Lloyds profits beat expectations but £377m put by for loan losses in cost crisis

Lloyds Banking Group has posted better-than-expected half-year profits, but revealed a £377 million hit to cover loan losses and further signs that customers are battening down the hatches amid the cost-of-living crisis.

The high street lending giant reported a 6% fall in profits to £3.7 billion in the first six months of 2022 after setting aside the loan loss provision, though the result was better than the £3.2 billion predicted in the market.

It said £95 million of its half-year impairment charge was also due to a weaker economic backdrop in the UK as soaring inflation affects consumer spending.

Lloyds revealed that customers have ditched 2.2 million subscription services since last summer in the face of soaring inflation and are building up savings for a financial buffer ahead of what is expected to be a dire winter for energy bills.

Chief executive Charlie Nunn said that, while most of its customers are able to tighten spending ahead of this October’s eye-watering energy cap hike, around 1% are already “struggling to make ends meet”.

But the group said it has yet to see a rise in borrowers falling behind with repayments, despite the inflation pressures.

Despite the wider economic woes, the bank raised its full-year profitability outlook, including its net interest margin – a key measure for retail banks – as higher interest rates are providing a boost to its earnings.

The Bank of England has increased rates from 0.1% to 1.25% since last December to try to rein in rocketing inflation, with another steep increase expected to be on the way next week.

Lloyds also unveiled a 20% rise in its interim dividend payout, helping shares in the group lift 4% on Wednesday morning.

On an underlying basis, the bank also saw profits rise 34% to £4.1 billion in the first six months of 2022.

Mr Nunn said: “Just as we remain well-placed to withstand the current macroeconomic uncertainty and continue to generate significant capital for our shareholders, so too do we remain committed to maintaining the support we give to our customers every day as they adapt to the challenges they face.”

The group is expecting the UK economy to slow but remain relatively flat, predicting growth of 0.5% next year, while interest rates are forecast to reach 2.25% in the first half of 2023, which will see mortgage demand wane and house prices ease off.

But Lloyds bosses believe a resilient UK jobs market will shield the economy from the worst of the cost crisis.

Mr Nunn said the group does not expect the unemployment rate to rise substantially, which he stressed is “absolutely key” to helping protect consumers from sky-high inflation.

He said around 20% of the bank’s customers are already slashing spending in areas such as big ticket items and white goods.

Analysis of its customer data reveals that the average family spent £89 per month more in June on energy, food and fuel than in the same month in 2019 – with energy costs accounting for £49 of that extra spend.

Lloyds said inflation for many of its financially vulnerable customers has already hit levels of 12% to 14%, given that the bulk of their spending is already on the essentials that have seen prices jump higher.

Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said: “Impairment charges look large on paper but were in fact rather benign in nature.

“This, combined with the improved efficiency profile, bodes well for future returns.”