Profits at Lloyds bank tumbled 26 percent in the three months to September as the UK’s largest mortgage lender steeled itself for a potential surge in defaults as it predicted house prices would fall eight percent next year. The drop in profits was much larger than the 9.5 percent analysts had expected, and was the result of having to put aside an extra £668m amid fears that some loan and mortgage customers could default on their debts.
Lloyds is expecting inflation to peak at 10.7 percent by the end of this year, and unemployment to rise to 5.5 percent by early 2024, further squeezing household finances.
William Chalmers, the bank’s chief financial officer, said that, when combined with rising borrowing costs, those factors were expected to push UK house prices down eight percent and weigh on mortgage lending.
That was a 25 percent drop on the same period last year. Banks typically make more money when interest rates rise as the gap between what they pay savers and what they charge borrowers widens, but the rapid increase in borrowing costs seen in the last year has made Lloyds gloomier about the overall economic outlook for the UK.
Lloyds said this reflects a forward-looking charge to guard against the worsening economy and higher inflation and interest rate environment.
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“In unsecured lending, we have put cost-of-living buffers in place, including a recent rise in affordability buffers to reflect the recent rise in prices for essentials.”
Customers falling into outstanding payments, defaults and write-offs remain low and below pre-pandemic levels, the bank said.
The financial officer added that Lloyds’ lending is skewed towards “slightly better off” customers to ensure they can pay back their loans if conditions get tougher.
The group has also seen its balance sheet boosted by bigger revenues on higher interest rates. It said its underlying net interest income was up 15 percent, driven by a stronger net interest margin – which measures a bank’s returns versus their costs on loans – of 2.98 percent in the third quarter.
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It comes as the Bank of England has increased the base rate over recent months to its current level of 2.25 percent, sending average mortgage rates higher and making it more expensive to borrow.
Looking ahead, Lloyds warned that the base rate could peak at four percent in 2024 before falling back.
William said he hoped the UK’s new cabinet under Rishi Sunak would provide stability after a turbulent period that sent mortgage interest rates to levels not seen since 2008.
He said: “The one request would be for a period of stability that in turn will help us to support customers, retail, commercial and insurance, navigate what will be a tougher macro environment going forward.”
In the meantime the expert admitted that this higher interest rate environment could lead to a slowdown in the housing market in the years ahead.
He said: “We are likely to see a bit of a slowdown in mortgage lending over the next 12 months in response to higher interest rates and a tougher macro-economic environment.”
The bank’s chief executive, Charlie Nunn, tried to offer some reassurance to borrowers who have been squeezed by a rise in inflation and rising borrowing costs. He said: “The current environment is concerning for many people and we are committed to maintaining support for our customers.
“The group’s resilient business model and prudent approach to risk position the group well to face the current macroeconomic uncertainties while generating enhanced returns for our shareholders.”
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