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Atlantic View – Impairment Shock At Lloyds Banking Group #LLOY Despite Balance Sheet Strength

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

Alan Green on why you should still hold Shell #RDSB, plus Capita #CPI & Braveheart #BRH on UK Investor Mag podcast

Alan Green and Jonathan Roy discuss why you should still hold Shell #RDSB, plus Alan discusses Capita #CPI & Braveheart #BRH on the UK Investor Mag podcast.

Alan Green talks Lloyds Banking #LLOY profits, plus Tertiary Minerals #TYM & Kibo Energy #KIBO on the UK Investor Magazine podcast

Alan Green discusses Lloyds Banking #LLOY profits, plus Tertiary Minerals #TYM & Kibo Energy #KIBO with Jonathan Roy on the UK Investor Magazine podcast.

Ian Pollard – Gooch & Housego #GHH Impacted by Microelectronic Headwinds

Gooch & Housego plc GHH updates that it is suffering from microelectronic headwinds despite which growth has continued. During the first four months of the financial year the business has seen a downturn in demand particularly from China. A cyclical downturn is also currently being experienced for industrial lasers.  2019 group trading performance is still expected to show low single digit growth compared to last year.

Glencore plc GLEN is pleased to report that it has delivered both record Adjusted EBITDA, up by 8% and significant cash returns to shareholders in 2018. The preliminary results also include net income attributable to equity holders down 41% and basic earnings per share also down 41%. Other highlights are that resolutions have been achieved with the Ontario Securities Commission regarding accounting, governance and disclosure matters and a refreshed management team has been appointed. Committees have been created to oversee the Group’s response to the U.S. Department of Justice’s investigation. Production guidance in all commodities for 2019 is that it is expected to be higher than 2018.

Intu Properties plc INTU  claims its management team has produced robust operational performance in a challenging market for the year to 31st December,  with increased like-for-like net rental income for the fourth consecutive year and 97 per cent occupancy. property valuations declined as sentiment weakened significantly. Valuations fell by a further 3 per cent  in the final quarter of 2018, in addition to the 9 per cent fall over the first nine months. Sentiment in the retail sector is at an all-time low.

Hochschild Mining plc HOC reports another strong year of record production and prudent cost control. Revenue for the year to 31st November fell by 3%, adjusted EBITDA by 11%, Profit from continuing operations (pre-exceptional) was down by 66% and Profit from continuing operations (post-exceptional) by 88%. 2018 operational delivery exceeded guidance.

Lloyds Banking Group LLOY 2018 results show that it was a year of strong strategic and financial delivery. The UK economy has proven itself resilient with record employment, which has enabled the bank to see profits jump by 24% whilst the total ordinary dividend of 3.21 pence per share, is up 5 per cent on 2017 In addition to this a share buyback of up to £1.75 billion is proposed. A continued strong performance is expected for 2019 with a statutory return on tangible equity of 14 to 15 per cent.

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Lloyds – The UK Economy Is Resilient

Lloyds Banking Group LLOY produced a strong financial performance in the nine months to the 30th September with profits improved on both an underlying and on a statutory basis. Underlying profit rose by 8% and total income by 6%. The improvement continued into the third quarter which saw income rising by 8%. Statutory profit before tax over the nine months rose by 38%, the overall performance no doubt being helped by what the bank describes as a resilient UK economy and Brexit not even getting a mention.

Metro Bank MTRO also reports a strong third quarter with record customer growth of 33% compared to the previous year and a 77% rise in underlying quarter on quarter profits. Revenue increased by 113%. The Banks presence is no longer limited to central London as it takes what it calls its revolution in banking out into the high streets of suburban England.

Nighthawk Energy HAWK has seen a steady but significant decline in both gross and net production during the first nine months of the year. Gross production fell from 373,146 barrels in the first nine months of 2016 down to 317,445 barrels this year. On a net basis the fall was from 305,153 barrels last year down to 236,864 in the first nine months of the current year. Work has been suspended on the preparation of a circular about share payment options for deferred interest and royalties which will now revert to being paid in cash whilst the company assesses its restructuring options.

