Lloyds Banking Group PLC on Wednesday reported a drop in profit, as it built its credit reserves, but has increased its margin outlook for 2022 due to its ‘solid’ performance.

Shares in the FTSE 100-listed lender were up 2.1% at 46.83 pence, making it one of the best blue chip performers in early trading.

In the three months to March 31, Lloyds recorded a pretax profit of £1.62 billion, falling from the £1.90 billion seen in the same period the year before.

The bank booked an underlying credit impairment of £177 million in the first quarter, reversing from a £360 million gain the year prior. Lloyds set aside the money as it prepares for the cost-of-living crisis in the UK to hurt borrower disposable income, while it also cut its outlook for the UK economy as the Ukraine war compounds inflation pressures.

‘Additional judgements have been raised to capture the increased risk of inflation and impact on the cost of living, with a further £100 million added in the quarter, largely within segments of the Retail book that are considered less resilient to disposable income shocks,’ the bank explained.

Chief Executive Charlie Nunn said: ‘Whilst we are seeing continued recovery from the coronavirus pandemic, the outlook for the UK economy remains uncertain, particularly with regards to the persistency and impact of higher inflation.’

Net income rose to £4.11 billion from £3.66 billion. Underlying net interest income increased to £2.95 billion from £2.68 billion, as its banking net interest margin improved to 2.68% from 2.49%.

Underlying ’other’ income rose to £1.26 billion from £1.14 billion.

‘In the first three months of 2022, we delivered solid financial performance, with strong income growth and capital build. These results demonstrate the consistent strength of our business model,’ Nunn added.

Lloyds ended the first quarter with a CET1 ratio of 14.2%, down from 16.7% at the same point the year before, and down from 17.3% at the end of 2021.

Nunn continued: ‘In February, we announced our ambitious new strategy, aiming to transform our business, generating a stronger growth trajectory and enabling the group to deliver higher, more sustainable returns and capital generation. In March we announced a new business structure, aligned to the new strategy and have started work on the strategic initiatives which will drive revenue growth and diversification, strengthen our cost and capital efficiency, as well as maximise the potential of our people, technology and data.’

The bank’s cost-to-income ratio in the first quarter improved to 52.3% from 57.6% the year before.

The bank ended the first quarter with a customer loan book standing at £451.8 billion, increased from £443.5 billion at the same point last year and up from £448.6 billion three months earlier. Lloyds saw its open mortgage book grow to £295.0 billion from £283.3 billion year on year, and rose from £293.3 billion over the past quarter.

Looking ahead, Lloyds said - owing to its ‘solid’ financial performance and current macroeconomic assumptions - it has upped its guidance for 2022 for banking net interest margin and return on tangible equity.

Banking NIM is now expected above 270 basis points, versus guidance of 260 basis points previously, while RoTE is guided to be greater than 11%, versus a prior prediction of around 10% and building on the 10.8% seen in the first quarter of 2022.

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