An awful lot has changed in the UK economy even since Britain’s largest high-street bank’s interim financial results in mid-September, so what will be the key focal points as Lloyds Banking Group PLC (LSE:LLOY) updates the market on Thursday.
The consensus forecast is for £4.56bn income for the third quarter, up 8% year on year, with pre-provision profits of £2.2bn, down 3%, and adjusted profit before tax of £1.9bn, down 20%.
There’s so far little to suggest that the volatility and unpredictability in UK politics and economics will be over any time soon, nevertheless, some simple features will remain clear according to analysts.
While UK banks have enjoyed a spike in mortgage applications accompanied by sharply rising prices after the chaos following the mini-budget, for Lloyds, more than peers like Barclays that have large trading arms, an economic downturn is not good for business.
“Lloyds is especially exposed because of its reliance on traditional banking,” Hargreaves Lansdown equity analyst Sophie Lund-Yates said in a preview.
“Classic loans, day-to-day accounts and mortgage lending are the core of the business, unlike other names which have more exposure to trading and investment bank activity.
“So, there will be a watch for any impairment charges.”
“Lloyds is likely to take the view that more people are going to default on their loan repayments.”
According to the Hargreaves analyst, the scope of impairments will indicate how Lloyds thinks its consumers are going to fare in the coming quarter.
Lloyds should make around £285mln of impairments, according to the analyst consensus of last week. That was before Barclays on Wednesday morning reported a £0.4bn impairment charge, while HSBC's was almost three times that - mainly to do with China but with US$0.2bn for UK economic uncertainty - as both lenders noted the deteriorating UK macro backdrop and uncertainty around the path of future rates.
With Lloyds' open mortgage book rising over £3bn in the first half of the year to £296.6bn, investors will be keen to get some commentary about mortgage demand, and the bank’s willingness to supply loans, amidst significant volatility in mortgage rates.
As Barclays and HSBC have reported this week, the UK has been a source of higher incomes and profits thanks to the Bank of England's several rate hikes this year.
Lloyds is also likely to see improved returns from lending given the sharp increase in rates.
“Even though interest rates are low by historic standards, the recent increases should be making themselves known in an improved net interest margin.”
Barclays reported its UK arm enjoyed 20% interest income growth in the past quarter, with UK profit before tax surging 69%.
While HSBC's group-level profits shrank, it reported higher UK mortgage balances, deposit balances and stronger commercial bank lending.
Lloyds shares have this year continued to underperform "despite being in a much better state of financial health than was the case five years ago", said CMC analyst Michael Hewson, down 15% in the year to date and 38% over half a decade.
In the second quarter the bank posted a strong set of revenues and profits, despite concerns over the effects of a slowdown, with Q2 statutory pre-tax profits came in at over £2bn, well above expectations of £1.71bn, and a decent improvement on Q1’s £1.6bn, while also setting aside another £200m of impairments in Q2, pushing the total net underlying impairment for H1 to £377mln.
During Q2, the bank saw an increase in loans and advances to customers that was driven by modest increases in credit card balances and unsecured loans - a trend Hewson expects to have slowed in Q3 with higher interest rates and concerns about rising inflation likely to have acted as a brake on consumer confidence.
"Against such a backdrop the last thing the sector needs is the prospect of a windfall tax, a measure that was touted last week as a possibility by the new Chancellor of the Exchequer Jeremy Hunt. With the UK economy slowing down and a slowdown in the housing market potentially impacting demand for mortgages, the bank may well have to look at increasing provisions for non-performing loans."
He said investors will also need to keep an eye on operating costs which rose slightly to £2.15bn from £2.1bn in Q1, with the bank expecting to see total costs for the year of £8.8bn.
Lloyds also boosted its guidance on net interest margin to 2.7% as well as raising the return on tangible equity to above 11%.