Another large detractor from performance for the most recent quarter and fiscal year was Lloyds Banking Group (LSE:LLOY, Financial), a dominant retail bank in the U.K. The company's fiscal-year results fell short of expectations as revenue fell 4%, underlying profit fell 7% and pre-provision profit declined 3% from a year earlier. 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. Key metrics fell far short of our estimates 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, Lloyds 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 its balance sheet has improved greatly in recent years, possessing strong levels of capital, liquidity and reserves. In our view, the management team has successfully simplified the business and achieved significant cost savings from capitalizing on acquisition synergies, reducing headcounts, deploying technology improvements and decreasing its number of branches. This simplification plan has contributed to a cost-to-income ratio that is largely in line with our estimates, despite continued pressures from low interest rates. In our view, Lloyds possesses a wide range of strengths that it can draw on to reinforce its business during current near-term challenges. 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.
From David Herro (Trades, Portfolio)'s Oakmark International Fund third-quarter 2020 commentary.
