Lloyds share price: what to expect from 2018 results

When is Lloyds’s earnings date?

Lloyds Banking Group (Lloyds) will report its 2018 annual results on Wednesday 20 February at 7am UK time.

Lloyds results preview: what does the City expect?

The 2018 annual results will cover the first year (Y1) of the bank’s three-year strategy aimed at digitising the business, cutting costs and expanding outside of its core retail banking operations by the end of 2020.

Lloyds, which has already cut tens of thousands of jobs and shut swathes of branches since the financial crisis, believes it can target up to 70% of its cost base by implementing new technology and aiming to improve efficiency by 30%.

Having built a strong platform to build its financial planning and retirement business by acquiring Zurich’s UK workplace pensions and savings business in 2017, Lloyds aims to add up to one million new pension customers and grow financial planning and retirement open book assets by more than £50 billion by the end of 2020.

A company-compiled consensus shows analysts expect Lloyds to report higher net income and profit in 2018, although underlying profit is expected to fall. Its net interest margin (NIM) is expected to remain resilient at a time when its peers have been squeezed, while its asset quality ratio should comfortably remain below 30% as guided. Capital generation - how quickly a bank can generate equity capital – is expected to be at the upper end of the guided range of 170-200 basis points.

Lloyds 2018 annual results consensus expectations

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What to watch out for in Lloyds’s 2018 annual results

1. Revenue growth vs cost growth, or jaws
2. Change in 2020 guidance
3. Schroders venture
4. Digitisation
5. Dividends and buybacks
6. Mergers and acquisitions
7. Brexit

Revenue growth vs cost growth, or jaws

Improving efficiency involves growing revenue at a faster rate than costs. The relationship between revenue growth and cost growth is represented by ‘jaws’ – which is positive when revenue grows faster than costs and negative when costs increase faster than revenue. In the first nine months of 2018 jaws was running at 5%, up from 4% in 2017. The bank’s cost to income ratio was 47.5% over the first three quarters of 2018 and should be heading toward its target in the 'low 40s' by the end of 2020. Operating costs in 2018 are expected to remain slightly above the 2020 target to bring the annual total below £8 billion.

Change in 2020 guidance

Lloyds will not be eager to divert away from any of its targets after the first year, but events such as Brexit means nothing can be ruled out. This includes ambitions to improve return on tangible equity to 14%-15% (13% in the first nine months of 2018 vs 8.9% in annual 2017) and achieve a CET1 ratio of 13% from 2019 onwards.

Schroders venture

Last year, Lloyds and FTSE 100 fund manager Schroders announced they would merge their respective wealth, investment and financial planning businesses under a new joint venture. Lloyds is already the largest retail bank in the UK and this venture will be key to growing other elements of the business. A report from the Financial Times suggests Lloyds is hoping to grow the £13 billion of assets under management it plans to contribute to the venture to £25 billion, delivering annual growth equal to about 14%. The pair originally stated they wanted operations up and running by the end of the first half of 2019 but are yet to even reveal what it will be called. Investors will be hoping not only for confirmation that everything remains on track but for more details on the prospects.

Digitisation

Lloyds has made it clear that digitisation is the key channel to bring down costs and improve efficiency. Last month, the bank announced it had invested £11 million to buy a 10% stake in UK fintech firm Thought Machine, which has cloud-based 'next generation banking platform' that can 'accelerate the digital transformation' of Lloyds. Media reports suggest Lloyds has launched plans to move data on 500,000 customers to Thought Machine’s platform as a test with a view of rolling it out across the business if successful. At the time it invested, Lloyds said 2019 would see it pursue a 'development and deploy phase' with Thought Machine in 2019.

Dividends and buybacks

Lloyds has promised to deliver a progressive dividend throughout its three-year strategy and return surplus cash to shareholders through buybacks. The dividend was raised 20% year-on-year in 2017 to 3.05p and the bank bought back £1 billion worth of its own stock. It has already said capital generation would be toward the upper-end of its guidance range in 2018, prompting some to believe Lloyds can beat its target enough to potentially double its share buyback programme in 2019 to £2 billion.

Mergers and acquisitions

However, the biggest threat to shareholders being sprayed with cash is any decision to divert surplus funds to acquisitions. The bank has shown its appetite for acquiring firms that can help improve its technology and is also looking for acquisitions that can help grow the likes of its wealth or insurance businesses.

Brexit

Brexit has weighed heavily on UK banks and, as the largest retail bank in the country, Lloyds has been no exception. Virtually all of its business is UK-focused. The bank recently announced it would lend 'up to' £18 billion (gross) to UK businesses in 2019 to show it is 'by the side of British business whatever the future brings' - part of its plans to grow net lending by £6 billion before the end of 2020. It has said it expected to deliver a £2 billion improvement in net lending in 2018. Although it has said Brexit could impact its plans going forward the commitment to grow lending in the UK is regarded as key to allay fears that Lloyds, the biggest mortgage lender in the country, could stop loaning out money because of a chaotic Brexit.

Chief financial officer George Culmer – who will be leaving after the first half results for 2019 are released – said in October that 'some sort of withdrawal agreement' would be hashed out between the UK and the EU before the Brexit deadline on March 29, 2019, and the bank’s financial performance has proven resilient so far. But with the deadline ever closer and more uncertainty than ever before, investors will hope Lloyds can reassure them that it is ready for whatever Brexit throws at it.

Lloyds share price analysis

Lloyds has seen its share price fall in line with peers Royal Bank of Scotland (RBS) and Barclays over the past 12 months but has regained more ground since the start of 2019 to outperform the wider market. Lloyds shares hit 50.03p just days before the New Year – their lowest in six years – but have since rallied almost 16%.

Banking shares: Lloyds vs HSBC vs RBS vs Barclays

Lloyds shares: technical analysis

Lloyds has rebounded impressively from the lows of December, and has succeeded in breaking the downtrend resistance line that has held back progress since May. However, it has had difficulty in pushing above 59p, and it needs to accomplish this and then clear the November highs around 60p in order to create a higher high. Above 60p the 61.8p level is the next major target. Over the past month dips towards 57p have found buyers, which is an encouraging sign. So long as this holds the outlook seems relatively bullish.

On the hourly chart the price has oscillated between 56.5p and 58.5p, with this trading range still in place. Ahead of results day, we may well see this price action continue.

How to trade Lloyds’s annual results

A Thomson Reuters poll of 23 analysts shows there is a long-term average buy rating (as of 13 February 2019). Analysts are more bullish on the bank than they were three months ago and, although there is a split, opinion favours the upside potential in Lloyds shares.

Lloyds shares: broker recommendations

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Lloyds earnings: keep the ship steady ahead of the storm

Lloyds will be keen to deliver progress in the first of its three-year plan. There is plenty of upside potential: operating costs are only slightly above its 2020 target and both capital generation and its NIM are expected to be at the top-end or above its guided targets in 2018. Although there is a chance Lloyds could accelerate its plans by, for example, launching deeper cost-cutting plans before the end of 2020, any upside potential this could deliver to the bottom-line is likely to be hoarded away for the rainy days that could be around the corner because of Brexit. The banking sector has little more clarity now than they did six months ago, and Lloyds is unlikely to raise expectations at such a time. It will just be keen to keep the ship steady and demonstrate its strategy is working.

Shareholders should expect more cash but could see some held back as either a buffer or for mergers and acquisitions (M&A). The bank has promised a progressive dividend and hinted that it could increase the amount of shares it buys back in 2019 from the £1 billion purchased last year.

The long-term broker rating for Lloyds sits at buy, although only by a slim majority with many believing the bank is either adequately or over-valued.