Lloyds (LSE:LLOY) shares took a hit last week when peer Barclays missed analysts’ forecasts. Barclays dropped 10% that day, but I’m not sure either bank deserved to see any of its recent gains wiped out (Barclays is down 13% over 12 months).
So let’s take a closer look at why I’m buying more Lloyds shares despite investors’ (over)reaction to the Barclays results.
Barclays results really weren’t that bad
Last week, Barclays posted a pre-tax profit of £7bn for 2022, missing estimates of £7.2bn. Shareholders were rewarded with a hefty increase in the dividend to 7.25p. But a £500m share buy-back left the City underwhelmed. After all, the bank isn’t exactly cash-strapped with its £7bn in profits.
Net interest margin (NIM), the difference between a bank’s loan and savings interest rates, rose during the year, reaching 2.86% from 2.52%. Barclays is targeting a 2023 NIM of more than 3.2%.
In fact, as the share price has dropped 10%, I’m buying more.
Lloyds is different
There were some bad bits in the Barclays results. To start, it had to pay $361m to settle US Securities and Exchange Commission charges over securities sold in error in September.
Credit impairment charges came in at £1.22bn against a net release of £653m the year before, reflecting “macroeconomic deterioration and a gradual increase in delinquencies“.
However, only £286m related to the UK suggesting Barclays’ non-UK-focused business had holes in it.
Meanwhile, Barclays reuslts were also held back by a poor performance in investment banking, due to a lack of mergers, IPOs and general deal-making.
So why is Lloyds different? Well, to start, it doesn’t have an investment banking arm. So that’s something we don’t have to worry about.
Lloyds is much more focused on the UK market. As only a quarter of Barclays impairment charges were focused on Britain, we shouldn’t expect Lloyds’ impairment charges to be too high.
And finally, Lloyds hasn’t had any run-ins with the US Securities and Exchange Commission. There won’t be any big hits like Barclays’ $361m penalty.
Interest rate sensitivity
This is the big reason why I see Lloyds as the best buy in UK banking — interest rate sensitivity. As noted, it doesn’t have an investment arm and because of its funding composition, it has higher interest rate sensitivity than other banks.
This means when interest rates rise, Lloyds net income will rise by a greater degree than its peers. The bank said in November that the NIM was forecast to reach 2.9% by the end of 2022, and it should grow further in 2023. Around 70% of the bank’s income comes from UK mortgages.
In some respects, this weighting towards the UK housing market could be concerning, especially if we start seeing more defaults and house prices fall. However, with the recession likely to be shallower than previously anticipated, I’m not too worried about this.
The post Why I’m buying Lloyds shares after Barclays disappointed investors! appeared first on The Motley Fool UK.
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James Fox has positions in Barclays Plc and Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.