Lloyds keeps wary eye on inflationary pressures as Q1 results beat expectations

Lloyds Banking Group PLC said it is paying close attention to the impact of inflation on its customers' ability to make payments, after reporting first-quarter results that surpassed consensus estimates.

Underlying pretax profit fell less than expected in the first quarter as Britain's biggest mortgage provider benefited from rising interest rates. However, the bank added £100 million of provisions, reflecting potential affordability risks for its customers in the wake of rising inflation.

With consumer price index inflation projected to peak at 7.5% in the fourth quarter, Lloyds is focused on the impact of higher inflation on its customers and will contact those it feels require support with payments, CFO William Chalmers said on an investor call with analysts.

"We think we've seen around 1.2 million subscription payments that have been stopped by our customers since the summer of 2021. Those relate to television streaming services and more discretionary items such as gym subscriptions," Chalmers said. "So we've seen signs of customers tightening their belts in respect of discretionary expenditure."

Mortgage boost

The bank reported a first-quarter underlying pretax profit of £1.78 billion, 17% above company-supplied consensus estimates. Net interest income was 2% higher than forecast and up 10% year on year at £2.94 billion as a result of base rate changes, it said.

Lloyds expects two further interest rate rises from the Bank of England by the end of 2022. "In practice, what we're seeing is base rate changes benefiting income today and this is expected to persist through 2022, providing a net tailwind to the margin," said Chalmers.

Net interest margin at 2.68% was also better than the consensus of 2.62%. The bank increased its guidance for full year NIM to above 270 basis points, though it warned that competitive mortgage pricing could act as a restraint.

The bank continues to see good levels of activity in the U.K. mortgage market, with mortgage balances up £1.2 billion in the quarter, Chalmers said.

As a result of regulatory requirements, the bank changed its definition of default for mortgages from 180 days to 90 days and changed its approach to past-term, interest-only mortgages. Together, this led to an increase in mortgages classed as stage 2 and stage 3, indicating deterioration in asset quality. Excluding these requirements, the underlying quality of mortgage assets improved, the bank said.

Credit quality

Lloyds maintained expected credit losses at £4.5 billion, £300 million higher than at the end of 2019 before the onset of the COVID-19 pandemic.

It kept COVID-19 provisions within its overall expected credit losses at just under £800 million. About half of this sum was a provision against the virus affecting the bank's broader economic forecasts. The remainder is set aside to take account of government support programs, which may have delayed potential customer defaults.

The bank would reconsider these provisions if there was a sustained period of a low level of infections and if no vaccine-resistant COVID-19 virus emerged, Chalmers said.

Lloyds expects unemployment, the leading indicator for asset quality defaults, to remain low at 4.1% this year, Chalmers said.

Shares of Lloyds were up 1.2% in early afternoon trading.