Lloyds Banking Group has reported a pre-tax profit that exceeded analysts' expectations for the second quarter of 2024, despite a fall in income. The positive result was driven by lower-than-expected provisions for bad loans, offsetting the decline in earnings.
The UK's largest mortgage lender announced a pre-tax profit of £1.70 billion (US$2.19 billion) for the three months ending June 30, outperforming the £1.61 billion recorded in the same period last year and the £1.58 billion consensus forecast.
The bank's improved macroeconomic outlook and stable to improving credit quality led to a £44 million impairment charge, significantly lower than the £305 million predicted by analysts. This lower provision suggests a more optimistic view of the UK economy.
However, excluding this charge, pre-tax profit missed expectations due to a depreciation in the bank's car leasing portfolio. This was attributed to a charge related to the decline in electric vehicle prices.
Net income stood at £4.15 billion, compared to £4.53 billion in the previous year and below the predicted £4.27 billion. The decline was attributed to pressure on net interest income, the difference between what lenders earn on loans and pay out on deposits. This was partly offset by higher other income.
Lloyds' net interest margin (NIM), a key measure of profitability, slipped to 2.93% as expected, down from 2.95% in the first quarter. The bank attributed this to the anticipated pressures on mortgage and deposit rates.
Despite the mixed results, Lloyds remains optimistic about its future performance. The group's common equity Tier 1 ratio, a key measure of financial strength, stood at 14.1%, slightly below market expectations of 14.2%.
For 2024, Lloyds has maintained its targets for a net interest margin above 2.90%, operating costs of £9.4 billion, return on tangible equity around 13%, and a CET1 ratio of around 13.5%. The bank also upgraded its impairment ratio forecast for the year, now expecting a ratio above 0.2% compared to the previous forecast of above 0.3%.
"Our progress to date enables us to reaffirm 2024 guidance and remain confident in achieving our 2026 strategic objectives and guidance," said Chief Executive Charlie Nunn.
Lloyds' shares traded slightly higher in early afternoon exchanges in London, recovering from an initial drop of 5% at market open amid a wider sell-off in UK equities. The FTSE 100 index was down 0.9%.
Some analysts believe the market may be disappointed by the lack of an NIM upgrade, given the sustained high interest rates. "The market may be a little disappointed not to see a NIM upgrade given rates have held up higher for longer," said Shore Capital analyst Gary Greenwood.
The board proposed an interim dividend of 1.06 pence, a 15% increase compared to the previous year.
While the results show a mixed picture for Lloyds, the bank's positive outlook and commitment to its strategic goals suggest a continued focus on growth and shareholder returns.
