Competition for mortgages and deposits has impacted on the profits of Lloyds

In the first quarter of this year, the increased costs and competition in deposits and mortgages slashed the profits at Lloyds Banking Group.

The pre-tax profit at Britain’s largest domestic lender fell by 28 percent to £1.63bn compared to a year ago, the clearest indication yet that the bank industry is losing the benefit of higher interest rates.

The FTSE 100 group’s net margin, which is the amount of interest paid on deposits minus the charges for loans, is a key measure to determine a bank’s profit. It fell from 3.22 percent a year earlier to 2.95 percent.

William Chalmers said that this decline in margin was due to “advanced pricing on the mortgage market” and the fact that savings were moving into higher-rate accounts.

Commercial banks made money last year by capitalising on rapid interest rate increases imposed by the Bank of England in order to combat inflation. Commercial lenders were able to increase their margins because they raised rates for depositors at a slower pace than for borrowers.

This boost has now faded, as political and regulatory pressures forced banks to increase rates for savers. Expectations are growing that the Bank is soon going to reduce borrowing costs. Savings have become more active by moving money into fixed-term accounts that pay higher interest rates, increasing the competition between banks to get deposits.

Mortgage competition is also reducing margins for lenders compared to a year ago. Chalmers said that mortgage customers waited until the last three months of the year to refinance fixed-rate deals due to uncertainty over the economy, before taking advantage more attractive terms during the first quarter.

Charlie Nunn is the head of Lloyds, Britain’s largest domestic lender.

The Bank imposed a new tax on lenders, and the “higher severance fees” of £100 million  were a result of recent job cuts. This was a blow to the profits of Lloyds.

Bank of America analysts called the numbers “messy”, but investors sent the shares of the group higher by 1,56 percent to 52.14p. The results of Lloyds are closely monitored, especially since Charlie Nunn is the chief executive.

Chalmers said that the group’s performance was “robust”, with an impairment charge of only £57 million for bad loans, which is significantly less than expected. He stated that the bosses expect the margin pressures to ease up until 2024. The bank has also stuck to its guidance for a net interest margin exceeding 2,9%.

Lloyds did not suffer any additional financial losses as a result of a regulatory investigation that covered a large part of the motor finance industry, in which the bank has a major role. In January, the Financial Conduct Authority announced an investigation into car loans. Lloyds set aside £450m the following month in order to cover costs for responding to the inquiry as well as potential compensation payments to customers after the regulator has completed its work.

This month, the FCA warned that many companies were having difficulty providing it with data. Chalmers stated: “I do not have any concerns to report regarding our data collection, we are getting on with it and we expect to be fully in compliance with what the FCA requests of us.”

The Bank has also warned this week that the increased interest rates are putting pressure on the private equity sector. Chalmers stated that Lloyds is “very careful about the risks we take” when it comes to its private equity financing and that management feels “very comfortable with our lending activity in this area”.

Lloyds, Britain’s biggest mortgage lender, upgraded its forecast for house prices in this year, predicting a 1.5% rise. This is a sign that the property market has begun to recover.

William Chalmers said that the group’s forecast for 2024 was revised to reflect a “slightly better economic outlook”.

The lender upgraded its rating due to the fact that the house prices are more resilient than expected. Lower inflation is also affecting interest rates, as well as the possibility of a stronger nominal and real growth in income this year.

Lloyds has also reduced its forecast of the unemployment rate in this year from 4.9 to 4.3 percent. The bank maintained its forecast that the Bank of England will cut its base rate three times by 2024. This would begin in the middle of this year.