City experts say Lloyds Banking Group's first-quarter results, including a �3.2bn provision to cover payment protection insurance compensation claims, show the company is still paying the price of its merger with HBOS
Lloyds Banking Group: what the analysts say
Howard Wheeldon, the senior strategist at BGC Partners
'Yet another fine mess you got me into' might have been the perfect expression for the relatively new Lloyds Banking Group CEO, Antonio Horta-Osorio to have used in describing the unfortunate swing back into loss at the bank for the first quarter of 2011. Perhaps older hands at Lloyds might have preferred to go one step further - using the lyrics of the old Beatles song "Yesterday" [Yesterday, all my troubles seemed so far away, now it looks as though they're here to stay, oh, I believe in yesterday...] as they look back to a time when albeit considered pretty dull Lloyds TSB as it was then was a reasonably profitable member of the traditional pack of four UK clearing banks. So much for the past and the days before Lloyds' then-management in the form of then chairman Victor Blank and then CEO Eric Daniels were to be so brilliantly taken-in by that master of economic disguise Gordon Brown (you know, the former British Prime Minister who really did believe that he saved the world!) into taking on the fast failing HBOS.
Two and a half years after Lloyds took on HBOS and almost exactly ten years since the ridiculous 'city' induced merger between the then largest UK mortgage lender Halifax and the Bank of Scotland those that had placed their trust investing in any of Halifax, Bank of Scotland or Lloyds TSB have little left to look at but still burning embers. It doesn't really need me or anyone else to remind those that ended up holding Lloyds Bank shares following the 'takeover' of HBOS in September 2008 what happened next but I'll do it all the same ? a total of around �157bn governmental and central bank support (this has subsequently been reduced to �70bn) with the government and taxpayer left holding 41% of the shares, maybe around �16bn of additional subsequent losses following the takeover and to top it all now being forced under rules laid down by European regulators to shed as many as 600 branches. For this mess let me remind that we can only blame the immediate former management - so it's a very big thank you to Messrs Blank and Daniels for the mess that they left behind. What an awful mess it was too and particularly of the legacy that Sir Brian Pitman and other more worthy past members of this once fine bank had left them only a few years ago.
For all that and for all Lloyds Banking Groups additional round of bad news today, slipping back into a Q1 net loss of �2.4bn following the correct decision to set aside �3.2bn to compensate clients (in terms of the mortgage protection policy aspect we may assume that this is mainly from HBOS) for alleged mis-selling of insurance on mortgage loans there can be little doubt that Lloyds is on the mend. The new CEO Antonio Horta-Osorio has made great strides forward over the past few months. Despite the drop back in share price today following the latest round of disappointing news we may in little doubt that the huge additional set aside that they announced today most probably marks the end game of deep seated bad news that has been lurking around and still coming from the HBOS corpse over the past eighteen months.
Horta-Osorio may not have got this one absolutely licked yet but in our view he has got Lloyds back on the right road and importantly, heading in the right direction. Of course there will be many more potholes ahead but I doubt that any will be quite as deep or dangerous as those that we have already seen. The garage sale at Lloyds is yet to come and who knows what else the bank might decide to throw in! True also that the quality of underlying profits at Lloyds Banking Group leaves much to be desired and that being far more dependent than its peers on the specific UK banking arena meaning that it does not have large scale activities overseas or a massive investment banking scenario to hold things up there will remain worries over the parlous state of the UK economy and of how this might further play out to potentially impact on Lloyds. So not the end of bad news yet but for all that we should be able to believe that the worst is probably now over for Lloyds. As to the possibility of the government selling down the current state shareholding, I wouldn't get too excited just yet!
Bruce Packard of Seymour Pierce
Lloyds made a statutory loss of �3.5bn, including PPI provision of �3.2bn, which was well above expectations. This compares to Q1 2010 statutory profit of �721m, this quarter's loss is ten times higher than the full year 2010 statutory loss of �320m. Combined business made a pre-tax profit of �284m v �1.1bn in Q1 2010. At �2.6bn, bad debt impairments were higher than Q1 last year, but down on the �3.7bn in Q4 10.
Net Interest Margin has declined from 2.12% in the final quarter of last year to 2.07% driven by the increased cost of wholesale funding. This is surprising since the cost of wholesale funding ought to be falling, but is explained by the fact that Lloyds is increasing the term issuance on its debt and competing for deposits to strengthen the funding position. These conditions are expected to continue for the remainder of the year. Strong deposit growth of �6.8bn in the quarter ... Q1 tends to be a good quarter for deposits due to the ISA season.
Core tier 1 capital has fallen by 20bp in the quarter to 10.0%, despite RWA (risk-weighted assets) falling by �15bn, because of the large statutory loss reported. Although these numbers may be perceived as the new Chief Exec "kitchen sinking" the results in his first quarter we have another interpretation. In March last year Lloyds released a statement guiding the market higher, and at the half year reported an extraordinary 36bp increase in Net Interest Margin. Rather than a 2011 "kitchen sink" from an incoming Chief Exec, we would see these results in the context of a 2010 "massage table" from his predecessor. Our recommendation on Lloyds is HOLD, with a target price of 65p.
Richard Hunter, Head of UK Equities at Hargreaves Lansdown Stockbrokers
Whilst Lloyds believe the PPI provision will put an end to the issue, the pain is currently being felt both in terms of the quarterly performance and the current share price.
There are other elements of concern within the statement. Lloyds has not traditionally been able to benefit from the international diversification of some of its rivals and where it has, such as in Ireland, it has been forced to make further writedowns. In addition, subdued lending demand has led to a decrease in net interest margin, which is of some concern given the current benign interest rate environment. On the plus side, deposit growth by customers is progressive, whilst the cost synergies resulting from the HBOS integration programme appear comfortably on track.
John-Paul Crutchley of UBS
The �3.2bn cost of PPI redress is a very significant number but puts Lloyds at the forefront of the industry in terms of dealing with this issue. Other notable issues with the results include further significant funding issuance (�13.5bn) and asset disposals of �21bn including �10.7bn of Treasury Assets at very close to their marked level.
Ian Gordon of Exane BNP Paribas
Despite the dire warnings contained within Lloyds' 2010 results release in February, our perception is that market expectations ahead of today still held out some hope of margin expansion in 2011, as well as arguably ignoring the inevitable revenue impact of ongoing balance sheet shrinkage.
The Banking Net Interest Margin actually fell 5bps to 2.07% in Q1 2011, total revenues are worse - down 19% Q1/Q1 (partially reflecting a �426m loss on treasury asset disposals) - and broadly flat costs (as guided) appear to offer precious little relief to underlying numbers either.
Even after today's charges, this remains a risk ahead of the June investor day. However, aside from the one-offs, underlying profitability is still very weak indeed. Lloyds remains a multi-year restructuring story.
Source: http://www.guardian.co.uk/business/2011/may/05/lloyds-banking-group-what-the-analysts-say
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