- Bank posts best-in-class margins

- Net interest margin forecast raised

- Early provision for bad loans taken poorly

The UK’s largest high street lender Lloyds Banking Group (LLOY) rewarded its army of small investors with a ‘robust’ nine-month trading update and improved full year guidance.

Chief executive Charlie Nunn said the bank was well placed to meet the current economic uncertainty ‘while generating enhanced returns for shareholders’ thanks to its strong capital generation, but a bigger than expected bad loan charge sent the shares 1.5% lower to 41.8p.


The bank posted a 12% increase in group income to £13 billion thanks to increased lending and a higher net interest margin, the difference between the interest rate it can charge on loans and the rate it pays on deposits.

Lending increased by £7.7 billion to £456 billion with continued growth in mortgages while deposits increased by £8 billion to £484 billion.

A bigger level of deposits means the bank doesn’t have to go to the wholesale market to fund its lending, which is how other banks such as Northern Rock got themselves in trouble.

Also, rising interest rates have allowed the bank to increase the cost of borrowing to customers while raising deposit rates more slowly.

As a result, net interest income climbed 15% and the net interest margin almost hit 3% during the third quarter, easily the best of any of the big high street banks.

Lloyds’ core equity tier one ratio, a measure which regulators use to gauge how solid the banks’ balance sheets are, hit 15% which is well ahead of its ongoing target of 12.5% plus the mandatory 1% ‘management buffer’.

Underlying net profits were up 29% to £6.5 billion, well ahead of analysts’ estimates, but the bank took a £1 billion provision for bad loans so as to ‘front-load’ against a possible deterioration in business and consumer finances which meant headline earnings were below estimates.


Given what it called the ‘robust performance’ of the first nine months, Lloyds raised its net interest margin target from 2.8% previously to 2.9% for the full year.

Operating costs are seen at £8.8 billion compared with £7.6 billion last year as the bank increases what it calls strategic investments and new businesses.

At the nine-month stage, the cost-to-income ratio was a fraction under 50% which was an improvement on the 51.2% recorded at the half-year and puts Lloyds even further ahead of its peers in terms of efficiency.

Banking specialist Gary Greenwood at Shore Capital commented: ‘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.’


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Issue Date: 27 Oct 2022