Savers might have cause for complaint – but Lloyds is doing fine

Lloyds CEO Charlie Nunn likes to talk about the bank’s “purpose-driven strategy”.

His savers aren’t seeing much sign of that.

The bank has just turned in what could justifiably be described as a robust set of results, with pre-tax profits up 50 per cent and “underlying” earnings showing a 27 per cent rise, ahead of City forecasts.

The net interest margin – that’s the difference between what the bank pays to depositors and charges borrowers – has risen to 3.22 per cent, against 2.68 per cent reported this time last year.

The sharp rise in UK interest rates means Lloyds is charging borrowers a lot more. But it isn’t boosting savers’ returns to the same degree. Hence the rise in margins (and profits).

The one group that is supposed to benefit from the Bank of England’s anti-inflation tactics are Britain’s savers, who’ve had a rotten time of it over the last decade. Longer in fact.

Except that they’re not. And so some of them are packing their bags. The bank reported a net outflow of £2.2bn in the first three months of 2023, which included a reduction in retail current account balances of £3.5bn.

Now Nunn has said that was “partly” seasonal in nature. Customers have self-assessment tax bills to pay in the first three months of the year which is one (painful) reason why a number of its customers will have made substantial withdrawals. But Nunn also spoke of a competitive market for deposits (and mortgages), clearly no bad thing for consumers.

Despite this competition, which will have seen some savers shopping around for the best rate, the bank has been able to keep that margin steady. There was also a net interest margin of 3.22 per cent during the last three months of 2022.

If the Bank of England’s Monetary Policy Committee does what I expect and tacks on another quarter point to base interest rates, those margins will continue to look great.

History tells us there will be an immediate impact on mortgage and loan rates with an interest rate rise, but savings rates will lag behind. Savers are getting the short end of the stick. That will continue for as long as they’re prepared to sit back and take it.

Shareholders on the other hand? They’re doing just fine. But goodness me, they appear an ungrateful bunch. Lloyds' stock dipped on a day the stock market was running modestly ahead. There is no earthly reason not to like this particular bank from an investor’s perspective – at its current valuation. A point made by a number of analysts.

No, Lloyds didn’t do anything exciting, such as upgrading its full-year guidance, and remains it cautious on the economy (who isn’t). There was also that talk of (light) competition. However, bad debt – which could be a real concern given the cost of living for many – is only expected to rise moderately. The bank is offering a prospective dividend yield of better than 5 per cent, and that dividend isn’t under any sort of threat.

Lloyds has the clout to act if that competition leads to something more than a modest decline in deposits. While the UK economy is hardly bouncing, and is shackled to a poor government, it also looks a lot better than it did this time last year.

“This slightly dull picture [at Lloyds] compares very favourably with what is happening to US banks, where two of America’s twenty biggest lenders have collapsed in 2023,” AJ Bell’s Mould said, pointing out that valuations look cheap across the board.

And they really do. Holding money in deposit with Lloyds isn’t paying. But in the medium term, investing in its shares at their current level ought to pay dividends both literally and figuratively.