Where next for Lloyds Banking shares?

Lloyds Banking Group unveils its first-quarter interim trading statement on Wednesday next week. Investors will be expecting to hear more about how the bank’s attempts to deal with the long-running aftermath of the HBOS Reading fraud are progressing.

Over the weekend news broke that former CEO António Horta Osório may have to return his £1m bonus and share incentives in a clawback by Lloyds’ remuneration committee. This is in relation to the ongoing fallout from the HBOS Reading scandal 15 years ago.

Six HBOS employees – now jailed – extorted £1bn from small business clients and used it to fund holidays, yacht purchases and sex parties.

Customer compensation costs are growing. At the full-year results in February, Lloyds set aside another £600m for client redress and the bill so far has hit £1.2bn.

Horta Osório joined Lloyds after the fraud occurred but his handling of the issue has been criticised. Other former Lloyds executives including George Culmer and Juan Colombas, have also reportedly had their compensation packages frozen.

Shares in Lloyds rose 1.9% on Friday to 44.98p but have performed disappointingly so far this year. The shares have risen only 5% this year compared to the FTSE 100, which is up 10%.

It’s thought the shares recently benefited slightly from investors topping up their ISAs before the April deadline.

Lloyds’ defensive qualities

However, Lloyds as a business is performing well. Although recent full-year profits came in lower than analyst expectations of £7.2bn, the bank still posted strong profits of £6.3bn, up from £1.2bn last year.

At the results, Lloyds also raised its earnings guidance. Management said it now expects to deliver a return on tangible equity of more than 10% by 2024 and 12% by 2026. What’s more, risk-weighted assets are anticipated to be in the region of £210bn by the end of the year.

With further interest rate hikes possible from the Bank of England, it’s likely Lloyds shares could benefit. Through its Halifax brand it is the UK’s biggest mortgage lender, which has enjoyed a buoyant UK housing market despite the pandemic. However, a fly in the ointment could be the potential for mortgage customer defaults.

Analysts at Credit Suisse recently highlighted Lloyds in a note on defensive share picks that are able to weather current threats, such as the cost of living crisis and war in the Ukraine. Lloyds featured in a list of 15 stocks because of its strong pricing power and low exposure to Eastern Europe.

Lloyds’ chunky dividend

The bank’s shares also pay a generous dividend of 4.45% and Lloyds is returning £2bn to shareholders in a share buyback programme. Analysts at Morgan Stanley recently reiterated their buy rating on the shares with a price target of 62p.

Lloyds reports its first-quarter trading update on Wednesday 27th April. While the shares have yet to be a star performer this year, they remain a long-term buy.

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