Lloyds shares were broadly flat on Thursday after the group reported profits that beat expectations but kept guidance unchanged.
Lloyds shares are up 40% year-to-date, and investors would have required an overwhelmingly strong set of half-year results to have the confidence to push shares higher.
The first half’s financial performance was steady, as opposed to a blowout, with Lloyds posting a statutory profit after tax of £2.5 billion, up from £2.4 billion in the same period last year.
The banking giant achieved a respectable return on tangible equity of 14.1%, underpinned by net income growth of 6% year-on-year.
“Lloyds is trotting along nicely as profits gallop past expectations. The reaction might be a little muted, though, given the lack of guidance upgrade off the back of a good set of numbers,” said Matt Britzman, senior equity analyst, Hargreaves Lansdown.
“Impairments continue to be the fuel sustaining these profit beats as default rates remain low and borrowers continue to show resilience.
“Lloyds offers a blend of strong underlying performance and potential upside for those willing to take on some risk. It’s an important period, not just because of today’s results, but also because the Supreme Court is expected to make a judgment on the motor finance case soon.”
The looming motor financing decision may have contributed to Lloyds’ shares’ tepid reaction to otherwise strong results, with Lloyds shares down marginally at the time of writing.
The group’s underlying net interest income rose 5% to £6.7 billion, driven by an improved banking net interest margin of 3.04% – up 10 basis points year-on-year. This was supported by higher average interest-earning banking assets of £458 billion.
However, profitability faced headwinds from rising costs and credit provisions. Operating costs increased 4% to £4.9 billion, reflecting inflationary pressures and strategic investments, though these were partially offset by cost savings measures. The group also recorded an underlying impairment charge of £442 million, up from £100 million in the same period a year ago.
Strong underlying performance provided Lloyds with the opportunity to hike the dividend and investors will be pleased to see the interim dividend increasing 15%.
Analysts point to the macroenvironment as the next big driver of Lloyds’ share price performance with the UK economy starting to show signs of stress.
“Our experts suggest that future results are strongly linked to the British economy, so if the British economy does well, Lloyds should do well,” said Max Harper, Analyst at Third Bridge.
“The Bank of England’s current stable interest rate policy is unlikely to significantly impact Lloyds’ dynamic hedging strategy, the primary risk for the bank is stagflation. A combination of a slowing economy and persistently high inflation would create a double-edged sword effect, simultaneously reducing appetite for new lending while interest rate hikes aimed at curbing inflation could turn the bank’s hedge into a source of financial loss.”