Profits at Lloyds Banking Group fell less than expected in the first quarter, as revenue from rising interest rates and continued mortgage growth offset extra provisions taken to account for the impact of surging inflation on the economy.

Pre-tax profit fell 14 per cent to £1.6bn in the first three months of 2022, beating analysts’ expectations for £1.4bn, the UK lender said on Wednesday. Revenue increased 12 per cent to £4.1bn, above consensus estimates of £4bn.

However, Lloyds was forced to add £177mn to its reserves, partially to protect against potential loan losses due to inflationary pressures. This was a swing from a year earlier, when it cancelled £360mn as the economic situation brightened after the initial stages of the pandemic.

“Whilst we are seeing continued recovery from the coronavirus pandemic, the outlook for the UK economy remains uncertain, particularly with regards to the persistency and impact of higher inflation,” said chief executive Charlie Nunn, adding that the bank was proactively contacting customers it felt might need assistance.

Shares rose as much as 2.5 per cent in morning trading on Wednesday. The stock had risen more than 20 per cent in the year to February, but the Russian invasion of Ukraine erased much of that gain.

As one of the nation’s largest high street lenders, Lloyds is a bellwether for the British economy. The results reflect the growing storm clouds as higher food and energy prices have slowed consumer sales and business activity, in part due to the war in Ukraine.

Chief financial officer William Chalmers said 1.2mn customers had cancelled subscriptions including streaming services and gyms since the summer and expenditure on energy and food bills had increased.

However, he said that while impairments were expected to increase throughout the year, they were starting from low levels. Lenders unwound much of the provisions taken in case of Covid-related bad loans last year, boosting results.

“Overall a very strong set of numbers and constructive outlook,” said Andrew Coombs, analyst at Citigroup. “Lloyds has comfortably beat expectations and guided to higher full-year net interest margin.”

Net interest margin (NIM), the difference between the cost of its funding and the price charged for lending, is boosted by rising interest rates.

Costs increased by about 3 per cent to £2.1bn, which the bank said was primarily due to strategic investments. Nunn announced a £4bn growth strategy in February, as it seeks to expand areas including wealth management and its investment bank after years of retrenchment under former chief executive António Horta-Osório.

The bank is already the UK’s largest mortgage lender and second to Barclays in the credit card market, making it hard to expand in these areas. It predicts that the strategy, which will include a new wealth management service targeting mass affluent customers and an expansion of its investment bank’s cash, debt and risk management for corporate customers, will add revenues of £1.5bn by 2026.

These results follow a disappointing fourth quarter, weighed down by charges related to historical fraud at HBOS, now owned by Lloyds. The bank disclosed in its annual report that it had frozen the unpaid bonus and unvested share awards of Horta-Osório. He left the bank last year to become chair of Credit Suisse, only to resign after being caught breaching Covid quarantine rules.

The bank also updated its outlook for the rest of the year. Among the projections are that its NIM is now expected to be above 270 basis points, up from 260bp.

It also expects its return on tangible equity, a key measure of profitability, to be greater than 11 per cent.

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