ii view: Lloyds Bank restarts the dividend

Covid uncertainty remains but provisions have fallen and mortgages have grown. 

Full year results to 31 December 2020

Guidance:

• Expects 2021 operating costs to reduce further to £7.5 billion
• Improving profitability with statutory return on tangible equity of between 5% and 7%
• Intention to accrue dividends and resume progressive and sustainable ordinary dividend policy

Chief executive António Horta-Osório said:

"The Group's unique business model, customer focused strategy and transformation in recent years positioned us well to respond effectively to the needs of our customers in 2020. At the same time, the Group's financial performance in the year has been impacted by the pandemic. We are now seeing positive developments in the business.

"Looking forward, significant uncertainties remain, specifically relating to the coronavirus pandemic and the speed and efficacy of the vaccination programme in the UK and around the world. I remain confident that the Group's clear purpose, unique business model, significant competitive advantages and the customer focused evolution of our strategy we have announced will ensure that the Group is able to Help Britain Recover and in so doing, help transition to a sustainable economy."

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 Bank 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. Over this latest financial year, its mortgage book increased by 3% to £277 billion out of a total loan book of £440 billion. Small to medium sized corporate lending rose by 26% to £40.6 billion, while credit card and UK motor financing both fell by 19% and 6% to just over £14 billion each. 

For investors, upcoming changes to UK government incentives that had been designed to stimulate the housing market offer some caution. An expected end to the current stamp duty holiday and a reining in of the ‘help to buy’ scheme could dampen mortgage demand. The bank’s dependency on the now highly indebted UK economy also needs to be remembered. As does the departure of its chief executive at the end of April.  

But while pandemic uncertainty persists, loan loss provisions reduced over the second half, raising some hope that writebacks of earlier provisions could be made in future. This could potentially strengthen the bank’s dividend paying ability. An increase in the capital cushion adds to balance sheet reassurance, while expectations for rising global inflation could lead to higher interest rates – a move which is seen as broadly favourable for the banking industry. In all, and with the share price sat at around 0.7 times the bank’s estimated tangible net asset value, longer-term investors may continue to accumulate holdings. 

Positives

• Dividend payment restarted
• Improved capital cushion

Negatives

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

The average rating of stock market analysts:

Cautious buy