Lloyds Banking Group has joined rivals in posting better-than-expected results for the first quarter, as rising interest rates helped profits rise 46%.
Pre-tax profits came in at £2.3bn for the three months to 31 March, up from £1.5bn a year earlier.
Lloyds took an impairment charge of £243m, up from £177m a year ago, despite a slightly improved economic outlook for the UK.
The financial updated noted “modest” increases in borrowers falling into arrears and defaulting on loans amid the cost-of-living crisis, but added that levels remain at or below those seen before the pandemic struck.
The arrears mostly relate to mortgages written in 2006 to 2008, at a time when borrowers could over-stretch themselves, with many of these loans also on variable rates, making them vulnerable to base rate increases.
Chief financial officer William Chalmers said: “It’s very modest and doesn’t cause us any alarm.”
The group now expects the economy to fall by 0.6% in 2023 overall - against its prediction in February for a 1.2% decline - but still slip into a mild recession over the first three quarters, before returning to growth.
House prices are likely to fall by a more muted 5.3% this year and 1.2% in 2024.
Chief executive Charlie Nunn said: “The macroeconomic outlook remains uncertain - we know that this is challenging for many people.”
The figures come after HSBC on Tuesday revealed profits more than tripled in the first three months of the year to £10.3bn, as the sector is buoyed by higher interest rates.
Barclays and NatWest also beat profit expectations when they reported last week.
But Lloyds said deposits fell £2.2bn, or 0.5%, including a £3.5bn drop in retail current account balances, partially offset by a £2.7bn rise in the commercial banking division.
This was partly as a result of customers spending more on utilities and bills due to the cost crisis, as well as seasonal tax payments and as people looked to take advantage of better savings rates across the industry.
Chalmers said Lloyds does not believe there was a flight to safety amid the worries over a global banking crisis in recent months, sparked by the collapse of Silicon Valley Bank in the US.
Troubles in the sector keep bubbling up and, on Monday, US regulators seized First Republic Bank and sold all of its deposits and most of its assets to JPMorgan Chase Bank.
San Francisco-based First Republic was the third mid-size bank to fail in two months.
Chalmers said the impact of this on the UK sector has so far been “very limited”.
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