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Impairment Shock At Lloyds Banking Group #LLOY Despite Balance Sheet Strength
by John Woolfitt, Atlantic Capital Markets
Fundamentals and Statement Summary
Eponymous banking giant Lloyds (LLOY) this morning reported half year results to June 30. The bank plunged into the red after recording a £3.8 billion provision for bad loans arising from the coronavirus crisis – almost £1.8 billion higher than financial analysts had expected. The results revealed a pre-tax loss of £602 million compared to profits of £2.9 billion for the same period in 2019, on net income of £7.4 billion, also 16% lower. Lloyds said it had set aside £2.4bn for possible loan losses in the three months to June alone as the UK economy became mired in the coronavirus lockdown.
The bank also pointed to a strong balance sheet, well positioned to absorb coronavirus impacts. This was in part due to a £29 billion increase in customer deposits during the period as a result of reduced consumer spending and “inflows to the Group’s trusted brands in an uncertain environment.”
The group loan to deposit ratio now sits at 100 percent, “providing significant potential to lend into recovery, with a strong liquidity position.” Lloyds said a CET1 ratio of 14.6 percent “provides significant headroom above lower regulatory requirements of c.11 per cent as a cushion against potential credit impairment.”
There have been early signs of recovery in the Group’s core markets, mainly in consumer spending and the housing market, but the outlook remains highly uncertain and the impact of lower rates and economic fragility will continue for at least the rest of the year. Looking forward, group operating costs are expected to be below £7.6 billion, with impairments expected to be between £4.5 billion and £5.5 billion.
CEO António Horta-Osório said that the impact of the coronavirus pandemic in the first half of 2020 “has been profound on the way we live our lives and on the global economy. We remain fully focused on helping our customers and the UK economy recover, in collaboration with Government and our regulators.”
“Although the outlook is uncertain, the Group’s financial strength and business model allow us to help Britain recover and play our part in returning our country to prosperity. Our customer focused strategic plan remains fully aligned with the Group’s long term strategic objectives, the position of our franchise and the interests of shareholders.”
Chart and Technicals
Source Factset & Hargreaves Lansdown
Shares of Lloyds have been trading in a tight range since the March “COVID sell-off” and, despite recovering the 50-day moving average in April, they dipped below this line in June and are now approaching the bottom of the range. The trend here is certainly weak, and if the stock continues to trade below this benchmark, we will expect a retest of 23.42p, a level last hit on November 21 2011. Shares are currently trading at 26.20p, and an end of week close above 28.4p will be required if the stock is to recover the 50-day moving average at 32.32p.
Summary and Atlantic View
Albeit Lloyds is long standing favourite of investors, fund managers and traders, it seems that the higher than expected impairment charge will mean that opportunities for share price improvement in the short term are going to be few and far between. That said, Lloyds is blessed with a strong balance sheet and a decent CET1 ratio to provide headroom above the regulatory requirements to protect against potential credit impairment. Unlike Barclays, Lloyds doesn’t have an investment banking arm to boost profits, so it is wholly reliant on making traditional banking and money lending as profitable as possible. For now the stock is mired in a trading range between 32p and 26p. Given this backdrop and uncertain outlook, for now Atlantic Capital Markets remain holders of the shares, although at either end of this trading range, they are a buy on weakness, particularly if the stock dips to the 10 year low of 23.42p, or conversely a sell into strength around 32p. Atlantic Rating: Hold
To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here