Lloyds is the strongest name within the UK banking sector. It has a secure and improving capital position and a notable cost advantage with an industry leading cost / income ratio of just 46%.
Progress from here relies on conduct fines and reparations declining and so freeing up both financial resource and managerial time. We also look for firmer interest rates to expand the bank’s net interest margin or the difference between their lending and deposit rates. Net interest margins of 2.5% are the average these days, although Lloyds guides to 2.85% for 2017. As base rates increase, so the net interest margin should expand.
Shareholders are being told that the tier 1 capital target is around 13% and that capital above this can either go back as dividends or, possibly, more MBNA-like deals. That said, I am wary that Lloyds’ exposure to car finance could fall behind expectations in terms of both growth and recovery rates.