Defenx plc DFX  Results for the year to 31st December are now expected to be materially below market forecasts to such an extent that a loss is expected, mainly due to weak management. Reasons for the turn round include previously anticipated orders are unlikely to be recognised in 2017, updates to address “certain performance issues” are taking longer than expected and the broadening of the product portfolio is also behind schedule. Steps are being taken to strengthen the executive management team.

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Lloyds Admits To “Positive Operating Jaws”

Lloyds Bank LLOY admits to having “positive operating jaws” which helped it to produce a strong first quarter financial performance and a significant improvement in statutory profit before tax, despite disagreeing with the house builders (see below) about the state of the UK economy, which the bank says still presents a challenging operating environment. As for those jaws, I never thought I would see the day when a bank would agree so openly that the widely held view about a banks resemblance to a certain type of large and very dangerous fish, appears to be correct !

Persimmon PSN claims that its continuing operational performance is excellent, helped by the resilience of the UK economy. does this mean that at long last challenging market conditions have disappeared. Forward sales revenue has risen by 11% on a year ago, whilst private sales rater per site are 12% ahead. The average selling price has, so far, been increased by 4.1%.

Taylor Wimpey TW is hopeful that the forthcoming general election will not disrupt the housing market after a good start has been made to the year. Average private net reservations so far this year, are up 16% on a year ago. The total order book has risen by 31% since the year end, whilst total order book value is up by 2% on a year ago. Build cost inflation for 2017 is expected to be between 3-4%.

WPP plc WPP First quarter revenue net sales and operating profit are all well above budget and well ahead of last year – at least until you strip out the helping hands provided by acquisitions and the weakness of sterling. On a like for like basis the picture looks far less impressive, with revenue rising by 0.2% and net sales by 0.8%. WPP regards net sales as the true test of its success or otherwise. In this respect North America was under pressure but the UK and continental Western Europe both grew strongly.

Weir Group WEIR is on track for a strong recovery in 2017, with first quarter order input up by 15%, oil and gas orders up by 50% and continued strong cash generation.

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Metro Bank – Providing A Service, Does Pay

Metro Bank MTRO Cheeky little Metro Bank is giving the big bad banks a lesson in growth and has now moved into profit for each quarter of the second half. Profit before tax in quarter 3 was a tiny £0.6m, increasing to £1.5m in quarter 4. Losses for the full year shrank from £46.4m in 2015 to  £11.7m. Asset growth came in at 64%, lending and deposit growth were both at record levels with rises  56% and 66% respectively, whilst revenue was up by 62%. Somebody must love its policy of actually trying to provide a service to its customers.

Barratt Developments BDEV Despite a fall of 5.8% in completions and revenue down by 3.2% in the six months to 31st December, Barratt claims it was a strong half year with profit before tax up by 8.8% and shareholders rewarded with a rise of 21.7% in the interim dividend. Total forward sales orders now stand at record levels after a rise of 17%. The one statistic which is omitted for some strange reason, is the increase in the average selling price. I wonder why.

Lloyds Banking Group LLOY is increasing its final ordinary dividend by 13% and maintaining last year’s special dividend of 0.5p meaning an overall rise for the year of 11%. Statutory 2016 profit before tax rose by 158% to £4.2b and earnings per share by 263%, whilst operating costs were reduced by 3%.

Gooch & Housego GHH good trading conditions during the first four months of the current financial year enabled GHH to see its order book up by 64.9% as at 31st January compared to last year, although on a like for like basis, excluding foreign exchange movements and acquisitions, the figure comes in at a more modest 19.4%. So far trading for the full year is expected to be in line but there does seem to be a hint of optimism in today’s trading update as a result of continuing good market conditions.

Hotel Chocolat HOTC produced strong growth in both sales and profitability in the 6 months to 25th December. Profit before tax rose by 28% on reported revenue up by 14% and the net cash position was transformed with a positive balance of £16.1m compared to debt of £1m at the end of the previous year.

Blue Prism Group PRSM now expects full year revenue will be materially ahead of current market expectations following the positive trading momentum evidenced at the end of last year, continuing into the current year.

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