Strong Q3 Earnings from Lloyds Banking Group (LSE), But Share Price Fails to Rise

Highlights:

• Lloyds reported Q3 pre-tax profits of £1.8 billion, beating forecasts of £1.6 billion.
• Net interest margin (NIM) for the quarter was 2.95%, slightly ahead of expectations.
• The bank maintained its full-year guidance despite strong quarterly performance.

Lloyds Banking Group PLC (LSE:LLOY) delivered third-quarter results that surpassed market expectations, yet its share price saw minimal movement. Despite solid earnings and a stable outlook, the bank’s stock remained steady, reflecting market conditions and tempered expectations following a period of strong gains.

For those following Lloyds closely, this lack of share price reaction was not unexpected. While the bank posted robust figures, there was no upward revision of its full-year guidance, which may have limited any significant market reaction. Additionally, after adding around £8 billion, or 28%, to its market capitalisation in recent months, the stock appears to be priced in line with current market expectations.

Earnings Beat Expectations

Lloyds, the UK's largest lender, reported pre-tax profits of £1.8 billion for the third quarter, beating analysts’ forecasts of £1.6 billion. Although slightly lower than last year’s £1.9 billion, the results were commendable given the challenging economic backdrop, including falling interest rates.

The bank’s ability to maintain a higher-than-expected net interest margin (NIM) was key to its strong performance. Lloyds used its "structural hedge," a financial strategy to manage interest rate fluctuations, to keep the NIM at 2.95%, up from 2.93% in the previous quarter and ahead of market predictions.

John Moore, senior investment manager at RBC Brewin Dolphin, commented on the numbers, noting that while interest rates are on a downward trajectory, Lloyds has managed to maintain solid performance despite the ebb and flow of market conditions.

Lloyds' underlying profit was 11% higher than consensus forecasts, and pre-provision profits were 4% ahead of expectations, supported by lower-than-anticipated impairment charges. Credit quality also remained strong, with analysts highlighting the resilience of Lloyds' loan book.

Strong Credit Quality and Profit Margins

UBS analysts pointed out that net interest income was 1% ahead of expectations, while the NIM slightly outperformed forecasts. Broker Jefferies also highlighted the margin and non-interest income as key strengths, especially considering the impact of the recent base rate cut.

Shore Capital’s Gary Greenwood noted that credit quality remained stable, while Lloyds’ capital generation continued to be strong, further supporting the bank’s financial health.

However, despite these positive figures, Lloyds chose to keep its full-year guidance unchanged. This decision may have dampened any significant share price movement, as investors had hoped for more optimistic forward guidance.

Looking Ahead

For 2024, City analysts are forecasting pre-tax profits of just under £6.2 billion, with earnings per share (EPS) of 6.3p. Greenwood, however, remains more optimistic, forecasting £6.6 billion in pre-tax profits and EPS of 6.8p. He noted that his forecasts do not account for any potential additional provisions related to the Financial Conduct Authority’s review into discretionary commission payments.

Two key uncertainties remain for Lloyds: the potential fallout from mis-sold Personal Contract Purchase (PCP) loans through its Black Horse motor finance division, and the bank’s long-term strategic direction. Investors are awaiting clarity on Lloyds’ growth plans and how it will navigate these challenges.

In summary, Lloyds’ Q3 results provided reassurance to investors with strong lending growth and stable margins, but the lack of upward revisions to guidance and lingering uncertainties kept the share price flat.