More bad debt charges for Lloyds

On the face of it, half-year results for Lloyds Banking Group (LLOY) showed the benefit of widening interest rate margins, with the 'black horse' closing in on half-year profits of £3.9bn, substantially up on the £3.1bn it generated at this point last year, thanks to the Bank of England’s interest rate raising campaign. However, the market’s reaction was decidedly muted after the results showed another large charge for bad loans of £419mn in the second quarter, compared with £243mn in the first and £465mn in the final months of 2022. Management also warned that the outlook remains “uncertain”. The net result was that Lloyds' performance came in slightly below the City’s forecasts, with the downbeat mood overshadowing management raising its margin guidance forecast for the year.

The widening spread between the loan rates that Lloyds' charges its borrowers versus the interest it pays its depositors meant that the net interest margin for the year full year is now expected to be above 3.1 per cent, compared with the 3.05 per cent the bank had previously expected. That had a positive impact on the key return on tangible equity which came in at a respectable 16 per cent.

It is really the rising levels of bad debt, while bearable in the context of Lloyds' £450bn loan book, that indicate that large numbers of its customers – around 35 per cent of loan holders – are experiencing greatly increased costs. Management also assesses that these credit conditions will persist through the year. This was already apparent in Lloyds' shrinking loan book, which fell by £4.2bn to £451bn, along with a churn in customer deposits of 1.2 per cent to leave deposits lower at £470bn – although the loan/deposit ratio was essentially flat at 96 per cent. This could be the first indication that savers are starting to chase higher interest rate deals, although the picture will be clearer as the year progresses.

Overall, the results were acceptable, although even the normally positive analyst take from Jefferies could not see consensus forecasts for the year shifting on the back of these results. The correlation between Lloyds and the fortunes of the broader housing market was evident. With the shares hitting a consensus price/earnings forecast of no more than six times forward earnings, the debate is not whether they are expensive but simply unable to break out of a tight trading range for an institution that has utility-like characteristics. Hold.

Last IC View: Buy, 49.9p, 22 Feb 2023