Shares in Lloyds Banking Group (LLOY) fell by up to 5% on Thursday despite half-year profits doubling on the same period last year. Didn’t investors get the memo?!

No, it looks like they got the other one – the ‘3000 more job cuts and 200 more branch closures by end-2017‘ one. Oh, and the ‘FCA investigation into the bank’s handling of mortgage arrears’ one (mortgages have the right not to have their arrears handled willy nilly, evidently). So it looks a if outlook has once again trumped past performance, but given the fact that H1 profits are still twice what they were in the same period last year, why has the UK lender announced further cost cutting measures if business has been so good? There are several key points here and they all spring from the same mantra – that outlook trumps past performance. They are buried in the text below.

Lloyds is still about 10% taxpayer owned. While this is so, there are limitations as to what the bank can do in terms of taking risks to garner rewards, so it’d like to essentially not be 10% taxpayer owned. The UK government will not sell its (our) remaining stake at a loss, and for that to happen shares need to be about 74p. By increasing its profit margins, Lloyds hopes to increase its share price to make this sale happen. Needless to say the UK government must be kicking itself for bailing out Lloyds after the financial crisis, because in doing so it stripped the bank of all those bits and bobs that could have helped it be in a better place now – a place that might have negated the need to cut thousands of UK jobs and close hundreds of branches.

The Bank of England is widely tipped to cut interest rates in August. Banks make money by borrowing at a lower rate and lending at a higher one, pocketing the difference, which increases as central bank interest rates increase. Lloyds needs to cut costs to offset this coming loss of profitability, grow its margins and maintain its generous dividend. Investors know, however, that one swallow does not a summer make and, like yesterday’s UK GDP numbers, these results refer to the period before the UK’s Brexit vote when everyone was confident. Now they’re not so confident. The risk that Q3 results disappoint given that the bank has played up the Brexit risks is real, and that would leave, well, nothing positive at all to say about Lloyds in November, which is also when we’ll see the effects of Brexit on the UK’s GDP.

That’s why shares are taking a beating today.

Augustin Eden, Analyst (28 Jul)