Banking goliath Lloyds (LSE: LLOY) released its freshest batch of results on Wednesday, and it made for somewhat concerning reading. Indeed, the market has responded by sending shares in the company 5% lower in mid-morning trading.
The business reported that underlying profit sunk by 8% between July and September, to £1.97bn, while total income slipped 4% during the period to £4.2bn.
The insipid top-line performance was prompted by a 13% collapse in ‘other income’ thanks to challenging conditions at its Commercial Banking division, as well as the impact of asset sales. Lloyds noted that “while we expect other income to recover in the fourth quarter, we now expect [it] for the full year to be slightly below 2014“.
Not only did these results miss forecasts, but Lloyds’ latest numbers once again highlighted the enduring headache of PPI penalties. The bank set aside yet another £500m in quarter three to cover claims related to the mis-selling of the instruments, taking the total bill to a shade under £14bn.
But on the plus side…
However, there were a number of things to be positive about following today’s results. For the three months to September Lloyds’ net interest margin jumped to 2.64%, up from 2.47% in the corresponding 2014 period. Consequently, the bank hiked its full-year projection to 2.63% from the prior forecast of 2.6%.
Elsewhere, total costs dropped 2% in the period, to £2.1bn, while impairments slid by a third to ‘just’ £157m thanks to improved economic conditions and the fruits of restructuring.
Lloyds saw its balance sheet improve further during July-September, too — the bank’s CET1 ratio registered at 13.7% as of the end of the period, up from 13.3% in the previous quarter and 12.8% from the close of last year.
So is the bank a ‘buy’ following today’s results?
Well, I certainly wouldn’t say today’s news gives fuel for investors to plough into Lloyds. Naturally the firm’s high street-focused approach makes it highly sensitive to the wider state of the economy, and with latest ONS figures this week showing UK GDP slow to 0.5% in July-September from 0.7% previously, I believe Lloyds’ top line could show signs of further struggle at the time of the firm’s next results.
Still, the splendid work achieved by the bank’s restructuring strategy was laid bare once again as costs fell and the capital buffer rose, giving the firm’s dividend outlook a shot in the arm. And while PPI remained a drag, provisions of half a billion pounds in the quarter fell from £900m in the same 2014 period. And the FCA’s plans to implement a 2018 cut-off for new claimants suggests that things could get still easier for Lloyds in the penalty stakes.
A projected 6% earnings bump in 2015 leaves Lloyds dealing on a P/E rating of just 9 times, a reading many would argue represents great value and fairly reflects the risks facing the bank. And City projections for a dividend of 2.5p per share creates a very decent 3.3% yield. Still, investors should be mindful that today’s patchy results could represent the start of a downward trend over at Lloyds, and be watchful of signs of further deterioration in the British economy.
