Earnings look ahead: Lloyds

The bank is suffering from difficult trading conditions and the compensation provisions are still rising.           

Lloyds Bank
Source: Bloomberg

Lloyds will announce its full-year figures on 25 February, and traders are anticipating revenue of £17.77 billion and adjusted net income of £5.92 billion. These forecasts represent a 3.2% fall in revenue and an 8% drop in adjusted net income. The bank will also reveal its second-half numbers on the same date, and investors are anticipating revenue of £8.73 billion and adjusted net income of £2.42 billion, which compares with the first-half revenue and adjusted net income of £8.96 billion and £4.06 billion respectively.

Lloyds is still setting cash aside for the payment protection insurance (PPI) compensation fund, which nearly totals £14 billion. The company is by far the worst offender of the UK banks for mis-selling PPI. October 2018 is going to be the government imposed deadline to claim mis-sold PPI, but at the rate at which Lloyds is setting aside funds, further provisions seem likely.

The bank stated its commercial division was finding trading conditions challenging and total income declined in the latest quarter. Flooding is going to have a negative impact on the insurance side of the business. Westminster has been winding down its stake in the lender, and it hopes to return it to private ownership but the process might be slowed down should the outlook continue to be uncertain. 

Fair valuation

  Trailing 12-month P/E Forward 12-month P/E Price/book value Dividend yield
Lloyds 20.08 7.74 0.93 1.32%
HSBC 9.54 8.56 0.64 8.46%
RBS N/A 10.26 0.49 N/A
Barclays 71.52 7.44 0.45 4.39%
Standard Chartered 9.7 16.88 0.33 2.27%
FTSE 100 26.59 15.57 1.69 4.59%

 

Lloyds is the only bank that has a trailing price to earnings ratio that is anywhere near that of the FTSE 100. The relatively low trailing price to earnings ratio of HSBC and Standard Chartered could be interpreted as under valuation, but it could also reflect the low expectations investors have for the stock.

The fall in forward looking price to earnings for Lloyds indicates earnings are anticipated to rise. Lloyds is marginally trading below its book value, and the deep discount other banks are trading at is a reflection of what little confidence traders have in them. The dividend yield offered by Lloyds may not be much, but at least it is moving in the right direction, unlike Standard Chartered who scrapped its second-half dividend. 

Earnings vs estimates 
Out of the past eight full-year figure announcements, the revenue figure exceeded the estimates 87.5% of the time, and the earnings per share (EPS) figures topped the expectations 62.5% of the time. Volatility can be anticipated on the day of the results being released, and the stock moved on average of 5.46% when the numbers were revealed, and only 25% of the time it was a positive move. 

Lloyds revenue chart

There is a very small correlation between the revenue performance and the share price movement on the day of the announcement.

Lloyds EPS chart

There is limited correlation between the EPS performance and the share price movement on the day of the figures being released.

Brokers are bullish

  Buy ratings Hold ratings Sell ratings
Lloyds 20 5 5
HSBC 14 17 5
RBS 12 13 2
Barclays 20 7 1
Standard Chartered 11 15 4

 

Equity analysts are very bullish on Lloyds and it has the second highest percentage (66.66%) of buy ratings attached to it from the list of banks above. Investment banks have an average target price of 84.41p, which is 33% above the current price.

Lloyds share price has been pushing lower in 2016 and even though the stock has rallied since mid-February the gains are not enough to rule out another downward move. We are seeing 61.1p provide support and if that level is held, a move higher is possible. The next big resistance levels in sight are 65p and 66p.

Should we see an hourly close above 66p, it would be a bullish signal and the next major resistance level in sight is 68.5p. If there is an hourly close below 61.1p, it would be a bearish indicator and the next big support levels on the horizon are 59p and 55.8p.

Lloyds chart

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