Lloyds profits exceeded expectations thanks to the rate hike

Lloyds Banking Group’s profits beat expectations in the third quarter thanks to strong income growth driven by higher interest rates.

The banking giant announced that its pre-tax profits totaled £1.8 billion for the three months ended September, down 2 percent on the same period last year but higher than the £1.6 billion forecast by analysts.

Net profit rose 5 percent to £4.3 billion from the previous quarter as the company benefited from a slightly higher net interest margin (the difference between what banks pay to savers and what they earn on loans) of 2.95 percent.

Lloyds attributed this to rising structural hedge income. This is when banks try to protect revenues and cushion income from interest rate fluctuations by using financial instruments to effectively ‘lock in’ higher interest rates.

This helped offset the impact of “deposit overflow headwinds and asset margin compression” from customers refinancing their mortgages in a lower margin environment.

Home finance costs have returned to more normalized levels, against the backdrop of falling inflation and high expectations that the Bank of England will cut interest rates further.

More than two-thirds of Lloyds’ £4.6 billion growth in underlying loans and advances to customers last quarter came from UK mortgages.

Customer deposits rose by £1 billion to £475.7 billion, meaning they are up by £7.3 billion so far this year.

Following the result, the bank maintained its annual guidance; it expects a net interest margin for the banks of more than 290 basis points and a return on tangible equity of around 13 percent.

Charlie Nunn, CEO of Lloyds, said: ‘The group delivered robust financial performance in the third quarter of 2024, with revenue growth alongside continued cost discipline and strong asset quality.’

However, the FTSE 100 company’s profits fell 12 percent to £3.8 billion in the first nine months of the year.

Lloyds blamed the decline on lower net interest income and rising operating costs due to inflationary pressures, redundancy payments and ‘strategic investments’.

John Moore, senior investment manager at RBC Brewin Dolphin, said: ‘With interest rates on a downward trajectory, there will inevitably be an ebb and flow in the numbers, and there is some evidence of that today.’

He added that the bank’s future strategic and potential payouts for misselling personal contract purchase agreements (PCP) to car buyers were the “two main issues” facing the bank.

The Financial Conduct Authority is currently investigating the historic use of discretionary commission arrangements (DCAs), which allowed lenders to set interest rates on car finance loans until they were banned three years ago.

Lloyds could be forced to pay billions in compensation over the investigation because it owns Black Horse, one of Britain’s largest car finance companies.

Lloyds Banking Group shares were 1.8 per cent higher at 63.1p on Wednesday morning and have grown by around a third this year.