Lloyds says it’s poised to beat lending profitability target

(Bloomberg) -- Lloyds Banking Group Plc, Britain’s biggest mortgage provider, said it will exceed its lending profitability target after first-quarter earnings beat analyst estimates. The shares jumped the most in a year.

Pretax profit before one-time items rose 21 percent to 2.2 billion pounds ($3.4 billion) from the year-earlier period, surpassing the 2 billion-pound average estimate of six analysts in a Bloomberg survey. The bank said on Friday it expects its net interest margin to exceed its 2.55 percent annual target.

The results bolster Chief Executive Officer Antonio Horta- Osorio’s efforts to return the bailed-out bank to full private ownership. Since taking over in 2011, he’s cut assets, shrunk the retail network and eliminated thousands of jobs, allowing the lender to post its first annual profit in five years in 2014 and resume paying dividends. The coalition government has pledged to cut its 21 percent stake after next week’s election by selling shares to individual investors.

“I was impressed by the results,” James Bevan, CEO at CCLA Investment Management Ltd., who owns the stock, said in an interview on Friday. Lloyds “trades relatively highly in terms of price-to-book but I fully expect the share price to be up to a pound in twelve months’ time.”

Shares Rise

The shares jumped as much as 4.4 percent, trading at 80.36 pence at 10:20 a.m. in London. That’s above the 73.6 pence at which the government would break even on its shares. Lloyds has increased about 6 percent this year, while Royal Bank of Scotland Group Plc declined 15 percent.

The price-to-book ratio, a measure of a company’s stock price versus the value of its assets, is 1.3 percent, the highest of any major U.K. lender. Barclays Plc is 0.7 percent.

Lloyds’s net interest margin, the difference between its income from lending and cost of funding, widened to 2.65 percent in the first quarter from 2.3 percent a year ago. At RBS, the measure fell as mortgage margins shrank, the bank said on Thursday.

While British lenders’ profitability has been squeezed by record-low interest rates, faltering housing demand and tougher competition, Lloyds benefited from decreasing costs of borrowing, according to Chief Financial Officer George Culmer.

‘Earnings Upgrades’

Pretax profit fell to 1.2 billion pounds from 1.4 billion pounds a year earlier, hurt by a 660 million-pound charge linked to the sale of its TSB Banking Group Plc unit to Banco de Sabadell SA. Revenue rose 3 percent to 4.6 billion pounds from a year earlier, Lloyds said.

“This is a very good set of numbers,” said Joseph Dickerson, an analyst at Jefferies International Ltd. in London with a hold rating on the shares. “The net interest margin is bucking the trend we’ve seen of declines elsewhere. I would expect that their improved guidance will likely lead to earnings upgrades.”

While Lloyds didn’t take any additional charges to compensate customers for wrongly sold payment protection insurance in the first quarter, Culmer said on a call with reporters that he can’t rule out further provisions.

Legal Costs

Although Lloyds has 1.7 billion pounds of unutilized reserves to cover the cost of PPI, Jefferies’s Dickerson said the bank will probably set aside as much as 750 million pounds in the second quarter. The lender has so far taken provisions of about 12 billion pounds, more than any other bank.

Other lenders are also grappling with rising legal costs. RBS, Britain’s largest government-owned lender, on Thursday reported a net loss of 446 million pounds in the first quarter after a profit of 1.2 billion pounds a year earlier. The bank, which has posted seven straight losses through 2014, has set aside about 3.8 billion pounds for PPI.

Britain’s Conservatives have vowed to sell more Lloyds shares to the public in a discounted mass privatization if they retain power in next week’s election. Prime Minister David Cameron, neck and neck in polls with opposition leader Ed Miliband’s Labour party, has said he would like to recoup the 20 billion pounds taxpayers spent bailing out the lender.

“Lloyds is printing its highest risk adjusted margins in recent history and the lowest risk numbers,” said Chirantan Barua, an analyst at Sanford C. Bernstein in London with an market perform recommendation on the stock. “However the biggest risk to the bank as a pure U.K. play is the elections.”

Lloyds Dividend

British lenders have been seeking ways to shore up their capital ahead of a second round of stress tests conducted by the Bank of England later this year. RBS and Lloyds narrowly passed last year’s exams.

Lloyds has built up the largest capital buffer of any British bank. Its common equity tier 1 ratio, a measure of financial strength, rose to 13.4 percent from 12.8 percent at the end of 2014. The bank’s loan-to-deposit ratio was at 109 percent, compared with 107 percent at the end of the year.

The bank reiterated that it plans to pay an interim and a final dividend for 2015.

Lloyds is “solidly ahead of European peers” including Deutsche Bank AG and Credit Suisse Group AG, said Jonathan Tyce, an analyst at Bloomberg Intelligence. “Lloyds’s underlying profit retention drove common equity Tier 1 growth and will boost hopes of the bank restating dividends.”

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