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FTSE 100: Lloyds sees profits drop by 28%

A general view of Lloyds Bank in Commercial Road, Portsmouth
Lloyds has been hit by rising competition in the mortgage market. (Rob Arnold)

Lloyds (LLOY.L) reported a 28% drop in its first quarter profits as the lender was hit by stronger competition in the mortgage market.

The bank announced a pre-tax profit for the first quarter of £1.6bn ($1.99bn), down from £2.3bn a year ago.

It came in slightly below forecasts with analysts expecting a quarterly profit of £1.7bn.

Lloyds said the decline was driven by lower net interest income — the difference between what it generates from loans and pays out for deposits — and higher business costs.

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. Underlying net interest income fell 10% to £3.2bn.

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Its margins have narrowed into 2024 amid intense competition for mortgages and deposits, and the expectation that rate-setters will make multiple cuts this year.

Furthermore, earnings per share decreased by 0.6 pence to 1.7 pence, and the CET1 ratio reached 13.9%. Operating costs jumped 11% to £2.4bn.

Read more: Best UK banks for online and mobile security revealed

Charlie Nunn, group chief executive, said: "The group is continuing to deliver in line with expectations in the first quarter of 2024, with solid net income, cost discipline and strong asset quality. Our performance provides us with further confidence around our strategic ambitions and 2024 and 2026 guidance.

"Guided by our purpose, we are continuing to support customers and successfully execute against our strategic outcomes, as highlighted in the third of our strategic seminars last month. This underpins our ambition of higher, more sustainable returns that will deliver for all of our stakeholders as we continue to help Britain prosper.”

Total lending was down £1.2bn at £448.5bn as were total deposits, down 1% (£2.2bn) to £469.2bn in the first three months of the year.

With fears about rising mortgage costs — and therefore higher defaults — rising, The UK's biggest bank insisted it will keep supporting customers.

The lender said it had reached out to around 735,000 savings customers "whose current behaviour" suggests they would benefit from changing their savings product to take advantage of a better rate.

For its mortgage customers, Lloyds said every year it contacts more than 200,000 on variable rates to talk about options to save money by transferring to a lower fixed rate.

Read more: Mortgage lenders hike interest rates as market jitters set in

There was an impairment charge of £57m compared to loans of £448bn.

The lender reassured investors by stating that results this year would be in line with expectations. Its outlook now includes house prices to rise 1.5% in 2024.

The FTSE 100 (^FTSE) company said it took no further charges related to the potential impact of the motor finance by the Financial Conduct Authority.

The bank booked a £450m provision related to the possible costs of the redress scheme in February.

Richard Hunter, head of markets at Interactive Investor, said: "This update has done little to excite supporters of the stock, with some weakness being experienced in the price in early trade, although as a longer-term play based on shareholder returns, improving prospects and a historically undemanding valuation, the market consensus of the shares as a buy is likely to remain intact.”

AJ Bell investment director Russ Mould noted that the lack of positive surprises halted a good run in the share price.

“Lloyds’ shares are up by more than a quarter in the past six months and that gallop leaves the shares trading almost exactly in line with their net asset, or book, value per share of 51.2p," he said.

“When the good times are really rolling, that figure could prove to be a valuation floor, but at the moment it feels more like a cap, given the uncertain economic outlook."

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