Lloyds Banking Group PLC (LON:LLOY) disappointing quarterly profits number, squeezed by higher provisions for bad debt, may in time bode well for future shareholder distributions, that’s according to analysts at Shore Capital.
As the UK banking sector delivered results largely in line with expectations at stockbroker Shore Capital, Lloyds remains its analyst team’s least preferred (whilst still passing muster as a ‘buy’ for the broker).
With the a ‘fair value’ estimate of 60p, down from 62p, analyst Gary Greenwood still sees potential for some 40% upside the Lloyds' current market price of 42p.
This value estimate is consistent with Lloyds’ own guidance for RoTE of around 13%, which along with the bank’s more prudent accounting for possible bad accounts leaves plenty of room for the analyst to stay confident (even if he prefers Barclays (LON:BARC) over the black horse bank).
“Despite no signs of stress in the book, profits missed consensus due to higher-than-expected impairments with the group now guiding to a full year impairment ratio of c.30 basis points (prev
“This was primarily driven to the introduction of more prudent IFRS 9 economic assumptions, which now assume base case UK unemployment peaking at 5.5% in Q1 FY24 and house prices falling c.10% peak to trough.”
“Weighting 100% to the severe downside would add a further £4.4bn to overall provision requirements, which would still see the group profitable, all else equal.”
He added: “Full year net interest margin guidance was upgraded on higher interest rates, but this was broadly offset by a downgrade to impairment ratio guidance, reflecting provision build on more prudent economic assumptions.
“Guidance for a RoTE of c.13% in FY22F was reiterated, while capital generation guidance was upgraded.
“This bodes well for shareholder distributions.”