Written by: Sophie Lund-Yates | Hargreaves Lansdown
Third quarter underlying net interest income rose 19% to £3.4bn, as net interest margins (the difference between what a bank earns in interest and pays on deposits) rose to 2.98% from 2.55%, because of higher interest rates. Underlying other income was down 4% at £1.3bn.
Costs only increased slightly, so underlying profit rose 22% to £2.4bn. But after including a £668m impairment charge in anticipation of more customers defaulting on their loans because of a weaker economic outlook, profit fell 17%.
Total loans and advances to customers were broadly flat at £456.3bn, with almost £300m of this coming from the open mortgage book.
The CET1 ratio – an important measure of a bank’s capital position – fell to 15% from 16.3%, partly reflecting regulatory changes.
Lloyds expects full year net interest margins to be higher than 2.9%.
Lloyds has seen its profits wiped out as it puts almost £700m aside in readiness for a weak economy. This non-cash charge is a buffer in case a high number of customers default on their loans. The best case scenario is that the group has over-egged its estimates and some of that hoard will be released, ultimately boosting profits. The more difficult scenario comes if the economic dive is steeper than predicted, which would see impairment charges swell. To a large extent, Lloyds can’t control the external forces that govern its customers’ behaviour, but its particular exposure to traditional lending, especially mortgages, puts it in the firing line when conditions sour.
Lloyds is doing what it can to diversify its income streams and announced a grand new strategy recently, which involves beefing up its wealth management capabilities. In usual times this would be a strong idea, but the wealth management sector has had a torrid time in recent months, making this yet another challenge for Lloyds to get through. The bank is dripping with excess capital, so it has more than enough backbone to pull through these difficult times, but further dents to the income statement certainly can’t be ruled out.