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Is Lloyds' Recovery Story Set To Continue?

By CMC Markets (Michael Hewson)Stock MarketsJul 24, 2017 12:51
Is Lloyds' Recovery Story Set To Continue?
By CMC Markets (Michael Hewson)   |  Jul 24, 2017 12:51
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Earlier this year Lloyds Banking Group (LON:LLOY) reported its best annual results in ten years, confounding fears that the Brexit vote might have adversely affected its largely UK focussed business.

The bank has also continued the process of streamlining its business along more digital lines at the beginning of Q2 by announcing another 325 job losses and the closure of another 100 branches.

In another milestone, the UK government finally disposed of the remainder of its stake in the bailed out bank, in the process recouping the total sum of the bailout of £20.3bn, plus a little bit more.

In its Q1 trading update the trend in profitability continued with the bank reporting a profit of £1.3bn, almost doubling its profits from a year ago; so investors will be hoping for further progress in this week’s trading update.

Legacy issues have remained a drag as the bank set aside another £450m in respect of PPI mis-selling and compensation towards those customers who were victims of the HBOS fraud scandal.

This looks set to replace PPI as the next banana skin for Lloyds Bank management, and while the independent review being announced could well help draw a line under this scandal, there is potential for further sums to be set aside in respect of these cases. These are likely to be small change compared to the £17.4bn already paid out as a result of PPI.

But nonetheless a swift resolution here will enable Lloyds to finally draw a line under the poison pill it had swallowed as a result of the misguided intervention to bail out HBOS all those years ago.

Away from the various scandals, the underlying business has also improved with the bank’s net interest margin also improving, rising to 2.8% from 2.68% a year ago, despite last year’s rate cut by the Bank of England.

Despite this continued outperformance the share price of the bank still remains just below its pre-Brexit peaks, with the hope that the upcoming numbers for Q2 could well prompt a retest.

With doubts about the future of CEO Antonio Horta Osorio seemingly settled earlier this month when he announced a shakeup of senior management as the bank looks to further integrate its recent acquisition of MBNA into its retail bank.

Management also announced a greater focus on wealth management in order to broaden its product diversity at a time when the bank is probably more exposed than its peers to the winds of change likely to blow through the UK economy.

Lending will be a particular focus given recent warnings from the Bank of England about lending criteria on mortgages and more generally.

We’ve already seen from US banks that they are setting aside higher provisions for defaults on credit card lending. Given the similarities between the two economies: is this sensible planning or an early warning sign of rising distressed credit?

The UK economy has continued to hold up fairly well but there are signs that we are starting to see a soft patch in consumer spending habits, as higher prices weigh on spending.

The improvement in the UK economy has also helped in a significant reduction in the amount of non-performing loans on the bank's loan books, which has helped boost profits as bad loan valuations decline, though this might change if some of the slowdown being seen in house prices starts to erode these valuations.

As the Brexit process gets under way in the coming months the outlook for this extremely focussed UK bank is likely to become clearer, however one thing does appear certain: as its legacy issues diminish, the bank should be able to keep more and more of its profits - which means shareholders are more likely to benefit in the form of more consistent dividends. This week’s trading update could well go further in reinforcing that.

DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.

No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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Is Lloyds' Recovery Story Set To Continue?

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Is Lloyds' Recovery Story Set To Continue?

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