Lloyds Banking Group PLC (LON:LLOY) saw profit fall 97% in the third quarter of the year as it took a big hit from PPI mis-selling charges.
Statutory profit before tax crashed to £50mln from £1.82bn in the same period last year, mainly due to £1.8bn of provisions for PPI compensation, well short of the average analyst forecast of £163mln.
Last month the bank suspended its share buyback as it warned of likely £1.2bn-£1.8bn PPI charges due to a spike in complaints in the final weeks leading up to the 29 August deadline, taking its total bill to around £26bn.
Underlying profits were also lower, down 12% to £1.82bn as net income fell 6% to £4.2bn due to a 2% dip in interest income and 12% fall in other income.
The adjusted PBT number was well short of the consensus analyst forecast of £1.98bn, reflecting weaker than expected non-interest income and higher than expected impairments partly offset by lower costs than expected, having been cut 5% so far this year. The full-year consensus forecast for adjusted PBT is £7.86bn.
Cautious outlook amid Brexit
Chief executive António Horta-Osório said he was “disappointed" but said, “our performance continues to demonstrate the resilience of our customer franchise and business model, the strength of our balance sheet and that our strategy is the right one in this environment”.
Net interest margin (NIM), the difference between margin paid on savings and charged on loan, was squeezed to 2.88% from 2.93% in the quarter.
The NIM outlook for the full year was trimmed to 2.88% from previous guidance of circa 2.9% though operating costs are now expected to be less than £7.9bn, ahead of previous guidance, with the cost-income ratio to be lower than indicated earlier.
Horta-Osório warned that “continued economic uncertainty could further impact the outlook” but said Lloyds remained “well placed”.
Analysts cautious
Lloyds shares dropped 2% in early trade on Thursday but strengthened to 56.99p just after midday.
Noting that adjusted PBT was 8% worse than consensus, that NIM reduced by five basis points but is still just ahead of consensus 2.87%, and the cost/income ratio increased by 0.5 percentage points (ppts) to 47.6% above the consensus 46.6%, broker Shore Capital felt these were "disappointing results".
The analysts noted that the underlying return on tangible equity decreased by 1.6 ppts year on year to 14.3% and 15.7% year to date, though this is the strongest performance of the quoted mainstream UK banks, though statutory RoTE reduced by 17.6 ppts to a negative 2.8%, reflecting the impact of the additional PPI provision.
ShoreCap observed that management's outlook was "cautious reflecting the continued macroeconomic uncertainty" but cost guidance has been upgraded. "While a key area of concern, the net interest margin, held up better than expected, Lloyds has managed to disappoint elsewhere."
Yes it was PPI that wiped out more profits than expected, said Nicholas Hyett at Hargreaves Lansdown, suggesting there are other details in today’s results that are more important for long-term investors.
“Low interest rates and increased competition mean the bank’s making less money on loans than it has done in the past, and writedowns are creeping up as used car prices fall and some of the bank’s commercial customers run into problems," he said.
“If those trends continue it will be increasingly difficult for Lloyds to grind out growth. Worse, if conditions deteriorate significantly, this quarter’s numbers suggest to us that Lloyds could really struggle.
“Having said that, if conditions hold, the end of PPI charges should mean the bank’s able to continue offering a pretty impressive 6%+ dividend yield. Unfortunately it increasingly feels like Lloyds’ destiny is out of its hands.”
UBS said the underlying business looked "in good shape despite the softer non-interest income print".
The analysts said they "do not think either the other operating income or expected credit loss run rates in 3Q19 are worth annualising into 2020" though they expected this and the NIM trajectory to be a key focus on the day's analyst conference call.
Director departure
Amid speculation mounts that the bank's Portuguese CEO will step down next year, Lloyds also announced that the director who had led its digital strategy in recent years will leave next year, with a successor not yet chosen.
Chief operating officer Juan Colombás, who like Horta-Osório joined the group from Santander in 2011, initially was chief risk officer and played “a critical role in helping the group determine its strategy in the wake of the financial crisis”, leading the restructuring of the balance sheet.
COO since 2017, the year the government finally sold off the last of its shares in the bank, Colombás has overseen the digital strategy, including a £3bn investment in updating the bank’s operations, technology and processes.
Lloyds said the Spaniard has “brought deep wisdom” to the board, with Horta-Osório saying he has “made a very substantial contribution to helping to turn Lloyds around”.
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