Lloyds; Good Credit Quality But Leverage Set To Increase

Lloyds Banking (LLOY LN) 4Q23 results out which look solid operationally and with good credit quality metrics (credit positive). Results include a GBP2bn equity buyback with the intention to drive leverage higher (CET1 target now 13.5%) – we take this as marginally credit negative.

• Key credit metrics: loan losses were a significant write-back and non-performers are better than at Sep-23 (2.2% of loans, underlying, from 2.4%). CET1 is 13.7% which looks marginally better than expected. There is a GBP450m hit for FCA motor finance issues, some had feared as much as GBP2bn but experience from the PPI and pensions mis-selling scandals is that the first provision or two tends not to be final.
• Revenues were 4% lower y/y (in line with consensus), costs rose 6% underlying (2pp worse than expected) and loan losses were a writeback meaning underlying profit beat expectations if you exclude the GBP450m motor finance litigation provision. Including this, it missed quite significantly.
• Outlook: there’s a GBP2bn equity buyback in here and an intention to “pay down” to a CET1 ratio of 13.5% (i.e. increase leverage). RoTE is seen at 13% (marginally above consensus). The key margin (NIM) is seen at 290bp which is only 8bp lower than the 4Q23 exit rate implying some better stability here.

Conf call is at 0930 (London time) at https://web.lumiconnect.com/#/m/159217583