Lloyds Banking Group (LLOY.L) saw pretax profit slide by 28% in the first quarter, as rising costs, peaking interest rates and intensifying competition in the mortgage market hurt income.
Britain's largest mortgage lender reported Q1 pretax profit of 1.6 billion pounds ($1.99 billion) on Wednesday, down from 2.3 billion a year ago, in line with expectations.
The bank's shares fell 2% in early trading, compared with a 0.3% dip in the FTSE 100 (.FTSE).
Lloyds said higher operating costs were partly to blame for the profit fall, including a new sector-wide Bank of England levy on lenders and a 100-million-pound additional charge to cover employee severance after a recent round of layoffs.
The results underscored the challenge Lloyds and peers will face to keep profit rising, as the interest rate environment turns and expenses tick higher.
Lloyds said its net interest margin, a closely-watched measure of profitability, edged down to 2.95% from 2.98% at the end of the fourth quarter and 3.22% a year ago.
But Chief Financial Officer William Chalmers told reporters on a conference call the lender expected pressures on margins "to ease through 2024".
The bank 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%.
Britain's banks had enjoyed a sharp uplift in profit in recent years as policymakers hiked interest rates rapidly to combat inflation. Those moves helped banks make more on the gap between what they charge borrowers and what they pay depositors.
Lloyds took an impairment charge of just 57 million pounds in the quarter, against a 280-million-pound analyst forecast, underlining the resilience of its borrowers and robust asset quality across its loan book.
It also opted against making any fresh provision this quarter for possible redress claims in its motor finance business, after already setting aside 450 million pounds.
"We expect the market will start to reward Lloyds for better cost control and asset quality versus peers," analysts at RBC Capital said in a note.
"...we think that 2024's election is most comparable to 1997. In that year, UK banks significantly outperformed the market in the 9 months running up to the election," RBC added, while adding that the FCA probe into possible motor finance overcharging challenged the thesis.
BENIGN ENVIRONMENT
A robust housing market remains key to Lloyds' fortunes, and the lender forecast house prices to rise by 1.5% in 2024, compared with previous expectations for a fall of 2.2%.
British house prices rose in March at their fastest annual pace since December 2022, data from the Nationwide Building Society showed this month.
Concerns whether global central banks have brought inflation under control have dampened expectations for a slew of interest rate cuts this year, but Chalmers told reporters he saw "a more benign economic outlook going forward" and was still expecting three BoE base rate cuts this year.
Lloyds hinted it could revise its guidance upwards later in the year, if conditions continued to improve.
"It's appropriate for us to ensure that we deliver in line with expectations we have set out, and if things turn out better, then we will guide to that at the half year or third quarter as appropriate," Chalmers said.
($1=0.8030 pounds)
