Lloyds Banking Group – Positive Trends Bode Well For Future Returns

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Lloyds Banking Group PLC (LON:LLOY)’s half year underlying net income rose 12% to £8.5bn, largely driven by a 13% increase in net interest income. Lloyds is benefitting from higher interest rates and continued recovery in customer activity.

The group incurred a £377m impairment charge relating to a low observed performance charge, as well as a £95m adjustment to the assessment of the economic outlook. Additional risks include the effects of higher inflation and interest rates. Including this non-cash impairment charge, underlying profit fell 2% to £3.7bn.

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Overall, Lloyds believes its portfolio is “well-positioned in the context of cost of living pressures”, and has upped full year guidance. Banking net interest margin (the difference between what a bank earns in interest on loans and the amount it pays in interest on deposits) is now expected to be over 2.8%.

The Board has declared an interim ordinary dividend of 0.8p per share

The shares rose 4.1% following the announcement.

Lloyds Banking Group's Earnings

Sophie Lund-Yates, Equity Analyst at Hargreaves Lansdown:

Lloyds has stepped onto the half-year court fighting. Half year results show a serious improvement in net interest income, as rate rises and accelerated UK consumer activity boosted performance, with the difference between what Lloyds earns in interest on loans and the amount it pays in interest on deposits, moving in its favour.

Impairment charges look large on paper but were in fact rather benign in nature. This, combined with the improved efficiency profile bodes well for future returns. The framework is set for much improved profitability too, which increases the chasm between expectations and the group’s valuation, potentially setting the scene for further buybacks.

The mortgage book swelled over £3bn, as the UK’s buoyant property market helped the domestic-facing banking group. As a long-term trend this should be viewed as a strong asset, but it’s worth remaining mindful that a sharp economic shock may will take the heat out of mortgage brokering in the medium-term.”

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