- Net interest income falls
- Cost-to-income ratio jumps
- Full-year guidance maintained
The UK’s largest mortgage lender, Lloyds Banking Group (LLOY), delivered a weak first-quarter trading update with most of the key metrics seemingly heading in the wrong direction.
The lack of mention of share buybacks or guidance on the dividend also disappointed investors, however confirmation of the bank’s full-year targets saw the shares reverse their early losses and add 2% to 52.4p.
REVENUE DOWN, COSTS UP
Underlying net interest income, which is where the bank makes most of its money, was down 10% to £3.2 billion due to a lower net interest margin – the difference between the return it makes on loans and the interest it pays on deposits – thanks to a shift into high interest-bearing deposits and a drop in lending.
At the same time, operating costs were up 11% to £2.4 billion and severance costs were £100 million, so the cost-to-income ratio jumped from 47% to 57%, although ‘remediation’ costs were just £25 million and there were no new provisions for car loans after the £450 million charge the bank reported in February.
Non-performing loan charges were £57 million, and the ‘asset quality ratio’ or proportion of bad to total loans was 0.23% which is below the estimate of 0.3% for the full year.
All this meant profit before tax was £1.63 billion, down 28% on the same quarter a year ago although in line with market forecasts, while earnings per share were down 0.6p from 2.3p to 1.7p.
In terms of the share buyback, which is expected to be in the region of £2 billion this year, all the bank said was it had bought in 500 million shares as of the end of March which at an average price of say 47p represents less than £250 million.
However, disappointment over the update was mitigated by the bank reaffirming its full-year guidance of a stabilisation in its net interest margin, an increase in mortgage demand, a return on tangible assets of around 13% and strong capital generation.
EXPERT VIEWS
Jefferies’ bank expert Joseph Dickerson said the results ‘tick high-level boxes’ in terms of the bank’s return on tangible equity and a slightly better than expected net interest margin, although he conceded there may be ‘some modest risk’ to consensus full-year net interest income forecasts.
‘For all the different moving parts, Lloyds is still making £1.6 billion a quarter with more than its fair share of challenges and those profits underpin cash flow and cash flow supports dividends and share buybacks. Patient investors will be keeping this in mind, even as the shares trade near one times book value,’ commented AJ Bell investment director Russ Mould.
‘Lloyds returned £2 billion to investors via share buybacks in 2023 and analysts expect a similar figure in 2024, to add to a forecast dividend worth around £1.9 billion. Add those two together and cash returns are expected by analysts to equate to around 12% of Lloyds’ current stock market valuation.’
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Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Ian Conway) and the editor (Martin Gamble) own shares in AJ Bell.
