The Brexit crisis continues to loom large and with Lloyds being regarded as a proxy for the UK economy, it is difficult to see an obvious exit from this financial maze that will not damage the banking giant.
Richard Hunter, head of markets at interactive investor, said Lloyds’ shares have not kept pace with what has been a generally strong effort from the bank, having fallen 12 per cent over the last year, as compared with a 1.3 per cent dip for the wider FTSE 100. Whilst the risks to the business are well-defined, he said the potential is also evident.
Lloyds’ pre-tax profit fell 7 per cent to a worse-than-expected £2.9bn in the six months to June 30 after the bank revealed another £550m hit from the mis-selling saga in the second quarter.
Mr Hunter said Lloyds will be counting down the days until the August 29 PPI deadline arrives and the issue can finally be consigned to the history books.
Meanwhile, competition in its important mortgage market remains fierce and the historically low interest rate environment is not one which favours the banks.
Mr Hunter said that despite this, there is little doubt that Lloyds and subsidiaries like the Halifax are well-run and there are grounds for optimism.
Lloyds said the recent relaunch of the Halifax brand has been a success for the group.
Russell Galley, managing director of the Halifax, said the Halifax brand has been relaunched with a modern new look and a brand new TV advert, emphasising the message that Halifax is a can-do bank that 'makes it happen' for customers - from the big moments like getting the keys to a new home, to simply paying in a cheque via the mobile app.
If there is a benign Brexit outcome - although it’s hard to see how that can happen right now - Lloyds will be well placed to continue its strong growth trajectory once the PPI deadline is over and done with.
However, analyst Gary Greenwood at Shore Capital the risks to this are clearly to the downside at present, but a worse macro-economic outcome is already captured in the share price, albeit perhaps not an outright UK recession.
We will learn more when the latest GDP figures are released, but the economy does appear to be stagnant or in decline.
Mr Greenwood said he remains cautiously positive on Lloyds’ shares, highlighting the group’s strong underlying cash generation and returns, despite the additional PPI charge.
Lloyds’ second quarter underlying profit fell 9 per cent year-on-year to £2bn, as a small decline in net income and higher impairments offset progress in reducing costs. This reflects weaker business confidence, although the consumer environment is looking determinedly healthy.
Analyst Nicholas Hyett at Hargreaves Lansdown said the results highlight the attractions of the business Antonio Horta-Osorio has built up, but also the bank’s inextricable relationship with the fortunes of the UK economy.
He said a tougher economic environment and increasing competition has left Lloyds with lacklustre income growth in the second quarter, that’s been compounded by an increase in impairments. These aren’t exactly promising trends, and all hint at the underlying weakness of the UK economy.
My Hyett said that for now consumers still look relatively upbeat, but increased exposure to things like unsecured retail lending, car finance and credit cards mean that should conditions turn sour for UK consumers, Lloyds will suffer.
Fortunately for Lloyds, the bank has been able to offset the macroeconomic weakness with more cost savings – improving an already market leading cost to income ratio.
Mr Hyett said the bank will hope this is a final Parthian shot from the miss-selling scandal which has cost it billions, and with August’s deadline for claims fast approaching, the regular extra provisions will hopefully be an unpleasant memory by Christmas.