Shares in Lloyds Banking Group PLC (LSE:LLOY) and the other UK banks enjoyed a strong earnings season, analysts at UBS have highlighted.
Results released last week have injected fresh confidence into the sector, the Swiss bank said.
“Barclays, Lloyds Banking Group and Natwest traded well through the earnings season and are up between 9% (Lloyds) and 39% (Natwest) in the year to date,” UBS said.
“That’s despite first quarter pre-provision profit just 2% ahead at Barclays and 6% and 10% below consensus at NatWest and Lloyds.”
“What really mattered was the reinforced investor confidence that hedge tailwinds would soon overwhelm the headwinds of mortgage refinancing at lower spreads (now only at LBG) and deposit mix and rate changes (all three).”
Net interest margin (NIM) was on the positive end of quarter-on-quarter comparisons for both Barclays and Natwest, it added.
“The overall picture – that the UK (banking sector) offers idiosyncratic revenue growth even as rates fall – was supported by the prints.”
Elsewhere, analysts at Barclays in a note commented: “Funding costs are nudging higher, amid a noisy backdrop rates, but the outlook for ‘core’ revenues is improving, across NIM, loan growth and fees – with EPS inflection fast approaching.
“Motor Finance presents uncertainty, but we think is likely to come in more benign than feared.”
Lloyds results
Lloyds, last Wednesday, delivered results that could be described as ‘better than some had feared’.
An underlying profit of £1.76 billion was reported for the first three months of 2024, just above flat compared to the preceding quarter, down 26% year-on-year but slightly higher than the £1.73 billion average analyst forecast.
Statutory pre-tax profits of £1.63 billion were down 8% on the quarter and 21% on the year, and modestly below the City consensus of £1.66 billion.
Impairments of only £25 million were made, with no further charges relating to the potential impact of the Financial Conduct Authority review into historical motor finance commission arrangements, with the FCA having indicated it will update in September.
Underlying net interest income of £3.2 billion was flat on the quarter and down 10% on the year, slightly below the City consensus.
Operating costs of £2.4 billion were higher than the £2.33 billion average estimate, but for the full year management still expects costs of about £9.3 billion.
After announcing 1,600 job cuts as part of a major branch overhaul earlier this year, this resulted in “elevated severance charges” of £100 million in the period, with a bigger hit from the sector-wide change in the charging approach for the Bank of England levy.
Immediately after the figures, analysts at Jefferies investment bank noted that impairment charges of £57 million were an 80% beat to the consensus, with the bank flagging an improvement in new to arrears and flows to default observed across the UK mortgage portfolio.
