Lloyds Banking Group's latest results have suggested bad debts, while currently very low, are likely to rise moderately from here, according to analysts.
In the results statement yesterday (27 July), Lloyds reported the level of bad debts at 0.12 per cent of the total loan book.
Rob James, banks analyst at Old Mutual global investors, said the results showed no indication of a looming credit crisis in the UK economy.
But he added the amount of bad debt at Lloyds - where repayments are not being made as originally agreed between the borrower and the lender, and which may never be repaid -
is "almost certain" to increase.
Ian Gordon, banks analyst at Investec, said in a note he also expects the number of bad loans at Lloyds to rise.
Lloyds is a widely held stock by UK fund managers.
For example, Job Curtis, who runs the £1.5bn City of London Investment Trust, has Lloyds as his 10th largest holding. He said the bank's results were "satisfactory" and expressed confidence in the level of dividends.
Neil Woodford has also been buying Lloyds shares. He takes the view the outlook for the UK economy is better than current market consensus and Lloyds as a domestically focused bank is likely to benefit from such an economic upturn.
The Bank of England’s Prudential Regulation Authority has expressed its concern about the level of consumer credit growth in the UK economy, and the Bank of England recently moved to tighten credit conditions in the economy.
Mr James said the level of impairments, that is bad debts on the loan book, is at a “negligible” level and has been so for a while.
He told FTAdviser: “It is likely that the level of impairments [as a proportion of the total loan book] can’t get lower from here but it has been at this level for a while.
"The [bad debt] will probably trend slightly upwards from here as disposable incomes are falling. But as long as unemployment stays very low, it is unlikely to be a problem, it [the level of bad] debts) tends only to get nasty when unemployment is rising.”
Lloyds Banking Group is also the owner of the MBNA credit card business, and Mr James said this business unit contained no signs of distress.
Mr James added Lloyds has not chased volume growth in the mortgage market in a way that applies to many of its peers, which he said implies the mortgage loan book is of a higher quality than the average for the market as a whole.
Lloyds results yesterday showed there was a charge of £283m for mortgage arrears errors.
Mr James said that this is an "operational matter, rather than an industry matter".
"So investors can be reasonably confident that this is a one-off for Lloyds and specific to Lloyds. The charge for payment protection insurance (PPI) is over £700m.
"If you look at that in the context of the market cap of Lloyds, just today, the shares are down by more than that amount. When you look at the level of cash the company is generating, dividend potential of the shares is enhanced by today’s results.”
Mr James principally works on the Old Mutual UK £2.2bn Alpha fund. It has a 4.4 per cent invested in Lloyds Banking Group shares.
Mr Gordon said his concerns about the potential for bad debts to rise did not put him off Lloyds shares. He placed a target price of 75p on the stock, which currently (27 July) trades at 67p.
William Howlett, banks analyst at Quilter Cheviot was even more bullish on the outlook for the shares.
He said that the figures: “Showed no signs of a slowdown of the UK economy with loans losses remaining low supported by record employment figures.
"Following an increase in revenue and underlying profits ahead of consensus along with a rise in its guidance, we believe Lloyd’s strong profitability is not adequately reflected in its current share price.
"The company continues to offer a compelling capital return story reflecting the strength of its balance sheet and organic capital generation.”
David.Thorpe@ft.com
