Market reaction to the third quarter results from lender Lloyds Banking Group (LON:LLOY) had an element of déjà vu.
The bank set aside another £1bn to cover the fall-out from the payment protection insurance (PPI) mis-selling scandal, so it was a bit of a case of the same old “same old”, though Richard Hunter, head of Research at Wilson Kind Investment Management, reckons the response to the numbers would depend on whether the situation is viewed through a microscope or a periscope
“The third quarter figures are largely disappointing, whilst the nine months year to date performance is rather more impressive,” he noted.
“There are some concerning developments within the quarter, such as the additional PPI provision, an increase in impairments, the reduction in net interest margin and the overall profit decline. Meanwhile, as viewed as a proxy for the UK economy, the shares have been under pressure in anticipation of a hard Brexit, with all its negative connotations and with interest rates remaining at historic lows, the sector in general faces ongoing challenges,” Hunter observed.
“More positively and on an underlying basis, profit and return on equity has spiked, the capital cushion has strengthened further, the cost income ratio is under strict control and the current dividend yield of over 4% is attractive to investors given the wider savings backdrop,” he concluded.
Henry Croft, a research analyst at spread betting outfit Accendo Markets, said the profits missed market expectations, while the latest PPI provision gives the bank the unwanted accolade of lender with the largest amount of dosh set aside to cover the PPI fall-out.
Laith Khalaf, senior analyst at Hargreaves Lansdown, was in forgiving mood.
“Things haven’t got any worse for Lloyds over the summer, which under the circumstances is a positive result.
“The bank continues to be profitable, and while Brexit has taken a bit of a shine off the bank’s prospects in the latter half of 2016, it looks like the bank is still going to be able to reward investors with a decent dividend at the end of the year,” he suggested.
“However, the fall in bond yields has taken a toll on the Lloyds pension scheme, which has swung from having a surplus to being in deficit. Thanks to the slightly absurd way pension liabilities are calculated, and bond yields being so volatile, defined benefit pension schemes currently represent a real headache for UK companies.
“The Lloyds share price has taken a hammering as a result of the Brexit vote, and it will take some time for the bank to recover its poise; however, for the moment things don’t look to shabby for the bank, despite the EU referendum result,” Khalaf opined.
Try telling that to Ken Odeluga, at spread better City Index.
“The 3% share price sell-off tells us Lloyds Banks’ very patient investors aren’t pleased,” Odeluga remarked.
“We notice consensus in recent weeks had been inching well above the £1.912bn underlying net income the group has reported,” he added.
“In the event, comparable profits look as much as 9.3% light of the typical City forecast, and 3% weaker than the ‘flat’ view,” Odeluga said.
Shore Capital Markets took a positive slant, saying the real highlight is much stronger-than-expected capital generation, which bodes well for the dividend.
“Capital generation has been a key concern for the market so we think this will be taken well,” Shore’s Gary Greenwood said.