Lloyds beats forecasts with 3 82bn underlying profit

Lloyds Banking Group beat market forecasts with its first-half year results after reporting a 32% jump in underlying profits to £3.82bn compared to forecasts of around £3.6bn.

Statutory profit before tax including a £1.1bn charge came in at £863m. The bank saw underlying income rise 4% to £9.25bn when excluding the impact of St James’ Place whilst net interest income rose 12%, mostly driven by the effects of margin improvement to 2.4%.

Highlights from Lloyds first-half-year results:

• Underlying profit +32% to £3.82bn (forecast £3.6bn)
• Underlying income +4% to £9.25bn
• Statutory profit of £863m (including £1.1bn impact for legacy charges)
• Net interest income +12% (excluding St James’ Place)
• Impairment charges -58% to £758m
• Underlying costs -2% to £4.67bn
• Increases provision for PPI by a further £600m (Note that this means total charges will be over £10bn!)

Forward-looking statements:

• Expect statutory pretax profit to be significantly ahead of first-half year
• Expect run-off assets to be less than £20bn by end of year
• Expect asset quality ratio to be around 35 basis points
• To apply to restart modest dividend payments

This is a solid set of earnings from Lloyds, and will re-affirm the belief that they continue to recover and adapt in the changing dynamics of the banking industry. The high level of costs may keep an underlying level of concern, particularly given the efforts of competitors to cut costs more aggressively wherever possible as income drops, particularly in investment banking. Lloyds does not has those similar problems as banks such as Barclays however.

We should not forget that over the past six months, Lloyds has sold 38.5% of Lloyds TSB through an initial public offering and the government’s stake in the bank was reduced to 24.9%. And so, alongside these earnings and the aim to restart dividends, albeit at modest levels, it shows that the theme of recovery is gaining momentum here.

Lloyds shares fall, but why?

Having initially opened higher to 77.5p as the London markets started trading on Thursday 31 July, Lloyds shares soon fell a further 2p to trade at 75p, marking a fall of 1% on the day. The fall comes despite the underlying profit beating forecasts.

So why the fall?

There are three reasons why Lloyds shares have suffered a minor fall today:

1. Strong run up in share prices – most banking stocks have enjoyed a strong run of late and Lloyds is no different.

In the last three weeks alone, shares have rallied close to 8% and investors bought into Lloyds shares even further yesterday after Barclays shares jumped on the back of their respective earnings.

2. Impact of further government stake sales – any marked improvement in the company will increase the appetite for further sales of the government’s stake (which now stands at 24.9%).

Any large sale is likely to see shares fall in the immediate aftermath and so there is a degree of hesitation among investors over what price the government is likely to want to sell more shares at.

3. Jump in PPI provisions – the market was not expecting any major jump in PPI provisions and so the new increased amount will come as a bit of a surprise.