Lloyds ‘bring it on’ makes sense

The bank’s brave face looks low on bravado.

The bank’s brave face looks low on bravado.

Banking on resilience

The custodian of the UK’s biggest consumer deposit base has signalled a bullish stance in the face of political and potential economic clouds approaching. The 5% total dividend rise is on the high side of expectations, a £1.75bn buyback is surprising in terms of timing and size. “The UK economy has proven itself to be resilient with record employment and continued GDP growth,” notes CEO António Horta-Osório, though acknowledging an uncertain near-term outlook. The contrast in tone between Lloyds and close rival RBS is clear and deliberate. Though their exposure to a potential consumption slump and deteriorating credit is similar, the larger bank is choosing a more confident approach.

Room for more

Despite net profit falling £200m short of expectations, albeit up a 24% to £4.4bn, a 4% share price rise suggests investors think Lloyds has got the balance right. Indeed, it’s balance sheet is no less solid. The core capital ratio is identical to 2017’s 13.9%, post-dividends and buyback, against Lloyds’ long-held 14% target. A ‘management buffer’ of around 1%, suggests further leeway for reimbursements. Underlying returns on tangible equity are up a percentage point to 15.5%. Reported ROE returns earmarked for shareholders at 8% continue to best High Street rivals. True, soft patches remain, like an 18% rise in soured loans totalling £937m, but investors signal unperturbedness. Lloyds’ shares steadily inched higher hours into Wednesday’s session. Buyers may have an eye to rising net interest margin and easing costs. Cost/income improved 2.5 percentage points to 49.3% with “low 40s” targeted by end 2020.

Hard hit

Brexit is chaotic enough, even before Britain’s 29th March exit date, as a faction of Conservative MPs splits from the party a day after Labour splintered. A Westminster compromise seems as distant as ever and Brussels unmoved. If Britain crashes out, Lloyds’ solid financials are bound to take a hit. Consensus points to loan losses double the rate of 2018’s, nearer 40%. Yet even as Lloyds shares advance about 18% for the year so far, they’re still largely flat after losing 23% in 2018 and the price return since the referendum has been paltry. That suggests a large chunk of ‘Brexageddon’ has already been priced. Bank shares will still crater if Britain fails to secure a deal with the EU. But a gambit that Lloyds would remain relatively resilient is difficult to argue with.

Normalised share price chart - year-to-date

Source: Refinitiv/City Index


Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.