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Lloyds share price: What to expect from H1 earnings results

2019 has been a mixed bag for Lloyds share price. Having notched up a 30% gain by 17 April, the share price has since fallen 13%. At the time of writing, the stock is up around 10% this year, underperforming the FTSE 100 in that time period.

With results for the first six months of the year due out Wednesday, investors will be looking to see how Lloyds [LLOY] cost-cutting strategy has fared against the backdrop of turbulence in the UK economy.

 

How Lloyds performed in Q1

Lloyds revenue came in at £4.4 billion in Q1, 4% below analyst expectations. Pre-tax profits of £1.6 billion also missed forecasts. 

On the plus side, net interest margin dropped just one basis point to 2.91% compared to the previous quarter. This reflects the cost cutting measures Lloyds has put in place to protect profits in the face of a wavering UK economy.

During the results, Chief executive Antonio Horta-Osorio stuck by the bank's cost-driven targets for 2019. These include reducing operating costs to below £8 billion as the company seeks to minimise its cost to income ratio.

-£8bn

Targeted threshold for operating costs

For the first half of the year, Lloyds is expected to report pre-tax profit of £4.3 billion, up from £3.1 billion a year earlier, while revenue is expected to rise to £9.4 billion. While that may be the consensus, UBS expect a slight weakening in underlying profits, coming in at £1.9 billion.

 

What to look out for

 

Cost cutting continues

Lloyds has been cutting costs and continuing with its capital management plans to help improve efficiency and protect margins. The bank is doing this to increase its return on tangible equity and shield it from any downturn in the economy. Evidence that this is going to plan, along with further reductions in operating costs, should reassure investors.

 

IT switches to the cloud

Sticking with cost cutting, at the start of the year Lloyds announced that it was planning to cut hundreds of millions of pounds from its annual IT budget. Lloyds spends an eye-watering £2.2 billion a year on running its IT systems, making it a prime target for savings.

One way it has done this is to shift client data into cloud technology developed by startup Thought Machine, a company Lloyds also has a stake in. Further reductions in IT spend could make a noticeable difference to bottom line results.

£2.2bn

Lloyds's annual spend on the running of its IT systems

 

Consumer lending

Lloyds, along with the UK's other big banks have been slashing mortgage rates in what has become a highly competitive environment. Figures from HMRC show that housing sales dipped 6.4% in May and 11.3% annually, as potential homebuyers put off buying until after Brexit. Consumer credit growth in the U.K. has also been slowing. In May it registered at 5.6%, its lowest rate since April 2014. This could all spell trouble for Lloyds lending business.

 

PPI payouts come to an end

The first quarter of the year saw Lloyds set aside an additional £100 million for PPI claims. Being the UK's biggest bank, Lloyds has been more exposed than others, having paid out over £19 billion to date. News of more money being used for claims will be sure to grate on investors’ nerves. For Lloyds the 29 August deadline for claims can't come soon enough.

 

Is Lloyds a ‘Buy’?

 

Market cap £39.61bn
PE ratio (TTM) 10.21
EPS (TTM) 5.50
Quarterly revenue growth (YoY) 0.90%

Lloyds stock vitals, Yahoo finance, 29 July 2019

 

For those expecting a spike following the earnings announcement, it's worth noting that the stock has a 0.81 beta rating, which suggests the stock is fairly stable relative to the rest of the market. Any big shift in price movement will depend on how well it is able to protect its profit margins. It will also be interesting to see if there’s any update on Lloyds wealth management ambitions following last week’s $129 billion settlement with Standard Life.

For income seeking investors, the dividend payout will be the big news during the results. Lloyds offers one of the best payouts on the FTSE 100 with a 5.66% forward dividend and a 96% payout ratio. Hopes will be that management have insulated any payout from all the cost cutting.

Among analysts, the consensus seems to be that the stock is a Buy. An average price target of 75.37p, would represent a hefty 34% upside on the current share price. The big question is whether Lloyds cost cutting measures are enough to shield against a potentially turbulent few months in the UK economy.

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