Lloyds Banking Group PLC has set aside £377million in loan loss provisions to cover potential defaults as rising inflation and the cost of living crisis hit borrowers. The bank also maintained significant COVID-19 provisions.
That compares to a £734million impairment release in the same period last year, when the economy was expected to grow rapidly after pandemic restrictions eased.
Behavior monitoring
The bank closely monitors the behavior of its customers for signs of stress and has already seen them adjust their finances to accommodate the rising cost of living, CEO Charlie Nunn said during the presentation. first half results. Inflation is running at 9.4%.
“We’re seeing customers spend less on appliances and taking steps, such as managing subscription services, to deal with rising energy, food and fuel costs. On the other hand aside, we are not seeing any increase in the number of our customers canceling insurance policies or opting out of auto-enrollment pensions,” he said.
In its retail and commercial lending business, the majority of the bank’s loans are at historically low loan-to-value ratios of around 40%. Its unsecured loans, like credit cards, tend to focus on major customers, Nunn said.
Lloyds maintained £500m of expected credit losses in relation to COVID-19 and its overall ECL charge was £4.5bn, £300m more than at the end of 2019.
Hikes helped
The bank has benefited from rapid interest rate hikes by the Bank of England, which has hiked the rate five times since last December to 1.25%. He should raise it again next week.
Lloyds saw its net interest income rise sharply to £6.1bn from £5.7bn in the second half of last year as higher interest rates more than offset the effects of ‘a competitive mortgage market,’ Nunn said.
Net interest margin, the difference between what the bank earns on loans and pays on deposits, was 277 basis points in the first half compared to 256 basis points in the second half of last year, before the rate hike. Lloyds expects it to be around 280 basis points by the end of the year, assuming interest rates of 2% at that time.
Under pressure
The Lloyds CEO was quizzed by analysts during the investor presentation on whether the bank had come under pressure from regulators or politicians to pass on rate hikes to savers more quickly.
“I can’t predict what’s in the future […] We have had no discussions with the government or the Bank of England on any of these matters,” Nunn said.
The majority of Lloyds customers who are savers are in the higher income brackets and were not cost-of-living customers, Nunn said, while the net interest margin is lower. to pre-pandemic levels.
The bank said it would pay an interim dividend of 0.80p per share, up 20% from the first half of 2021, and said it had had no indication the BoE would be unhappy with its dividend proposals in light of the macroeconomic situation.
