Lloyds' shares suffer on poor results. What hope for the future?
"…you didn't know all the ways I loved you, no
So you took a chance
And made other plans
But I bet you didn't think that they would come crashing down, no…"
("Cry Me A River" lyrics).
I think of Lloyds Banking (LSE: LLOY) these days as one may a former partner; there's a certain fondness for what once was, but things have moved on, the world is very different today and the betrayal of trust means things can never be quite the same again.
And just in case you've been in a coma for the last year and a bit and don't know what I'm on about; Lloyds took over Halifax Bank of Scotland (HBOS) in January last year, underestimating how many bad loans HBOS had on its books, and had to go cap-in-hand to the government as a result.
Talk is cheap
So is there any hope for future trust? In a word, "yes", but they're still only words only at this stage and talk is cheap. Today's final results for its annus horribilis of 2009 are long on positive rhetoric but short on real performance. The market doesn't like promises and at the time of writing, Lloyds is the FTSE 100's biggest faller on the day.
The bank reported a pre-tax loss of £6.3bn, compared with a £6.7bn loss a year ago -- on a pro-forma basis including the results of Lloyds and HBOS. Impairment charges came in at a whopping £24bn, slightly higher than analysts' expectations.
Silver lining
There is the glimmer of a silver lining today, though. Lloyds said second-half impairments were down 21% from the first half and the bank expects to see a similar pace of improvement throughout 2010, with further substantial reductions in 2011 and beyond.
Despite the losses, total income was up by 12%, to £23.9bn, while costs fell by 5%. Meanwhile, the core tier one capital of 8.1% after the second fund-raising in December is some comfort.
But it's easy to say you're going to do better in the future, and that your head won't be turned by the politicians again. The taxpayer still owns 41% of what us long-term investors thought of as "our" bank; what a joke that turned out to be.
One of the main men responsible for taking the poison chalice, CEO Eric Daniels, reckons the bank is well positioned for the future. "We are building strong earnings momentum and expect our performance to improve significantly in 2010 and beyond," he said today. But just saying the worst has passed doesn't make it so. It's commendable that he waived his bonus, but this is a minor side issue.
He also says all divisions, including retail and wholesale, should show improvements in bad-debt charges this year, whist the commercial real estate portfolio should see improvement due to more stable property prices.
Private or public?
The decision to opt out of the government's scheme to insure bad loans and to raise £22.5bn through the UK's largest ever rights issue was a bold one. In doing so, Daniels managed to prevent further state ownership, unlike the Royal Bank of Scotland (LSE: RBS). But private shareholders are still uncomfortable with any direct government control. The sooner this is resolved, the better.
Quite when profitability will be restored, though, is the key issue. The brokers have distinctly mixed views on this issue, though the consensus is for a £2bn loss for the current year.
For the longer term investor, the main question is what earnings will look like in 3, 5 or even 10 years' time. Can Lloyds ever return to the kind of level that enables the bank to resume annual dividend payments not far off its current share price?
I believe it can, if it's allowed to without too much political interference; everything else is short-term noise.
More from David Holding:
David owns shares in Lloyds Banking Group.
