The Lloyds [LLOY] share price has struggled so far this year. All eyes will be on the bank’s half-year results on 27 July, as shareholders hope for a rebound.
Second-quarter earnings are expected to remain similar to those seen in the first three months of the year. The group produced a consensus report ahead of the upcoming earnings release, which projected net income of £4.14bn – a minimal increase on the £4.11bn seen in Q1. Pre-tax profit is predicted to decline 2.3% to £1.59bn, down from £1.62bn in the previous quarter.
The UK banking giant’s shares have had a mixed past 12 months as investors digested news of rising inflation and interest rates. The shares are down 6.8% year-to-date as of 22 July, which puts Lloyds’ stock price in the middle of the pack compared with its peers. In comparison, HSBC [HSBA] is up 18.2% since the start of the year, while Barclays [BARC] has fallen 13.6%.
Investors will be hopeful that the half-year results show that the bank has prepared itself well to deal with economic uncertainty. However, with the company considerably underperforming the FTSE 100 – which is down 2.7% this year as of 25 July – the results will have to be a very good read to turn around current investor sentiment.
Profits beat analysts’ expectations in Q1
Lloyds reported pre-tax profits of £1.62bn for the first three months of 2022, which comfortably exceeded analysts’ expectations of £1.4bn. While this was still a 14.4% decline from the year-ago quarter, it showed that Lloyds has dealt with the volatile start of the year better than expected.
Michael Hewson, chief market analyst at CMC Markets, noted that “we saw the bank increase impairment provisions of £177m” in order to cover “possible impacts related to higher inflation”. “This could well be added to in this week’s Q2 and H1 numbers given the deterioration in the economic outlook and increasing pressure on consumer incomes and budgets,” he added.
The provisions made in Q1 came as a shift in tone. A year earlier, Lloyds was able to release £360m from its reserves on the back of an optimistic post-pandemic economy.
The bank’s net interest margin (NIM), which is the difference between the rates for lending and borrowing cash, has risen on the back of rising interest rates. This helped to boost revenue by 12% to £4.11bn in the first quarter. The group updated its outlook for the remainder of 2022, with its NIM expected to rise above 2.7%.
Preparing Lloyds shares for growth
Lloyds has been forced to increase its impairment provisions as the industry prepares for an increase in loan losses with the UK economy battling inflationary pressures. However, an increase in interest rates has brought some good news for shareholders, with the company able to charge customers higher interest on loans.
Looking ahead, CEO Charlie Nunn has laid out a new restructuring plan that will see £4bn invested in the business to add revenues of £1.5bn by 2026. The plan is to shift Lloyds towards insurance and wealth management and away from sectors such as mortgages that are heavily tied to interest rates.
These measures will take a while to implement. Their success will take even longer to evaluate. However, it shows ambition from a company that has suffered from years of stagnation. The group has seen limited growth since scaling back its operations after its 2008 government bailout.
Out of 24 analysts offering 12-month price forecasts for the Lloyds share price, which were compiled by the Financial Times, the average target price was 60p, representing a 38.7% upside on the 22 July closing price of 43.23p. Of these analysts, four have a ‘buy’ rating, 12 ‘outperform’, five ‘hold’ and only three have a current ‘underperform’ rating.
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