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Lloyds share price: 5 things to look out for in its Q1 results

Investors are expecting good things from Lloyds, a lender that has focused on cost-cutting and strengthening its profit margin to drive a recovery in its share price ahead of its Q1 earnings.

Lloyds Source: Bloomberg

Lloyds will release it Q1 trading update on Thursday, with investors expectations high after the bank continues to focus on reducing expenditure and improving its profit margin in a bid to recovery the ground its share price has lost.

Lloyds earnings guidance

The lender is expected to report earnings of 2p a share on Thursday, representing a 0.1% decline over the year, while revenue is expected to also fall by 1.5% to £4.5 billion.

It is worth noting that the bank has beaten earnings estimates in six of the last eight quarters and in seven of the last eight for revenue.

Can Lloyds maintain its margin?

UK lenders have had to contend with a particularly challenging banking environment, plagued by a myriad of macroeconomic headwinds which have hampered returns.

However, Lloyds has seen its net interest margin recover and find its footing at 2.9% after focusing its attention on reducing costs which helped the bank to bring its spending targets forward to the full-year 2018 results, exemplifying the progress that it has made in recent years.

PPI provisions continue to wind down

Investors can breathe a sigh of relief now that the bank’s payment protection insurance (PPI) pay-outs have diminished, falling from a peak of almost £4 billion back in 2015 to around £0.7 billion in 2018, with that number expected to fall again this year.

Total provisions for PPI by the end of 2018 were almost £20 billion for Lloyds alone, marking one of the most remarkable transfers of capital from institutions to ordinary consumers, and arguably a more effective form of monetary stimulus than the Bank of England’s (BoE) quantitative easing (QE) programme.

Cost-cutting remains vital to profitability

Over the last four years, Lloyds has cut its interest expenses on deposits by more than 60% and slashed debt securities by more than 45%. This cost-cutting measure has played an important role in helping the lender return to profitability and restore its dividend pay-out to shareholders.

Investors will be interested to see how the bank plans to make further reductions in expenditure to ensure the bank’s balance sheet remains healthy.

Many of the lender’s customers have been moved to current accounts from savings accounts, reducing the amount the bank is forced to pay in interest.

However, more than 33% of Lloyds deposits are still in savings accounts, indicating that there is still cost-savings to be made.

Brexit looms large over Lloyds

The UK financial services sector continues to be plagued by the uncertainty surrounding Brexit, with a hard exit still a possibility and no clarity over Britain’s future trading relationship with Europe likely until nearer the new October 31 deadline.

But if Lloyds continues to reduce costs and improve its net interest margin, while exhibiting good risk management with regards to lending the bank could weather the Brexit storm.

Low loan-to-value rates on its large mortgage book will help insulate the bank from a downturn in the housing market, while credit quality has remained solid in both mortgages and credit cards.

At 8.1 times forward earnings, Lloyds is still around one standard deviation below the five-year average of 9.1, and well below the peak of over ten times forward earnings seen in early 2017. The five-year low of 6.6 times forward earnings seen at the end of 2018 provided an attractive entry point, and the shares have duly rallied.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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