Within its full-year results, Lloyds revealed underlying profit for the fourth quarter of £1.5bn, which was a massive 11% below the City analyst consensus, principally driven by higher non-PPI remediation costs.
Analyst Nicholas Hyett at Hargreaves Lansdown said the outlook for 2020 was more important than the tough end to 2019 when both retail and corporate customers remained super-cautious in the run-up to the election.
“The bank reckons it can squeeze more out of its already market leading cost base, and forecasts for capital build bode well for both the dividend and potentially a renewal of the suspended share buyback programme,” he said.
“We also note that, despite a spike in bad loans in 2019, the bank doesn’t expect conditions to get worse next year.”
Diving deeper in the detail, analysts at UBS found encouragement from better than expected full-year capital levels and agreed that 2020 operational guidance “is reassuring”.
Lloyds’ Core Equity Tier-1 (CET1), the headline measure of a bank’s capital, was 13.8% for 2019, 20 basis points better than the analyst consensus.
The FTSE 100-listed lender retained its ongoing 13.5% capital target, which includes a 1% “management buffer”, despite the Bank of England’s 100 basis point (bps) increase in the countercyclical capital buffer, the amount of cash needed for banks to withstand financial shocks, as part of the stress test report in December.
For 2020, Lloyds aims to generate 170-200bps in capital, which the UBS analysts noted was a 9-10% free cashflow yield and would put capital for the year around 10-12% of the group’s market cap above the 13.5% CET1 target.
Reassurance for 2020, but longer term concerns
Furthermore, the UBS analysts said operational guidance was “reassuring relative to forecasts and peers”, including a “resilient” net interest margin target of 275-280bps for 2020, costs reduced more than expected, a lower cost/income ratio, maintaining impairments and reducing remediation costs.
“Given the environment and results posted by UK peers to date, we regard these targets as reassuring overall,” UBS said.
Analysts such as Hargreaves’s Hyett do have some longer term concerns though, and they centre around growth.
“Competition in the mortgage market is fierce, meaning new loans are less profitable than old ones. Increased motor finance and unsecured lending is higher risk and while updates from the growing Insurance business look promising, it’s capital intensive.
“Overall we like what Lloyds has done, but with a lot of the low-hanging fruit already gone the future risks being more solid than sparkling. ”