted UK economy also needs to be remembered. As does the now imminent change of the chief executive.   

But despite ongoing pandemic uncertainty, the significant reduction in bad debt provisions to a small writing back of prior expected losses is a major positive. Further write-backs could also be seen later in the year. An increase in the capital cushion adds to balance sheet reassurance. And the previous restarting of the dividend payment now sees analysts estimating a forward dividend yield of just over 4% (not guaranteed). A rise in interest rates further down the road is also typically a boost for banks. In all, and with the share price sat at around 0.9 times the bank’s tangible net asset value, longer-term investors will likely remain optimistic.

Positives

• Dividend payment restarted
• Improved capital cushion

Negatives

• Ongoing pandemic uncertainty
• Low interest rates are considered broadly bad for bank profits

The average rating of stock market analysts:

Buy