A London black taxi cab passes a Lloyds bank branch, a unit of Lloyds Banking Group Plc, in London, U.K., on Wednesday, May 31, 2017. Lloyds is in talks to lease a new London office with room for about 1,000 workers in an effort to consolidate its locations in the capital and help save 100 million pounds ($130 million), two people familiar with the plan said. Photographer: Luke MacGregor/Bloomberg
Lloyds said the majority of estates were not affected, however, it estimated that in hundreds of cases, estates were incorrectly distributed © Bloomberg

Lloyds Banking Group’s new £1.8bn provision for compensating customers who were mis-sold payment protection insurance takes its total outlay to £21bn since 2011. And this unintended consumer stimulus is now hitting the bank in other ways.

A few years back, the Society of Motor Manufacturers and Traders reported soaring sales of new vehicles partly because an average PPI payout of £3,000 was “enough to put a deposit on a car.” But, with the majority of purchases made under three-year leasing plans, the second-hand market is now flooded with these vehicles, depressing their values as they are handed back to car finance outfits such as . . . Lloyds’ very own Black Horse and Lex Autolease. It is one reason why the bank’s impairment charge is up 28 per cent, to £950m, for the first nine months of 2019.

You could not make it up, really — which is perhaps one reason why analysts were not taking it too seriously. With the August deadline for final PPI claims now passed, and the conversion rate of claims to payouts down to 10 per cent, Goodbody’s number crunchers reckoned £1.8bn for PPI was “likely to be more conservative than optimistic”. Also, while the market “will not be so pleased with . . . lower used car prices”, they noted that Lloyds’ impairments were primarily driven by a single large corporate charge — “presumably Thomas Cook, which will be forgiven . . . due to its one-off nature”.

Treat all of these impacts as non-recurring, and a 97 per cent drop in third-quarter pre-tax profit looks less of a car crash. In fact, many other numbers appear to be moving in the right direction. Quarterly net interest income was 1 per cent higher than analysts’ estimates, and a net interest margin of 2.88 per cent was 1 basis point ahead — despite a competitive UK lending market in which RBS and HSBC struggle to achieve 2 per cent. At the same time, Lloyds cut its total costs by 5 per cent in the period and said full-year operating costs would be £100m lower than guidance. Other operating income was down 12 per cent as commercial banking activity slowed, but also reflected the fact there were no gilt sales to profit from in Q3.

So, can Lloyds’ investors, like its car lessees, look forward to a smoother ride in 2020? Not automatically.

Net interest margin could yet go into reverse. Analysts at Citi pointed out that Lloyds’ own guidance implies a lower NIM in Q4, which falls further if a 2 bps benefit from credit card interest rate assumptions is not counted, and if mortgage customers roll on to new cheaper deals, as is likely.

Other operating income may fail to reaccelerate, too. Those same analysts suggested that gains from gilt sales would ease, and it may take time for Lloyds’ wealth management venture with Schroders to get up to speed.

If anything, then, in a Brexit-induced low-interest rate environment, Lloyds’ fortunes look even more correlated to those SMMT car dealers: they also see their margins constrained “by the political and economic uncertainty”.

BT’s dividend hang-ups

Halloween pranksters in certain parts of the country have taken to wearing Jeremy Corbyn masks. But they would be unlikely to get much reaction if they tried “trick or treating” shareholders in BT Group. After the telecoms company’s boss, Philip Jansen, told investors they had nothing to fear from the Labour Party leader and scourge of privatised industries, they bid the share price up 1.5 per cent.

Indeed, Mr Jansen’s assurance that BT’s estimated £25bn-£30bn fibre investment plan was supported by all political leaders, and the business was “not on the list” for nationalisation under a possible Corbyn government, had shareholders calmly looking forward to future dividend payments. Even with investment at that level, the company has intimated that there are ways to fund it other than a cut to payouts. These include redeploying cost savings from its transformation programme, reprioritizing its £3.8bn of capital expenditure, and increasing its borrowing. Thursday’s results — which noted £1.1bn of transformation benefits, higher capex and debt that only rose on an accounting change — suggested all three remained an option.

However, more ghoulish analysts reckoned there might still be a way to spook BT shareholders: by dressing up as a page of cash flow forecasts. According to those at broker AJ Bell, the sight of normalised cash flow falling by almost a fifth, to £2bn, in the year to March 2020 ought to “leave BT investors on edge about the dividend” because, amid further pressure on profit, “the payout could come under threat”.

A dividend yield of 7.4 per cent certainly suggests the market deems the shares more trick than treat.

Carpetrights and wrongs

What did high-street struggler Carpetright, which is being taken private for just £15m, get wrong? Excess space and debt — two things that high-street survivor WHSmith got right. And what is the only thing WHSmith got wrong? Arguably, carpet.

matthew.vincent@ft.com

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