Lloyds Shares Rise Despite Further £1bn PPI Hit

Lloyds bank has set aside a further £1 billion to meet PPI mis-selling claims, but equity analysts believe the scandal is behind the bank and are pleased with the latest results

Derya Guzel 26 October, 2016 | 5:14PM
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Lloyds (LLOY) reported its third-quarter 2016 results today, showing year-to-date underlying profit at £6.1 billion, declining only 4% year over year. Following this rather good set of numbers, we opt to maintain our fair value estimate of 77p per share; meaning at current levels, shares look undervalued.

We believe the PPI scandal is largely behind the bank

With regard to payment protection insurance (PPI), Lloyds management advised that the Financial Conduct Authority proposed a deadline for compliance of June 2019. However, instead of waiting for the full outcome of the FCA decision, the bank remained on the conservative side, setting aside provisions of £1 billion to cover the additional costs. At this point, we believe the PPI scandal is largely behind the bank. It has set aside the additional provisions needed to meet the extended 2019 deadline set by the FCA, a year later than the industry originally expected.

On the cost side, the rigorous cost management is here to stay. The cost/income ratio improved 30 basis points on last year and stands at 47.7%. Total operating cost is down by 2% year over year, which helped the bank maintain its leading position in cost management compared with U.K. peers. Lloyds is in line with the management-targeted cost/income ratio of 49% for this year.

On the asset quality side, increases in impairments were mainly due to the lower level of releases and write-backs during the quarter, rather than deterioration of the underlying loan portfolio. Hence, we believe this is rather seasonal and expect a correction in the coming quarters. The impaired loans ratio stayed flat at 2.0%, while the asset quality ratio increased by only three basis points to 0.14%. Management maintains its 0.20% asset quality ratio for the full year.

Lloyds remains well capitalised, with internal capital generation reaching 110 basis points in the year to date. Its common equity Tier 1 ratio stood at 13.4% following the dividend payment. The bank maintained its target of delivering 160 basis points of improvement in core equity Tier 1 before dividend payments, which seems feasible so far. As it did in the previous quarter, Lloyds maintained its optimistic position around Brexit.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Lloyds Banking Group PLC43.60 GBX0.39Rating

About Author

Derya Guzel  is an Equity Analyst for Morningstar