Savings by Lloyds customers are causing a decline in profits

The UK’s largest domestic lender posted a decline in profits for the first half of the year as the interest rate boom that benefited the banking sector faded.

Lloyds Banking Group reported that its pre-tax profit for the six months ending June was down 14 percent from £3.9 billion one year ago to £3.3 billion. This is slightly higher than the City’s expectations of £3.2 billion.

Net interest margins, a key indicator of profitability for a bank, have fallen to 2,94% from 3,18% a year earlier. This margin is the difference between how much it charges for loans and what it pays for deposits.

Lloyds is a FTSE 100 listed company, and Charlie Nunn has been its CEO for the past three years. Its brands include Halifax, Bank of Scotland credit cards, MBNA, Black Horse motor finance, as well as Bank of Scotland. It is the largest mortgage lender in the UK and its operations are almost exclusively focused on Britain.

It enjoyed, like other commercial lenders a large profit boost as of late 2021 when the Bank of England started to quickly raise interest rates to combat inflation. The lenders were able to increase their profit margins because they could pass on the rate increases to their customers more quickly than their depositors.

Margin is now under pressure. Banks are under pressure from politicians and regulators to increase the interest rates they offer to savers. Depositors also have become more active in moving their money to fixed-term deposit accounts that pay higher rates.

The fierce competition on the mortgage market also reduces margins.

Lloyds stated on Thursday that the lower half-margin was due to “headwinds caused by deposit churning and asset margin compression in particular in the mortgage book, as it refinances its loans in a margin environment with lower margins”.

The bank, which is a major player in the auto finance industry, set aside £450m in its February annual results to cover any potential losses from a regulatory investigation into the motor financing market. This could include compensations to customers. This provision was not changed on Thursday. The lending at its vehicle financing business increased to £16.2 billion, up from £15.8 million a year ago.

Lloyds has also increased the cash return to its shareholders by declaring a interim dividend of 1,06p. This is a 15 percent increase on last year’s figure and equal to £662million.

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