Lloyds’ profit remained flat on last year despite the benefit of rising interest rates as the bank set aside more than anticipated to cope with bad loans.
In the second quarter the high street bank recorded a pre-tax profit of £1.6bn, flat with last year but slightly lower than company compiled consensus. However, the profit figure was 29 per cent lower than last quarter as the an increasingly competitive market ate away at the bank’s net interest margin.
The bank’s net interest margin – a measure of the difference between what it pays out and receives in interest payments – was 3.14 per cent, higher than analysts had predicted, helping net interest income hit £3.5bn in the second quarter.
On the back of rising rates, Lloyds lifted its guidance for its net interest margin to be greater than 310 basis points across the whole year. It announced an interim dividend of 0.92p per share, 15 per cent more than last year.
Although Lloyds was boosted by the impact of rising rates, it also had to set aside more than expected to cope with an expected rise in bad loans as borrowers are put under more pressure.
Shares in Lloyds were trading 2.7 per cent lower on Wednesday morning.
The impairment charge for the quarter came in at £419m, up from £200m in the same period last year.
Finance chief William Chalmers noted that this included an £84m charge for updated macroeconomic forecasts. Chalmers said that behind the charge, “actual observed defaults in Q2 were very similar to Q1, and to Q4 before that.”
Chief executive Charlie Nunn said customers were facing “huge uncertainty” and were making “difficult choices”, but were showing “significant resilience”.
Mortgage costs have spiralled in recent months as inflation has remained far above the Bank of England’s two per cent target. Nunn said customers refinancing in the second half of the year would face “quite a significant increase” compared to the first half.
Customers refinancing in the first half of the year saw an average increase of around £180 per month, while those refinancing in the second half will see an increase of £360. The bank said it had proactively contacted more than 200,000 mortgage customers.
Danni Hewson, head of financial analysis at AJ Bell said: ““There are storm clouds gathering as the country’s biggest mortgage lender has to consider how many of its customers are likely to struggle as they face a jump from ultra-low fixed rates to the unexpected ‘new normal’.”
The results come as politicians and regulators pile pressure onto banks to pass on higher savings rates to customers. Lloyds offer up to 1.8 per cent on their easy access savings account, although significantly higher rates are available on fixed term deposits. The Bank of England’s base rate stands at five per cent.
The Financial Conduct Authority warned banks that they must inform savers if better deals are available once the new Consumer Duty comes into force at the end of this month.
Nunn said the bank had been “proactive” in contacting over 10m customers about better options available on fixed rate products. He said that had been “great changes” in its product mix in the first half, with a £3.1bn increase in retail savings balances in the first half and 1.9m savings accounts opened.
However, customer deposits decreased by £5.5bn since the start of the year, reflecting a “more competitive market” and high customer spend.
Lloyds are the first UK bank to report earnings for the second quarter. Barclays will release results tomorrow while Natwest report on Friday.