Lloyds rides out end of interest rate spike with bumper profit
Increasing competition was not enough to stop Lloyds from performing above expectations in the third quarter as the bank continued to benefit from a relatively benign credit environment.
In the three months to September, pretax profit hit £1.9bn, more than triple the same period last year and slightly ahead of analyst expectations.
Net interest income was in line with analysts’ expectations but the continuing resilience of customers ensured that profit soared.
The bank set aside much less in impairment charges than expected. Lloyds’ impairment charge, a measure of loan quality, was just £187m compared to £668m last year.
Lloyds said this reflected “broadly stable credit trends and resilient asset quality” as well as an improved macroeconomic outlook. The bank now expects interest rates to peak at a lower level than it forecast earlier in the year, which means unemployment will also peak at a lower level.
Chief financial officer William Chalmers said that across the bank “early warning indicators, which give us insight into how customers are behaving, are pretty stable”.
“Customers are adjusting to the times that we’re in,” he continued.
Although customer deposits dropped by £5bn on the same period last year, including a £9.4bn reduction in retail current accounts, deposits grew on the previous quarter thanks to a £5.2bn increase in retail savings.
Chalmers said this underlined the competitive rates Lloyds was offering on savings products.
The bank reaffirmed its guidance on net interest margin (NIM) for the remainder of the year, although its third quarter NIM was 3.08 per cent, down on the previous quarter by more than markets had expected.
NIM is a measure of the difference between what banks pay out and receive in interest payments. Increasing competition for deposits is cutting into banks’ margins.
Chalmers said he expected the decline to continue due to a competitive deposit market and mortgage market. “If you look at margins on mortgages, they’re at a very low level relative to historical averages,” he said.
The results come as investors assess how the impact of higher interest rates will impact banks over the coming months.
Although the Bank of England paused its rate hiking campaign, policymakers are now signalling that rates will remain higher for longer in order to decisively stamp out inflation.
This may mean banks face continuing pressure on their margins as customers adjust to a higher rate environment. Borrowers can also expect to be put under greater pressure as they deal with much higher rates than have been usual over the previous decade.
Zoe Gillespie, investment manager at RBC Brewin Dolphin, said: “Lloyds’ update should provide some reassurance about the sector’s resilience. The group’s performance is in line with expectations, its loan book appears to be relatively stable despite the economic backdrop”.
Lloyds’ earnings follow a poor set of results from Barclays yesterday. Barclays struggled with increasing competition for deposits, flagging that its NIM for the year would be lower than previously forecast.
The bank’s share price was down about 0.8% in early trade in London as investors parsed the news.