In a week that has seen the NatWest Group share price retreat from levels last seen in early 2018, the Lloyds Banking Group share price has struggled to return to the levels we saw just over a year ago, prior to the Russian invasion of Ukraine.
This underperformance rather begs the question as to why Lloyds has consistently struggled to match the share price performance of its UK peer, despite being consistently more profitable over the same period of time. One reason could be Lloyds business model and the fact its fortunes closely track the ups and downs of the UK economy, particularly mortgages and consumer credit. Another reason is that historically Lloyds has always been a conservative banking organisation, with a slow and steady business model.
This morning’s Q4 and full-year numbers have borne out that steady business model with another solid performance, however the shares have still slipped back, probably on account of the more negative mood prevailing on markets today than anything else.
Statutory pre-tax profits came in at £1.76bn, slightly below consensus, however net interest margin rose to 3.22%, up from 2.98% in Q3, pushing annual interest margin up to 2.94%, a 40bps increase from 2021. Coming on top of the £1.51bn in Q3, this has pushed full-year statutory pre-tax profit up to £6.9bn, and in line with last years profit numbers. This is still a very decent performance despite high impairment costs this year which were increased again in Q4, by £465m, to stand at £1.51bn, compared to last year which saw writebacks of £1.38bn.
A final dividend of 1.6p was announced, pushing total dividend per share to 2.4p, an increase from 2p last year, with the bank implementing a new £2bn share buyback. On the business side of things, the bank increased loans and advances to customers to £454.9bn, even as customer deposits fell by £1bn to £475.3bn. One thing the bank does need to improve is its costs, which rose in Q4 to £2.56bn, pushing the total for the year to just under £9.1bn.
On the outlook, Lloyds said it expects to see net annual interest margin to improve to greater than 3.05%, up from its previous 2.8%, while operating costs are set to remain static at £9.1bn, rising to £9.2bn in 2024. In the earnings call, CEO Charlie Nunn said that there was a slightly more negative outlook for the UK economy in Q4.
On taxes, the bank paid £1.37bn and expects to pay a 27% effective tax rate for 2023, which includes the impact of the rate of the banking surcharge and the increase in corporation tax, from 19% to 25%, which are set to come into effect in April.
On shareholder returns, the bank said it expects to maintain its sustainable ordinary dividend policy, and in response to criticism that the bank has been too slow to pass on rate increases to its depositors, Nunn said the bank would pass these much more quickly through the rate cycle.
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