Lloyds reported first-quarter net income of £4.2bn, down 9% driven by lower net interest income. This was broadly flat compared to the fourth quarter of last year. Banking net interest margin fell from 3.22% to 2.95%, a smaller drop than markets were expecting.
Underlying profit of £1.8bn was down 21%, but better than the £1.7bn markets were expecting due to lower impairment charges.
Loans and advances to customers fell 1% to £448.5bn, largely due to a dip in UK mortgage balances. Customer deposits also fell 1%.
The group’s CET1 ratio, a key measure of financial strength, is 13.9% - well ahead of its target of 13.0%.
The shares fell 1.7% in early trading.
Our view
Lloyds has started the year doing what it needed to. Don’t focus on the year-over-year numbers too much. Yes, the drops look substantial from this time last year, but that’s been expected for some time. The environment is simply not as favourable as it once was. Markets look forward not back, and an improving UK economic environment along with resilient borrowers gives scope for optimism.
Lloyds has a focus on traditional lending, so net interest margin (NIM - a measure of profitability in borrowing/lending) is key. Things peaked early last year, but first-quarter results showed a stabilisation quarter-on-quarter and it’s expected to stay that way over the year.
NIM’s been under pressure from several angles - but we expect some to ease over the next year or so.
Mortgages issued during the pandemic are coming up for renewal at less profitable levels. This will remain a headwind over 2024 but should start to tail off as we move through the year. There’s also an ongoing impact from consumers shifting to longer-term savings accounts in search of better rates. But the pace of switching looks to be easing, which is good news for Lloyds.
The structural hedge has the potential to be a key driver of income over the medium term. This can be thought of as a bond portfolio, and as the bank rolls from low-yielding contracts written over the past few years onto higher-yielding ones, income is expected to get a significant boost – to the tune of £700mn over 2024.
The flip side of the business model is higher exposure to potential loan defaults. For now, UK borrowers are remaining resilient to pressures, and Lloyds has one of the higher-quality asset portfolios. But this remains a risk to monitor.
Very aware of its reliance on traditional financing, Lloyds has invested heavily in its other income plays (credit card fees, insurance, investment management). This should provide an income tailwind when rates aren’t as supportive, we’ll be looking to see more progress over 2024.
The key risk in the short term is the FCA’s investigation into the misselling of motor finance. Lloyds is more exposed than peers and has already set aside £450mn in preparation for potential costs. At this stage, it’s hard to say if that figure is enough, so it’s a risk to be aware of.
Capital levels are strong and support returns to shareholders over the next few years. With an attractive valuation, Lloyds is one of our preferred names in the sector. However, the overhang from the FCA investigation could act as a brake on any near-term rerating, and no returns are guaranteed.
Environmental, Social and governance (ESG) risk
The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security is also an increasingly important risk for banks and diversified financial firms. Business ethics, ESG integration and labour relations are also worth monitoring.
According to Sustainalytics, Lloyds’ management of material ESG issues is strong.
The FCA’s investigation into historical auto-lending practices between 2007 and 2021 is a risk for Lloyds. Provisions have been taken but the scale of the potential impact is still largely unknown, more details should come later in the year. There’s room for improvement in product governance and responsible marketing, though it demonstrates strong progress in integrating ESG factors into asset management and corporate financing.
ESG data sourced from Sustainalytics.
Lloyds key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.
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