Analyst Note| Niklas Kammer, CFA |
Narrow-moat Lloyds reported third-quarter statutory profit before tax of GBP 2.03 billion, comfortably beating consensus estimates collected by Lloyds of GBP 1.35 billion. Overall, the performance was good. Compared with the second quarter this year, net interest income increased 4% to GBP 2.85 billion. The net interest margin for the banking business increased to 255 basis points from 251 basis points last quarter. The structural hedge contributed positively (1 basis point) to the margin and given the current yield curve, is expected to continue to do so. As a result, Lloyds now guides for a net interest margin modestly above 250 basis points for the full year, having logged 252 basis points year to date. Operating costs were flat while loan losses remain benign, outperforming our expectations. Lloyds posted the third consecutive quarter of net loan-loss reversals. This allowed Lloyds to lower its guidance from below 10 basis points in loan losses to a net reversal for the full year. We revised our model based on third-quarter results, slightly updated guidance, as well as the improving interest rate outlook in the U.K. in the near term. This lifts our fair value estimate to GBX 68 per share from GBX 62 previously. Shares are undervalued.