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Profits at Lloyds Banking Group fell 28 per cent in the first quarter, as a windfall from higher interest rates for the UK high street bank continued to wane.
Lloyds said pre-tax profits fell year on year to £1.6bn from £2.3bn, broadly in line with analysts’ expectations. Quarterly revenues dropped to £4.2bn, just below market expectations of £4.3bn.
Lloyds’ net interest margin (NIM) — the difference between the interest it charges on loans and the rate it pays on customer deposits — fell to 2.95 per cent from 2.98 per cent in the previous quarter.
The bank said it continued to expect an average NIM for its banking operations of 2.9 per cent this year, in line with previous expectations, despite signals there would be fewer central bank rate cuts than previously expected.
Chief financial officer William Chalmers said the bank continued to expect three base rate cuts by the Bank of England, with the first one expected around the middle of the year.
UK high street banks have benefited from rising rates as the Bank of England has attempted to bring down inflation. However, competition in the savings and mortgage markets and expectations of rate cuts have weighed on interest margins. Banks have also come under pressure to pass on higher interest rates to savers, further squeezing margins.
Lloyds’ total lending fell £1.2bn to £448.5bn in the first quarter, with its mortgage balance shrinking by £1.6bn. The group however flagged a rise in mortgage applications in the first quarter.
Its customer deposits were about £470bn at the end of the first quarter, a decrease of £2.2bn compared with the previous three months driven largely by balance reductions from smaller businesses while consumers moved money to savings accounts in a fiercely competitive market.
Reacting to a Bank of England warning about banks’ exposure to private equity, Chalmers said regulators’ concerns were “understandable” given the growth of the non-banking financial sector in recent years.
However, the chief financial officer reiterated the bank’s commitment to financing the sector and said it was “careful in all matters risk”.
“We do believe that private equity has an important role to play in terms of financing British industry,” he said, adding that Lloyds’ role in that was “consistent with our ambition to help Britain prosper”.
The group set aside £49mn to account for future losses in its commercial banking portfolio after non-performing commercial loans rose to 2.5 per cent of the total as of the end of the quarter, up from 2.3 per cent in the previous quarter.
Lloyds, which is seen as a bellwether for the UK economy, indicated that overall credit quality was “stable” and in line with pre-pandemic levels. The lender said it had recorded fewer arrears and defaults in the first quarter overall, following a spike last year as variable-rate mortgage costs rose.
The bank set aside £57mn to cover bad loans, much lower than the £243mn in the same period last year, reflecting improvements in the economic outlook for 2024. The group revised its expectations for unemployment and now expects a 1.5 per cent rise in house prices this year.
Lloyds’ operating costs were up 11 per cent, in part due to an “elevated” severance charge of £100mn as the lender embarked on a restructuring plan to increase its focus on digital. The bank said last month it would cut jobs in its risk function, after management found it was a “blocker” to the transformation plan.
In the bank’s previous quarterly results in February, it set aside £450mn to cover the costs of an industry-wide probe of potential car finance mis-selling.
The lender said on Wednesday that it had taken no further charges related to the probe, ahead of an update by the Financial Conduct Authority in September.
