Lloyds Bank Shares Up 2.5% On Results – Is More To Come?

Lloyds Bank (LON: LLOY) shares are up 2.5% this morning on the back of the first quarter results issued as a management report. As these results aren’t audited, it’s not quite right to call them a quarterly profit report. Even as they do contain that statement of a quarterly profit – £1.2 billion, down from £1.4 billion YoY. Yes, this is a fall in profits, just as we all thought things were getting better. But this quarter last year there was a write back of credit impairments, this Q, there’s the more normal allowances that, obviously enough, some of their lending will go wrong just because some always does.

This in itself can be taken as a sign that banking is returning to something like normal.

As we’ve pointed out before about Lloyds Bank the sector benefits from rising interest rates. Banks live on the difference between deposit and loan rates – the margin. The very low – artificially low as a result of QE – interest rates of the past few years have compressed that gap and thus those margins. As interest rates rise we can expect margins to widen again. This is indeed already happening – net income was up 12% to £4.1 billion as a result of higher net interest – that very margin point. As interest rates continue to rise we can expect this particular effect to continue.

Also Read: Which Banks Benefit From Rising Interest Rates Not Passed On To Savers?

As Lloyds says: “a stronger banking net interest margin of 2.68 per cent” is the gap between what the bank must pay for deposits and what it can charge for loans widening.

Tangible net assets are calculated to be 56.5 pence, which means that Lloyds is still trading below book value as the shares are in the high 40s. Given those widening margins this might not be a situation we’d expect to continue forever.

For we are also told that this effect is expected to continue. That makes sense as we’re also all pretty certain that the Bank of England is to continue increasing interest rates in the face of the current inflation. So, Lloyds tells us they expect “ Banking net interest margin now expected to be above 270 basis points” for the year.

The point here is not just that with the economy doing better, then baking is a better business to be in. It’s that rising interest rates themselves make banking in and of itself a more profitable activity to be undertaking.

Looking at the downside, as this report from Lloyds doesn’t, it’s also possible that we’re going into recession of course. That would not be good for banking profits as it would likely increase those credit write offs, even if interest margins increase with those higher interest rates.

Trading in Lloyds shares is, therefore, something of a balance of probabilities. Continued economic growth with rising interest rates is good for the bank, an actual recession would not be. Macroeconomic factors do matter for bank share prices.