Lloyds Bank: Shares fall after bumping up ‘bad loan’ recession provisions
Lloyds Bank reported that higher interest rates offset the money set aside to cope with loan defaults during the final quarter of 2022, but disappointed the market with yet more conservative guidance on net interest margin for 2023.
Lloyds recorded a pretax profit of £1.8bn during the quarter, in line with company-compiled consensus and over 80 per cent higher than the same quarter last year.
The bank’s profit for the full year 2022 totalled £6.9bn, roughly flat on the previous year while revenue in the final quarter climbed to £5bn, mainly as a result of higher net interest income.
On the back of the results, Lloyds said it will pay a final dividend of 1.60p per share bringing the total dividend to 2.40p per share, up 20 per cent on last year. The bank also announced a buyback programme worth £2bn.
After a decade of ultra-low interest rates, sharp hikes throughout 2022 have widened banks’ net interest margins and earned them bumper profits. Net interest margin is the difference between what banks pay and receive in interest.
Lloyds posted 2.94 per cent across the year as a whole and 3.22 per cent in the final quarter, higher than expected.
While Lloyds set aside £465m in impairment costs – more than expected – this was more than offset by the bank’s strong revenue figures.
Banks set aside loss provisions in order to cushion losses on loans when economic conditions darken. CEO Charlie Nunn said the bank forecasts a “mild recession” in 2023, but said it will still be “meaningful” for customers.
Despite the funds set aside for impairments, CFO William Chalmers said there has only been “modest evidence of deterioration in credit” and that the underlying impairment figures “remain very benign”.
Net interest margin has been a crucial feature of this earnings season, particularly banks’ forecast for how it will change in 2023.
Going into 2023, Lloyds expects its net interest margin to be “greater than 305 basis points”.
Analysts at Barclays said “this seemingly confirms UK net interest margins have peaked and are potentially weaker than hoped” although they noted the “conservatism around rate assumptions” from Lloyds. Analysts at Jefferies agreed, saying Lloyds was “setting a low bar” with its forward guidance.
Defending the guidance, Chalmers said the “benefits of a rising rate environment tends to be frontloaded…benefits start to be distributed for customers in the years thereafter.” Chalmers noted that the margin in mortgages will slim over the coming years, while the bank also expects more customers to move into savings accounts which are more expensive for the bank.
Barclays and NatWest both disappointed investors with conservative estimates for net interest margin last week. Both banks expected their net interest margin to remain roughly constant throughout 2023.
Investors were also looking for signs that Lloyds’ long term strategy was bearing fruit. Announced by CEO Charlie Nunn in 2022, the plan will see £4bn worth of investment over five years in an attempt to diversify Lloyds’ revenue stream away from mortgages.
Nunn said the strategy “remains the right one” despite changes to the wider economy and said the bank was making “good progress” on the plan.
The bank invested £900,000 in the plan during the year, helping to increase daily logons by eight per cent to 19.8m while the bank also saw an increase in banking balances in the ‘mass affluence business’ of more than five per cent.