Rising rates and slow growth squeeze Lloyds
Lloyds Banking Group, which embraces Bank of Scotland, Halifax, Scottish Widows and Embark, saw its annual figures hit by a combination of rising interest rates and a slowing economy.
The bank raised its dividend despite posting flat attributable profit of £6.9 billion, just £26 million higher than 2021. A 14% rise in net income to £18bn for the year to the end of December was offset by mounting bad loan provisions.
Underlying profit before impairment was up 46% to £9bn in the year (with £2.4 billion in the fourth quarter), as a result of solid net income growth.
The board has recommended a final ordinary dividend of 1.6p per share, resulting in a total for the year of 2.4p, up 20% on the previous year, and in line with the group’s policy. The bank announced a share buyback worth up to £2bn.
Chief executive Charlie Nunn said the group had produced a robust financial performance.
“We believe our strategy will create higher more sustainable returns, as reflected in our
enhanced guidance and are excited about the opportunities ahead,” he said.
Russ Mould, investment director at AJ Bell. said: “Shouldn’t the banks be doing better this earnings season? Rising interest rates are usually a cause for celebration in the industry but instead of striking up the band the sector has just left investors feeling rather flat.
“Lloyds is just the latest name to disappoint the market. The problem is that rates are rising at a time when the economy is slowing, a somewhat unusual situation reflecting the exceptional inflationary pressures facing central banks.
“This means that while higher rates are boosting profit in the short term, they are creating a situation whereby lots of businesses and consumers are struggling to pay their debts.
“A key feature of Lloyds’ latest update is the need to put aside more money to cover bad loans, with the bank already seeing modestly increased signs of stress out there.
“The numbers themselves were broadly in line with what had been forecast, though updated medium-term guidance will likely disappoint the market given it falls short of what its closest lookalike – NatWest – is promising in terms of returns.
“Lloyds is facing its own pressures on costs, although the company remains confident in its ability to keep rewarding shareholders with generous dividends and share buybacks. Given a sketchy track record and an uncertain outlook this may not be enough to secure the patience of investors.”
John Moore, senior investment manager at RBC Brewin Dolphin, said: “Lloyds has finished off the major UK banks’ results season with a performance that is 80% NatWest and 20% Barclays.
“Profits have been flat year-on-year, with bad loan provisions adding extra costs, among other moving parts. The bank has a history of prioritising its dividend, which is up 20% on last year, and acts as a good indicator of sentiment from management.
“Alongside the dividend increase is a £2 billion share buyback programme, underpinned by enhanced guidance for the years ahead – all of which suggests a relatively positive outlook for Lloyds.
“The bigger question, though, is what Lloyds will do with its existing portfolio of businesses – while there are no answers on that front today, updates will likely be a feature of future statements.”