Lloyds
Lloyds (LLOY), which has been our preferred name in the UK banking space, has delivered healthy full-year results. Along with their full-year results, Lloyds also announced its third strategic plan, which mainly focuses on digital transformation, which we view as long-term positive as it would create positive jaws for cost-efficiency and switching costs. Lloyds management guides toward similar operational performance to 2017 in 2018, in light of stable GDP growth and continuation of its strategic plan.
On an underlying basis, Lloyds posted net income of £3.6 billion, indicating an increase of 41% year over year, while this was slightly below our own estimate, mainly owing to PPI charges in the fourth quarter. Lloyds posted a healthy 6% increase in the top line. Its underlying profit for the year saw an 8% increase over last year, with costs declining 1%.
The bank announced a 20% increase to dividend pay-outs to 3.05p per share for the year, as well as share buy-backs to the tune of £1 billion, prompting the share price to rise.
When looking at revenue generation on a segmental level, while retail segment underlying profit increased by 9% thanks to the MBNA acquisition last year, commercial banking total income increased by 5%, whereas insurance and wealth management posted a 3% decline. Within retail, although MBNA had good segment volume growth in its open mortgage book, margin improvement also contributed to the good results. On the commercial segment, with 2% growth in small and midsize enterprise lending, Lloyds continues to lead the market and gain market share. Management guided that in 2018, the bank is expecting similar trends for its retail and commercial segments.
In terms of below-the-line items, while volatility-related items and conduct charges decreased when compared with last year, PPI provisions saw a sharp 65% increase. On the PPI issues, total charges came to £1.7 billion, with Lloyds booking £400 million during fourth-quarter 2017. From the guidance given by the management, it sounds like PPI claims are continuing. Hence, we view PPI charges as hard to predict, and it seems like uncertainties surrounding claims will continue in the coming quarters, with no concrete guidance provided by management on PPI.
As a fully private bank since May 2017, Lloyds management has stated that while organic growth will be its target, if and when a strategic acquisition comes along, it will use excess capital for buyouts.
HSBC
HSBC’s (HSBA) full-year performance in terms of profit before tax on both a reported and adjusted basis shows visible improvement when compared with last year. On an adjusted basis, HSBC booked a one-off charge due to the sale of its Brazilian operations. Reported profit stood at $17.2 billion, versus $7.1 billion in 2016. While we will be rolling our model and plugging in full-year numbers, we are adjusting our fair value estimate to reflect the time value of money.
We also maintain our narrow moat and stable moat trend ratings. We deem the results operationally improving and strong. Looking at the segmental contribution, as highlighted by HSBC management, Asia continues to show strong operational performance, especially in commercial banking, retail banking, and the wealth management businesses. Management guides towards another strong year in markets across Asia, which should support the business.
When it comes to overall exposure, the group’s business mix is now more focused towards Asia, with this segment contributing more to the group’s profits than in 2015, 75% of group reported and adjusted profit in 2017. As a result of its strong performance, HSBC delivered return on equity of 6% in 2017, a strong jump from 0.8% in 2016. HSBC management reiterates its medium-term return on equity target of greater than 10%.
