Shares in Lloyds Banking (LLOY) struggled to move higher, despite announcing first quarter results that showed pre-tax profits ahead of expectations coupled with an increase in its returns target.
However, as with HSBC (HSBA) which reported results yesterday, concerns have been raised regarding a significant decline in Lloyd’s core capital ratio, a measure of financial strength.
Moreover management has indicated that impairments for bad loans are likely to increase this year.
Reported pre-tax profit fell 14% year-on-year to £1.62 billion, which was ahead of a consensus estimate of £1.43 billion.
Reported earnings per share declined by 17% year-on-year to 1.5p which was in line with consensus. There was no interim dividend, as expected.
The Tier 1 capital ratio, a measure of the buffer the bank has to guard against crisis conditions, fell by 3.1 percentage points to 14.2% which was below a consensus estimate of 14.6%.
ENCOURAGING OUTLOOK
Management has upgraded full year 2022 guidance in two respects. First, it has lifted its net interest margin target from 260 basis points to above 270 basis points.
This reflects the rising interest rate environment. Second, the group have lifted their return on tangible equity target from around 10% to greater than 11%.
On a more disconcerting note, chief executive Charlie Nunn stressed that: ‘Whilst we are seeing continued recovery from the coronavirus pandemic, the outlook for the UK economy remains uncertain, particularly with regards to the persistency and impact of higher inflation.’
These comments echo those made by HSBC’s management team yesterday.
It is becoming increasingly apparent that impairments for bad loans will increase this year as consumers’ finances come under increasing pressure in the wake of inflationary pressures.
Lloyds has added a further £100 million to for higher cost of living risk. This may prove to be insufficient if the economic situation deteriorates further.
