Lloyds profits fall as interest rate benefits wane

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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, broadly in line with analyst 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 that 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.

Lloyd’s 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 as consumers moved money to other savings accounts in a fiercely competitive market.

Lloyds, which is seen as a bellwether for the UK economy, indicated that 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, 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.

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.