- Pre-tax profit ahead of consensus
- Beat helped by lower provisions
- Net interest margin narrows
With the earnings season in full swing, attention turned to high-street lender Lloyds Banking Group (LLOY), the first of the ‘Big Four’ to report, and while earnings may have topped estimates there was little in the way of celebration.
The shares, which have had a good run this year gaining 24%, opened down 2.7p or 4.5% to 57p before recovering to trade at 58.9p for a loss of 1.2%.
LOWER CHARGES
For the second quarter to the end of June the bank reported underlying pre-tax earnings of £1.74 billion, roughly £100 million or 6% ahead of the consensus forecast.
However, the beat was achieved by the bank releasing £132 million of provisions due to the better-than-expected UK economic backdrop, which in turn reduced the amount it needed to set aside for expected credit losses or bad loans to just £44 million against forecasts of around £300 million.
For the first half to the end of June, the picture was less rosy with underlying net interest income shrinking by 10% to £6.34 billion due to a lower net interest margin, which is difference between the interest rate the bank charges on loans and the rate it pays on deposits, and the ongoing shift in the deposit mix.
Operating costs increased 7% as efficiency measures were more than offset by higher investment needs, elevated severance charges and continued inflationary pressures, while ‘remediation’ costs climbed more than 30% to £95 million, although there was no update on provisions for the CMA (Competition and Markets Authority) investigation into car finance where Lloyds is the UK market leader.
FORECASTS MAINTAINED
On the plus side of the results, the bank’s CET1 (core equity tie one) ratio was strong at 14.1% against its medium-term target of 13% and the interim dividend rose by 15% from 0.92p to 1.06p per share.
The bank reaffirmed its guidance for the full year including a net interest margin of more than 2.9% (which it barely achieved in the first half), a return on tangible equity of 13% (13.5% in the first half) and a CET1 ratio of 13.5% after returning cash to shareholders.
Guidance for 2026 was also maintained, most importantly return on tangible equity rising to more than 15% and a cost-to-income ratio of less than 50% compared with around 57% at present.
