Lloyds upgrades income target on back of elevated interest rates

Lloyds Banking Group has upgraded its income targets for the year as the bank expects to bring in more cash as interest rates remain elevated from the Iran war.

The FTSE 100 financial giant – which counts Lloyds Bank, Halifax and Bank of Scotland among its subsidiaries – said it expects net interest income to now be north of its previous estimate of £14.9bn.

It comes after the conflict in the Middle East stoked fears of an energy shock and have fanned the flames of inflation, leaving central banks hesitant to cut rates.

“Increases in energy prices lead to the re-emergence of inflationary pressures, with reductions in UK Bank Rate expected to be delayed until 2027,” Lloyds said in its update.

The upgrade came as Lloyds delivered a 33 per cent jump in pre-tax profit, hitting £2bn. The figure breezed past the £1.8bn pencilled in by analysts.

This was driven by the expansion of the bank’s net interest margin – a key indicator of a firm’s profitability from lending – to 3.17 per cent. This was up 14 basis points year-on-year and seven basis points from the last quarter.

The firm’s structural hedge, which banks use to shield against interest rate volatility, was credited for the expansion. Income from the hedging for the year is now expected to exceed £7bn.

Meanwhile, operating expenses slimmed three per cent to £2.5bn as the bank continued to execute its cost-cutting regime. Though some of this was offset by the inflationary pressures and its play to take full control of its wealth partnership with Schroders last year.

Lloyds makes £101m war provision

Lloyds set aside £295m for sour loans, which £101m was attributed to the “deterioration in economic outlook as a result of the Middle East conflict”.

The firm said it balanced the hit by releasing a £50m reserve it had previously held for “global tariff and political disruption risks,” which the bank now feels is covered by their new war-based model

On the motor finance front, Lloyds made no change to its provision but warned there “still remain a number of uncertainties”. The country’s largest motor finance lender Black Horse is among the financial services group’s subsidiaries.

The group said at the beginning of April that it had “undertaken an assessment of the implications and impact” of the final redress and believed the £2bn it has set aside would suffice.

Lloyds was originally on the hook for £1.2bn in car finance provisions, before setting aside another £800m in October, which led to profit sliding 36 per cent.

Whilst the lender has said it is “disappointed” in the final scheme, it has ruled out legally challenging the Financial Conduct Authority on the redress.

But on the flipside, compensation claimant group Consumer Voice has confirmed it is gearing up for a legal showdown after accusing the regulator of leaving motorists “out of pocket” with the scheme.