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Is there life in the black nag?

Higher interest rates mean better times for Lloyds as the bank continues its long search for direction
July 27, 2022
  • Decent showing on rising interest rates 
  • Mortgage loan risks are rising

Rising interest rates are, in part, good news for the nation’s largest mortgage lender, which saw its net interest margin increase in these results to 2.77 per cent, up from 2.5 per cent this time last year. However, without outside intervention to improve profitability, still the impression remains that Lloyds Banking (LLOY) is left in no-mans-land: too big to fail, but also too big to adapt its lending business model. Which is a shame as the results were generally better, particularly the second-quarter performance, than the market had expected. It is still a measure of how sensitive the bank is to the UK’s stuttering economy that few investors are prepared to give it much credit for any kind of decent showing.

The mortgage market is the key area of concern as interest rates rise. This is reflected in the impairment charges starting to come through to the operating line, as the last of the capital releases to cover potential pandemic loan arrears started to peter out during the half. That meant a capital charge of £377mn, compared with a £734mn release last year.

As the UK’s biggest lender, Lloyds is naturally tied to how the housing market performs. Having held up so far, predicting a major slump has become a mug’s game, but there is a sense that a downturn is somehow inevitable. This is reflected in the bank’s own risk calculations for its mortgage book. In December, the war game scenario forecast a maximum mortgage hit of £1.3bn if a severe downturn took hold.

This default forecast has now increased to £2.2bn in the bank’s own projections. Of course, this is only worst-case scenario modelling, but with the bank holding an open mortgage book of £296bn at 30 June, up nearly £7bn compared with last year, investor wariness is easy to understand. In addition, there was no sign that Lloyds can make much of dent in its operating costs – these are still forecast to be £8.8bn for the full year – despite the announcement of another round of branch closures.

As a minimum, Lloyds looks well on course to meet consensus estimates for full-year EPS of 6.5, which gives a price/earnings ratio of seven, which is broadly in line with its underperforming peers. Hold.

Last IC View: Hold, 47.4p, 24 Feb 2022

LLOYDS BANKING (LLOY)    
ORD PRICE:45.3pMARKET VALUE:£31bn
TOUCH:45-45.5p12-MONTH HIGH:56pLOW:38p
DIVIDEND YIELD:4.7%PE RATIO:7
NET ASSET VALUE:73p*LEVERAGE:20
Half-year to 30 JunTotal operating income (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
202119.63.905.100.67
2022-6.323.663.700.80
% change--6-27+19
Ex-div:04 Aug   
Payment:12 Sep   
*Includes intangible assets of £7bn, or 103p a share