Lloyds earnings preview: are the good times over?

Lloyds will report next week and shed light on the UK’s evolving economy and how it’s impacted the bank’s profitability.

Net interest margins (NIM) are always in focus when the FTSE 100’s banks report. NIM is the difference between what a bank earns in interest from loans and what it pays out in interest to savers. This time round, they will be highly anticipated because many banks are expected to post much lower NIMs than in the same period last year. 

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In the comparable period last year, the financial system was in the midst of a tightening cycle whereas Q1 2024 preparations for rate cuts were underway.

The comparative mortgage rates offered in the two periods were dramatically different, and this will affect Lloyds’ interest margins. Banks have also started to offer savers more competitive rates which will pile further pressure on Lloyds profits. The good times could be over.

“Lloyds is the first of the major UK banks to report first quarter earnings next week. Markets expect weaker results than this time last year, with net interest margin expected to fall from 3.22% to 2.93%,” said Matt Britzman, equity analyst, Hargreaves Lansdown.

“While the drop is expected, and more a result of the particularly strong environment this time last year when rates were being hiked, anything lower than 2.90% would likely be punished. There’s also the ongoing issue of an FCA investigation into motor financing to contend with. As one of the more exposed banks, Lloyds has already set aside £450mn in preparation for charges.

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“It’ll be interesting to see whether management has any further commentary here, up to now details have been hard to come by. Loan defaults are the other key thing to watch, with analysts pencilling in £280mn of impairments.

“There is scope for a better result here and investors expect to hear commentary that borrowers remain resilient. Performance clearly peaked last year, but several tailwinds yet to play out could give room for upside. Of course, there are no guarantees.”

The big question for Lloyds is whether it can maintain profits as interest rates fall or if the end of higher rates will erode earnings in the coming quarters. 

Lloyds shares breached the psychological 50p mark in mid-March and have remained above this level ever since. Next week’s update has the potential to send the Lloyds share price crashing back through this level or have the bulls eyeing 60p.

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