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Lloyds - income rises and profits jump on provision releases

Net income rose 9% to £15.8bn, reflecting a 4% increase in underlying net interest income to £11.1bn.

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Net income rose 9% to £15.8bn, reflecting a 4% increase in underlying net interest income to £11.1bn. Other income rose too, and Lloyds benefited from higher used car prices because of its exposure to car finance.

The release of credit provisions meant underlying profit rose to £8.0bn from £2.2bn.

The group also announced a new strategy and will spend £4.0bn over the next few years. Priorities include further digital investment, as well as expanding Wealth services.

Lloyds announced a final dividend of 1.33p, taking the total payment for the year to 2.0p. A buyback of up to £2.0bn was also announced.

The shares fell 8.7% following the announcement.

View the latest Lloyds share price and how to deal

Our view

Lloyds is a bread-and-butter bank. It's reliant on traditional current accounts and lending, meaning its fortunes are closely tied to how the UK economy is faring. As such, the ongoing Ukraine crisis is likely to cause ups and downs for the group.

Despite the subdued market reaction, full year results were reasonably bright. Huge provisions put aside at the worst of the pandemic have been unwound, supercharging profits. At the same time, income was helped by a £16.0bn increase in mortgage lending. Even more encouraging were comments suggesting credit card activity is starting to pick back up.

There's a lingering bugbear though, which puts a ceiling on performance. Interest rates remain very low by historical standards.

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. Of course, the recent interest rate hikes are a welcome change for Lloyds. But current levels are hardly cause for corporate celebration.

As a traditional high street bank without fee-based investment banking income, low interest rates are particularly painful for Lloyds. A net interest margin of 2.5%, isn't highly profitable. As further incremental interest rate rises come through, Lloyds is in a good spot, but it's also doing the right thing by looking for alternative ways to grow.

The 2021 strategy review includes 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 £390m acquisition of Embark at the half year and a further £4.0bn being invested over 5 years, means Lloyds is taking this strategy shift seriously.

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 is streets above the capital ratio set by regulators, meaning there's hoards of uninvested excess capital - arguably - going to waste. Cash that could be returned to shareholders.

Overall, Lloyds' exposure to interest rates means it's likely to be less profitable for as long as rates stay low. We commend the efforts to diversify, but these are a way off being the main event.

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.

Full year results

Loans and advances to customers rose 2% to £449bn, helped by the strongest growth seen in mortgage lending in a decade. The open mortgage book rose £16bn. The group's underlying net interest margin rose 2 basis points to 2.54%.

Card balances fell year on year as customers paid down balances faster, but this trend is starting to unwind.

Other income rose 12% to £5.1bn, as customer activity normalised and there were strong returns in Lloyds' equity investment business.

Operating expenses rose to £10.8bn from £9.7bn, reflecting higher pay costs and increased remediation and restructuring costs. The cost to income ratio rose 1.4 percentage points to 56.7%.

The group recognised a net underlying impairment credit of £1.2bn in 2021, compared to a net charge of £4.2bn in 2020, partly because of a better than expected macro-economic outlook.

Lloyds' CET1 ratio was 17.3%, up from 16.2% in 2020.

Looking ahead, Lloyds expects a Banking net interest margin above 26% for 2022, and return on tangible equity of around 10%.

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: 24th February 2022