The Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) reported higher net interest margin and year-on-year improvement in net interest income, but a sequential drop in NII and a revenue miss have analysts divided over how to rate the stock.
Lloyds improves over last year, but drags behind last quarter
After heavy losses in the second half of 2013, The Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) has returned to profitability with pre-tax profits of £1.4 billion in 1Q14 (underlying profit of £1.8 billion). The combination of rising NIM (up 3 basis points from 4Q13) and weak loan growth that was even with 1Q13 but 1% below the previous quarter, 1Q14 NII grew 10% year on year but was down sequentially. Other income was soft because of pension fees, business divestments from last year, and weather related insurance claims. Underlying costs fell to £2.3 billion from £2.4 billion in 1Q13 and £2.5 billion in 4Q13, while impairments were down 57% year on year, reaching £400 million. Also, Lloyds capital position continued to improve with its CET capital rising to 10.7% compared to 9.3% at Barclays and 8.6% at the Royal Bank of Scotland.
“Lloyds’ shares have travelled well into today’s announcement, fully participating in the broader market rally over the past two weeks,” writes Investec analyst Ian Gordon, who rates Lloyds a Buy with an 85.0p price target (currently 79.43p) in a May 1 report. “On a total shareholder return basis, save for Standard Chartered (Buy), Lloyds has outperformed every other UK bank in 2014 year-to-date, albeit underperforming relative to the FTSE100.”
Gordon not only expects to see The Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) EPS end the year in the black, he thinks there is a good chance that the bank will start paying dividends this year as well. The Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) stock price has risen 5.43% so far today following the earnings report.
Revenue miss has some analysts holding back
Despite being pleased with the narrowing gap between underlying and statutory profits, Jefferies analysts Joseph Dickerson and Omar Fell rate The Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) as Hold with a 69.0p price target because of the revenue miss, which they attribute to weaker than expected non-interest income. The tone of their report is positive (calling this an example of when ‘boring is good’), but they are waiting to see better revenue growth before moving in.
