The release of Lloyds (LSE: LLOY) first-quarter trading update on Thursday coincided with a period of heightened uncertainty for the UK economy. GDP growth forecasts have been reduced over the last couple of years, while Brexit has contributed to an increase in the scale of political challenges that may be ahead.
Despite this, the company’s results suggest that it is performing relatively well. Since it trades on a low valuation and offers an improving income investing outlook, it could have an appealing risk/reward ratio for long-term investors.
In the first three months of the year, Lloyds recorded an increase in underlying profit of 8% to £2.2bn. It was driven by increased net income and lower operating costs. Net income increased by 2% to £4.4bn, with a net interest margin of 2.91% being delivered. Costs moved 4% lower to just under £2bn, with lower operating costs and remediation charges helping to make the company more efficient. Evidence of this can be seen in a cost-to-income ratio of 44.7%, which is significantly lower than many of its FTSE 100 banking rivals.
The bank has made progress in a number of key areas during the first quarter of the year, despite the risks posed by an uncertain period for the UK economy. For example, the migration of MBNA has been completed ahead of schedule, with an increased return on investment of 18% now expected. Schroders Personal Wealth is on track to launch in the second quarter, while there has been further progress on digitising the group and enhancing its customer proposition.
In the current year, Lloyds is forecast to post a rise in net profit of just 2%. While this would represent a disappointing result, when the slow growth of the wider economy is factored in, it is perhaps to be expected. Crucially, the bank is making progress on reducing costs, with its cost-to-income ratio forecast to fall every year and be in the low 40s at the end of 2020. Equally, the investment it is making in its digital operations and in improving the customer experience could lead to greater differentiation versus sector peers.
Since the group now has tangible net assets per share of 53.4p, it trades on a price-to-tangible-book ratio of 1.2. This suggests that it offers a wide margin of safety, and may be worthy of a higher valuation over the long run. Similarly, a dividend yield of 5.7% from a payout that is covered 2.1 times by profit indicates that the stock could have income investing potential.
Therefore, while it may face challenging operating conditions due in part to Brexit uncertainty, Lloyds’ recent performance suggests that it has a robust outlook. With a low valuation and a high income return relative to the wider FTSE 100, it could offer impressive total returns in the coming years.
According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…
And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...
It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…
But you need to get in before the crowd catches onto this ‘sleeping giant’.
Peter Stephens owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.