2016 got off to a rough start for Lloyds (LSE: LLOY) as turbulence in markets across the globe led Chancellor George Osborne to scrap plans to offload the government’s remaining 9% stake in the UK’s largest retail bank. Government bearishness combined with continuing worries over the £16bn PPI mis-selling saga kept shares underperforming the FTSE 100 for much of the beginning of the year.
Thankfully, things turned around in late February when Q4 2015 results revealed a huge increase in annual dividends from 0.75p to 2.75p per share. This news sent shares rocketing up 13% in one day to around 70p per share, near where they’d begun the year. Disappointing Q1 results that showed a 6% year-on-year drop in underlying profits and miserly 4.4% statutory return on equity (RoE) unfortunately sent shares tumbling back under 70p until they recovered slightly before the EU Referendum.
And then came Brexit. Shares promptly tumbled from 72.15p before the vote all the way down to 47.55p in early July. Half-year results released later that month went some way to soothing nervous investors as pre-tax profits more than doubled to £2.4bn due to the bank not setting aside further cash for PPI payouts and management targeting a further 3,000 job cuts and £1.4bn in cost cuts.
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As the first post-Brexit economic data began to trickle out and it became clear that the economy hadn’t fallen off the proverbial cliff, market confidence in Lloyds slowly crept upwards. And there was further good news in October as Lloyds set aside a further £1bn for PPI claims in Q3 but cheered analysts by announcing that the bank expected this payment to be its final major claim related to the insurance mis-selling scandal. Not even a 15% year-on-year drop in pre-tax profits was enough to dent investor enthusiasm at the prospect of Lloyds putting the £17bn scandal behind it.
Lost year?
However, even this good news wasn’t enough to fully reverse the stunning drop in share prices following the Brexit vote. Shares currently fetch 63.75p each, which is a full 9.5% lower than their price on the first day of trading in January. Does this mean 2016 has been a lost year for Lloyds? Not necessarily, but it hasn’t been an entirely positive one either. This is clear if we look at the results for the first nine months of both 2015 and 2016.
|
|
2015 |
2016 |
|
Underlying profit (£m) |
6,355 |
6,073 |
|
Cost:income ratio (%) |
48 |
47.7 |
|
Underlying RoE (%) |
15.7 |
13.6 |
As we see, the bank has made a bit of progress in trimming costs, which is a critical issue for all major retail banks as low interest rates crimp returns. That said, the loss of TSB from 2016 results and an increase in impairment charges did lead to lower pre-tax profits and the subsequent decline in underlying RoE.
What does all of this mean going into 2017? Well, this week’s announced £1.9bn purchase of MBNA’s UK credit card operations will provide some slight top-line growth. Outside of this riskier lending segment there isn’t much prospect for huge growth though. But if the bank is indeed done with PPI payments and the economy keeps growing, then income investors will have good reason to cheer the growth potential of what’s already a 3.6% yielding dividend.
