Lloyds Banking Group Losses Lopped In Half


LONDON -- Lloyds Banking Group appeared quite pleased with its 1.3 billion-pound loss for the year -- that's a loss of 2 pence per share compared to last year's 4 pence loss -- as the bank made meaningful progress toward its strategic goals set out in the summer of 2011.

If you brush away the additional 3.6 billion pounds set aside to address seemingly ever-rising PPI claims and 1.2 billion pounds in supposedly one-time restructuring costs, then you can see some of the reasons for management's satisfaction.

Statutory, Management, Core, or Non-Core?
The most exciting bit about reading bank financial releases these days (and believe me, it is exciting) is trying to decide which profit line to actually look at. Lloyds provides us with at least four.

Statutory profit is what they are required to report according to accounting rules; Management profit is what management looks at because it ignores things like PPI provisions, which arise because of a lack of management; Core profits arise from nebulously defined core banking operations; and Non-Core profits come from the business that the bank wishes it had never entered and now wants to be rid of.

Metrics (in millions of pounds)



Statutory Profit



Management Profit



Core Management Profit



Non-Core Management Profit



If we look at the various permutations of Management profit, it looks like Lloyds is making progress. However, this number includes a significant amount of money (3.2 billion pounds at the Group level) made on selling government bonds, which is not regularly repeatable so I think should be ignored.

What lies beneath
For that we turn to Underlying profits, where we see Lloyds's core operations turned in flat profits at 6.2 billion pounds despite cost cuts of nearly 500 million pounds and a reduction in bad loan provisions of nearly 1 billion pounds. Income was down 1.5 billion pounds mainly as a result of fewer assets earning returns and lower returns on those assets -- the core banking interest margin was down from 2.42% to 2.32%.

Management expects its core lending to increase next year, but we'll have to see if they can do that and collect higher rates.

However, the bank's capital ratios improved -- Tier 1 was up to 12% from 10.8% last year -- and are well ahead of the new regulatory minimums. Additionally, the bank's reliance on short-term borrowing has reduced dramatically which improves the stability of its balance sheet.

Judging a book
Lloyds's net asset value, or book value, is currently about 63 pence per share so the shares are trading at 84% of book value. This is a significant discount to historical levels, but well above its closest peer RBS, which recently reported a significant increase in losses and currently trades around half of book.

It looks like Lloyds is further along in its rehabilitation than RBS so this premium is probably justified, but investors still need to ask themselves where they see Lloyds going in the future. With rising capital requirements and authorities doing their best to increase competition in UK high-street banking, it remains unclear if Lloyds will be able to achieve the returns it did historically.

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The article Lloyds Banking Group Losses Lopped In Half originally appeared on Fool.com.

Nate does not own any shares discussed above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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