Date: Thursday 01 Nov 2012
In a third quarter update, Lloyds Bank said it is making progress despite delivering a statutory loss before tax of 583m pounds for the first nine months of the year, including a further Payment Protection Insurance (PPI) provision of 1bn pounds in the third quarter.
Legacy issues continue to affect its results and a provision of £2.08bn relating to its PPI business, of which £1bn was in the third quarter, was the primary driver behind the statutory loss of £583m for the first nine months of 2012, against a loss of £3.86bn in the same period in 2011.
However, the lender has reaffirmed previous guidance and says that for the full year 2012 group net interest margin is expected to be around 1.93%. The cost base will be close to £10bn by the end of the year, two years ahead of its original plan. It has lowered guidance for 2012 impairment charges to £6bn.
It also expects to reach its long-term loan-to-deposit ratio target of 100% for the core business in the first quarter of 2013, at the same time that it expects to reach a 120% loan-to-deposit ratio for the group.
Furthermore, in the nine months ending on September 30th, underlying profit increased by 148% to £1,904m. This was mainly driven by a further decrease in the impairment charge (down 40%) and a continuing improvement in cost efficiency. This increased profit was achieved in spite of the fall in income of 14%, which mainly reflected a smaller balance sheet as well as a lower net interest margin of 1.93%.
During the period in question Lloyds made further progress on strengthening its balance sheet and reducing risk, including improving its core tier 1 capital ratio to 11.5%, and continuing with its reduction of non-core assets, to the tune of £30.7bn in the first nine months of the year, to reach £110.0bn. That decrease in non-core assets than it had previously targetted for the whole of 2012 and represents substantial progress towards one of its main objectives, to reduce non-core assets to less than £70bn by the end of 2014.
This is what analysts at Credit Suisse are saying: "Underlying results were better than expected, driven by lower impairments. Results are supportive but the stock has come a long way, so trading at 0.7 times the estimated 2013 tangible net asset value (TNAV) for a 5-7% return on tangible equity (RoTE), we remain Neutral.
"Lower impairment guidance for fiscal year 2012 of £6.0bn from previous guidance of less than £7.2bn. We and consensus were already at £6.3bn. The group commented to us that they are comfortable with consensus at £4.8bn for 2013 (estimate) - we are at £4.9bn. In terms of fourth quarter implied impairment this guidance actually suggests a significant increase again in the fourth quarter, to £1.6bn."
Over at Charles Stanley meantime, analyst Nic Clarke had this to say: "We remain concerned about the outlook for the UK economy and the knock on impact that a relapse in the Euro area would have on the UK and the bank most exposed to the UK consumer. There is also the potential for further ‘banana skins’ down the road.
"The PPI redress situation has turned out far worse than expected and it is possible that issues like customer redress relating to ‘interest only’ mortgages could prove painful for the UK’s largest mortgage lender. Therefore, despite an impressive improvement in the underlying performance in 2012 our recommendation on the stock remains just a Hold."
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