Following its half-year results on Thursday (25 July), Lloyds Banking Group (LSE: LLOY) share price saw a modest 1.6% rise, disappointing some investors despite the better-than-expected figures. While the shares are up 25% in 2024, this pales in comparison to the 65% surge seen in NatWest Group.
Interim Results: Beating Expectations But Facing Headwinds
Lloyds reported a profit before tax of £3.32bn for the first half, exceeding analysts' expectations of £3.2bn. However, this figure represents a fall from the previous year. This drop is partly attributed to a decline in the bank's net interest margin, falling to 2.94% from 3.18% a year earlier.
With the Bank of England potentially considering a base rate cut on 1 August, a further contraction in net interest margins is anticipated. This could explain the muted response to Lloyds' recent results.
Looking Ahead: Solid Guidance But Challenges Remain
Despite the current headwinds, Lloyds remains confident about its future. The bank reaffirmed its 2024 guidance, aiming for a return on tangible equity (ROTE) of approximately 13%. Furthermore, it seeks to maintain a CET1 ratio (a key liquidity measure) of around 13.5%. By 2026, the ROTE target is set to increase to over 15%, signifying a robust growth trajectory. However, the CET1 ratio is expected to dip slightly to about 13%.
These targets, while solid, demonstrate a bank in good financial health, far exceeding regulatory minimum requirements.
Valuation: Attractive but Cautious Outlook
Analysts predict a price-to-earnings (P/E) ratio of 10 for the current year. While this is lower than the FTSE 100's long-term average, it could be considered fair given the current financial uncertainties. Forecasts indicate that earnings per share (EPS) will rise by 40% between 2023 and 2026, despite a dip in the current year. Consequently, the 2026 P/E would fall to around 7 if these projections hold true.
Share Price: Potential for Growth But Near-Term Caution
Many investors might perceive the current share price as already high, particularly given the anticipated profit decline this year. The potential for further pressure on net interest margins also creates a sense of caution.
While the forward dividend yield has dipped to 4.6% following the recent price rise, this may be a temporary blip, and the yield could rebound once the final 2024 payment is made.
Future Outlook: Potential for Upside But Short-Term Volatility
Despite the near-term uncertainty, a flat second half for Lloyds shares is anticipated. However, brokers' price targets suggest a potential upside of around 18%, reaching 71p. Therefore, Lloyds might be a stock worth considering, particularly for longer-term investors, with potential for growth, especially in 2025.
While the outlook for Lloyds is positive in the long term, the immediate future might be marked by volatility. Investors should carefully consider their own investment goals and risk tolerance before making any decisions.
