Lloyds boosts the dividend after another strong quarter

Unloved and underperforming, the Lloyds share price has fallen around 7% year to date, despite managing to move back to levels last seen in February 2020 in the early part of January this year.

Since those early peaks, the shares have slipped back, with the Russian invasion of Ukraine knocking the shares to one-year lows in March.

After an initial rebound above 50p, the shares have struggled, slipping back on a combination of concern over the economic outlook, and higher interest rates putting pressure on one of its key business areas, namely the housing market.

So far there has been no evidence of this, with a reluctance on the part of the markets to drive the shares higher, even though the bank is in an eminently stronger position balance sheet wise than it was before the pandemic when the shares were at the much headier heights of 60p.

It was expected that today’s Q2 numbers might have been challenged by the weakening economic backdrop, a factor that Lloyds recognised as a concern back in Q1, when they set aside £177m in impairment provisions.

These fears so far appear to be misplaced with Lloyds posting another strong quarter of revenues and profits.

The allocations of provisions are generally a prudent response in relation to possible impacts related to higher inflation and the cost of living, and the bank has gone further today in setting aside another £200m in Q2, pushing the total net underlying impairment for H1 to £377m.

Q2 statutory pre-tax profits came in at over £2bn, well above expectations of £1.71bn, and a decent improvement on Q1’s £1.6bn.

Lloyds also boosted its guidance on net interest margin to 2.7% and raising the return on tangible equity to above 11% and has managed to beat on both with today’s Q2 numbers, NIM rising to 2.87% in Q2, while the bank raised its outlook for return on tangible equity to 13%, from 11%.

Operating costs rose slightly to £2.15bn from £2.1bn in Q1, with the bank expecting to see total costs for the year of £8.8bn.

During the quarter, the bank saw an increase in loans and advances to customers of £4.3bn to £456.1bn, driven by modest increases in credit card balances and unsecured loans.

Customer deposits fell by £2.9bn to £478.2bn, driven primarily by a fall in commercial banking deposits. Current and savings account balances saw a slight increase in Q2.

There appears to be nothing in these numbers to suggest that the UK consumer is in significant financial distress now, despite the challenging economic outlook. Nonetheless management is right to remain cautious about the uncertainties facing the UK economy, while at the same time remaining optimistic about the full year outlook.

The bank also announced an increase in the dividend to 80p per share.