Lloyds Bank droops despite profits boom

Lloyds Banking Group' (LLOY)s numbers provide much of what any bank should aspire to, with strong growth underpinned by a disciplined and organised balance sheet.

Quite apart from a significant 23% jump in pre-tax profit to £1.6 billion, the key metrics continue to consolidate. The capital cushion is robust, Net Interest Margin (NIM) continues to grow, whilst there are further noticeable improvements to the cost/income ratio and the return on equity.

Meanwhile, the previously announced £1 billion share buyback is supportive and the dividend yield of 4.6% (projected 5.4%) provides a compelling attraction to income-seeking investors. The reduction in the PPI provision, where Lloyds has been the major culprit in terms of repayments, is a welcome development.

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Less positively, the rise in impairment provisions is slightly troubling given a fairly benign economic backdrop, although the bank has stressed that it is seeing little deterioration in credit quality at present.

This could become relevant in the event of a downturn in UK fortunes, especially given the bank’s exposure through its credit card business. From a wider perspective, the ongoing cost of the transformation towards becoming a digitised provider and the inevitable overhang of regulatory requirements could place a drag on growth.

Source: interactive investor          Past performance is not a guide to future performance

Even so, for the most part this is an impressive update with the potential for future growth becoming crystal clear.

Unfortunately, the share price has not kept up with developments, having drifted lower over the last year, as compared to a 2% hike for the wider FTSE 100 (UKX).

There has also been some weakness over the last quarter as the shares have lost 8%, but an undemanding valuation coupled with measurable progress means that the general market view of the shares as a ‘buy’ is likely to remain undisturbed.

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