Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) gets a Hold rating from Investec analyst Ian Gordon despite the bank reporting a fourth consecutive year of negative earnings.
Ian Gordon of Investec in the recent report titled “No earnings = no dividends. Paradise lost or just postponed?” however retains Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) target price at 85p and prefers Lloyds to Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS).
Lloyds dragged by PPI charge
In its pre-announced FY 13 earnings, Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) expects a ‘small’ statutory profit before tax, thanks to an additional £1.8 billion of PPI provisions (FY’13 total of £3.05 billion) and £130 million for interest rate hedging charges. The group also announced that it intends to apply to the PRA in H214 to restart dividend payments at a ‘modest level’ and expects progressive policy moving to a payout ratio of at least 50% over time.
Sustained losses
Tracing the evolution of Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)’ statutory earnings over the past 15 quarters, the Investec analyst points out a combination of elevated impairment charges and other substantial legacy items have condemned the group to sustained losses over the period. The following chart captures the Lloyds’ EPS since Q1 2010:
The Investec analyst is positive on the outlook for Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)’s dividend-paying capability. The analyst however trimmed Investec’s DPS forecasts to 1.5p from 2 p in 2014e. The following chart highlights Investec’s forecasts for EPS and dividend per share through 2014-16e.
Lloyds underprovided for PPI
The Investec analyst points out at 30th September 2013, Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) had taken £ 8.025 billion of cumulative PPI provisions, of which 79% had already been utilized. However, this compares unfavorably with Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS) (72%), Barclays PLC (NYSE:BCS) (LON:BARC) (68%) and HSBC Holdings plc (ADR) (NYSE:HSBC) (68%) indicating other things being equal, Lloyds was materially underprovided relative to peers. Moreover, the absolute PPI provision shortfall was materially greater for Lloyds given the fact that its PPI charges exceed those of Barclays, Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS) and HSBC combined.
The following graph highlights the build-up of PPI provisions and PPI spend for Lloyds since the beginning of 2011:
The Investec analyst anticipates a jump in reported PBT for the group to £ 5.7 billion in 2014e, rising further to £ 7.5 billion by 2016e. The following chart captures the evolution of the income statement through 2008-2012 together with Investec’s forecasts for 2013-2016e:
Ian Gordon of Investec concludes that Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) is now Investec’s fourth favorite UK bank, while preferring Standard Chartered PLC (LON:STAN), HSBC Holdings plc (ADR) (NYSE:HSBC) and Barclays PLC (NYSE:BCS) (LON:BARC) ahead of Lloyds. By using RoE-g/CoE-g methodology, the analyst pegged Lloyds target price at 85 pence.
