Lloyds Banking Group has said its profits nearly doubled in the final three months of 2022, as its loan book swelled and interest rates increased.
The UK’s largest lender said its quarterly statutory pre-tax profit was £1.8bn, up from £968m over the same period in 2021.
This takes its full-year earnings to £6.9bn, the same as in 2021.
The group saw its net interest income surge by nearly a fifth to £13.2bn in 2022 as it benefited from higher borrowing costs and a boost to its net interest margin – which shows the difference between what a bank charges for loans and pays for savings.
Its loan book surged by £6.3bn to £475bn over the year.
But the group revealed it had put aside £1.5bn in credit provisions as it cautioned over an uncertain economic outlook and an uplift in borrowers defaulting on loans this year.
During the fourth quarter it observed a small increase in defaults, but that credit performance was generally strong despite the cost-of-living crisis.
Nevertheless, chief executive Charlie Nunn took home a total pay packet worth £3.8m for 2022, including a £1.3m shares bonus.
Lloyds’ annual report also showed the bank’s staff bonus pool increased by 12% to £446m, “as a result of the group’s strong performance in 2022”.
Nunn said: “While the operating environment has changed significantly over the last year, the group has delivered a robust financial performance with strong income growth, continued franchise strength and strong capital generation, enabling increased capital returns for shareholders.
“We know that the current environment continues to be challenging for many people and have mobilised the organisation to further support our customers.
“Our purpose-driven strategy is more relevant now than ever before - we remain committed to helping Britain prosper and helping the country recover from the current economic uncertainties.”
The bank set aside £1.5bn over the year in preparation for debt defaults, while operating costs were up 6%. That meant underlying profit fell 1% to £7.4bn and return on tangible equity, a measure of profitability, moved from 13.8% to 13.5%.
For 2023, return on tangible equity is expected to be around 13% and net interest margin’s expected to exceed 3.05%.
The board also announced a final dividend of 1.6p per share and a buyback programme of up to £2bn.
Shares fell 1.6% in early trading.
Matt Britzman, equity analyst at Hargreaves Lansdown, commented: “Lloyds has taken advantage of its strong capital position to start a big £2bn buyback scheme and having been disappointed with the scale of the capital returns from some of the other major banks, markets should be relatively happy with this.
“Guidance on net interest margin for 2023 was a little lower than markets had hoped for, and that’s a trend we’ve seen across the sector over the last couple of weeks.
“We’re cautiously optimistic that the £1.5bn of impairment charges taken over the year in preparation for bad debt are more than sufficient. If that’s the case, there could be scope for that to feed its way back to the profit line in future periods.”
Lloyds' trading update also noted that it expects the UK to dip into a mild recession this year, as the bank braces for a fall in house prices and as mortgage lending continues to recover following September’s mini-budget.
Nunn explained: “We are predicting what we call a mild recession – nothing like the financial crisis, more like some of the earlier recessions we had in the early parts of the century.
“For our customers, especially those at the lower income bracket in the UK who we know will struggle to make ends meet, we are focused on supporting them.”
The bank laid out its forecast for the UK economy this year, which includes the Bank of England’s base rate peaking at 4%, and gross domestic product declining by around 1.2%, before returning to growth in 2024.
It also expects house prices to fall by about 7% this year, which would mean the value of average properties returning to levels seen in the third quarter of 2021.
But most of its homeowner customers would still have “very positive equity”, Lloyds stated.
Mortgage lending has been gradually returning to normal levels since the former chancellor’s controversial mini-budget, which led average two- and five-year fixed-rate mortgages to temporarily surpass 6%.
After what Lloyds described as the “mini crisis”, hopeful new homebuyers retreated from the housing market, causing the value of total mortgage lending across the country to drop from about £1.5bn a day to just £600,000 a day.
These levels have since begun to normalise, but still remain around 30% lower than pre-mini-budget levels.
The higher interest rate environment is expected to impact homeowners who are coming to the end of a fixed-rate mortgage this year, and having to remortgage onto a higher rate.
Nunn added: “If you look at the average mortgage customer in the UK, their average salary of about £75,000, and the average loan-to-value on our mortgage book is about 41% – so there is really significant equity.
“This tends to be a customer base that is not struggling to make ends meet in terms of the cost of living.
“We are laser-focused on mortgage customers that we know aren’t in that higher income range and are going to experience an increase in interest income that will be difficult for them.
“But we also recognise that about 20% of our mortgage customers are going to be repricing this year, as most have a fixed-term that goes through 2023.”
A significant proportion of customers have had to adapt their spending habits, including switching to supermarket value brands or cancelling subscriptions to deal with higher food and fuel costs, Nunn noted.
But less than 1% of Lloyds’ customers are in serious financial difficulty and struggling to make ends meet.
The bank said that it had observed a small increase in borrowers defaulting on loans towards the end of last year, but that credit performance was generally strong despite the cost-of-living crisis.
Nevertheless, the group said it had put aside £1.5bn in credit provisions over the year to guard it against bad debts, and stressed it was remaining “vigilant” and ready to help borrowers that face difficulties.
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