Shares in Lloyds Banking Group [LLOY] remain stubbornly low. Ahead of Wednesday’s interim Q1 statement, we consider whether Lloyds’ improving financial position could drive the shares back towards their pre-pandemic comfort zone.
Stock sits below previous range
Lloyds’ shares are currently trading at just over 45.5p, having fallen more than 8% year-to-date. In mid-January, the shares briefly hit a 52-week high of 56p before slipping back – the closest they’ve come to scaling pre-pandemic highs of more than 60p.
Indeed, for about three years before Covid-19 forced the UK into lockdown, Lloyds’ shares traded fairly consistently within the 50-70p range. However, since rebounding from a low of less than 25p in September 2020, they’ve revisited the bottom end of that range only fleetingly. This is somewhat surprising because the bank is arguably in a stronger position now than it was before the pandemic.
Recent results point to improving finances
Lloyds had a strong 2021. The full-year results, released in February, revealed profits of £6.9bn, below expectations of £7.2bn but still a massive increase on the 2020 figure of £1.2bn. Net interest margin grew to 2.57% in Q4, a sixth consecutive quarterly improvement, and averaged 2.54% for 2021 as a whole.
The miss on annual profits was partly due to a surprise increase in operating costs, which rose above £2bn in Q4, up from £1.87bn in Q3. The investor reaction to lower-than-expected profits, alongside concerns over developments on Ukraine’s border, sent the shares falling to a 12-month low.
In more positive news for shareholders, the group – which owns Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows, among other brands – announced a final dividend of 1.33p per share, bringing the total dividend for 2021 to 2p per share.
The company also announced a £2bn share buyback, worth 2.82p per share.
Uncertain outlook
Looking ahead, net interest margin is expected to increase to at least 2.6% in 2022, though a possible slowdown in UK economic growth could present challenges for Lloyds, which is the UK’s largest mortgage lender.
Lloyds could well be negatively affected if further interest rate hikes dampen demand for property and mortgages, though in the long term demand for housing is likely to remain buoyant amid chronic undersupply in some parts of the country. Property prices in the UK increased more than 10% in 2021.
Higher interest rates could also support further improvement in the bank’s net interest margin.
Meanwhile, as part of cost-cutting measures, the company announced in March that it will close a further 60 branches across the UK later this year. The closures are in addition to the 41 shutdowns that the group announced late last year. These savings should help shore up operating margins.
Scope for further cost savings, as well as forecasts on interest rates and the challenges facing the UK economy, are likely to be among key talking points when the company announces its Q1 results at 7am on Wednesday 27 April.
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