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Lloyds the biggest mortgage lender but competitive pressures could bite

Last updated: 05:22 25 Oct 2018 BST, First published: 12:22 24 Oct 2018 BST

Lloyds
UBS expects Lloyds to post lower profits for the third quarter

Lloyds Banking Group PLC (LON:LLOY) is the market leader in UK mortgages but the lender is not immune from the sector-wide pressures of fierce competition and low interest rates.

Given that many banks’ margins have been weighed down by a tough mortgage lending market, this will be a key area of focus for investors assessing the third quarter results of Lloyds on Thursday.

READ: Lloyds loses UK mortgage market share but remains biggest lender, UK Finance reveals

In the first half, the group’s net interest margin – a measure of banks’ profitability – rose to 2.93% from 2.82% last year as growth in its MBNA credit card business offset pricing pressures in mortgages. 

READ: Lloyds first-half profits rise 23% despite extra £460mln provision for PPI claims

For the third quarter, UBS said it expects a flat margin compared to the previous three-month period with “greater uncertainty around volumes”.

“LBG has done a good job of managing mix and flow pricing to drive margins higher but at the expense of volumes overall,” UBS said.

Profits expected to fall 

Another area UBS thinks investors will be zoning in on is other operating income. It predicts flat other operating income in line with the first quarter’s run rate due to volatile markets, Brexit uncertainty and difficult fee conditions.

UBS also sees costs, loan losses and capital generation as other issues to pay attention to in the results.

The broker predicts pre-tax profit of £1.96bn for the quarter, including remediation costs of £100mln, compared to a profit of £2.08bn last year. Lloyds is expected to generate a total income of £4.68bn for the period, up from £4.62bn last year.

The bank reported a 23% increase in first-half pre-tax profit to £3.1bn as higher income and tight cost control to offset a fresh £460mln provision for its compensation scheme for the payment protection insurance (PPI) mis-selling scandal. Lloyds has so far spent £18.8bn on PPI compensation and the bill still has room to grow given that the Financial Conduct Authority’s deadline for claims is August 2019.

Further update on Schroders joint venture eyed

Meanwhile, Lloyds announced on Tuesday that it was teaming up with Schroders PLC (LON:SDR) to create a financial planning joint venture. The financial planning business will be launched by the middle of 2019.

Under the agreement, Lloyds will own 50.1% of the business and Schroders the remainder.

READ: Lloyds and Schroders confirm plan to create financial planning joint venture

Lloyds will transfer £13bn of assets from its wealth management arm to the joint venture. A further £400mln of existing private clients assets will transfer to Schroders.

Schroders will also get a contract to manage £80bn worth of assets in Lloyds’ Scottish Widow business that were previously managed by Aberdeen Asset Management before it merged with Standard Life.

Lloyds said it would withdraw £109bn of Scottish Widow assets from Standard Life Aberdeen earlier this year due to competition concerns about the merger. Standard Life Aberdeen is trying has contested Lloyds’ decision to pull the assets and the two firms are currently locked in arbitration about the contract.

Any update on the progress of settling the dispute will be closely eyed in the quarterly results. 

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