Lloyds hurt by PPI past

The bank will announce its third-quarter figures on 28 October, and it is still being haunted by its PPI past.

Lloyds logo
Source: Bloomberg

Westminster’s stake in Lloyds keeps falling, but so does the company’s share price as dealers concerns for the ongoing PPI provisions outweigh the rising profitability of the bank. For the first six months of the year, the company saw a large jump in profits as costs remained under control and income increased marginally. The financial institution has improved its capital buffers and impairments on loans has dropped considerably since the credit crisis, but yet another cost related to the mis-selling of PPI took the shine off the numbers.

The UK government has made a lot of headway in its reduction of its stake in the bailed-out bank. Westminster’s stake now stands at 12% and George Osborne has plans to offer shares in the bank to members of the public, and that scheme is expected to take place in the spring of 2016.  Mr Osborne plans to offer the stock at a five percent discount to entice buyers, and as stated previously, the sooner the bank is returned to full privatization, the better.

Lloyds’ total provision for the PPI has exceeded £13 billion making it the worst offender of the UK banks. The FCA is aiming to set a deadline of 2018 for customers who were mis-sold PPI to claim, and it looks like it will be making provisions for the foreseeable future. Traders will only gain real confidence in Lloyds when they see the PPI provisions coming to an end.

Lloyds will report its full-year numbers in February 2016, and traders are expecting revenue of £8.9 billion and adjusted net income of £3.39 billion. These forecasts represent a 51% fall in revenue and a 47% drop in adjusted net income. The bank will reveal its second-half numbers on the same date, and dealers are expecting revenue of £9.07 billion and adjusted net income of £2.69 billion, which compares with the first-half revenue and adjusted net income of £8.9 billion and £3.39 billion respectively.

Investment banks are bullish on Lloyds, and out of the 30 ratings, 17 are buys, nine are holds, and four are sells. The average target price is 91.19p, which is 17% above the current price. Equity analyst are also bullish on RBS, and out of the 28 recommendations, six are buys, 17 are holds, and five are sells. The average target price is 358p, which is 9% above the current price.

Since late August the share price has been trapped in the 70-80p range, and a break above 80p will bring 82p into sight, and beyond that the May high of 89p will be the target. If the stock drifts towards 70p, buyers are likely to return to the fold, but should it be punctured 63p will be the next area of support. 

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