Lloyds (LSE:LLOY) shares rebounded in February and March, but stayed just about flat in April. Why was this?
Results disappoint
Lloyds, Britain’s biggest mortgage lender, whose subsidiaries include Halifax and Bank of Scotland, reported earnings on 24 April. Analysts had forecast profits of £1.7bn for the quarter, but earnings came in a little lighter.
Profit before tax for the first three months of 2024 was £1.63bn, down considerably from the £2.2bn recorded a year earlier. The main reason for this change was lower net interest income, amid increasing competition in the mortgage market, and higher business costs. This including £100m of additional charges to cover severance pay after a recent round of layoffs.
Another reason for the higher business costs was the new sector-wide Bank of England levy on lenders. Lloyds noted in the Q1 report that “this annual levy of c.£0.1bn was charged through operating expenses in the first quarter and will have a broadly neutral impact on profit in 2024“.
One positive on the cost side was impairments. The market was quite shaky about impairments last year — in fact, it was shaky on any bad news. Impairments came in at £70m, a huge improvement on the three months ended 31 March 2023 when it was £246m. Impairments are related to losses on recoverable assets. In this case, it’s often associated with customer defaults on debt.
Running low on momentum
Lloyds’ bull run appears to be running low on momentum. The stock surged in February and March, but it’s now trading closer to its fair value. Establishing fair value’s never easy, so here are two indicators.
Firstly, Lloyds’ average target price is 60.3p, which is a 16.8% premium to the current share price. British stocks tend to trade at a discount to their average share price targets, primarily because investor sentiment isn’t as strong here as it is in the States. This 16.8% is an attractive discount, but it’s a lot smaller than it was three months ago.
Secondly, Lloyds is trading around 7.5 times earnings and eight times forward earnings. That broadly puts it in line with its UK peers, but at a discount to American peers. The discount to the latter is around 33%, but that doesn’t mean the stock should be trading 33% higher.
The big issue with this US/UK valuation gap is Britain’s slower economic growth than in the US, and banks are cyclical. But just how big should that discount be? That’s the question.
The bottom line
Lloyds shares gained just 1% in April because momentum slowed as the stock got closer to its average share price target, and because the earnings report for Q1 just wasn’t that strong.
Nonetheless, I’m still pretty bullish on it for the long run. I hold plenty of the stock, and I would buy more. But I just think there’s better value in other sectors.
