Lloyds Banking Group shares rise as earnings smash estimates

Lloyds Banking Group (LLOY) shares were trading higher in early London price action today after the company reported better than expected first-half results.

Lloyds Bank reported a net income of £7.56 billion in the first half of 2021 which was 2% higher than what it had posted in the corresponding period in 2020. The metric was ahead of the £7.35 billion that analysts were expecting.

Lloyds Banking Group earnings were better than expected

Lloyds posted pre-tax profits of £3.9 billion in the quarter as compared to a pre-tax loss of £602 million in the first half of 2020. The bank’s pre-tax profit was also head of analysts estimates who were forecasting the UK’s largest mortgage lender to post pre-tax profits of £3.1 billion.

“During the first six months of 2021, the group has delivered a solid financial performance with continued business momentum, bolstered by an improved macroeconomic outlook for the UK,” said interim CEO William Chalmers.

Warren Buffett

There has been a considerable turnaround in banking and financial shares in 2021 amid the economic recovery. Lloyds shares are up over 36% for the year and are outperforming the markets by a wide margin. Notably, while the outlook for banking shares has improved, legendary value investor Warren Buffett has been selling banking shares. Berkshire Hathaway has exited JPMorgan Chase and Goldman Sachs. It has also almost sold its entire stake in Wells Fargo. The conglomerate held an almost 10% stake in Wells Fargo at the peak. Meanwhile, the Oracle of Omaha has added more Bank of America shares taking the stake above the self-imposed limit of 10%.

Lloyds earnings: key takeaways

Coming back to Lloyds’ first-half earnings, the lender reported a tier 1 capital ratio of 16.7% as compared to 14.6% in the corresponding period last year. It reported a banking net interest margin of 2.5% which was 9 basis points lower than what it had posted in the first half of 2020. Meanwhile, the bank reinstated its dividend and announced a dividend of 0.67 per share which was higher than what the markets were expecting. UK banks were barred from announcing dividends in 2020 as a prudent measure to shore up the balance sheet. Now, with the economic condition improving, the Bank of England has relaxed the restrictions.

Dividend restoration

Meanwhile, it advised banks to take a cautious approach towards shareholder payout. “We expect bank boards to be appropriately prudent in distributions they make both to their shareholders and to their staff, given the vital role that banks are going to play in supporting the recovery,” said Bank of England Deputy Governor Sam Woods.

Lloyds has reintroduced its progressive dividend policy. “Going forward, the Group will revert to paying any ordinary dividends half yearly, rather than quarterly, with the quantum announced with the half year and full year results. The Board believes this approach is appropriate in the current environment given its simplicity, environmental benefits and the additional flexibility it provides to the business,” it said in the release. The current dividend implies a yield of 2.8% which looks healthy and is almost double the S&P 500’s dividend yield.

Embark acquisition

Lloyds also announced the acquisition of Embark group for £390 million. Embark is a digital retirement group and manages £35 billion in assets and has almost 410,000 clients. “We are targeting a top-three position in direct-to-consumer self-directed and robo-advice business in the medium term.  We are also targeting a top-three position in the individual pensions and retirement drawdown market by 2025. The acquisition of Embark transforms our ability to achieve these objectives,” said the company in its release.

Lloyds also raised the guidance

After the impressive first-half earnings, Lloyds also raised its 2021 guidance and now expects a net income margin at 250 basis points which are in line with its first-half performance. It expects operating costs in the year to be near £7.6 billion while is forecasting a return on tangible equity of close to 10%.

“While we are clearly seeing positive developments and the macroeconomic outlook is improving, supported by the successful vaccine roll out in the UK and emergence from lockdown restrictions, the outlook remains uncertain,” said Chalmers on the company’s outlook.

Lloyds valuation

Lloyds reported a tangible book value per share of 55.6p which is below its current share price. Generally, for banks. A share price below the book value is seen as a sign of undervaluation. The shares trade at an NTM (next-12 months) PE multiple of 7.7x which is below the three-year average of 9.08x and five-year average of 9.03x. The shares look attractively valued looking at both assets based and earnings-based valuation multiples.

Lloyds share price forecast

According to the forecast estimates compiled by TipRanks, Lloyds has a median price target of 54.50p, which is a premium of 15% over current prices. Its highest and lowest target prices are 62p and 47p respectively. The shares trade only slightly above their street low target price.

Of the 10 analysts covering the shares, 7 have rated them as a buy or higher, while three analysts have a hold or equivalent rating. None of the analysts has a sell rating on the shares.

Lloyds shares were trading 1% higher at 47.29p at 9:45 AM London time today.