By Lawrence White and Sinead Cruise
LONDON (Reuters) -Lloyds Banking Group's pretax profit slid by 28% in the first quarter, as rising costs, peaking interest rates and intensifying competition in the mortgage market hit income.
Britain's largest mortgage lender reported first-quarter pretax profit of 1.6 billion pounds ($1.99 billion) on Wednesday, down from 2.3 billion a year ago, in line with expectations.
A robust housing market is key to Lloyds (LON:LLOY)' fortunes, and the lender forecast house prices to rise by 1.5% in 2024, compared with previous expectations for a fall of 2.2%.
British house prices rose in March at their fastest annual pace since December 2022, data from the Nationwide Building Society (LON:NBS) showed this month.
The bank's shares fell 2% in early trading but rallied to trade 2.5% higher at 1156 GMT as analysts welcomed the bank's confidence in the housing market and in particular, signs of rising demand for home loans.
"There are still pressure points, from customers switching to higher-rate accounts to a mortgage market that is not as profitable for banks as it was a few years ago. But both those trends are easing," Matt Britzman, equity analyst, Hargreaves Lansdown (LON:HRGV), said.
Lloyds said higher operating costs were partly to blame for the profit fall, including a new sector-wide Bank of England levy on lenders and a 100-million-pound additional charge to cover employee severance after a recent round of layoffs.
The bank said its net interest margin, a closely-watched measure of profitability, edged down to 2.95% from 2.98% at the end of the fourth quarter and 3.22% a year ago.
But Chief Financial Officer William Chalmers told reporters on a conference call the bank expected pressures on margins "to ease through 2024".
BENIGN ENVIRONMENT
Lloyds reiterated its guidance for 2024, including a net interest margin greater than 2.90%; operating costs of 9.3 billion pounds and a return on tangible equity around 13%.
It took an impairment charge of just 57 million pounds in the quarter, against a 280-million-pound analyst forecast, underlining the resilience of its borrowers and robust asset quality across its loan book.
It also opted against making any new provision this quarter for possible redress claims in its motor finance business, after already setting aside 450 million pounds.
"We expect the market will start to reward Lloyds for better cost control and asset quality versus peers," analysts at RBC Capital said in a note.
"...we think that 2024's election is most comparable to 1997. In that year, UK banks significantly outperformed the market in the 9 months running up to the election," RBC said, referring to a national election in Britain that is expected to take place later this year.
But the analysts also said a Financial Conduct Authority probe into possible motor finance overcharging challenged the thesis.
Uncertainty over whether global central banks have brought inflation under control have dampened expectations for a wave of interest rate cuts this year.
Chalmers told reporters he saw "a more benign economic outlook going forward" and was still expecting three Bank of England base rate cuts in 2024.
Lloyds flagged the potential for an upward revision to its guidance upwards later in the year, if conditions continued to improve.
"It's appropriate for us to ensure that we deliver in line with expectations we have set out, and if things turn out better, then we will guide to that at the half year or third quarter as appropriate," Chalmers said.
($1=0.8030 pounds)