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Lloyds Investors Welcome The Slow Path To Grow

Published 21/02/2018, 13:28
Updated 14/12/2017, 10:25

Modest applause

Shares in Britain’s biggest lender are up around 2% as I write; somewhat belying the clearest signs seen for years that it’s firing on all cylinders. News of the group’s highest pre-tax profit since 2006—a 24% advance to £5.3bn—is tempered by a £430m consensus miss. The stock has drifted from a modest opening rise on Wednesday to an even more modest uptick.

Conduct

A more material drag in the report in our view is the persistent rise in conduct-related costs. ‘Other conduct provisions’ of £865m fell on the year but those for PPI rose £650m to £1.6bn, meaning the total was a fifth higher than 2016. Lloyds (LON:LLOY) is committed to addressing 'historic conduct issues', of course. And the drop off in provisions for more recent misconduct is encouraging. By nature though, the direction of conduct costs is an unknown. The prospect that revenue could rise by as much as 20% by stemming missteps is probably far-fetched given that Lloyds’ already huge deposit base is still inching higher. Plus LBG’s loan-to-deposit ratio now stands at 110%, up 1 percentage point.

More buybacks possible

Even if such impairments fail to abate though dividends could keep growing at the current snail’s pace. Furthermore, further disbursements of proceeds from best-in-class efficiency and capital management look likely. Note LBG’s key capital ratio would be a robust 13.9% after dividends and if the maximum £1bn buyback announced today was offered. Admittedly, a future economic downturn that edges defaults higher and slows deposits and loans could crimp such largesse. That’s why the shares have crept just 5% higher over a year, despite Lloyds’ return to rude health.

No fast moves

Nevertheless, shareholders also welcome the lack of flashy moves in Lloyds’ new three-year plan. One tacit message it conveys is that as CEO António Horta Osório enters his seventh year at the helm, he is still not tempted to kick-start faster growth by taking on more risk. 'Small insurance acquisition opportunities' might pique Lloyds’ interest, but the plan retains a largely organic approach. It even echoes what we assumed to be long-standing aims: “Transform the Group into a digitised, simple low risk, customer focused” provider. The cost will be a little more than £3bn, or a contained 5% of total income a year. The digital focus is sensible, not least due to likely cost benefits. The move could also optimise LBG’s customer data use just ahead of new rules that force banks to open data access to rivals.

Hopes that rising UK interest rates could be a significant tailwind for Lloyds continue to look on the over-optimistic side. Still, a cautious (not to say boring) Lloyds can continue to satisfy patient investors, so long as the economy behaves as sensibly as the group.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.

Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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