INVESTORS in Lloyd Banking Group observed a rare bounce in the institution’s faltering share price last night after third-quarter profits beat market expectations, keeping it on course to meet its financial targets for the year.
The Bank of Scotland owner, which has seen Brexit uncertainty weigh heavily on its share price this year, reported a statutory pre-tax profit of £1.8 billion for the three months to September 30, boosted by a reduction in operating costs.
Profits were seven per cent lower than the £1.95bn booked in the third quarter of last year thanks to higher restructuring costs, at £235 million versus £148m. The exceptionals included £35m of severance costs and the cost of integrating the MBNA credit card and Zurich UK pensions and savings business.
However, the third quarter profits were ahead of analysts’ average forecast of £1.7bn.
As investors responded to the update, shares in Lloyds climbed by nearly two per cent, closing at 57.72p. But the price remains well adrift of the year-high of 71.8p it reached in January.
With Lloyds’ heavy exposure to the UK economy, analysts said Brexit was the main factor holding back the share price.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “These numbers don’t change the story at Lloyds.
“It’s a solid UK bank that’s generating a very attractive return for shareholders, and handing back cash through dividends and share buybacks.
“That inevitably leads you to ask why the bank’s share price has gone precisely nowhere since mid-2016.
“The issue is that its position as the UK’s largest banker to consumers and small businesses makes it very sensitive to the fate of the UK economy, and with Brexit looming large investors just can’t get comfortable with that exposure. Until the Brexit question is resolved, Lloyds will remain in limbo.”
Lloyds’ chief financial officer George Culmer, who announced yesterday that he will retire in the third quarter of next year, told Reuters that, despite continuing Brexit uncertainty, the bank still expects “some sort of withdrawal agreement going forward”.
The bank told the stock market that there had been no deterioration in credit risk in the first nine months of the year, describing credit quality as strong.
Lloyds, which this week unveiled a new wealth management partnership with Schroders, booked underlying profits of £6.3bn for the nine months to September 30, up 5% on last year. Net income was up 2% at £13.4bn, with net interest margin stable at 2.93%.
The rise in underlying profits for the nine months reflected an 11% fall in exceptional costs for the period, driven by lower provision for PPI (payment protection insurance) compensation pay-outs, at £550m versus £1.05bn last time. The bank made no provision for PPI in the third quarter.
General operating costs were slightly lower for the nine-month period, at £6.01bn, which offset increased investment. And the bank’s tier one capital ratio, a measure of its balance sheet strength, edged up to 15.5% from 15.1%.
Lloyds confirmed it has completed a £1bn share buyback, with more than £3.2bn returned to shareholders this year, equal to 4.5p per share.
Graham Spooner, investment research analyst at The Share Centre, said: “Long-suffering investors who have seen the shares fall this year close to a two-year low will be hoping that these numbers show a possible light at the end of the tunnel, despite Brexit looming large for this UK-focussed bank.”
Antonio Horta-Osorio, chief executive, said the bank remains “on track to deliver the improved financial targets for 2018 that we announced in August”, when it said it expected net interest margin to be in line with the first half of the year, at 2.93%.
Mr Horta-Osorio said: “In the first nine months of 2018 we have delivered a strong and sustainable financial performance, with increased profits and returns and continued strong capital build. These results further demonstrate the strength of our business model and the benefits of our low risk, customer focused approach.”
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