Lloyds Banking Group has raised concerns about the UK economy’s “uncertain” outlook, warning the cost of living crisis had already forced customers to cut spending on services such as streaming and gyms and could mean more defaults on its loans.
Lloyds, the country’s largest mortgage lender and considered a bellwether for the UK economy, said that while it did not have direct exposure to Russia, the war in Ukraine was affecting customers through higher energy and commodity prices, as well as supply chain disruption.
The chief financial officer, William Chalmers, said the bank had already seen customers start to count their pennies, cancelling about 1.2m gym memberships and video streaming contracts over the past six months, as inflation soared to 7% in March.
“We’ve also seen customers spending more, unsurprisingly, on energy and food bills over the course of the first quarter. So we’re certainly seeing some signs that our customers are responding to the challenges presented by the current environment,” Chalmers said.
The finance chief explained Lloyds had “slightly” reduced its forecasts for UK GDP growth to 3.5% for 2022, while predicting that unemployment would hover at about 4% for the course of the year. House prices, which hit another record high last month, are expected to be “stable”.
Lloyds’ chief executive, Charlie Nunn, said the bank was reaching out to customers who may be struggling as a result of the cost of living crisis. “While we are seeing continued recovery from the coronavirus pandemic, the outlook for the UK economy remains uncertain, particularly with regard to the persistency and impact of higher inflation,” he said.
“We are proactively contacting customers where we feel they may need assistance and will continue to help with financial health checks and other means of support. We encourage customers, where affected, to get advice early and talk to us.”
It came as the bank reported a 14% drop in first-quarter pre-tax profit to £1.6bn from £1.9bn a year earlier, although that was better than the £1.4bn that analysts had expected and resulted in a 2% rise in Lloyds shares on Wednesday morning.
The dip was the result of a £177m charge meant to protect the bank from potential defaults linked to the inflation squeezing UK household finances and is making it harder for borrowers to keep up with payments.
It marks a reversal from 2021, when Lloyds released £360m of the cash originally put aside for defaults linked to the Covid crisis, thanks to government support programmes that made it less likely that customers would fall behind on their debts.
The lender said it would continue to monitor for any further risks that could emerge from the war in Ukraine: “Investigations so far have not revealed any significant risks, although the group remains vigilant.”