Lloyds Earnings: Net Interest Income Guidance Increased Slightly, but Outlook Remains Complex

Narrow-moat Lloyds LLOY reported second-quarter underlying operating profit before tax of GBP 1.82 billion, down from GBP 1.91 billion a year ago. The performance was nevertheless decent as net interest income and other income more than offset higher operating expenses due to investments and inflation. We maintain our GBX 77 per-share fair value estimate and narrow economic moat rating.

Lloyds’ complex NIM outlook, which we highlighted in the first quarter, has started to play out and will likely continue through the remainder of the year. Further base-rate increases by the Bank of England support NIMs, but are being offset by Lloyds passing on rate benefits to depositors. In the second quarter, Lloyds saw GBP 2.7 billion in current accounts that left and GBP 2.1 billion in savings that joined. That said, the deposit dynamics were not as negative as feared by Lloyds previously, resulting in the bank lifting its full-year guidance for its NIM to above 310 basis points from above 305 basis points last quarter. The challenging mortgage market acted as a headwind, but was offset by a gradual increase in the structural hedge and remains a core assumption of this guidance. Having achieved a 314-basis-point NIM in the second quarter and 318 basis points in the first half suggests a modest decline in the NIM for the remainder of the year. Although the NIM has started to shrink again, margins should remain well above those in prior years, supporting profitability and shareholder distributions.

The asset quality ratio of 36 basis points in the quarter was slightly above the guidance of 30 basis points for the full year due to higher expected losses from an increased base-rate outlook in the U.K.