What the pro's say23 Feb 2023 18:48
Lloyds' Q4 results show many similarities with NatWest and Barclays. There is a headline beat for Q4 but guidance suggests net interest margins have already peaked. Accordingly, the outlook for return on tangible equity looks modestly below expectations. However, the capital return story remains with Lloyds declaring dividends and buybacks of up to £3.6 bln for FY22, equivalent to more than 10% of the market cap. We remain Neutral and see better value at Barclays (even discounting less consistent delivery) and stronger profitability at nearest peer NatWest.
Headline beat: Lloyds generated underlying PBT of £2.0 bln, up 21% yoy and 7% ahead of consensus. The result included a benefit of £230 mln relating to insurance assumption and methodology changes which are non-recurring suggesting a weaker result than the headlines suggest.
Revenue growth on higher interest rates: Revenue is up 21% yoy driven by higher net interest income (+26%) on better net interest margins (+65 bps yoy and +24 bps qoq to 3.22%) and loan book growth (average interest earning assets +1% yoy).
Solid cost control: Operating costs rose 7% due to higher investment spend but showing discipline versus revenue up 21%.
Loan losses pick-up: Lloyds took £0.5 bln of loan loss charges in Q3 which was a little worse than expected and included a further material charge in Commercial relating to a single case.
Puts and takes on guidance for FY23: Lloyds set out guidance for FY23 and expects to generate a return on tangible equity of 13% versus consensus at 14%. Driving this is a NIM of 305 bps (versus 322 bps in Q4 22 suggesting peak NIM may have passed), operating costs of £9.1 bln and asset quality ratio of 30 bps. This is weaker than consensus with regard to NIM (consensus at 315 bps) but with an offset on lower impairments (consensus at 35 bps) while costs are in line.
Capital return continues: The CET1 ratio is down to 14.1% (15.0% at Q3) but reflecting an additional pension contribution of £400 mln in Q4. Significantly, further variable contributions will likely not be necessary for 2023 and beyond. This leaves more of the capital generation (guided to 175 bps for FY23 and FY24, equivalent to £3.7 bln per annum or 11% of market cap) to be returned to shareholders. TNAV stood at 51.9p at year end, up 2.9p qoq.
The shares trade on a price to tangible book of 1.0x for a return on tangible equity of c. 13% over the next couple of years after 13.8% reported in FY21 (flattered by reserve releases) and 13.5% in FY22. This looks discounted but reflecting uncertainties with regard to the UK economy.
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