Lloyds is a high street London based lender, offering wide ranges of banking and non-banking services primarily in the UK. Its services portfolio consists of current and savings accounts, credit and debit cards, short and long-term loans, unsecured loans, mortgages, protection, investment products, motor finance, bonds and syndicated loans. They are also engaged in offering wealth management services, capital market services, foreign exchange, private equity and leasing services. The company shares are traded at the London Stock Exchange and part of the FTSE 100 benchmark index.

Key Segments

Retail segment: It is a leading provider of credit cards, mortgages, current accounts, motor finance, savings, insurance, and loans.
Commercial Banking segment: It provides transactional banking, risk management, working capital management, lending, and debt capital markets services to small and medium-sized enterprises, financial institutions, mid-market, and corporates.
Consumer Finance segment: It offers consumer lending products, including credit cards, unsecured personal loans, and motor finance.
Insurance segment: It provides a range of pension, investment products, and protection.

Key Subsidiaries: Lloyds Bank, Scottish Widows, Lex Autolease, Colleys, Halifax, Bank of Scotland, and AMC.

Key Management

Group Chief Executive: António Horta-Osório
Chief Operating Officer: Juan Colombás
Chief Financial Officer: George Culmer

Key Statistics

Segment Analysis

(Source: Annual Report, Company Website)

In FY18, underlying net interest income from Retail segment surged by 4.1% to £9,066m; Commercial Banking segment down by 0.9% to £3,044m; Insurance and Wealth segment dipped by 7.5% to £123m, and the Other segment rose by 15.5% to £521m. The company’s underlying basis total net interest income surged by 3.2 per cent to £12,714 million for the year ending December 2018 as compared to £12,320 million in 2017 for the same period, due to an increase in underlying net interest income from the Retail and Other segments.

Financial Highlights (FY 2018, £million)

(Source: Annual Report, Company Website)
 
 
Financial Commentary

The company reported net interest income of £13,396 million for the year ending December 2018 as compared to £10,912 million in 2017 for the same period. The company’s total income declined to £22,091 million in FY2018 as compared to £34,237 million in FY2017. There was a decrease of 35.5 per cent due to lower levels of client markets activity. In FY18, profit before tax surged by 13 per cent to £5,960 million against £5,275 million reported last year. Profit attributable to equity holders climbed by 24.4% during FY18 to £4,302 million from £3,457 million in FY17, due to the decrease in the tax expense charges and improvement in performance. The company’s basic earnings per share were 5.5 pence in FY2018 as compared to 4.4 pence in FY2017. Cash and balances at central banks dipped by 6.6 per cent to £54,663 million, down from £58,521 million a year ago, due to low maintenance in the balance sheet and lower performance in trading. In 2018, reported total assets was down by £13,584 million to £797,598 million against £811,182 million reported last year. Lloyds reported total equity excluding non -controlling interest of £49,925 million for FY18, up by 4.6 per cent against its FY17 reported total equity. A special ordinary dividend per share of 3.21 pence declared, total DPS dividend increased by 5.2% to 3.05 pence.

Ratios

(Source: TR)

Ratios Commentary

The reported net interest margin in FY2018 increased by 0.07 per cent to 2.93 per cent against 2.86 per cent reported last year. Operating leverage of 7.2% for FY18 stood considerably higher than the industry median of 0.5 per cent. In FY18, Loan growth stood at 2.6% which was remarkably lower than the industry median of 4.9%. The company’s reported deposit growth of 0.7% in 2018 stood below the industry median. As compared to the previous year, deposit growth has decreased significantly in FY18. On financial leverage front, the asset-equity ratio was significantly higher as compared to the industry median. Pre-tax Return on Equity (ROE) stood at 12.1 per cent which was higher than the industry median of 9.7 per cent. Pre-tax Return on Assets (ROA) of 0.7 per cent for the financial year 2018 stood lower than the industry median of 0.8 per cent.
 

Stock Performance


Daily price chart as on March-05-2019, before market close. (Source: TR)

On 5^th March 2019, at the time of writing (before market close), Lloyds shares were trading at GBX 63.24, down by 0.270 per cent over the previous day closing. Stock’s 52 weeks High and Low is GBX 69.69/GBX 49.52. At the time of writing, Llyods shares were trading at 9.50 per cent lower than its 52w High and 27.38 per cent higher than its 52w low. In the last one year, the share has fallen significantly by 5.87 per cent (as at March 05, 2019). The 5-day average trading volume of the stock was 186,804,675.60, and the 30-Day average volume of 138,880,078.53. The average traded volume for 5 days was up by 34.51 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 8.1x as compared to the industry median of 9.0x. The company’s stock beta was 0.69, reflecting lower volatility as compared to the benchmark index. Total outstanding market capitalization was around £45.05 billion and a dividend yield of 5.09 per cent.
 

Brexit Effect
Brexit overhang has compressed valuations, but management remains confident on the stability of the mortgage market, as Lloyds has a unique insight into the UK economy through its market share of current accounts and predominately UK-based credit exposures. It is also confident that a Hard Brexit scenario will have a manageable impact on the Bank as characteristics of the mortgage market, such as the high proportion of home-ownership, consumers’ liability for debts, and the shortage of housing stock might bring some balance.
 
Growth Perspective and Risk Assessments

The company is planning for the UK’s take-off from the EU to provide continuity for all the clients in the UK and Europe. As Lloyds operates the largest digital bank in the UK with a decent market share, the company’s incremental benefits of group cost reduction and savings recycling into further investment contributes towards a cycle of a lower cost/income ratio. Increasing interest in developed markets will help the bank to improve its interest margin but weakening economic data does not augur well for it. The country risk and market risk in the last year have increased considerably, which may strain the margins and financials. Protectionist policies driven by nationalist agendas could disrupt established supply chains and invoke retaliatory actions. Countries might impose tariffs on goods and services available domestically or from other economies. Such actions would impact global trade.

Valuation Methodology
Valuation Method 1 (NTM EPS (FY19E) approx.)


Valuation Method 2


While valuing Lloyd on NTM Peers Price to book value, we have considered its peers like HSBC Holdings PLC (NTM P/B 0.87x), Royal Bank of Scotland Group PLC (NTM P/B 0.69x), Barclays PLC (NTM P/B 0.45x), Standard Chartered PLC (NTM P/B 0.53x), Bank of Ireland Group PLC (NTM P/B 0.66x), CYBG PLC (NTM P/B 0.55x), Metro Bank Plc (NTM P/B 0.63x), and Amigo Holdings PLC (NTM P/B 4.81x) respectively.

Note: All forecasted figures and peers have been taken from Thomson Reuters.
 
Conclusion
The company will have to remain watchful from political and economic uncertainties around the world. Rising interest rate can help the company to improve its margins but can decrease demand for loan. Based on our PE and P/B based valuations approaches, we have given a BUY recommendation with a single-digit upside potential (based on 9.26x NTM PE on FY19E EPS) or (based on 1.1x NTM P/B on FY19E book value).

*The buy recommendation is valid for the current price as covered in the report as on (5th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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