Lloyds Banking Group PLC (LON:LLOY) posted a 23% increase in first quarter profit, boosted by the MBNA credit card business and lower payment protection insurance (PPI) claims.
Statutory profit before tax in the three months to March 31 rose to £1.6bn from £1.3bn the same period a year earlier, driven by a 6% increase in underlying profit to £2.0bn from £1.8bn.
The results included a £90mln charge related to claims for the payment protection insurance mis-selling scandal, compared to £350mln last year., it said in a statement.
The Financial Conduct Authority recently launched another advertising campaign featuring the robotic head of Arnold Schwarzenegger in an effort to encourage those affected by PPI to put in claims before the August 2019 deadline.
"PPI costs are much lower than last year, and this is a theme we can expect to continue for the UK banks," said Laith Khalaf, senior analyst at Hargreaves Lansdown.
"As the largest source of compensation, Lloyds also stands to be the biggest beneficiary of PPI disappearing in the rear-view mirror.
"It's not entirely out of the woods yet though, with another 18 months until the FCA claims deadline, and we wouldn’t be entirely surprised to see further costs along the way, as compensation applications ramp up the closer we get to the cut-off date in August 2019."
MBNA benefits credit card portfolio
Net income climbed 4% to £4.3bn from £4.2bn as growth in net interest income offset a decline in other income.
Net interest income rose 8% to £3.1bn on the back of a 13 basis points gain in the net interest margin to 2.93%, with a strong performance in MBNA mitigating asset pricing pressure.
Other income dropped 5% to £1.4bn from £1.5bn, reflecting higher weather-related insurance claims, lower bulk annuity business, transaction flows in the Commercial Banking business and changes to overdraft fees that came into effect in November.
READ: Lloyds announces shake-up of overdraft fees for retail customers
"Rising interest rates are positive for the banking sector, and Lloyds is also benefitting from the purchase of the MBNA credit card portfolio, as this kind of debt yields significantly more for banks than mortgage borrowing, albeit with greater risk," Khalaf said.
The bank strengthened its balance sheet, raising the common equity tier 1 capital ratio by 0.2 percentage points (pp) in the quarter to 14.1% after dividends.
The cost to income ratio improved by 4.1 pp to 47.8% while the return on tangible equity edged up 3.5pp to 12.3%.
Dividend yield 'attractive' and capital position robust
"The capital cushion is robust, net interest margin continues to grow, whilst there are further noticeable improvements to the cost/income ratio and the return on equity," said Richard Hunter, head of markets at Interactive Investors.
"Meanwhile, the previously announced £1bn share buyback is supportive and the dividend yield of 4.6% (projected 5.4%) provides a compelling attraction to income-seeking investors."
Higher impairments 'slightly troubling'
However, impairment provisions rose to £258mln from £127mln last year, which Hunter thinks is "slightly troubling given a fairly benign economic backdrop" but the bank has stressed that it is seeing little deterioration in credit quality at present.
He added: "This could become relevant in the event of a downturn in UK fortunes, especially given the bank’s exposure through its credit card business. From a wider perspective, the ongoing cost of the transformation towards becoming a digitised provider and the inevitable overhang of regulatory requirements could place a drag on growth."
Financial targets for 2018 unchanged
Chief executive Antonio Horta-Osorio said the bank has made a strong start to the year with no change to its financial targets for 2018.
“In the first three months of 2018 we have again delivered strong financial performance with increased profits and returns, a significantly reduced gap between underlying and statutory profit and a strong increase in capital,” he said.
“The UK economy continues to be resilient, benefiting from low unemployment and continued GDP growth. Asset quality remains strong with no deterioration seen across the portfolio. We expect the economy to continue to perform along these lines during 2018.”
Lloyds puts strategic plan into action
He added the lender has started to implement its strategic initiatives to become a “digitised, simple, low risk, customer-focused UK financial services provider”.
Earlier this year, Lloyds announced a three-year strategic plan to upgrade its digital offering and cut costs.
In an effort to bring down costs and focus on online banking, the company has been closing down branches. It is targeting costs of below £8bn by 2020, which represents cuts of £180mln compared to 2017.
The bank, which was bailed out by the taxpayer during the 2008-09 financial crisis, returned to private ownership last May following successful turnaround under Horta-Osorio.
Shares fell 0.51% to 65.78p in morning trading.