Lloyds (LLOY) latest annual report reveals a 10-year high in profits for the high-street bank. Pre-tax profits for the fourth quarter hit £973 million, compared to losses of more than £500 million in the last three months of 2015.
The bank reported a net income of £2 billion for 2016, fourfold the previous year’s £466 million.. While net interest income and net fees saw a slide, hinting at signs of the difficult environment for banks, net trading income supported overall top-line growth. Following the full-year results, Morningstar equity analysts will be maintaining our fair value estimate of 77p per share and our narrow moat rating for the bank, meaning we consider it to have a slight competitive advantage over peers. Overall, we view Lloyds' 2016 results as a confidence builder for shareholders and an important milestone for achieving management's long-term targets.
Lloyds is now one of the sturdiest banks in Europe. It nearly destroyed itself in 2008 with its notorious acquisition of HBOS, and the U.K. government ended up with 43.5% of the combined group. Now, after years of bailouts and setbacks, the bank has essentially righted itself, and the government has largely sold down its stake. Lloyds has closed HBOS’ worst businesses, wrote down much of its bad assets, has re-emerged as the powerhouse U.K. bank that it once was.
PPI Mis-selling Costs Fall
On the cost side, excluding regulatory provisions for conduct charges, Lloyds' total costs were flat. We view this as good progress towards achieving the bank's targeted 45% cost/income ratio by 2019. Including the provisions, the total operating expenses declined by 20% relative to last year, thanks to lower PPI charges. The bank put aside £1 billion in 2016 for so-called mis-selling of Payment Protection Insurance in 2016, versus £4 billion in 2015. In total, Lloyds has PPI provisions amounting to £17.8 billion on its books, which we believe will be adequate to cover the claims, implying that the worst could be over for the bank.
Dividend Boost for Shareholders
Government ownership in Lloyds is now below 5%, indicating that the bank will return to full private ownership very soon. Given the confidence in its capital position, the bank increased its total dividend payment to 2.55p, an increase of 13% versus 2015, on top of its 0.55p per share special dividend. In our view, full private ownership and the increased dividend to shareholders, as well as the further strengthening of the consumer finance business via the MBNA acquisition, are positives.
