Shares in Lloyds Banking (LLOY), the UK’s largest lender, were the worst performers in the FTSE 100, falling 3% to 44.7p after second-quarter earnings missed estimates due to a higher level of provisions for potential loan losses.

The bank said its base case outlook had deteriorated in the second quarter and it now expected the UK economy would take longer to recover than previously thought while interest rates would stay higher for longer.

A LESS ROSY OUTLOOK FOR LENDERS

At a headline level, the results looked solid enough with net income for the first half up 11% to £9.2 billion, a similar level to the second half of 2022, and a return on tangible equity of 16.6%.

Higher interest rates meant the bank’s net interest margin – the difference between the interest rate it charges on loans and the rate it pays on deposits – expanded from 2.77% a year ago to 3.18%, but a closer look reveals the margin was already 3.10% at the end of 2022 so in fact there was barely any progress in the first half.

Moreover, the margin actually narrowed in the second quarter to 3.14% while lending decreased by £1.6 billion in the quarter and £4.2 billion in the first half due to the sale of a legacy mortgage book and the bank taking a generally more prudent approach to lending.

In addition, Lloyds booked a £662 million impairment for expected loan losses compared with £377 million in the same period last year, no doubt partly to cover potential non-payment of unsecured retail loans and motor finance lending which grew by £800 million to £9.3 billion and by £700 million to £14.9 billion respectively.

Chief executive Charlie Nunn tried to gee investors up with his ‘enhanced’ guidance for the full year, including a net interest margin above 3.10% (which is where it was last year), an asset quality ratio of 0.3% (against 0.36% in June and 0.38% last December, so in other words still falling) and a return on tangible equity of over 14% against 13.6% in June and 11% last year, but it fell on deaf ears.

ALL IN THE SAME BOAT

The UK arm of Banco Santander (SAN:BME) also posted an increase in first half profits and net interest margin due to higher base rates but flagged a slowdown in mortgage demand at the same time as deposit costs were rising due to increased competition.

Looking ahead, the Spanish bank said the challenges faced by UK households and businesses were likely to continue while inflation was ‘likely to reduce real consumer spending and we expect further declines in house prices in 2023’, which is hardly a ringing endorsement for the economy.

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