Lloyds: surplus capital is the mane event

The bank’s black horse supposedly canters to the pace set by Britons. Like all television advertisers, Lloyds overclaims — after all, heroism and family cohesion are not consequences of affordable mortgages. But the correlation between this dominant domestic retail lender and the British economy is high. The bank is therefore awash with capital it cannot easily spend at a time when many customers are too.

Lloyds first-quarter surplus was more than £6bn, Lex calculates, more than double total payouts to shareholders in 2019. The figure has been swelled by the UK’s improving economic outlook. The outbreak of optimism in Lloyds’ buttoned-down strategy department reflects the UK’s fast vaccination rollout.

The upgrade triggered a £460m credit. This helped lift underlying profits steeply compared with the fourth quarter, to £2bn. Mortgages have been selling briskly thanks to a stamp duty holiday. Customer deposits rose 8 per cent year on year to £462bn.

The capital of banks, as with Lloyds’s emblem, is a darker horse than the capital of the typical Brit. Lex’s £6bn surplus figure bakes in multiple assumptions. But the total will only go on rising if UK GDP grows 5 per cent in 2021 and again in 2022, as Lloyds expects.

Lloyds shares should be a screaming buy at their steep implicit dividend yield of almost 20 per cent. But there is no chance of the bank making hefty payouts while caps imposed by the Prudential Regulation Authority remain. Lloyds was only permitted to pay 0.57p per share for 2020.

Even after restrictions are lifted, Lloyds incoming chief executive Charlie Nunn must calibrate shareholder returns to the British public mood, as well as to capacity.

He will replace António Horta-Osório, who rebuilt a lender damaged by the financial crisis. Horta-Osório’s emphasis on the public service obligation of banks pacified an angry mob. Since the coronavirus pandemic broke out, many big consumer-facing businesses have sung from the same song sheet.

Expect Lloyds to whittle down surplus capital with diplomatic gradualism. Automation, less controversially, should also feature as a destination. No one is pilloried as a profiteer for buying computers.

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