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Lloyds profits fall as competition for mortgages heats up

<span>Pressure to pass on interest rates to savers at the same rate as raising mortgage and loan charges has squeezed income for lenders such as Lloyds.</span><span>Photograph: Tom Nicholson/Reuters</span>
Pressure to pass on interest rates to savers at the same rate as raising mortgage and loan charges has squeezed income for lenders such as Lloyds.Photograph: Tom Nicholson/Reuters

Lloyds Banking Group has suffered a 28% drop in first-quarter profits amid tough competition for mortgages and savings, but bosses said they expected those pressures to soon ease, helped by an improving UK economy.

The country’s largest mortgage lender, which also owns the Halifax brand, said pre-tax profits dropped to £1.6bn between January and March, having fallen from £2.3bn last year when rising interest rates boosted the lender’s profits by almost 50%.

The bank’s chief financial officer, William Chalmers, said this reflected “keen pricing in the mortgage markets, and savings moving into higher rate accounts”. Competition and jitters in the mortgage market led to a drop in its total outstanding loan book.

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It resulted in a 10% drop in net interest income, which accounts for the difference in loan charges versus what is paid out to savers, to £3.2bn in the three months to March.

Pressure from politicians and regulators to pass on interest rates to savers at the same rate they had been raising mortgage and loan charges has squeezed income for major mortgage providers such as Lloyds in recent months.

In response, banks have had to compete harder for customer deposits by offering more substantial returns, particularly on fixed savings products where consumers lock away cash for longer. It attracted £1.3bn in regular customer deposits but that failed to make up for the £3.5bn pulled by business clients.

However, Chalmers said these savings and mortgage pressures were likely to “ease through 2024”, as economic conditions continued to improve.

House prices, which Lloyds previously expected to fall by 2.2% in 2024, are forecast to rise by 1.5% by the end of the year.

The banking group, often seen as a bellwether for the UK economy, is also forecasting a steady improvement in economic growth, at a rate of 0.3% in most quarters and a drop in inflation to 2.4% – from 3.2% in March – resulting in a fall in interest rates to 4.5% by December. It expects the Bank of England to cut rates three times in 2024, starting in the middle of the year.

Chalmers said mortgage applications had already soared by 20% in the first quarter, which could translate into new home loans, and reverse some of its loan book losses. That partly reflected the group’s willingness to offer better interest rates in order to boost lending.

“We’re really pleased to see the pickup in applications, and development of our market share, in that respect. And I think that represents what is a series of competitive offers out there in the market, suiting our customer needs. We’d hope to maintain that ambition over the course of the year,” Chalmers said.

Overall, the banking boss said he expected the UK mortgage market to pick up by 5% by the end of 2024. “We’d hope to play a major part in it,” Chalmers added.

The improved economic outlook meant the bank was more confident that customers could repay their loans. Despite the cost of living crisis and higher mortgage repayments, which have weighed on borrowers, Lloyds set aside £57m for potential defaults, compared with £243m last year.

The Lloyds chief executive, Charlie Nunn, 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.”

Investors had also been hoping for updates on the Financial Conduct Authority investigation into whether consumers have been charged inflated prices for car loans. Lloyds, which has the largest car loan division of the four biggest UK banks, has already put aside £450m – far short of the £2bn that analysts believe it could be on the hook for.

However, Lloyds did not give any more details about whether it might put aside more cash to cover potential fines or compensation for customers. The FCA has indicated that it will give more details on its findings by the autumn.