Retail investor favourite Lloyds (LLOY) positive half year results to 30 June have been marred by the bank having to set aside £1.1bn to settle payment protection insurance (PPI) claims.

The news that PPI is still a live issue has disappointed investors. Lloyds is down by 1.8% to 67.83p on releasing its latest results.

The bank has had to set aside more for PPI as the number of claims has increased since the Financial Conduct Authority set a deadline of August 2019 for any compensation.

Lloyds' reported pre-tax profit of £2.5bn for the first half of the year is around 11% lower than the analyst consensus and the miss is due to exceptional charges, particularly PPI claims.

Lloyds is also in hot water over the running of its mortgage arrears programme between 2009 and 2016, setting aside a further £300m to deal with this.

RAY OF SUNSHINE

The ongoing misconduct matters is clearly a problem for Lloyds, its total cost for PPI is now more than £18bn, larger than any other bank by far. But the results did also contain some news that should bring some cheer to investors and not just its headline profit figure.

The bank’s net interest margin (NIM), essentially the difference between income from lending and the amount it pays out, is up to 2.82%. This key indicator of a bank’s profitability was at 2.74% a year ago so Lloyds has made progress there.

The increase in NIM beat the consensus forecast of 2.78%. It has been driven by liability re-pricing and also the bank’s acquisition of credit card company MBNA which happened at the end of May.

But the main reason investors like Lloyds is for its income and again the bank has beat forecasts in its first half results. Davy Research predicted an interim dividend payment of 0.9p per share and Lloyds declares 1p per share. This is an 18% increase on a year-on-year basis.

In our recent article on investing in banks, we said that Lloyds is expected to pay 4.5p per share for 2017, this still seems on the cards and will please income investors.

The bank has also bolstered its capital reserves, put in place by regulators to prevent a repeat of the 2008 financial crisis. Lloyds common equity tier one (CET1) stands 13.5%, well above the level set by regulators.

In plain English, CET1 is the size of a bank’s cash reserves against its loans, adjusted to account for the riskier assets in the portfolio such as unsecured lending.

Diarmaid Sheridan, analyst at Davy Research, says the bank’s capital cushion leaves it well placed to return significant capital to shareholders, which means that more special dividend payments could be on the cards. The bank paid out a £2.2bn special dividend for 2016.

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Issue Date: 27 Jul 2017