Lloyds Bank’s results are a recovery play in action

Can the bank’s robust figures be seen as a barometer of the UK’s economic health?

Lloyds Banking Group (LSE:LLOY) is seeing the benefit of the rising tide of sentiment in the UK and its numbers reflect a recovery play in action.

This time a year ago, as the UK economy was going into freefall, the banks found themselves in the eye of the storm. This latest update from Lloyds encapsulates the improvements that have been seen since, and the release of £459 million of bad loan provisions is a strong indication of an improving economic outlook.

The release has also largely led to a pre-tax profit number of £1.9 billion, comfortably ahead of the expected figure of £1.1 billion and comparing with a figure of just £74 million in the corresponding quarter last year.

Often seen as a barometer of the UK economy, the loan book provides a snapshot of consumer behaviour. From its fairly dominant position, Lloyds saw a sharp increase in mortgage lending in the quarter given the current headwinds in the housing sector. At the same time credit card lending reduced by 19% and overall customer deposits rose by 8%, providing further evidence of the UK’s switch to personal savings.

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Meanwhile, the bank’s financial position remains robust, with a capital cushion of 16.7% ahead of the 14.2% number last year, giving significant headroom to the statutory minimum. The liquidity coverage ratio is also stable at 134%, while in terms of performance metrics the return on tangible equity figure spiked sharply to 13.9%.

The dividend policy is expected to return on a sustainable and progressive basis, subject to any regulatory caps, and provides further evidence of an improving environment.

There are a few pockets of performance which need some attention, however, and the bank is remaining cautious on the potential of any derailment to the UK’s recovery, such as a spike in unemployment after the government schemes have ended or issues caused by various mutations of the virus.

At the same time, the headwind caused by the interest rate environment remains ever-present and shows few signs of abating. The pressure is most obvious in the net interest income figure, which fell 9%, and the net interest margin number, which reduced to 2.49% from 2.79%.

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This has in turn forced the sector to look for fee-based alternatives for income, although Lloyds’ number is marginally higher than most of its peers. Similarly, the cost/income ratio remains the lowest in the sector, even though the current figure of 52.3% has moved slightly higher from the previous 49.7%.

Overall, Lloyds will be pleased with the progress it is making, particularly with regard to those factors within its control. The share price has also seen the benefit of its improving fortunes, having added 43% over the last year, as compared to a jump of 17% for the wider FTSE 100.

Recent momentum is similarly strong, with a 59% spike since the announcement of the vaccine in early November.

With a steady hand on the tiller, the bank remains well regarded by investors, and the market consensus of the shares as a ‘buy’ will likely remain intact following this update.