Despite the strong market reaction to results from the US banks last week, we can’t see investors getting quite so excited when the UK’s biggest financial institutions unveil their latest earnings over the coming weeks.
As usual, the country’s largest mortgage lender Lloyds Banking Group (LLOY) gets proceedings under way with its third-quarter trading update on Wednesday 23 October.
Although it posted a better-than-expected pre-tax profit at the half-year stage, shares in Lloyds sank on the report due to a fall in net interest income and a higher cost of deposits as savers sought out better rates.
Therefore, we suspect the focus is once again likely to be on the top line and the net interest margin – the spread it makes on loans minus the cost of deposits – rather than the bottom line.
At the half-year stage, the net interest margin was down 24 basis points or 0.24% from the previous year to 2.94%, while this time a year ago the margin was 3.08% and the bank has set a full-year target of more than 2.90%, so anything starting with a three for the third quarter would be positive.
Another disappointing feature of the half-year results was the unexpected surge in the cost-to-income ratio, which determines the direction of earnings, from 48.8% to 57.1%, which the bank blamed on increased investment, higher severance costs and inflation.
A year ago, this ratio was just under 50% (49.5%) and chief executive Charlie Nunn has said he wants to get it back to that level by 2026 so progress on reining in costs will be key.
Given the economy looks to be in reasonable shape, as shown by August’s positive GDP (gross domestic product) figure, investors’ big bug-bear – bad loans – shouldn’t be an issue for now, but as always comments on how customers are behaving will be read with interest.
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