Lloyds Banking Group PLC on Wednesday said first quarter profit slumped as the benefits of higher interest rates faded amid mounting costs.

Shares in the Edinburgh-based lender were down 1.4% to 50.60 pence in London on Tuesday morning. The wider FTSE 100 index was up 0.5%.

Lloyds said pretax profit in the first three months of 2024 slumped 28% to £1.63 billion from £2.2 billion a year prior. Earnings per share decreased to 1.7p from 2.3p.

Net income slid 8.8% to £4.24 billion from £4.65 billion, with net interest income down 10% to £3.18 billion from £3.54 billion.

The latter reflected a lower banking net interest margin, as expected, of 2.95%. This was below 3.22% reported a year before and 2.98% in the fourth quarter of 2023.

Lloyds forecast a banking net interest margin of greater than 290 basis points for 2024 as a whole.

Adding to the squeeze on profitability, operating costs increased by 11% to £2.43 billion from £2.19 billion and the cost income ratio deteriorated to 57.2% from 47.1%.

The rise in costs included an around £0.1 billion charge relating to the sector-wide change in the charging approach for the Bank of England levy. Excluding this, operating costs were up 6%, Lloyds said.

Lloyds also highlighted ‘elevated’ severance charges, £0.1 billion higher in the year to date.

Despite the profit fall, Lloyds reaffirmed 2024 guidance.

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.’

Impairment charges fell to £57 million in the first quarter from £243 million a year before, while Lloyds recognised remediation costs of £25 million, compared to £19 million.

But there was no further charge relating to the potential impact of the UK Financial Conduct Authority’s review into historical motor finance commission arrangements, announced in earlier this year.

In February, Lloyds booked a £450 million provision in connection to the probe.

Lloyds said loans and advances to customers were down 0.8% to £448.5 billion from £452.3 billion, with a similar decline in customer deposits to £469.2 billion from £473.1 billion.

Growth in Retail deposits of £1.3 billion was more than offset by a reduction in Commercial Banking of £3.5 billion, the bank noted.

Lloyds said the CET1 capital ratio eased to 13.9% from 14.1%. The return on tangible equity decreased to 13.3% from 19.1%.

Looking ahead, Lloyds forecast 2024 operating costs of around £9.3 billion plus the around £0.1 billion Bank of England levy; an asset quality ratio of less than 30 basis points; return on tangible equity of around 13%, capital generation of around 175 basis points; and to ‘pay down’ to a CET1 ratio of around 13.5.%.

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