- Shares jump on raised full year guidance and first half earnings beat
- Prospect for further capital distributions at year end
- Macro and mortgage market concerns remain
Shares in Lloyds Bank (LLOY) moved 4.3% higher following the announcement of first half results that demonstrated significantly better than anticipated profits.
Management upgraded guidance for the net interest margin, return on tangible equity and capital generation for 2022.
The latter combined with balance sheet strength should support further dividend increases and share buybacks.
First half results were 19% ahead of consensus estimates with the second quarter result a noticeable 39% ahead of the street.
Guidance has been upgraded for the second time this year. The net interest margin is expected to be greater than 2.8%, versus a previous estimate of 2.7%.
The impairment ratio is expected to be less than the current 20 basis points, and the return on tangible equity target has been increased from greater than 11% to 13%.
Management is also guiding for capital generation of greater than 200 basis points. 100 basis points is equal to 1%.
Reported profit before tax increased by 2% year-on-year to £2.04 billion, ahead of a consensus figure of £1.58 billion. Earnings per share fell 27% to 2.2p, but this was ahead of an estimated 1.6p per share.
The interim dividend is up 19% year on year to 0.80p per share, ahead of a consensus forecast of 0.75p per share.
Critically management have suggested that they will consider further capital returns at the end of the year.
BENEFTING FROM RISING INTEREST RATES
One key driver of the strong first half results was higher net interest income of 287 basis points compared with 268bps in the first quarter.
Research by Numis has revealed the impact a 25 basis point interest rate increase has on the net interest income of each UK bank.
NatWest is the standout winner. For every quarter point rise in interest rates it experiences a 5.5% uplift to its net interest income which is a key measure of a bank’s profitability.
Lloyd’s benefits by 2%, which is less than NatWest, and HSBC at 2.2% but ahead of Barclays at 1.6% and Virgin Money at 1.3%.
MACRO AND MORTGAGE CONCERNS WEIGH
Two factors are responsible for the 9% fall in the share price year to date.
First, there is increasing concern about competitive pressures in mortgage pricing.
The fear is that as one of the largest players in the mortgage market Lloyds is unduly exposed to contractions in mortgage margins as competition for new business intensifies.
Secondly, fears mount that the deteriorating macro-economic environment will result in higher loan loss provisions for Lloyds.
EXPERT VIEW
Shore Capital analyst Gary Greenwood said:
‘We believe the market is misunderstanding and so mispricing the significant improvement in bank balance sheets since the Global Financial Crisis and that they will prove much more resilient than in previous cycles’.
