Lloyds raises dividend despite profit decline amid competition in mortgage market

Lloyds Banking Group has raised its dividend despite reporting a significant fall in first-half profits, amid increased competition in the mortgage market.

The lender intends to pay investors an interim dividend of 1.06 pence per share, equivalent to 662 million pounds and an increase of 15 percent from the previous year.

Lloyds posted a 14 per cent fall in pre-tax profits to £3.3bn in the six months to June due to rising operating costs and peak interest rates.

However, this figure exceeded analysts’ forecasts, who had expected around 3.2 billion pounds.

Underlying net interest income fell 10 percent to 6.3 billion pounds, while its net bank interest margin – the difference between what banks pay savers and receive in loans – fell 24 basis points to 2.94 percent.

Like many other banking giants, Lloyds enjoyed strong results in 2022 and 2023 as the Bank of England raised the UK base rate 14 times in succession in response to rising inflation, allowing it to charge customers more for loans.

However, strong competition in the mortgage market and pressure to offer more generous savings interest rates have subsequently reduced the profitability of the sector.

So while Lloyds’ mortgage book has grown marginally to £306.9bn this year, the company said on Thursday that homebuyers were refinancing in an environment of lower margins.

Customer deposits have risen since last December by £3.3bn to £474.7bn, with an expansion in retail deposits offsetting a fall in commercial bank deposits.

Lloyds’ first-half profit was also hit by operating costs which rose 14 per cent to £5.5bn, which the firm attributed to “strategic investments”, severance payments and inflationary pressures.

Lloyds chief executive Charlie Nunn said the group “delivered solid financial results with strong revenue performance and cost discipline coupled with strong capital generation.”

Following the result, Lloyds maintained its full-year forecasts.

The bank is expected to achieve a net interest margin of over 290 basis points and have operating expenses of approximately £9.4 billion.

It also said it was confident of achieving around £700m of additional revenue from strategic initiatives and generating around £1.2bn in cost savings.

Richard Hunter, director of markets at Interactive Investor, said: ‘With a resilient performance amid a higher interest rate environment and with some promising signs of growth, Lloyds has provided a timely reminder of why it is often seen as a barometer of the wider UK economy.

‘An improvement in the second quarter bodes well for the rest of the year, with the added possibility that the bottom has been reached in regards to the crucial metric of net interest margin.’

Lloyds Banking Group shares fell 1.3 percent to 58.9 pence in early trading but are still up around 22 percent so far this year.