Lloyds Banking Group has posted a 28 per cent fall in profit – in line with analysts’ estimates – as price wars and the prospect of interest rate cuts starting this summer forced it to offer better rates to savers.
The group – which owns Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows – reported a pretax profit of £1.63bn for the first three months of 2024.
This figure is down from £1.78bn during the previous quarter and 28 per cent lower than the £2.26bn in the first quarter of 2023. A company-complied analyst consensus had expected a profit of £1.66bn.
The bank’s return on tangible equity, a key measure of profitability, came in at 13.3 per cent – down from 19.1 per cent in the first quarter of 2023.
Lloyds’ profits were propelled to a record high last year following interest rate hikes from the Bank of England. However, its margins have narrowed into 2024 amid intense competition for mortgages and deposits, and the expectation that rate-setters will make multiple cuts this year.
The lender’s net interest income – the gap between what it earns from interest on loans and pays out to savers – fell to £3.05bn in the first quarter from £3.43bn at the end of last year.
Meanwhile, its net interest margin fell to 2.95 per cent in the first quarter, from 3.22 per cent in the same period last year. Analysts had expected a margin of 2.93 per cent.
In recent weeks, concern over the US economy and stickier-than-expected UK inflation has caused traders to pare their bets on rate cuts from the Bank of England. Markets are currently pricing in just two cuts, down from seven at the start of the year.
As a result, lenders could see a significant tailwind from higher-for-longer rates this year. Lloyds has reaffirmed its guidance of a net interest margin of greater than 2.9 per cent for 2024.
The group’s credit impairment charge came in at £56m, down from £242m in the previous quarter and £541m during the same period in 2023. The decline shows resilience among its customer base despite the tough economic backdrop.
Loans and advances to customers fell during the quarter to £448.5bn from £452.3bn in the previous three months, which the group blamed mainly on expected reductions in mortgage balances, given the refinancing of the higher maturities towards the end of last year.
Investors have paid close attention to Lloyds’ response to a review by the Financial Conduct Authority (FCA) into now-banned commission arrangements on car loans that analysts say could cost the motor finance industry up to £16bn in compensation payouts.
The bank took a £450m provision in February to cover potential costs tied to the regulator’s probe, with questions looming over whether it might raise this figure to align more closely with analysts’ estimates.
Lloyds said on Wednesday that it had made no further changes relating to the potential impact of the review, noting that the FCA is due to set out its next steps in September.
Lloyds, which owns the UK’s largest auto lender Black Horse, is considered the most exposed UK bank in absolute terms. Analysts at RBC estimate the bank could take a hit of around £2.5bn, or up to £3.5bn in its worst-case scenario, from potential compensation fees.
Earlier this month, the FCA wrote to motor finance firms to remind them to “maintain adequate financial resources at all times”.