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Lloyds announces departure of CFO as it reports better-than-expected decline in profits

“We remain on track to deliver the improved financial targets for 2018 that we announced in August, as well as all of our longer-term guidance,” said Lloyds boss Antonio Horta-Osorio.

Lloyds took a remediation charge of £109mln related to misconduct in the quarter

Lloyds Banking Group PLC (LON:LLOY) said chief financial officer George Culmer is stepping down as it reported a 7% drop in pre-tax profit for the third quarter.

Culmer joined Lloyds in 2012, helping to nurse the bank back to health and return it to private hands last year following a £20.3bn government bailout in 2008 at the height of the financial crisis. He plans to retire after the first half results in 2019.

"George has been a crucial member of the team that has helped turn Lloyds around and position it for future success,” said chief executive Antonio Horta-Osorio.

Profits hit by higher costs 

In a separate statement, Lloyds reported statutory pre-tax profit of £1.82bn for the three months to September 30, down from £1.95bn a year ago but ahead of the £1.7bn analysts had expected.

The lower profits reflected a remediation charge of £109mln along with increased investment, higher operating expenses and a rise in restructuring costs. 

Some of the costs stemmed from the integration of the MBNA credit card business and Zurich's UK workplace pensions and savings business as well as the separation of its retail bank from the rest of its operations to meet ring-fencing rules.

Lloyds, however, did not set aside any further provision for the payment protection insurance mis-selling scandal like it did in the previous quarter.

Excluding items, underlying profit was still broadly flat at £2.07bn.

In the year to date pre-tax profit increased 10% to £4.94bn from £4.49bn last year as costs dropped 3%.

“Lloyds remains in rude health, as it now accelerates its efficient business model having left behind its previous issues," said Richard Hunter, head of markets at Interactive Investor.

"Despite a slip in profits for the period, in the year to date pre-tax profit is above consensus, having risen 10%, and the post-tax number is up 18%."

Total income and net interest margin ticks up

Total income came to £4.69bn in the quarter, up 1% on the previous year’s £4.62bn with net interest income flat at £3.20bn and other income up 4% to £1.49bn.

Net income grew 2% to £4.45bn from £4.35bn last year as the net interest margin (NIM) – a key measure of banks’ profitability –edged up to 2.93% from 2.90% a year ago.

Compared to the second quarter, NIM was stable with lower deposit costs offsetting pressure on asset margins amid difficult competition in mortgage lending.

Loans and advances to customers rose to £445.6bn from £442.3bn, supported by growth in motor finance, retail unsecured loans, commercial banking and small and mid-sized enterprises. Lloyds saw a flat performance in loans and advances for credit cards and its open mortgage book while the closed mortgage book shrunk.

The cost to income ratio rose to 47.1% from 46.0%, but excluding the remediation charge, it fell to 44.7% from 46.0%. 

Return on tangible equity dipped to 14.8% from 15.3%. 

The common equity tier 1 capital ratio stood at 14.6% at the end of September, compared to 14.5% at the end of June, after dividends.

CEO says Lloyds on track to meet improved financial targets 

Lloyds reaffirmed its guidance for 2018.

“We remain on track to deliver the improved financial targets for 2018 that we announced in August, as well as all of our longer term guidance,” said Horta-Osorio.

In February, Horta-Oscorio laid out a fresh three-year strategy that includes improving its digital operations and expanding outside core markets like mortgages, into in areas such as insurance and wealth, lending to small businesses and car finance.

Ahead of the results, Lloyds this week announced plans to create a wealth management joint venture with Schroders. The companies hope to become one of the top three financial planning business in the next five years.

READ: Lloyds and Schroders confirm plan to create financial planning joint venture

In August Lloyds completed its £1bn share buyback programme in August. It now returned more than £3.2bn to shareholders this year after paying the final and interim dividends. 

This week the Financial Times reported that Lloyds was working on a plan to double the scale of its share buyback scheme next year to £2bn but the bank did not comment on the claims in its results. 

READ: Lloyds working on plan to double share buyback scheme to £2bn next year: Media report

Shares rose 1.3% to 57.4p in morning trading. 

Shore Capital repeats 'buy' recommendation

Shore Capital maintained a buy rating on the stock, saying "Lloyds continues to demonstrate solid underlying performance with an improving statutory result and strong capital generation". 

"The current share price appears to be factoring in significant forecast downgrades, which we think are only likely to emerge if the UK economy disappoints relative to current consensus expectations (on which we base our forecasts)," it said.

"If this does not happen then we would expect the shares to rally towards our fair value of 80p (40% upside)."

While Lloyds made no changes to full year profit forecasts, ShoreCap said the may be a "slight edging up of consensus, albeit with a small moderation to our forecasts."

For the year, ShoreCap predicts adjusted pre-tax profit of £8.38bn (consensus forecast: £8.04bn) and a dividend per share of 3.3p. 

Quick facts: Lloyds Banking Group

Price: 58.7 GBX

Market: LSE
Market Cap: £41.11 billion

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