- Third-quarter earnings better than expected
- Net interest margin improves slightly
- Loan losses remain limited, litigation and conduct costs subdued
- Net asset value grows
- Shares are the most highly valued among those of the big five FTSE 100 banks
“The big US banks have generally pleased investors with their third-quarter results and Lloyds has got the reporting season here in the UK off to a good start, with a pre-tax profit of £1.8 billion for the July-to-September period, 12% better than analysts had been expecting,” says AJ Bell investment director Russ Mould. “Net interest margins rose very slightly, loan losses remained subdued, as did conduct costs, and robust profits underpin the bank’s generous cash return to shareholders, whose only real concern at the moment may be the stock’s valuation, which is the highest among the big five FTSE 100 lenders on the basis of both earnings and book value.
“Pre-tax income came in almost exactly flat against the third quarter of a year ago at £1.8 billion, to handily exceed analysts’ forecasts of £1.6 billion. In the absence of any economic upset or fresh litigation and conduct concerns Lloyds is producing consistent profits, although investors will be keeping an eye on the Budget and also the Financial Conduct Authority’s investigation into discretionary commission arrangements (DCA) and their potential future impact.
Source: Company accounts
“In the latter case, the bank has already taken a £450 million provision and there could in theory be more to come, but for the moment conduct costs and loan losses remain lowly.
“Net interest income and net interest margins are stabilising, to provide further support for profits, although the trajectory of the Bank of England base rate and bond yields could have a say here, even allowing for Lloyds’ use of hedges to mitigate the impact of lower headline borrowing costs.
“Net interest income came in at £3.1 billion and net interest margin at 2.95%, slightly higher than in the second quarter.
Source: Company accounts
“Both figures were well down from their respective peaks of £4.4 billion and 3.22% in the fourth quarter of 2022 and analysts do not expect much by way of profit growth, thanks to the apparent downward trend for interest rates, competition between established and challenger lenders, regulatory pressure and lingering concerns over the trajectory of the UK economy – loan and deposit growth remains limited, after all.
Source: Company accounts
“Despite the better-than-expected outcome for the third quarter, chief executive Charlie Nunn is not upgrading profit expectations for the year and analysts continue to expect lower profits in 2024 before a modest rebound in 2025.
“However, next year’s advance will not return the headline pre-tax income number to the record level seen in 2023 and that could cap the shares’ upside potential, at least in the near-term, especially as they trade on the highest prospective multiple of earnings of any of the FTSE 100 banks and come on a near 20% premium to their latest tangible net asset, or book, value per share figure of 52.9p.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Price/NAV based upon last historic published number (Q3 2024 for Lloyds, Q2 for the others).
“The good news, at least, is that net asset value per share grew again in the third quarter (although progress over the past five years has been negligible).
Source: Company accounts
“In addition, the shares could continue to draw support from the company’s dividend and share buyback plans. If analysts’ consensus forecasts of a dividend just above 3p per share for 2024 are correct, then the payment would be worth around £1.9 billion.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts.
“The bank is also running a £2 billion share buyback this year, to take total cash returns to £3.9 billion, or more than 10% of its current stock market valuation.”
Source: Company accounts, Marketscreener, consensus analysts’ forecasts, LSEG Refinitiv data
