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Morningstar | Lloyds Posts Good First-Half 2018 Results While More PPI-Related Charges Are Added to the Tally

Lloyds has kept its momentum in 2018 and recorded a good first half for the year, while uncertainty remains around provisions for the settlement of missold payment protection insurance. Provisions for PPI increased by GBP 550 million in the first half of the year, of which GBP 460 million was booked in the second quarter, owing to a higher expected volume of complaints and the associated costs thereof. This brings the total amount provided towards PPI to GBP 19.2 billion and the outstanding provision on the balance sheet to GBP 2.3 billion. Provisions are based on the number of weekly PPI-related complaints and therefore will likely be volatile. The deadline for PPI claims as of today is set at the end of August 2019.

Operationally, Lloyds performed well, as higher net interest income, lower remediation costs, and lower PPI provision charges meant that profits after tax grew 38% to GBP 2.3 billion relative to first-half 2017. Excluding PPI provision, volatility, and restructuring charges, underlying profit before tax came in 7% higher at GBP 4.2 billion. Lower deposit and wholesale funding costs more than offset pressure on asset margins, lifting the net interest margin by 11 basis points to 2.93%, while loans and deposits remained virtually flat. As a result, underlying returns on tangible equity improved to 16.3% from 14.5%, well above our cost of common equity assumption of 9%. Also, Lloyds added to its capital base, increasing the pro forma common equity Tier 1 ratio post-dividend by 60 basis points to 14.5% from 13.9% since the beginning of the year. Against this blue-sky backdrop, management refined guidance related to capital, which is now expected to increase by 200 basis points (previously 170-200 basis points), while it expects net interest margin in line with the first half of 2018 and an asset quality ratio below 25 basis points (from 30 basis points) for 2018. We maintain our GBX 76 per share fair value estimate and reiterate our narrow moat rating.