On the face of it, today’s first-quarter update from Lloyds (LSE: LLOY) (NYSE: LYG.US) is somewhat disappointing. After all, pre-tax profit has fallen by 11% to £1.2bn in the first quarter of the year, which is clearly a result that no investor would be happy with – especially when you consider how strong the UK’s economic performance has been.
However, behind the headline figure are a number of positives for Lloyds, which makes it all the more enticing as an investment at the present time.
Underlying Performance
The main reason for the decline in profitability is a loss on the sale of Lloyds’ stake in TSB. In fact, with Lloyds agreeing to the sale of its remaining 40% stake in the newly created bank, it has booked a £660m loss. Were this to be stripped out of the first quarter figures, Lloyds would clearly have posted a much better result. In fact, underlying profits were 21% higher at £2.2bn and this should provide investors in the bank with a degree of confidence, since it shows that Lloyds is moving in the right direction.
Looking Ahead
Furthermore, today’s results are highly significant due to the reduction in provisions for fines and other regulatory action. For example, Lloyds has set aside no cash for payment protection insurance (PPI) claims in the quarter, and impairments for the quarter fell by almost 60% to £177m. This is great news for investors in the bank, as a large chunk of profit had, in the past, simply been diverted to provisions or swallowed up by impairment charges. If the first quarter’s reduction in such costs is the start of a trend, it will mean significantly more cash is available for shareholder payouts in the form of a rising dividend.
Valuation
Clearly, Lloyds has been a frustrating stock to hold over the last year, with its share price being up less than 1% while the FTSE 100 has risen by 2%. However, this could be about to change, since Lloyds offers extremely good value for money at the present time. For example, it trades on a price to book (P/B) ratio of just 1.1 and this shows that there is tremendous scope for a significant rise in its share price.
The catalyst that may cause this is improved performance. Certainly, Lloyds is benefitting from an improving UK economy and, looking ahead, this is likely to continue since a loose monetary policy appears to be here to stay for a number of years. And, with today’s first quarter results showing that there could be an end to the provisions for PPI miss-selling and a continued reduction in impairments, Lloyds’ profitability could surprise on the upside and lead to a significant rise in its share price.
So, while the outcome of the General Election in six days’ time could cause Lloyds’ share price to come under pressure in the short run, its long run prospects are very bright.
