FEARS about the UK tumbling into recession grew today when the UK’s biggest domestic bank set aside hundreds of millions of pounds to cover loan defaults.
Lloyds Banking Group still made profits of £3.7 billion in the first half of the year, a result that beat City expectations.
But the change in tone from a year ago when the bank saw its balance sheet boosted from the return of cash it had set aside for Covid-losses was palpable.
Last time it returned £734 million to its own coffers as, thanks to furlough, the economy was seen to cope with the pandemic better than many had feared. Today it said it needed £377 million to cover future bad debts.
That’s a £1.1 billion turn around in fortunes.
Lloyds is widely seen as a bellwether for the UK economy since it holds so many of the nation’s mortgages and savings accounts.
While rising interest rates increase bank profit margins, they also increase the risk of defaults. The bank’s net interest margin – the gap between what it charges borrowers and pays savers – rose from 2.5% to 2.77%.
But the risk of bad debts is clearly rising. At the moment defaults are at “low levels”, Lloyds says.
It has been asking customers in trouble to get in touch and discuss their problems rather than hide away.
Charlie Nunn, the CEO who joined a year ago from HSBC, offered reassurance.
He said: “Just as we remain well placed to withstand the current macroeconomic uncertainty and continue to generate significant capital for our shareholders, so, too, do we remain committed to maintaining the support we give to our customers every day as they adapt to the challenges they face.”
But he warned: “The persistency and potential impact of higher inflation remains a source of uncertainty for the UK economy as many consumers grapple with cost of living pressures.”
Inflation is at a 40-year high of 9.4 per cent and the Bank of England is raising interest rates in a bid to halt surging prices.
Nunn plans to boost the bank by expanding its wealth management arm, offering advice to those heading into retirement.
City analysts were bullish on the results. Ian Gordon at Investec said the figures “crushed consensus, triggering material upgrades” to what the bank might do next year, if not the year after.
The beleaguered shares responded somewhat, rising 1.75p, or 4%, to 45p.
They were 55p back in January.
The government had to bail out the bank to the tune of £20 billion during the financial crisis, money the bank later claimed to have repaid at a profit of £900 million to the taxpayer.
Lloyds’ rivals Barclays and NatWest report results tomorrow and Friday. The amount they set aside for bad debts will be closely watched.