Lloyds shares were marginally lower on Wednesday after the bank said profits fell in line with expectations but reaffirmed guidance for 2024.
When we previewed Lloyds earnings last week, we questioned whether the higher rates ‘party’ was over for Lloyds, and it appears it is.
Net interest margin (NIM), the key profitability metric dictated by interest rates, fell to 2.95% after being well above 3% for most of 2023. Although Lloyds NIM has fallen sharply, the group expects it to remain steady around the current level for most of this year.
“Management still expects the full-year NIM will be greater than 290 basis points, even though interest rates may be set to fall later this year,” said Garry White, Chief Investment Commentator at wealth manager Charles Stanley.
The drop in NIM dragged on income, which fell 9% to £4.2bn, and statutory profit after tax fell to £1.2bn in the first quarter. However, the slowdown has been well-telegraphed and is largely priced into Lloyds shares, which dipped 1.5% in mid-morning trade on Wednesday.
“Lloyds is doing exactly what it needs to do. 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,” said Matt Britzman, equity analyst, Hargreaves Lansdown.
“That said, Lloyds is showing why the UK banking sector is an attractive place to be right now. Consumers remain resilient to cost pressures and default trends look stable, at or below pre-pandemic levels. At the same time, the economic outlook is improving, and impairment charges came in lower than analysts had expected.”
Investors hoping to gain clarity on the motor finance fine would have been disappointed to learn they will have to wait until later in the year to learn more about the extent of the cost to Lloyds.
“There is yet to be an update on the regulatory probe into past motor finance commission arrangements, with the bank already setting aside £450m against any potential liabilities,” Garry White said.
“The Financial Conduct Authority will update on 24 September and investors keenly await the outcome as the potential fines and compensation could be higher.”
The scale of the fines isn’t likely to be as large as previous provisions for wrongdoing, but the uncertainty will weigh on sentiment.