Higher interest rates and lower loan impairments flattered Lloyds Banking Group Plc’s earnings in the first quarter, as the lender said the benefits from higher interest rates have likely peaked.
(Bloomberg) — Higher interest rates and lower loan impairments flattered Lloyds Banking Group Plc’s earnings in the first quarter, as the lender said the benefits from higher interest rates have likely peaked.
Pretax profit rose to £2.26 billion ($2.8 billion) in the first quarter, above a Bloomberg-compiled estimate of about £2 billion, with its net interest margin rising to 3.22%.
But Lloyds maintained its guidance for the rest of the year, tempering expectations that further rate increases from the Bank of England could boost its margins on deposits. Britain’s economy has avoided recession this year, yet inflation has stuck above 10%.
“We have seen continued pressure on margins, with greater competition in mortgages and savings. These factors have been offset by impact of the increase in base rates,” the bank said. Chief Financial Officer William Chalmers said on a media call that it was reasonable to expect margins had peaked this quarter.
Lloyds shares dropped, down 4.1% at 11:57 a.m.
The results come days after NatWest Group Plc shares fell as the lender’s guidance stoked concerns that the banking boost from rising rates was fading. Lenders have come under scrutiny for raising loan costs while barely improving savings rates.
Cost of Living
The British lender took £242 million in statutory impairments — or £243 million on an underlying basis — to cover loans that could default, 37% more than a year ago but less than expected. It said its “asset quality remains resilient and the portfolio is well-positioned in the context of cost of living pressures.”
There’s been “very limited” impact on UK banks from the US banking issues that felled several lenders in recent months, CFO Chalmers said on the call with journalists. He said customers haven’t reacted by moving money into larger institutions, adding that a slight drop in deposits at Lloyds was partly due to shifts out of current accounts and into savings products.
Lloyds, Britain’s biggest mortgage lender, is exposed to the slowing housing market as surging rates make repayments more expensive for borrowers on new or variable rate loans. Lloyds’ total loans and advances fell £2.6 billion in the quarter to £452 billion. The bank said the movement was due to exiting a mortgage portfolio, while deposits declined in part due to seasonal tax payments and higher customer spending.
Other Key Figures:
- CET1 ratio, a key measure of capital strength, stood at 14.1%, ahead of 12.5% target
- Operating costs of £2.2 billion, up 5% compared to the prior year, but full-year guidance still £9.1 billion
- Lloyds assumes a “mild contraction” in UK economy of 0.6% this year — better than the 1.2% decline it expected in February
- Assumes house prices falling 5.3% and unemployment rising to 4.3% this year
(Updates with details on peak rates throughout.)
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