Lloyds Profit Up 140% as PPI Claims Dwindle

Lloyds has revealed pre-tax profits of £1.95 billion for the three months to the end of September – an increase of more than 140% on the same period last year

Derya Guzel 25 October, 2017 | 12:32PM
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Lloyds Bank has revealed an increase in profits

Lloyds (LLOY) has revealed pre-tax profits of £1.95 billion for the three months to the end of September – an increase of more than 140% on the same period last year.

Lloyds posted underlying profit of £6.6 billion and net profit of £3.1 billion year to date, indicating 8% and 50% respective year-over-year increases. Given Lloyds’ strong profit generation and increased capital generation, we maintain our fair value estimate of 84p per share and our net income estimate of £4 billion for full-year 2017. We also retain our narrow moat rating for Lloyds, which we consider the strongest firm within the UK banking space.

On the PPI claims side, Lloyds made no further provisioning during third-quarter 2017; thus, year-to-date total PPI-related provisioning stands at £1 billion, unchanged from the year-ago period. While we believe current balance sheet provisioning of £2.3 billion looks sufficient, an increase in PPI claims during the quarter as a result of the renewed FCA advertising campaign creates a downside risk of further provisioning, as the deadline for claims was extended to August 2019. For Lloyds, the total amount provided towards payment protection stands at £18.1 billion.

We view year-to-date profit and loss as trending in line to deliver our full-year net profit estimate, and so we maintain our forecasts for the time being. Nine-month net interest income stood at £9.1 billion, indicating an increase of 6% year over year, driven by 13 basis points of improvement in net interest margin, or NIM.

Margin improvement came on the back of lending growth in the mortgage book, consumer finance, and small and midsize enterprises, as well as the acquisition of credit card provider MBNA. Other income also saw an increase of 6% compared with last year and stood at £4.8 billion, mainly driven by a one-off gain of £146 million booked in the previous quarter as a result of the sale of payments technology firm VocaLink.

During the quarter, Lloyds added 60 basis points to capital driven by profit generation. For the year to date, its common equity Tier 1 ratio stands at 14.9%, indicating a 185-basis-point improvement. Driven by stronger-than-expected capital generation, Lloyds' management revised its capital generation upwards to 225-240 basis points.

While there is pressure on capital, mainly owing to the revision carried out by the Prudential Regulation Authority to the Pillar 2A common equity Tier 1 requirement, to 3% from 2.5%, we believe the bank currently has sufficient capital to meet its long-term management target of 13% and dividend obligations.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Lloyds Banking Group PLC58.80 GBX-0.51Rating

About Author

Derya Guzel  is an Equity Analyst for Morningstar

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