Lloyds Banking Group PLC (LON:LLOY) shares rose on Wednesday, a day ahad of the release of its first-quarter results, as the lender revaled it is likely to have more surplus cash available this year after the banking regulator loosened the purse strings for the lender's ring-fenced bank.
The Bank of England’s Prudential Regulation Authority on Wednesday told Lloyds that it would only need a ‘systemic risk buffer’ of 200 basis points for its ring-fenced bank, which equates to 170 basis points at a group level compared to the 210bps previously guided.
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Following the net 30bp reduction in the group's Pillar 2A capital requirement that went into effect from 1 January, the lender believes it now needs to operate with a core tier 1 ratio of around 12.5% with a management buffer of around 1%, equating to a total target of 13.5% compared to the previous CET1 ratio of 14%.
As at 31 December 2018, the group reported a pro-forma core tier 1 ratio of 13.9%, net of the proposed share buy-back of £1.75bn that was announced in February and will be executed during the current financial year.
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Lloyds, which saw a capital build of 210bps in 2018, said it continues to expect ongoing capital build of 170bps-200bps per year.
Referring to the group’s “progressive and sustainable” ordinary dividend policy, directors, who are expected to face questions about pensions at the group's annual general meeting on 16 May, said they will “continue to give consideration to the distribution of surplus capital at the end of the year”.
Broker Shore Capital said the reduction in the CET1 ratio requirement means the group started the year with around £0.8bn of pro-forma surplus and with the organic capital build equivalent to a further £3.5bn-£4.1bn, of which dividends would be expected to consume around £2.4bn.
Analyst Gary Greenwood said this would leave a residual capital surplus at the end of the year of between £1.9bn-£2.4bn, "which would theoretically be available to fund further distributions to shareholders" either by way of share buy-backs or special dividends.
“This is comfortably enough to fund our forecast for a further share buyback of £1.5bn in 2020F, although it is possible that the implied one-off release from this announcement could see an uplift to capital return plans in the current financial year.”
In afternoon trading, Lloyds shares were 1.8% higher at 63.67p.
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