Progress made but Lloyds far from out of the woods

Lloyds announced in its interim results statement on Friday it will consider the introduction of a special dividend or share buyback programme.

Progress made but Lloyds far from out of the woods


But, while  this is a clear demonstration of how much progress has been made, says OMGI’s Stephen Message, there are risks of which to be aware.

Lloyds CEO António Horta-Osório said: “The amount of retained capital is likely to vary from time to time depending on circumstances, but is currently around 12% plus an amount broadly equivalent to a further year’s ordinary dividend.”

The bank announced that further to an interim dividend of 0.75p per share – totalling £335m in payments to shareholders – there is a view to increasing the dividend pay-out ratio to “at least 50% of sustainable earnings”.

“On the current earnings forecast this translates to a dividend of about 5p per share in the next two or three years, which is a yield of around 6% with scope to grow in the longer term,” said Message, manager of the Old Mutual UK Income Fund, which holds a 3.6% weighting in the bank.

“On that assumption Lloyds could turn out to be one of the UK’s top 10 dividend payers in a few years.”

However, as at 11.10am on 31 July the Lloyds share price had dropped 2.6% to 84.37p, and Message issued a caveat on potentially damaging influences moving forward.

“As well as a negative impact if interest rates go out further than expected, Lloyds has paid upwards of £13bn in PPI claims,” he expanded. “It is a serious amount of money, and if that regulatory burden continues then it is a risk.

“But the biggest risk is if the UK economy starts to roll over, in which case Lloyds could struggle and the share price might not go up as much you would hope.”

In the six months to 30 June, Lloyds’ statutory profit before tax rose to £1.2bn, a 38% jump on the £863m recorded in H1 2014, while underlying profit rose 15% in the same time-frame to £4.38bn. This was in spite of a £1.4bn fine relating to a PPI investigation and £660m charge stemming from the sale of TSB.

Total income increased by 2% to £8.96bn, while net interest income rose 6% to £5.7bn boosted by a margin improvement of 2.62%.

A strengthened balance sheet resulted in the capital equity tier one ratio standing at 13.3%, up on the 12.8% recorded six months previously, while Lloyd’s total capital and leverage ratios were 21.7% and 4.9% respectively.

With the UK government’s stake in the bank reduced to 15% as at 15 July, Lloyds’ tangible net assets per share post dividend dropped slightly year-on-year, totalling 53.5p per share against 54.9p in 2014.

Underlying required equity returns rose incrementally to 16.2%, a 2.2 percentage point improvement on the prior year.

Horta-Osório added: “The continued improvement in financial performance and strong start to the next phase of our strategic journey in the first six months of the year position us well for the future, despite the uncertainties around the economic, regulatory, competitive and political environment.”