Lloyds Banking Group PLC (LSE:LLOY) shares slipped as analysts warned of gathering clouds ahead for the UK’s largest lender after a jump in bad debt provisions.
In the six months to June 30, the FTSE 100-listed bank, reported pre-tax profit of £3.87bn, up 23% from £3.15bn a year ago, but slightly below the £4bn average of analyst forecasts compiled by the bank.
Shore Capital’s Gary Greenwood said the earnings miss was primarily due to higher-than-expected impairments and volatility charges.
Impairment charges for the six months leapt 76% to £662mln from £377mln the year before with £419mln of this arising in the second quarter, more than double last year’s total.
Despite this asset quality remains resilient and the portfolio is well-positioned in the context of cost of living pressures, the bank said.
Roberto Rivero, market analyst at Admirals explained: “As the cost-of-living crisis squeezes budgets, higher rates will at some point translate into a visible increase in loan defaults, if it hasn’t already.”
“The fact Lloyds have significantly increased its loan loss provisions in the latest quarter is demonstrative of this.”
Danni Hewson at AJ Bell said “there are storm clouds gathering,” and Lloyds has to consider how many of its customers are likely to struggle as they face a jump from ultra-low fixed rates to the unexpected new normal.
“"We know that rising interest rates, cost of living pressures and an uncertain economic outlook are proving challenging for many people and businesses,” Lloyds boss Charlie Nunn accepted as he pledged to proactively support customers.
Lloyds also reported a slight drop in deposits which Rivero suggested was a “signal that banks may be facing an increase in competition as savers actively shop around for higher interest bearing accounts".
On the bright side, Lloyds did raise guidance for net interest margin (NIM) and return on capital.
For 2023, the bank expects NIM to fall more slowly than previously forecast, easing to 3.10% this year instead of 3.05% while it predicts return on equity to be greater than 14% compared to 13% it had guided.
But Shore Capital’s Greenwood “the new levels are already captured in consensus, which may still edge down slightly given the Q2 miss.”
Richard Hunter at interactive investor, commented “The second quarter slowdown has taken some of the shine from the bank’s recent progress.”
But he felt “for the half-year as a whole Lloyds has again shown its financial mettle.”
Zoe Gillespie, investment manager at RBC Brewin Dolphin, was also positive.
“Lloyds has narrowly missed analyst expectations with its results, but the bank remains in a very strong position,” she said.
Shares fell 3.0% to 44.72p and are down 5.1% year to date.