Lloyds gallops back into profitability with mortgage lending leading the charge

By Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

Lloyds has galloped back into profitability, no mean feat given the hurdles the bank has had to jump through the coronavirus crisis.

It posted profit before tax of £1 billion and is now expecting the amount of money it has to set aside for bad loans this year to be at the lower end of forecasts.

Lloyds wins a rosette for a surge in applications for home loans and a huge increase in mortgage lending, led by the mini boom in the housing market. It doesn’t end here, as Llloyds has also nabbed a large share of approvals for the next quarter as well.  This is encouraging news, but once the stamp duty holiday ends and given the fragile economic recovery, there are concerns the mini housing boom could turn into a bust, which would lead to a reversal of fortunes for this part of Lloyds business.

The group though has scooped another prize by winning a large share of the government support scheme loans to businesses. It lent £11 billion to companies to help them through the crisis. This is far less risky as the government has promised to pay out if the businesses default. Lloyds has been well set up for the shift to digital we have witnessed during the pandemic, which has helped it trim costs.

The number of its customers using online services has continued to increase and it is selling more of its products through digital channels. But net margins have still taken a squeeze over the last 9 months from ultra-low interest rates and allowing customers payment holidays. Customers are also paying off their credit cards and car financing deal balances are lower, reflecting how consumers are showing more caution about carrying too much unsecured debt.

The outlook is still highly uncertain and there was no mention of the return of the dividend. However, the group is heading into this stretch in a resilient position. It’s nosing ahead of the pack in terms of new retail customers with a strong balance sheet and increased capital buffers to help it stay on course through the pandemic.