- Pre-tax profit between January and March meets expectations but falls sharply year-on-year
- Lower interest income and higher operating expenses explain earnings drop
- No change in outlook
- Lack of positive surprises halts good run in the share price
“A year-on-year drop in profits of more than a quarter in the first three months of the year at Lloyds looks dramatic – and will please those who feel the banks are not doing enough to help their customers – but it is no worse than expected and there is no change to chief executive Charlie Nunn’s earnings outlook for 2024 as a whole,” says AJ Bell investment director Russ Mould. “Lower net interest income and higher operating costs explain the profit decline, as loan losses and conduct costs remain subdued, and the shares are now pausing for breath after a very strong run from last autumn’s lows.
“Lloyds’ shares are up by more than a quarter in the past six months and that gallop leaves the shares trading almost exactly in line with their net asset, or book, value per share of 51.2p.
“When the good times are really rolling, that figure could prove to be a valuation floor, but at the moment it feels more like a cap, given the uncertain economic outlook.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts. *Book value based on last published number (Q1 2024 for Lloyds and Q4 2023 for HSBC, NatWest, Standard Chartered and Barclays).
“Going into Lloyds’ results, Banks was the seventh-best performing sector within the FTSE 350, while NatWest and Barclays were among the top five stocks in the FTSE 100, in 2024 to date.
Source: LSEG Datastream data, to the close on Tuesday 23 April
“This may reflect hopes for lower interest rates, or at least relief that the worst may be behind the UK economy as it shows tentative signs of turning the corner and emerging from the shallow recession of the second half of 2023.
“If the UK does indeed start to grow again, that could be a good result for the banks, which are yet to see any major deterioration in the loan books. Lloyds booked just £57 million of loan and asset impairments in the first three months of 2024, well below the £243 million in the same period last year. However, boss Charlie Nunn continues to expect loan losses to start to normalise and hence his repetition of guidance for an asset quality ratio below 0.30%, compared to the 0.06% seen in the first quarter. He will doubtless be aware of how the early stages of an economic upturn can pressure some firms’ cash flows as working capital needs rise.
Source: Company accounts
“Conduct costs also remain subdued, at least after the spike in the fourth quarter of last year to cover the potential impact of the Financial Conduct Authority’s investigation into discretionary commission arrangements (DCAs) in the car financing market.
Source: Company accounts
“The two biggest factors behind the drop in first-quarter earnings were lower interest income and higher operating costs.
Source: Company accounts
“Consumers may be pleased to see the margin that Lloyds makes on its loan book continue to contract, as it suggests competition for deposits and loans alike, not to mention political and public pressure, is helping to boost returns for depositors and lower costs for borrowers.
“Net interest income of £3.05 billion was down from £3.43 billion a year ago and now rests way below the £4.43 billion peak in the final quarter of 2022. The net interest margin has slipped by 27 basis points, or 0.27%, to 2.95% from the late-2022 high, to show how sensitive Lloyds’ profits are to this figure – though this is hardly surprising when the company carries £469 billion in deposits and has a £449 billion loan book. Every basis point counts.
Source: Company accounts
“Lloyds puts the 11% year-on-year jump in operating expenses down to higher redundancy costs and a change in how the Bank of England levy is charged as of 1 March this year. Investors will continue to watch the cost-to-income ratio, just in case, as the 57.2% figure recorded between January and March is unusually high for the first quarter of a financial year, which tends to come in nearer the 50% mark.
Source: Company accounts
“For all of the different moving parts, Lloyds is still making £1.6 billion a quarter with more than its fair share of challenges and those profits underpin cash flow and cash flow supports dividends and share buybacks. Patient investors will be keeping this in mind, even as the shares trade near one times book value.
“Lloyds returned £2 billion to investors via share buybacks in 2023 and analysts expect a similar figure in 2024, to add to a forecast dividend worth around £1.9 billion. Add those two together and cash returns are expected by analysts to equate to around 12% of Lloyds’ current stock market valuation.”
Source: Company accounts, company investor relations website, analysts’ consensus forecasts
