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Earnings

Can Lloyds' share price bank on gains after Q2 update?

Lloyds share price: A square Lloyds Bank sign with prancing horse logo outside one of the bank's branches

Ahead of Lloyds Banking Group’s half-year results, the Lloyds share price has outperformed since its Q1 results helped push the shares to 15-month highs towards the end of May and into June, with Lloyds’ share price closing at 50p on 2 June, well ahead of 2021 lows at 33p in January.

Lloyds share price outperforms peers

Since those early summer peaks, however, the Lloyds share price has slipped back, closing on Monday at 45.56p, down 9% from the year-high close. When we look year-to-date, Lloyds’ share price is very much the outperformer as far as UK banks are concerned, up over 30% in the run-up to the UK banking giant’s second quarter and half-year update.

By comparison, Barclays, which reports its results a day earlier, has seen its share price climb 16% year-to-date. The Lloyds’ share price decline in recent weeks is largely as a result of concern about slower growth prospects and falling yields, in line with the rest of the banking sector.

Unlike Barclays, Lloyds did release some of its loan-loss reserves, siphoning back £323m, while also pledging to accrue dividends with the intention of resuming a progressive and sustainable dividend policy. Loan demand for housing was a notable strong point in Q1, with its open mortgage book seeing a 6% increase from a year ago, to £283.3bn, and a 2% rise over the quarter.

Credit card spending, however, was down 19% over the year, and 6% on the quarter at £13.5bn Given the recent strength in the housing market, this may have continued in Q2, and is something to look out for in the bank’s update on Thursday.

Dividend restrictions lifted

In a boost for investors, the Bank of England’s Prudential Regulation Authority (PRA) removed payout restrictions in July, which were put in place due to the pandemic. The PRA cited stress test results and lower-than-forecast loan losses, saying that UK banks were “well capitalised and resilient to outcomes for the economy”.

The PRA noted that while there is still some uncertainty around the outlook for the UK economy, that uncertainty has reduced since last December, thanks in part to the successful vaccination rollout. The PRA added: “The extraordinary guardrails within which it asked bank boards to determine the appropriate level of distributions in relation to full-year 2020 results are no longer necessary and have been removed with immediate effect.”

Management cautiously optimistic

Lloyds’ management was more confident about the outlook when delivering it first-quarter update in April, saying that lending margins were expected to improve over the rest of the year, with net interest margin expected to be in excess of 245 basis points, up from 240 at the end of the previous quarter, while also seeing an increase in customer deposits.

There was a note of caution around the outlook, given that more of its customers could find themselves in financial difficulty in the months ahead due to the latest lockdown. Statutory profit in Q1 came in at £1.4bn, with expectations around Q2 expected to be equally as optimistic. However, that optimism over the second half of the year could be tempered by recent events, as Delta variant cases rise, and the economic picture looks less certain.  

How will Lloyds’ share price react when the FTSE 100 banking giant releases its half-year results at 7am on Thursday 29 July?


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