Lloyds LLOY reported 2024 underlying profits of £6.3 billion, below the £6.7 billion consensus estimate collected by the bank prior to the release.
Lloyds Banking Group Stock vs. Morningstar Fair Value Estimate
Source: Morningstar Direct. Latest price as of 11:30 GMT. Data as of Feb. 20, 2025.
What We Thought of Lloyds’ Earnings
The bank booked another £700 million provision related to the motor finance probe currently with the supreme court. This drove the majority of the consensus miss, with operating performance in line with expectations. We maintain our GBX 78 per share fair value estimate.
In total, Lloyds has now set aside £1.2 billion for the motor finance probe, which we believe is adequate. This figure is the sum of different potential outcomes of the probe and the subsequent implementation these outcomes weighted and averaged. Crucially, uncertainty around the scope and final impact remains high. Unknowns include the commission type being contested or upheld, Lloyds’ commission type mix, the applicable time periods, whether banks will have to compensate only damages or the entire fee, and whether the remediation process will be outbound or inbound, which can result in significantly different outcomes.
Operationally, Lloyds had a decent year. Net interest income declined 7% to £12.8 billion. However, the net interest margin continued expanding during the fourth quarter. The structural hedge, a bank’s hedge portfolio used to smooth out interest rate changes, is offsetting lower deposit margins. This trend should continue through 2025, lifting net interest margins further.
Other income, up 9%, was good showing traction across the commercial and retail banking as well as the insurance and pension business. Lloyds strategy is centered around reducing its reliance on net interest income to diversify its income streams. The rapid rise in interest rates over the last two years had lowered the contribution of non-interest income, but one should not dismiss the structural improvements Lloyds has made on its commission and fee income.
Operating expenses of £9.4 billion, up 3%, included £0.4 billion in cost savings offsetting investments and staff pay inflation. The cost-to-income ratio 60%, which includes remediation, was high, but we see a clear path towards Lloyds 2026 target of an efficiency ratio below 50%.
Lloyds announced a final ordinary dividend of 2.11 pence per share and a £1.7 billion share buyback program.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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