Profits recover at Lloyds but shares hit by Ukraine rout

Lloyds Banking Group shares fell 11% to 46.55p on Thursday despite the group joining its peers in posting bumper profits. Pre-tax profits at the UK’s largest banking group recovered to £6.3bn from £1.2bn last year but the figures disappointed analysts, coming in well below consensus forecasts of £7.2bn. Lloyds’ share price was also hit by the wider FTSE100 rout as Russia invaded the Ukraine.

Profits were lower than expected due to exceptional items relating to historic fraud costs at its HBOS operation. Lloyds paid out £1.3bn in remediation charges, including £600m for issues at HBOS Reading.

"2021 has been a year of solid financial performance with successful strategic execution, ongoing investment and continued franchise growth,” new chief executive Charlie Nunn told investors. “This has enabled the group to deliver on its customer focused ambitions, as set out in strategic review 2021, as well as on Helping Britain Recover during the pandemic. It has also enabled the group to offer high levels of capital return to our shareholders.”

Meanwhile, net income rose 9% to £15.8bn. Lloyds’ mortgage book jumped £16bn to £293.3bn last year, while customer deposits increased by £25.6 billion to £476.3 billion, with retail current accounts up 14% to £111.5bn.

Along with many other FTSE100 companies and banks, Lloyds is returning £2bn to shareholders in a share buyback programme.

Lloyds’ new strategy under Charlie Nunn

New CEO Charlie Nunn replaced former chief António Horta Osório in August, who left the company - albeit briefly - for Credit Suisse.

As part of Nunn’s new strategy, he says the bank plans to “look to deepen relationships” with its “existing customers, both consumers and businesses of all sizes, and meet more of their financial needs by making our great products more relevant to them and our channels simpler and more personalised to use.” Nunn believes this will set Lloyds on a “higher growth trajectory with more diversified revenue streams” while the business looks at cutting costs.

The lender also plans to invest £4bn in wealth management and drive growth in consumer products such as motor insurance and protection policies.

Interest rate hikes and buoyant housing market boost Lloyds’ coffers

Lloyds hiked its forecasts, saying it now expects to make a return on tangible equity of more than 10% by 2024 and 12% by 2026, while risk-weighted assets at the end of 2022 are anticipated to be around £210 billion.

The group, which also owns Halifax, the UK’s biggest mortgage provider, has benefited from interest rate hikes and the buoyant housing market following the pandemic lockdowns.

“The bank’s retail market penetration should mean [it] is well placed to significantly grow its mass market wealth proposition,” said Benjamin Toms, director at RBC Capital Markets. “However the bank’s strategy, of being the UK bank with the largest branch network, looks misplaced in a post Covid-19 world.”

However, broker Jefferies has a price target of 63p on the shares with a buy rating. Lloyds’ shares are likely to face tailwinds from inflation and the cost of living crisis. But, at 49.64p – well off their highs of 62.5p seen in December 2019, the current dip looks like a buying opportunity.

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