By Peter Thal Larsen
LONDON (Reuters Breakingviews) - Lloyds Banking Group’s dividend gusher has suffered a regulatory blockage. Britain’s biggest retail lender reported a robust pre-tax profit of close to 2 billion pounds for the three months to September and topped up its already-healthy capital ratios. Shareholders might have hoped that Lloyds will spray some of that cash in their direction. Regulators have other ideas.
The bank run by Antonio Horta-Osorio did most things right in the third quarter. Revenue jumped 8 percent, helped by the first-time inclusion of the UK credit card portfolio it bought from Bank of America. Operating costs fell, despite higher inflation, and bad debt charges remain under control. And while Lloyds is still paying out about 100 million pounds a month in compensation to customers who were mis-sold payment protection insurance, it did not need to top up provisions for the scandal.
As a result, Lloyds’ common equity Tier 1 capital ratio improved to 14.9 percent – up 85 basis points in three months, and well ahead of the 13 percent that the bank previously reckoned it needed.
However, the regulatory goal posts are shifting. During the third quarter, the UK’s Prudential Regulatory Authority lifted the amount of extra capital that Lloyds must hold by 50 basis points to 3 percent. Meanwhile, regulators have also raised the counter-cyclical buffer for all UK lenders in an attempt to slow the surge in consumer lending. Lloyds will not know the full impact until early next year, but admits that there is “upward pressure” on its overall capital requirements.
Lloyds shareholders should not be too perturbed. Even if it pays out 4.5 pence per share in dividends - almost 50 percent more than last year – the bank will still have added 90 basis points to its capital ratio over the course of 2017 at the upper end of its own estimates. That’s more than enough to absorb any regulatory increase.
Nevertheless, the lack of clarity over its capital raises a question mark over how much Lloyds will be allowed to return to shareholders in future. Combined with Britain’s sluggish economy and the risk of a chaotic Brexit, it’s a reason for investors to doubt the value of a bank that trades at more than 1.2 times its tangible net asset value.
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