- Pre-tax profit tops estimates
- No change to full-year targets
- Remediation costs still unknown
There was little initial follow-through after today’s third-quarter trading update from Lloyds Banking (LLOY), as while earnings beat estimates the group maintained its full-year outlook and questions remain over its liability for discretionary commission payments.
The shares added 1p or 1.7% to 63p taking their gains over the last year to 50% against a 13% rise in the FTSE 100 index.
BETTER BOTTOM LINE
Pre-tax profit for the three months to September came in at £1.82 billion, 8% lower than last year but ahead of the consensus forecast of £1.65 billion, thanks to slightly better-than-expected income, slightly lower-than-forecast costs and lower impairment charges for bad loans.
Net interest income was £3.23 billion, an increase of 2% on the same period last year, with a banking net interest margin of 2.95% against 2.93% in the previous quarter.
‘Other’ income jumped 10% to £1.43 billion in the quarter, driven by ‘strengthening customer and market activity and the benefit of strategic initiatives,’ according to the bank.
Operating costs were 2% lower than the previous year at £2.29 billion, but net underlying impairment charges were just £172 million, meaning for the nine months to September charges were £273 million against £849 million a year earlier.
That represents just 0.09% of the loan book against full-year guidance of more than twice that level, so the bank clearly feels the ‘resilient credit performance’ it has seen so far this year can continue and there is little risk of a rise in bad debts.
There was no significant charge for remediation, as the FCA (Financial Conduct Authority) review of discretionary commission deals in the car loan market isn’t due to complete until May 2025, but most analysts expect the bank to have to put aside around £1 billion as its Black Horse agency is a leading player in the motor finance market.
GUIDANCE LEFT UNCHANGED
The bank kept its outlook for the full year, continuing to target a net interest margin of more than 2.9%, operating costs of around £9.4 billion, an impairment ratio of under 0.2%, ROTE (return on tangible equity) of 13%, capital generation of around £3.9 billion and a 13.5% CET1 (core equity tier one) capital ratio.
While there was no change to the current dividend or buyback policy in the trading update, Shore Capital’s bank expert Gary Greenwood expects Lloyds to announce a further £2 billion share buyback with its full-year results in January given that figure would be comfortably covered by the estimated capital generation of around £4 billion.
