Lloyds has wrapped a disappointing earnings season for the UK’s three major banks with a warning that net interest margins would fall in the year ahead.
Lloyds followed in the footsteps of NatWest and Barclays in unnerving investors with downbeat forecasts and expectations for the coming year, and impairment charges curtailing 2022 profit growth.
However, Lloyds shares’ reaction to their full year results was not nearly as negative as NatWest and Barclays. A Lloyds £2bn share buyback would have helped contain losses this morning after a slight miss of profit expectations.
Lloyds shares price had broken beneath 50p to 49.6p and were trading down 2% at the time of writing on Wednesday.
Impairment charges
Speaking in an interview with Bloomberg TV Lloyds CEO Charlie Nunn said they saw a mild recession in 2023, which was reflected in a £1.5bn impairment charge in 2022 after a credit in 2021. Nunn said they were seeing early signs of stress on lower balance accounts and noted an overall drop in mortgage activity.
The impact of the impairments eroded a 46% jump in profit before impairments to £9bn in 2022, up from £6.2bn in 2021. Surging profit before impairments was a result of a 2.94% net interest margin for the 2022 full year and 3.22% in the fourth quarter.
Nonetheless, it was the outlook on margins that was the biggest cause of concern for investors. Lloyds echoed Barclays and NatWest in suggesting we have enjoyed the best of the impact of higher rates on earnings. Lloyds predict net interest margins in 2023 will be in excess of 3.05%, below the 3.22% recorded in Q4 2022.
“Guidance on net interest margin for 2023 was a little lower than markets had hoped for, and that’s a trend we’ve seen across the sector over the last couple of weeks,” said Matt Britzman, equity analyst at Hargreaves Lansdown.
“We’re cautiously optimistic that the £1.5bn of impairment charges taken over the year in preparation for bad debt are more than sufficient. If that’s the case, there could be scope for that to feed its way back to the profit line in future periods. For now, the impact of the cost-of-living crisis on consumers and businesses is only having a small impact on debt repayment, though we’d expect that to pick up as we move through the year.”