Lloyds’ [LLOY] share price managed to end October higher than where it started, something the stock hasn’t done in a long time. For the month, Lloyds’ share price climbed 5.6%, making last week's third quarter results all the more important. A slip could have wiped out the bank's meagre gains, prolonging a slump that has been in effect since March. In reality, though, Lloyds’ share price benefitted from third quarter results that saw the UK's biggest bank return to profits after last quarter's devastating losses.
Still, Lloyds’ share price isn't out of the woods yet. The announcement of a second UK lockdown could hit the bank’s fourth quarter, given its status as a bellwether of the economy. We look at what the results mean for Lloyds’ share price in light of the lockdown.
What happened in the results
Lloyds posted pre-tax profits of £1bn in the third quarter, reversing the £676m loss seen in the previous quarter and well ahead of the £50m profit seen in the same period last year, when PPI dragged on earnings. Net income of £10.8bn was 17% lower than last year, with return on tangible equity coming in at 7.4%.
The big number to watch was how much more cash Lloyds had set aside to cover bad debts. This came in at £301m, a huge 85% drop from the £2.4bn seen last quarter and well below analyst expectations. The bank now expects impairment charges to be at the lower end of the £4.5bn to £5.5bn range
Helping Lloyds turn a profit in the third quarter was the UK housing boom, with the bank reporting that mortgage activity picked up strongly. Lloyds’ open mortgage book was up £3.5bn since June, winning 22% of market share for approvals.
A £1.5bn trading surplus in the quarter brought total surplus to £5bn. The bank noted that this would help it absorb impairment charges.
"Although our performance has clearly been impacted by the pandemic and the associated challenging economic environment, I am pleased that we are now seeing an encouraging business recovery and, with impairments significantly lower, a return to profitability in the third quarter."
"Although our performance has clearly been impacted by the pandemic and the associated challenging economic environment, I am pleased that we are not seeing an encouraging business recovery and, with impairments significantly lower, a return to profitability in the third quarter." - Lloyds statement
What a second lockdown means for Lloyds’ share price
The strength of Lloyds’ third quarter helped it increase its capital position to 15.2% — a good position to be in considering the UK is heading into a second lockdown. A continuation of the furlough scheme will help assuage fears of a sudden spike in unemployment. However, should the bank reintroduce mortgage and credit card payment holidays, then it could see a significant hit in revenue in the fourth quarter.
One area that should remain relatively unaffected is Lloyds’ mortgage business. During the new lockdown property viewings can still go ahead and, with buyers racing to complete before the stamp duty holiday's 31 March deadline, there could be even more demand.
“We already know that this strong mortgage growth in Q3 is going to accelerate into Q4 and we are absolutely on it,” Lloyds’ CEO António Horta-Osório said.
"We already know that this strong mortgage growth in Q3 is going to accelerate into Q4 and we are absolutely on it" - António Horta-Osório, Lloyds' CEO
The lack of an investment bank means that Lloyds’ performance is closely tied to that of the UK economy. As the country moves into a second lockdown, the optimism of Lloyds’ third quarter could be dulled as businesses struggle.
Where next for Lloyds’ share price?
Lloyds’ share price has proven resilient to news of a second lockdown. Since new lockdown measures were announced over the weekend the stock has climbed more than 1.75% — no mean feat considering how far they fell when the first lockdown was announced. Lloyds’ share price could already have the impact priced in, meaning that the current levels represent a buying opportunity for long-term investors.
Among the analysts tracking Lloyds’ share price on Yahoo Finance, the stock has a 36.5p target. Hitting this would represent a 27.98% upside on the current share price (as of 4 November’s close).
|PE ratio (TTM)||27.43|
|Quarterly revenue growth (YoY)||-18.8%|
Lloyds' share price vitals, Yahoo Finance, 5 November 2020