Lloyds Banking Group PLC
Lloyds Banking Group PLC (LLOY) is a London, United Kingdom-headquartered financial services group that offers a wide variety of banking and non-banking services predominantly in the UK. The group serves millions of customers in the country through numerous brands, including Scottish Widows, Bank of Scotland, Halifax and Lloyds Bank. The group is focused on retail and commercial financial services with a diversified customer base and operates the largest retail bank in the UK. The group offer services related to current and savings accounts, short and long-term loans, credit and debit cards, unsecured loans, investment products, mortgages, motor finance, protection, bonds and syndicated loans. It is one of the largest companies within the FTSE 100 and is listed on the New York Stock Exchange as well. The operations are organised into four operating segments, namely the Commercial Banking segment, Insurance segment, Retail segment, and Consumer Finance segment.
Financial Highlights (H1 FY 2019, £m)
(Source: Company Filings)
Net interest margin remained at 2.90 per cent due to lower average interest-earning banking assets, leading to a decline of 3 per cent in net interest income, which led to a decrease of 2 per cent in net income to GBP 8,822 million versus GBP 8,971 million in the corresponding prior-year period. Driven by lower remediation charges and a reduction in operating costs, total costs of GBP 4,049 million declined by 5 per cent compared to that in the first half of 2018. The cost/income ratio improved by 1.8 percentage points to 45.9 per cent, which continued to provide a competitive edge to the group. The statutory profit before tax was reported at GBP 2,897 million, which represented a decline of 7 per cent, while underlying profit was GBP 4,194 million, declining by 1 per cent over the corresponding prior-year period. Driven by lower restructuring costs and a robust underlying profit, statutory profit after tax was 4 per cent lower than the first half of 2018 to GBP 2,225 million, which corresponded to earnings per share of 2.7 pence. Return on tangible equity was 11.5 per cent against 12.1 per cent in H1 2018, while the underlying return on tangible equity was flat at 16.3 per cent. Loans and advances to customers were GBP 441 billion, and the group announced an ordinary interim dividend of 1.12 pence per share for the first half of 2019.
Share Price Commentary
On 14 August 2019, at the time of writing (before the market close, at 12:17 pm GMT), LLOY shares were trading at GBX 48.78, down by 0.37 per cent against its previous day’s closing price. Stock’s 52 weeks High and Low is GBX 67.90/GBX 48.23. Stock’s average traded volume for 5 days was 162,834,295.60; 30 days – 143,382,781.00 and 90 days – 146,938,772.26. The average traded volume for 5 days was up by 13.57 per cent as compared to 30 days’ average traded volume. The stock’s beta as on date was 0.70, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around GBP 34.50 billion, with a dividend yield of 6.66 per cent.
An increase in credit losses, write-downs or defaults due to changes in the economic environment could impact the profitability of the group, especially when the economy is in a downturn. Extreme weather conditions can increase longevity risk which can impact insurance earnings and capital requirements. Interest rates and credit spreads in the banking business can be affected by adverse market fluctuations, which has the potential to impact the capital or earnings profile of the group. While the group continues to adapt itself to the imminent threat from Brexit, especially a no-deal exit, there remains a high degree of uncertainty which can materially impact the earnings generating power of the group. There remains continued uncertainty surrounding both the UK and global macroeconomic and political environments. The risks of a slow down or even recession have increased lately, which can greatly affect the business. Moreover, the possibility of a rate cut by the Bank of England would put pressure on the net interest margin of the banks, affecting profitability margins.
To create the capacity for further investing in the business, the company continues to focus on reducing the underlying cost base and is targeting a cost/income ratio in the low 40s by the end of 2020. Additionally, it continues to expect operating costs of less than GBP 8 billion for the current financial year and net credit costs of less than 30 basis points, reflecting strong credit quality. The overall credit quality of the secured book remains strong, and the low cost/income ratio continues to provide a competitive advantage to the group. The company reported a higher net interest margin of 2.90 per cent against the industry median of 1.89 per cent and the loan growth at 2.1 per cent was also higher than the industry. While it was a bit more leveraged than its peers, the Tier 1 Risk-Adjusted Capital Ratio was at 16.5 per cent, against an industry median of 14.67 per cent.
