Rate Squeeze Impact: Lloyds Takes £700m Provision for Bad Loans

Rate Squeeze Impact: Lloyds Takes £700m Provision for Bad Loans

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Lloyds Banking Group has disclosed a substantial provision of £700 million to tackle the challenge of bad loans in the current tough economic climate. Nevertheless, the bank managed to offer a silver lining to its shareholders by raising dividends, buoyed by a surge in profits. The bank, serving as Britain’s largest mortgage lender and housing renowned brands such as Halifax, Bank of Scotland, and Scottish Widows, reported impressive pre-tax profits of £3.9 billion for the six months leading up to June.

This figure represents a remarkable increase from the £3.1 billion achieved during the corresponding period last year, a gain attributed to the benefits derived from higher interest rates levied on customers in response to Bank of England actions aimed at combating inflation. While exhibiting a cautious approach by setting aside additional funds to safeguard against potential loan defaults, Lloyds emphasized its proactive stance in working with customers to manage their financial obligations and offering optimal rates to those with savings.

As the first among the major lenders to update the City on their 2023 progress, Lloyds faces scrutiny amidst accusations of rates profiteering – an industry practice of being slow to raise savings rates while promptly passing on higher mortgage costs. Barclays and NatWest, with the latter currently grappling with the departure of its chief executive over controversies related to the Nigel Farage de-banking situation, are scheduled to release their financial results on Thursday and Friday, respectively.

This release of results by financial institutions comes just ahead of the enforcement of a new customer service rule. Known as the “consumer duty,” the regulation takes effect from Monday and mandates that all firms regulated by the Financial Conduct Authority (FCA) demonstrate their commitment to providing positive outcomes for customers. Key elements of this duty include delivering helpful and responsive customer service, facilitating effective communications, and ensuring fair value for money on offered products.

In light of the ongoing cost of living crisis, compounded by the impact of rising interest rates, concerns are mounting that this coming winter could exacerbate the challenges faced by household budgets, which have already been under considerable strain.

Following the Financial Conduct Authority’s recent Financial Lives survey, which revealed that 7.4 million people struggled to connect with their financial services providers during the 12 months leading up to May 2022, the watchdog has urged firms to improve their interactions with customers and expedite assistance.

Amid criticisms surrounding inadequate instant access savings rates among major lenders, Lloyds has taken measures to engage with its customer base. The bank stated that it has reached out to over 10 million customers to discuss their savings options, resulting in the opening of 1.9 million new savings accounts during the first six months of the year. Furthermore, Lloyds has proactively contacted customers, including more than 200,000 mortgage customers, offering cost of living support. The bank also reiterated its commitment to the government’s Mortgage Charter, which provides reduced monthly repayment options to borrowers in need.

Despite the improved interim ordinary dividend of 0.92 pence per share, marking a 15% increase compared to the prior year and equating to a return of £594 million to shareholders, Lloyds experienced a nearly 4% drop in share value at the market opening. However, the bank remains optimistic, revising its expected return on equity to be greater than 14% for the year, a closely-watched measure of profitability.

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