Lloyds reported third quarter net income of £4.3bn, down 4% on last year but 5% higher than the prior quarter and 1% better than expected. Within that, net interest income was lower than last year, offset by an increase in other income.
Banking net interest margin fell from 3.08% to 2.95%, but again that was up from the previous quarter and better than expected.
Pre-tax profit was down 2%, at £1.8bn, but beat forecasts due to lower impairment charges. Non-performing loans remain at low levels.
There was a 1% rise in loans driven by retail mortgages, and deposits were broadly flat. The group’s CET1 ratio, a key measure of financial strength, is 14.3% - well ahead of its target minimum of 13.0%.
Full-year guidance is unchanged, with banking net interest margin expected to exceed 2.90%.
The shares rose 1.9% in early trading.
Our view
Things are ticking along nicely at Lloyds. Performance may not be a strong as last year, but fears that higher rates would cause trouble for borrowers haven’t come to pass. Instead, conditions look good, and Lloyds has seen a material rerating over 2024 as a result.
Lloyds has a focus on traditional lending, so net interest margin (NIM - a measure of profitability in borrowing/lending) is key. There’s been a marginal decline over the first couple of quarters this year, but things look to have stabilised.
Mortgages issued during the pandemic are coming up for renewal at less profitable levels. This will remain a headwind over 2024, but should start to tail off as we move into 2025. It was good to see loan book growth over the past couple of quarters, something we expect to continue through the back end of the year, with new mortgages a key driver. There’s also an ongoing impact from consumers shifting to longer-term savings accounts in search of better rates. But the pace of switching is easing, which is good news for Lloyds.
The structural hedge has the potential to be a key driver of income over the medium term. This can be thought of as a bond portfolio, and as the bank rolls from low-yielding contracts written over the past few years onto higher-yielding ones, income is expected to get a significant boost – to the tune of £700mn over 2024.
The flip side of the focus on traditional lending is higher exposure to potential loan defaults. For now, UK borrowers are remaining resilient to pressures, and Lloyds has one of the higher-quality asset portfolios. But this remains a risk to monitor.
Very aware of its reliance on traditional financing, Lloyds has invested heavily in its other income plays (credit card fees, insurance, investment management). This should help provide an income tailwind when rates aren’t as supportive, and progress has been good.
The key risk in the short term is the FCA’s investigation into the mis-selling of motor finance. Lloyds is more exposed than other peers and has already set aside £450mn in preparation for potential costs. At this stage, it’s hard to say if that figure is enough, so it’s a risk to be aware of.
Lloyds remains one of our preferred names in the sector, with strong capital levels that will hopefully support returns to shareholders over the next few years. That said, the valuation isn’t as attractive as it once was, and the overhang from the FCA investigation could act as a brake on any further rerating. There are no guarantees.
Environmental, social, and governance (ESG) risk
The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security is also an increasingly important risk for banks and diversified financial firms. Business ethics, ESG integration and labour relations are also worth monitoring.
According to Sustainalytics, Lloyds’ management of material ESG issues is strong.
The FCA’s investigation into historical auto-lending practices between 2007 and 2021 is a risk for Lloyds. Provisions have been taken but the scale of the potential impact is still largely unknown, more details should come later in the year. There’s room for improvement in product governance and responsible marketing, though it demonstrates strong progress in integrating ESG factors into asset management and corporate financing.
ESG data sourced from Sustainalytics.
Lloyds key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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