It’s hard to see the wood for the trees when navigating the dense forest of the UK bank’s results. Lloyds (LSE: LLOY) (NYSE: LYG.US) is no exception: its 132-page announcement reports underlying, statutory, core and non-core profits.
So I’ve taken to applying my own consistent, judgmental analysis to banks’ income statements, sifting them into two figures: underlying profits — generally, what the bank would like their profits to be; and statutory profits before the fair value adjustment of the banks’ own debt (FVA) — that’s the warts-and-all bottom line. You can see my analysis of Barclays‘ results here.
FVA — Lloyds calls it ‘own debt volatility’ — is a meaningless accounting adjustment which counter-intuitively represents changes in the market value of the bank’s bonds. Fortunately for Lloyds, it’s not a significant figure. These are the last three years’ results for Lloyds:
|
£m |
2011 |
2012 |
2013 |
|---|---|---|---|
|
Underlying profit before tax |
638Â |
2,607Â |
6,166Â |
|
Exceptional/one-off items |
(435) |
840Â |
(2,075) |
|
Litigation |
(3,375) |
(4,225) |
(3,455) |
|
FVA |
(370) |
208Â |
(221) |
|
Statutory profit before tax |
(3,542) |
(570) |
415Â |
|
Statutory profit before FVAÂ |
(3,172) |
(778) |
636Â |
Improvement
What matters is the top and bottom lines. At both the underlying and statutory level, Lloyds has shown remarkable improvement, with a near-tenfold increase in underlying profit in two years, and a statutory loss turned into a marginal profit.
The difference between underlying and statutory profit is made up of one-off costs (including £1.5bn of restructuring costs in 2013) and costs and provisions for regulatory misdeeds: in Lloyds’ case, this is mainly PPI mis-selling. Restructuring and mis-selling costs should fall away in the next year or two, which gives a clue to Lloyds’ future profitability.
It adds credibility to CEO António Horta-Osório’s claims that Lloyds is becoming a ‘normal’ bank again. A further £35bn of bad assets were shed, leaving £64bn more to go. The capital position is healthier, with a “CET1” ratio of 10.3% and leverage of 4.1%: Barclays was forced to undertake a rights issue to get that ratio up to 3%.
Making hay
With the push of economic growth and a vibrant housing sector, Lloyds is enjoying a moment in the sun. Resumption of dividend payments should turn it into a respectable income stock by next year. But trading at 1.7 times tangible net assets, there isn’t much margin for error.