Banking giant Lloyd rallies on massive downturn, reports Fiona Cincotta.
Lloyds Banking Group PLC (NYSE: LYG; LSE: LLOY), the last of the big four United Kingdom banks to report full year earnings, rallied sharply despite a dramatic drop in profits. To say the bar was set low would be an understatement.
Results
- Annual profit -26% to £4.4 billion ($5.67 billion) vs. £3billion ($3.86 billion) expected
- Underlying profits -7% to £7.5 billion ($9.66 billion)
- Net income -4% to£17.1 billion ($22.02 billion)
Lloyds reported a 26% decline in annual profits owing to bad loans and high compensation payout from payment protection insurance (PPI). PPI redress totaled £2.5 billion in 2019 however this is expected to be the end of the payouts after the PPI deadline passed at the end of summer 2019.
Impairments on bad loans spiked by 38% to £1.3 billion vs. £937 million, the previous year owing to a reduction in net interest margin and in part to the failure of two large companies which knocked the commercial division. While the bank couldn’t confirm the name of the companies Lloyds was known to have been one of the main lenders to collapsed holiday firm Thomas Cook.
Tough 2019, improving conditions 2020?
Last year the bank struggled with slowing global growth but perhaps more importantly domestic political uncertainty, as Brexit dragged on business and consumer confidence. This year the macro climate in the UK appears to be setting off on the right foot. GDP at the end of 2019 beat expectations, while in January the labor market remained strong, inflation increased, and retail sales jumped indicating a bounce in the UK economy.
Given the strong correlation between Lloyds and the UK macro climate, this is encouraging. However, there are still plenty of potential pitfalls ahead as the UK negotiates a trade deal with the EU and the macro climate in the UK is expected to remain challenging. Despite this, the outlook from Lloyds was relatively stable.
March’s Budget to Lift Lloyds Further?
While low interest rates squeezed margins at the lender last year, an expansionary fiscal policy could underpin the share price in early 2020. Higher government spending would take the pressure off the Bank of England to cut interest rates, thus supporting the net interest margins at the banks. All eyes will turn towards Chancellor of the Exchequer Rishi Sunak’s Budget next month to see whether he can deliver the higher spending the markets hope for.
Chart thoughts
The share price has jumped over 2.5% this morning, taking Lloyds above its 50-bar simple moving average on the four-hour chart. The rally has been capped by resistance around 58.1p. A meaningful move through this strong resistance could see the doors opened to 59.3 (24th Jan high) prior to 60p (10 Jan high).
On the flip side support can be seen around 55.65p (yesterday’s low).
Fiona Cincotta is a Market Analyst for Currency Live
