Shares in Lloyds Banking Group [LLOY] are down by around 9% this year, but jumped 5% – from 43.55p to 45.74p – at Wednesday's open as investors reacted to the bank's second-quarter results and a boost to the dividend. The stock shed some of those early gains by 10am, but remained up by more than 4%.
Profits beat expectations
Lloyds recorded pre-tax profits of £3.7bn for the first six months of the year, beating analyst forecasts, but down from £3.9bn in the year-ago period as the group set aside £377m to cover possible loan defaults amid the cost of living crisis.
Investor concerns have weighed on the Lloyds share price this year, with many worried about the worsening economic outlook, high inflation and rising interest rates. The latter could dampen demand for home loans, putting pressure on Lloyds, the country's biggest mortgage lender.
There appears to be some reluctance among investors to drive the shares higher, despite the bank's balance sheet being in a stronger position than it was before the pandemic, when the shares topped 60p.
Analysts predicted that today’s Q2 numbers might highlight the challenges posed by the weakening economic backdrop – a factor that Lloyds cited as a concern in Q1, when the bank set aside £177m to cover possible loan defaults. These fears now appear misplaced, or at least premature, as Lloyds posted another strong quarter of revenue and profits
Bank set aside reserves, boosted dividend
The provisions for bad debt are a prudent response to the current climate and the potential impact of inflation, which is running at 9.4%, and the cost of living squeeze. The bank set aside a further £200m in Q2, bringing the half-year total to the above-mentioned £377m.
Q2 statutory pre-tax profits came in at over £2bn, well above expectations of £1.71bn, and a decent improvement on Q1’s £1.6bn. Lloyds' net interest margin rose to 2.87% in Q2, while the bank raised its outlook for returns on tangible equity to 13%, up from 11%.
Operating costs rose slightly to £2.15bn, up from £2.1bn in Q1. The bank expects to see total costs of £8.8bn this year.
Loans and advances to customers increased by £4.3bn to £456.1bn in Q2, mainly due to modest increases in credit card balances and unsecured loans. Meanwhile, customer deposits fell by £2.9bn to £478.2bn, driven primarily by a fall in commercial banking deposits. Current and savings account balances saw a slight increase in Q2.
The bank also lifted its dividend to 80p per share, up from 67p a share, which should be some comfort to shareholders at a time when markets seem hesitant to drive the shares higher.
Few customers in arrears
There appears to be nothing in Lloyds' Q2 and half-year numbers to suggest that the UK consumer is in significant financial distress at the moment, despite the challenging economic outlook.
Nonetheless the bank's leaders are right to be cautious about the uncertainties facing the UK economy, while at the same time remaining optimistic about the full-year outlook.
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