The Lloyds (LSE:LLOY) share price dropped on Thursday (25 July) following the company’s results for the first half of the year.
These results and the reaction are always up for interpretation, and Lloyds’ results were actually rather strong — better than expected.
However, the market’s on a bearish trend. The FTSE 100‘s down, and so are all major indexes around the world. Any sign of weakness is being exposed by the market.
Beating estimates
A lot of the headlines may highlight that Lloyds’ earnings have fallen over the previous year. But we knew that already. The bank actually beat estimates.
Lloyds was one of several UK retail banks that saw earnings surge in 2023 as the Bank of England rapidly put up interest rates to stem rising inflation.
However, for the first half of this year, the group, which owns Lloyds Bank, Halifax, Bank of Scotland, and Scottish Widows, reported a pretax profit of £3.32bn.
While this is down from £3.87bn in the same period last year, the bank’s H12024 earnings exceeded analysts’ expectations of £3.2bn.
The bank’s net interest income (NII), the difference between what it pays savers and what it charges borrowers, fell by 10% in the first six months of this year to £6.3bn.
The all-important net interest margin (NIM) fell to 2.94%. That’s lower than last year, but way ahead of where it has been over the previous decade. Operating costs also rose by 7% to £4bn.
The bank also reiterated that it was looking to hit its 2024 targets and its 2026 strategic objectives.
All in all, the results were pretty strong. However, investors may have been somewhat spooked by the further evidence of increased competition for mortgages.
Personally, I thought this was already baked into the share price. But clearly the investors and institutions had high expectations given the rapid share price growth we’ve seen in recent months.
What does this mean for investors?
According to the forecasts, 2024 was always going to be a more challenging year for Lloyds. The company’s trading at 10.4 times expected earnings for the year — this figure may fall slightly after the H1 outperformance.
However, looking forward, analysts expect earnings to improve significantly in 2025 and 2026, with the bank trading at 8.4 times projected earnings and 7.1 times projected earnings respectively.
One reason for this better-projected earnings next year is the changing interest rate environment and something called hedging.
Banks have hedging strategies that protect them against fluctuations in interest rates. It’s like having a portfolio of fixed-interest assets and variable-interest assets. This is often achieved through complex financial metrics called swaps.
However, with interest rates set to fall, the hedge can also deliver a net gain to the business. The bank reported a net sterling hedge income of £1.9bn in the first half of the year, up from £1.6bn in the first half of 2023.
Analysts project that hedging income will hit £5bn in 2025.
The bottom line
I already hold Lloyds shares and quite a few of them. So from a concentration risk perspective, I’m always dubious about adding to my position.
However, I believe that the stock will continue upwards towards 80p over the long run.
This post was originally published on Motley Fool
