Lloyds Banking Group Plc - Strong funding and liquidity position

Lloyds Banking Group Plc (LON: LLOY) is a FTSE 100 listed Banking Company, which is engaged in the business of financial and banking services.

On 29 October 2020, the Company will announce the Q3 interim management statement.

Rationale for Valuation – Buy at GBX 26.97

• The Company has shown impressive growth in the last four years (FY15 to FY19), which indicates the financial resilience and sound business model of the Group.
• Net interest margin expected to remain broadly stable on Q2 level at approximately 240bps for rest of the year, resulting in a full-year margin of approximately 250bps.
• Average liquidity coverage ratio stood at 40%, which was well above the regulatory minimum.
• Witnessed significant deposit growth from the strong franchise and Government schemes.

Key Risks

• The outlook remains uncertain, and the economic fragility will continue for at least the rest of the year. This may impact financial performance.
• The impact of lower rates, higher impairment and lower levels of activity will continue into the second quarter of 2020.
• Further, the external risks faced by the Company may also impact the success of delivering against LLOY’s long-term strategic objectives.

Financial Highlights (for the six months ended 30 June 2020, as on 30 July 2020)

(Source: Company Website)

• The Company has shown a strong balance sheet and is well-positioned to absorb COVID-19 impacts, with loans and advances of £440 billion (which were stable against FY19), an increase of £29 billion in customer deposits and CET1 ratio of 14.6%.
• It also witnessed a strong liquidity position, with a loan to deposit ratio of 100%. This shows a significant potential to lend into recovery.
• The Group took a £3.8 billion impairment charge in the period, higher than the £579 million a year before. In H1 FY20, the statutory profit after tax was £19 million, and statutory loss before tax stood at £602 million, both impacted by income developments, and the surged impairment charge.
• The Company’s loan book was standing at £440 billion, unchanged from the end of 2019 but marginally behind the same point the year before.

One Year Share Price Chart

Daily Chart as of 7 September 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Technical Analysis

From the technical standpoint, 14-day RSI is supporting the upside movement, which also means there is a good potential for a short term rebound in the stock price.

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

In FY20, the net interest margin is expected to remain broadly stable, impairment expected to be in the range of £4.5-£5.5 billion, operating costs to be below £7.6 billion and the risk-weighted assets expected to be flat. Despite the uncertain environment, the LLOY’s business model and financial strength will ensure that it can continue to help Britain recover and support the customers. The Company witnessed a recovery sign in the core market, mainly in the housing market and consumer spending, but the outlook stays uncertain. Overall, it has strong foundations and unique competitive strengths position, which shows that LLOY is well-positioned for the long-term and provides superior and sustainable returns for the future. The stock made a 52-week low and high of GBX 25.43 and GBX 73.66, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Lloyds Banking Group at the closing market price of GBX 26.97 (as on 7 September 2020), with lower double-digit upside potential based on 0.51x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

Man Group Plc – Operating with strong balance sheet and liquidity position

Man Group Plc (LON: EMG) is a FTSE-250 listed Investment Management Company, which focuses on generating attractive performance and client portfolio solutions.

On 16 October 2020, the Company will announce the Q3 trading update.

Rationale for Valuation – Buy at GBX 120.55

• Over the past three years, it has returned more than US$950 million to shareholders via dividends and buybacks programme.
• The Company has maintained a strong focus on reinforcing existing client relationships and nurturing new relationships, which has given more than 16% growth in FUM from FY15 to H1 FY20.
• The Company has strong track records over the long term. As a diversified investment manager, Man Group outperformed the peers in H1 FY20 despite market turbulence.
• In the last six months, Man Group Plc share price has delivered approximately 4.34% return, which also shows that the stock has outperformed the index (FTSE 250) during the last six months.

Key Risks

• The impact of COVID-19 on financial markets and the subsequent negative investment performance could further reduce FUM and subscriptions. This reduction can also lead to reputational damage and dissatisfied clients.
• The ongoing Covid-19 pandemic may also impact the business growth trajectory in the near term.

Financial Highlights (for the six months ended 30 June 2020, as on 30 July 2020)

(Source: Company Website)

• The Company has a good relative performance in a difficult market environment, with asset-weighted outperformance of 1.3% driven by outperformance across alternative and systematic long-only strategies.
• It witnessed a strong balance sheet and liquidity position, with net financial assets of US$611 million (31 December 2019: US$674 million) and proposed an interim dividend of 4.9 cents per share. In H1 FY20, the dividend was slightly higher from H1 FY19 due to increased management fee profits and a lower share count.
• Funds under management (FUM) was down by 8% in H1 FY20, driven by the market declines (due to COVID-19) resulting in the negative absolute investment performance of US$5.4 billion.

One Year Share Price Chart

Daily Chart as of 7 September 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Technical Analysis

From the technical standpoint, 14-day RSI is supporting the upside movement, which also means there is a good potential for a short term rebound in the stock price.

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

The first half of 2020 was a challenging time; however, the flow momentum is normalising in second half of 2020. The balance sheet and liquidity position remained robust, and it seems to be well placed to handle volatile market conditions. Going forward, the Group has been reliably investing in talent acquisition and new technology to expand their client’s portfolio and investments, which should support them in yielding progressive returns for their shareholders. Moreover, Man Group keeps on launching new platforms for providing solutions related to investment management services, to cater to the needs of the existing and new clients. The stock made a 52-week low and high of GBX 84.72 and GBX 177.10, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Man Group at the closing market price of GBX 120.55 (as on 7 September 2020), with lower double-digit upside potential based on 1.76x Price/NTM Book Value (approx.) on FY20E book value per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.

Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.