Lloyds reported net income of £4.7bn in the first quarter, up 15% on the prior year. That was largely driven by higher net interest income, which benefited from higher interest rates. Net interest margin (NIM, a measure of profitability in borrowing/lending) rose from 2.68% last year, to 3.22%. NIM was flat compared to the fourth quarter of 2022.
The number of customers with overdue payments remains lower than pre-pandemic levels. The £243m impairment charge taken in preparation for credit default was lower than the £356m analysts were expecting. Underlying profit rose 27% to £2.2bn.
The £2.0bn share buyback programme announced in February has begun, with 0.8bn shares repurchased as at 31 March 2023. Considering the total amount committed to the buyback, the CET1 ratio (a key measure of balance sheet strength) was 14.1%, ahead of target.
For 2023, NIM is expected to be greater than 3.05%, with a fall in the second quarter due to headwinds from mortgages and deposit pricing.
The shares were broadly flat in early trading.
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Our view
Lloyds is a good barometer for the overall health of the UK consumer and its smaller businesses, and they're proving remarkably resilient in the face of mounting cost pressures. First-quarter performance was solid, outperforming analyst expectations as impairment charges set aside for loan defaults were lower than feared.
A focus on traditional banking means Lloyds is more exposed to the interest rate cycle than others, 76% of total income is interest related. Net interest margin (a measure of profitability in borrowing/lending) was steady over the quarter, which was a relatively good result. It's expected to dip over the second quarter as some of the more profitable mortgages issued over the pandemic come up for renewal at less profitable levels. There's also increased pressure on banks to offer more in the way of interest on deposits as consumers and businesses shop around for the best rates.
Nevertheless, if management's predictions of a year where margins are greater than 3.05%, it'll be positive for income. There's also the potential for more rate hikes this year, which could help offset some of the mortgage headwinds.
The flip side of the business model is higher exposure to potential loan defaults. £1.5bn was set aside last year to provide a buffer. Uncertainty remains, and the £243m set aside in the first quarter is still elevated but nowhere near the kind of numbers we've seen during crisis periods, like the start of the pandemic. Some pockets of the loan portfolio saw an increase in defaults, but overall, levels remain at or below pre-pandemic levels across the board.
Very aware of its reliance on traditional financing, a recently refreshed strategy plans to build out the bank's small business offer as well as increase the focus on larger corporate and institutional clients. Both groups have the 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. These plans have merit, and investment is expected to peak in 2023, but we're a long way off knowing if it'll pay off.
Finally, there's the balance sheet to consider. The ongoing £2bn buyback goes some way to returning excess capital to shareholders and the 6.2% forward yield is attractive, but there's still room for more. Having a robust capital position as we enter a murky economic environment certainly isn't a bad place to be and earlier in the year, management pledged a return of further excess over the next 2 years. As usual, nothing's guaranteed.
Overall, we commend the efforts to diversify, but these are far from being the main event. In the meantime, Lloyds boasts one of the highest return on tangible equity percentages (a measure of profitability) among the major UK banks and an undemanding valuation. Investors should be aware though, a worse than expected downturn or a downward shift in interest rate expectations would hit Lloyds harder than others.
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.
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.
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