Lloyds Banking Group PLC (LSE:LLOY) shares rose 1% after it posted quarterly profits that were some way better than the market predicted, especially considering how interest rates are starting to come down.
The UK's largest lender has managed to use its 'structural hedge' to maintain a higher net interest margin (NIM) than the forecasts that were pencilled in, which is likely to lead some analysts to revise up their forecasts for the full year.
"With interest rates on a downward trajectory, there will inevitably be an ebb and flow to the numbers, and there is some evidence of that today," said John Moore, senior investment manager at RBC Brewin Dolphin.
The underlying profit for the third quarter was 11% ahead of consensus forecasts, with pre-provision profits 4% ahead and lower impairments than anticipated, with UBS noting that net interest income was 1% ahead of consensus and that NIM at 2.95% was up from 2.93% in the prior quarter and 2bps ahead of expectations.
"The margin and non-interest income were highlights, particularly in the context of a quarter in which the lag effect of the base rate cut might have impacted by circa three basis points," said broker Jefferies.
While NIM was "slightly flattered" by a drop in much lower margin loans to banks, Jefferies said, and that the tailwind from Lloyds' structural hedge "looks to have been slightly more front-end loaded", the fact that margins rose despite the deposit lag from the change in interest rate "is helpful".
Shore Capital analyst Gary Greenwood agreed the positive inflection in NIM was "notable", that credit quality remains "very benign" and capital generation remained strong.
For the full year, the City analyst consensus is looking for reported PBT of just under £6.2 billion and earnings per share of 6.3p,
Greenwood said the main different between this and his forecast of £6.6 billion and 6.8p EPS is that he is not including a further provision for the FCA’s review into discretionary commission payments as "it seems unlikely to us that anything extra will be set aside in the current financial year given the FCA’s review does not complete until May".
RBC's Moore added that the quantum of potential payouts for Lloyds’ Black Horse motor finance brand for mis-sold PCPs was one of two key areas of uncertainty around Lloyds, and will possibly dictate the other, which is what strategic plans the bank has next.