Lloyds (LLOY) reported a strong start to the year, which we see as a good indicator for the remainder of 2017 and a confidence builder for shareholders. While underlying profit remained flat year over year at £2.1 billion, reported profit doubled to £1.3 billion despite the fact the bank had to book a further £350 million towards the payment protection insurance claims and £200 million towards the HBOS and other conduct matters. Net income for the first quarter stood at £890 million versus £531 million a year ago, an increase of 68% year over year.
Stable net interest income and lower impairment charges were the highlights of the operational performance for the quarter. We are pleased with the results and believe that Lloyds in a good position to double its net income in 2017. We maintain our narrow moat rating and fair value estimate of 84p per share, and we believe that at their current level, the shares are still undervalued.
In our view, results were healthy, given the operational performance displayed by Lloyds. Strong underlying profit generated during the quarter and a noteworthy decrease in below-the-line items helped Lloyds report statutory profit before tax of £1.3 billion, which almost doubled from last year, and its return on tangible equity improved to 8.8%, a 310-basis-point increase from the first quarter of 2016; this is trending above our estimate of 8.4% estimate for 2017. On an underlying basis, Lloyds posted return on equity of 15.1%. We expect Lloyds will be able to deliver an average return on equity of 10.3% between 2017 and 2021, above our cost of equity of 9% for the bank.
On the payment protection insurance claims, as previously announced by the bank, quarterly numbers included an additional £350 million PPI provision. The addition followed the release of the revised policy statement by the U.K. Financial Conduct Authority on March 2, which confirmed a two-month extension for claims until the end of August 2019.
On the operating cost side, we believe there was a clear improvement on an underlying basis thanks to the cost-control and simplification programme. Total costs stood at £1.97 billion, almost flat with a year ago, and the cost/income ratio came in at 47.1%, indicating a 30-basis-point decline. However, on a reported basis, mainly due to the PPI charge, conduct charges, and restructuring costs, total operating costs increased 15%.
