On Wednesday (25 October), Lloyds (LSE:LLOY) shares were particularly volatile as investors struggled to interpret Q3 results.
Now at 41p, the banking stock is down 5% over 12 months.
While that might not sound terrible, it’s worth remembering we were coming from a low base a year ago — Liz Truss’s ill-fated premiership had just come to an end.
But if we’re looking from the beginning of 2023, we can see the stock is down 12%
So, if I’d invested £1,000 in Lloyds stock on 2 January, today I’d have £880 plus dividends. I’d have received around £50 in dividends. So, I’d be down £70 over the period.
Earnings
Lloyds shares sit in a fairly lowly position right now. In fact, now is the cheapest they’ve been for all year. And that doesn’t seem overly fairly considering the strength of the company’s earnings.
Lloyds, the parent company of Halifax and Bank of Scotland, posted pre-tax profits of £5.73bn for the nine-month period ending September.
Moreover, pre-tax profit for the three months to 30 September soared to £1.86bn. That was up £576m on a year earlier, slightly higher than the bank’s own compiled estimates of £1.8bn.
Profits were driven by higher interest rates, with the net interest margin (NIM) coming in at 3.08% for the quarter, slightly lower than expected. Interest income reached £13.7bn during the first nine months of the year, a 7% rise compared to the previous year.
Positive signs
The NIM for the first nine months of year was 3.15%, up from 2.84% in the same period last year. But the 3.08% reading in Q3 suggests that interest margins have peaked. This seemed to be the overriding commentary immediately after the results came out on Wednesday.
However, when we look beyond that, as the market did on result’s day afternoon, the outlook appears a lot more positive. One particular plus point was falling debt allowances. The underlying impairment charge for the quarter fell to £187m from £668m.
That’s very important as analysts, for most of the year, have been worrying about a slew of defaults that could spell chaos for the banking sector. To date, there’s no signs of this happening,
Moreover, the bank says its customers are coping well with higher borrowing rates. Although it’s worth noting that Lloyds’ typical mortgage customer has an annual income of £75,000. This is far above the UK average and offers a cushion against higher interest rates and the cost-of-living crisis.
Of course, it’s hard to forecast what will come next in the current climate. Lloyds expects house prices to continue falling in 2024, possibly causing potential homebuyers to postpone their purchases. In turn, this wouldn’t be good for the loan book.
Nonetheless, I remain optimistic that the worst-case scenario has been avoided and that higher, albeit moderating, interest rates will provide a tailwind throughout the medium term. And at 5.5 times forward earnings, I’m looking to increase my position.
