Lloyds Bank profit sails past forecasts

Lloyds Banking Group (LSE:LLOY) has provided some relief that the UK consumer is alive and well, although the group is taking a more cautious stance at the corporate level in these half-year results.

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Indeed, impairments are the most notable headwind for Lloyds at the moment. While no further provisions were taken this quarter for the remediation of potential motor finance commission arrangement fines, £1.2 billion has already been set aside, with the next judgement expected later this month.

Elsewhere, however, a further charge of £442 million relates mainly to the Commercial Banking business, where there has been a “small number” of individual cases moving into default territory.

But for the most part there are any number of positives emanating from the update. Pre-tax profit of £3.5 billion for the six months to 30 June was up by 5% year on year, boosted by a second-quarter contribution of £2 billion, which sailed past estimates of £1.69 billion. Net income grew by 6% to £8.9 billion, and underlying Net Interest Income by 5% to £6.7 billion, the latter of which reaped the benefit of a Net Interest Margin of 3.04% versus 2.94% in the corresponding period. The structural hedge, designed exactly to mitigate the group’s susceptibility to changes in a falling interest rate environment, should provide a further revenue boost this year.

Other key metrics are also moving comfortably in the right direction. A Return on Tangible Equity of 14.1% compared to 13.5% last year, with the target remaining a figure in excess of 15% next year. The capital cushion or CET1 ratio improved from 13.5% to 13.8% and the cost/income ratio reduced to 55.1% from 57.1%, with a target of less than 50% in 2026. Higher operating expenses resulted from a number of factors, including lease depreciation, inflationary pressures and ongoing growth costs both in terms of investment but also severance payments.

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There was also some positive news in terms of the group’s more traditional business, with growth in both loans and deposits. Loans increased by 3%, or £11.9 billion to £471 billion, with UK mortgages a highlight. Meanwhile, the customer deposit exodus which had been in place with higher rates being sought elsewhere seems to have steadied for the time being, with an increase of 2%, or £11.2 billion in deposits to £494 billion.

The currently stable operating environment is allowing Lloyds to pursue its refocused strategy, especially on the digital front where a further 3% increase brings the total number of banking app users to 20.9 million, while also providing a springboard for further capital light growth.

The group is also prioritising higher value areas, such as what it describes as the Mass Affluent segment, deepening customer relationships and separately expecting in excess of £1.5 billion of annualised additional revenues from strategic initiatives from next year.

Shareholder returns remain in focus and, while there could be some slight disappointment in the absence of a buyback programme, the increased dividend leads to a healthy projected yield of 4.3%, with increases in both still on the table for future updates. Guidance for the year as a whole has been maintained, stretching out to next year, and the prudent impairment measures should shield the bank from any unexpected headwinds.

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Such progress and a general rerating of the banking sector has led to a strong performance of late, with the shares having risen by 30% over the last year, as compared to a gain of 11.1% for the wider FTSE100 and by 69% over the last two years.

However, while there is little doubt that Lloyds runs a tight ship, there is a concern of potentially choppier waters ahead. Often seen as a barometer for the UK economy, a worsening of the backdrop could further squeeze an already pressed consumer would leave Lloyds as one of the first domestic banks to feel the heat. Thus, the market consensus of the shares as a hold - albeit a strong one - reflects this caution.