Reaction: Analysts praise 'strong' results from Bank of Scotland owner Lloyds despite Q3 profit drop

Bank of Scotland owner Lloyds Banking Group has seen a decline in its profits, and set aside £668 million to cover loan losses, but believes most of its mortgage customers will be able to withstand cost-of-living pressures.

The UK's biggest lender said its statutory pre-tax profits were £1.5 billion in the third quarter, a substantial drop from the £2bn reported last year and falling short of the market consensus of £1.88bn.

The £668m impairment charge in the three months to September 30 was a big swing from the £199m it held onto in credit last year, and Lloyds said this reflects a forward-looking charge to guard against the worsening economy, and higher inflation and interest rate environment.

But it assured investors that there has been only "very modest" evidence of customers struggling with repayments to date. Customers falling into arrears, defaults and write-offs remain low and below pre-pandemic levels, the bank said. The group has also seen its balance sheet boosted by bigger revenues on higher interest rates.

Lloyds' chief financial officer William Chalmers said: "So far, at least, our customers are proving to be resilient and adapting well to the cost-of-living increases that we have seen.” He also stated that its lending is skewed towards "slightly better off" customers.

The lender reported that its underlying net interest income was up 15 per cent, driven by a stronger net interest margin – which measures a bank's returns versus their costs on loans – of 2.98 per cent in the period.

Looking ahead, Lloyds cautioned that the base rate could peak at 4 per cent in 2024 before falling back down. The lender has updated its full-year outlook, including raising its net interest margin expectations to at least 2.9 per cent.

Charlie Nunn, group chief executive at Lloyds, said: "Our income growth, balance sheet momentum, and resilient customer franchise have enabled the group to deliver a robust financial performance and strong capital generation, alongside updated guidance for 2022.

Bank of Scotland's landmark premises on The Mound in Edinburgh. Picture: Andy Buchanan/AFP via Getty Images.

"The current environment is concerning for many people and we are committed to maintaining support for our customers. The group's resilient business model and prudent approach to risk position the group well to face the current macroeconomic uncertainties while generating enhanced returns for our shareholders."

Richard Hunter, head of markets at Interactive Investor, also commented, stating: “In all, this is a robust showing from Lloyds. The share price has tended to reflect concerns on the wider UK economy and its faltering prospects, and has fallen by 13 per cent over the last year, as compared to a drop of 3 per cent for the wider FTSE100. This has not deterred longer term supporters of the story, however, with the market consensus remaining at a buy.”

John Moore, senior investment manager at RBC Brewin Dolphin, said: “Lloyds may be putting aside more money for potential bad loans against the current economic backdrop, but that overshadows a strong set of results from the bank. Although it is the most exposed of the major UK banks to the domestic economy, Lloyds is benefitting from an improving net interest margin, which is driving income growth. There is little said about shareholder returns, which is a tricky balance for banks to strike in the current environment. The key question remains, what is next for Lloyds?”