Lloyds' PPI charge may scare the horses on Halloween, BT bounce-back eyed

The black horse-branded bank last month suspended its share buyback as it warned of likely £1.2bn-£1.8bn PPI compensation costs due to a spike in complaints

Lloyds Banking Group - Lloyds' PPI charge may scare the horses on Halloween, BT bounce-back eyed
Analysts at Citi are expecting a £1.55bn PPI bill for Lloyds

Continuing this week's parade of banking results, Lloyds Banking Group PLC’s (LON:LLOY) third-quarter profits on Thursday may contain some scares as they are expected to take another big hit from PPI mis-selling charges, however but unless they are at the top end of the scale other factors are more likely to move the shares.

The equine-branded bank’s results – which follow those from Royal Bank of Scotland Group PLC (LON:RBS) and Barclays PLC (LON:BARC) - last month suspended its share buyback as it warned of likely £1.2bn-£1.8bn PPI compensation costs due to a spike in complaints in the final weeks leading up to the 29 August deadline, taking its total bill to around £26bn.

Having in August sunk to a six-year low, Lloyds stock is actually 20% higher since its PPI warning last month, with Brexit optimism having provided a big boost after Boris Johnson agreed a deal with the EU.

In the third quarter last year, Lloyds reported pre-tax profit (PBT) of £1.8bn and underlying profits, excluding items such as conduct costs at just over £2bn, a level that has remained fairly constant, as proved in the second quarter of 2019.

Analysts at Citi predict Q3 underlying profit will be stable quarter-on-quarter, and they expect a £1.55bn PPI bill resulting in £0.5bn of reported PBT.

Amid a competitive mortgage market, Lloyds net interest margin (NIM) - the difference between its interest paid on savings and charged on loans - declined by two basis points in both the first and second quarters and Citi foresees further compression.

Bounce-back eyed at BT

On Thursday, BT Group PLC (LON:BT.A) puts out second-quarter numbers with its shares bouncing back from recent long-term lows.

The former telecoms monopoly August’s Q1 results led to the shares dropping to their lowest level since 2011 as investor fears were stoked about a dividend cut.

Cash flows were dialled down by a third due to the company’s roll-out of high-speed broadband and a consumer market that is “significantly more competitive and aggressive than last year”.

Chief executive Philip Jansen, who joined at the start of the year, assured that the group remained “on track” to meet its full-year targets, which include free cash flow of £1.9bn-£2.1bn.

However, he insisted that regulatory winds are moving in favour of the sector, pointing to the government's reiterated ambition for full-fibre broadband across the country, saying he was confident there will be “further steps to stimulate investment”.

Recently, UBS analysts said a meeting with Jansen revealed no more detail on how any expanded fibre rollout would be financed, leaving investors to continue worrying about a dividend cut, in addition to further cost savings, reallocation of capex and higher debt.

Within an increasingly competitive market, analysts said the CEO indicated BT “will not sit back and lose market share”, but even though some rivals’ 5G mobile promotions are “not rational”.

Egypt concessions may provide more black gold for Shell

Meanwhile, at Royal Dutch Shell PLC (LON:RDSB), investors will be seeing whether declining oil prices have caused misery for the oil major similar to that of its competitor BP PLC (LON:BP.), which on Tuesday saw its third-quarter profits slump 39%.

Goldman Sachs, however, is optimistic, saying that the firm offers “one of the strongest cash returns to shareholders” with a c.6% dividend yield paid in cash.

Analysts at the US investment bank added that Shell’s investment in the middle east and north Africa, with new concessions off the coast of Egypt due to begin exploration in 2020, has potential to grow the company, but may also have exposed it to short term security risks.

Pilot strikes and weak bookings cloud the skies for IAG

British Airways owner International Consolidated Airlines Group PLC’s (LON:IAG) third-quarter results on Thursday may get off to a turbulent start following a profit warning in September when pilot strikes and weak bookings forced it to cut its full-year profit guidance by around 6%.

Investors will likely be on the lookout to see if both of these factors are set to continue into the coming months, and with BA’s pilots union still not having accepted its offer of an 11.5% payrise, further strikes could be on the horizon.

There is also the risk that booking declines, which have been concentrated among IAG’s budget brands such as Vueling and LEVEL, are indicative of wider economic weakness.

With this in mind, non-fuel costs per average seat kilometre will be eyed closely as weaker booking will mean costs may have to be cut to maintain margins.

Investors spooked at Smith & Nephew changes

Smith & Nephew PLC (LON:SN) already spooked investors ahead of its Halloween trading update when chief executive Namal Nawana announced earlier this week plans to leave the artificial hip and knee company after only 18 months on the post.

Ronald Diggelmann, who joined the FTSE 100 firm in March 2018 as a non-executive director, will replace him as of 31 October, in what analysts call a “crucial” phase in its history as it has unveiled a new commercial model after ten years of below-market growth.

Significant events on Thursday 31 October:

Trading statement: BT Group PLC (LON:BT.A), Elementis plc (LON:ELM), Hilton Food Group PLC (LON:HFG), International Consolidated Airlines Group PLC (LON:IAG), International Personal Finance PLC (LON:IPF), Lloyds Banking Group PLC (LON:LLOY), Royal Dutch Shell PLC (LON:RDSA), Smith & Nephew PLC (LON:SN.)

Economic announcements: GfK consumer confidence, EU GDP, EU inflation, US jobless claims

Ex-dividends to clip 1.6 points off FTSE 100 index: Unilever PLC (LON:ULVR)

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