Higher Base Rates Are a Boon for Lloyds in First Half and There Is More To Come; FVE Raised

Narrow-moat Lloyds reported first-half underlying profit of GBP 3,746 million, versus a consensus estimate of GBP 3,401 million collected by the bank prior to the release. Income generation was strong, up 12% versus the same period a year ago. Higher base rates set by the Bank of England as well as the upswing at the long end of the yield curve have widened net interest margins at Lloyds significantly, forming the strongest tailwind since the beginning of the year. Gaining confidence from these results as well as an outlook of further rate increases over coming quarters, Lloyds again lifted its NIM guidance to above 280 basis points from above 270 basis points in the first quarter. We had anticipated a more gradual benefit at the beginning of the rate-hike cycle, but have now adjusted our NIM assumptions upward. As a result of these changes, as well as time value of money since our last model was updated, we raise our fair value estimate to GBX 77 per share from GBX 68 previously. We believe Lloyds’ shares are attractive at current levels.