LloydsTSB lags as UK Banks post record profits
Whilst the performance of the UK banking sector is only just eclipsed by the fortunes of the oil majors, UK banking plc has recently delivered a spate of record profits, with the big five, including HSBC, RBS, HBOS and Barclays, predicted to have generated a combined £30bn in 2005. Last week HSBC revealed record profits for last year of £11.9bn.
Of these big five, Lloyd's has recently become accustom to being considered the laggard, and a possible take-over target.
Combined profits from the groups three core businesses, retail; insurance and investments; wholesale international rose 4pc to £3.47bn. In the best performing section of the business - wholesale and international banking - profits rose 20pc to £1.5bn. This was largely attributed to strong growth in customer lending in corporate markets, business banking and asset finance, and a reduction in loan impairments (bad debt). Demand was also strong for new products aimed at corporate clients such as structured finance transactions. Profits in the low growth, mature UK insurance and investments subsidiary Scottish Widows rose just 3pc to £798m.
The rise in profits is broadly in line with analysts' expectations; however the more prudent investors who recall the details of the companies 2004 results may instead perceive last week's announcement as an indictment of Lloyd's abortive international ambitions. Profits in 2004 slid 20pc to £3.49bn following the sale of five Latin American banks and the New Zealand business, and were only helped by a strong activity in the mortgage and credit card business which helped raise retail bank profits for that year to £1.8bn. Thus, profits are down 17pc on 2003 and talk of "continued good levels of earnings momentum" may be somewhat tempered.
The bank is currently undertaking a £275m cost-cutting drive under Chief Executive Eric Daniels, which some analysts expect to deliver in excess of £300m savings by 2007. The international business contributed only £113m - immaterial in comparison with rivals such as Royal Bank of Scotland who's overseas operations last year accounted for 42pc of earnings - and slightly down on the previous year had it not been for lower impairment costs, resulting from a refinancing of capital held off-shore by the division.
Speculation has been growing in recent months that Lloyd's may become a takeover target, with 2005/6 seeing strong M&A activity across the European banking sector due to large sums of cash on balance sheets (RBS this week agreed to return £3.3bn to shareholders). Rumours first circled in August 2005 that Wells Fargo, the fourth largest US retail bank by market capitalisation (value of its shares on the stock market) was preparing to launch a bid for the British bank. Rumours re-emerged last month that Spain's BBVA bank might be considering making a bid, following the collapse of merger talks with Italy's BNL bank. However, analysts are divided about the likelihood of such a deal, potentially worth £35bn, taking place. The consensus view in the city is that Wells Fargo is a closer strategic fit due to its emphasis on US domestic retail banking, mirroring Lloyds core business in the UK.
Verdict? International growth prospects look weak after the bank divested its operations in Oceania and South America in 2004, and the bank warns of a further weakening in the consumer credit environment at its high street banking arm. Although the dividend yield looks impressive at 6.1pc, a payout ratio of 77pc leaves little room for manoeuvre in a company with a £2.9bn hole in its pension fund. On a forward weighted price-to-earnings ratio of 12.7, the market appears sanguine that recent takeover speculation will refuse to go away.
