For a bank long caught in the mire of paying compensation for mis-sold payment protection insurance (PPI), Lloyds’ (LLOY) strong third quarter to 30 September results at first glance suggest a company on the up.
For the quarter, its earnings per share (EPS) figure of 1.9p is 46% ahead of consensus estimates and beat Investec analyst Ian Gordon’s forecast by 14%.
Gordon says the scale of ‘the EPS “beat” primarily reflects an absence of any conduct charges in the quarter, which drives a step-up in capital generation’.
The bank’s solid results include a 1% consensus beat on its pre-tax profit at £2.075bn, yet its share price dipped by 1.8% to 66.18p.
That’s probably because investors don’t like comments from Lloyds that the regulator is putting more pressure on the bank regarding the amount of capital it needs to hold.
Crunching the numbers
For the UK’s most popular traded stock, Lloyds’ results are pleasing in many areas.
Its net interest margin (NIM) in the third quarter is 2.9%, ‘comfortably’ ahead of the consensus forecast of 2.87% according to Investec’s Gordon.
NIM is a key guide to a bank’s profitability as it is the difference between income from lending and the cost of funding.
If the Bank of England does raise interest rates as is widely expected next month, Lloyds’ NIM may also increase.
The bank’s common equity tier one ratio (CET1) rose by 0.6% to 14.1% compared the previous quarter. That’s essentially a measure of the ability of a balance sheet to withstand economic shocks.
Not only does Lloyds’ latest CET1 result represent an improvement of the consensus forecast of 13.7%, it suggests the bank may be able to increase its dividend payout.
Although the bank is still awaiting guidance on the level of capital needed to act as a buffer against unforeseen charges, essentially what CET1 is used for, it remains optimistic regarding dividend payments.
Lloyds says it ‘still expects to deliver a progressive and sustainable ordinary dividend for the full year and the Board will give due consideration at the year end to the distribution of surplus capital through the use of special dividends or share buybacks’.
Verdict
Lloyds is the UK’s number one mortgage provider and, following the purchase of credit card assets from MBNA, it also growing its unsecured lending division.
Both investment bank Jefferies and Investec give Lloyds a ‘buy’ recommendation, with target prices of 91p and 75p respectively. This represents an upside potential between 13.3% and 37%.
As for dividends, Investec’s Gordon still expects Lloyds to pay a 4.5p dividend per share, equating to a 6.8% dividend yield.
The bank is trading on a price to book forecast of 1.2-times using Investec’s forecasts.
