Adding to the buoyancy of this earnings season, Lloyds Bank (LSE: LLOY) too posted a healthy first quarter update. Investors are clearly happy. The Lloyds share price is up by 4% this morning, making it the biggest FTSE 100 gainer in today’s trading so far.
The Lloyds share price stands at 45.4p as I write, the highest in over a year. If the momentum built up by its latest numbers continues, I reckon it is only a matter of time before it goes back up to its pre-market crash levels of 50p.
Since January 2021 alone, the Lloyds share price has risen by over 10p, which shows that it is possible in a matter of months, if not less.
Why the Lloyds share price can keep rising
The key, however, is that share price momentum should continue. I think there are three reasons it can.
#1. Profits rise: Lloyds Bank’s net profits came in at £1.4bn this quarter, which is a 191% increase from the same quarter last year. This is because of betterment in its bad debt provisions. It actually has a £323m impairment credit this quarter, compared to a £1.4bn provision in the first quarter of 2020.
This is disappointing since the improvement in Lloyds Bank’s health is not because of improved business, but because it think it is now more likely to be repaid loans than before. But I think even just this fact is a positive, considering the economic slump recently seen in the UK and the fact that we are still not past the pandemic.
#2. Positive outlook: The bank also sounds quite bullish in its outlook. It expects lower operating costs, which is positive for future earnings. It also expects better asset quality, which is in line with its optimistic stance on bad debts now.
#3. Supportive economy: Lloyds Bank’s bullish outlook is based on a robust economic outlook. In its own projections, it expects the UK economy to grow by 5% in 2021 and 2022 as the base case, which is encouraging. This should help in a pick up in loans, an improvement in interest income, and a better bottom line, without the help of impairment charges.
The downside to the FTSE 100 stock
However, I think downsides to the Lloyds Bank share price need to be considered too. Even though I think impairments are a valid reason for a profits boost, I looked at the bank’s performance before these were factored in.
To do this, the trading surplus was considered, which is the net income less costs. The number comes in at £1.7bn, which is actually 12% less than during the year before. It is still 21% higher than last quarter, to be fair. But overall, the earnings story looks less impressive by this measure.
Also, the bank says nothing material on dividends, a big reason the Lloyds Bank share was attractive earlier.
My verdict
I would wait for another quarter to really know how things look for the share and indeed, the UK economy.
