Why Shares In Lloyds Banking Group PLC Fell After One Of Its Best Quarters

Lloyds Banking Group PLC (LON:LLOY) may not be a great bet after all, argues Alessandro Pasetti.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Lloyds (LSE: LLOY) reported today its best quarterly results for some time, which showed the highest net interest income level, the lowest level of impairment and record underlying profit over the last five quarters. Mid-afternoon on Friday, its shares are giving up some 2.5% of the gains they had recorded in recent weeks, however.

Why is that? 

Fundamentals

Net interest income stood at almost £2.9bn — the highest level since the quarter ended on 30 June 2014 (2Q14). Add to it some £1.6bn of “other income”, and its total income, or bank revenues, is £4.54bn in the second quarter 2015.

Lloyds is a rather stable business, so the annualised figure of £18bn for 2015 revenues makes a lot of sense.

It would mean that Lloyds won’t disappoint investors, who have pencilled in a revenues target of £18.2bn for the year — its top-line will likely be flat year-on-year. 

This is not ideal to back a Lloyds investment at 83p a share, based on its implied price to tangible book value ratio, which is way too high, I’d say.

Costs, Underlying Profit

Operating costs and lease depreciation stood at £2.3bn, but impairment charges, at £21m, plummeted to their lowest level since 2Q14 — the quarterly impairment average, excluding the current quarter, comes in at £213m, and shows a declining pattern from £300m during the period. 

That’s the reason why, once all the costs are deducted, its underlying profit (at £2.2bn in this quarter) was better than in the previous quarter, at £2.06bn. It sends a mixed signal: Lloyds may need to cut costs, but it needs investment to grow — and this could be another problem in future.  

Its second-quarter underlying profit, excluding the contribution of TSB‘s earnings, compares with: 

  • £2.06bn in 1Q15
  • £1.67bn in 4Q14
  • £2bn in 3Q14
  • £1.9bn in 2Q14

Growth, Government Overhang & Provisions

It doesn’t take a financial guru to understand that Lloyds lacks growth, and it couldn’t be otherwise in a low-rate environment where the direction of interest rates remains highly uncertain. That combines with downwards pressure on the stock stemming from a meaningful stake that is stil being held by the government, which must sell about 16% of Lloyds stock in the market. 

Its bottom line rose more than 30% on a comparable basis, but investors are not paying attention to its net income. 

Rather, they are focused on the risk that the bank may have to set aside more capital for its bad behaviour in the past.

And this the biggest problem of all

(Its interim dividend came in line with expectations, and is below 1p a share; Lloyds also hinted at buybacks and special dividends to deliver shareholder value, both of which theoretically should help its stock price rise.)

Non-Recurring Items 

“Statutory profit before tax up 38% £1,193m (2014: £863m), including charge of £1,400m for PPI and £660m charge relating to the disposal of TSB,” the bank said today. 

Certain non-recurring items had a big impact on its financials today and, unfortunately, nobody knows whether these items will prevent the bank from returning excess capital to shareholders over time.  

As it clearly emerged this week during several conference calls between analysts and chief executives at some of the major banks in the UK and Europe, the outlook for the second half of the year isn’t exactly easy to predict.

Litigation risk, and similar risks, are giving sleepless nights to the banks’ bosses. 

In this context, Lloyds said today that “the additional (£1.4bn) provision for PPI is disappointing. It mostly reflects higher than expected reactive complaints with higher associated redress and is covered in more detail in the chief financial officer’s review of financial performance.

Now, I don’t now if similar provisions will emerge again — but this quarter’s figure was by far the highest since 2Q14. (The average for the 2Q14-2Q15 period is about £775m.)

What I know, though, is that “conduct provisions” amounted to zero in the last quarter, when Lloyds’ share price surged 7% in a single day of trade. The market decided to bet on LLOY at the end of April, but was caught by surprise today — and if that happens again, talk of higher dividends and buybacks will be soon forgotten.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Can the Rolls-Royce share price hit £13 in the coming year?

After a stunning couple of years for the Rolls-Royce share price, can it keep up its recent momentum? This writer…

Read more »

Calendar showing the date of 5th April on desk in a house
Investing Articles

Here’s how a £20k ISA could produce £1,580 of passive income in the next year

A Stocks and Shares ISA stuffed with dividend shares can be a lucrative source of passive income. Christopher Ruane explains…

Read more »

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »