LLoyds Bank’s ha’penny special buys some time

<p>Lloyds Bank’s share surge of as much as 13% after a surprise bonus pay-out shows the lender’s implicit pitch to investors has hit the mark. […]</p>

Lloyds Bank’s share surge of as much as 13% after a surprise bonus pay-out shows the lender’s implicit pitch to investors has hit the mark.

 

The return of investor confidence is a privilege which no corporate can take lightly, especially ultra-regulated and liability prone British banks.

A strong outcome on the hypersensitive issue of PPI provisions helped.

That combined with the 0.5p extra dividend ensured shareholders wasted no time, especially after the stock’s almost 40% loss from June peak-to-February trough.

We agree with Lloyds’ top brass that the bonus is both strictly in-line with “progressive and sustainable” policy, and reflective of “strategic and financial progress”.

(In other words routine, but also symbolic.)

But the ‘special’ also seems aimed at securing longer-term good will, because further significant ‘strategic and financial progress’ would be the optimistic case for the long term.

The bonus ha’penny also buys LBG some time for stated dividend policy to get anywhere near 50% of sustainable earnings.

 

We see two main reasons why that horizon is likely to be elusive.

 

 

 

Persistent Provisioning Instances

  • Even if we take Lloyds at its word that its £2.1bn PPI set-aside in Q4 will suffice to cover even a 25% rise in claims before the FCA’s planned deadline of “at least spring 2018”, the watchdog has left wiggle room.

“The proposed rules and guidance on PPI complaints would not apply to complaints about any other financial products or services, even where these are, or connected to, credit agreements” stated the FCA in October.

Legal experts suggest increasing scope for consumer and corporate private prosecutions of banks, alleging mis-selling of non-PPI products like packaged accounts, swaps, and more.

 

 

Flying low

  • Lloyds, like other lenders, faces more years of low interest rates, amid an edgy operating environment.

Net interest margins (NIM) rose 0.23 percentage points to 2.63% in 2015, with guidance for just 0.7 points more in 2016.

That’s conservative, but also credible.

Reported return on equity halved to 1.5%, whilst the bank said weak rates and unpredictable markets forced it delay key targets.

Return on required equity won’t hit 13.5%-15% before 2018 now, instead of 2017 before.

Cost/income at 45% must wait till after 2019, instead of after 2017.

Weak margins, in turn, undermine sustainable growth goals. ‘Real’ (vs. ‘underlying’) bottom line earnings were just £956m.

Better than forecast but undoubtedly buffed by one-offs, and still 36% lower than FY 2014.

 

 

 

We expect questionable growth prospects and regulatory icebergs to cap Lloyds Banking Group stock for years.

However given that the shares are now in proximity to the popularly held view of the government’s target (74p) a return to its long-term average of around 80p in the nearer term is conceivable.

Thursday’s demand has lifted LLOY back above likely strong support at 68.66p.

Also above the 50-day moving average (MA)—the first MA to surmount before prospects of further gains can be taken seriously—and the first time the shares have had such poise since October.

In the event of a near-term pause—probably between 72.47p and confirmed resistance at 75.5p—68.66p can be expected to hold, before 67.3p might be needed.

 

DAILY CHART

LLOYDS BANKING GROUP DAILY POST FY RESULTS 25TH FEB 2015_1534_resize

Please click image to enlarge

 

 

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