Lloyds Banking Group Reports Lower Profits as Benefits from Higher Interest Rates Wane

Lloyds Bank reports 28% drop in Q1 2024 profits due to lower interest income and increased competition, but remains optimistic about the UK economy and its ability to support customers.

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Salman Akhtar
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Lloyds Banking Group Reports Lower Profits as Benefits from Higher Interest Rates Wane

Lloyds Banking Group Reports Lower Profits as Benefits from Higher Interest Rates Wane

Lloyds Banking Group, the UK's largest mortgage lender, reported a 28% drop in its pre-tax profit for the first quarter of 2024, falling to £1.6 billion from £2.3 billion a year earlier. The decline was driven by lower net interest income, as mortgage costs eased and more savers moved cash into higher-yielding accounts, as well as increased competition in the mortgage and savings market.

The bank's profits were impacted as the boost from rising interest rates started to diminish. Lloyds' net interest margin, a key measure of profitability, also declined. However, the bank took a lower-than-expected impairment charge, indicating the resilience of its borrowers and robust asset quality.

Despite the challenges, Lloyds said its customers are resilient, and it has an improved outlook for the economy in 2024. The bank expects house prices to rise by 1.5% this year, compared to its previous forecast of a 2.2% fall. Lloyds also anticipates interest rates to be cut three times in 2024, with the first 0.25 percentage point reduction coming in May or June.

William Chalmers, the group's chief financial officer, noted that about half of the bank's customers tied to a fixed-rate mortgage have refinanced since October 2022, representing around £100 billion worth of lending. A significant chunk of borrowers with loans worth about £50 billion are still set to refinance over the course of the year.

Why this matters: Lloyds Banking Group's financial performance serves as a barometer for the UK economy and the banking sector. The bank's lower profits and the waning benefits from higher interest rates highlight the challenges faced by financial institutions in the current economic environment.

Lloyds reiterated its guidance for 2024, including a net interest margin greater than 2.90%, operating costs of 9.3 billion pounds, and a return on tangible equity around 13%. The bank expects pressures on margins to ease through 2024 and hinted it could revise its guidance upwards later in the year if conditions continue to improve. "Our strong capital position, combined with our improved outlook for the UK economy, means that we are well placed to continue to support our customers," said Chalmers.

Key Takeaways

  • Lloyds Bank's Q1 2024 pre-tax profit fell 28% to £1.6B due to lower net interest income.
  • Profit decline driven by easing mortgage costs, higher-yielding savings, and increased competition.
  • Lloyds expects house prices to rise 1.5% in 2024, with interest rates cut 3 times.
  • About £50B in borrowers still to refinance mortgages in 2024, posing challenges.
  • Lloyds reiterates 2024 guidance, expects margin pressures to ease through the year.