24th Apr 2024 10:44
(Alliance News) - Lloyds Banking Group PLC is in "relatively rude health" and in a "good position" to deal with falling interest rates in the coming year, analysts on Wednesday said.
Shares in Lloyds were flat at 51.34 pence in London on Wednesday, recouping early losses.
On Wednesday, Lloyds said first quarter profit slumped as the benefits of higher interest rates faded amid mounting costs.
Lloyds said pretax profit in the first three months of 2024 slid 28% to GBP1.63 billion from GBP2.2 billion a year prior. Earnings per share decreased to 1.7p from 2.3p.
Net income slid 8.8% to GBP4.24 billion from GBP4.65 billion, with net interest income down 10% to GBP3.18 billion from GBP3.54 billion.
The latter reflected a lower banking net interest margin, as expected, of 2.95%. This was below 3.22% reported a year before and 2.98% in the fourth quarter of 2023.
Lloyds forecast a banking net interest margin of greater than 290 basis points for 2024 as a whole.
Adding to the squeeze on profitability, operating costs increased by 11% to GBP2.43 billion from GBP2.19 billion and the cost income ratio deteriorated to 57.2% from 47.1%.
The rise in costs included an around GBP0.1 billion charge relating to the sector-wide change in the charging approach for the Bank of England levy. Excluding this, operating costs were up 6%, Lloyds said.
Lloyds also highlighted "elevated" severance charges, GBP0.1 billion higher in the year to date.
Despite the profit fall, Lloyds reaffirmed 2024 guidance.
Chief Executive Charlie Nunn said: "The group is continuing to deliver in line with expectations in the first quarter of 2024, with solid net income, cost discipline and strong asset quality. Our performance provides us with further confidence around our strategic ambitions and 2024 and 2026 guidance."
Impairment charges fell to GBP57 million in the first quarter from GBP243 million a year before, while Lloyds recognised remediation costs of GBP25 million, compared to GBP19 million.
But there was no further charge relating to the potential impact of the UK Financial Conduct Authority's review into historical motor finance commission arrangements, announced in earlier this year.
In February, Lloyds booked a GBP450 million provision in connection to the probe.
Zoe Gillespie, investment manager at RBC Brewin Dolphin, said: "Lloyds' numbers have begun to slow, which was to be expected as interest rates appear to have peaked and competition in the mortgage market heats up."
But while the bank's profits and net interest margin "may have been squeezed, they are still at strong levels."
"More generally, Lloyds appears to be in relatively rude health and in a good position to manage the potential fall of interest rates later in the year," she said.
"With such steady performance, Lloyds' focus may soon turn to more strategic questions around its future direction, adding to the GBP6 billion sale of Scottish Widows' in-force bulk annuity portfolio announced earlier this year."
Richard Hunter, head of markets at interactive investor felt the results were "generally uninspiring," although there are "some signs" that performance could tick higher as the year progresses.
He noted pretax profit of GBP1.63 billion was marginally light of the expected GBP1.66 billion, with net Interest Income of GBP3.2 billion again shy of the estimated GBP3.26 billion.
"Most of the other key metrics tended to miss expectations," he added.
"However, there are certainly some signs that the backdrop could be improving," he said.
Hunter suggested interest rate reductions this year could shift some customer lending activity towards higher margin mortgage products, where there has been some pressure given pricing and demand limitations as consumers refinance.
Elsewhere, the bank remains fundamentally in "rude health," he said with a capital cushion, CET1 ratio, of 13.9%, comfortably ahead of the bank’s own target of 13%.
He pointed out Lloyds indicated that this figure may be managed down slightly over the next couple of years, which "in theory could add to another of Lloyds' main attractions, namely shareholder returns."
By Jeremy Cutler, Alliance News reporter
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