Lloyds profits rise 15% in first half but second quarter disappoints

Lloyds Banking Group posted a 15% increase in underlying first-half profits to £4.4bn and declared an interim dividend of 0.75p per share, but plans for what analysts said was an "illusory" buyback and some missed forecasts hit the shares.

The increased profit came from an increase in net interest margin to 2.62% and a 2% increase in income to £8.97bn, together with a 75% reduction in impairments and flat operating costs despite increased investment and an extra £1.4bn provision for payment protection insurance (PPI) mis-selling.

Supported by a much better impairment result than predicted, underlying profit before tax in the second quarter rose 1% quarter on quarter to £2.2bn, some 13% ahead of consensus.

But analysts at Investec said: "The underlying picture is not stellar. As expected, quarter on quarter trends saw revenues down and costs up."

Furthermore, the bank said it would consider returning capital to shareholders through one-off dividends or share buybacks from the end of 2015 if its core capital is higher than 12% plus the equivalent of one year's dividend payment, which would take it to around 13%.

Total costs were slightly higher, rising 1% on the previous quarter to £2.3bn including the FSCS levy, in line with consensus.

But the PPI provision was higher than the market had anticipated and lifted the bank's total cumulative number to £13.5bn.

Underlying earnings per share rose 12.2% to 4.6p.

Net interest margin were strengthened by 27 basis points to 2.62% compared to the first half of 2014, by 17 basis points compared to the second half of 2014 and up two from 2.60% in the first quarter.

This key banking measure benefitted from continued pressure on asset prices more than offset by improved deposit pricing, lower funding costs, and the disposal of lower margin run-off assets.

Chief executive António Horta-Osório said: "Today's results demonstrate the strong progress we have made in the first half of the year."

He increased guidance for 2015 net interest margin and asset quality ratio, while other guidance was reconfirmed.

Net interest margin for the full year guidance improved to around 2.60%, full year asset quality ratio improved to around 15 basis points from the previous 25 basis points.

Management said it continued to expect other income to be broadly stable in 2015, with full year cost:income ratio also expected to be lower than the full year 2014 ratio of 49.8%.

A day ahead of Friday’s interims, Lloyds sold a major portfolio of unprofitable Irish commercial loans for £827m. The loans - a mix of commercial assets given out by HBOS before Lloyds bought the bank in a controversial deal at the height of the financial crisis in 2008 - were sold to a consortium of investors including a Goldman Sachs affiliate and Bank of Ireland.

Analysts find problems

Broker Investec pointed out that the loss per share of 0.1p for the second quarter was a full 1.1p below consensus estimates, while the CET 1 capital ratio of 13.3%, while solid, was also light against consensus forecasts of 13.7%.

Analyst Mike van Dulken at Accendo Markets said the "illusionary share buyback" instead of special dividend payments to return cash "will be a worry" for the many investors who went without dividend income since the bank was bailed out.

Nomura, however, saw upside, and said: "The focus today will be on dividends. After another £1bn payment protection insurance (PPI) provision in 2H15 and a final dividend of 2p, we see Lloyds on a circa 14% CET 1 ratio. If management is looking to distribute surplus capital, then assuming a 13% CET 1 requirement there is excess capital of circa £2.2bn at the FY15 stage, or circa 3.1p per share. Thus, potential distribution capacity by the full-year stage will be circa 5p."

Richard Hunter at Hargreaves Lansdown felt the results confirmed Lloyds' recovery was firmly on track. "Again, however, the drag of PPI provisions has reared its head with a figure of £1.4bn being rather higher than the market had anticipated, one which brings the cumulative number near to a painful £13.5bn.

He added that the interim dividend was "still something of a gesture at this point although compared to the first half of 2014 it is, quite literally, better than nothing. It also potentially opens the door to a more progressive policy which in coming years could restore Lloyds to be the high yielder which it had traditionally been."