Lloyds Bank (LLOY) continued the trend established by UK banks to beat expectations in their third quarter updates.
Reported profit before tax of £2.029 billion was ahead of a consensus figure of £1.349 billion. Earnings per share of 2p, compared with a 1.5p forecast. The group decided not to declare a quarterly dividend. The market was mildly encouraged by these results and has marked the shares up by 1.86% to 49.87p.
TWO KEY DRIVERS
The group has benefited from an improvement in the net interest margin which increased by 13 basis points to 2.55%. Net interest margin reflects the difference between the rate at which banks can fund their lending to consumers and corporates, and the amount they charge.
Looking forward management has upgraded full year guidance on net interest margins to above 250 basis points which is ahead of current expectations of 2.49%.
Secondly, the improvement in the macro-economic environment post Covid, has resulted in a marked improvement in impairment charges. The UK banks made provisions for the financial impact of Covid. These estimates are an art not a science.
Given the improving economic environment, it appears that the UK banks may have been overly cautious in the nature of their provisioning. Lloyds is now benefiting from this innately cautious approach.
The relatively muted share price response to today’s update is due to a confluence of factors. First, there is increasing pressure within the UK mortgage market, reflected in the compression of mortgage margins.
Second, the share price is up 34% year to date, and 3% below their 12 month high. Third, the group passed on the opportunity to announced a quarterly dividend.
Gary Greenwood, banks analyst at Shore Capital said:
‘Our last published fair value of 56p is broadly in line with current tangible book value and offers 14% upside to the current share price.’
