Lloyds Banking Group plc (LON:LLOY) today reported its highest full year pre-tax profit in a decade and announced a special dividend as payment protection insurance provisions (PPI) were slashed.
Statutory pre-tax profit was £4.2bn in the year to 31 December 2016, more than double the £1.6bn recorded a year earlier but below analysts’ estimates of £4.4bn.
The FTSE 100 lender raised its total ordinary dividend 13% to 2.55p from 2.25p and recommended a special dividend of 0.5p per share. The group said it expects ordinary dividends to increase "over the medium term" with a dividend payout ratio of at least 50% of sustainable earnings.
Investors had speculated the special dividend would be scrapped given Lloyds is spending £1.9bn on buying MBNA’s credit card business.
WATCH: Wilson King's Richard Hunter on why Lloyds is looking like a 'fairly stable bank'
Lloyds said strong capital generation allowed the group to handle the impact of the MBNA credit.
The common equity tier 1 ratio (CET1) edged up to 13.8% at 31 December from 13.0% the same time the prior year, largely due to fewer PPI provisions of £1.0mln, down from £4.0mln.
The provisions meant the bank cut 19% off its bonus pool to £393mln, though it was 11% higher than last year. Chief executive Antonio Horta-Osorio was paid £5.5mln for 2016, down from £8.7mln a year ago
Total income fell slightly to £17.5bn from £17.6bn but Lloyds said this was more than offset by lower operating costs. Operating costs declined to £8.1bn from £8.3bn.
The asset quality ratio climbed one basis point to 0.15%. However, impairment charges rose to £645mln from £568mln, which Lloyds said was due to a reduction in the level of provision releases and write-backs.
Underlying profit dropped to £7.8bn from £8.1bn, reflecting the higher impairments.
“Looking forward the group expects a further reduction in releases and write-backs in 2017 and, as a result, the asset quality ratio to increase to around 25 basis points,” Lloyds said.
The bank also expects a return on required equity of between 12.0% and 13.5% and a return on tangible equity between 13.5% and 15.0% in 2019. The group anticipates it will generate between 170 and 200 basis points of CET1 capital per annum, before dividend payments, “going forward”.
The net interest margin is projected to be more than 2.7% in 2017. before the impact of MBNA.
Shore Capital said the guidance for 2017 would appear to be better than implied by consensus market estimates, notably in respect to net interest margins. The broker expected net interest margins of 2.68% compared to the consensus forecasts of 2.67%.
"For fiscal year December 2017 we currently forecast adjusted pre-tax profit of £7.6bn, adjusted diluted earnings per share of 7.1p, a Total dividend of 4.00p (including a 1.15p special – the Total being comfortably covered by anticipated capital generation) and tangible net asset value per share of 57.8p."
ShoreCap issued a 'buy' rating and target price of 67p, saying it remains posiitive on the stock and sees it as attractively valued compared to its major UK banking peers.
"Lloyds’ shares have increased by 40% since reaching a post EU referendum low of 48p in July as the UK economy has held up better than expected, although Lloyds’ performance has lagged the FTSE350 banking sector which has increased by 48% over the same period," the broker noted.
"As such, the shares are now trading broadly in line with our current fair value estimate of 65p which we provisionally expect to increase to around 75p to reflect roll forward and a higher long-term return on tangible equity assumption."
Shares rose 3.89% to 69.39p in morning trade.
Meanwhile, the bank confirmed reports that it is close to selecting Berlin as a European base to secure market access to the European Union once the UK exits the bloc.
Horta-Osorio said the UK’s decision to leave the European Union means "the exact nature of our relationship with Europe going forward remains unclear and the economic outlook is uncertain."
The taxpayer owns 5% of Lloyds after the government sold off shares following its bailout during the 2008 financial crisis.
The results follow disappointing full year earnings from HSBC Holdings plc (LON:HSBA) yesterday. HSBC reported pre-tax profit of $7.1bn in the year to 31 December 2016 on a reported basis, down from $18.9bn the previous year and compared to analysts' expectations of $14.4bn.
Read: HSBC's full year profits miss forecasts on one-off costs
The drop in profits reflected a $3.2bn impairment of goodwill in the company’s global private banking business in Europe and the impact of the sale of its operations in Brazil.
-- Adds bonus payment, Brexit plans, broker comment, share price reaction, video --