The first-quarter 2018 kicked off well for Lloyds Banking Group as it booked £1.6 billion in statutory profit before tax, up 23% when compared with last year. Net profit is at £1.2 billion, up 29% year over year, which is in line with our 29% increase for the full year. Lower PPI charges and lower costs helped Lloyds’ quarterly profits. Morningstar equity analysts maintain their fair value estimate of £76 per share, above the current share price of £65.
During the quarter, Lloyds maintained its strong balance sheet position along with its capital generation.
With regard to the payment protection insurance provision, or PPI, charges, the charges were significantly lower this quarter at £90 million versus £350 million a year ago and £600 million last quarter. As per the earlier guidance given by management, it sounds like PPI claims are continuing. Hence, we view PPI charges as hard to predict, and it seems that uncertainties surrounding claims will continue in the coming quarters, with no concrete guidance provided by management on PPI.
While we believe £2.3 billion PPI provisions on the balance sheet looks sufficient, renewed Financial Conduct Authority advertising campaigns create a downside risk of further claims, as the deadline was extended to August 2019. For Lloyds, the total amount provided toward payment protection stands at £18.1 billion.
In our view, Lloyds' first-quarter results reflect its improved operational efficiency and the good place the bank has created for itself within the banking industry. Completing its restructuring process ahead of some of its peers and committing management to performance also helped the bank during this journey. While the shares trade around the three-star category, we still believe Lloyds is one of the good quality names in the UK banking space.
It is one of the firms we think will be less affected by Brexit and the aftermath, thanks to its status as a pure UK banking play, and given that 95% of its assets are based domestically. When it comes to the domestic macroeconomic outlook, Lloyds' management maintains its constructive view and guides that the UK economy will remain resilient, benefiting from low unemployment and continued GDP growth.