Interest rate hikes aided British bank Lloyds (LLOY.L) in beating first-quarter profit forecasts on Wednesday, but early signs of stress among some borrowers suggested that tougher times were ahead.
The results of Britain’s largest mortgage lender highlighted how the same rate increases that have boosted its profit margins are also putting pressure on its weakest customers, who are already dealing with the highest inflation rate in Western Europe.
Lloyds reported a pretax profit of 2.3 billion pounds ($2.9 billion) for the first three months of 2023, up from 1.5 billion pounds the previous year and exceeding the 1.95 billion pounds average of analyst forecasts compiled by the bank.
While bank asset quality has been resilient during the COVID-19 pandemic and recent spiraling consumer prices, Lloyds said it has seen more loans fail.
Lloyds set aside 243 million pounds to cover potential losses in the first quarter after reporting “modest” increases in arrears, primarily in commercial banking loans and mortgages. In the same period last year, it set aside 177 million pounds.
The bank’s shares fell 0.4% in early trading, while the European banking stocks index rose 0.5%. (.SX7P)
The Bank of England raised interest rates from 0.25% in December 2021 to 4.25%, allowing banks to prosper by lending money at more profitable rates.
While earnings have exceeded expectations across the sector, Lloyds has followed suit by keeping full-year performance forecasts flat rather than raising them as some analysts had predicted.
That decision signaled concern about the outlook for profit-boosting rates, as defaults are rising, lending margins are being squeezed, and savers are shopping around.
Lloyds is the last of Britain’s ‘Big Four’ banks to report quarterly results, following profit increases from HSBC, NatWest, and Barclays.
However, like others, Lloyds reported 2.2 billion pounds in deposit outflows during the quarter as customers dipped into savings and moved money into alternative products.