First quarter earnings from Lloyds Banking Group (LLOY) have beaten market expectations and analysts are now hinting they will upgrade full year profit forecasts, potentially by as much as 7%.
The market is clearly pleased with the trading update, as reflected by a 3.3% rise in its share price to 69.6p.
The strong results, which include £2.08bn underlying profit, bode well for Lloyds to return to its previous glory days as a consistent generous dividend payer.
Investec forecasts the bank will pay 4.5p per share dividend for the 2017 financial year, equating to a 6.5% prospective yield.
WHY IS THE SHARE PRICE UP TODAY?
‘Net interest income (has) surpassed expectations for the first time in ages,’ says investment bank Jefferies.
The bank’s net interest margin (NIM), or the difference between income from lending and the cost of funding, is up to 2.8% in the first quarter versus 2.68% in the final quarter of 2016. Net interest margin is a key measure of profitability.
Having beaten market expectations, Lloyds’ chief executive Antonio Horta-Osorio says: ‘We remain on track to deliver the group financial targets for 2017, whilst maintaining our longer term guidance’.
IS THE BANK GETTING STRONGER?
Lloyd’s common equity tier one (CET1) capital has risen to 14.3%. This represents the financial cushion available to a bank should an economic downturn trigger widespread customer bad debts.
The CET1 ratio measures the size of a bank’s capital against its assets. It takes into account the risk profile of customers’ loans.
There is a requirement for banks to have a minimum 7% tier one ratio. This includes a minimum ratio of 4.5% to protect against defaults in a loan book and 2.5% to protect against other risks such as changes in interest rates.
A bank whose balance sheet mainly features mortgages may be seen as safer and requiring less capital than one with lots of unsecured personal loans.
Bank capital is the value of its assets minus liabilities. Assets include cash, loans and securities; liabilities are customer deposits and money owed to other banks and bondholders.
