The Lloyds share price has had a difficult quarter, pushing up to one-year highs in early February in the aftermath of its full-year numbers, before sliding to its lowest levels since November last year as the March turmoil in the banking sector clobbered valuations.
The UK bank has been a serial underperformer over the past five years, despite being more profitable than it was when it was trading above 70p back in 2019. Three months ago, Lloyds' full-year numbers showed a statutory pre-tax profit of £6.9bn, despite setting aside £1.51bn in impairments, and is still very profitable compared to its peers, with healthy margins.
This trend has been borne out with another set of decent quarterly number, with Q1 statutory profit pre-tax profits coming in at £2.26bn, a £716m increase on the same quarter last year, on net income of £4.65bn. Net interest margin remained steady at 3.22%, unchanged from Q4, and up from 2.68% in Q1 last year. The bank set aside a further £243m in respect of impairments, a modest increase from the £177m set aside in Q4, but well below the £465m set aside in Q1 last year.
Customer deposits fell slightly during the quarter from £475.3bn to £473.1bn, and are down 2% from a year ago. Operating costs did see a modest increase over the quarter to £2.17bn, but are still lower than this time last year.
When Lloyds set its guidance in February, the bank said it expects to see net annual interest margin to improve to greater than 3.05%, up from its previous estimate of 2.8%, while operating costs are set to remain static at £9.1bn, rising to £9.2bn in 2024. The bank kept this guidance unchanged even as expectations increase that the Bank of England is poised to raise rates further next week, potentially improving the outlook for margins further.
This abundance of caution, which mirrored NatWest Group last week, seems eminently sensible given that the higher rate/margin outlook does need to be tempered by the willingness of savers to move their funds around to get the best return in the current high inflation environment. This caution doesn’t appear to be finding favour with investors with the shares slipping back in early trade.
With that in mind it's perhaps not surprising given current events in the US, that Lloyds thinks it may well have to raise savings rates in the coming months, increasing the pressure on margins as it looks to create an environment that creates a stickier deposit base. Lloyds has already seen an £8bn fall in its deposit base over the last 12 months and will be keen to ensure these remain sticky.
There is also the fact that Lloyds is one of the UK’s biggest mortgage lenders, and further rate rises could prompt the risk of further impairments if rates rise much further, and fixed rate mortgages start to roll off. Here we have continued to see a slowdown in loans and advance to customers, which fell to £452.3bn, a number that has been trending lower since June of last year, although it is still above the levels of Q1 last year.
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