November was a good month for Lloyds Banking Group (LSE: LLOY) shareholders. The bank’s share price rose by more than 10% during the month, outperforming rivals Barclays and NatWest.
Lloyds also beat the market — the FTSE 100 only managed a gain of 5% last month, despite a general market rebound.
Why Lloyds rose
Lloyds’ strong performance was probably partly due to the stronger performance of the UK market last month. But I think there’s a second reason too.
Rising interest rates are helping the bank to rebuild its profit margins. This is because the interest rates on lending are rising faster than the rates paid out on savings. At the end of October, we got an early look at how higher interest rates are supporting Lloyds’ profits.
The bank’s net interest income rose by 15% to £9,529m during the first nine months of this year. That helped to lift pre-tax profit by 29% to £6,520m, before bad debt charges.
Higher profits like these should increase Lloyds’ return on equity. That would be good news for shareholders, as it could support higher dividends and a stronger share price.
However, there could be some clouds on the horizon.
Recession risk?
Interest rates are rising just as many people are struggling with the higher bills. There’s a widespread view that the UK could be headed into a recession next year. That could lead to an increase in bad debts among Lloyds’ mortgage and credit card customers.
The bank is following UK regulations and making preparations for possible future losses. During the three months to 30 September, Lloyds recorded an impairment charge of £668m. That takes the total impairment charge for the year so far to £1,045m.
This charge does not represent losses suffered this year. Instead, it’s the bank’s best guess at possible future losses. So far in 2022, management say that credit performance has been “resilient”.
Impairment charges like these are not cash items, but they’re still subtracted from a bank’s reported profits. As a result of this charge, Lloyds pre-tax profit fell by 13% to £5,169m during the first nine months of this year, despite higher interest income.
A dividend stock to buy now?
Lloyds shares performed well in November, but the bank is still lagging the wider market on a one-year view. I think there’s a decent chance that this bank share could still be cheap.
According to the latest figures I can find, the shares are trading on 6.5 times forecast earnings, with an expected dividend yield of 5.2%.
The shares are also trading slightly below the bank’s last reported tangible net asset value of 49p per share.
This year’s dividend is expected to be covered nearly three times by earnings, so even if profits come in slightly lower than expected, I don’t see much risk to the payout.
Lloyds Bank may not be the most imaginative stock choice. But I think this big FTSE 100 business looks like a decent choice for dividend investors right now.
