Lloyds Banking Group (LLOY) this morning continued the positive trend of earnings announcements in the sector by announcing better than expected first half profits, and reinstated an interim dividend. The shares gained 1% to 47.2p.
The group also signaled a deeper strategic commitment to growing its wealth management business with the £390m acquisition of Embark Group.
Lloyds announced pre-tax profits for the six months to June, of £3.9 billion, significantly ahead of a consensus estimate of £3.1 billion.
Reported earnings per share of 3.3p, also exceeded a consensus figure 1.6p, and compared with a loss of 0.8p for the previous year. Income investors will be encouraged by the declared interim dividend of 0.67p that is also ahead of expectations.
Despite the robust nature of the group’s interim results, Lloyds faces a fundamental challenge from the anemic returns on lending.
This is a direct result of low interest rates, and has negatively impacted the group’s net interest margin (the difference between the rate at which Lloyds can fund its lending, and the amount it charges its customers for borrowing).
Given the prospect of a continued low interest rate environment today’s acquisition of Embark Group appears to be distinctly prescient.
The deal bolsters Lloyds position within the more lucrative wealth management segment and brings 410,00 customers and £35 billion of assets under management.
Lloyds, is currently trading on a 2021 prospective pe of 7.9x, and a dividend yield of 3.2%. According to Shore Capital banks analyst Gary Greenwood the shares have further upside.
‘We currently see 17% upside to our fair value of 55p (with scope to nudge this higher on roll-forward and to reflect forecast upgrades).’