Should you keep faith in Lloyds Banking Group shares?

After diving to a seven-month low, our head of markets makes sense of reaction to Lloyds Bank results.

A largely uninspiring second quarter has contributed to a half-year result which is for the most part forgettable, even if Lloyds Banking Group (LSE:LLOY) itself is for the moment content with plotting a stable course.

Pre-tax profit in the six months to 30 June was down 7% on the previous year and is even further away from analyst expectations. Impairments showed a hefty increase, even if they were to some extent expected, net income was down and the Return on Tangible Equity number was marked lower. 

Yet another PPI provision of £550 million for the second quarter is unwelcome, leaving Lloyds counting the days until the 29th August deadline arrives and the issue can finally be consigned to the history books. 

Meanwhile, competition in its important mortgage market remains fierce, the historically low interest rate environment is not one which favours the banks in general, and management outlook from the company is relatively subdued.

Even so, there is little doubt that the business is well-run and there are grounds for optimism. 

Source: TradingView Past performance is not a guide to future performance

The investment in digital banking, in which Lloyds is predominant, continues apace, the tie-up with Schroders should deliver benefits in what is the increasingly important space of financial planning, and the group’s efficiency drive is delivering results. 

Indeed, the cost/income ratio, which now stands at under 46% (compared to nearly 48% previously) is sector-beating and extremely healthy. The capital cushion also remains robust at 14% and an increase in the dividend, signalling confidence in prospects, adds to an existing and attractive yield of 5.8%. 

Given the largely efficient model which Lloyds has crafted, the possibility of future dividend increases and further share buybacks will also feature in the minds of investors.

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For all of this, the Brexit spectre continues to loom large and, with Lloyds being regarded as a proxy for the UK economy, it is difficult to foresee an obvious exit from this financial maze until the terms of the withdrawal are finally decided, resolved and implemented. 

Perhaps not surprisingly, the shares have not kept pace with what has been a generally strong effort from the bank, having fallen 12% over the last year, as compared to a 1.3% dip for the wider FTSE 100 index. 

While the risks to the business are well-defined, the potential is also evident and, with this in mind, the market consensus of the shares as a ‘buy’ is testament to a more optimistic longer-term outlook.