Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

Lloyds Banking Group - higher rates benefit, outlook upgraded

Half year underlying net income rose 12% to £8.5bn, largely driven by a 13% increase in net interest income.

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

This article is more than 1 year old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

Half year underlying net income rose 12% to £8.5bn, largely driven by a 13% increase in net interest income. Lloyds is benefitting from higher interest rates and continued recovery in customer activity.

The group incurred a £377m impairment charge relating to a low observed performance charge, as well as a £95m adjustment to the assessment of the economic outlook. Additional risks include the effects of higher inflation and interest rates. Including this non-cash impairment charge, underlying profit fell 2% to £3.7bn.

Overall, Lloyds believes its portfolio is "well-positioned in the context of cost of living pressures", and has upped full year guidance. Banking net interest margin (the difference between what a bank earns in interest on loans and the amount it pays in interest on deposits) is now expected to be over 2.8%.

The Board has declared an interim ordinary dividend of 0.8p per share.

The shares rose 4.1% following the announcement.

View the latest Lloyds share price and how to deal

Our view

Lloyds' fortunes are closely tied to how the UK economy is faring.

The non-repeat of provision releases is denting profits. That's partly caused by the group putting money aside in relation to economic uncertainty. While the new trend is unhelpful, it's not a long-term concern, especially because these charges don't affect cash generation.

The group's also benefitting from improvements in net interest income, as interest rate rises and accelerated UK consumer activity boosted performance, with the difference between what Lloyds earns in interest on loans and the amount it pays in interest on deposits, moving in its favour.

At the same time, income is being helped by increased mortgage lending, with the open mortgage book rising over £3bn in the first half. But looking ahead consumers are feeling a lot more pressure, with rising energy costs and wider inflation. First time buyers make up around a quarter of the market, and it's these customers that may start to evaporate while times are tough. Considering that global growth forecasts are falling, and that the UK is expected to trail behind the wealthiest nations, a moderate shock to the housing market can't be ruled out. This would hurt Lloyds more than its diversified peers.

Banks make money by lending money out at higher rates than they pay on deposits - the difference is known as the net interest margin. With interest rates on savings accounts still low, that has its drawbacks.

As a traditional high street bank, without fee-based investment banking income, low interest rates are particularly painful. A net interest margin of 2.77%, isn't highly profitable. As further interest rate rises come through, Lloyds is in a good spot, and this should feed through directly to growth. But Lloyds is also doing the right thing by looking for alternative ways to grow.

The new strategy plans to build out the bank's small business offer as well as increasing the focus on larger corporate and institutional clients. Both groups have potential to generate fees, rather than interest income.

The group's also looking to grow its Wealth Management options, across asset management, general insurance and pensions businesses, another area which isn't closely linked to interest rates. It's early days, but the billions being invested over 5 years means Lloyds is taking this strategy shift seriously. These plans have merit, but we're a long way off knowing if that hefty investment will pay off.

The other weapon in Lloyds' arsenal when it comes to fighting low interest rates is an impressively low cost: income ratio. In particular, increased digitisation reduces the cost to serve customers and potentially boosts profitability of future revenue growth.

Finally, there's the balance sheet to consider. The group's streets above the capital ratio set by regulators, which means there's hordes of uninvested excess capital - arguably - going to waste. Cash that could be returned to shareholders.

Overall, we commend the efforts to diversify, but these are far from being the main event. In the meantime, Lloyds looks set to benefit from incremental interest rate hikes - but investors should be prepared for ups and downs (such as higher default rates on loans) given economic uncertainty.

Lloyds key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Half Year Results

Underlying net interest income rose 13% to £6.1bn, while total loans and advances to customers were up £7.5bn to £456.1bn. That included continued growth in the open mortgage book, which rose £3.3bn to £296.6bn. Underlying other income, which includes retail and commercial banking and insurance, rose 5% to £2.5bn.

Lloyds' net interest margin rose 27 basis points to 2.77%, reflecting the benefit of higher interest rates and deposit growth.

Traditional operating costs where stable, but higher-than-expected investment in strategic changes meant total operating costs rose 5% to £4.2bn. As previously announced, the group's strategic shift includes implementing a new operating structure while boosting its presence in personal wealth products, among others. A more detailed update on progress is due in the first half of next year.

Lloyds had a return on tangible equity of 13.2%, lower than last year's 19.2%. The decline reflects the non-repeat of last year's credit releases, when the UK's economic outlook improved following the end of lockdowns.

As at the end of June 2022, Lloyds had a CET1 Ratio - an important measure of a bank's capitalisation - of 14.7%, which is higher than the target of 12.5%.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 27th July 2022