Lloyds Banking Group (LSE:LLOY, Financial), a dominant retail bank in the U.K., was the largest detractor for the fiscal year. The company's fiscal-year results fell short of expectations. Results were also weaker than our estimates, which we attributed to 2019's very difficult operating environment, one that was dominated by uncertainty surrounding Brexit and the formation of a U.K. government. The company's results for the first half of 2020 were also disappointing, primarily because of Covid-19. Total revenue from core operations declined 16% from a year ago and operating profit realized a loss of GBP 281 million, driven by a significant impairment provision charge. Management stated that the larger than anticipated provision amount was due to a significantly depressed economic outlook. However, Lloyds' loan book continues to perform well and actual defaults to date remain stable. Despite the difficult operating environment, the company is well capitalized. Its Tier 1 ratio is 14.6% and it holds GBP 11.8 billion more in excess capital than regulations require. We believe that Lloyds has the preeminent retail banking franchise in a consolidated U.K. market and that its balance sheet has improved greatly in recent years, possessing strong levels of capital, liquidity and reserves. Overall, we find that Lloyds is trading at a large discount to our estimate of the company's intrinsic value and that it remains an attractive investment. Bayer, a German-based company with sizable businesses in pharmaceuticals, agricultural productivity and consumer health products, was the largest detractor for the quarter.
From David Herro (Trades, Portfolio) and Bill Nygren (Trades, Portfolio)'s Oakmark Global Select Fund third-quarter 2020 commentary.
