Lloyds Banking Group Plc

Lloyds Banking Group Plc (LON: LLOY) is an FTSE 100 index listed Banking Company. It operates under three segments: Commercial Banking, Retail Banking and Insurance and Wealth.

On 29 July 2021, the Company will release its H1 FY2021 results.

The next dividend could be declared on 29-July-2021 with the H1 FY2021 results (interim dividend).

Investment Rationale for Valuation – SELL at GBX 50.04

• Fitch has recently downgraded LLOY’s long-term issuer default rating to ‘A’ from ‘A+’.
• The resurgence of Covid-19, especially the Indian variant, could lead to further lockdowns and muted sentiments in the UK.
• LLOY’s pre-tax ROE and pre-tax ROA are lower than corresponding industry median of 6.6% and 0.5%, respectively, in FY2020.
• Over the last year, LLOY’s stock yielded a return of over 59%, giving an attractive opportunity to book profit.
• The stock is currently trading near its 52-week high price, reflecting overstretched valuation.

Key Risks

• LLOY added £400 million central overlay in FY2020 due to significant uncertainties that are still in place.
• The group is exposed to credit and counterparty risks.
• There are financial risks from unfavourable interest and exchange rate movements.
• Unfavourable macroeconomic factors could reduce the pipeline of opportunities.
• There is a change in the CEO position, which adds to the uncertainty.

Q1 FY2021 Trading Update (released on 28 April 2021)

(Source: LSE Website)

• Due to Covid-19 induced lower business activities and lower interest rates, Net Interest Income was under pressure. It went down by ~9.3% YoY in Q1 FY2021.
• However, driven by expected credit loss provisions, the statutory profit after tax significantly rose by ~191% YoY in Q1 FY2021.
• CET1 ratio surged to 16.7% in Q1 FY2021 with a notable improvement from 16.2% in FY2020.
• Driven by an increase of £6.0 billion in the open mortgage book, loans and advances to customers went up by £3.3 billion in Q1 FY2021.
• Primarily due to optimisation activity undertaken in Commercial Banking, risk-weighted assets were down by £3.8 billion in Q1 FY2021.

One Year Share Price Chart

 (Analysis done by Kalkine Group)

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

Conclusion

Though LLOY has achieved a decent result in Q1 FY2021, the outlook remains uncertain. The change in the CEO position of the Group further added to this uncertainty. Hence, it would be prudent to liquidate the position at a profit as macroeconomic challenges are still in place. The stock is also trading near its 52-week high, indicating overstretched valuation. The stock made a 52-week low and high of GBX 23.59 and GBX 50.44, respectively.

Considering the rating downgrade, recent stock selling by an insider, uncertain market outlook, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Lloyds Banking Group Plc at the current market price of GBX 50.04 (as on 1 June 2021 at 8:45 AM GMT), while we look forward to reinvesting when due corrections are done, and uncertainty regarding the outlook disappears.

Investec Plc

Investec Plc (LON: LLOY) is an FTSE 250 index listed specialist bank and asset management company. It serves a selective client base with wealth and investment products and services.

On 23 September 2021, the Company will publish its pre-close briefing for H1 FY2022.

The next dividend will be of GBX 7.5 per share with an ex-dividend date of 22-Jul-2021 (Final dividend).

Investment Rationale for Valuation – SELL at GBX 311.40

• Lower interest rate and Covid-19 related macroeconomic weakness still affect the performance of the Company.
• INVP has downsized recently by closing down its Australian operations.
• In FY2021, its adjusted EPS reduced substantially YoY by 14.7%.
• Since FY2018, INVP’s pre-tax ROE and pre-tax ROA are lower than corresponding industry medians of 15.9% and 3.2%, respectively. It indicates that the Company cannot utilize its resources as good as the industry.
• Over the last year, INVP’s stock yielded a massive return of around 95%. It gives investors to book an impressive profit.
• The stock is currently trading near its 52-week high price, indicating overstretched valuation.

Key Risks

• Elevated risk management and risk reduction costs could put further stress on the margins.
• The Company closed its Australian operations. It could affect its reputation.
• The Company is exposed to credit and exchange rate risks.
• Changes in client demand and competitive environment could pose substantial risk.
• Its interest income could be affected by lower interest rates.

Recent News

Change in Non-Executive Director: On 21 May 2021, INVP announced that Charles Jacobs and Lord Malloch-Brown would step down from the Board with effect from 30 June 2021 and 5 August 2021, respectively.

Financial Highlights (for the year ended 31 March 2021 (FY2021), as of 21 May 2021)

(Source: LSE Website)

• Driven by its resilient client base and a partial rebound in macroeconomic conditions, the Company achieved improved performance in H2 FY2021 after muted performance in H1 FY2021.
• This led to substantial recovery. However, still, total operating income before expected credit losses was down 9.2% YoY in FY2021 due to lower interest rate and overall reduced client activity in FY2021.
• Due to headcount reduction and lower discretionary spending, total operating costs were down 1.8% YoY.
• Because of less reduction in costs than the decline in operating income, adjusted basic EPS was down 14.7% YoY.
• This decline in EPS led to a substantial decline in ROE, which was down to 6.6% in FY2021 from 8.3% in FY2020.
• However, net asset value rose by 11.1% to GBX 460.20.

One Year Share Price Chart

 (Analysis done by Kalkine Group)

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

Conclusion

Though INVP has achieved a decent result in H2 FY2021, the outlook remains uncertain and overall results in FY2021 was down compared to the FY2020 levels. The Company has reduced its investment portfolio and reorganized its UK bank. Currently, we do not have enough clarity about the outcomes of these initiatives. Hence, it would be prudent to liquidate the position at a profit. The stock is also trading near its 52-week high, indicating overstretched valuation. The stock made a 52-week low and high of GBX 126.10 and GBX 312.20, respectively.

Considering the fall in earnings in FY2021, elevated risk management costs, uncertain macroeconomic outlook, poorer resource management than the industry, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Investec Plc at the current market price of GBX 311.40 (as on 1 June 2021 at 8:25 AM GMT), while we look forward to reinvesting when due corrections are done, and the economy rebounds.

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

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

Disclaimer

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

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