Lloyds Beats Expectations as Higher Interest Rates Flow Through

Narrow-moat Lloyds reported a good first quarter with underlying profits before impairment of GBP 1,962 million, 14% ahead of the consensus estimate collected by the group itself prior to its earnings release. Net income generation was strong in the quarter with net interest income as well as other income up 10% and 11% respectively. We anticipated that Lloyds should fare well in a higher interest-rate environment, but incorrectly expected benefits to materialize at a slower pace. The banking net interest margin, or NIM, increased to 268 basis points in the quarter from 254 basis points at the end of last year. This was ahead of the 262-basis-point consensus estimate, but also beat Lloyds’ previous full-year guidance of above 260 basis points. Lloyds now expects its NIM for the full year to come in above 270 basis points. The flip side of higher interest rates and margins is a normalization of loan losses from reversals over the past quarters and also heightened uncertainty around asset quality as rates move up. That said, we believe Lloyds will be a net beneficiary of the rate hike cycle. We maintain our GBX 68.00 per-share fair value estimate.