DBRS: Lloyds’ 3Q14 underlying profits up, but PPI charges continue

Summary:
• Underlying PBT of GBP 2.155 billion in 3Q14 (up 41% YoY)
• On a statutory basis, PBT of GBP 751 million reflects ongoing legacy items, notably a further PPI charge of GBP 900 million
• Strategy update – includes ongoing focus on efficiency and increased investment in digital
• DBRS rates Lloyds Bank plc Senior Unsecured Long-Term Debt at AA (low) with a Stable trend

DBRS Ratings Limited (DBRS) noted that on an underlying basis, Lloyds Banking Group plc (Lloyds or the Group) reported Profit before Tax (PBT) of GBP 2.155 billion in 3Q14 (up 41% year-on-year (YoY)), with the banking Net Interest Margin (NIM) up 34 basis points (bps) YoY to 2.51%, driven by increased deposit margins and lower funding costs. Impairment charges continued their downward trajectory and in 3Q14 were GBP 259 million, equivalent to 20 bps (below the Group’s expectation of 40 bps through the cycle). Lloyds also made further progress in reducing costs, with a 5% decrease Y-o-Y enabling the Group to reach a cost-income ratio of 48% in 3Q14.

However, profits continue to be negatively impacted by provisions relating to Payment Protection Insurance (PPI). Following a quarter-on-quarter increase in reactive complaints, Lloyds took a further GBP 900 million charge, taking the total charges to GBP 11.325 billion to date, with GBP 2.550 billion unutilised.

Lloyds also provided a strategic update for the next 3 years. The major elements of this included: (i) the Group will continue with a multi brand / multi channel approach - the branch network will be broadly maintained, but the Group anticipates a reduction of around 9,000 full-time roles, and the Group will invest about GBP 1 billion in digital capabilities; (ii) Lloyds will continue to focus on efficiency and will invest GBP 1.6 billion over 3 years to achieve a further GBP 1 billion run-rate reduction and a cost-income ratio of around 45%; and (iii) Lloyds plans to grow in line with the market in current accounts and mortgages but to increase its presence in certain areas, such as SME/ mid-market lending, asset finance and retirement planning.

Lloyds posted solid capital ratios at the end of 3Q14, with a fully loaded CRD4 Common Equity Tier ratio of 12.0% (up 170 bps from end-2013), and a Basel 3 leverage ratio (January 2014 rules) of 4.7%, an increase of 90 basis points. DBRS also notes that Lloyds passed the recent EBA stress tests, reporting a 6.2% CET1 ratio in the adverse scenario under UK’s PRA capital definitions (this would be equivalent to around 9.6% under European transitional capital rules, given the stricter UK rules on capital deductions).

DBRS rates Lloyds Bank plc Senior Unsecured Long-Term Debt at AA (low) with a Stable trend.

Note:
All figures are in GBP unless otherwise noted.