MARKET COMMENT
Lloyds TSB: Nice For Income Investors

By Bruce Jackson (TMFGoogly)
February 15, 2002

Today's figures from Lloyds TSB (LSE: LLOY) highlight just how badly they needed Abbey National (LSE: ANL). Or for that matter, how badly they need to make another big acquisition, whether that be here in the UK or whether it be abroad.

Banking is a very competitive business, and with top line income growth relatively hard to come by, the easiest and quickest way for banks to grow profits is by slashing costs. Lloyds are the past masters of cost-cutting and cost control, and today's figures are no exception. In fact, the "efficiency programme" is to be accelerated in 2002, resulting in a net reduction of in the region of 2000 heads. Whilst that may seem impressive to shareholders (if not to existing Lloyds staff), the real meat in the cost-reduction pie comes with acquisitions. Branch rationalisation (closures to you and me) and combining of head and back office functions are areas where a bank like Lloyds has had huge success in cutting costs. The benefits almost always exceed expectations.

Of course Lloyds maintain that their focus is on organic growth. They quite rightly don't want to be seen to be desperate for an acquisition, and are apparently willing to bide their time, waiting for the right opportunity. However, they may not be prepared to sit on their laurels for too much longer, as evidenced by Chief Executive Peter Ellwood's comment that Lloyds "...continue to review all opportunities for potential mergers or acquisitions." Standard Chartered (LSE: STAN) continue to lead the City's rumour mill, for what it's worth (usually not a lot!).

So what are shareholders and potential shareholders to make of Lloyds results? Well, stock markets can go up as well as down. Lloyds found that out to their cost in 2001, as £648m was shaved from their operating profit due to "short term fluctuations in investment returns". Bad debts have understandably risen, especially given Lloyds exposure in Argentina, not to mention the overall weakening in world economies. The net result was an 8% decline in pre-tax profits and corresponding 8% fall in earnings per share to 45.2p. On a business as usual basis, stripping out all sorts of exceptional items, operating profits rose 6% and earnings per share by 7% to 57.6p. The one number not open to interpretation is the dividend, up 10% to 33.7p.

In terms of their share price, where to from here for Lloyds? At about 760p, the shares stand on a 2002 prospective price to earnings ratio (P/E) of about 13 and dividend yield of about 4.8%. In this low interest rate environment, the latter number should be of interest to income seeking investors. For those looking for capital growth to boot, Lloyds' shares are likely to keep pushing that Zimmer frame forward.

The author holds shares in Lloyds TSB.