Lloyds Banking Group (LSE: LLOY) delivered first-quarter figures Wednesday, and they looked generally positive. But the Lloyds share price only moved a little, up 2.5% by mid-morning.
Chief executive Charlie Nunn said: “In February, we announced our ambitious new strategy, aiming to transform our business, generating a stronger growth trajectory and enabling the group to deliver higher, more sustainable returns and capital generation.“
The bank expanded on that in March, announcing a new business structure. It all sounds good, but it does bring with it significant uncertainty.
We have a bank restructuring itself, and doing so in a time of tough economic pressure and soaring inflation. I expect continued Lloyds share price weakness as a result.
Profit and impairments
The quarter saw a drop in post-tax profit, from £1.4bn to £1.2bn. But that’s largely down to a change in the bank’s impairment status.
The first quarter a year ago brought a net impairment credit, as cash set aside to cope with the pandemic started to flow back. This time we saw a net charge of £177m, stemming from the worsening economic outlook. But the bank does describe the impact as limited, and “offset by stronger house prices and unemployment.”
It does, however, illustrate one uncertainty facing banks for the remainder of 2022 and probably well into 2023. HSBC Holdings also reported credit impairment charges for its first quarter, and I expect the others to follow suit.
Before impairment charges, Lloyds’ underlying profit actually rose by 26% compared to the same quarter a year ago. And it’s up 78% on the final quarter of 2021.
It’s all about the dividend
For me, investing in Lloyds is all about the dividend. It’s provided me with some comfort for the years of watching the Lloyds share price go just about nowhere. For the dividend to improve in the coming year, I’m looking at a few key metrics.
One is earnings, and we saw first-quarter EPS drop 17%. Again, that’s partly down to the new impairment charges. But I see a strong possibility of further impairments in the coming quarters so, at the moment, I’m not overly optimistic regarding full-year earnings progress.
Still, the bank’s asset and liquidity situation looks more encouraging. Lloyds has upgraded its full-year guidance, and now expects a 2022 return on tangible equity of more than 11%.
Lloyds also reported a liquidity coverage ratio of 138%, up from 134% a year ago. As I see it, I’m looking at a solid underpinning for long-term cash generation and progressive dividends. But over the short to medium term, I’m seeing Lloyds facing yet another external economic onslaught.
Lloyds share price future
I think the keys to how 2022 will go for the Lloyds share price will lie in inflation and interest rates, and how soon retail price rises will start to slow. The property market is probably also vital, with Lloyds heavily involved in the build-to-let business and in UK mortgages.
I remain optimistic about both of those factors in the long term. So despite the current risks, Lloyds remains a hold for me.
