Shareholders in Lloyds Banking Group received a positive surprise on Friday morning.
The partly state-owned bank a released a statement guiding that it will be profitable at the underlying combined business level in 2010:
Costs have remained well controlled and are lower than the equivalent period in 2009. Impairment provisions are currently trending at lower levels than anticipated and as a result the Group now expects to deliver a better impairment performance than previously guided, in both the retail and corporate businesses, in 2010. Overall, based on the Group’s current economic and regulatory assumptions which remain unchanged since our recent 2009 preliminary results announcement, the Group believes that it will be profitable on a combined businesses basis in 2010.
Analysts had expected Lloyds to record of a loss of £300m at the combined business level this year. Following today’s statement, forecasts could rise by as much as £1bn, according to house broker Citigroup.
We expect that market forecasts for underlying (“Combined Businesses”) pre-tax and preexceptionals profits will rise by perhaps GBP1bn, lifting the current (company-supplied) post-FY09 results consensus for FY10e of a loss of around GBP300m to a profit of GBP500m-1.0bn.
Lower impairment charges and higher revenues were roughly equal in driving the upgrade, which should add around 1p earnings forecasts for this year and next.
The news on impairments is particularly noteworthy because there was a surprise rise in bad debt charges at Lloyds in the fourth quarter of last year. That led some people to question the company’s guidance, but Lloyds is now saying it will do better than the previously forecast charge of £14.5bn-£1.5bn.
Here’s the banking team at Noumra on the bad debt forecast:
The most significant aspect of the trading statement, in our view, is the message around impairments, which are indicated to be trending lower than anticipated by the management. At the full-year results, the group had indicated that it expected impairments to improve at a similar rate as that seen in the second half of 2009, where they were down 21% half on half. This implied impairment in 2010 is around the level of c£15bn. The group now expects to deliver a better impairment performance, in both retail and corporate businesses in 2010
As for revenues, Citi says Lloyds is trying to allay concerns that they might not be increasing in line with margin expansion. From its statement on Friday:
In the first 10 weeks of 2010, the Group’s trading performance has been strong and we are pleased with the Group’s performance against each area of recent guidance. The banking net interest margin is trending in line with recent guidance and this has supported a good level of income growth, on a combined businesses basis and excluding last year’s gains from liability management transactions.
Anyway, all of that triggered an 8 per cent rise in Lloyds’ share price on Friday:
But will it be enough to tempt Eric Daniels, Lloyds’ media-shy boss, away from his bunker on Gresham Street to give an interview?
And none of this should detract from the serious challenges that lie ahead for Lloyds, not least the new Basel proposals on capital and liquidity. Indeed the balance sheet conundrum facing Lloyds was neatly summed up by Andrew Lim of London-based brokerage Matrix, earlier this week:
We believe that Lloyds will be unable to right-size the balance sheet so that it can be funded on an independent basis, while simultaneously ensuring that earnings are high enough and RWA low enough such that it has adequate capital under the proposed Basel III principles. We believe consensus will gradually come to this view and that the stock price is likely to be weighed down by these concerns until such time that they are resolved.
Related links:
Lloyds losses narrow to £6.3bn – FT
BarCap’s funding findings – FT Alphaville
Lloyds needs to sell Scottish Widows - FT Alphaville