Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets, CFDs, OTC options or any of our other products work and whether you can afford to take the high risk of losing your money.

Lloyds share price: pressure on as profit plunges

Lloyds share price: pressure on as profit plunges

Lloyds Banking posted a statutory profit after tax of £480 million, which was a 60% decline when compared with the same period last year. 

Lloyds share price under pressure

It is worth noting, the bank had a tax credit of £406 million, so when that is stripped out, pre-tax profit was only a measly £74 million. The Lloyds share price could come under pressure from the tumble in earnings.

The impact of the health emergency is evident already as loan impairments came in at £1.4 billion, and that surged by more than £1.1 billion on the year. Banks across the board are preparing themselves for a spike in loan defaults, so Lloyds are not alone in that regard.

The company derives the bulk of its income from lending, and in the three-month period net interest income slipped by 4% to £2.95 billion. The net interest margin rate dropped to 2.79% from 2.91%. Sadly for Lloyds, the lending margin is likely to be put under further pressure in the next few quarters in light of compressed bond yields.  

Underlying fundamentals in good shape

Ignoring the impact of the Covid-19 crisis, the bank is in pretty good shape. The CET1 ratio ticked up from 13.9% to 14.2%. Total costs were fractionally higher at £1.96 billion. The finance house appears to have finally drawn a line under the payment protection insurance (PPI) scandal, but bad debts relating to the pandemic are likely to be a feature of their reports for years to come.

In accordance with the recommendation from the PRA, the bank halted its dividend about one month ago. The board of directors will review the dividend policy at the end of the year, but some traders are not holding out much hope.

The Lloyds share price, along with other banking stocks, was jolted higher in mid-December 2019 on the back of the decisive Conservative party win in the UK general election. Traders took the view the pro-business Tory party would be good for the economy. The bullish move fizzled out shortly after the election. In February, Lloyds' share price was nudged higher on the back of the company’s full-year results, but not long after that the coronavirus began to take hold in the west, so the stock suffered greatly as a result of the wider sell off in the equity markets.

Heavy PPI cost

Last year, the bank posted a 33% fall in annual statutory profit after tax to £3 billion. As far as PPI provisions go, Lloyds was by far the worst offender, and the bank set aside £2.45 billion for the year. The finance house claimed that no more provisions were necessary, but overall the saga cost the company nearly £22 billion.

Net interest income slipped by 3% to £12.37 billion, which was because the net interest margin fell to 2.88% from 2.93%. The low interest-rate environment squeezed lending margins, and to make matters worse, the bank predicted the metric would fall to 2.75-2.8%. The balance sheet was a touch weaker as the CET1 ratio came in at 13.8% from 13.9% in the previous year. The bank did a good job in keeping an eye on outgoings as the cost-to-income ratio dipped from 49.3% to 48.5%, and it predicted the metric would improve in the year ahead.

Lloyds' share price is off the lows of the month, and if it can hold above the 30p zone, the rebound that began at the start of April should continue.

 

Background image

Find your flow: four principles for trading in the zone

Learn about the four trading principles of preparation, psychology, strategy, and intuition, and gain key trading insights from some of the world's top investors.

Get this free report
Mobile trading app


Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.