By my reckoning 17 FTSE 100 firms are due to release results or host their Annual General
Meeting for shareholders in the coming week, so it’s going to be busy.
Potentially notable statements include those scheduled to come from
Miner Anglo American and the London Stock Exchange Group on Tuesday 24th
British American Tobacco, GlaxoSmithKline, Persimmon and Whitbread on the 25th
Barclays, Just Eat, Shell and Taylor Wimpey on the 26th
And Royal Bank of Scotland on Friday 27th
And even after that lengthy and august list I suspect another bank is the name most likely
to cause the biggest fuss in the week ahead and that is Lloyds, which is set to release
first-quarter numbers on Wednesday 25th April.
The Government finally sold down its stake to zero in 2017, to return the bank to private
ownership nine years after 2008’s bail-out, and it is possible that has caused a bit of
indigestion as the shares have really gone nowhere fast over the past year – and that
is despite another increase in the dividend and even the announcement of a £1 billion
share buyback.
Other factors may be at work when it comes to the share price, including
Brexit and whether it will be good, bad or neutral for Britain’s economy
The UK housing market and whether it is overheating or already starting to cool
And Lloyds’ own strategy update back in February.
Chief executive Antonio Horta Osorio announced a £3 billion investment in new initiatives,
including greater digitisation and improved online services.
That changed the investment case a bit, which had previously been about cost cutting and
how earnings has the potential to improve when – or if – costs related to conduct,
litigation, restructuring and bad loans began to fall.
Lloyds’ Q1 results on the 25th will therefore be a good test and all initial attention will
focus on the headline operating profit number.
A year ago this came to £2.08 billion so that’s your benchmark for Q1 2018.
Note however that net profit came to just £890 million a year ago and as we can see
here the gap between quarterly operating profit and net profit has been very big on several
occasions going back to Q1 2013:
This is because Lloyds’ profit and loss account has been burdened with those hefty
loan loss and impairment charges, restructuring costs and also litigation and conduct provisions
relating to things like protection payment insurance, or PPI.
This next chart shows how all three have added up on a quarterly basis also back to 2013:
If – and I stress if – these three numbers start to diminish and net profit comes in
a lot closer to operating profit (allowing for tax) then Lloyds would look like a very
profitable and cash generative bank indeed.
This is still really the bull case for the stock, although the new investment plan does
muddy the waters a bit, as mentioned before.
In fact, Lloyds was not the only bank to talk about greater investment – HSBC did too
– and this may be one reason why the Banks sector has lot a bit of momentum of late.
We can see that here, with the FTSE All-Share rebased to the Banks sector index.
Banks have outperformed the broader index over 12 months but after the recent loss of
momentum, the banks index is down 7% in 2018, which means it is only the 27th best performer
among the 39 industrial groupings which comprise the FTSE All-Share.
When it comes to the numbers analysts will also be looking at growth in loans, deposits
and risk-weighted assets.
This chart shows the recent trends here and I guess Lloyds, which has also just made an
acquisition in credit cards, may be looking to return to growth as a result of its digital
investments and that deal.
Sceptics will also point to how Lloyds is still shrinking itself back to health: as
we can see here, loan growth and deposit growth have been nothing to shout about for some
time, while risk-weighted assets on the balance sheet are still shrinking too.
Personally I find it hard to see why Lloyds is going to suddenly start growing rapidly
again, given that the UK is a very competitive, mature and tightly regulated banking market,
the national savings rate is already low and debt is already high – unless Lloyds really
pushes out the boat on credit card and mortgage lending and starts to take a lot more risk
again and I’m not sure that’s what shareholders are looking for.
I suspect they’re after less risk, more dividends, rather than more risk, but let’s
see what the first-quarter figures bring.
Thank you for watching and I look forward to seeing you next time