Never Mind the Earnings Miss, Lloyds Is All About the Strategy

The focus of Lloyds Banking Group’s

should be squarely on its future strategy, which should overshadow a small miss on fourth-quarter underlying profit, Morgan Stanley analyst Alvaro Serrano said. The market agreed, sending the shares up as much as 3%.

The bank’s guidance on operating-cost reductions by 2020 was better than expected, while below-the-line charges will likely abate, according to UBS analyst Jason Napier. Investment in digital banking to boost efficiency should help to “de-risk the outlook,” he said.

Morgan Stanley, Alvaro Serrano

(Equal-weight, 78p PT)

Underlying profit missed consensus by 4%, but “focus should be on the strategy plan.” Notably, the net interest margin should remain resilient over the course of the plan thanks to more room to reduce the cost of funding and a steeper yield curve.

Guidance from Lloyds for operating costs to be below 8 billion pounds a year by 2020 is better than consensus and “more importantly it signals a large reduction in below-the-line items as PPI charges should come to an end in 2019.”

UBS, Jason Napier

(Buy, 85p PT)

“The new strategic plan looks good to us.” 

Guidance for the net interest margin to remain around 2.9% through 2020 “implies higher interest income than consensus and a little hedge fade.” The planned cost reductions by 2020, translating to a best-in-class cost/income ratio in the low 40% range, is backed up by a 3 billion-pound investment plan “to de-risk the outlook.”

Overall, the plan to “grow revenues at stable margins, cut costs and generate surplus capital” should reassure investors.

Jefferies, Joseph Dickerson

(Buy, 91p PT)

The results “looked robust to us and consistent with our buy thesis.” A return to revenue growth and margin expansion is positive and while other income caused the miss for the fourth quarter, it still rose 2% year-on-year.

The guidance on net interest margin and the asset quality ratio for 2018 suggest a 2% upgrade to consensus pretax profit estimates. In addition, guidance for 14-15% return on tangible equity from 2019 on a higher capital ratio suggests Lloyds has “materially re-assessed the earnings power” of its business.

Shore Capital, Gary Greenwood

(Buy, 68p fair value estimate)

“The strategy update implies a sharp improvement in statutory profitability is anticipated,” with capital generation to remain strong and impairment ratios “that are more optimistic than consensus is expecting.”

For 2018, “we believe that these forecasts are supportive of our current expectations and slightly more optimistic than consensus, given favorable asset quality guidance.”

Goldman Sachs, Martin Leitgeb

(Sell, 53p PT)

4Q numbers are broadly in line with consensus, including the capital return. Share buyback rather than special dividend, but the quantum (up to 1 billion pounds) is broadly in line with what was expected.

Strategy targets look in line with expectations, but asset quality looks around 10 basis points lower.

— With assistance by James Cone, Brian Lysaght, and William Canny

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