Bank of Scotland owner Lloyds to focus on cost cutting and income growth after profit slide to £3.3 billion

“Lloyds has provided a timely reminder as to why it is often seen as a barometer for the wider UK economy” – Richard Hunter, Interactive Investor

Bank of Scotland owner Lloyds Banking Group has become the latest big lender to see its profits cool as margins come under pressure from peaking interest rates and competition.

The group, which ranks as the UK’s biggest mortgage provider and also includes Halifax and Scottish Widows, generated a pre-tax profit of £3.3 billion in the first six months of the year. This marks a 14 per cent decline from the £3.9bn reported a year earlier although it is higher than some analysts had been forecasting.

Hide Ad
Hide Ad

The banking giant generated less income in the first half of 2024 despite borrowing costs remaining higher. Its net interest income - the amount it generates from loans minus what it pays out on savings - fell by a tenth year on year.

Lloyds Banking Group's latest results were met with a mixed reaction in the City.Lloyds Banking Group's latest results were met with a mixed reaction in the City.
Lloyds Banking Group's latest results were met with a mixed reaction in the City.

Lloyds was among the major UK lenders to report bumper profits last year, with its income boosted by higher interest rates which allowed banks to charge more for loans. Those interest rates now look set to fall after plateauing, with the Bank of England making its first cut possibly as early as August 1.

Nevertheless, Lloyds also revealed that its balance sheet grew, with the amount it lent to customers jumping by £2.7bn. Customer deposits also increased over the period, with an additional £4.9bn put into savings and current accounts.

Richard Hunter, head of markets at investment platform Interactive Investor, described the results as “steady rather than spectacular” but said an improvement in the second quarter “bodes well for the remainder of the year”.

Hide Ad
Hide Ad

He added: “With a resilient performance amid a higher interest rate environment and with some promising signs of growth, Lloyds has provided a timely reminder as to why it is often seen as a barometer for the wider UK economy.”

The headquarters of Lloyds owned Bank of Scotland on The Mound, Edinburgh.The headquarters of Lloyds owned Bank of Scotland on The Mound, Edinburgh.
The headquarters of Lloyds owned Bank of Scotland on The Mound, Edinburgh.

Lloyds chief executive Charlie Nunn said the bank was “surprised by how quickly the mortgage market recovered, which gave an indication that people had been waiting for that lower rate environment”.

Mortgage rate cuts towards the start of 2024 prompted more activity in the housing market, especially in January and February, he noted. Nunn said that demand had slowed in recent months as mortgage rates edged up again, but that people are still looking to “lock in” mortgage rates for two or five years.

He said individuals and businesses were showing “more resilience” than the bank had expected, with the number of customers having financial difficulty going down in recent months.

Hide Ad
Hide Ad

Attention will now focus on the outlook for the full year and the next big move for Lloyds, which is looking to make about £1.2bn worth of cost savings from changes to its wider strategy, and unlock some £700 million worth of extra income, which it said it is on track to achieve.

Zoe Gillespie, senior investment manager at wealth firm and brokerage RBC Brewin Dolphin, said: “Although profits have fallen, Lloyds’ results are broadly in line with expectations. The bank’s net interest margin was always going to come under pressure from peaking interest rates and competition.

“The indications from European banks’ results were that the sector, as a whole, should be in relatively rude health and Lloyds is very much a continuation of that story. All things being equal, the bank is on track to deliver its guidance for the year and longer term strategic aims - but the question remains what the next big move will be, following the sale of its Scottish Widows in-force bulk annuity portfolio.”

Shareholder boost

Lloyds, which was releasing its interim results a day ahead of RBS owner NatWest Group, announced the payment of an interim ordinary dividend of 1.06p per share, up 15 per cent on a year ago, which will cost £662m in total.

Hide Ad
Hide Ad

Nunn said the bank delivered “robust financial results” in the first half and that 2024 is a “key year for our strategic delivery”. Furthermore, new economic forecasts provided by the bank show that the UK economy is expected to grow by slightly more than previously thought. Gross domestic product (GDP) could rise by 0.8 per cent this year, and then 1.2 per cent next year, according to its base case forecasts. However, the bank is now expecting UK interest rates to be reduced just twice this year, having previously forecast three cuts.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: “Investors should look past the headline year-on-year numbers; they don’t make for great reading. It’s long been expected that performance will lag the record levels seen over 2023. That doesn't mean it’s time to turn away.

“An improved economic outlook for the UK drove the better-than-expected profit performance, as impairments came in below expectations. Underneath the accountants’ mojo, borrowers continue to show resilience in the face of higher interest rates. Lloyds grew the loan book over the period, with a slight uptick in new mortgages. These still aren’t as profitable for the banks as they have been in the past, but it’s a good sign that demand’s coming back.”

“Deposit growth completed the balance sheet clean sweep,” he added. “Savers are still favouring the longer-term accounts, trying to take advantage of higher rates before they disappear. That’s acting as a headwind for Lloyds, but one that’s easing as savers opt for limited withdrawal products over longer-term fixed accounts.”

Hide Ad
Hide Ad

Earlier this week, TSB, which is part of Spain’s Banco Sabadell, reported a 24.5 per cent fall in its first-half, pre-tax profit, to £111.6m. It said this was due to lower income, which fell by 6.1 per cent to £548.7m.

Comments

 0 comments

Want to join the conversation? Please or to comment on this article.

Dare to be Honest
Follow us
©National World Publishing Ltd. All rights reserved.Cookie SettingsTerms and ConditionsPrivacy notice