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Lloyds Banking Group has reported better than expected third-quarter profits but flagged that some of the benefits of higher interest rates are starting to wane.
The UK’s largest high-street lender said on Wednesday that statutory profit before tax was £1.9bn in the third quarter, slightly above analysts’ expectations of £1.8bn.
Revenues rose to £4.5bn, just below market expectations of £4.6bn. Comparable quarterly profit for 2022 was restated lower after accounting regulation changes.
However, net interest margin — a closely watched measure of the difference between the interest banks charge on loans and the rates they pay consumers on deposits — fell to 3.08 per cent, down from 3.14 per cent in the previous quarter and slightly missing the average estimate from analysts.
The bank said this reflected “expected mortgage and deposit pricing headwinds” as demand for home loans dropped and customers moved their money into higher-interest savings products. It maintained its guidance that net interest margin should be higher than 3.1 per cent this year, a contrast to its peer Barclays, which cut its outlook when it reported earnings on Tuesday. Lloyds shares were flat in morning trading on Wednesday.
“The numbers are fine but most importantly, full year [net interest margin] guidance is reaffirmed,” said Jonathan Pierce, an analyst at Numis. “Given broader expectations coming into this — particularly post-Barclays — this is a big relief.”
Lloyds’ impairment charge for potential bad loans fell to £187mn from £668mn in the same three-month period last year — compared with expectations of £336mn — thanks to fewer defaults on credit cards, mortgages and commercial property.
Lloyds is one of the UK’s largest lenders and credit card providers, and is widely seen as a bellwether for the economy. Like other retail banks, it has benefited from successive rate increases from the Bank of England over the past two years. However, the BoE last month held its benchmark rate at 5.25 per cent, signalling that an earnings windfall for the sector may have peaked.
The bank’s performance shows Lloyds’ ability to deliver “net income growth, cost discipline and resilient asset quality” and “reaffirm our 2023 guidance”, said chief executive Charlie Nunn.
Despite the boost from interest rates, the stock continues to trade at a 30 per cent discount to the book value of its assets. Chief financial officer William Chalmers said he hoped the value of the bank would be “more fully recognised” in the market over time if it delivered consistent profitability and capital returns to shareholders.
Jefferies analyst Joseph Dickerson said he was disappointed that management had “stuck to its stale [£2bn] full-year buyback policy” and pointed out that the lender had another £2.5bn in excess capital. Chalmers said the board would reconsider increasing the dividend and buybacks at the end of the year.
The group posted a 3 per cent year-on-year fall in customer deposits which it attributed to higher spending and a more competitive savings market. Its retail current accounts were hit by a £9.4bn reduction since the start of the financial year that was partly offset by inflows of £5.2bn into its savings and wealth management products.
Chalmers said customers had also moved money from instant-access savings accounts to fixed-term products as they were “prepared to give up access in exchange for locking up their money at a slightly higher return”.
He also signalled a “slight improvement” in the UK economic outlook and said Lloyds expected growth of about 0.4 per cent this year, compared with previous expectations of 0.2 per cent.
High-street lenders in the UK are under pressure to improve deposit rates for consumers and pass on higher interest rates. State-backed provider National Savings & Investments in August raised the interest rate on its one-year fixed bonds from 5 per cent to 6.2 per cent.
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