Lloyds unveils solid first quarter but takes extra PPI hit

● Profits up 23% as boss Horta-osorio expects economic resilience in 2018

Growing income and a sharp fall in costs for insurance misselling have powered Lloyds Banking Group to a near-quarter jump in profits in the first three months of 2018.

The bank, which owns Edinburgh-based Scottish Widows life assurance and Bank of Scotland, revealed that it had taken £90 million of further costs on payment protection insurance (PPI) mis-selling.

That is sharply down on the £350m hit on PPI taken in the same quarter of last year, and takes Lloyds’ cumulative provision on the industry scandal to £18.8 billion – the biggest exposure of the big five banks.

It came as Lloyds, now back in full private ownership after nearly a decade in part-taxpayer ownership following the financial crash, unveiled a Q1 pre-tax profit of £1.6bn – up 23 per cent.

The group’s total income rose 4 per cent to £4.58bn in relatively benign UK economcosts, ic conditions, with the Bank of England (BOE) raising interest rates in November for the first time in ten years.

Lloyds is the most exposed of the big banks to the UK economy, and the City thinks there is an even-money chance that the BOE will hoist rates again next month.

Antonio Horta-osorio, chief executive, revealed yesterday that the lender’s net interest margin (NIM) – the difference between what it charges on loans and pays on deposits – rose from 2.8 per cent to 2.93 per cent in the first quarter.

City analysts said the improvement in NIM was partly due to the bank’s acquisition last year of the MBNA credit card business.

Laith Khalaf, an analyst with broker Hargreaves Lansdown, said: “Rising interest rates are positive for the banking sector, and Lloyds is also benefitting from the purchase of the MBNA credit card portfolio, as this kind of debt yields significantly more for banks than mortgage borrowing, albeit with greater risk.”

On the sharp decline in PPI Khalaf said it was “a theme we can expect to continue for the UK banks. As the largest source of compensation, Lloyds also stands to be the biggest beneficiary of PPI disappearing in the rear-view mirror”.

Yesterday’s results come ahead of first-quarter figures from rival Royal Bank of Scotland, owner of Natwest Bank, tomorrow. The City consensus is for unchanged underlying RBS profits of £1.3bn.

Meanwhile, Horta-osorio said the UK economy continued to be “resilient”, benefiting from low unemployment and continued GDP growth.

“We expect the economy to continue to perform along these lines during 2018,” he added.

Richard Hunter, head of markets at interactive investor, said: “These [Lloyds] numbers provide much of what any bank should aspire to, with strong growth underpinned by a disciplined and organised balance sheet.

“The capital cushion is robust… whilst there are further noticeable improvements to the cost/income ratio and the return on equity.”