The Lloyds Banking Group (LSE: LLOY) share price hasn’t been my most profitable investment. I’ve had some good dividends, but I keep hoping for something to give the shares a boost.
Might H1 results, released 26 July, make a difference? Well, we saw profit grow nicely, boosted by high interest rates.
The bank reported a 14% rise in underlying net interest income, to £7,004m. And that helped towards a 23% rise in pre-tax profit, which reached £3,870m. Operating costs were up a bit too, but by a relatively small 6%.
Dividend boost
Earnings per share rose 26%, and Lloyds upped its interim dividend by 15% to 0.92p per share. If that keeps up, 2023 dividends could grow ahead of inflation. And that’s no mean feat.
How did the share price respond? Well, you can guess, can’t you? It fell 3% in early trading.
That’s a stock that’s already lost nearly 30% in the past five years, and is on what I think is a super-low valuation.
Beware impairments
It’s proving to be a weird year. High interest rates make for fatter net interest income. But mortgage defaults could make a dent in profits.
Lloyds took a £662m impairment charge in the half, up 76% from last year. That might not mean an actual loss, as it’s a reserve to cover the risk. And some of it might be credited back in the future.
But it does seem to be behind the price fall on the day. After all, Lloyds’ impairments are making it into all the financial headlines.
And, to be fair, it does highlight one of the risks of doing banking business in 2023.
Cautious optimism
I am, as always, upbeat about the long-term future of Lloyds Banking Group. Well, I wouldn’t have bought any shares if I wasn’t. But I don’t think the underlying outlook is quite as rosy as it might seem from these figures.
The thing is, inflation will fall and interest rates will dip along with it. And the high interest income enjoyed by the banks right now will surely drop back.
Leaving that out, I see other income up a more modest 7% in the half. That’s still fine, but total costs rose by 5% too. So this is really just steady progress, and there’s not a whole lot of change here.
Good value?
Even with static earnings though, I’d still rate Lloyds as a buy. Well, at least for long-term investors who are happy with the clear risks that financial stocks face in this climate.
I mean, we’re looking at a forecast price-to-earnings (P/E) ratio of only a bit over six, which is less than half the long-term FTSE 100 average. I know stocks should be valued more lowly when the risk is higher, but come on.
There’s a forecast dividend yield of 5.2%. But if the final dividend is hoisted by the same 15% as the interim, we could see more like 6% for the full year. That’ll do.
