Analysts seemed to agree on Wednesday, the main focus in Lloyds Banking Group PLC’s (LON:LLOY) first-half results can be summed up in three letters – PPI.
The FTSE 100-listed lender surprised some as it took a fresh £460mln provision for the payment protection insurance (PPI) mis-selling scandal, although the amount was a lot less than last year’s provision.
READ: Lloyds first-half profits rise 23% despite extra £460mln provision for PPI claims
Richard J Hunter, head of markets at Interactive Investor said: “The additional PPI provision is an unwelcome development. The issue has long cast a shadow over the sector and Lloyds in particular.”
He added: “it is especially galling given that the Q1 update suggested that these provisions were on a downward trajectory and that the issue was close to being consigned to the history books.
“This will not sit comfortably with the current view that the UK economy may have some troubling times to come, with Lloyds being potentially exposed to consumer defaults through its credit card business, let alone any difficulties which higher interest rates could bring.”
The analyst added: “This may explain why bears of the stock have the upper hand at present. The shares have fallen 5% over the last year, as compared to a 5% hike for the wider FTSE 100, and are down 10% in the last six months. Despite an undemanding valuation and undoubtedly robust numbers, the market consensus has also slipped to a hold, albeit a strong one.”
Deadline stimulation
However, Laith Khalaf, senior analyst, Hargreaves Lansdown pointed out: “While the bank has taken another £550mln hit in the first half of 2018, that’s around half what it had to put aside this time last year.
“Next August marks the cut off-date for claims, which may flush out some more consumer activity, because there’s nothing that stimulates action quite like a deadline.”
He added: “In the short term that may mean Lloyds has to dip into its pockets again, but in the long run that’s going to free up a lot of cash for shareholders.
“The PPI scandal has now cost Lloyds over £19bn over the last 8 years, money the bank would have dearly loved to use elsewhere.”
Horta-Osório’s Conundrum
The Hargreaves Lansdown analyst continued: “Despite its excellent business performance, Lloyds’ share price has drifted lower this year. CEO António Horta-Osório must be wondering just what he has to pull out of the bag to push the stock price up.
“Since taking over the reins in 2011, Horta-Osório has presided over a bank which has swung from an annual loss of £260mln to a profit of £3.5bn. The share price meanwhile is at roughly the same level it stood at when he became CEO.
“That’s largely because Brexit means some investors don’t want to touch UK domestic companies like Lloyds with a bargepole. While this sentiment doesn’t look like shifting any time soon, Lloyds shareholders are being paid to wait. The bank is expected to deliver a total dividend of 3.44p this year, equivalent to a 5.5% income yield. Not bad, if you can get it.’
Winning back a reputation
AJ Bell investment director Russ Mould agreed: “Lloyds is working increasingly hard to win back its reputation as a genuine income play and today’s first half numbers feature a healthy 7% increase in the dividend.
“The hike in the payout accompanies a strong set of results only slightly marred by a £460mln provision against PPI claims. This issue should be put to bed in the relatively near future given the August 2019 deadline for claims to be made.”
But, Mould added: “A more pressing risk going forward is the fall-out from Brexit given the company’s big exposure to the UK economy and specifically to consumer debt.”
And Graham Spooner investment research analyst at The Share Centre, commented: “The group has not completely moved away from the past with yet more PPI provisions, but the CEO did highlight that overall financial performance is improving and also commented that significAnt progress had been made with its business plan and that the UK economy remains resilient in the face of Brexit.
“Investors have much to mull over for although the group appears to be making good progress on many fronts it is a UK focussed bank and Brexit uncertainty is not going to go away for some time.
“We therefore maintain our hold recommendation but would suggest the shares should be viewed increasingly positively by income seekers.”