Lloyds set for uptick in annual profits as investors look for clues on motor finance probe

Lloyds Banking Group is set to report an uptick in annual profits next week on the back of higher interest rates, with its cost control, impairments and exposure to an FCA motor finance probe in focus.

Britain’s largest domestic bank – which owns the Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows brands – is due to post its full-year results next Thursday.

Company-compiled analyst estimates forecast a pretax profit of £7.4bn for 2023, up from £6.9bn in 2022.

Britain’s biggest lenders have benefited from a jump in net interest income (NII) – the difference between what a bank pays out to savers and receives in interest from loans – since late 2021 as the Bank of England hiked borrowing costs in an effort to slow down inflation.

However, the final quarter of 2023 is expected to show more pressure on banks’ net interest margins (NIM) as rates have likely peaked and lenders come under pressure to offer savers better deals.

Halifax is the UK’s biggest mortgage lender and has been engaged in a price war with other firms this year to compete for business in a market shrunk by economic turmoil.

As a more traditional lender – it wound down and divested its investment bank in the aftermath of the financial crisis – Lloyds’ business model relies on interest income generated from lending. Its NII is set to rise by around £600m to £13.8bn.

Analysts are expecting a NIM of 3.01 per cent for Lloyds in the fourth quarter, down from 3.08 per cent the previous quarter – which itself was lower than markets had anticipated.

“Although net interest income will likely be lower in 2024 vs 2023, we see UK rates at c.2-4 per cent as a sweet spot for the sector and expect the earnings environment to improve as we go through the year, providing a solid launchpad for 2025,” Benjamin Toms, an analyst at RBC, told City A.M.

“Recent strategic investments should start to manifest themselves in other income growth and cost control. The outlook for impairments is likely to surprise to the positive, and we expect management to guide that in 2024 the asset quality environment will remain fairly benign.”

Last quarter, Lloyds was the only big UK bank to see its pretax profit grow from the previous three months.

It also recorded impairment charges than expected, which Lloyds said reflected “broadly stable credit trends and resilient asset quality” as well as an improved macroeconomic outlook.

“With consumers under pressure, loan default commentary and the value of impairments Lloyds takes will be watched closely,” said Matt Britzman, equity analyst at Hargreaves Lansdown.

“Consensus is for a £126m impairment charge, but some analysts see scope to unwind previous charges which would be a boost to profit.”

Investors are keen for more details on Lloyds’ exposure to an FCA review into historic motor finance commission arrangements, with potential compensation payouts being compared to the PPI scandal.

RBC estimates that Lloyds, the owner of the UK’s largest auto lender Black Horse, could be on the hook for up to £2bn in compensation but flagged that it would not know the size and scope of the issue until at least September.

Lloyds confirmed last month that it would cut 1,600 jobs across its branch network as it looks to reduce costs.

British lenders closed 645 branches last year, according to Which? as part of a drive to lower costs.