Lloyds Bank Q1 results fail to inspire 

Lloyds Banking Group (LSE:LLOY) has kicked off the quarterly reporting season for the banks in generally uninspiring style, although there are some signs that performance could tick higher as the year progresses.

Compared to the corresponding period, pre-tax profit of £1.63 billion in the three months to 31 March 2024 is 28% lower and also marginally light of the expected £1.66 billion, with pressure coming from both higher operating expenses and lower Net Interest Income (NII). NII for the quarter of £3.2 billion was down by 10% and again shy of the estimated £3.26 billion, while most of the other key metrics tended to miss expectations.

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Return on Tangible Equity (ROTE) of 13.3% compares with 19.1% the previous year, but was expected to hit 14.3%, while operating costs rose by 11% (or 6% excluding the revised Bank of England levy) to £2.4 billion.

The combined pressures resulted in the cost/income ratio rising to 57.2% compared to a corresponding number of 47.1%, although, more positively, the number will likely remain sector-beating, as has been the case for some considerable time, and is also an improvement from the previous quarter where the number reached 71.5%.

However, there are certainly some signs that the backdrop could be improving. Interest rate reductions are still expected this year, which could shift some customer lending activity towards higher margin mortgage products, where there has been some pressure given pricing and demand limitations as consumers refinance.

Lloyds had expected some of the subsequent pressure on the Net Interest Margin (NIM) to ease and, while the latest NIM figure of 2.95% compares with a slightly higher 2.98% in the previous quarter, it is above the expected 2.93% and as a crucial metric, could show that any pace of decline is starting to stabilise.

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Elsewhere, the bank remains fundamentally in rude health, with a capital cushion (CET1 ratio) of 13.9% ticking up from last quarter’s 13.7% and comfortably ahead of the bank’s own target of 13%. Indeed, the group has stated that this figure may be managed down slightly over the next couple of years, which in theory could add to another of Lloyds’ main attractions, namely shareholder returns.

At the moment, the previously announced share buyback programme of £2 billion is in progress, while a dividend yield of 5.4% adds to the investment attraction with the group currently providing strong capital and income returns.

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, although in the more immediate future there are other challenges to grapple with, not least of which is the perception that Lloyds is something of a barometer for the UK economy. As such, the group continues to grow other lines of revenue such as its Wealth offering to help offset the lesser income which a lower interest rate environment could bring.

The group has also reaffirmed its guidance for the rest of the year, such as a ROTE of around 13% and NIM in excess of 2.9%, while its managed approach to risk has seen a further nominal impairment charge of £57 million. Customer defaults remain well-managed and showing few signs of escalation, although 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 later in the year.

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In the meantime, an improvement of 24% in the share price over the last six months has removed any recent weakness, such that the shares have risen by 5% over the last year, as compared to a gain of 1.7% for the wider FTSE 100.

This update has done little to excite supporters of the stock, with some weakness being experienced in the price in early trade, although 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.