On both sides of the Atlantic, the corporate-reporting season is now in full swing. And from what I’ve seen so far, it’s been a great time to be an investor in oil & gas producers. Meanwhile, US mega-tech stocks have been big fallers as earnings growth disappoints. And on this side of the Pond, results from Lloyds Banking Group (LSE: LLOY) left the Lloyds share price looking sickly.
The Lloyds share price drops again
As I write early on Thursday morning, the Lloyds share price hovers around 41.89p, down 0.66p (-1.6%) since Wednesday’s close. At its morning low, the Black Horse bank’s stock dipped to an intra-day low of 40.86p, before rebounding by more than penny. At this level, the bank is valued at £28.2bn — a fraction of its pre-2008 high.
The bad news for long-suffering Lloyds shareholders is that its quarterly pre-tax profit slumped by more than a quarter (-25.7%). In the quarter ending 30 September, the bank recorded a before-tax profit of £1.5bn, versus over £2bn in Q3/21. This was well below analysts’ average forecast of £1.8bn.
So what went wrong to slash the bank’s profits? The answer is provisions for bad debts and loan losses, which soared to £668m. In Q3/21, the bank actually released £119m of previous reserves, so this amounts to a negative swing of £787m. Ouch.
But it wasn’t all bad news
Despite this setback, there was also good news buried in Lloyds’ latest numbers. For example:
- Thanks to rising interest rates, the bank’s quarterly net income leapt 13% to almost £4.6bn.
- Lloyds’ net interest margin jumped from 2.55% in Q3/21 to 2.98% in Q3/22, up 43 basis points.
- The cost-to-income ratio dropped to 47.8% from 51.8%, improving by four percentage points.
- Various measures of the bank’s balance-sheet strength also strengthened.
Alas, with our economy facing hurricane-force headwinds, being the UK’s biggest retail bank is hardly ideal. The soaring cost of living, skyrocketing energy and fuel bills, rising mortgage rates and the growing risk of a prolonged recession are battering consumer confidence.
What next for Lloyds shares?
I don’t own a crystal ball, so I can’t make accurate predictions about the future direction of the Lloyds share price. But here’s how it’s performed over six timescales:
| Five days | 0.1% |
| One month | -3.2% |
| Six months | -8.5% |
| 2022 YTD | -12.4% |
| One year | -14.4% |
| Five years | -39.2% |
To be frank, Lloyds shares have been a long-term lemon, losing almost two-fifths of their value in the past half-decade. But I buy into businesses based on their future and not their past. And the group’s current fundamentals look promising to me.
At the current Lloyds share price of 41.89p, this FTSE 100 stock trades on a modest price-to-earnings ratio of 6.9. This translates into an earnings yield of 14.4%, which covers the running dividend yield of 5.1% by 2.8 times. To me, this cash yield looks secure — for now, at least.
To me, these numbers indicate that Lloyds shares are cheap today, relative to the wider market. But Lloyds has been a perennial value trap, sucking in fresh investors for years, before crushing their dreams. Even so, I have no intention of selling any of the Lloyds shares in my family portfolio. In fact, if this stock gets much cheaper, I may well buy more shares!