Lloyds beats profit estimates as consumers prove resilient and Bank of England holds rates

Lloyds Banking Group has outperformed profit expectations, buoyed by a lower-than-anticipated provision for doubtful loans and signs of rising consumer confidence.

The banking conglomerate, which includes Lloyds Bank, Halifax, and Bank of Scotland, disclosed a pretax profit of £1.82 billion for the period from July to September, slightly down from £1.86 billion in the same period last year, as reported by City AM.

Analysts had predicted a third-quarter profit of £1.62 billion, according to a consensus compiled by the company.

The FTSE 100-listed group enhanced its profits by earmarking considerably less for bad loans than analysts had forecasted. It recorded an impairment charge of £172 million, an increase from £44 million in the previous quarter but substantially below the £419 million logged a year earlier.

Expectations were set for Lloyds to allocate a £271 million impairment.

As a barometer for the UK's economic health with over 27 million customers, Lloyds' financial performance is closely watched. "We have continued to see increased confidence in customer activity," said William Chalmers, the Chief Financial Officer, during a press briefing.

Chalmers attributed the "relatively low" impairment to a debt sale within the quarter and noted the resilience of their customers. "Our customers continue to prove resilient, without a doubt," he remarked.

Highlighting positive economic indicators, the group observed a five percent uptick in non-essential spending by customers throughout the first nine months of 2024. Additionally, there was a notable 20 percent reduction in average energy bill expenditures.

In terms of deposits, Lloyds reported a £1 billion increase, reaching £475.7 billion in the third quarter.

The company's stock price experienced a 1.7 per cent increase in early trading on Wednesday. So far this year, its shares have seen a rally of 31 per cent due to an improving outlook for the UK economy.

For the third quarter, Lloyds' net interest income - the revenue it generates from loans minus what it pays on deposits - was £3.23bn.

This figure is down from £3.44bn a year ago and aligns with analysts' expectations of £3.18bn. Its net interest margin has narrowed to 2.95 per cent from 3.08 per cent.

UK lenders' margins have been under pressure this year as the Bank of England moved closer to reducing interest rates from a post-financial crisis high. In August, policymakers made the first rate cut since March 2020.

Expectations of further cuts this year have ignited a mortgage price war in recent months, with lenders reducing their rates to attract borrowers.

Lloyds, being Britain's largest mortgage provider, stated that its margins were impacted by customers refinancing their home loans onto lower-rate deals.

However, it reported £3.2bn of growth in mortgages during the quarter driving a £4.6bn increase in Lloyds' underlying loans and advances to customers.

In response to uncertainty ahead of the new government's first Budget on 30 October, mortgage rates, including those of Halifax, have started to rise this month.

The banking giant reaffirmed its guidance for 2024, which includes a net interest margin of over 2.9 per cent and a return on tangible equity, a crucial profitability measure, of around 13 per cent. "We are making good progress on our strategy and remain on track to deliver higher, more sustainable returns," stated CEO Charlie Nunn.

In other news, Lloyds provided no fresh details regarding its exposure to the Financial Conduct Authority's (FCA) review into whether consumers were unjustly charged through now-prohibited commission arrangements on car loans. The bank acknowledged a judicial review and Court of Appeal decisions involving its peers and stated it "will assess the impact, if any, of these decisions".

Since the probe was announced in January, investors have been closely monitoring Lloyds' response. Lloyds, owner of the UK's largest auto lender, Black Horse, is considered the most exposed lender in absolute terms to potential compensation fees.

In February, Lloyds earmarked £450m for potential costs related to the review, but analysts predict the total bill could reach as high as £3.5bn.