Lloyds Banking Group PLC – Showed Resilient Business Model in a Challenging Economic Environment.

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

Investment Rationale – Hold at GBX 37.67

• Over the past three years (H1 FY17 - H1 FY20), LLOY’s revenue and gross profit have surged at a CAGR of ~90.42%, and ~61.46%, respectively.
• From a technical standpoint, 20-day SMA (34.96) is supporting the upside potential.
• The Group’s credit ratings continued to reflect the resilience in the business model.
• The common equity tier 1 capital ratio increased to 15.00% at the end of September 2020 from 14.30% at 31 December 2019, primarily reflecting new AT1 issuances and increase in common equity tier 1 capital.

Risk Assessment

• The economic outlook is clearly challenging with the mitigating impact of Government measures in the UK and the longer-term outcome dependent on the severity and length of the pandemic.
• The impact of lower interest rates, higher impairment, and lower levels of activity on the Group’s business will continue in the short-term.

Recent News

30 November 2020: Charlie Nunn was appointed by the Group as Chief Executive Officer and Executive Director. The announcement is subject to regulatory approval.

Q3 FY20 Results for the third quarter ended 30 September 2020 (as on 29 October 2020)

(Source: Company Website)

• The Group’s results were significantly affected by the coronavirus pandemic and its impact over the UK economy.
• Moreover, the considerable increase in impairment due to the Group’s economic outlook for the UK affected its profitability.
• In 9M FY20, there was a 9% year-on-year decrease in the total net interest income due to lower interest rate environment.
• As of 30 September 2020, total assets at £606,888 million, reflected a 4% increase from £581,368 million at 31 December 2019. Even the cash balance was higher by £13,514 million during the same dates.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The charge taken in the past three months reflected the relative economic stability. Overall credit quality also remained robust while the arrears and defaults remained low. Adjacently, the Group's loan portfolio continued to be well-positioned, reflecting a through-the-cycle approach to credit risk and high levels of security. The commercial portfolio reflected a diverse client base with relatively limited exposure to the most vulnerable sectors so far. Moreover, there was an increase in assets, equity, and common equity tier 1 capital ratio, which underpins strong fundamentals. Stock 52 week High and Low were GBX 73.66 and GBX 23.59, respectively.

Based on the above rationale and valuation methodology, we have given a “Hold” recommendation on Lloyds Banking Group PLC at the current price of GBX 37.67 (as on 2 December 2020, before the market close at 8.15 AM GMT).

Barclays PLC – Diversified business model delivering a resilient operating performance.

Barclays PLC (LON: BARC) is FTSE 100 Index listed British universal bank. It provides consumer banking and payments operations around the world, along with global corporate and investment banking services.

On 11 February 2021, the Company has scheduled to report its FY20 results.

Investment Rationale – Hold at GBX 141.90

• Furthermore, from a valuation perspective, Price/Cash Flow, Price/ Earnings, EV/Sales, and Price/Book multiples of the BARC are lower than the corresponding multiples of Financials Industry.
• The impairment charges in H2 FY20 are expected to be lower than H1 FY20.
• In Q3 FY20 YTD, Tangible net asset value (TNAV) per share increased to 275 pence (December 2019: 262 pence).
• Over the past two years (H1 FY18 – H1 FY20), BARC’s Tier 1 Risk-Adjusted Capital Ratio has remained above 17.00%, which is higher than the industry median.
• From a technical standpoint, 20-day SMA (135.82) is supporting the upside potential.
• In terms of stock price performance, RB has delivered a positive return of nearly 23.51% in the past six months, whereas the FTSE 100 has given a return of merely 3.59%.

Risk Assessment

• It can face a higher volume of defaults and delinquencies.
• The Covid-19 pandemic and resulted in wider macro-economic disruptions, which is posing a substantial risk to the profitability, capital, and liquidity position of Barclays.
• Moreover, the economic downturn can significantly impact the value of assets.
• Further, the income is likely to remain impacted due to lower transaction and lending volumes. Interim Results

Q3 FY20 Results for the period ended 30 September 2020 (as on 23 October 2020)

 (Source: Company Website)

• The diversified income streams of Corporate and Investment Bank (CIB) division offset the income challenges faced by Barclays UK and Consumer, Cards and Payments (CC&P) divisions. Therefore, Q3 FY20 YTD income increased by 3% year-on-year.
• The increased impairments driven higher coverage ratios, and therefore, Group credit impairment charges increased to £4.3 billion in Q3 FY20 YTD (Q3 FY19 YTD: £1.4 billion).
• The operating expenses declined by 1%, which improved cost to income ratio to 59% in Q3 FY20 YTD (Q3 FY19 YTD: 62%).
• In terms of Q3 FY20 performance, CET1 ratio improved by 40 basis points against Q3 FY19 and stood at 14.6%, mainly due to lower RWAs.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The impairments in H2 FY20 is expected to remain challenging but below the H1 FY20 impairment charge. Similarly, impairments of FY21 is likely to be lesser than FY20. Given the low-interest rate environment and certain headwinds in Barclays UK, the second half of FY20 will continue to be challenging. However, the income in the Consumer, Cards and Payments (CC&P) has shown recovery. Meanwhile, the CIB division is well-positioned for the future. Overall, the Group remained in strong capital position and confident of its capital generation capacity. The Company continued to target RoTE of above 10% and cost to income ratio of below 60% over time. Stock 52 week High and Low were GBX 192.99 and GBX 73.04, respectively.

Based on the above rationale which are supported by valuation done using the above method, we recommend a “Hold” stance on Barclays PLC at the current price of GBX 141.90 (as on 2 December 2020, before the market close at 8.10 AM GMT), while we look forward to reviewing the support from upcoming catalysts to reinvest. 

 

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

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