The UK’s largest mortgage lender, which is also the country’s largest bank by assets, has raised its expectations for house prices to rise this year. It has also posted a better-than-expected quarterly profit as customers are more confident.
Lloyds Banking Group (which accounts for over a fifth in the mortgage market) said that it now predicts a 3.1% increase in house prices by 2024. This is a significant upgrade to the 1.2% growth they were expecting at the end June.
It revealed its better forecast in third quarter results, which showed that it generated profits before tax of £1.8 billion for the three months ending September. This was a drop of only 2 percent compared to a year ago and much higher than the £1.6 that City analysts had expected.
William Chalmers, Lloyds’ finance chief, stated that the bank “continued” to see an increase in confidence from customers. Mortgage applications have increased by 17 percent over the past year, and the group has noticed a “material increase” in non-essential expenditure by customers over the first nine month.
The figures of the FTSE 100 firm, the first British big bank to announce earnings for the third-quarter, shed more light on the state of the economy and households in advance of next week’s Budget.
Lloyds is a leading indicator of the British economy. Its operations are largely focused in the UK, and include brands like Halifax, Bank of Scotland and MBNA Credit Cards, along with life insurance, pensions and retirement plans from Scottish widows and Black Horse Car Financing.
Chalmers’ predictions of the economy are closely monitored and on Wednesday, it said that there had been “a modest improvement” in their forecasts. It expects a gross domestic product increase of 1.1% this year, and 1.30% in 2025. This is up from 0.8% and 1.20% respectively at the halfway point.
It also increased its estimate for property prices by 2025 from its previous estimate, which was 1.4 percent, to 2 percent.
The total lending balances of Lloyds increased £4.6 billion during the third quarter, to £457.7 billion. Deposits also increased £1 billion, to £475.7 Billion, Chalmers stated.
He said that the growth in its lending book was driven by an increase of £3.2 billion in mortgages. The market’s sentiment has been boosted by the falling mortgage rates.
The Bank of England raised its base rate rapidly at the end of the year 2021, and the financial markets in Britain were thrown into turmoil by the mini-budget crisis in September 2022. The Bank of England cut its benchmark interest rate from 5.25 to 5 percent in August this year. Further reductions are expected. Lloyds predicts that there will be one more reduction this year, and three by 2025.
Recent price wars in mortgages have been fueled by the expectation that borrowing costs would continue to fall. Mortgages are priced based on predictions of future interest rates. The banks’ margins have been impacted by this, and savers are moving their surplus cash into accounts with higher interest rates.
The performance of L Lloyds in the first nine month of the year was also a confirmation. Its net interest margin (which measures the difference between the amount it charges for loan and the amount it pays for deposit) fell to 2,94% from 3,15% in the same period last year.
Lloyds stated that the lower margin was due to anticipated headwinds resulting from deposit churning and asset margin compression. This is especially true for mortgages, which are refinancing in a low margin environment.
Analysts expect that the banking industry will continue to benefit from the hedging agreements they have put in place to protect themselves from rate fluctuations.
A lower-than-expected impairment charge of £172million for bad loans in the third quarter was partly due to a £77million one-off writeback after a debt sale. This helped Lloyds to exceed profit expectations for the period.
The recent strong earnings of banks has sparked speculation that the Labour Government could target this industry in its first budget on Wednesday. Chalmers stated that the banking industry, including Lloyds, was “one of the UK’s biggest taxpayers” and it is important to have “competitive tax regime”.
Chalmers stated that customers’ nervousness over other possible tax changes led to “a modest rise in pension withdrawals”. However, uncertainty regarding the budget only had “a very limited impact” on customer behaviour.
Chalmers stated that “overall, we hope that the budget will be a confidence boosting event.” Chalmers was asked about the possible impact of an alleged increase in employer contributions to national insurance. He said: “Whatever tax changes they might be, we think that they will be pursued within the context of constructive pro-growth agenda.”
Lloyds sponsored the international investment summit of the British Infrastructure Taskforce this month.
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