It’s hard to see the wood for the trees when navigating the dense forest of the UK bank’s results. Lloyds (LSE: LLOY) (NYSE: LYG.US) is no exception: its 132-page announcement reports underlying, statutory, core and non-core profits.
So I’ve taken to applying my own consistent, judgmental analysis to banks’ income statements, sifting them into two figures: underlying profits — generally, what the bank would like their profits to be; and statutory profits before the fair value adjustment of the banks’ own debt (FVA) — that’s the warts-and-all bottom line. You can see my analysis of Barclays‘ results here.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
FVA — Lloyds calls it ‘own debt volatility’ — is a meaningless accounting adjustment which counter-intuitively represents changes in the market value of the bank’s bonds. Fortunately for Lloyds, it’s not a significant figure. These are the last three years’ results for Lloyds:
|
£m |
2011 |
2012 |
2013 |
|---|---|---|---|
|
Underlying profit before tax |
638 |
2,607 |
6,166 |
|
Exceptional/one-off items |
(435) |
840 |
(2,075) |
|
Litigation |
(3,375) |
(4,225) |
(3,455) |
|
FVA |
(370) |
208 |
(221) |
|
Statutory profit before tax |
(3,542) |
(570) |
415 |
|
Statutory profit before FVA |
(3,172) |
(778) |
636 |
Improvement
What matters is the top and bottom lines. At both the underlying and statutory level, Lloyds has shown remarkable improvement, with a near-tenfold increase in underlying profit in two years, and a statutory loss turned into a marginal profit.
The difference between underlying and statutory profit is made up of one-off costs (including £1.5bn of restructuring costs in 2013) and costs and provisions for regulatory misdeeds: in Lloyds’ case, this is mainly PPI mis-selling. Restructuring and mis-selling costs should fall away in the next year or two, which gives a clue to Lloyds’ future profitability.
It adds credibility to CEO António Horta-Osório’s claims that Lloyds is becoming a ‘normal’ bank again. A further £35bn of bad assets were shed, leaving £64bn more to go. The capital position is healthier, with a “CET1” ratio of 10.3% and leverage of 4.1%: Barclays was forced to undertake a rights issue to get that ratio up to 3%.
Making hay
With the push of economic growth and a vibrant housing sector, Lloyds is enjoying a moment in the sun. Resumption of dividend payments should turn it into a respectable income stock by next year. But trading at 1.7 times tangible net assets, there isn’t much margin for error.
