Lloyds flags uncertainty for outlook warning

A last-minute surge of PPI costs damped the quarter but that is the least of the bank’s worries

It’s difficult to see how Lloyds Banking Group could have performed more robustly given the specific challenges of the quarter. Looked at this way, perhaps the accelerated downturn of its shares on Wednesday is not entirely justified. The bigger picture helps explain why investor confidence continues to ebb. At last check, the shares had trimmed 4% more off a 2019 advance that stood almost 30% higher at mid-April. Now, they’re barely up 2% for the year and looking likely to turn negative.

The bank points to a fresh charge of £500m linked to payment protection insurance (PPI) as primarily responsible for missed second-quarter expectations.

The key misses

Statutory pre-tax profit: £1.294bn vs. £1.76bn estimate
2Q net interest income: £3.06bn vs. £3.16bn consensus
2Q underlying profit: £2.03bn, below company-compiled £2.05bn consensus
2Q net interest margin: 2.89% vs. 2.94% estimate

Bloomberg consensus unless specified

But beyond the headline misses, the outlook weighs more. Hopes were pinned on the possibility that rising efficiency and lower regulatory and business capital needs, could enable swifter dividends rises and share buybacks. The interim dividend rose 5% to 1.12 pence; in line with expectations, which is exactly the point.

“Below the line charges”, including the last-minute wave of PPI costs have scuppered those hopes for now. Lloyds’ boast of sufficient capital for growth, regulatory requirements, uncertainty and a ‘management buffer’, have come a cropper as it now expects 2019 leeway to be at the lower end of a 170-200 basis point range. It implies that’s the reason why it’s holding back from a nearer term increase of capital returns. A fairly solid first-half despite misses adds a random variable.

Total costs fell a more than forecast 5%, operating costs -3%
Cost: income ratio on course for low 40% levels by end-2020, better than comparable rivals
The wealth management push is bearing early fruit whilst insurance is stable

“Continued economic uncertainty could impact” the outlook as clarified on Wednesday, the bank says. Despite economic “resilience” it is nodding to Brexit risks for a decision to hang fire on pay-outs, perhaps for even longer than the first quarter of 2020.

More broadly, if the first half was sobering for Lloyds investors, it should be more worrying for RBS holders. They will find out how that bank fared in the first half on Friday. RBS faces a sharper delta from declining economic confidence and is the runner-up in Britain’s mortgage market. The stock was down 3% at time of writing and is slightly weaker for the year than Lloyds’. On the basis of results from its bigger rival, it’s set to continue leading the downside.

Normalised: Lloyds Banking Group, RBS – year-to-date [31/07/2019 13:14:42]

Source: Bloomberg/City Index

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.