A reduction in PPI payments helps Lloyds Banking (LLOY) post its best profit in a decade. The results are better than expected and guidance for 2017 suggests consensus forecasts on forward earnings and dividends may also be too conservative. The shares top the FTSE 100 leaderboard, moving 4% higher to 69.4p.
BACK FROM THE BRINK
Pre-tax profit for 2016 is up 158% to £4.24bn, a level not seen since 2006 before the onset of the financial crisis, provisions for PPI fall from £4bn to just £1bn, the dividend is hiked 13% to 2.55p and the company will also pay a 0.5p special dividend despite the £1.9bn acquisition of MBNA’s consumer credit card business announced in December 2016.
Shore Capital analyst Gary Greenwood, a buyer of the stock, notes the balance sheet looks strong enough to fund the MBNA deal while pressing ahead with generous returns to shareholders.
‘The core tier 1 ratio increased by 0.8ppts yoy to 13.8% (Shore: 13.5%; consensus: n/a) with pre-dividend capital generation of 1.9ppts ahead of management guidance for 1.6ppts.
‘This provides a sufficient buffer to absorb to 0.8ppts of anticipated core tier 1 capital consumption from the acquisition of MBNA which is expected to complete during the current financial year.’
LOOKING GOOD FOR 2017, BUT...
Better margins, lower impairments and stronger capital generation seem to be the key messages for 2017 and Greenwood forecasts earnings per share of 7.1p and a total dividend of 4p (including a 1.15p special payout).
This puts the stock on a price-to-earnings ratio of 9.7 and a prospective yield (including the special divi) of 5.8%. At one time 43% of the bank was in state hands, now that total is just 5% and the plan is to fully return Lloyds to private ownership before the end of the year.
This all sounds pretty rosy but chief executive Antonio Horta-Osorio notes the ‘uncertain’ economic outlook ahead of Brexit and we would question the decision to increase exposure to consumer debt at this point in the cycle through the MBNA deal, which should complete later this year.
