Lloyds (LSE: LLOY) shares are still down 17% from their 9 February high this year. I say ‘still’ for three main reasons.
First, it is one of the UK’s ‘Big Four’ banks. This means it has extremely strong solvency buffers to endure temporary economic setbacks that might come from continued high inflation.
Second, it is operating in a perfect interest rate environment for banks. UK interest rates are estimated to keep rising until at least the end of H1 2024. This means that banks’ net interest margin – the difference between earnings from loans and payouts for deposits – will continue to grow.
And third, it is a well-run business, with great growth plans and terrific rewards given to shareholders.
Drop below 50p looks unwarranted
Lloyds shares were trading above the 50p level before they were hit by rumours of difficulties at Silicon Valley Bank. This bank’s failure, and that of Credit Suisse later, raised fears in FTSE 100 of another general global banking crisis.
Yet these fears were unfounded as far as the major UK banks were concerned. After 2007, the Bank of England (BoE) pressured them to have core equity (‘CET1’) capital ratio requirements of over 10%. At the time of the SVB and Credit Suisse failures, Lloyds had a CET1 of 17.1%.
The Big Four’s resilience to financial crises is also regularly stress-tested by the BoE’s Prudential Regulation Authority. And after 2007, all these banks’ riskier trading activities were siloed away from their retail activities.
In its H1 2023 results, Lloyds additionally pre-empted the impact of any significant deterioration this year in its operating environment. This was done through a £662m impairment charge to cover potential bad loans arising from the UK’s cost-of-living crisis.
Even better figures predicted
The H1 results also showed pre-tax profit up nearly 25%, to £3.9bn compared to £3.1bn the same time last year. Net income also rose, by 11%, to £9.2bn. The return on tangible equity (ROTE) for the half was 16.6% against 11.8% in the same period in 2022.
This strong performance prompted Lloyds to upgrade its guidance for the remainder of this year. It now expects the net interest margin to be greater than 310 basis points and ROTE to be greater than 14%.
Even better news for shareholders was the announcement of an improved interim ordinary dividend of 0.92p per share. This is up 15% from 2022, which produced a final overall yield of 5.3%.
And it looks like things will become even better. Consensus analyst expectations are for dividends of 2.67p, 2.9p and 3.34p for 2023, 2024 and 2025, respectively.
If the share price stayed where it is now, the payouts would be 5.9%, 6.4% and 7.4%. This compares to a current average FTSE 100 yield of around 3.7% and forecasts next year of around 4%.
The key risk for me in the share price is that the UK economy deteriorates more than expected. This might lead to more bad loans in the bank’s portfolio.
However, I hold Lloyds shares and am seriously considering buying more. For me, the current and projected yields look great. And I also think the share price will recoup all this year’s losses and then extend these gains.
