Lloyds Results Boost Investor Confidence

Morningstar equity analysts are pleased with the latest Lloyds results and believe that the bank is in a good position to double its net income in 2017

Derya Guzel 28 April, 2017 | 9:27AM
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Lloyds (LLOY) reported a strong start to the year, which we see as a good indicator for the remainder of 2017 and a confidence builder for shareholders. While underlying profit remained flat year over year at £2.1 billion, reported profit doubled to £1.3 billion despite the fact the bank had to book a further £350 million towards the payment protection insurance claims and £200 million towards the HBOS and other conduct matters. Net income for the first quarter stood at £890 million versus £531 million a year ago, an increase of 68% year over year.

Stable net interest income and lower impairment charges were the highlights of the operational performance for the quarter. We are pleased with the results and believe that Lloyds in a good position to double its net income in 2017. We maintain our narrow moat rating and fair value estimate of 84p per share, and we believe that at their current level, the shares are still undervalued.

In our view, results were healthy, given the operational performance displayed by Lloyds. Strong underlying profit generated during the quarter and a noteworthy decrease in below-the-line items helped Lloyds report statutory profit before tax of £1.3 billion, which almost doubled from last year, and its return on tangible equity improved to 8.8%, a 310-basis-point increase from the first quarter of 2016; this is trending above our estimate of 8.4% estimate for 2017. On an underlying basis, Lloyds posted return on equity of 15.1%. We expect Lloyds will be able to deliver an average return on equity of 10.3% between 2017 and 2021, above our cost of equity of 9% for the bank.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Lloyds Banking Group PLC48.96 GBX-0.08Rating

About Author

Derya Guzel  is an Equity Analyst for Morningstar