Lloyds Banking Group share price dips as it misses estimates: Here's how the City reacted

Caitlin Morrison
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Fears Continue For Lloyds Bank As Shares Continue To Plunge
Lloyds Bank is still dealing with PPI issues (Source: Getty)

Lloyds Banking Group this morning reported an increase in profits - but it still managed to miss analysts' expectation.

Pre-tax profit was forecast at £2.9bn but came in at £2.5bn, and while the bank was expected to set aside £400m for PPI claims, in actual fact it has provided another £1bn.

As the market opened, shares dropped. At the time of writing, the stock was down 1.6 per cent.

This is how City experts and analysts have reacted:

Sign of strength

"It’s a sign of Lloyds’ strength that it can shrug off £1.6bn of misconduct charges to post a strong rise in profits," said Hargreaves Lansdown senior analyst Laith Khalaf.

"Growing revenues at the bank were driven by a good showing from its commercial banking division, and with costs heading downwards, that spells good news for profits, dividends and shareholders."

Lloyds has two more years of the PPI storm to weather, after which a significant headwind to profitability will have dissipated.

"There are other misconduct costs at play too, in particular a compensation scheme for customers who fell into mortgage arrears between 2009 and 2016, which shows that unfortunately poor treatment of banking customers was not restricted to the period before the financial crisis. However these costs are limited in scope by comparison to PPI claims, where the light at the end of the tunnel is now in sight."

Khalaf added that as "the lion’s share of Lloyd’s dividends are paid at the end of the year", the most recent increase "hints that there may be further treasure ahead for income-seekers".

He also noted: "The bank’s fortunes are heavily reliant on the UK economy, which still hangs in the balance as we leave the European Union, though even if we are entering a period of economic weakness, Lloyds is at least doing so from a position of strength."

Compares favourably

Michael Hewson, chief market analyst at CMC Markets, said while the bank's profit was £400m short of analyst expectations, "it still nonetheless compares favourably with its other bailed out peer the Royal Bank of Scotland which is still having to deal with the EU over its own rescue package".

Legacy issues continue to plague Lloyds, Hewson noted, adding: "As the Brexit process gets under way in the coming months the outlook for this extremely focussed UK bank is likely to become clearer, however one thing does appear certain, as its legacy issues diminish the bank should be able to keep more and more of its profits which means shareholders are more likely to benefit in the form of more consistent dividends, and this week’s trading update could well go further in reinforcing that."

The scandal that just won’t go away

Lloyds took a hit as it was forced to set aside more cash for PPI claims although first-half profits still managed to hit an eight-year high," said Neil Wilson, senior market analyst at ETX Capital.

"We thought Lloyds was through the worst of it in terms of conduct charges but the bank had to up provisions by £1bn, with £700m of this coming in Q2. Lloyds has now set aside more than £18bn to cover PPI claims. It’s not just PPI: Lloyds has also been forced to allocate at least £300m to reimburse mortgage customers after failures in the way it handled arrears.

"PPI remains a thorn in the side of Lloyds and it could yet get worse. The bank stressed that ‘risks and uncertainties remain’ with respect to future volumes of claims. Costs could easily rise again."

Lloyds has so far settled or provided for just over half of all the 16m PPI policies sold since 2000. Not all PPI policies were mis-sold, of course, but it would be reasonable to assume that there will have to be further provisions made.

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