Lloyds Banking – Gloss Comes Off of Dividend Hope Story

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The Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) earnings report from Joseph Dickerson of Jefferies below.

The Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)  pre-announcement of £6.2bn underlying PBT misses our £6.4bn estimate. £1.9bn of PPI/conduct costs drives de minimis statutory PBT. Dividend discussions with regulator won’t start until H2 14, consistent with our view and “modest” pay-out disappoints. Our price target is 69p.

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LLOY has pre-announced FY 13 results this morning. “Underlying” PBT of £6.2bn compares with our £6.4bn estimate and the consensus of £5.8bn. The beat relative to consensus is likely a mix of income growth (core loans grew 3% in FY 13) and better than expected impairments. As a result of a further £1.8bn of PPI provisions (FY ’13 total of £3.05bn) and £130m for interest rate hedging charges, the group now expects a “small” statutory profit before tax vs the £2.7bn est. Based on this, we would expect a small statutory loss after tax.

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Dividend timing and size disappoint. The Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) has announced that it intends to apply to the PRA in H2 14 to restart dividend payments at a “modest level” and expects progressive policy moving to a payout ratio of at least 50% over time. The timing of dividend payouts is consistent with our long-held views regarding repatriation of capital for LLOY. The “modest level” is disappointing to us as we had factored in a 40% pay-out in 2015, which looks optimistic in light of today’s announcement. We would not expect a >50% pay-out until 2018 at best.

 

Franchise indicators ok. The NIM for FY13 is expected to be 2.12%, compared with company guidance of 2.11% and our expectation for 2.18%. Core loan growth of 3% looks about 100bps ahead of our estimate. Fully loaded core capital ratio = 10.3% versus our estimate of 10.5%.

 

Group preparing “certain documents” (eg prospectus) for sale of part of HMT’s The Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)  stake to public.

 

We rate LLOY at HOLD with a 69p target. Current 1.4x 2015 P/TBV multiple looks rich against sector multiple of 1.0x.

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