Lloyds Banking Group’s share price slid to its lowest level since March earlier this month as concerns over the UK economy prompted investors to worry about a rise in defaults, rates mortgages that have increased due to the turmoil in the gilt markets.
Shares have stabilized since then, but the health of the UK economy remains top of mind, especially in light of two terrible months of retail sales data.
For most of this year, stocks have struggled for the same reasons listed above without showing any signs of weakness so far, returning a decent set of H1 numbers, but that hasn’t been enough to appease investor concerns.
It looks like management is also starting to batten down the hatches after what has been a turbulent quarter for the UK economy.
In the second quarter, the bank set aside a further £200m of impairments, bringing the total net underlying impairment for the first half to £377m. In today’s third quarter figures, that number was boosted by £668million in a sign that the recent squeeze in customer finances was increasing concerns about possible loan losses, pushing the impairment provision to over £1 billion.
Today’s third quarter figures also saw third quarter statutory pre-tax profits fall to £1.51bn, down 26% from the same quarter last year and down by a similar percentage compared to the second quarter.
During the second quarter, the bank recorded an increase in loans and advances to customers of £4.3 billion to £456.1 billion, driven by modest increases in credit card balances and unsecured loans. guaranteed, a trend that should slow down a bit this quarter.
This did not happen with unsecured lending recording a 4% increase to £8.8bn, while the open mortgage portfolio recorded a 1% increase. Small business loans saw a slight drop of 3% to £39.8bn, which is not entirely surprising given the economic backdrop.
On the positive side, we saw a decent increase in net interest margin to 2.98% for the quarter, from 2.55% in the second quarter, pushing the NIM year-to-date average to 2.84% .
This inevitably led to calls for a windfall tax on banks, even though profits are lower this year than they were last.
Notwithstanding the fact that from next year UK banks will pay a 25% corporate tax rate and an additional 8% bank levy, this is another economically illiterate populist measure which might work well in the short term, but in the long term runs the risk of being completely doomed as companies decide there are better investment opportunities elsewhere.
If politicians want to make a difference, they might want to ask the banks why they haven’t raised savings rates in line with lending rates. It would be a much better use of their time, rather than claiming windfall taxes.
Although earnings may be good now, measures such as this discourage investment in the UK economy and increase economic uncertainty about the UK’s ability to invest.
Also noteworthy is that operating costs increased in the quarter to £2.19bn from just over £2bn in the second quarter.
For the full year, Lloyds expects the NIM to fall from 2.84% to 2.9% with operating costs expected to reach £8.8bn, up from £2.4bn sterling from their current level.
Overall these numbers remain a decent set of results, but it is clear that Lloyds is battening down the hatches with the sharp rise in non-performing loan provisions and that is what has seen profits fall short of expectations.