Lloyds Bank reports 83 rise in Q3 Profits

Lloyds Banking Group announced on Tuesday an 83% rise in third quarter profits as improving margins, lower costs and a reduction in bad debts helped to continue the banks journey on the road to recovery.

The bank saw third quarter profits come in at £1.52bn compared to £831m a year ago for the same reporting period with a 7% rise compared to the second quarter. The number (£1.52bn) largely met the majority of analyst forecasts and so the rise in profits was not a huge surprise.

For the first nine months of the year, underlying profits now stand at £4.4bn with returns on risk-weighted assets more than doubling to 2% (from 0.74%).

Loan to deposit ratio also improved to 114% from 121% at the end of last year.

Forward Looking

In terms of the forward looking elements of the interim management statement, Lloyds announced that net interest margin is now expected to be 2.11% for the full year compared to 2.10% originally forecast. Non-core assets are expected to around £66bn, with non-core assets at £26bn at the end of the year and £15bn by the end of 2014. Capital position guidance (fully loaded ratio remains forecast at above 10%) and savings expectations remain unchanged in the statement with costs expected to fall to around £9.6bn for the full year.

Lloyds set aside another £750m to cover PPI miss-selling claims, meaning that the bank has now set aside a total of £8bn for PPI alone, a huge number and the largest in the UK banking sector.

Progress remains the key word

Progress continues to be the key word when it comes to Lloyds Banking Group in 2013. The rise in underlying profitability whilst the board continues to reduce Lloyds’ exposure to risky assets and strengthen the balance sheet despite the rise in charges related to PPI miss-selling claims.

What CEO Antonio Horta-Osorio has achieved in the first nine months of this year has been extremely positive and no easy task.

Lloyds Shares remain impressive

Shares have been actively bought by investors in the run up to today’s Q3 interim management statement. Prices have rallied 13% in the last two weeks alone but were sold off from yesterdays 81.6p high ahead of this morning’s earnings statement.

Shareholders have to be delighted with Lloyds’ performance in the last two years. In November, shares were trading at 21p. In May 2012 shares traded at 24p. Today they are trading at 79p. That’s a huge rise in a short space of time and investor faith is being rewarded handsomely.

First Time Buyers | Help to Buy Scheme

CEO Horta-Osorio also claimed that the bank strongly supports the governments Help to Buy Scheme and lent £6.7bn to over 56,000 first home buyers in September alone, whilst also exceeding 60,000 first time buyers (its government commitment) in October – when the government brought forward its Help to Buy scheme.

The Help to Buy Scheme remains a deep concern of mine given the sharp increase in house price trajectory since the Scheme was announced. With most APR’s for 95% loans being offered on the Scheme ranging from 5.2% to 5.6%, I have significant concerns on whether monthly repayments can be sustainable to first time buyers when, and it’s only a matter of when, interest rates rise. Current market expectations are for the first rate rise to take place in the next 18 months to 2 years. This rate rise could significantly impact repayment amounts for buyers on short term fixed mortgages. If first time buyers are struggling to save for a deposit now, will they be able to afford an additional £400-£500 a month in repayments? This is the heart of my concern over the scheme.