The upcoming financial update from Lloyds Banking Group (LSE: LLOY) promises to be one of the most closely-watched releases next week.
Trading numbers for 2018 are set to be unveiled on Wednesday, February 20. Amid a steady slew of disappointing updates on the health of the UK economy — like the 0.4% GDP dip recently reported for December by the Office for National Statistics — it will be interesting to see how Lloyds performed in the latter part of last year and has begun trading in 2019.
There are a number of key things that investors need to look out for in that upcoming release. In this article I will look at three of the most critical things to pay attention to.
Stagnating, or falling, revenues?
Lloyds is, of course, particularly susceptible to the Brexit-hit domestic economy because it relies on a strong UK retail sector to drive profits.
It’s already seen revenues growth decelerate sharply in the third quarter — in fact, net income stagnated on an annual basis at £3.2bn between July and September, reversing the rises of earlier in the year. I wouldn’t bet against another weak reading for the fourth quarter, given the steady deterioration of economic data since then.
Bad loans booming?
The other thing to look out for in troubled economic times like these is, of course, a rise in the number of bad loans that Lloyds has on its books.
Reflecting the worsening economic landscape, the FTSE 100 firm saw its asset quality ratio — that is, the loan impairment charge as a percentage of total loans — edge higher again in the third quarter, to 0.22%, from 0.2% in the first half.
This increase clearly isn’t seismic, and overall total impairments relative to Lloyds’ loan book remains low. But a possible spike in the fourth quarter, resulting in the bank missing its target of 0.25% for the full year, would be serious cause for concern.
Rising PPI claims?
After a brief moratorium, Britain’s banks have seen the quantity of claims relating to their earlier mis-selling of PPI products tick up over the last year, or so.
The Financial Conduct Authority’s decision in summer 2017 to implement a claims deadline of August 29, along with the advice “to encourage people to decide whether to find out if they had PPI and whether to complain or not,” has had the desired effect and individuals have been hitting the claims hotlines in their droves.
Lloyds itself bunged away an extra £550m for the first half of 2018 to take aggregated provisions to a shocking £19.2bn. A similar squirreling away of capital for PPI purposes has been seen over at Barclays and RBS since the midpoint of 2018. There’s never a good time to be facing additional hulking penalties, of course, but with the profits outlook already hampered by the difficult economic environment, the timing of these increased PPI costs couldn’t come at a worse time.
Lloyds is cheap, but its forward P/E ratio of 7.8 times still isn’t enough to encourage me to invest. I expect newsflow to remain troubling throughout 2019, and quite possibly beyond. For this reason, it’s best avoided, in my opinion.