By Iain Withers and Lawrence White
LONDON (Reuters) -Lloyds Banking Group reported a third-quarter profit that met forecasts and maintained its guidance for full-year performance, despite declining lending margins and rising costs that are squeezing British banks' returns.
Britain's biggest mortgage lender on Wednesday reported a pre-tax profit of 1.9 billion pounds ($2.3 billion) for the three months to September 30, in line with the 1.8 billion expected by analysts in forecasts compiled by the bank.
Most British banks have reported a run of strong profits as higher rates have lifted lending revenue. But investor concerns about tougher competition for savers' cash and potential loan defaults in a cost of living crisis have weighed on the sector.
The economic backdrop of rising prices and upward pressure on wages is also pushing banks' costs higher, with Lloyds (LON:LLOY) reporting its operating costs have risen by 5% to 6.7 billion pounds in the year to date.
Lloyds shares fell 2% in early trading, as investors looked past the solid numbers to the lack of an unscheduled dividend or buyback payout, which some analysts had hoped for.
Barclays (LON:BARC) shares had closed down 7% on Tuesday after it downgraded its margin forecast for the year and hinted at big cost-cutting plans to come.
Lloyds in contrast reaffirmed its performance guidance for the year and said it expected asset quality to be slightly better than forecast.
The bank's quarterly profit was up on 576 million pounds the prior year, which was restated due to accounting changes.
Analysts welcomed the steady set of results, noting a bad loan charge of just 187 million pounds - versus 668 million in the same quarter a year earlier - was much lower than expected.
"Lloyds' update should provide some reassurance about the sector's resilience," said Zoe Gillespie, investment manager at RBC Brewin Dolphin.
"Bad debt provision is also relatively limited, but profit growth has been held back slightly by subdued demand."
Banks' rising profits have been checked this year by intensifying competition for deposits amid political pressure to improve saving rates, after lenders raised rates on borrowing at a much faster pace.
However, Lloyds said it increased its deposits by 500 million pounds during the third quarter, reversing a trend of outflows seen by many banks this year. Deposits remained down 5 billion pounds year to date at 470 billion pounds.
Lloyds' net interest margin - a measure of profitability that tracks the difference between what is made on lending and paid out on deposits - came in at 3.08%, down 6 basis points on the prior quarter.
($1 = 0.8218 pounds)