Tailwinds Outweigh Headwinds at Lloyds; We Maintain Our FVE Despite Surge in Provisions

Narrow-moat Lloyds reported third-quarter underlying profits of GBP 1,729 million, down 17% compared with the same period a year ago. The decline was driven entirely by higher loan-loss provisions of GBP 668 million versus a reversal booked last year of GBP 119 million. Excluding these provisions, performance was good overall, with income generation up 13% outpacing operating expense growth of 9%. Despite growing uncertainty around the U.K economy, tailwinds in the form of higher interest rates are outweighing headwinds for Lloyds. This is in line with our thesis for Lloyds, which we expect to disproportionately benefit from the higher rate environment compared with the strain expected from a weakening economy. We maintain our fair value estimate of GBX 77 per share.