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Lloyds Banking Group: Strong performance YTD and guidance raised post Q3 results

Lloyds Banking Group is a leading provider of financial services to individual and business customers in the UK, whose main business activities are retail and commercial banking and long-term savings, protection, and investment. The Group operates the UK’s largest retail bank and has a large and diversified customer base.




Its shares have a premium listing on the London Stock Exchange (symbol: LLOY), have a market cap of £31bn and are a constituent of the FTSE 100 index.

We were delighted to welcome Douglas Radcliffe, Group Director of Investor Relations and Andrew Pipe, Head Economist, to the latest Yellowstone Advisory and ShareSoc webinar to provide an update on the recent third quarter results and the groups plans going forward. A recording of the webinar is available here.


The webinar started with a presentation from Andrew on the Lloyds’ view on the UK economy, which is key to Lloyds performance going forward given 97% of their business is generated in the UK and the performance of the UK economy has a big impact on their impairment charge and consequently profitability. The economy suffered significantly from the pandemic and is still recovering from this, there has been a huge impact from the Russian invasion of Ukraine and inflation is currently running at over 10%, a figure that many people will have never experienced before.


That said the UK economy is performing better than many people had assumed. GDP is also back to pre-pandemic levels, we have the lowest unemployment since 1974, house prices have grown 20% to record levels versus household income and commercial real estate is up 10% despite concerns that working from home would have on the sector. Its not all rosy as we have witnessed a weaker GDP recovery than some other western economies, low unemployment has been impacted by a big increase in the number of inactive people and long-term sick. So the economy could do with some help and factors that were highlighted as important included: improving health outcomes, productivity growth, investment in education, training and skills and infrastructure. There is also the immediate issue of the cost-of-living crisis which needs to be addressed. Higher energy costs will make the country 2-3% poorer and growth will not offset this resulting in the country going into recession. Higher costs feed into higher inflation and the Bank of England is raising interest rates in an attempt to prevent high inflation becoming embedded in the economy.


The good news is that the majority of economists expect this to be a mild recession as unlike previous recessions, it hasn’t been preceded by a build up of private sector debt. There is concern though about government debt which has been rising for the past 13 years and limits government’s ability to intervene. Looking at Lloyds forecasts relative to others in the market they have taken a slightly more cautious or prudent approach and have unemployment rising to 5.5% and house prices falling by 10%. Overall, they expect an economic recovery to come more swiftly than after previous recessions and all theses factors are incorporated into the assumptions on impairment charges. This was an excellent summary of the Lloyds economic viewpoint and provided great context for the business and financial update that Douglas took the audience through.


Douglas started with a reminder of the Lloyds strategy which is centred around helping Britain prosper. The strategic vision is to be a UK customer focused digital lead and integrated financial service provider. The strategy is to create sustainable value for all stakeholders through 3 primary pillars. These are: revenue growth and diversification; cost and capital efficiency, and efficient execution through people, platform and data.


Growth is a core focus of the strategy and over 2/3 of investment is directed to this area. In the consumer market they are making it easier for customers to access new products and they are developing their offering for the mass affluent sector. In the SME market they are looking to digitalise their offer and grow new products and sectors where they have low market shares. Lloyds is also working to support its customers through these more challenging times and has specific programs for retail, commercial and insurance customers.

Douglas then went through the Q3 financial performance and picked out a few numbers. Net Interest Income rose 12% to £13bn, the net interest margin improved to 284bps, operating costs rose 6% and underlying profits rose 29%. However, there was big swing in the impairment charge reflecting the weaker economic outlook and underlying PBT fell 7% to £4bn. Strong capital generation improved the core tier 1 equity capital ratio to 15%.

This strong financial performance was reflected in strong business performance in the different customer franchises. Mortgage balances rose £1bn to £310m, credit card balances rose modestly and commercial banking loans rose £0.6bn. On the other side of the balance sheet retail deposits rose £1.4bn, commercial deposits rose £3.5bn and the insurance business generated £6bn of net new money.


Net income rose 12% and this was helped by net interest income that rose 15% to £9.5bn and a lower operating lease charge that fell 23%. The group now has £450bn of interest earning assets. In terms of guidance the group is assuming a base rate of 4% by the year end which will act as a tailwind to margins and Lloyds has increased its guidance for net interest margin to 290bps accompanied by low single digit volume growth.


On the cost side, operating costs rose 6% to £6.4bn and the cost income ratio fell again to 47.8% driven by the growth in income. The group is experiencing inflationary pressures of 10% but will seek to offset these costs where possible. Strategic investment is expected to peak next year which will have an ongoing benefit on the cost income ratio.

Moving onto Impairments, the observed asset quality remains strong but the impairment charge has increased due to Lloyds forecasting a deteriorating economic outlook. The pre-economic charge figure is £250m, equivalent to an asset quality review of only 21bps. The year-to-date impairment charge is £1bn, equivalent to an AQR of 30bps and this is expected to the case for the full year.


There are few signs of pressure in the customer base currently and discretionary spend continues to increase. SME overdrafts and revolving credit facilities are stable as are invoice financing debtor days. Given the economic forecasts this could change but for now there has been no deterioration in these numbers.


Statutory profit came in at £4bn and return on tangible equity was 12.9% and this is expected to increase to 13% at the FY. Capital generation of 191bps YTD is strong and includes 169bps from banking generation and is after £800m (31bps) of pension contributions. The common equity tier 1 ratio of 15% is very strong and for the full year the group expects to increase capital generation to 225-250bps. Capital will be distributed to shareholders via a progressive and sustainable ordinary dividend supported by the return of excess capital and a decision on this will be made at the FY results. At the HY the ordinary dividend was raised 20% and based on previous patterns you might expect the FY dividend to be also raised 20%. Surplus capital is that capital above a 13.5% TIER1 capital ratio and last year the board approved a return of capital above 14%. Both buy backs and special dividends are considered.


In summary, Lloyds Banking Group is performing well and facing the future with confidence despite the difficult environment. Their low-risk portfolios are well positioned for challenging times. The group has delivered a strong performance so far this year and guidance was raised at the Q3 update to include NIM above 290bps, AQR of 30bps and capital generation of 225-250bps.


This felt like a more upbeat presentation from Douglas and Andrew reflective of the strong performance delivered this year by Lloyds Banking Group. With the upgraded guidance investors should be able to look forward to 2023 with more optimism.


A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact info@yellowstoneadvisory.com

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