Lloyds Banking Group saw pre-tax profits double in the three-months to the end of March after bank overcame a "challenging" environment that included another hit for payment protection insurance mis-selling.
The group’s first quarter trading update reports pre-tax profits of £1.3bn, up from £654m a year before. It is also one-third higher than the £973m reported for the previous three-month period.
The profit rise comes in spite of further compensation for payment protection insurance mis-selling and the cost of compensating customers for fraud in the HBOS Reading branch.
António Horta-Osório, group chief executive, said: “In the first three months of this year we have delivered strong financial performance with increased underlying profit, a significant improvement in statutory profit and returns, and strong capital generation.
“These results continue to demonstrate the strength of our customer focused, simple and low-risk business model and our ability to respond to a challenging operating environment.”
Lloyds Banking Group intra-day share price
Source: FE Trustnet
Lloyds – which is now 2 per cent owned by the UK taxpayer, down from 43.4 per cent after the government bailed out that bank at the height of the global financial crisis – rose by around 4 per cent in early trading.
Neil Wilson, senior market analyst at ETX Capital, says the bank appears to be “hugely profitable”. It is generating an underlying return on tangible equity of 15.1 per cent while statutory return on equity was 8.8 per cent.
“Lloyds remains the star of the UK banking show with another impressive set of numbers in its first quarter trading update,” Wilson said.
“Shares in Lloyds have already bounced more than a third higher since the immediate aftermath of the Brexit vote in June. Lloyds’ resilience is based a lot on the continued health of the UK economy but we must factor some downside risks, particularly around credit risks. Its increased exposure to the UK credit card market through the acquisition of MBNA is a risk for sure.
“The timing is suspect with expansion in consumer lending making it more exposed to a downturn in the UK economy. Impaired loans were steady with the previous quarter, and slightly better than a year before. Rising unsecured consumer debt is a risk that the Bank of England has rightly flagged.”
Performance of Lloyds vs FTSE All Banks sector over 5yrs
Source: FE Analytics
However, despite this risks, the analyst describes Lloyds as being “on the up”.
“The comparison with RBS – which was also bailed out by the government – is striking. While Lloyds is poised to return fully to private ownership, RBS remains largely taxpayer-owned. RBS made a £4bn loss in 2016, while Lloyds generated a £4.2bn statutory profit,” he added.
“The two leading high street lenders could not have fared differently in the last nine years. The government will be able to make a tidy sum as it offloads the rest of its stake in the coming weeks.”
Lloyds is a common holding in many UK equity funds.
Data from FE Analytics shows that more than 10 per cent of funds in the IA UK All Companies sector and close to 18 per cent of IA UK Equity Income funds have the bank in their top 10 holdings. Many more hold the stock within their wider portfolios.
Helal Miah, investment research analyst at The Share Centre, highlights the attractiveness of the bank to investors with an income mandate: “The dividend yield is set to improve and as a result, the company will therefore begin to appeal again to income investors.
“However, we continue with the view that the macro-economic environment will be very uncertain for the banks and we are wary of the impact that Brexit could have on consumer and business confidence. We therefore continue to recommend Lloyds as a ‘hold’ for medium-risk investors.”
Funds with the bank in their top 10 holdings include JOHCM UK Equity Income, Jupiter UK Growth, M&G Recovery, Premier Income and Schroder UK Alpha Income.