Lloyds investors welcome the slow path to growth

Lloyds Banking Group is offering more of the same, and for now investors are signalling measured approval.

 Modest applause

Shares in Britain’s biggest lender are up around 2% as I write; somewhat belying the clearest signs seen for years that it’s firing on all cylinders. News of the group’s highest pre-tax profit since 2006—a 24% advance to £5.3bn—is tempered by a £430m consensus miss. The stock has drifted from a modest opening rise on Wednesday to an even more modest uptick.

 Conduct

A more material drag in the report in our view is the persistent rise in conduct-related costs. ‘Other conduct provisions’ of £865m fell on the year but those for PPI rose £650m to £1.6bn, meaning the total was a fifth higher than 2016. Lloyds is committed to addressing “historic conduct issues”, of course. And the drop off in provisions for more recent misconduct is encouraging. By nature though, the direction of conduct costs is an unknown. The prospect that revenue could rise by as much as 20% by stemming missteps is probably far-fetched given that Lloyds’ already huge deposit base is still inching higher. Plus LBG’s loan-to-deposit ratio now stands at 110%, up 1 percentage point.

More buybacks possible

Even if such impairments fail to abate though dividends could keep growing at the current snail’s pace. Furthermore, further disbursements of proceeds from best-in-class efficiency and capital management look likely. Note LBG’s key capital ratio would be a robust 13.9% after dividends and if the maximum £1bn buyback announced today was offered. Admittedly, a future economic downturn that edges defaults higher and slows deposits and loans could crimp such largesse. That’s why the shares have crept just 5% higher over a year, despite Lloyds’ return to rude health.

No fast moves

Nevertheless, shareholders also welcome the lack of flashy moves in Lloyds’ new three-year plan. One tacit message it conveys is that as CEO António Horta Osório enters his seventh year at the helm, he is still not tempted to kick-start faster growth by taking on more risk. “Small insurance acquisition opportunities” might pique Lloyds’ interest, but the plan retains a largely organic approach. It even echoes what we assumed to be long-standing aims: “Transform the Group into a digitised, simple low risk, customer focused” provider. The cost will be a little more than £3bn, or a contained 5% of total income a year. The digital focus is sensible, not least due to likely cost benefits. The move could also optimise LBG’s customer data use just ahead of new rules that force banks to open data access to rivals.

Hopes that rising UK interest rates could be a significant tailwind for Lloyds continue to look on the over-optimistic side. Still, a cautious (not to say boring) Lloyds can continue to satisfy patient investors, so long as the economy behaves as sensibly as the group. 

Thoughts of Lloyds Banking Group's share price chart

Lloyds' is a low-beta FTSE 100 stock. It is about 6% less volatile than the wider market. It should be little surprise therefore that the shares have straddled pretty much the same 61p-69.5p range since December 2016. And since June last year, the stock has barely ventured out of a corresponding channel aside from an advance in step with the market which fizzled out during the big sell-off earlier this month. That recent up leg peaked at 72.77p, very close to last year's 73.58p top. Even if LLOY makes it through the channel again for a spell, the probability of another failure in the medium term close to or a little south of 72p looks high.

Lloyds Banking Group Plc. share price chart - daily intervals

Source: Thomson Reuters and City Index