Lloyds profits fall 14% as it warns of mortgage defaults

Lloyds said soaring inflation threatened the outlook. Photo: Paul Hackett/Reuters

Lloyds Banking Group (LLOY.L) warned that the cost of living crisis could lead to an increase in defaults on its loans, as it saw a 14% drop in quarterly profits.

The British lender reported first-quarter profit of £1.6 billion, up from £1.9 billion a year earlier. Revenue rose 12% to £4.1bn, helped by rising interest rates and continued mortgage growth.

The lender, which is the UK’s biggest mortgage provider, recorded an impairment charge of £177million as it warned the cost of living crisis could affect the borrower’s disposable income .

“While we are seeing a continued recovery from the coronavirus pandemic, the outlook for the UK economy remains uncertain, particularly regarding the persistence and impact of higher inflation,” the chief executive said. Charlie Nunn.

The bank said rising inflation, which hit a record 7% last month, is making it harder for borrowers to keep up with payments.

Read more: HSBC profits fall 28% amid Ukraine war fallout

“We are proactively reaching out to customers when we think they might need help and will continue to help them with financial health checks and other means of support.

“We encourage customers, when concerned, to get advice early and talk to us.”

Lloyds chief financial officer William Chalmers said that although borrower arrears remain low and below pre-pandemic levels, the bank is preparing for an increase in them.

“We’re probably going to go into a tougher environment and expect the impairments to increase a bit,” he said.

Lloyds’ share price rose in early trading as investors reacted to the numbers.

“The performance of Lloyds Bank’s share price since the pandemic first hit the shores of the UK economy has been one of life’s great mysteries, given that it is still well below pre-pandemic levels, yet the bank continues to return numbers that have improved significantly from pre-pandemic levels,” said Michael Hewson, chief market analyst at CMC Markets.

“Of course, as we look to the second quarter, the main risks to Lloyds’ outlook are higher prices across the board, with the bank warning of continued higher inflation among its customers, going on to say that she proactively engages with customers who may be particularly vulnerable,” he added.

The lender has also cut its outlook for the UK economy as the war in Ukraine adds to inflationary pressures.

Lloyds has no direct exposure to Russia, but said the war in Ukraine was impacting customers through higher energy and commodity prices.

The bank now expects the UK economy to grow below the first forecast of 3.6% in 2022, with expansion stagnating in the second quarter, but said this would be offset by the stable house prices and low unemployment.

The group sees interest rates climbing to 1% in the second quarter and rising to 1.25% over the following three months as the Bank of England scrambles to contain soaring inflation.

However, despite the economic uncertainty, Lloyds has revised its guidance for its return on tangible equity and net interest margin.

Read more: FTSE: UK dividend payout climbs to £13bn

Its net margin, the difference between the cost of its funding and the price it charges for loans, is expected to be above 270 basis points, down from 260 basis points.

Tangible equity, a key measure of profitability, is expected to be above 11%, compared to a target of 10% in February.

Lloyds’ Tier 1 capital buffer, a measure of financial strength, fell significantly to 14.2% from 16.3% in 2021, which the bank blamed on regulatory changes.

Costs rose around 3% to £2.1bn, which the bank said was mainly due to strategic investments.

Watch: How does inflation affect interest rates?

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