James Gard: Welcome to Morningstar. So, bank earnings season is in full swing. So, our latest stock of the week is Lloyds. The bank has just put out half year results, and the shares rose nearly 5% after the news. In simple terms, rising interest rates are good for banks because they get paid more for lending money. But bank results themselves are often confusing with talk of impairment charges, net interest income and return on tangible equity.
So, let’s stick to the basics. Half year profits were down on 2021 levels because of losses set aside for loan defaults. But the dividend is up 20% on last year and the shares yield nearly 5%. Full year profits are expected to be around £6.6 billion but could be revised higher. Lloyds is also one of the cheapest of the big four banks with the price to earnings ratio of around 7.5.
Lloyds is seen as a bellwether for the UK economy. So, are there any signs of the gathering storm that experts are predicting? Well, loans to customers including mortgages, credit cards, overdrafts, and car loans are only 1% higher than this time last year, and this suggests that borrowers are not exactly piling up on debt during the cost-of-living crisis. In fact, Lloyds notes that customers are actually increasing their savings rates and there is talk of resilience.
There is a sense though that banks are in a sweet spot before things take a turn for the worst economically. According to Morningstar analysts Lloyds has a fair value of around 68 pence per share but are currently trading around 45 pence per share after a share price fall of around 10% this year.
For Morningstar, I’ve been James Gard.