Good Fourth Quarter for Lloyds, but Lower NIM Guidance in Focus

Narrow-moat Lloyds LLOY reported fourth-quarter underlying profits of GBP 1,973 million ahead of consensus expectations of GBP 1,847 million. Despite these good results, focus revolved around lower net interest margin guidance for 2023. We maintain our fair value estimate of GBX 77 per share.

Similar to its U.K. peers, Lloyds lowered expectations on further sizable net interest income gains in 2023. Guiding for a net interest margin above 305 basis points for the full year versus a fourth-quarter 2022 NIM of 322 basis points, the bank anticipates multiple headwinds this year after benefiting immensely from higher rates in 2022. While the structural hedge is expected to remain a significant benefactor for Lloyds over the medium term, the nature of maturities rolling onto higher yields only slowly and gradually means that short-term dynamics will weigh on NIM in 2023. In particular mortgage book refinancing and deposit repricing is expected to chip away at Lloyds margin, as short-term mortgages roll over onto lower product margins versus two years ago and depositors become more rate sensitive as inflation stays high and base rates are elevated.

Operationally, Lloyds had a good fourth quarter. Net interest income increased to GBP 3,643 million from GBP 3,394 million a quarter ago. The net interest margin grew 24 basis points to 322 basis points on a virtually flat average interest-earning banking assets base. Operating costs increased to GBP 2,399 million, up 10%, which partially includes investments Lloyds is making in an effort to diversify its income stream and lower its cost basis structurally, building toward a more profitable bank by 2026. Loan impairments of GBP 465 million, or 38 basis points, were driven by weaker macroeconomic assumptions filtering through Lloyds’ risk models.