So Lloyds Banking Group (LSE: LLOY) posts a nice 46% rise in Q1 profit, and what do we get? Lloyds shares falling, that’s what.
At the time of writing, the drop is around 3%. And it does make me wonder what the market wants from Lloyds. I mean, £2.3bn in profit before tax isn’t enough? Beating City forecasts doesn’t cut it?
Interest rates
Well it does look like a chunk of this big boost is down to short-term events. Lloyds is the UK’s biggest mortgage lender, and high interest rates give a boost to lending margins.
Net interest income rose 20%, thanks to a 3.22% margin. And while that sounds good, we just don’t know how long it will last before rates start to drop. In fact, the bank thinks its net interest margin will fall, to around 3.05% for the full year.
Still, Lloyds did report a 6% rise in other income, which it said is a sign of continued recovery. But it’s seeing increases in competition for savers’ cash too.
Deposits down
Customer deposits fell by £2.2bn in the first three months of the year. That might sound like a big drop, but the total still stood at £473.1bn. The bank put the dip down to various reasons, but it seems barely above random noise to me.
The loan side of the business saw a similar small fall. Total loans and advances stood at £452.3bn, down £2.6bn. That’s a drop of only half a percent, but it does seem to have spooked the market.
Impairments modest
What else did I want to watch out for? Well I feared that impairments might surge this year. With inflation and interest rates so high, that can spell bad debts. In the event, Lloyds made an impairment charge of £243m in Q1.
That’s not too much at this stage. But there could still be a long way to go before the threat fades, and the squeeze could cause more pain in the months ahead. So yes, for me it’s still one of the key things to watch for the rest of the year.
The bank has kept its full-year outlook pretty much flat, when the City expected a boost. That reflects the pressures the financial sector still faces for the rest of 2023.
And it also shows how much competition there is these days, chasing savers and lenders who are under so much pressure from costs.
The verdict?
So what’s my take on all this? Well I think the fears could keep the Lloyds share price low for quite some time yet. And Lloyds shares might fall even more in the months to come.
But for me, what Lloyds looks like for the long term is all that counts.
And on that score, I see a forecast price-to-earnings (P/E) ratio of only 6.5, and set to fall. And there’s a dividend yield of 5% on the cards, also on the up.
Whatever we see for the rest of this year, Lloyds shares are still on my buy list for the long term.
