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FTSE 100: Lloyds profit dips as it sets aside £377m to cover loan defaults

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·Business Reporter, Yahoo Finance UK
·4-min read
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Lloyds bank, in London
A branch of Lloyds bank in London. Photo: Tom Nicholson/Reuters

Lloyds Banking Group (LLOY.L) climbed higher on the day despite posting a 6% fall in half-year profits to £3.7bn ($4.5bn). This was after it set aside £377m to cover a possible increase in loan defaults due to rising interest rates to combat soaring inflation.

However, this was better than analysts forecasts of a profit of £3.2bn, even though it was down from the £3.9bn achieved in the same period the year before.

The lender, which is considered a bellwether for the British economy, said that £95m of its half-year impairment charge was due to a weaker economic backdrop in the UK, as runaway inflation impacted consumer spending.

Despite the wider economic concerns, it still upped its full-year outlook across a raft of performance measures, thanks to rapidly rising interest rates to combat inflation. UK banks have benefited this year from nine consecutive months of interest rate rises from the Bank of England (BoE).

Watch: What higher interest rates means for your finances

The UK’s biggest domestic bank added that profits rose 34% on an underlying basis to £4.1bn in the first six months, and that strong revenue growth was supported by continued recovery in customer activity and UK bank rate changes.

Net income came in at £8.5bn, up 12% compared with the same period the year before, with card spending higher than in 2019.

Customers were spending less on things like white goods, and ditched 2.2 million non-essential subscription services since last summer in the face of soaring inflation.

Lloyds also raised its forecast for return on tangible equity, a key measure of profitability, to 13% for 2022, up from a forecast of greater than 11% as of March. Meanwhile, its mortgage book swelled over £3bn as the UK’s buoyant property market helped the group.

It declared an interim ordinary dividend of 0.8p per share, pushing the stock almost 5% higher in London on the back of the news.

“In February we announced an ambitious strategy to transform our business, generate a stronger growth trajectory and enable the group to deliver higher, more sustainable returns. While the world has changed significantly since February, our strategic focus remains clear and disciplined,” chief executive Charlie Nunn said.

“Our strong financial performance demonstrates the resilience of our business model and customer relationships, and has enabled us to enhance guidance for 2022.

“Just as we remain well placed to withstand the current macroeconomic uncertainty and continue to generate significant capital for our shareholders, so too do we remain committed to maintaining the support we give to our customers every day as they adapt to the challenges they face.”

Read more: HSBC reveals the scams that target bank customers

Richard Hunter, head of markets at Interactive Investor, said: “Despite an increasingly challenging economic backdrop in the UK, Lloyds has made an impressive start to the year on most metrics.

"The capital strength and cash generation has also enabled an increase to the dividend, which now stands on a projected yield of 4.9%. quite apart from being a show of confidence by management, the yield is comfortably in excess of the average for the FTSE100 and provides significant attraction to income-starved investors."

He added: "The share price has struggled to keep pace with this progress, partly given the fact that it is often seen as a barometer of the UK economy. The shares have dropped by 6.5% over the last year, as compared to a gain of 4.4% for the wider FTSE100, although the fact that the bank has increased its guidance should engender stronger confidence, as evidenced by the initial price reaction to the numbers."

Read more: UK shop prices continue rise to record high as inflation bites

It came as the bank announced on Tuesday that it was closing 66 bank branches between October 2022 and January next year.

It confirmed 48 Lloyds Bank branches and 18 Halifax branches will shut down as part of a wider trend which has seen larger lenders ditch the high street, shifting their focus to online banking.

The additional closures come just two months after Lloyds revealed plans to shut 28 branches between August and November this year.

Lloyds said all staff members will have the opportunity to move to a different branch or another part of the company, and that there will be no compulsory or voluntary redundancies.

Visits to the branches due to shut have fallen by 60% in the last five years on average and by 85% in some locations, Lloyds said.

Watch: How does inflation affect interest rates?

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