Lloyds Banking Group has made a good start to 2018 with a near-quarter rise in profits despite having had to set aside yet more money to compensate PPI victims.
The lender saw bottom line profits rise 23 per cent to £1.6 billion in the first three months of 2018, from £1.3billion in the same period last year.
That’s despite adding another £90million in costs for PPI mis-selling claims in the quarter, which however is much less than the £600million set aside in its fourth quarter.
Lloyds has paid out a total of £18.8billion in PPI compensation since 2011.
Rising profits: Lloyds profits jumped 23% but the lender also saw impairment charges double
Lloyds’ exposure to consumers’ finances via mortgages and unsecured lending like credit cards make it a bellwether for the British economy.
Chief executive Antonio Horta-Osorio said the UK economy continued to be ‘resilient’, benefiting from low unemployment and GDP growth.
‘We have made a strong start to 2018 and have begun implementing the strategic initiatives which will further digitise the group, enhance customer propositions, maximise our capabilities as an integrated financial service provider and transform the way we work.’
He added: ‘We expect the economy to continue to perform along these lines during 2018.’
However Lloyds took £258million in loan impairment charges in the quarter, which is more than double a year earlier.
It also revealed £138million in restructuring costs, including redundancy expenses as it ploughs on with its three-year strategy focused on digital banking.
Lloyds last week announced plans to shut another 49 branches, with the loss of 1,230 roles.
The bank was helped by the first rise in interest rates since the financial crisis last year, when the Bank of England lifted them to 0.5 per cent from an all-time low of 0.25 per cent.
Retail banks make money by taking savers’ deposits and lending them to borrowers.
The rate paid to savers will be lower than what borrowers are charged, and the gap between the two is measured by the so-called net interest margin.
When this is higher, lenders make more cash because they keep a greater share of income instead of giving it to savers, and it typically rises when the Bank of England puts its base rate up.
Lloyds’ margin jumped from 2.86 per cent to 2.93 per cent, with net income rising 4 per cent to £4.3billion.
Lloyds shares were down 0.14 per cent at 66.03p in morning trading.
Digital shift: Lloyds chief executive Antonio Horta-Osorio
Richard Hunter, head of markets at interactive investor, said the results were ‘impressive’ but also noted that the rise in impairment provisions was slightly troubling, given a fairly benign economic backdrop.
‘Quite apart from a significant jump in pre-tax profit, the key metrics continue to consolidate. The capital cushion is robust, Net Interest Margin continues to grow, whilst there are further noticeable improvements to the cost/income ratio and the return on equity,’ he said.
But he added: ‘Less positively, the rise in impairment provisions is slightly troubling given a fairly benign economic backdrop, although the bank has stressed that it is seeing little deterioration in credit quality at present. This could become relevant in the event of a downturn in UK fortunes, especially given the bank’s exposure through its credit card business. From a wider perspective, the ongoing cost of the transformation towards becoming a digitised provider and the inevitable overhang of regulatory requirements could place a drag on growth.
‘Even so, for the most part this is an impressive update with the potential for future growth becoming crystal clear.’
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the shadow cast on the banking sector by Brexit had dented appetite for the shares.
He said: ‘Since taking over the reins in 2011, António Horta-Osório has presided over a bank which has swung from an annual loss of £260 million to a profit of £3.5 billion. The share price meanwhile is only a few pence higher than the 62p it stood at when he became CEO.
‘In the interim the share price did trade close to 90p in 2015. However the shadow cast on the banking sector by Brexit has dented appetite for the shares of a company which is so indelibly plugged into the UK economy. But with Lloyds expected to yield in excess of 5% this year, investors are being paid to wait for sentiment to shift.’