Lloyds reported an 11% rise in net income over the first half to £9.2bn. Growth was driven by higher net interest income, propped up by the higher UK base interest rate, and an improvement from other (non-interest) income.
Net interest margin (NIM, a measure of profitability in borrowing/lending) fell over the second quarter, to 3.14%, but the drop was less than markets were expecting. For the half, it came in at 3.18%. For 2023, NIM guidance has ticked higher, now expected to be greater than 3.10%
There was a modest increase in arrears, which remain at or below pre-pandemic levels, and an impairment charge of £0.7bn was taken over the half reflecting changes in the expectations for future defaults. Underlying profit rose 10% to £4.0bn.
At 30 June, the CET1 ratio, a key measure of financial resilience, was 14.2%. The Board announced an interim dividend of 0.92p, up 15%.
The shares fell 3.0% in early trading.
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Our view
Lloyds continues to benefit from the high-rate environment. A focus on traditional banking makes it more exposed to the interest rate cycle than others, 76% of total income is interest related.
Net interest margin (a measure of profitability in borrowing/lending) looks to have peaked in the first quarter, but a better than expected drop over the second reflected the recent rate hikes from the Bank of England.
There are headwinds limiting the benefit of recent hikes, which will also impact any further hikes too. Some of the more profitable mortgages issued over the pandemic are coming up for renewal at less profitable levels. There's also increased pressure on banks to offer more in the way of interest on deposits, and depositors are shifting from higher-margin current accounts to less profitable longer-term savings accounts that offer better rates.
Nevertheless, if management's predictions of a year where margins are greater than 3.10% prove correct, it'll be positive for income.
The flip side of the business model is higher exposure to potential loan defaults. There was a modest uptick in new arrears, particularly from those on variable rate mortgages who are hit hardest by recent rate rises. The £662m impairment charge over the half was a little higher than expected, as Lloyds updated its forecast for future loan losses. On the one hand, a better GDP outlook works in its favour, but rates moving higher than expected weighs heavily on the other side of the scale.
We also have our eyes on costs, up 6% over the first half but guidance suggests only a 3.4% rise over the full year. That looks a little optimistic to us, given UK wage inflation is growing at around double that level.
Very aware of its reliance on traditional financing, there are plans to build out the bank's non-interest income. Building out areas like asset management, general insurance and pensions businesses are on the cards. These plans have merit, and investment is expected to peak in 2023, but we're a long way off knowing if it'll pay off.
Finally, there's the balance sheet to consider. The ongoing £2bn buyback is nearing completion, and goes some way to returning excess capital to shareholders. Add in the 6.4% forward yield and returns are attractive, but there's still room for more. Management pledged a return of further excess over the next two years. As usual, nothing's guaranteed.
Overall, with rates looking set to remain at healthy levels, and considering the current valuation, returns are attractive. But Lloyds remains exposed to a worse-than-expected economic drawdown, and profit growth's going to be a challenge from here out.
Lloyds key facts
All ratios are sourced from Refinitiv. 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.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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