Lloyds profits beat expectations thanks to interest rate boost

Lloyds Banking Group’s profits beat estimates in the third quarter thanks to strong income growth on the back of higher interest rates. 

The banking giant revealed its pre-tax profits totalled £1.8billion for the three months ending September, 2 per cent down on the same period last year but ahead of the £1.6billion forecast by analysts.

Net income increased by 5 per cent to £4.3billion from the prior quarter as the firm benefited from a slightly higher net interest margin – the difference between what banks pay savers and earn from loans – of 2.95 per cent.

Lloyds credited this to rising structural hedge earnings. This is when banks attempt to protect income and smooth revenues against fluctuations in interest rates by using financial instruments to effectively ‘lock in’ higher rates.  

This helped compensate for the impact from ‘headwinds in respect of deposit churn and asset margin compression’ from customers refinancing their mortgages in a lower-margin environment.

Home borrowing costs have returned to more normalised levels amid falling inflation and elevated expectations that the Bank of England will further cut interest rates.

Over two-thirds of Lloyds’ £4.6billion growth in underlying customer loans and advances during the last quarter came from UK-based mortgages.

Customer deposits expanded by £1billion to £475.7billion, meaning they have climbed by £7.3billion so far this year.

Following the result, the bank upheld its annual guidance; it anticipates a banking net interest margin of greater than 290 basis points and a return on tangible equity of around 13 per cent.

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

However, the FTSE 100 company’s profits declined by 12 per cent to £3.8billion over the first nine months of the year.

Lloyds blamed the drop on lower net interest income and rising operating costs from inflationary pressures, severance charges, and ‘strategic investment.’

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 to the numbers, and there is some evidence of that today.’

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

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

Lloyds could be forced to pay billions in compensation in relation to the probe because it owns Black Horse, one of the UK’s largest automotive 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.