By Serge Khairallah

LLOYD plc , a group of retail and commercial banks situated in both Britain & Scotland have been demonstrating positive performance in multiple sections but unfortunately , the fear of a hard Brexit have been dominating the headlines and as a result scaring investors away .

I will focus in this article on the fundamental points that support my bull case by dividing it into three main parts starting with the bank top & bottom line, moving to key metrics like assets quality then & finally potential near term risks .

Top & Bottom line :

With a brief look at the income statement , we can see that both top & Bottom line have increased . Total income has risen from 13,150 million for the 9 months ended 30 September 2016 to 13,893 mill for the 9 months ended 30 September 2017, a 6 % increase divided between an increase of 6% for the NII ( net interest income ) & 6% increase for the other income .Simultaneously, operating cost has increased only by 1 % from 5,959 mill to 6,019 mill ( Excluding MBNA, operating costs were down year-on-year ) which proves the efficacy of the cost reduction plan followed by the bank aimed at an annual run-rate saving of 1.4 billion £ by the end of the year. As a result , the company provided a positive operating jaw YoY .

Along , NIM ( Net interest margin ) have increased for the 9 months ended September 2017 to 2.85% from 2.72% for the 9 months ended September 2016 .

Moving to loans and deposit , loans have been growing over the course of the year but deposits have been resilient :

 

Key ratios :

With the increase in the loan portfolio , one key metric to watch very closely is the impaired loans as percentage total loan portfolio . The latter have improved YoY to 1.7% in 2017 from 1.8% in 2016 and 2.1% in 2015 which is considered extremely healthy metric especially with all the recent uncertainty and fear from the current economic conditions :

Another key metric to watch is Capital requirement CET1 which increased from 14.0% to 14.9% QoQ & the statutory RoTE ( return on tangible equity ) which increased  from 7.6% to 10.5% for the 9 months ended 30 September along with the closing gap between statutory & underlying RoTE :

The bank achieved a Cost:income ratio of 45.9% for 9 months ended September 2017 compared to 47.7% for the 9 months ended September 2016 and which is one of the best between its peers.

Almost a year ago ,  Lloyd group completed its acquisition of MBNA , its first major acquisition since the financial crisis . The latter is a consumer credit card provider with 7 million customers in the UK which helped Llloyd group increase it’s credit card market share to 26% , right behind Barclay’s 27% market share & regarding the 3rd quarter , MBNA impact on net interest income is an increase by 5 basis point along with an increase of interest-earning assets by 2% QoQ .

Risk :

The company currently faces two uncertainty . The first one is the PPI ( Payment Protection Insurance ) for which the company , after putting aside a provision of 2.3 Billion pound , still don’t have a clear vision for the actual required amount .For the 3rd quarter PPI claim levels increased following the FCA advertising campaign, reaching c.16,000 per week and have now reduced to c.11,000 per week (above the bank’s assumed run-rate of c.9,000 per week ) .

 Second , the upward pressure on Capital requirement for the CET1 & Pillar 2A , as stated by the company

The Group’s current view of the appropriate level of CET1 capital required to grow the business, meet regulatory capital requirements and cover uncertainties is around 13 per cent. Capital requirements however continue to evolve and during the third quarter the Prudential Regulation Authority (PRA) has increased the Pillar 2A CET1 requirement from 2.5 per cent to 3 per cent. The additional Pillar 2A capital will be held at year end and as a consequence, while other elements are still uncertain, there is upward pressure on the Group’s overall capital requirement of around 13 per cent. “

Conclusion :

The bank is showing positive signs but caution is necessary , as shown , the company was able to deliver the best Cost to Income ratio between its peers while increasing its loan portfolio and keeping a healthy trend of impaired loans . All of these improvements are not without risk , starting with capital requirements , uncertainty regarding PPI provision , and the unknown outcome of the Brexit talk .

 

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