Lloyds Banking Group PLC on Thursday reported a sharp drop in quarterly profit, as it recognised a large credit impairment to cover the rising number of bad loans.

In three months to September 30, pretax profit slumped 26% to £1.51 billion from £2.03 billion.

Net income was up 13% to £4.59 billion from £4.08 billion, as underlying net interest income rose 19% to £3.39 billion from £2.85 billion, but other income was down 4% to £1.28 billion from £1.34 billion.

Shares in Lloyds fell 1.7% to 41.85 pence each in London on Thursday morning.

The bank set aside £668 million in the quarter as underlying credit impairments to handle the fallout from increased bad loans, reversing from the £119 million gain recorded the year prior.

Lloyds’s CET1 ratio - a key measure of a bank’s financial strength - rose to 15.0% at the end of September from 14.7% at June 30.

In the first nine months of the year, net interest income jumped 56% to £11.06 billion from £7.07 billion. However, this was offset by a loss in other income of £17.98 billion, swung from positive income of £20.01 billion.

This led to a loss in total income of £6.92 billion, compared to positive income of £27.09 billion. Pretax profit fell to £5.17 billion from £5.93 billion, as the firm recognised an impairment charge of £1.06 billion compared to a credit of £846 million a year before.

Lloyds’s banking net interest margin improved to 2.98% in the third quarter from 2.55%. Looking ahead, the bank now expects its annual banking NIM to be greater than 2.90%, which is higher than the over 2.80% expected in July.

Lloyds said its return on tangible equity is still expected at 13% in 2022, unchanged from July. It was 11.9% in the third quarter, down from 14.5% a year ago.

Asset quality ratio is expected to be about 30 basis points. At the bank’s half-year results the ratio was guided at below 20 basis points. The asset quality ratio is the ratio of non-performing assets to total equity plus loan loss reserves.

Shore Capital said the Lloyds third-quarter pretax profit of £1.51 billion missed market consensus of £1.84 billion.

‘Guidance sees full year NIM upgraded which is broadly offset by a downgrade to the impairment ratio, although capital generation is now expected to be better than previously expected,’ said analyst Gary Greenwood.

‘While the strengthening of provisions is prudent given the deterioration in the economic outlook, and observed asset quality remains strong, we think the market may be spooked by the miss to expectations and downgraded guidance in this respect.’

‘In February we announced an ambitious new strategy. While the operating environment has changed significantly since then, our customer focus remains unchanged. We continue to execute against our strategic goals, based on our objectives of transforming the business, while generating a stronger growth trajectory and enabling the group to deliver higher, more sustainable returns,’ said Chief Executive Charlie Nunn.

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