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Lloyds to reveal profits nearly doubled in first quarter but Brexit means outlook uncertain

Lloyds is expected to increase its first quarter profit and dividend but the bank is largely exposed to uncertainties surrounding Brexit and the general election
Lloyds is tackling a competitive mortgage lending market

Lloyds Banking Group plc (LON:LLOY) reports its first quarter results on Thursday with analysts expecting the lender to have enjoyed a solid start to the year.

The bank, which is edging closer towards full privatisation after the government cut its stake to below 2% earlier this month, achieved its highest annual profits for a decade in 2016.

Full year profits more than doubled to £4.24bn compared to £1.6bn a year earlier, Lloyds revealed in February.

UBS expects pre-tax profits nearly doubled again in the first quarter to £1.21bn from £654mln a year earlier, largely due to absence of last year’s £790mln cost of buying back high income bonds.

The bonds, called "enhanced capital notes", were issued in 2009 to raise capital in the wake of the 2008-09 financial crisis.

Lloyds still faces some hefty charges relating to claims by customers who were mis-sold payment protection insurance (PPI) and compensation for victims of fraud at its HBOS sUBSidiary.

Earlier this month the company said it had set aside £100mln to compensate HBOS victims while it has also recently announced a further £350mln provision for PPI claims.

Lloyds to pay generous dividends…

Deutsche Bank believes Lloyds will continue to reward shareholders sUBStantially after the bank announced a special dividend at its annual results.

Lloyds has said it would increase dividends “over the medium term" with a pay-out ratio of at least 50% of sustainable earnings.

“Lloyds has paid a special dividend for two years and we expect this to continue, and to be a larger size, Deutsche said. “We expect a dividend yield of 8% for each of the next three years.”

Deutsche has forecast underlying pre-tax profits of £1.855bn for the period, with income down around 1% quarter-on-quarter, and impairments higher - but off a low base.

The analysts said they believe a key focus will be on the net interest income and net interest margin performance and outlook.

Exposure to Brexit uncertainty…

While Lloyds has been doing well at the moment, Deutsche warned of the company’s exposure to UK macro and political uncertainties.

As a UK-focused bank, Lloyds boss Antonio Horta-Osorio said at the full year results that Brexit posed a risk should the economy suffer as a result.

The bank’s outlook in the first quarter results will therefore be closely scrutinised in light of the latest developments on Brexit and news of a snap general election on 8 June.

Mortgage lending competition...

Like its banking peers, Lloyds is facing ongoing margin pressure due to a competitive mortgage lending market following the Bank of England’s decision to cut its base interest rate to 0.25%. 

Lloyds is particularly vulnerable given its standing as UK's biggest provider of mortgages and has cut its rates on home loans by 0.2-0.3 percentage points to entice homebuyers deterred by mounting political and economic uncertainty.

It now faces fresh competition from challenger bank, Yorkshire Building Society, which has brought mortgage rates to a record-low by offering a rate of 0.89%.

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