On reporting better-than-expected quarterly earnings in CEO Charlie Nunn’s first set of profits at the bellwether bank, Lloyds Banking Group (LLOY.L) upgraded its outlook.
Pre-tax earnings increased to £2 billion from £1 billion in the same quarter the previous year, above analysts’ estimates by more than 50%, thanks to strong demand for mortgages and lower-than-expected loan defaults. Revenue increased by 20% to £4.1 billion, above expectations.
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Lloyds’ earnings, like those of competitors Barclays (BARC.L) and HSBC (HSBA.L), were lifted by the release of cash – 84 million pounds – held aside for bad loans last year when the economy was looking bleak.
Last year, during the height of the epidemic, the lender overturned another £84 million in losses taken to cover probable bad loans. Lloyds now expects damages to be net credit for the year, having written off £740 million of the £4.2 billion in reserves it accumulated during the shutdown of large parts of the economy in 2020.
Loan impairments are now expected to be a net credit for the year, and the bank’s return on actual equity – a crucial indicator of profitability – is expected to be more than 10%, up from 5-7 percent at the end of 2020.
In early trade, the bank’s shares jumped 2.5 percent, making it the second-best performance on the FTSE 100 index (.FTSE).
Nunn, a former HSBC executive, took over as CEO of Lloyds in August, succeeding long-serving boss Antonio Horta-Osorio, who departed to lead crisis-hit Credit Suisse (CSGN.S).
Nunn joins a bank that has been stabilized by his predecessor, but he confronts a difficult task in improving profits in the face of near-zero benchmark interest rates and more competition from digital rivals.
Nunn stated, to further expand and strengthen its platforms and capabilities there are definitely enormous prospects for Lloyds Banking Group.
The bank’s core capital ratio grew to 17.2 percent, significantly over its aim of 12.5 percent.
Shore Capital analysts wrote in a note:
“The capital condition is substantially higher than expected, which speaks well for future shareholder dividends. We continue to believe a sizeable share repurchase will be revealed alongside the full-year results in February.”
Chief financial officer William Chalmers announced in a press conference that the bank has surpassed its full-year objective for lending to first-time buyers, supporting the purchase of 62,000 first homes so far this year.
Over the same time period, the value of credit cards and unsecured UK retail loans both increased by 1%, reflecting rising consumer spending. Closed mortgages, auto loans, and loans to small and medium-sized businesses all declined by 2 to 3%.
To combat the difficulty of low interest rates, the business has looked for new fee-generating revenue streams, particularly in wealth management and property. According to the Financial Times, it plans to buy 50,000 properties over the next decade to be one of the UK’s largest landlords.
Housing was an “underserved market with a lot of change going on right now,” according to Chalmers, who noted that it was still an “exploratory activity” at this stage.
However, the bank set aside another 100 million pounds for remediation expenditures, including payment for victims of earlier fraud at its HBOS Reading branch, which continued to eat into profit.
Under Nunn’s leadership, Lloyds has attempted to slash expenses, axing another 48 branches throughout England and Wales this month, as banks across the sector reduce their high street footprint in response to the increased usage of digital banking.