Lloyds Cuts Jobs Despite "Brexit Optimism"

Analysts think Lloyds is better positioned than most peers to handle Brexit fallout and are maintaining the fair value despite job cuts and plans to sell off property assets

Stephen Ellis 28 July, 2016 | 4:28PM
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Lloyds reported a solid second quarter and we plan to maintain our 77p fair value estimates and narrow moat rating. Results were good, with an underlying profit of £4.2 billion, down 5% from last year’s levels due to the elimination of TSB, lower insurance income, pressure on fees and commissions, and reduced income from the run-off portfolio. Still, an underlying return on equity of 14% and a 13% increase in the dividend are positive.

We do think Lloyds is better positioned than most peers to handle Brexit given its simple, lower risk business model focused on retail and commercial lending, and it has also done much of the heavy lifting already in terms of simplifying its business in the past several years.

Job Cuts Despite Brexit Optimism

The bank remains optimistic in the face of Brexit, indicating that the U.K. enters Brexit from a position of economic strength. However, the bank’s plans to deepen its cost cuts indicate that it is clearly worried about the negative impacts of Brexit, concerns that we share. The bank now plans to close an additional 200 branches, reduce head count by another 3,000 employees, and has boosted its cost-savings target to £1.4 billion versus £1 billion by the end of 2017.

The bank also plans to eliminate about 30% of its non-branch property portfolio by the end of 2018. These deeper cuts confirm our view that the bank will face a difficult outlook going forward for the medium term and that it expects lower growth.

We do expect Lloyds to see higher loan losses, as the U.K. property market has been negatively affected already with demand falling, and slower growth. We believe the U.K. is likely to enter a recession, or at the very lease see sharply lower economic growth.

Lloyds is now one of the sturdier banks in Europe. It nearly destroyed itself in 2008 with its notorious acquisition of HBOS, and the U.K. government ended up with 43.5% of the combined group. Now, after years of bailouts and setbacks, the bank has essentially righted itself, and the government has largely sold down its stake.

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Stephen Ellis  Stephen Ellis is a senior stock analyst on the Energy Team.