The performance of the Lloyds Banking Group (LON:LLOY) share price over the last few months has been disappointing, despite a decent performance in Q1. This appeared to be predicated on the basis that after such a good Q1 the bank would see a bit of a slowdown in Q2.
Notwithstanding Brexit concerns Q1 was fairly decent as statutory pre-tax profits rose to £1.6bn, slightly below expectations of £1.88bn but still well above the levels seen in Q4, and in line with those in Q1 2018.
The picture for Q2 was always likely to be much more tricky given that the UK economy slowed quite significantly during April and May, in the wake of the extension of the Brexit deadline at the end of March.
This belief has been reflected in a share price slide from the peaks in April just above 65p a share.
One of the more notable items in the Q1 numbers was a £100m provision in respect of PPI and with the new deadline fast approaching there was always the prospect of another lumpy provision in the Q2 numbers.
This has turned out to be the case though the extent of the provision is somewhat of a surprise at £500m and has taken quite a lump out of its profits for Q2. This brought the statutory pre-tax profit numbers down to £1.294bn, significantly below estimates of £1.76bn, sending the shares down to six month lows, however it is important to look at that in the context of the latest PPI provision.
In terms of income we have also seen a modest slowdown, with a decline to £3.06bn from £3.08bn in Q1. The slightly weaker interest rate environment over the last quarter has also seen net interest margin drop to 2.89% from 2.91%, which is still pretty healthy.
The bank announced an increase in the dividend to 1.12p a share, an increase of 5% a year ago.
Overall loan demand has remained steady as have customer deposits, with mortgage demand slowing slightly from the same period a year ago.
There has been reports that Lloyds is in discussions with Tesco (LON:TSCO) with respect to taking on its mortgage book, which of course would make the UK focussed bank even more sensitive to the vagaries of the UK economic cycle.
On balance these are a decent set of numbers with statutory pre-tax profits for the half year at £2.9bn, against a tough economic backdrop, with management appearing to adopt a responsible attitude to managing risk with a cautious update against such a difficult economic backdrop.
This attitude is reflected in the statement with management acknowledging that business confidence and investment has slowed, and warning that due to higher charges the capital build requirements for the year are likely to be at the lower end of the target range for 2019.
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