Lloyds Banking Group has raised its dividend despite a sharp decline in first-half profits, driven by increased competition in the mortgage market.
The bank will distribute a 1.06 pence per share interim dividend, totaling £662 million, marking a 15% increase from last year.
For the six months ending June, Lloyds reported a 14% drop in pre-tax profit to £3.3 billion, attributed to rising operating costs and peak interest rates. This figure, however, surpassed analyst expectations of around £3.2 billion.
The bank’s underlying net interest income fell by 10% to £6.3 billion, with its banking net interest margin shrinking by 24 basis points to 2.94%.
Lloyds had strong results in 2022 and 2023 due to the Bank of England’s series of interest rate hikes in response to inflation, which allowed it to charge more for loans. However, increased competition in the mortgage sector and the need to offer better savings rates have compressed profitability.
Despite a slight growth in its mortgage portfolio to £306.9 billion this year, the bank noted that refinancing has occurred in a lower-margin environment. Customer deposits have risen by £3.3 billion since last December to £474.7 billion, with retail deposits increasing and commercial deposits decreasing.
Operating costs surged 14% to £5.5 billion, driven by strategic investments, severance payments, and inflation.
CEO Charlie Nunn stated that Lloyds achieved strong financial results with solid income performance, cost control, and robust capital generation. The bank has maintained its annual guidance, expecting a banking net interest margin over 290 basis points and operating expenses around £9.4 billion. It anticipates generating approximately £700 million from strategic initiatives and achieving about £1.2 billion in cost savings.
Richard Hunter from Interactive Investor remarked that Lloyds’ performance amidst a high interest rate environment reflects its role as a key indicator of the UK economy. He noted an improvement in the second quarter and potential stabilization in net interest margin.
Lloyds shares fell 1.3% to 58.9p in early trading but have risen about 22% this year.
