By Iain Withers and Lawrence White
LONDON (Reuters) -Interest rate rises helped British bank Lloyds (LON:LLOY) beat first quarter profit forecasts on Wednesday, but early signs of stress among some borrowers pointed to tougher times ahead.
Britain's biggest mortgage lender's results highlighted how the same increases in rates that have lifted its profit margins are also piling pressure on its weakest customers, already contending with the highest inflation rate in western Europe.
Lloyds reported pretax profit of 2.3 billion pounds ($2.9 billion) for the first three months of 2023, above the 1.95 billion pounds average of analyst forecasts compiled by the bank and up from 1.5 billion pounds the prior year.
While the asset quality of banks has proved resilient during the COVID-19 pandemic and recent spiralling consumer prices, Lloyds said it had begun to see more loans run into difficulty.
Lloyds made a provision of 243 million pounds in the first quarter to cover potential losses after reporting "modest" rises in arrears, mainly in commercial banking loans and mortgages. It set aside 177 million pounds in the same period a year ago.
The bank's shares edged down 0.4% in early trading, compared to a 0.5% rise in the European banking stocks index.
The Bank of England has hiked rates from a rock-bottom 0.25% in December 2021 to 4.25%, enabling banks to prosper as they lent money at more profitable rates.
While earnings have exceeded expectations across the sector, Lloyds has echoed rivals in keeping full-year performance forecasts flat instead of upgrading them further as some analysts had anticipated.
That decision signalled caution about the outlook for profit-boosting rates, that defaults are rising, competition is squeezing lending margins and savers are shopping around.
Lloyds is the last of Britain's 'Big Four' banks to post its quarterly results, after HSBC (LON:HSBA), NatWest (LON:NWG) and Barclays (LON:BARC) also reported profit jumps.
But in common with others, Lloyds also reported deposit outflows of 2.2 billion pounds over the quarter as customers dipped into savings and moved money into alternative products.
($1 = 0.8006 pounds)