Interactive Investor

Lloyds’ profit beats forecasts

28th October 2021 08:46

Richard Hunter from interactive investor

The bank’s numbers raise the prospect of a potential special dividend.

Lloyds (LSE:LLOY) has joined the merry throng of the UK banks in the current reporting season, with a further release of credit impairments and improved guidance outlook for the year.

The improving performance within the UK economy, of which Lloyds is often seen as something of a bellwether, has enabled pre-tax profit in the quarter to double to £2 billion from a year before, comfortably exceeding expectations.

Perhaps most promisingly, it was not the release of previous provisions which solely contributed to these stronger profits. A release of £84 million over the quarter and of £740 million in the year to date compared with 2020 charges of £301 million and £4.1 billion respectively. The quarterly release has, of course, provided a tailwind for profit, but more notably net income rose from £3.4 billion a year previously to £4.1 billion for the quarter, again breezing past expectations.

Even before the impairment release, the third-quarter underlying profit was 27% higher than the previous quarter, representing some real progress as the bank readies itself for the next leg of the strategic journey.

The key metrics also remain reassuringly positive, with a Return on Tangible Equity of 14.5% (6% the year before), Net Interest Margin still stable at 2.52% and a capital cushion which improved further, now standing at 17.2%, well in excess of the bank’s own target of around 12.5% and the 11% regulatory requirement. Balance sheet strength was further underlined by the cost/income ratio, which remains the lowest in the sector, which improved to 48.3% from 56.9% in the corresponding period last year.

The immediate outlook for that ratio is also improving, as the roll-out of more digital products can be made at relatively low cost while materially improving earnings. In the meantime, the strength of the housing market has played into mortgage sales growth in the quarter of £2.7 billion, and with Lloyds’ dominant position there will almost certainly be more to come.

Less positively, there is still evidence of a cautious UK consumer continuing to pay down debt where possible, impacting lines such as credit card balances, where the margin is higher. There has been some increase in similarly profitable retail overdrafts facilities, but for the most part the low level of interest rates will continue to hamper the traditional “positive jaws” within the sector as a whole.

As mentioned at its half-year results, dividend announcements will now be made on a half-yearly basis rather than quarterly. These numbers tend to suggest that there could therefore be something of a bumper year-end bonus, where share buybacks and even a special dividend are distinct possibilities. In the meantime, the shares have had a good run, having risen 73% over the last year as compared to a rise of 30% for the wider FTSE 100 and, with improved guidance and prospects in evidence, the market consensus of the shares as a buy will come under little threat.

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