Investments In Mortgages And Efficiency Will Strengthen Future Prospects

Key Takeaways

• Strategic transformation efforts aimed at boosting sustainable returns and improving net margins through enhanced customer offerings and efficiencies.
  
• Investments in mortgages are growing market share and revenue, while favorable deposit dynamics and cost discipline improve earnings.
  
• Rising operating costs, market volatility, and competitive pressures may challenge Lloyds’ profitability, while regulatory changes could affect capital management and equity returns.

Catalysts

Provides a range of banking and financial services in the United Kingdom and internationally.

• Lloyds Banking Group is actively pursuing a strategic transformation aiming to generate higher and more sustainable returns. This initiative is expected to drive income growth and improve net margins as the bank enhances customer offerings and operational efficiencies.
  
• The group is experiencing strong growth in net interest income, which has increased by 2% quarter-on-quarter, supported by a net interest margin increase and favorable deposit dynamics. This trend is expected to positively impact future earnings.
  
• Strategic investments in the mortgage segment are contributing to market share growth and strengthening the franchise. Increased mortgage completions and a focus on customer propositions are likely to boost revenue.
  
• The bank’s commitment to cost discipline and asset quality, alongside strategic initiatives aimed at delivering £0.7 billion of additional income in 2024, may lead to improved net margins and operating leverage.
  
• Lloyds anticipates a gradual but significant increase in net interest margin over the coming years due to structural hedge contributions and a slowdown in deposit churn, positioning the bank for enhanced earnings growth.

Lloyds Banking Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lloyds Banking Group's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.0% today to 23.5% in 3 years time.
• Analysts expect earnings to reach £4.8 billion (and earnings per share of £0.1) by about December 2027, up from £4.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £5.8 billion in earnings, and the most bearish expecting £4.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.8x on those 2027 earnings, up from 7.4x today. This future PE is lower than the current PE for the GB Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 8.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

Lloyds Banking Group Future Earnings Per Share Growth

Risks

• The potential for rising operating costs, partly driven by inflationary pressures and strategic investments, may put pressure on Lloyds’ net margins.
  
• The motor finance segment has shown some volatility, with court cases pending that might impact future earnings if outcomes are unfavorable.
  
• Nonbanking net interest income could tick up, potentially offsetting gains in net interest margin and earnings, reflecting increased costs from heightened activity levels and market environment changes.
  
• Any regulatory changes, particularly involving Basel 3.1 implementation, though modestly positive, could impact Lloyds' capital management and potential returns on equity.
  
• Competitive pressures within the mortgage market, especially with refinancing headwinds and completion margins, could impact revenue if Lloyds cannot maintain its share or if market dynamics shift.

Valuation

• The analysts have a consensus price target of £0.65 for Lloyds Banking Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £0.8, and the most bearish reporting a price target of just £0.53.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be £20.4 billion, earnings will come to £4.8 billion, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 7.4%.
• Given the current share price of £0.54, the analyst's price target of £0.65 is 16.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.