Lloyds Bank half-year results: steady rather than spectacular

With a resilient performance amid a higher interest rate environment and with some promising signs of growth, Lloyds Banking Group (LSE:LLOY) has provided a timely reminder as to why it is often seen as a barometer for the wider UK economy.

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An improvement in the second quarter bodes well for the remainder of the year, with the additional possibility that the trough has been reached with regard to the crucial metric of Net Interest Margin (NIM). The figure has held steady at 2.94%, with the bank cautiously guiding for a figure in excess of 2.9% for the year as a whole. At the same time, the so-called structural hedge, which lessens the group’s susceptibility to changes in interest rates, could also provide further income to offset pressures elsewhere.

In the second quarter, pre-tax profit of £1.7 billion exceeded both the year’s previous £1.61 billion and market expectations of £1.58 billion. Lloyds saw an improvement in customer deposit balances of £3.3 billion, as well as increasing loans and advances by £2.7 billion.

These figures combined suggest that the movement of funds elsewhere by customers seeking higher rates of return is levelling off, while the increase in UK mortgages is a promising development, given that it is a major strand of the bank’s lending, accounting for almost 70% of total loans.

A post-tax profit for the half-year of £2.4 billion compares less favourably due to the difficulties posed in the first quarter. The number is down from £2.9 billion the year previous, with some pressure on Net Interest Income, which fell by 10% to £6.3 billion, being exacerbated by a rise of 7% in operating costs, although for the latter some of the increase was due to planned strategic investment.

Overall, the cost/income ratio remained higher than the previous year’s figure of 48.8% at a level of 57.1%, although the number is likely to remain sector-beating, as has been the case for some time.

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Indeed, there are certainly some signs that the backdrop could be improving. Interest rate reductions are still expected this year, which could shift some further customer lending activity towards higher-margin mortgage products. At the same time, there has been no discernible increase in customer defaults, with the group’s asset quality remaining strong, which will come as something of a relief to investors.

The additional impairment of £44 million takes the half-year number to £101 million, which is a cautious but prudent move, and which is a considerable improvement from the £662 million charge from the previous year. In the background, the previous £450 million set aside for potential motor finance mis-selling will remain a concern until the full results (and monetary value) of the investigation become clear, with an update expected from the Financial Conduct Authority (FCA) in September.

The other key metrics reveal that the group remains in good shape, with a capital cushion of 14.1% stable and well in excess of the bank’s own 13% target, while the Return on Tangible Equity (ROTE) still hovers around 13.5%, expected to dip slightly to 13% for this year, before moving on its way to the 2026 target of a figure in excess of 15%.

In terms of shareholder returns, around £900 million of the previously announced £2 billion share buyback has now been completed. Meanwhile, the group has announced an increase to the dividend which takes the projected yield to 4.9%, consolidating its reputation as something of an income play, and with the real possibility of more to come as the year unfolds. 

Meanwhile, the move towards a more digital business will reap large rewards as the process evolves, with the closure of office space and indeed branches a reflection of the times as customer behaviour changes. This improves the longer-term outlook, and the group is targeting a cost/income ratio of below 50% in the next two years, and in the meantime this strand of the business is growing apace, with more than 19 million active users of its mobile apps.

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In all, the results are steady rather than spectacular, even though there is the promise of brighter times ahead. The cool reaction to the update in opening trade comes against a weaker wider market, but does little to undermine a recent performance which has seen the share price rise by 30% over the last year, as compared to a gain of 6% for the wider FTSE 100, including a particularly strong six-month run of late which propelled the price 42% higher.

Indeed, as a longer-term play based on shareholder returns, improving prospects and a historically undemanding valuation, the market consensus of the shares as a buy is likely to remain intact.