Lloyds share price hits 7-week high on rosier outlook

Lloyds share price up 4% after beating expectations

Shares in Lloyds Banking Group, the largest domestic bank in the UK, are up over 4% this morning after the bank said it will be more profitable than originally anticipated this year, prompting it to hike its dividend by 20%.

Pretax profit declined 6% in the first half of 2022 to £3.66 billion, partly thanks to a £377 million impairment as Lloyds became more cautious as it considered additional risks of rampant inflation and higher interest rates on British consumers. A year earlier, it had boosted its bottom-line by releasing reserves that had been set aside during the pandemic. Still, this was well ahead of the £3.26 billion forecast by analysts.

The bank said it dished out more £7.5 billion in additional loans in the period compared to last year and that its open mortgage book was some £3.3 billion larger, while customer deposits increased by £1.9 billion. That has left it with a loan-to-deposit ratio of 95%.

Lloyds raises 2022 outlook

Its net interest margin – which measures the net return on the bank’s earning assets – improved to 2.77% in the first half, above its 2.7% target and prompting it to upgrade its 2022 goal to over 2.8%, marking the second time its ambition has been raised this year. Lloyds reiterated its aim to keep operating costs capped at £8.8 billion this year.

Improved margins coupled with a tight control over costs will go a long way to shoring up confidence it can improve profitability as interest rates rise. Lloyds said return on tangible equity, a key measure of profitability within the industry, will now be 13% in 2022, up from the 11% targeted back in March.

This will undoubtedly prompt analysts to upgrade their forecasts for Lloyds, with Jefferies flagging that the improved outlook could translate to a 7% increase in pretax profit estimates for 2022.

Lloyds: inflation still poses risk to UK economy

Still, CEO Charlie Nunn warned that uncertainty still lingers over the outlook as the ‘potential impact of higher inflation remains a source of uncertainty for the UK economy as many consumers grapple with cost of living pressures’.

Lloyds has over 26 million customers in the UK, making it highly susceptible to the any downturn, but said the vast majority of them are ‘demonstrating resilience, adapting behaviours and increasing their savings’.

‘Although uncertainties persist, our measured approach to risk is demonstrated by our strong asset quality, with no current deterioration seen across the portfolio. This highlights the resilience of our business model and customer franchise,’ Nunn said.

Lloyds increases dividend by 20%

The strong performance gave Lloyds the confidence to up its interim dividend by 20% to 0.8 pence, which will cost around £550 million in total. That is in addition to the £2 billion share buyback programme launched back in February, of which around £1.3 billion has been returned so far.  

The bank’s CET 1 ratio – which measures the financial strength of a bank – sits at 14.8%, well above the 12.5% target to leave Lloyds the ability to consider returning more excess capital in the second half.

Where next for the Lloyds share price?

Lloyds shares have found support from the better than anticipated performance in the first half, coupled with the improved outlook, sending the stock to its highest level in seven weeks.

They have now recaptured the 100-day moving average for the first time in four months, thrusting the RSI into bullish territory, and are now testing the June-high at 46p, which should be considered the next key upside target. A break above here would allow it to bring 47.2p into the crosshairs, marking the 200-day moving average that is in-line with the highs seen in April. This could prove a more significant level to breach as this could pave the way for the stock to return above the 50p mark. Notably, the 24 brokers that cover the bank see even greater upside potential over the next 12 months with an average target price of 63.83p – some 40% above current levels.

With 46p proving a tough ceiling to crack in early trade, we could see Lloyds shares fall back toward the 44p mark and keep the uptrend intact, but a break below this trendline could bring the 50-day moving average, currently at 43.5p, back into play. Investors will hope 43.0p can hold as a firm floor as it has done for over the past week, which would allow it to avoid a potential fall below the 42.0p threshold. Average trading volumes were lacklustre ahead of the results, but early trade suggests interest has exploded, with estimates from Bloomberg suggesting volumes today could be some 59% above the 100-day average – suggesting today’s end result could provide insight as to which way momentum is gaining traction.

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