Lloyds results: Is there cause for optimism?

With Lloyds shares continuing to frustrate, our head of markets looks for positives in today's results.

A strict reading of these results is that somewhat disappointingly, it is a case of “close, but no cigar” after these numbers from Lloyds. The largely mixed performances in the season so far from its UK banking rivals had presented Lloyds Banking Group (LSE:LLOY) with an open goal, but it has failed to convert the chance.

One of the main culprits for the performance was the previously advised PPI provision, which totalled £2.5 billion for the year and, in particular, all but erased profit for the third quarter.

Lloyds has had the worst record for PPI claims and, although £1.6 billion of the provision remains as yet unused, the scale of the number inevitably feeds through to make uncomfortable reading for some of the headline numbers.

Pre-tax profit, down 26% year on year and shy of analyst expectations, was also hindered by other regulatory costs, while compression on asset margins remain and the mortgage market, in which Lloyds is a significant player, still suffers from intense competitive pressure.

Elsewhere, impairments rose by 38%, net income slipped 4% and the outlook comments make little mention of proposed growth, rather concentrating on further cost control.

Seen as a barometer for the UK economy, its fortunes are likely still to remain somewhat out of its hands as negotiations with Europe unfold over the year.

Yet for all of these headwinds, there are a number of areas in which Lloyds is clearly winning.

The continued investment in its digital presence, where it is the largest UK digital bank with 16.4 million active users is beginning to bear fruit and will ultimately help to streamline its offering.

In the meantime, overall costs are a particular focus, with the cost/income ratio remaining at a sector-beating level of just 48.5%. The capital cushion is ample at 13.8% which bodes well for the future.

Indeed, but for the PPI provision there may have been scope for an additional share buyback announcement, but for now investors will be content with a current and projected dividend yield of around 6%, which remains attractive, with the increased dividend reflecting confidence in prospects.

Net interest margins were exactly in line with expectations at 2.88%, while there is an ambitious target for the return on tangible equity figure, currently at 7.8% on a statutory basis, but with a 12-13% aim in the near future.

The hope must be that the end of the PPI saga will unleash both capital and improved fortunes for the bank, which rather like the results today, have had mixed reviews.

A 12% hike in the share price over the last six months was largely due to the “Brexit bounce”, but over the last year the shares have shed 4%, which compares to a 3.2% rise for the wider FTSE 100.

Indeed, perhaps the scale of the challenges ahead is also represented by the fact that the shares have lost 18% over the last two years. 

The market consensus of the shares as a cautious buy shows that Lloyds retains many supporters. In addition, the extremely undemanding valuation as compared to its peers and some renewed optimism around the wider UK economy may provide an entry point for new investors, as evidenced by the spike in early trading.