Lloyds Banking Group stays healthy despite PPI relapse

Milestone gets the thumbs-down

Thursday should be an historic day for Lloyds Banking Group. Unfortunately though, the market reacted to its biggest half-year profit since the financial crisis by selling the stock at the open. Its shares even remained lower despite news that Lloyds hiked its interim dividend as had widely been hoped. In some ways, the mild thumbs down should reassure the bank. After all, investor disappointment still shows that normalisation for the biggest UK-focused bank continues, despite its strides ahead of rivals in a return to stability and profitability.

PPI vs. NII

Lloyds’ first half shows it still has some way to go on the road to a becoming that ‘normal bank’ bank again. For one thing, legacy conduct costs are drifting back to the surface. Again, ironically, scepticism about Lloyds’ claim to have drawn a line under payment protection insurance (PPI) 9 months ago saves the shares from a deeper fall on Thursday. The additional £700m provision—particularly the size—for compensation, is still a negative surprise. And it’s unlikely that PPI scepticism will alleviate much, even beyond the group’s new putative 2019 cut off point. Guidance that the new provision will cover claims of around 9,000 a week through to Q3 2019 is helpful, though not categorical. 

The slight undershoot in net profit also sets the stage for a potential decline of Lloyds shares into the year end, after a modest c. 10% rise up to Wednesday’s close. The broad suspicion is of course that as the group prudently tightens lending standards to finesse exposure to UK mortgages—it has the highest in the world—its recuperating net interest margin (NII) could catch another chill. A new compensation front in the group’s residential mortgage business may be further cause for concern. The hit there was £283m in H1. Further requirements should be milder, but again, there’s no discernible endpoint for mortgage compensation either. It helps that NII continued the steady improvement of the last few quarters to stand at 2.82% at the end of H1, two basis points above annual guidance.

Returns to health

Other gauges of Lloyds' health ought to be similarly reassuring. Return on tangible equity, for instance, also progressed—rising 150bp to 16.6%, keeping the group at the top of its class in the UK. As does the 18% dividend rise that had widely been expected to follow continued capital strengthening. Lloyds’ health is still improving. That affords it much better defences should mild erosion of Britain’s lending environment turn into outright deterioration.

Lloyds Banking Group's share price chart continues to show investors are tardy of prices above 70p, as they have been since a short-lived burst to 88. The collapse of the post-Brexit vote rising channel adds further uncertainty. A sharply declining flag pattern (normally bullish if counter-trend) should offer buyers some reassurance. However despite it culminating in bounce at 65.35p, the resulting upleg got no further than specific resistance at 68.97p. Buyers would be wise to wait for the stock to surpass that price before adding. 65.35p is a useful lower reference marker. The support should limit range expansion to the downside, so long as it holds.

(Please accept our apologies. Due to technical difficulties, we are temporarily unable to include the chart. Please note, the chart was included in the social media post that linked to this article.)