Lloyds bring it on makes sense

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 29^th 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.

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