Analyst Note| Niklas Kammer, CFA |
Narrow-moat Lloyds reported a second-quarter underling profit of GBP 1,994 million, down nearly 4% versus the first quarter this year based on higher remediation costs. These charges come as a result of ongoing legacy issues related to HBOS and miscommunications around insurance renewals. Excluding these charges, performance was decent. Net interest income came in 2% higher. Importantly, margins at a group level remained robust, and Lloyds now guides for net interest margins around 250 basis points versus its previous guidance of above 245 basis points. Mortgage margins are coming down modestly, which we expect to continue as risk appetite of the banks is returning and all are looking to pick up volumes. However, current margins still remain above front book margins. Unsecured volumes continue to be a drag on group margins as volumes have not materially recovered towards prepandemic levels just yet. Going forward, we see greater upside risk than downside risk to our net interest margin assumptions. Operating costs came in 2% higher as well, primarily due to higher variable pay. Finally, Lloyds booked another set of loan loss reversals this quarter to the amount of GBP 333 million on the improving macroeconomic outlook. The bank retains a GBP 1.2 billion overlay buffer still. For the full year, Lloyds now expects loan losses to come in below 10 basis points. We will adjust our near-term loan loss assumptions as a result but don’t anticipate any changes to our medium-term forecast or fair value estimate of GBX 62 per share.