Lloyds Banking Group has said it expects the UK to dip into a mild recession this year, as it braces for a fall in house prices and as mortgage lending continues to recover following September’s mini-budget.
The UK’s largest lender flagged an uncertain economic outlook and stressed it was focused on supporting its customers who will be “struggling to make ends meet”. It comes as the bank increased its bonus pot for bankers to £446 million last year, the highest amount dished out since 2018.
Charlie Nunn, the group chief executive of Lloyds, said: “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 (GDP) 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 said. 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 £1.5billion 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, Lloyds said. And 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.
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Mr Nunn explained: “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, Mr Nunn added. But less than 1% of Lloyds’ customers are in serious financial difficulty and struggling to make ends meet, he stressed.
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 £1.5billion 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.
Meanwhile, the bank’s staff bonus pool increased by 12% to £446 million in 2022, the highest pot it has shared out among staff since 2018. It credited the uplift to the group’s “strong performance” in 2022, with Lloyds revealing a statutory pre-tax profit of £6.9billion, the same as in 2021.
Chief executive Mr Nunn took home a total pay packet worth £3.8million for 2022, including a £1.3 million shares bonus. This is less than the £5.5million he picked up in 2021, although that included a £4.2million payout on taking on the role in lieu of share awards due from his previous employer, HSBC.
The group’s annual report showed plans for new long-term share awards for top bosses that could be worth a potential 300% of salary – which would be a maximum of £3.4million for boss Mr Nunn on top of his pay package, if all performance targets are met. The group is putting the plans to vote at its upcoming annual shareholder meeting in May, with aims for the new share bonuses to be awarded from 2024 onwards.
Lloyds is the last of the UK’s biggest high-street lenders to share full-year earnings, all of which have reported strong financial results amid the cost crisis. On Tuesday, HSBC reported a near-doubling of pre-tax profits to 5.2billion US dollars (£4.3billion) for the final three months of 2022 alone, compared with the previous year. And NatWest saw its full-year pre-tax profits surge by more than a third to £5.1billion in 2022.
