Four months on from Britain’s historic vote to leave the EU, how has Lloyds (LSE: LLOY) been performing, what’s the outlook for the business and are the shares worth buying today?
I’m looking at the company’s Q3 results this morning for answers to these crucial questions.
Performance
Chief executive António Horta-Osório said the bank had “delivered a robust underlying performance” for the first nine months of the year. The table below puts some of the key Q3 numbers into the context of previous quarters.
| Q3 2016 | Q2 2016 | Q1 2016 | Q4 2015 | |
| Total income (£bn) | 4.27 | 4.49 | 4.38 | 4.43 |
| Underlying pre-tax profit (£bn) | 1.91 | 2.11 | 2.05 | 1.76 |
| Statutory pre-tax profit tax (£bn) | 0.81 | 1.80 | 0.65 | (0.51) |
As you can see, total income slipped lower in Q3, and the previously rising trend in pre-tax profit reversed, showing a 4.5% decline to £1.91bn from £2.11bn in Q2.
Meanwhile, warts-and-all statutory pre-tax profit, which had been getting close to matching the underlying number in Q2, fell dramatically in Q3 to £0.81bn from £1.8bn. This was due to Lloyds taking a further provision of £1bn for mis-sold payment protection insurance, which however it expects to be its last major provision.
Despite the PPI hit and the company pension scheme swinging from a £430m surplus to a £740m deficit over the quarter, Lloyds maintained a strong capital position, with its core tier one (CET1) ratio moving up to 13.4% from 13%.
Overall, the result was broadly as expected. Lloyds hasn’t seen any significant change in activity from consumers since the Brexit vote, but has seen some deferring of investment and borrowing by businesses, as reflected in the Q3 performance.
Outlook
Lloyds has reaffirmed its full-year guidance on net interest margin, cost-to-income and asset quality ratios and CET1 capital generation. However, the bank offered no guidance for 2017, with Horta-Osório saying it’s still “too early to assess any longer-term trends.”
Uncertainty continues to weigh on investor sentiment, with the shares falling over 3% to 53.5p this morning, and 26% down from the 72p they were trading at prior to the referendum result.
Worth buying?
The share price is depressed and analysts are forecasting double-digit EPS declines this year and next. Does the current valuation offer a margin of safety in the event that Lloyds puts in an even gloomier performance than that already expected by the City?
The shares are trading at 7.3 times this year’s forecast earnings and 8.2 times 2017 forecasts. This compares with the FTSE 100 long-term average of 14, so there does appear to be scope for earnings to disappoint without hammering the shares too badly.
Lloyds paid an interim dividend of 0.85p and in today’s results referred to “total 2016 foreseeable dividends of 2.55p,” giving a yield of 4.8% at the current share price. While the board added that the actual final dividend payment will only be assessed at the end of the year, again there appears scope for the dividend to undershoot but to still give a very acceptable yield.
In my view, the economic outlook would have to deteriorate pretty severely for investors to suffer a major disappointment. Even if that were to happen, Lloyds should still deliver over the longer term with its “UK-focused, simple, low risk business model.” As such, I reckon the shares are worth buying today, despite the near-term uncertainty.
