Lloyds Earnings: Stable Deposit Volumes Reflect Lloyds’ Franchise Strength

Narrow-moat Lloyds LLOY reported third-quarter underlying profits before tax of GBP 2.022 billion, up 22% from the same period a year ago. Underlying profits before impairments and tax of GBP 2.209 billion versus GBP 2.328 million a year ago paint a clearer picture of Lloyds’ performance as the banking group booked material macroeconomic scenario adjustment-driven impairments last year. Income development was up 1%, with net interest income growing 1% and underlying other income growing 11%. However, this was more than offset by 7% higher operating expenses. Asset quality stood out positively at just 17 basis points in the quarter versus 25 basis points year to date. Lloyds now expects loan impairments below 30 basis points for the full year. We maintain our GBX 77 per share fair value estimate.

Customer deposit movements stood out positively to us. We had been expecting Lloyds to fare better in the current interest-rate environment due to what we see as the leading banking franchise in the U.K. While Lloyds cannot entirely shield itself from having to pass through higher base rates to depositors, its deposit development has been more beneficial relatively speaking to Barclays, which reported results earlier. Customer deposits declined 1.1% year over year but were virtually flat sequentially. As a result, Lloyds maintained its net interest margin guidance. The shift from current accounts toward savings, weaker product margins, but a positive contribution from the structural hedge are also driving Lloyds NIM performance and outlook, but we anticipate Lloyds to perform better on the funding side on a relative basis.