Lloyds sees profits fall and gears up for spate of loan losses

Lloyds Banking Group has posted a fall in third quarter profits, as the lender braces itself for a potential surge in loan defaults as inflation squeezes borrowers.

Britain’s biggest mortgage lender posted a pre-tax profit of £1.5billion for July to September, which is below the £1.8billion average analyst forecast provided by the bank and down 26 per cent from £2billion a year earlier.

The results were dented by a £668million provision taken to cover potentially soured loans, which it said reflected the souring economic outlook.

The lender thinks UK house prices could fall by 8 per cent next year and then stagnate for a number of years afterwards.  

Tough times ahead: Lloyds Banking Group has reported a slide in its third quarter profit

Tough times ahead: Lloyds Banking Group has reported a slide in its third quarter profit

Lloyds’ shares fell today and were down 1.54 per cent or 0.65p to 41.90p this morning, having fallen over 13 per cent in the last year.’ 

The company’s net income rose 12 per cent to £13billion on the back of surging interest rates. Customer deposits of £484.3billion were up £8billion in the first nine months of the year and £6.1billion in the quarter.

Lloyds said: ‘Loans and advances to customers are up 2 per cent on 31 December 2021 at £456.3billion, including continued growth of £5.1billion in the open mortgage book (£1.8 billion in the third quarter), alongside higher retail unsecured loan and credit card balances.’

The Bank of England has hiked the base rate over recent months to its current level of 2.25 per cent, sending average mortgage rates higher and making it more expensive to borrow. It is expected to hike by another 75 basis points to 3 per cent next week. 

Looking ahead, Lloyds cautioned that the base rate could peak at 4 per cent in 2024 before falling back down.

Lloyds increased its guidance for several key performance metrics, highlighting the unusual environment Britain’s banks are now facing.

Rising central bank interest rates aimed at combating inflation boost banks’ income, but those same pressures of inflation and higher rates on mortgages are squeezing household budgets, risking defaults on loans later down the line.

In charge: Charlie Nunn, the boss of Lloyds, said, 'The current environment is concerning for many people'

In charge: Charlie Nunn, the boss of Lloyds, said, ‘The current environment is concerning for many people’

Charlie Nunn, the boss of Lloyds, said: ‘The current environment is concerning for many people and we are committed to maintaining support for our customers.’

Some analysts have argued Lloyds could be particularly vulnerable to any increase in loan defaults because of its huge mortgage book and significant share of the credit card market.

Banks are also concerned Sunak’s new government could slap additional taxes on the industry, with a surcharge on bank profits under review by Chancellor Jeremy Hunt.

Rivals including Barclays and HSBC reported robust results this week, but investors are wary the rising cost of living will hurt consumers and businesses and damage bank finances in the long term.

Despite its lower profit, Lloyds said the strength of its underlying performance meant it could raise its forecast on several performance metrics for the year.

Net interest margin, which measures how much the bank makes on the spread between what it pays savers and charges borrowers, will be 290 basis points rather than 280, it said, and the bank will generate more capital.

But, Lloyds said asset quality – measuring potential loan defaults – was expected to be slightly worse this year. Actual loan defaults remain low for the time being, it added.

Richard Hunter, head of markets at Interactive Investor, said: ‘In all, this is a robust showing from Lloyds.’

He added: ‘The share price has tended to reflect concerns on the wider UK economy and its faltering prospects, and has fallen by 13 per cent over the last year, as compared to a drop of 3 per cent for the wider FTSE 100. This has not deterred longer term supporters of the story, however, with the market consensus remaining at a buy.’

John Moore, senior investment manager at RBC Brewin Dolphin, said: ‘Lloyds may be putting aside more money for potential bad loans against the current economic backdrop, but that overshadows a strong set of results from the bank. 

‘Although it is the most exposed of the major UK banks to the domestic economy, Lloyds is benefitting from an improving net interest margin, which is driving income growth. There is little said about shareholder returns, which is a tricky balance for banks to strike in the current environment. The key question remains, what is next for Lloyds?’

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