Lloyds Banking Group (LSE: LLOY) has reported a 26% fall in pre-tax profit for 2019, to £4.39bn. That’s down from £5.96bn a year ago, and a bit below analysts’ forecasts.
Profits were hit by a hefty PPI charge of £2.45bn, bringing the total cost of the mis-selling scandal to £21.9bn. With that uncertainty finally settled, investors seem to have gained a little more confidence, and pushed the Lloyds share price up 3% in morning trading.
Lloyds put underlying profit at £7.5bn, down 7%, in what it called “a challenging external market.” But chief executive Antonio Horta-Osorio described 2019’s underlying performance as “resilient, reflecting the health of our customer franchise and the strength of the business model.”
In other headline news, the CEO’s pay package was cut by 28% to £4.73m, and the firm’s staff bonus pool has been pared by a third.
Brexit
Investors fear economic pressure could hurt Lloyds profits further, especially if the UK’s Brexit trade negotiations turn sour. And right now, the noises coming from our negotiation partners aren’t encouraging. It could hit mortgage lending and business credit, and perhaps even impact on our precious dividends.
But for 2019, at least, things didn’t look too bad. Lloyds posted growth of £3.5bn in its open mortgage book, though that does include September’s acquisition of Tesco Bank’s mortgage portfolio. Retail current accounts were up £3.2bn too.
Lloyds lifted its annual dividend 5%, to 3.37p per share. That’s bang in line with expectations, and amounts to a yield of 5.9%. I’m reasonably happy about that, even though it was only thinly cover by reported earnings per share of 3.5p.
Caution
But I’m cautious of complacency, as there’s definitely a squeeze on cash available for shareholders. In 2018, Lloyds handed back £1.1bn in the form of share buybacks, but none in 2019. The buyback programme was halted when the scale of PPI costs started to become clear.
But if I had uncertain debts ahead of me, I’d be holding back on any expense as hard as I could until I knew exactly how much I’d have to pay. So I do wonder if the bank should have been more conservative with the cash a bit earlier.
I also think Lloyds might have done better by reintroducing its dividends a bit more gradually. As well as the financial cost, the banking crisis was hugely embarrassing for the banking sector as it screamed incompetence. There was clearly pressure to show a rebound to health, and rapid dividend growth was part of that. But maybe that was more short-term thinking.
Outlook
Addressing the bank’s outlook, Horta-Osorio said: “Uncertainty remains given the ongoing negotiation of international trade agreements and the rate outlook remains challenging.” And I see a tension there with analysts’ forecasts taking the dividend yield up to 6.5% by 2021.
I wouldn’t be surprised to see Lloyds dividend held flat for a couple of years, and I think that might be a wise move for the long term. Either way, even with a tough economic outlook, I still see Lloyds shares as a buy.