Sensible approach to Lloyds Banking

Half-year results from Lloyds Banking Group looked fairly decent and there are certainly grounds for optimism, but a failure to budge the share price (currently 73p) suggests a healthy dose of scepticism persists. The sages at Barclays sum up the situation quite neatly, and sensibly.

"Operationally very positive, unknowns manageable," is Barclays' take.

"An underlying 16% return on tangible equity (RoTE) for the first half 2014 ought to justify more than the current 1.4x tangible book multiple (tNAV)," says the broker. "Whilst the multiple is high relative to other European and UK banks we also have a lot more visibility on Lloyds' earnings power and capital is in very good shape."

In fact, that tNAV is what's putting off a lot of potential buyers. True, it's not cheap compared to the other UK banks, but by historic standards it is - Lloyds trades on about half pre-credit crunch multiples.

"We retain an overweight rating on the operational earnings and return outlook while acknowledging that issues like the UK government sell down and conduct risk could impact near term performance," says Barclays.

Underlying pre-tax profit, which strips out a whole host of hefty costs and other one-off items, surged by almost a third to £3.8 billion during the six months, about £200 million more than consensus forecasts. Exclude the sales of its 21% stake in St James's Place late last year, and it was up 58%, driven by a 39 basis-point improvement in net interest margin to 2.4%.

Lloyds more than halved the impairment charge to £758 million; again, that's about £200 million better than the City expected, and cut costs by 2% to less than £4.7 billion. It now expects full-year costs of about £9 billion.

Add all the horrible charges back in - this includes a further £600 million provision for mis-selling of Payment Protection Insurance (PPI) and a £226 million to settle LIBOR manipulation and BBA repo rate issues - plus the £780 million made from the sale of government bonds in 2013, and statutory profit sank by £1.3 billion to £863 million. That was light.

Still, Investec Securities reckons the extra PPI provision "offers relief rather than alarm," and that Lloyds has £2.3 billion (22%) in hand. "We regard it as credible that the current provision will now prove adequate. If we are wrong, any incremental charge is now likely to be small," says the broker, which still reckons the shares are worth 85p a share.

Lloyds increased guidance for full-year net interest margin by five basis points to 2.45%, and now expects its asset quality ratio to be around 35 basis points. The run-off portfolio should drop below £20 billion by year-end, too, about £3 billion better than previous guidance.

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