Here’s the 3-year dividend forecast for Lloyds Bank

Preparing a dividend forecast for Lloyds Bank isn’t easy. But I think there are only two pieces of financial information that really matter.

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To produce an accurate dividend forecast requires an assessment of a company’s earnings. That’s because dividends are a means of sharing profits with shareholders.

Fortunately, many experts are employed to crunch the numbers and come up with these estimates.

But when it comes to banks — and Lloyds Bank (LSE:LLOY) in particular — I think there are only two financial measures that need to be considered.

Interesting

The first is the net interest margin (NIM). This is the difference between the interest earned on loans and that paid on deposits, expressed as a percentage of interest-earning assets.

In an era of rising interest rates, this is likely to be increasing. Whenever the Bank of England raises the base rate, banks tend to pass on the full increase to borrowers, but lift savings rates by a smaller amount.

But there are many customers with fixed rate loans. Banks are unable to generate any additional revenue from these.

This helps to explain why the average base rate has increased over eight fold during the past five quarters, whereas Lloyds’ NIM has gone up by ‘only’ 54%.

MeasureQ1 2022Q2 2022Q3 2022Q4 2022Q1 2023
Net interest margin (%)2.682.872.983.223.22
Average base rate (%)0.450.951.612.823.85
Source: Bank of England / author’s calculations

Loan losses

The second key financial measure is bad loans.

Each quarter, the bank will make an assessment as to the recoverability of the amounts lent.

If it believes there’s an increasing likelihood of default then it will book an impairment charge (a cost) in its accounts. If the position is improving then a credit (income) will be recorded.

During each of the last five quarters, Lloyds has increased its provision for bad loans which has reduced its earnings by a cumulative £1.75bn.

The rate of increase may have slowed but it still shows a worsening position.

MeasureQ1 2022Q2 2022Q3 2022Q4 2022Q1 2023
Impairment charge (£m)177200668465243
Source: company financial information

Expert opinion

At the beginning of 2023, the bank published a summary of 22 forecast models produced by analysts.

These predicted the NIM to be 3.15%, 3.14% and 3.18% in 2023, 2024 and 2025, respectively.

Since these were compiled it now seems likely that interest rates will peak higher — and remain at an elevated level for longer — than previously thought.

As a result, I think Lloyds’ margin will be better — probably around 3.25% — over the next three years.

Based on its 2022 results, a 0.1 percentage point improvement in the NIM would increase annual earnings by approximately £450m.

But I expect the extra profit generated to be nearly wiped out by additional costs associated with bad loans.

Analysts were expecting the impairment charge to be £1.72bn, £1.64bn and £1.56bn during the next three years.

Instead, I reckon the charge is going to be closer to £2bn in 2023 and 2024, falling to £1.5bn in 2025, as higher-than-expected interest rates really start to bite.

Forecast

So how is this going to impact on the amount returned to shareholders?

The average of the analysts’ forecasts is a dividend per share of 2.67p, 2.9p and 3.34p for 2023-2025.

But I think the bank will do slightly better than this and is likely to pay 2.8p a share this year.

Measure2021 (actual)2022 (actual)2023 (forecast)2024 (forecast)2025 (forecast)
Dividends (pence per share)2.02.42.83.13.4
Source: company accounts

As a shareholder in Lloyds, I hope my prediction is accurate.

Based on my forecast for 2023, the stock is currently yielding 6.3%. That’s far more than I’d earn from depositing the value of my shareholding in one of the bank’s deposit accounts!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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