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Lloyds Banking Group faces a decline in profits amid increased competition



A booming mortgage market and an economic recovery that made it less likely that Covid-hit borrowers would default on loans helped Lloyds Banking Group double its profits in the three months to September.

Lloyds Banking Group, Britain’s largest domestic lender, reported a significant decline in profits for the first quarter of the year, largely due to increased competition in the deposit and mortgage markets.

The FTSE 100 bank announced that its first quarter pre-tax profits fell 28 percent to £1.63 billion, compared to £2.26 billion in the same period last year. This fall is closely in line with expectations from City analysts, who expected profits to hover around £1.66 billion.

One of the main factors contributing to this profit dip is the contraction in net interest margin, which fell to 2.95 percent from 3.22 percent a year ago. Lloyds attributed the decline to challenges arising from deposit overflow and asset margin compression, particularly within the mortgage sector, as the bank navigates a lower margin environment amid refinancing activity.

Net interest margins are a crucial measure for assessing banks’ profitability, and the recent decline reflects increased competition for deposits and mortgages. Although margins had seen a surge following rate hikes by the Bank of England in late 2021, subsequent improvements in savings rates and increased deposit mobility have eroded profitability.

In addition, increased competition in the mortgage market compared to the previous year has put pressure on margins, exacerbating the challenges facing Lloyds. With expectations of a key rate cut by the Bank of England looming, commercial lenders are poised to face further pressure.

As a prominent player in the UK financial landscape, Lloyds’ performance is closely watched as a barometer of the country’s economic health. The bank’s revised economic forecasts, including an upgraded projection for house price growth, indicate changing dynamics in the housing market.

In addition, Lloyds’ involvement in car finance through its Black Horse business has attracted attention, with ongoing scrutiny from the Financial Conduct Authority over concerns about unfair commissions on car loans. While the bank has made provisions to address potential costs and customer compensation related to this investigation, no additional provisions have been made in the latest announcement.

Lloyds Banking Group’s challenges underline the evolving landscape of the financial sector, marked by increased competition and regulatory scrutiny, as it navigates the complexities of the UK economic environment.