The Lloyds share price lifts, then dips
On Thursday morning, the Lloyds share price briefly rose, peaking at 47.9p. However, the stock later lost its shine to close down 0.62p (-1.3%) at 46.16p. This was in spite of the bank raising its full-year targets as the UK economic outlook improves.
I see two sweet spots in the £32.8bn bank’s latest results. First, Lloyds is a giant in UK mortgages, accounting for roughly one in five (20%) home loans. With house prices hitting record highs, Lloyds is a winner from the booming housing market. The UK’s largest retail lender unveiled a £2bn pre-tax profit for Q2/21. This was £0.8bn — two-thirds (+66.7%) — higher than the average analyst forecast of £1.2bn. In Q2/20, the bank lost £676m, making this a huge turnaround. However, given the housing market is cooling, this may explain why the Lloyds share price declined today.
Second, Lloyds set aside huge sums in 2020 against expected credit impairments (loan losses). As UK vaccination numbers soar and the economy grows, the bank can free up some reserves. Lloyds released £333m of loan-loss reserves and this sum drops straight into the bank’s bottom line. If Covid-19 infections keep falling and UK growth continues, then more impairments could be reversed. Again, this might provide future boosts to the Lloyds share price.
Lloyds gets stronger
Two more improving metrics might also support the Lloyds share price. First, the bank’s return on tangible equity (ROTE) soared to 24.4% in Q2/21, versus 13.9% in Q1/21 and 5.9% in Q4/20. Thus, the group is making substantially higher returns from its asset base. Second, Lloyds’ common equity tier 1 (CET1) ratio — a key measure of its financial strength — increased to 16.7% at the end of June, versus 16.2% at the end of 2020 and 14.6% in mid-2020. This is well ahead of the bank’s 12.5% target and the regulatory minimum CET1 of 11%.
These improved results allowed Lloyds to restore its cash dividend, cancelled on the bank regulator’s orders last year. The interim dividend will be 0.67p, worth roughly £475m across nearly 71bn shares. Nevertheless, this is a long way from the total dividend of 3.21p paid for the 2018 financial year. Perhaps investors were hoping for a higher base dividend, with selling contributing to the decline in the Lloyds share price today?
I like the look of Lloyds
Looking forward, Lloyds expects a softer second half for 2021. It expect its full-year ROTE to be around 10%, while it anticipates a NIM (net interest margin; a measure of lending profitability) of around 2.5%. However, staff costs are expected to rise after the return of employee bonuses, cancelled in 2020 due to the pandemic.
Meanwhile, the Lloyds share price lies 8.7% below its 52-week high of 50.56p, hit on 1 June. Although the Lloyds share price is up more than a quarter (+26.7%) in 2021, there may be more to come. I don’t own Lloyds stock currently, but I’d buy LLOY at the current price as a pure recovery play. However, if the Delta and other Covid-19 variants continue to cause problems globally, or growth reverses, then I’d hesitate to invest in Lloyds and other British banks!
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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.