Lloyds Banking Group - Life in the old nag yet.

Lloyds Banking Group (LLOY.L): This was a mixed bag of an IMS, covering the nine months to 30^th September 2015. Total income was flat at £13.2bn, with net interest income up 4% at £8.6bn but other income down 7% at £4.6bn, with the fourth quarter not expected to make up the lost ground. Operating costs were down 1% nudging the cost income ratio down to 48.0%, but the big win was a 64% drop in impairment charges to £336m. Underlying profits for the nine months were up 6% at £6.4bn, but down in the third quarter from £2,155m last year to £1,972m this time. Whilst statutory nine-month pre-tax profits were up 33% at £2.151m, this was after a further £500m PPI provision making £1.9bn YTD (9M 2014: £1.5bn). Underlying eps were 1.8p for the nine months against 1.7p a year ago. The Common Equity Tier 1 ratio was 13.7%, up on the 12.8% at the previous year-end and the half year’s 13.3%. The Tangible Net Asset Value is 55.0p, up on December 2014’s 54.9p and the interim stage 53.5p. Looking forward the net interest margin guidance has been edged up to the 2.63% achieved in the first nine months (9m 2014: 2.39%) although the asset quality gains of the first nine months look to be temporary.

The news of a further PPI provision and a miss to consensus forecasts has sent the shares down to 74p today, which is a price to book of 1.34x. Consensus eps of 8.6p is a PE of 8.6x, with a dividend forecast of 2.5p indicating a yield of 3.4%. Forecasts for 2016 seem to be all over the place but centre on 8p for a PE of 9.25x. A further hike in the dividend is expected in 2016, with the 3.9p mid-range pointing to possible (and eye-catching) yield of 5.2%. This is consistent with previous company comments about distributing surplus capital above a CET1 ratio of 13% (v 13.7% now) and aiming for a 50% payout ratio. The frosty attitude of Government and Regulators towards banks has thawed in recent months, yet the backdrop for an incumbent retail bank is still tricky. They are lumbered with old IT systems, over-spaced on the High Street and burdened with the sins of the past (e.g. PPI). The Government wants more Challenger banks, even if taxation policy seems to run against this policy. Yet, Lloyds looks cheap, maybe due in part to the overhang of the state’s stake and the drip feed sales of recent times. Along with that there will be plenty of vocal support from vested parties ahead of next year’s public sale. So I think there is upside in this share at the moment. If you are an individual the share sale won’t make you rich, but if you invest the £1000 maximum limit for obtaining a priority allocation, then the 5% initial discount and first anniversary 1 for 10 bonus make for a handsome potential return. (Neil Cumming^, 28^th October 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower