Lloyds Bank publishes its first quarter results on Thursday, which means Lloyds shares will be under scrutiny. Headline profit for Lloyds Bank came to £2.08 billion in Q1 2017 but net profit was just £890 million. The gap can be partly attributed to tax, but it is mainly loan impairments which we are talking about here, as well as conduct costs and restructuring charges.
It is these three items which cost Lloyds another £3.9 million in 2017, so investors will be hoping to see them start to come down. With the PPI deadline nearing there is no guarantee this will happen.
Lloyds Bank share forecast – cost cutting is the order of the day
Lloyds Bank CEO Antonio Horta Osario has announced a £3 billion investment in new initiatives including greater digitisation and improved online services, but there will also be more job losses.
If Lloyds Bank can reduce loan impairments and conduct costs and manages to get its net profit to look a lot more like its operating profit (allowing for tax) then the bank may start to look much more profitable and cash generative.
We’ve been very negative about Lloyds in the past, but in February it was starting to look like Lloyds Bank shares would begin emerging from under the cloud of government ownership and PPI payments. Lloyds shares have been relatively range bound if you look at them over the last 12 months, trading between 72-73 and hitting as low as 63.
In recent months we’ve seen a drop from 72.12 in late January to 64.64 on 26 March. The market simply can’t make up its mind.
Lloyds Bank shares are trading at a discount
Lloyds shares are trading at a discount of 23% to the wider UK banking sector. So is it time to pick this one up again?
Lloyds Bank is a pure banking play, unlike other UK banks like HSBC or Barclays. This is one important factor that sets it apart. This does make it more vulnerable to the state of the UK economy and particularly the likely impact of Brexit. Analysts are, however, becoming more cautiously bullish.
“On the cost side, especially when it comes to regulatory cost risk, we believe the worst is over for Lloyds,” says Morningstar analyst Derya Guzel. “We also anticipate visible improvement when it comes to total cost, with the help of digital investments and additional branch closures and full-time employee reduction.”
Lloyds Bank shares continue to trade on an undemanding forward price-earnings ratio of 8.7 against 12.8 for its peers, while it has a two year PE average of 9.2.