Lloyds Bank Q3 Profit Beat Forecasts On Net Interest Margin Growth

by Ike Obudulu Posted on October 25th, 2018

London, UK : Britain’s Lloyds Banking Group (LLOY.L) on Thursday reported a third-quarter pretax profit of 1.8 billion pounds, outperforming the 1.7 billion pound average analyst estimates.

It was helped by a growing net interest margin – a key measure of bank profitability – and falling costs. The net interest margin rose 8 basis points to 2.93 percent.

Lloyds also said it had grown its lending to small businesses and in higher-margin areas such as car finance – two strategic aims laid out in the three-year plan laid out in February.

The bank aims to digitise operations and grow outside of core markets such as mortgages, where it has effectively exhausted opportunities for significant growth.

Another key ambition is an increased presence in insurance and wealth, where the bank has secured two partnerships in recent weeks.

The bank reported a core capital ratio of 15.5 percent, up from 14.9 percent a year ago, reflecting continued efforts to make its balance sheet recession-proof.

CFO Culmer said the bank is likely to return some of that excess capital to shareholders, with the board set to make a decision after December.

In a separate statement, the bank said Culmer, who played a key role in turning Lloyds around after its 20.3 billion pound bailout in 2008, would retire after interim results in 2019.

The Group’s statutory profit after tax of £3,664 million was 18 per cent higher than the first nine months of 2017, driven by a 5 per cent increase in underlying profit to £6,303 million, an 11 per cent reduction in below the line charges and a lower effective tax rate of 26 per cent. Profit attributable to ordinary shareholders was 19 per cent higher at £3,272 million; statutory return on tangible equity improved by 2.5 percentage points to 13.0 per cent.

Net income of £13,423 million was 2 per cent higher than in the first nine months of 2017, with a 5 per cent increase in net interest income partly offset by lower other income, while operating lease depreciation reduced by 5 per cent.

Net interest income of £9,544 million increased 5 per cent on the first nine months of 2017, reflecting an improved net interest margin and increased average interest-earning banking assets which at £436 billion were 1 per cent higher than in the same period last year. The net interest margin was stable on the second quarter at 2.93 per cent with lower deposit costs offsetting continued pressure on asset margins. Other income of £4,610 million for the first nine months of 2018 was broadly flat excluding the £146 million for Vocalink and increased 4 per cent in the third quarter compared to the same period in 2017.

Operating costs at £6,014 million were slightly down on the first nine months of 2017, with underlying business as usual costs1 down 4 per cent offset by increased investment in the business. Operating costs for the quarter were down 1 per cent on the third quarter last year largely driven by increased efficiency from digitalisation and process improvements. The Group’s market leading cost:income ratio continues to provide competitive advantage and improved by 2.5 percentage points to 47.5 per cent (or 1.1 percentage points to 44.8 per cent, excluding remediation) with positive jaws of 5 per cent. Remediation costs were down 32 per cent on the first nine months of 2017.

Credit quality across the portfolio remains strong with no deterioration in credit risk. The gross asset quality ratio remains in line with full year 2017 and 2016 at 28 basis points, despite the inclusion of MBNA. On a net basis the asset quality ratio increased to 22 basis points reflecting the expected lower write backs and releases.

Restructuring costs were £612 million, with £235 million in the third quarter. The third quarter charge included £35 million for severance costs relating to the Group’s strategic investment plans as well as the expected costs of the integration of MBNA and Zurich’s UK workplace pensions and savings business, ring-fencing and the rationalisation of the non-branch property portfolio. Volatility and other items of £207 million for the nine months included the £105 million loss on sale of the Irish mortgage portfolio. No additional charge was taken for Payment Protection Insurance in the quarter.

Balance sheet strength maintained with strong increase in capital Group loans and advances to customers increased by £2.3 billion in the quarter to £445 billion with growth in targeted segments partly offset by a reduction of £0.7 billion in the closed mortgage book. Over the last nine months, SME and Mid-markets grew by £1.9 billion and Motor Finance by £0.9 billion whilst balances on the open mortgage book of £267 billion are in line with the start of the year. The Group continues to expect the year end position for open mortgages to be slightly higher than the end of 2017. The Group continues to optimise funding and target current account balance growth, with combined Retail and Commercial current account balances up 7 per cent in the year.

In August, the Group completed its £1 billion share buyback programme and, with the final and interim dividends paid this year, has now returned more than £3.2 billion back to shareholders in 2018, equivalent to more than 4.5 pence per share. The Group’s CET1 ratio has strengthened to 15.5 per cent, pre dividend, an increase of 41 basis points in the quarter with continued strong profit generation partially offset by market movements and expected additional pension contributions. Capital build was 162 basis points for the year to date and post dividend accrual, the Group’s CET1 ratio was 14.6 per cent. The Group continues to expect to deliver c.200 basis points of capital build, pre dividend, in 2018 after the full year Insurance dividend, further pension contributions and bank levy in the fourth quarter.

Tangible net assets per share of 51.3 pence with underlying increase in the quarter of 0.3 pence before interim dividend payment.

Lloyds Banking Group shrugged off fears of a chaotic, no-deal Brexit and pledged to keep pumping credit into the economy regardless of the outcome of negotiations between Brussels and London.

The bank’s finance chief George Culmer told reporters on Thursday that Lloyds remains hopeful that the two sides can secure a deal before Brexit day in March 2019, when the UK will undergo its biggest policy shift in four decades.

“There is great uncertainty out there, but our continued expectation is for some sort of withdrawal agreement going forward,” Culmer said, adding that 97 percent of the bank’s business is UK-focused.

“What is fundamental is that we continue to support our customers whatever the outcome.”

The Bank of England has laid out a contingency plan to ensure that banks such as Lloyds, Britain’s biggest mortgage lender, do not suddenly slam the brakes on lending in the event of a no-deal Brexit.

Lloyds, which is a bellwether for the economy given its broad exposure to UK consumers, said it had seen no change in customers’ ability to repay debt.

Despite lengthy talks between Britain and the European Union, the terms of divorce remain uncertain five months before the country leaves the bloc with or without a deal.

That has clouded confidence in British lenders and helped to drag down Lloyds’ share price by 17 percent this year despite its strong performance.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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