Lloyds shares were down in early trade on Wednesday after the UK bank said net interest margin – a key measure of operational profitability – fell in the last quarter.
Lloyds shares were down 2.4% in early trade, breaking through the significant 40p mark, before rebounding.
Net interest margin (NIM) fell to 3.08% in the third quarter, a drop of 6 basis points compared to the previous quarter. The drop in NIM was a result of challenges in mortgage pricing and competitive influences on deposit interest rates.
However, unlike Barclays yesterday, Lloyds maintained their full-year net interest margin guidance at ‘greater than 310 basis points.’
Customer deposits were steady in the period as increased savings and wealth deposits offset a reduction in current account balances.
“Lloyds’ retail deposit base has put in a steady performance over the quarter as it managed to keep hold of savers looking for better rates. As we’ve seen over recent quarters consumers are conscious of the rates they’re receiving on current account deposits and are off in search of higher yields. Lloyds did see a 3% dip in current account values and has seen over £9bn in outflows year to date, but was able to make up for the loss this quarter with inflows into its savings products. These are less profitable products, and net interest margin was a touch lower than expected,” said Matt Britzman, equity analyst at Hargreaves Lansdown.
There were bright spots in Lloyds’ update. Lloyds were relatively upbeat on the macro outlook to the extent they set aside less than expected for bad debts. Lloyds only recorded £187m in impairment charges in the third quarter compared with £668m in the prior quarter.
Lower than expected impairment charges saw Lloyds’ profit rise to £2bn in the third quarter.
“Impairments came in less than expected, as Lloyds continues to see macroeconomic conditions improving. Consumers facing higher living costs may not be feeling any release of pressure, but they’re managing finances well and remain remarkably resilient, with arrears levels stable,” Britzman said.
Although Lloyds has yet to see any major deterioration in the health of its loan book, there were undertones of caution in the decision to hold off bringing forward any share buybacks.
Britzman added “there was chatter that Lloyds may lean on its strong balance sheet to push forward full-year buyback plans. But prudence is on the cards, and investors will have to wait until full-year results more any indication on the size of planned distributions – given the levels of excess capital floating about, there’s potential for surprise on the upside.”