I expected the Lloyds Banking Group (LSE: LLOY) share price to gain some ground after H1 results on Thursday (25 July).
But I was disappointed to see only a 1.6% rise on the day. And that’s even though the results were better than expected.
Lloyds shares are still up 25% so far in 2024, but that’s nothing compared to the huge 65% surge we’ve seen from NatWest Group.
Interim results
Profit before tax in the first half fell from last year. But while market analysts had expected a profit before tax of £3.2bn, Lloyds beat it by posting £3.32bn.
Still, the fall is partly down to a drop in the bank’s net interest margin, which fell to 2.94% from 3.18% a year previously.
According to the pundits, we could be looking at a 50% chance of a base rate cut when the Bank of England next meets to discuss it, on 1 August.
A drop should cut into the banks’ net interest further. And that might well be the reason behind the lacklustre response to these results.
What next?
But what about the outlook for Lloyds, and what might it mean for the future of the share price?
At the halfway stage, the bank confirmed its 2024 guidance, aiming at a return on tangible equity (ROTE) of about 13%. And it wants to get its CET1 ratio, a key liquidity measure, to around 13.5%.
Then by 2026, the ROTE target is set at more than 15%, which would be a solid gain. But we shouldn’t expect to see progress with CET1, set to drop a bit to about 13%.
These would be pretty solid results, not even close to suggesting any liquidity problems. And the CET1 target is way better than the minimum regulatory requirements.
Valuation
Forecasts have the price-to-earnings (P/E) ratio at 10 for the current year. The FTSE 100’s long-term average is about 50% higher than that.
With today’s financial uncertainties though, that might be fair value on this year’s earnings. But forecasts show earnings per share (EPS) rising by 40% between 2023 and 2026, albeit with a dip this year. The 2026 P/E would be down around 7 if they’re right.
In the short term, I think many will see today’s share price as high enough for now. And until this year pans out, and the expected profit fall is behind us, investors might not want to put too much into Lloyds.
The interest margin threat hangs over it too.
The forward dividend yield dip to 4.6% due to the price rise we’ve already seen also takes away some of the attraction. At least until we see it rising again, after the final 2024 payment is out of the way.
Future
So, I fear a flat second half for Lloyds shares. But the top end of brokers’ price targets suggests around 71p, for a gain of 18% on today’s price.
I can see that as a decent possibility, at least in 2025 if perhaps not this year so the stock could be worth considering.
