Shares in the UK’s largest mortgage lender Lloyds Bank (LLOY) rose 4.4% to 45.5p after the bank posted first quarter pre-tax earnings well ahead of market expectations. The bank also raised full year profitability guidance, prompting analysts to revisit their spreadsheets.
Underlying pre-tax profits for the group were £2.07 billion against consensus forecasts of just over £1 billion, helped by better than expected net interest income and lower than expected provisions for credit losses.
In contrast to HSBC (HSBA), which yesterday reported a sharp drop in its net interest margin to just over 1.2% in the first quarter, Lloyds was able to limit the fall caused by low interest rates and keep its net interest margin around 2.5%.
It also performed much better than HSBC in terms of expenses, with a cost to income ratio for the quarter of 52%, ahead of market expectations.
Thanks to its strong asset quality and the ‘benign’ environment for credit, the bank released net provisions of £323 million, while its mortgage book continued to grow as momentum in the housing market was boosted by the stamp duty holiday.
As a result, the bank’s Return on Tangible Equity - a measure closely watched by investors - hit 13.9%, a jump of nearly 9% from the first quarter last year and well ahead of forecasts for a 4%-plus increase.
RAISED OUTLOOK
Outgoing chief executive Antonio Horta-Osorio, who is moving to become chairman of Credit Suisse, described Lloyds as ‘well placed for sustainable success’ having made a ‘strong start to the year’.
He also laid out new forecasts for 2021 including an ‘enhanced’ Return on Tangible Equity of between 8% and 10% compared with a previous range of 5% to 7% and a lower level of credit loss provisions.
Analyst Joseph Dickerson at Jefferies called the results ‘stellar on all fronts’ and said the upgraded full year guidance suggests ‘material upside to consensus earnings estimates’.
The bank also said it would accrue dividends over the course of the year ‘with the intention to resume a progressive and sustainable ordinary dividend policy’. Analysts are forecasting a dividend yield this year of 5.6%, the second-highest pay-out in the sector.
MORE BANKING RESULTS
Challenger bank Metro (MTRO) also released its first quarter earnings, which showed a substantial drop in new loans - mostly due to the disposal of a mortgage portfolio - and a big increase in lending, taking the loan to deposit ratio from 100% a year ago to 73% last quarter.
The bank didn’t reveal its net interest margin but it is likely to have suffered a similar fall to its rivals at the very least. There was no indication of profitability or of whether the bank released any provisions during the quarter, save for a reference to credit impairments being ‘benign’ as per the commentary from Lloyds.
Meanwhile Santander UK, which is a sizeable player in the retail market with 14 million customers, posted a sharp increase in first quarter profits helped not just by a release of provisions but by an improvement in its net interest margin to 1.81% against 1.55% a year ago.
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