Lloyds Banking Group (LSE: LLOY) released its 2022 full-year results earlier today. At first, investors pushed down the share price, with Lloyds shares hitting a low of 49.44p. However, as the day wore on, this popular and widely held stock bounced back.
Lloyds’ profits may have peaked
I think investors’ initial disappointment was probably triggered by news that margins and profits at the high-street lender may have topped out.
In the final quarter of last year, Lloyds’ pre-tax profits came in at £1.8bn. This was almost 80% higher than the figure for the last quarter of 2021. This number was boosted by revenues that leapt 20% year on year to £5bn. So far, so good.
Now for the bad news. First, Lloyds forecasts that its net interest margin (NIM) — the spread between its lending rates and saving rates — will decline slightly.
In the fourth quarter, the bank’s NIM hit 3.22%, up from 2.57% at the end of 2021. However, the Black Horse bank expects this to slip to over 3.05% in 2023, behind analysts’ expectation of 3.15%.
Second, Lloyds is setting aside higher reserves to offset bad debts and loan losses. With the UK economy on the brink of recession and consumer confidence low, it’s no surprise that more borrowers will struggle in 2023.
Hence, Lloyds set aside £465m in loan provisions for Q4, well above analysts’ forecasts of £380m. In Q4/21, the group actually reversed £532m of loan reserves. There’s a £997m swing in Lloyds’ bottom line right there.
Lloyds gives shareholders £3.6bn
Of course, being one of the UK’s biggest banks while our economy is looking weaker by the day is hardly ideal. Even so, I was a little surprised by the 3% fall in the Lloyds share price this morning.
What struck me as an existing Lloyds shareholder is the bumper returns the bank is funnelling to its owners. First, the group unveiled a £2bn share buyback, equivalent to retiring almost 5.8% of its existing share base. And reducing the number of shares in issue adds support for the future share price.
Second, Lloyds announced a 1.6p final dividend per share. Adding the 0.8p interim dividend takes the full-year cash dividend to 2.4p. This means that Lloyds will pay out over £1.6bn in hard cash to shareholders. Nice.
Lloyds shares look cheap to me
At the current share price of 51.25p (up 0.5% today), Lloyds is valued at £34.6bn. Therefore, its £3.6bn payout to shareholders works out at over 10.4% of its market capitalisation. To me, that’s a fantastic return for owning this ‘boring’ FTSE 100 value share.
What’s more, Lloyds shares still look inexpensive to me. Their price-to-earnings ratio of 8.5 translates into a healthy earnings yield of 11.8%. Also, their dividend yield of 4.7% a year is covered a solid 2.5 times by trailing earnings. That’s a decent margin of safety.
Finally, though Lloyds shares trade close to their 52-week high of 54.33p, I’m tempted to buy more shares in the bank. However, I will have to wait until the start of the 2023-24 tax year on 6 April!
