Lloyds Banking Group PLC mulls how much to pay out as cash piles up

Lloyd’s Banking Group PLC’s () first-quarter numbers came in well ahead of forecasts and impressed market commentators.

It was chief executive Antonio Horta-Osorio’s last update before he heads off to chair and the consensus was he is leaving on a high note.

Profits were £1.9bn helped by a sizeable write-back of bad debts, but Russ Mould, investment director at AJ Bell, added: “Net interest margin (NIM) is better than expected, being the difference between what it earns from interest charged on loans and interest paid on savings deposits.

“Costs are also better than expected, which might come as a surprise given how difficult it is to streamline a business the size and complexity as Lloyds.”

Lloyds Banking profits hit £1.9bn as bad debts tumble

UBS said profits beat its forecast by 60%, with the upgrades to guidance also a pleasant surprise.

The key balance sheet strength ratio (CET1) was also higher than expected at 16.7% compared to forecasts of 16% implying roughly about £1.4bn extra of spare cash, said UBS

“Credit quality has remained extremely resilient, holding out a good probability, we think, of further releases and stronger-than-forecast capital generation to come” said the Swiss bank.

That makes Lloyds look good value it added especially with the potential endowment benefit if interest rates do start to tick up.

The bank has a price target of 47p on a twelve-month view, while its yield forecast for the year-end December 2022 is 8.4% at 43p.

Better than when he started

Shore Capital noted the economic outlook has improved and so have management expectations.

“António Horta-Osório leaves Lloyds in a much better position than when he took the reins in early 2011, having presided over a significant period of balance sheet restructuring for the group as it recovered from the Global Financial Crisis.” 

Shore said it is upgrading its forecast this year to profits nearer to £6bn adding that Lloyds’ relative emphasis on retail and small business banking means that it should be capable of generating a structurally higher return than its large mainstream UK banking peers. 

“In addition, we see the potential for a healthy level of shareholder distributions (both dividends and share buybacks) in the coming years given the strength of the group’s capital position and improving earnings prospects.”

Hargreaves Lansdown added a note of caution, highlighting that low interest rates remain a fundamental challenge for banks, and that can be seen in Lloyds numbers.

Loans have increased steadily, thanks to a £6bn increase in mortgage balances, but Lloyds is struggling to turn that extra lending into extra revenue, it said.

Even it acknowledges, however, that Lloyds has built up a formidable capital position over last year and some of that is going to make its way back to shareholders through a new dividend policy to be announced at the half-year.

“A commitment to a progressive policy, means the dividend is likely to be below 2019 levels, meaning the bank will be left with a still substantial capital pile even after resuming payments.

“ It’ll be interesting to see what the bank does with that. Share buybacks, a special dividend, aggressive organic growth or even an acquisition are all possibilities.”

CEO-elect Charlie Nunn is set to take up his role on 16 August, with CFO William Chalmers holding the fort on an interim basis once Horta-Osorio leaves.

Lloyds share rose 3.3% to 45.02p.