Lloyds Banking Group PLC (LON:LLOY) achieved a strong start to the year but analysts have raised concerns about higher impairments and the prospect of further payment protection insurance (PPI) claims.
The bank reported a 23% increase in first quarter statutory profit to £1.6bn, slightly below analysts’ expectations.
Shares fell 2% to 65.8p in afternoon trading.
READ: Lloyds first quarter profit boosted by MBNA and lower PPI charges
Results included a £90mln for claims related to the PPI mis-selling scandal but this was much lower than the £350mln charge recorded last year.
More PPI claims on the horizon
However, one analyst said the bank faces further PPI claims ahead of the Financial Conduct Authority’s 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.
“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.”
Impairment provisions rise
The bank’s impairment provisions also rose to £258mln from £127mln last year.
Richard Hunter, head of markets at Interactive Investors, said the rise in impairment provisions is “slightly troubling given a fairly benign economic backdrop, although the bank has stressed that it is seeing little deterioration in credit quality at present”.
“This could become relevant in the event of a downturn in UK fortunes, especially given the bank’s exposure through its credit card business.”
Hunter added that the bank’s investment in becoming a digitised provider and pressure from regulators could place a drag on growth.
Nevertheless, he noted that the capital position is robust, the net interest margin continues to grow and there are further improvements to the cost to income ratio and the return on equity.
Dividend yield and share buyback
A dividend yield of 4.6% and a £1bn share buyback that started in March also provides a compelling attraction to income-seeking investors, Hunter added.
David Madden, market analyst at CMC Markets, said a healthier balance with the common equity tier 1 capital ratio rising to 14.4% from 13% at the end of last year should reassure investors.