Lloyds Banking Group share price slipped to its lowest level since March earlier this month as concern over the UK economy prompted investors to worry about an increase in defaults, as mortgage rates pushed higher on the back of turmoil in gilt markets.
The shares have settled down since then but the health of the UK economy remains front of mind, especially in light of two awful months of retail sales data.
For most of this year the shares have struggled for the same reasons as listed above without showing any signs of weakness thus far, returning a decent set of H1 numbers, however this hasn’t been enough to placate investor concerns.
It appears that management are also starting to batten down the hatches after what has been a turbulent quarter for the UK economy.
In Q2 the bank set aside another £200m of impairments, pushing the total net underlying impairment for H1 to £377m. In today’s Q3 numbers this number was increased by £668m in a sign that the recent squeeze on customer finances was increasing concern about possible loan losses, pushing impairment provision year to date to over £1bn.
Today’s Q3 numbers have also seen Q3 statutory pre-tax profits fall back, coming in at £1.51bn, a 26% decline from the same quarter last year, and down a similar percentage from Q2.
During Q2, the bank saw an increase in loans and advances to customers of £4.3bn to £456.1bn, driven by modest increases in credit card balances and unsecured loans, a trend that was expected to slow a little this quarter.
This hasn’t happened with unsecured loans seeing an increase of 4% to £8.8bn, while the open mortgage book saw an increase of 1%. Lending to small business saw a modest decline of 3% to £39.8bn not altogether surprising given the economic backdrop.
On the plus side we did see a decent increase in net interest margin to 2.98% for the quarter, up from 2.55% in Q2, pushing average NIM year to date up to 2.84%.
This has inevitably led to calls for a windfall tax on the banks, even though profits this year are lower than they were last year.
Notwithstanding the fact that from next year UK banks will be paying a 25% corporation tax rate and an 8% banking levy on top of that this is yet another economically illiterate populist measure that may play well in the short term, but in the long term runs the risk of being completely self-defeating, as businesses decide there are better investment opportunities elsewhere.
If politicians want to make a difference they might want to ask the banks why they haven’t increased savings rates in line with lending rates. That would be a much better use of their time, rather than banging on about windfall taxes.
While profits may be good now, measures such as this discourage investment in the UK economy, as well as increasing economic uncertainty about how investable the UK is.
What was also notable was that operating costs increased during the quarter to £2.19bn, up from just over £2bn in Q2.
For the full year Lloyds says it expects NIM to increase from 2.84% to 2.9% with operating costs expected to come in at £8.8bn, up £2.4bn from where they are now.
All in all these numbers are still a decent set of results, however it is clear that Lloyds is battening down the hatches with the big increase in provisions for non-performing loans and it is this that has seen profits come in below expectations.
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