Morningstar | Lloyds Continues to Build Capital on Solid Operational Performance
Higher restructuring charges in the third quarter of GBP 235 million versus GBP 148 million last year meant that profit before tax fell 7% to GBP 1.4 billion for Lloyds despite an operationally solid quarter. Income generation increased 1% year over year, owing to a slightly higher net interest margin offsetting lower interest-earning assets. The cost/income ratio improved to 44.7% from 46% last year, although including remediation costs weakens this metric to 47.1%. In total, return on tangible equity came in at a respectable 14.8% in the quarter, above our cost of equity assumption of 9%. We maintain our fair value estimate of GBX 76 per share but adjust our ADR fair value estimate to $3.90 from $4.30 to account for movements in the exchange rate. Our narrow moat rating is unchanged.Loan and deposit growth quarter over quarter was healthy at 1% each, while asset quality stands at a solid 25 basis points. On its capital position, Lloyds added another 41 basis points this quarter, bringing the common equity Tier 1 ratio to 14.6%. The bank is now just 38 basis points shy of its full-year guidance of 200 basis points and ahead of its 13% requirement plus 1% self-imposed buffer. If it achieves its target, which we think is likely, Lloyds will have some excess capital at the end of the year, which could be distributed to shareholders.
The bank is also progressing on its strategic plan to digitise its offerings and recently announced a joint venture with Schroders. The operation, which is set to start next year, will be infused with GBP 13 billion of Lloyds' assets and is aimed at the lucrative personal advisory market.
Lloyds Banking Group is a financial services provider. Co.'s main business activities are retail and commercial banking, general insurance and long-term savings. Co.'s Lending products are mortgages, credit cards, personal and business loans; Deposit products include taking Current accounts and savings accounts; Insurance products are home insurance, motor insurance and protection; Commercial financing products includes term lending, debt capital markets and private equity; and Risk management products includes interest rate hedging, currency and liquidity. As of Dec 31 2017, Co. had total assets of £812.1 million and total deposits of £448.0 million.
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