Earnings Review: Lloyds Banking Group
- The U.K. based bank posted its highest profit in a decade.
- To show the tremendous financial strength they have the bank announced a special dividend.
- Although Brexit uncertainty is on the horizon the bank has more room to grow and is undervalued.
Lloyds Banking Group Plc(LYG) is a financial services company, which provides a wide range of banking and financial services. It operates through the following segments: Retail Banking, Commercial Banking, Insurance, Consumer Finance, and Runoff and Central Items. The U.K. bank reported earnings of £0.029/share($0.04/share) and revenue of £9.27 billion($11.5 billion). Lloyds Banking Group revenues have declined 18.1% year over year. However, in terms of profitability the bank posted its highest profit in a decade. Lloyds Banking Group’s profits grew by 158% to £4.24 billion ($5.28 billion). This is mainly attributed to their cost cutting measures.
Looking at the net interest margin which is an important metric for banks it increased by 0.08%. Although rates were cut by the Bank of England from 0.5% to 0.25% the bank was still able to have an increasing net interest margin. The bank’s operating costs were lower by £2 billion($2.49 billion) as the bank has closed a number of branches and has moved online. Lloyds Banking Group is largest digital bank with 12.5 million active users a number that will grow with the millennial generation growing. Lloyds is still integrating the credit card business it acquired from Bank of America. The bank paid £1.9 billion ($2.37 billion) and expects to get 17% return on investment this year.
Given the positive numbers from the bank, management announced a special dividend of 0.5p/share($0.01/share) on top of the ordinary dividend of 2.55p/share ($0.03/share). The bank is also in a strong financial position with a capital ratio of 13.8% post dividends. To show this financial strength the U.K. government has reduced its stake to below 5% as it returns the bank to private ownership. The U.K. government acquired a significant stake in the bank during 2008 financial crisis. Although the uncertainties of Brexit loom the effects will not be seen until 2019 if the U.K. Parliament invokes article 50. But looking at the U.K. economy right now there is positive economic data given the weak pound. UK exports have benefitted the most from the weak pound and this is spurring growth.
Verdict: Lloyds Banking Group is my number 1 pick in terms of my Brexit investment thesis. The results showed that the bank is in a strong position. The bank currently trades at 1.04x price to book, the stock is 26% away from its 52 week high. I will be adding to my position in any type of market sell off. It was a B+ quarter from the U.K. based bank.
Disclosure: Cresco has a position in Lloyds Banking Group.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor.
