Yesterday’s full-year results from Nationwide Building Society were a painful reminder of just how badly the UK’s listed banks are performing.
Gross mortgage lending rose by 20% to £32.6bn, giving Nationwide a 14% share of the market. The group also opened 525,000 new current accounts, a 12% increase from last year.
Indeed, customers appear keen to switch from listed high street giants such as Lloyds Banking Group (LSE: LLOY) to Nationwide. The number of customers switching current accounts to Nationwide rose by 38% last year. Savers deposited an extra £6.3bn in Nationwide’s accounts — up from £1.9bn in 2014/15. In contrast, Lloyds’ customer deposits fell by 1% last year.
All of this new activity helped push Nationwide’s underlying profits up by 9% to £1,337m. Reported profit rose by 23% to £1,279m. The equivalent figures for Lloyds were a 5% rise in underlying profit to £8,100m and a 56% rise in statutory profit to £1,499m.
Why the difference?
The big listed banks expanded too fast during the credit boom. They’ve ended up with a poisonous legacy of bad debts and multibillion pound misconduct charges. Last year, Lloyds’ reported PPI compensation and misconduct charges totalling £4.8bn. That’s why Lloyds’ underlying profit figure was so completely different to its statutory profits.
In contrast, Nationwide’s lack of exceptional costs resulted in near-identical statutory and underlying profit figures for last year.
A clean set of figures like this must be the stuff of dreams for the bosses of listed banks such as Lloyds, but is it something shareholders can hope for in the near future?
This lengthy clean-up will end
I believe that big listed banks such as Lloyds will eventually come to the end of the credit boom clean-up process. When this happens, profitability and shareholder returns should improve and genuine new growth may be possible.
The problem is that we don’t know how long this process will take. Seven years after the crash, all of the big banks are still working their way through portfolios of bad assets.
Analysts’ forecasts suggest Lloyds may now be close to a recovery. Post-tax profits are expected to rise this year, funding an 88% dividend increase to 4.2p per share. That’s equivalent to a forecast yield of 5.8%.
Lloyds is also the only big listed bank to trade at a premium to its tangible net asset value. The current share price of 73p represents a 40% premium to tangible net assets per share of 52.3p. That premium could be a signal that the market believes Lloyds is returning to business as usual and will deliver acceptable returns from its assets.
Can Lloyds match Nationwide’s success? In fairness, Nationwide is much smaller and doesn’t have Lloyds’ exposure to business customers. Strong government support for the housing market has probably also helped Nationwide to expand.
But companies make their own luck. Lloyds should probably focus on the two areas Nationwide chief executive Joe Garner believes has driven the mutual’s success: attractive products and good customer service.
Mr Garner expects the “increased switching and redemption behaviour” seen last year to continue as current account switching becomes quicker and easier.
In my view, this is an opportunity for Lloyds to return to the kind of banking that once made it both popular and profitable.