BAE Systems PLC
BAE Systems PLC (BA) is a United Kingdom-headquartered global defence, aerospace and security company with operations primarily in the US, UK, Saudi Arabia and Australia. The company employs around 85,800 people around the world and delivers a broad range of advanced defence technologies that cover a wide range of applications. The company’s business is differentiated in five operating segments: Platforms & Services (US), Maritime, Cyber & Intelligence, Air, and Electronic Systems.
Financial Highlights (H1 FY 2019, in £m)
(Source: Company Filings)
In the first half of the financial year 2019, the order backlog increased by GBP 7.7 billion to GBP 47.4 billion as compared to GBP 39.7 billion in H1FY2018, driven by order intake of GBP 8,418 million in H1 of the financial year 2019. Order intake declined by GBP 1,283 million to GBP 8,418 million in H1 FY2019 versus GBP 9,701 million reported in H1 FY2018. The company’s sales surged by 4 per cent on CER (constant exchange rate) basis to GBP 9,416 million in H1 FY2019 from GBP 8,818 million in H1 FY2018. Revenue on a CER basis increased by 4 per cent to GBP 8,674 million in H1 FY2019 from GBP 8,161 million in H1 FY2018. The company’s underlying EBITA was up by 9 per cent on a CER basis to GBP 999 million in H1 FY2019 from GBP 874 million in H1 FY2018. The operating profit increased by 7 per cent (CER) to GBP 896 million in H1 FY2019 from GBP 792 million in H1 FY2018. Underlying EPS rose by 11 per cent to 21.9 pence, while basic EPS increased by 69 per cent to 25 pence for the period. Compared to the first half of the last year, net debt at the end of the year declined to GBP 1,889 million, while operating business cash flow decreased by GBP 127 million to GBP 309 million in the first half of the financial year 2019. The company’s interim dividend was 9.4 pence per share in H1 FY2019, reflecting an increase of 4.4 per cent over H1 FY2018 data.
Share Price Commentary
On 14 August 2019, at the time of writing (before the market close, at 12:15 pm GMT), BA shares were trading at GBX 552.6, down by 0.50 per cent against its previous day’s closing price. Stock’s 52 weeks High and Low are GBX 643.60/GBX 439.40. Stock’s average traded volume for 5 days was 6,764,119.80; 30 days – 6,025,627.60 and 90 days – 7,189,734.54. The average traded volume for 5 days was up by 12.26 per cent as compared to 30 days’ average traded volume. The company’s stock beta as on date was 1.10, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around GBP 17.81 billion, with a dividend yield of 4.07 per cent.
The company maintains important relationships with several its government customers with 91% of the total sales defence-related, which can be impacted by constraints on government expenditure. Movements in oil prices, budgetary constraints, political considerations or change of government policies can lead to adverse fluctuations in defence spending, which can have a material adverse impact on future results. The company is exposed to volatility in earnings from movements in currency exchange rates as it conducts its business in several regions, including the Middle East and the US. Brexit can potentially impact the group as it might have to face new barriers from the EU and the movement of goods between the UK and the EU would also be affected.
The group has a strong order backlog giving multiyear visibility and enjoys a strong relationship with its partner countries which continue to prioritise defence and security. The company is focussed on investing in technology and research and is actively looking for organic investment opportunities. It has also made decent progress in improving the outlook and geographic diversification of the group, with established positions on the long-term programmes and a growing presence in other international markets. Research and development activities, diversified operations and growth in revenue are the major strengths of the company. The group is well placed to maximise opportunities and manage the challenges through improved programme execution and maintaining strategic capital allocation policies.
With a net margin of 9.4 per cent (against industry median of 5.4 per cent) and return on equity of 14.5 per cent (against industry median of 7.4 per cent), the company reported higher profitability ratios, which increased year on year. The company was significantly more leveraged than its competitors, with debt/equity ratio of 0.92x, versus 0.32x of peers. Over the last three years, the first-half revenues have largely remained flat with CAGR of 1.55 per cent, but operating income has risen at a CAGR of 4.86 per cent. Net income after taxes nearly doubled at a CAGR of 24.75 per cent, while net income after taxes rose by a CARG of 13.55 per cent.
(Source: Thomson Reuters)