Lloyds shares were marginally down on Wednesday morning after reporting Q1 2023 results. There will be questions about how much of the drop was a direct consequence of their Q1 2023 update or the impact of fears about US banking volatility which reignited overnight.
Lloyds shares were down around 0.9% at the time of writing. NatWest and Barclays were both trading in negative territory.
Higher interest rates have helped increase FTSE 100 banks’ profitability in Q1 – Lloyds was no exception. Underlying net interest income rose 20% in the first quarter, and net interest margins hit 3.22%.
Net interest margins were steady compared to Q4 2022 but significantly higher than Q1 2022. There may be concerns around future profitability after Lloyds said they expect full-year net interest margins would be above 3.05%. This would represent a decline from Q1’s 3.22%.
A small win for investors would be the amount set aside for bad debts. Lloyds set aside just £243m in the first quarter, down from £465m last quarter.
Lower impairment charges for the provision of bad debts were a factor in robust underlying profit growth. Lloyds underlying profit for the period rose 30% to £2.2bn in Q1, up from £1.7bn in the same period a year ago.
“Lloyds continues the trend of major UK banks outperforming analyst consensus as impairment charges set aside for loan defaults were lower than feared,” said Matt Britzman, equity analyst at Hargreaves Lansdown.
Britzman continued to explain how Lloyds results are a good reflection of underlying economic activity.
“Lloyds is a good barometer for the overall health of the UK consumer and its smaller businesses, and they’re proving remarkably resilient in the face of mounting cost pressures. Some pockets of the loan portfolio saw an increase in arrears, but overall, levels remain at or below pre-pandemic levels across the board,” Britzman said.
“For Lloyds, interest income takes the main stage despite a push to diversify income streams. Net interest margin was steady over the quarter, which was a relatively good result.”
AJ Bell analysts suggested that while performance in Q1 was more than acceptable, the competitive landscape for Lloyds and other UK banks may become challenging later in the year.
“It is hard not to ignore the £2.2 billion reduction in customer deposits during the first quarter of 2023. Part of this was down to a more competitive market for deposits – higher rates mean consumers are shopping around more to get a better deal on their money, and that means banks are having to work harder to lure them in,” said AJ Bell investment director Russ Mould.
