ii view: Lloyds Bank profit surprises to the upside

Covid and Brexit both cloud the outlook, but virus provisions have fallen. Buy, sell or hold? 

Third-quarter results to 30 September

• Impairment provision of £301 million down from £2.4 billion in Q2
• Pre-tax profit of £1 billion, up from £50 million a year ago
• Dividend payment suspended 
• Capital cushion up to 15.2% from 14.6%

Chief executive António Horta-Osório said:

"Although our performance has clearly been impacted by the pandemic and the associated challenging economic environment, I am pleased that we are now seeing an encouraging business recovery and, with impairments significantly lower, a return to profitability in the third quarter.

“Although the outlook remains uncertain, our customer-focused strategy and the strength of the Group's business model will allow us to continue to help Britain recover and play our part in helping to return the UK to prosperity. This is fully aligned with the Group's long-term strategic objectives, the position of the franchise and the interests of our shareholders.”

ii round-up:

Lloyds Banking Group (LSE:LLOY) is home to household brand names including Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows.

In the wake of the 2008 financial crisis, Lloyds has restructured to become a UK-focused bank with around 26 million customers.  

In 2019, the bank announced its intention to switch and start paying dividends on a quarterly basis in 2020, only to earlier this year suspend payments given regulatory pressure under Covid-19. 

For a round-up of these third-quarter results, please click here.

ii view:

Lloyds has come a long way. Its journey through the financial crisis and back to the relatively dull and sturdy bank it once was previously appeared complete. Now, the bank is battling the fallout from the Covid-19 pandemic, while uncertainty regarding the exact terms of Brexit and their potential impact remains. 

For investors, renewed lockdowns and possible further need for additional bad debt provisions now tops concerns. High exposure to the UK economy leaves Lloyds more dependent on the efficiency of the UK government’s Covid approach than Barclays (LSE:BARC) or HSBC (LSE:HSBA). Brexit and the Bank of England’s previous flagging of possible house price falls also need to be remembered given the group’s mortgage exposure. 

That said, these latest results suggest that Lloyds is navigating the Covid crisis better than expected. Lower than forecast bad debt provisions have left third-quarter profit more than 50% ahead of estimates. This and a further strengthening of the capital cushion also raise the potential for a possible reintroduction of the dividend in 2021. A government stamp duty holiday and recent updates from UK housebuilders also indicate robust demand for housing. In all, and with the share price sat at around half of the bank’s estimated tangible net asset value, brave longer-term investors might like the look of the shares at current levels. 

Positives

• Improved capital cushion
• Mortgage book up £3.5 billion since June 

Negatives

• Dividend payment suspended
• Low interest rates are considered broadly bad for bank profits

The average rating of stock market analysts:

Strong buy