Lloyds Earnings: Uneventful Quarter as Net Interest Income Outlook Remains Complex

Narrow-moat Lloyds LLOY reported first-quarter underlying profits before impairment of GBP 2.463 billion, up 13% on a sequential basis. Returns on tangible equity of 19.1% stood out positively on an otherwise uneventful quarter. We maintain our GBX 77 per share fair value estimate.

Net interest income of GBP 3.525 billion on an underlying basis came in 3% below the quarter-ago period, as the banking net interest margin, or NIM, remained flat at 322 basis points and average interest-earning assets were broadly stable. Continued benefits from base rate increases widening deposit margins and the structural hedge were nearly entirely offset by weaker product margins on mortgages. Reiterated guidance of a net interest margin above 305 basis for the full year, deposit repricing, and further headwinds on mortgages in the second quarter suggest that NIM has likely peaked in the first quarter. That said, the structural hedge should continue to support NIM through the year and given further base rate increases by the Bank of England—markets currently expect rates to peak at about 5%—deposit margins should give further support, albeit at a lower rate as Lloyds will have to pass on part of the rate increases to depositors. Overall, the NIM outlook remains complex for Lloyds, as it does for its U.K. peers.

Underlying impairment charges of GBP 243 million, or 22 basis points, were below full-year guidance of 30 basis points. Deposits declined 0.5% in the quarter, driven by retail customers (down 1.4%). Deposits of commercial customers on the other hand increased 1.6%. Overall, Lloyds has a solid deposit base, and, important given the recent stress emanating from U.S. regional banks, has 57% of its total deposit base insured.