Lloyds (LSE: LLOY) released its latest half-year results this morning. They come at a time when the long shadow of PPI mis-selling claims is finally set to pass (29 August), but to be replaced by the rapidly-approaching dark clouds of Brexit and a potential UK recession.
Here, I’ll look at how Lloyds performed in the six months of the year, the near- and longer-term outlook for the business, and whether I’d buy or avoid the shares.
Shares down on results
The rate of consumer credit growth has been sliding in recent months, and Lloyds reported a 2% decline in net income for H1. More positively, operating costs were 3% lower, and total costs down 5%.
However, pre-tax profit of £2.9bn (down 7%) was weaker than expected, partly due to a higher PPI provision. A Q2 provision of £550m took the first-half total to £650m, compared with £200m in the same period last year. Shareholders can only be thankful this saga will soon be over.
There was another negative though, that could become an increasing drag if the economy is turning down. The first half saw a 27% increase in loan impairments to £579m from £456m. Most of the damage was done by the retail banking divisions of unsecured lending and motor finance (areas to which Lloyds has ramped up exposure in recent years). Two individual corporate names also ensured commercial banking contributed negatively to impairments.
Chief executive António Horta-Osório described the financial performance as “good,” highlighting the bank’s “market leading efficiency and returns,” as well as continuing “strong strategic progress.” Despite this, and the announcement of a 5% increase in the interim dividend, the shares fell as much as 5.4% in early trading.
Near- and longer-term outlook
Horta-Osório noted that “economic uncertainty has led to some softening in business confidence as well as in international economic indicators.” However, he reckons the resilience of the group’s business model will enable it to maintain the first-half net interest margin of 2.9% for the full year. He also expects the cost/income ratio to improve, with operating costs falling to below £8bn from £8.2bn last year.
Looking beyond 2019, he said: “Longer term targets remain unchanged although continued economic uncertainty could impact outlook.” If its longer-term targets are realised, shareholders should be able to look forward to sustained earnings and dividend growth.
However, we have the risk of “economic uncertainty” impacting the outlook, and then there’s the risk of an actual full-blown economic recession, perhaps catalysed by a no-deal Brexit. The recent fiscal risks report from the Office for Budget Responsibility, which includes a fiscal stress test for such a Brexit, makes for grim reading. And it’s not even a worst-case scenario.
A bet on an orderly Brexit
Lloyds today reported tangible net asset value (TNAV) per share of 53p, while the share price is at a tad of a discount at 52.7p, as I’m writing. The forward price-to-earnings (P/E) ratio is 6.9 and the prospective dividend yield is 6.5%.
I see Lloyds as very much a bet on an orderly Brexit, against which is the risk of a no-deal departure and recession, with Lloyds’ TNAV, earnings, dividend and share price all heading deeply south. Some may see this as a good risk-reward proposition, but it doesn’t appeal to me, and I’ll continue to avoid Lloyds at this stage.