Lloyds heading in right direction as underlying profits rise to £8bn

Helal Miah, Investment Research Analyst at The Share Centre, explains what Lloyds’ results mean for investors

Article updated: 21 February 2018 10:00am Author: Helal Miah

Despite the fact that Lloyds Bank’s full year results missed expectations due to ongoing PPI issues, there are many positives to take away, among these that shares are trading higher, up by roughly 2% at the open.

Bank posts reassuring full year numbers

Underlying profits rose by 8% to £8.5bn, while reported net profits jumped by 41% to £3.5bn. The net interest margin rose to 2.86% and the group have set a market leading cost to income ratio of 46.8%. We have seen further improvements in the balance sheet and its tier 1 equity ratio has risen to 13.9%.

Provisions for PPI claims have had an impact on results

However, the issue of PPI claims has not entirely gone away and, for 2017, the bank made another £1.65bn of provisions. This was more than expected which largely explains the miss compared to analyst expectations.

Lloyds is heading in the right direction

We are seeing a bank heading in the right direction after a decade long process of restructuring following the financial crisis. The bank is no longer in government hands and income investors will be particularly pleased to see the dividend hiked by a further 20% to 3.05p as well as the shares to be supported by a £1bn share buyback programme. Past restructuring and cost cutting programmes will continue to show through on its cost to income ratio which Lloyds aims to be in the low forties by 2020.

Whilst regulatory pressures remain, improvement in margins anticipated if interest rates rise and restructuring continues
Regulatory changes will continue to put pressure on margins and the group’s focus on being a more digital bank will have IT infrastructure related spending costs in the short to medium term. Going forward, net interest margins should improve if interest rates are on an upward path and that PPI claims will come to an end.

We currently recommend Lloyds as a ‘hold’ for medium risk investors

We still believe that some uncertainties remain in the banking sector but we would not discourage those keeping an eye on the potential for income from looking at the group. Overall, these are a good set of results for one of the lower risk banks in the UK.

All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Helal Miah portrait photo
Helal Miah

Investment Research Analyst

After graduating with an economics degree from University College London, Helal started his career within private banking at Smith & Williamson Investment Management and later held analyst and fund manager roles with the Industrial Bank of Japan, Schroders and Mitsubishi Corporation. He is a chartered fellow of the Chartered Institute for Securities & Investment.