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Lloyds Banking Group Announces Improved NIM Guidance

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The Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)’s second-quarter profit more than doubled, as the bank set to increase profitability before the government’s potential sale of its stake.

Andrew Coombs and team at Citi Research feel the bank’s underlying 2Q 13 PBT £1,423 million showed 31 percent increase quarter-on-quarter driven by better net interest income and lower impairments.

Strong NIM

Citi analysts note Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)’ net interest margin of 2.06 percent shows 10 basis points increase on quarter-on-quarter basis, besides being 7 bp higher as compared to Citi’s estimates.

Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)’ NIM at 2.06 percent is substantially ahead of Citi’s estimates of 1.99 percent, thanks to lower deposit pricing, better than anticipated asset margins besides improved funding mix.

Citi analysts however, feel the bank’s statutory PBT for the second quarter at £94 million has been hit by another provisions towards payment protection insurance of £500 million, making the cumulative PPI provisions at £7,275 million.

Andrew Coombs and team feel the British bank is now set to commence business on a dividend timetable.

Government’s sale could be this month

According to Gavin Finch of Bloomberg, Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)’s return to profit and possible dividend would remove the final hurdle for government’s sale of its 39 percent stake in the lender as soon as this month.

Lloyds’ CEO Antonio Horta-Osorio indicated he is ready for the government to sell, as the bank has successfully shrank its assets besides cutting costs faster than anticipated, besides beating its targets to increase its profitability and capital.

Lloyds Banking Group’s improved outlook

Citi analysts recall Lloyds’ CEO confident statements on improved group net interest margin and anticipated substantial reduction in 2013 impairment charges.

Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)’s CEO also exuded confidence as the bank is set to target a fully loaded core tier 1 ratio of over 10 percent, which is a shade below Citi’s estimates of 10.1 percent.

Citi analysts commended Lloyds’ impressive capital position as the lender has successfully reduced its non-core assets enabling its Basel III Risk Weighted Assets decline to £21.5 billion quarter-on-quarter.

Andrew Coombs and team at Citi Research also note Lloyds’ costs of £2.3 billion are lower by 3 percent quarter-on-quarter and 5 percent lower on year-on-year basis, primarily driven by simplification savings.

Citi analysts also observe Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)’s impairments at £0.8 billion are lower by 19 percent on quarter-on-quarter and by over 46 percent on year-on-year basis, thanks to improvement in both core and non-core.

Citi analysts note the strongest improvement to the bank accrued from its commercial banking. The NPL ratio declined 7.7 percent with a coverage ratio at 49 percent.

Andrew Coombs and team at Citi Research view Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)’s recent results as ‘excellent’ particularly on the NIM front.

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