Lloyds shares have more than recovered the minor losses incurred after they announced full year results last week and are shaping up for a run at the 52-week high of 53.97p.
Lloyds was the last FTSE 100 UK bank to report and wrapped an earnings season for the sector which was largely disappointing for those banks with a focus on the UK economy.
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However, when Lloyds is compared to to NatWest and Barclays, there are many positives to take away.
Lloyds share market reaction
First and foremost is the market reaction. Notwithstanding the variations in each respective companies’ metrics, Lloyds shares had the most favourable immediate market reaction to their results.
Both NatWest and Barclays suffered dearly in the aftermath of their full results with NatWest falling nearly 10%. In contrast, the Lloyds share price slipped only 2% and has since more than recovered their initial losses. While this has little bearing on the future performance of the Lloyds share price, it does highlight the market’s favourable perception of Lloyds shares based purely on 2022 results.
UK bank comparisons
UK banking results for 2022 on an underlying basis were very similar. Lloyds, Barclays and NatWest all reported higher net interest margins and an expansion to the top line.
What set the banks apart were impairments charges, one-off litigation costs, and 2023’s outlook.
| 2022 Net Interest Margin | 2023 Net Interest Margin Forecast | ||
| Lloyds | 2.94% | > 3.05% | |
| Barclays | 3.54% | > 3.20% | |
| NatWest | 2.85% | around 3.20% |
Lloyds Net Interest Margin, a key profitability metric, was by no means the highest of the three UK-focused banking giants. However, Lloyds earns the entirety of their income from the UK through retail and business banking.
Barclays has previously enjoyed the benefits of a strong international and markets business, but in 2022 they suffered a litigation costs of £1,597m due to the over issuance of bonds. This hit their earnings and reduced their 2022 profit before tax compared to 2021.
| 2022 Impairment Charges (£m) | Litigation/Remediation | ||
| Lloyds | 1,510 | 255 | |
| Barclays | 1,220 | 1,597 | |
| NatWest | 337 | 385 |
Lloyds managed to marginally increase profit before tax to £6,928m, despite a £1,510m impairment charge. This would suggest Lloyds has largely priced in the impact of any up coming economic deterioration, and could even reverse the impairments next year.
NatWest recorded an impairment of just £337m and created the uncertainty of additional impairments next year.
2023 Outlook
In terms of the outlook for 2023, all three of the banks suggest Q4 2022 saw a peak in their net interest margins.
The impact of higher interest rates was evident in 2022 banking results. However, a stabilising inflation rate and the threat of an economic downturn means rates are unlikely to increase much further. Certainly not to the extent we saw in 2022.
This will cap banking net interest incomes and make the bank’s increasingly reliant on increased demand for banking products to generate earnings growth.
As the UK’s largest mortgage provider, Lloyds is well placed to benefit from an upside surprise in UK economic conditions. Lloyds does, however, lack the exposure to international financial markets and investment banking that Barclays does. This could mean Barclays outperforms Lloyds in 2023 if capital markets activities enjoy a revival.
Lloyds Dividend Comparison
Lloyds increased their ordinary dividend for the 2022 full year to 2.4p, an increase of 20%. As a result, Lloyds shares have a historical yield of 4.6%, largely in line with their peers.
However, Lloyds willingness to announce an additional £2bn share buyback sets them apart from peers and is likely a core reason for their recent outperformance.
| Ordinary 2022 Dividend (p) | Historic Yield | Additional Share Buyback (£m) | |
| Lloyds | 2.4p | 4.6% | 2,000 |
| Barclays | 7.5p | 4.3% | 500 |
| NatWest | 13.5p | 4.7% | 800 |
It must be noted NatWest paid a rewarding 16.8p special dividend in August.
Lloyds Valuation
From a valuation perspective, Lloyds offers very little value compared to their peers. They trade at a premium to the average earnings and NAV multiples. This would imply Lloyds offers little value but also suggests the market feels Lloyds is a higher quality business and deserves a premium valuation.
| Forward Price-to-Earnings | Price-to-Earnings | Price-to-NAV | |
| Lloyds | 6.9 | 6.5 | 0.7 |
| Barclays | 5.5 | 4.5 | 0.4 |
| NatWest | 6.2 | 7 | 0.7 |
Conclusion
Lloyds higher valuation reflects solid underlying earners and a willingness to front-load bad debts, at a time they are prepared to reward investors with higher distributions.
This makes Lloyds a more stable income option.
However, should we see upside surprises to the global economy and a recovery in capital markets, the Lloyds share price may lag their peers.
