Markets reacted coolly to last week’s half-year results from domestic financial services behemoth Lloyds Banking Group (LSE: LLOY), but I think markets got it wrong. The stock fell 2% in early trading on Friday yet profit growth is strong and the results mark yet another step towards returning the bank to its former status as one of the steadiest income stocks on the FTSE. The black horse is back.
Big profits
Lloyds’ recovery has taken time and isn’t complete yet, but just look at the progress that has been made. The bank is now fully back in private ownership, after handing taxpayers a surprise £900m profit. Underlying first-half profits rose 8% to £4.5bn, while total income climbed 4% to £9.3bn. Lloyds cut its operating costs by 1% to £4bn and incurred impairment charges of just £268m, showing the quality of its asset base. It also boasts a healthy common equity tier 1 ratio of 14%, or 13.5% after payment of its dividend.
Last week, Lloyds posted a statutory first-half profit before tax of £2.5bn, up a steady 4%, despite incurring an additional £1bn of conduct charges in the second quarter, primarily in respect of PPI, plus another £540m of other misconduct charges, including the costs of the redress scheme for mortgage customers who fell into arrears. It was these conduct charges that investors chose to focus on when marking down the stock. A little unfairly in my opinion, because finally there is some light at the end of the tunnel.
Goodbye, PPI
I wasn’t particularly surprised by the provisions, nobody who has followed this saga will be. An increase was always likely as the deadline for claims loomed every closer. Claims continue to pour in at an average rate of 9,000 a week. Customers have to file their complaint by 29 August 2019 and yes, I know that is still two years away but the clock is ticking, we have a definite cut-off date, and Lloyds now has a £2.6bn PPI war chest, including today’s provisions, which may see it through to the claims deadline in August 2019. Afterwards, its future should look clearer.
The bank’s net interest margin climbed slightly to 2.85%, up from 2.74% last year. Its restructuring continues, the lack of an investment bank operation reduces risk, and although its domestic focus leave it exposed to Brexit fears, it makes for a clearer, simpler structure.
Dividend delight
Best of all, there is the income. Lloyds raised the interim dividend 18% to 1p a share with the yield now forecast to hit 5.9% this year, and 6.5% in 2018. Yet the stock currently trades at just 9.1 times earnings, while its price-to-book ratio of exactly one confirms you are not overpaying for the stock.
I am impressed to see Lloyds post conduct charges of £1.6bn and still deliver a massive profit. I am also pleased to see its commercial banking division performing strongly. Low levels of loan impairments show the slowing UK economy isn’t inflicting much damage yet. The government is no longer selling off Lloyds shares in the marketplace, giving support for the share price. Today’s 66p looks an attractive entry point. Buy today and let this stock carry you all the way to retirement and beyond.
