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Lloyds Banking Group - positive first quarter

First quarter net income rose 12% to £4.1bn, reflecting double digit increases across underlying net interest income...

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First quarter net income rose 12% to £4.1bn, reflecting double digit increases across underlying net interest income and other income.

Despite a reduction in costs, underlying profit fell 7% to £1.8bn. That reflects a £177m impairment charge, including a limited charge for the weakening economic outlook. Ignoring this, underlying profits increased 26%.

The group said that ''given the solid financial performance'', it now expects the group's banking net interest margin to be above 2.7% for the full year.

The shares rose 2.7% following the announcement.

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Our view

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

The reversal 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, and impairment charges were lower than the market was expecting.

At the same time, income is being helped by increased mortgage lending. The open mortgage book rose £1.7bn in the first quarter alone.

But we wonder what mortgage volumes may look like from here. Consumers are feeling a lot more pressure, with rising energy costs and wider inflation. New mortgage-borrowers make up around a quarter of the market, and it's these customers that may start to evaporate while times are tough. A slowdown in the residential property market would hurt Lloyds more than its more diversified peers.

Interest rates remain very low by historical standards too.

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 2.7%, isn't highly profitable. As further incremental 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 too, another area which isn't closely linked to interest rates. It's early days, but the £4.0bn 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. Execution risk is high.

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, meaning 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 a way off 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 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.

First Quarter Results

Underlying net interest income rose 10% to £2.9bn, reflecting an increase in interest-earning banking assets and higher deposits. Loans and advances to customers of £451.8bn was up 2%, including a £1.7bn increase in the open mortgage book to £295bn. The banking net interest margin of 2.68% was higher than last year's 2.49%, helped by rising interest rates.

Underlying Other income reached £1.3bn, up from £1.1bn. Growth was driven by Retail and Insurance new business.

Operating costs of £2.1bn were up 3%, with the increase driven by strategic investments. ''Business as usual'' spending was flat.

Regulatory changes contributed to a fall in the CET1 ratio from 16.3% to 14.2%, but this is still higher than Lloyds' regulatory target of 11%.

Lloyds achieved a return on tangible equity of 10.8%, and this is expected to exceed 11% for the full year.

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.

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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.

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Article history
Published: 27th April 2022