Big lender makes some adjustments, hopes new Reeves taxes will settle the market
Lloyds Banking Group has reported a slight drop in profits as it contends with challenges in the mortgage market, driven by falling interest rates. Despite the dip, the UK’s largest mortgage lender managed to exceed analysts' predictions.
For the third quarter, Lloyds' pre-tax profits declined by 2% to £1.8 billion, slightly down from £1.86 billion a year earlier. However, this result outperformed forecasts, which had projected a more significant drop to £1.6 billion. “Our performance allows us confidently to reaffirm our 2024 guidance,” said CEO Charlie Nunn (pictured), highlighting the bank’s resilience.
Lloyds' net interest margin, which measures profitability by comparing lending and deposit rates, dropped to 2.95% from 3.08% a year earlier. Over the first nine months of the year, this margin also fell to 2.94% from 3.15%, as increased competition in the mortgage market and customers shifting savings to higher-rate accounts pressured earnings. Still, Lloyds maintained its target of keeping the margin above 2.90% for 2024.
Market competition and economic headwinds
The mortgage market has become more competitive as rates, which are tied to future expectations, have eased slightly following the Bank of England’s decision to cut its base rate from 5.25% to 5%. CFO William Chalmers noted that, “We have continued to see increased confidence and customer activity,” emphasising that the bank's loan book grew by 1%, driven by new mortgages, credit cards, and other unsecured loans.
While Lloyds took £172 million in impairment charges in the quarter—better than the £271 million anticipated—it attributed £77 million to the sale of an unsecured loan portfolio. The bank also reassured investors that hedging strategies continued to shield it from some of the negative impacts of falling interest rates.
Tax speculation and market response
With the UK government considering new fiscal policies to plug a £22 billion public finance gap, banks are wary of potential tax increases. Chalmers expressed hope that the government’s upcoming budget would focus on growth. "It is important to have a competitive, stable tax regime to encourage investment and promote lending," he said. He added that Lloyds was prepared to support the economy “whatever the tax environment.”
Despite the profit decline, the market responded positively to Lloyds' results. Shares rose by as much as 2.4%, reaching their highest level since 2019, reflecting investor confidence. The bank's stock has climbed 31% since the start of the year, significantly outperforming the broader FTSE 100 index.
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Lloyds’ revenue slipped 4% to £4.35 billion, with net interest income contributing £3.23 billion. However, other income rose 10% to £1.43 billion. The bank reiterated its 2024 targets, aiming for a return on tangible equity of around 13% and a common equity Tier 1 ratio of approximately 13.5%, signaling strong capital health.
Looking ahead, Lloyds expects house prices to rise by 3.1% this year, up from earlier predictions of 1.9%, reflecting modestly improving conditions in the housing market. Nunn credited the bank’s performance to disciplined cost management and stable asset quality, adding that Lloyds remains on course toward becoming a more streamlined and digital-focused operation.
