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Lloyds warns over inflation and braces for loan defaults

Paloma Kubiak
Written By:
Paloma Kubiak

Lloyds Banking Group has issued a warning over the ‘uncertain’ outlook for the UK economy as the high cost of living could push up loan defaults.

The lender set aside £177m to help buffer against bad loans, pushing first quarter pre-tax profits for 2022 down to £1.6bn from £1.9bn in the same period a year earlier.

However, the group said its loan portfolio is “well-positioned” reflecting a prudent approach to credit risk.

Mortgage lending in the open book grew by £1.7bn in the quarter, driving overall loans and advances to customers up £3.2bn to £451.8bn (£448.6bn in December).

The lender’s net interest margin benefitted from the UK bank rate increases as well as deposit growth – customer deposits were up £4.8bn in the period to £481.1bn – which helped offset headwinds from mortgage book growth and pricing. This rose to 2.68% from 2.49% annually.

Charlie Nunn, group chief executive, said: “Whilst we are seeing continued recovery from the coronavirus pandemic, the outlook for the UK economy remains uncertain, particularly with regards to the persistency and impact of higher inflation.

“We are proactively contacting customers where we feel they may need assistance and will continue to help with financial health checks and other means of support. We encourage customers, where affected, to get advice early and talk to us.”

As a base case, the bank has forecast house price growth will be flat next year and in 2024. In a worst case scenario (severe downside), it suggested house price growth could fall 12.1% next year and 12.3% in 2024.

‘Help people manage finances during cost-of-living crisis’

Russ Mould, investment director at AJ Bell, said: “It’s serious when a bank talks about proactively contacting customers that could be facing financial troubles to offer help and guidance.

“This is quite a different tone from a company whose key messages were recently focused on expansion into wealth management – i.e. helping the rich to look after their money.

“It’s a reminder that Lloyds’ customer base is broad and that having a caring mentality is the right approach, even if it doesn’t necessarily result in earnings growth.

“Banks cannot alienate a chunk of their customer base simply because they don’t match the target market for future growth. Lloyds’ roots lie in helping people of all types and this inclusive approach is fundamentally correct.

“The bank doesn’t want bad debts on its books, but neither does it want customers to be in trouble, so it is in its own interest and of society to help people manage their finances during this cost of living crisis. Lloyds is in a strong position financially to weather any storm but many of its customers won’t be.”

The Lloyds result follow Santander’s yesterday which revealed it had set aside £18m for mortgage defaults.