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Full year results showed an 8% uplift in underlying profit before tax, to £8.5bn, as increased loans to clients and a stronger net interest margin outweighed a slight increase in operating expenses.
Lloyds has also announced a £1bn share buyback and a final dividend of 2.05p per share, up 20.6% on last year. This takes the full year payment to 3.05p.
Lloyds’ 2018-2020 strategy review accompanied results. It broadly calls for more of the same, with continued emphasis on digitising operations while increasing Financial Planning & Retirement activity and lending to smaller companies.
The shares rose 1.6% in early trading.
Exciting Lloyds is not. But steady growth and a chunky dividend – analysts are forecasting a prospective yield of 6.7% next year – are not to be sniffed at.
Performance has been driven by more loans to customers, at higher margins and with lower operating costs – in essence doing simple banking well. CEO Antonio Horta-Osorio’s plan for the next three years calls for more of the same.
Lloyds is already the UK’s biggest digital bank, as well as operating the largest branch network. The new strategy calls for further digitalisation, aiming to improve customer service while also reducing costs.
The group is also making a land grab into the Financial Planning and Retirement world – aiming for £50bn+ of new assets and 1m new clients by 2020. The Scottish Widows business means it already has a foot in the door, but expansion will still require significant investment.
Small business lending is also getting a shot in the arm, with management targeting an extra £6bn of net lending by 2020.
All this, together with a significant increase in investment in staff, is expected to cost around £3bn. But if Lloyds can pull it off the rewards could be substantial.
The bank’s cost to income ratio should continue to fall, reaching the low 40s by 2020, with improvements every year. Loan defaults are also expected to remain low.
If all goes to plan, return on equity should hit 14-15% (versus 8.9% in 2017) with capital generation of 1.7-2 basis points a year. For shareholders that should mean a sustainable and growing dividend, with potential for further returns of surplus capital.
It’s worth bearing in mind there’s always scope for regulatory or economic curveballs to upset the apple cart with banks. Lloyds is also particularly exposed to the fortunes of the UK economy, especially given its increasing exposure to more volatile credit card and car finance markets. With concerns about a painful Brexit weighing on the economy that’s not ideal – and might explain the group’s undemanding valuation.
However, it’s difficult to see where the bank has put a foot wrong so far. Horta-Osorio’s two previous three year plans have taken the bank from financial crisis pariah to one of the strongest players on the high street.
It might lack fireworks, but if his next offering delivers more of the same there won’t be many complaining.
Full Year Results
Net income increased 5% on the previous year to £17.5bn, including a 2.6 percentage point benefit from the acquisition of credit card business MBNA.
This includes an 8% improvement in net interest income, the money Lloyds make from lending to customers, which rose to £12.3bn. Growth came from a 1% increase in loans to customers, to £456bn, and an improved net interest margin of 2.86%.
Other income, which includes revenues from commercial banking, Lex Autolease and insurance, rose 2% to £6.2bn.
Operating costs rose slightly over the year, but lagged income growth. As a result Lloyds’ already market-leading cost to income ratio continued to improve, falling 1.9 percentage points to 46.8%.
2017 saw impairments for bad loans rise 23% to £795m, although this remains low by historic standards.
Lloyds generated 2.45 percentage points of surplus capital during the period, taking the full year CET1 ratio, a measure of a banks capitalisation, to 15.5%.
Guidance for 2018 sees the group delivering a net interest margin of around 2.9% and further improvement in the cost to income ratio. Impairments for bad loans are expected to remain low, although may rise, with CET1 capital generation of between 1.7 and 2 percentage points.
Author holds shares in Lloyds Banking Group.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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