Broker snap: Lloyds strengthening balance sheet 'at the expense of profitability'

24th Feb 2012 10:35

Nomura has maintained its reduce rating and 35p target price for Lloyds Banking Group following its full-year results this morning, saying that the bank is 'putting balance sheet strength before earnings'.The statutory pre-tax loss came in at £3,542m, compared with a profit of £281m last year, and includes a £3.2bn non-recurring provision for PPI contact and redress costs. However, pre-tax profit for the combined businesses - which Lloyds believes reflects more "meaningful and relevant comparatives" - jumped 21% to £2,685m, while pre-tax profit for the the core combined businesses rose 3% to £6,349m.However, while the group said that it is confident of making its medium-term financial targets - set out in the June 2011 'Strategic Review' - "over time", the company now expects the attainment of both income-related (including operating income) and return on equity (15%) targets beyond 2014 as a result of a "weaker than expected economic outlook". Nevertheless, the group assured that its balance sheet, cost and impairment targets will be delivered by 2014 or sooner. "Given the complexities at Lloyds, our initial post-results reaction is subject to even more uncertainties than usual. Nevertheless, the main features seem similar to those at RBS. The group has strengthened the balance sheet at the expense of profitability and is deferring the achievement of its profitability targets," Nomura said.The broker says that the group is likely to be in an extended phase of deleveraging, implying weak revenues and capital build, "which looks fundamentally unattractive.""The shares are geared to risk appetite and perceptions of economic recovery. However, we retain our negative view."BC