James Gard: Welcome to Morningstar. Making another appearance as stock of the week is Lloyds Banking Group. While the worst of March’s banking turmoil may be over, the aftershocks are continuing, as we see from First Republic’s collapse at the weekend.
That may partly explain some of the cautious responses to UK bank results in recent days. At the moment the market is tending to focus on the negatives even as the headline numbers are broadly positive. In this earnings season, investors want some surprise good news and Lloyds and NatWest haven’t served up any. On the surface, Lloyds’ first quarter figures were encouraging. Quarterly profits were up 46% on last year at £1.5 billion, net interest income was up 19% at £3.5 billion on a year ago.
It reiterated its full-year guidance but warned that net interest margins are likely to soften this year. Lloyds is also an income stock yielding over 5% and its final dividend is due to be paid on May 23. Its outlook on the UK economy was more sobering. As the UK’s biggest lender, it’s not exactly optimistic about the UK housing market in the coming quarters, predicting chunky declines until late 2024, and a rise in the unemployment rate to 5%. Its commercial property forecasts are even more bearish. The bank also expects a modest recession this year.
On flipside, Lloyds is forecasting a fall in inflation to 3% from next year and for the Bank of England to start chopping rates from next year. This is all consistent with what we know already about the current state of the UK economy. Lloyds is a “pure play” on the UK and that’s been an advantage in the recent turmoil, which has so far affected Swiss and US banks. But the UK has its own problems, facing weak growth, persistently high inflation and a potential change of government next year. So far the consumer is holding up OK but it feels like the hard work is still ahead of us.
For Morningstar, I’m James Gard.
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