Lloyds Banking Group reported stronger-than-expected profits after the UK’s largest mortgage lender cashed in on a surge in demand for home loans.
The bank, which owns Halifax and accounts for roughly 19% of the UK mortgage market, said mortgage lending increased by £3.5bn over the three months to September, as it processed the highest number of applications since 2008.
The housing market has boomed since a temporary stamp-duty holiday and a so-called race for space, as many people have been reconsidering their lifestyles during the Covid-19 pandemic.
Chief executive António Horta-Osório said Covid restrictions, which have forced people to spend more time at home, prompted demand for larger homes outside city centres. Meanwhile, lockdowns have resulted in consumers spending less on going out, but saving more of their earnings for home purchases.
“People have been saving through the pandemic, given that they spent less on travel and hospitality… So there is also structural shift in customer behaviour,” he said.
The bank is expected to profit from further demand in the final three months of the year. “We already know that this strong mortgage growth in Q3 is going to accelerate into Q4 and we are absolutely on it,” the chief executive added.
The boost in mortgage and business lending helped lift pre-tax profits, which were £1bn for the quarter. Analysts had been expecting profits of £588m.
It is also a significant improvement on the £50m profit reported during the same period last year, when the bank was forced to put aside large sums linked to payment protection insurance claims, which nearly wiped out its earnings.
Despite the bank’s strong performance Lloyds’ chief financial officer, William Chalmers, cautioned that an economic downturn in the UK had merely been delayed from the end of 2020 and into 2021. “The downturn is expected to come, but it is expected to come slightly later,” he said.
Lloyds suffered a 16% drop in net interest income – which measures the difference between interest earned on loans versus paid on deposits – to £2.6bn after UK interest rates were cut to a record low of 0.1% in March.
The Bank of England has warned lenders to prepare for negative interest rates, prompting Lloyds’ rival HSBC to warn it may start charging for current accounts in countries such as the UK to help make up for the drop in income.
Horta-Osório said Lloyds’ position on current account fees was unchanged, adding that the central bank would likely announce further quantitative easing before introducing negative rates.
Lloyds put aside a further £301m to cover a potential surge in bad debts linked to the Covid crisis, but this was less than half the amount analysts had expected.
The provision brings the bank’s total impairment charge to £4.1bn for the first nine months of the year. It now expects the full year total to be at the lower end of the £4.5bn-£5.5bn it predicted in the summer.
However, Lloyds said there was “significant uncertainty” around the economic outlook due to both the ongoing pandemic and Brexit. “The extent of the impairment charge at the full year will depend on the potential severity and duration of the economic shock in the UK.”
Lloyds shares rose 2.5% in morning trading to 28.36p. The banks’ stock price has dropped around 50% since February.