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Highlights:
- Lloyds Banking Group (LSE:LLOY) will release its third-quarter update on 23 October, following recent mortgage rate increases.
- The bank reported a 9% fall in net income in the first half, with a NIM decline to 2.93% in the second quarter.
- UBS analysts see Lloyds' shares as fairly valued but warn of potential profitability pressure if interest rates fall.
Lloyds Banking Group PLC (LSE:LLOY) is set to release its third-quarter update on Wednesday, 23 October, as the UK's largest lender navigates a fluctuating interest rate environment. Recently, Lloyds increased its mortgage rates, a move designed to protect its profit margins amid uncertainties about the Bank of England's upcoming interest rate decisions.
In its last results, Lloyds reported a dip in first-half profits but maintained its full-year outlook. Notably, the bank announced a 15% dividend hike, indicating confidence in its long-term financial stability. However, net income fell by 9% during the period, largely due to a decline in its banking net interest margin (NIM), which dropped to 2.93% in the second quarter, compared to 3.03% in the previous year’s second half.
Operating costs increased by 7%, although this was partially offset by a £560 million reduction in impairment charges. As a result, pre-tax profits saw a decrease of nearly 8%. Despite these challenges, Lloyds remained optimistic about its full-year performance, forecasting a net interest margin of greater than 2.90%, a return on tangible equity of approximately 13%, and a CET1 ratio of around 13.5%.
However, these expectations were based on macroeconomic conditions at the time, and with inflation now below 2%, the bank may need to adjust its outlook slightly. Lloyds’ Halifax mortgage division has already made moves to adjust mortgage rates, which could help protect its margins in the face of shifting market dynamics.
Analysts at UBS recently noted that Lloyds’ shares appear fairly valued, with positive developments such as the stabilisation of deposit rates and growth in sight deposits. These lower-yielding deposits offer a stable income stream for banks, helping to balance the impact of market fluctuations. However, UBS also warned that with interest rates likely to fall, banks like Lloyds may face pressure to pass on reductions to customers, which could limit their profitability in the near term.
As Lloyds prepares to release its third-quarter results, market watchers will be keen to see how the bank manages these challenges and whether its recent mortgage rate changes will bolster its margins.
