What Lloyds Banking Group PLC’s Results Really Meant


It’s hard to see the wood for the trees when navigating the dense forest of the UK bank’s results. Lloyds (LSE: LLOY) (NYSE: LYG.US) is no exception: its 132-page announcement reports underlying, statutory, core and non-core profits.

So I’ve taken to applying my own consistent, judgmental analysis to banks’ income statements, sifting them into two figures: underlying profits — generally, what the bank would like their profits to be; and statutory profits before the fair value adjustment of the banks’ own debt (FVA) — that’s the warts-and-all bottom line. You can see my analysis of Barclays‘ results here.

FVA — Lloyds calls it ‘own debt volatility’ — is a meaningless accounting adjustment which counter-intuitively represents changes in the market value of the bank’s bonds. Fortunately for Lloyds, it’s not a significant figure. These are the last three years’ results for Lloyds:





Underlying profit before tax




Exceptional/one-off items












Statutory profit before tax




Statutory profit before FVA 





What matters is the top and bottom lines. At both the underlying and statutory level, Lloyds has shown remarkable improvement, with a near-tenfold increase in underlying profit in two years, and a statutory loss turned into a marginal profit.

The difference between underlying and statutory profit is made up of one-off costs (including £1.5bn of restructuring costs in 2013) and costs and provisions for regulatory misdeeds: in Lloyds’ case, this is mainly PPI mis-selling. Restructuring and mis-selling costs should fall away in the next year or two, which gives a clue to Lloyds’ future profitability.

It adds credibility to CEO António Horta-Osório’s claims that Lloyds is becoming a ‘normal’ bank again. A further £35bn of bad assets were shed, leaving £64bn more to go. The capital position is healthier, with a “CET1” ratio of 10.3% and leverage of 4.1%: Barclays was forced to undertake a rights issue to get that ratio up to 3%.

Making hay

With the push of economic growth and a vibrant housing sector, Lloyds is enjoying a moment in the sun. Resumption of dividend payments should turn it into a respectable income stock by next year. But trading at 1.7 times tangible net assets, there isn’t much margin for error.

Banks produce a welter of information and sifting the really important numbers from the fog of data is difficult for even the most expert analysts. I've focussed on the income statement here, but also important are aspects such as balance sheet quality and liquidity. To help you understand the banking sector, 'The Motley Fool's Guide to Investing in Banks' identifies six key ratios with which to compare the UK banks.  What's more it explains each of the ratios, so you can interpret new results as they are reported. You can get the guide downloaded to your inbox by just clicking here -- it's free.

 > Tony owns shares in Barclays but no other stocks mentioned in this article.