Lloyds has enjoyed the sharp rise in interest rates over the past year as this has put a rocket under its profits. It has earned more thanks to the wider gap between the interest it pays on deposits and the amount it charges customers to borrow money.
That’s fine for now, but it is hard not to ignore the £2.2 billion reduction in customer deposits during the first quarter of 2023. Part of this was down to a more competitive market for deposits – higher rates mean consumers are shopping around more to get a better deal on their money, and that means banks are having to work harder to lure them in.
AJ Bell’s Russ Mould said: “Unlike the regional US banks, some of which are facing a deposit crisis, Lloyds’ decline in deposits is not a reason to panic, particularly as the company remains well-capitalised.
“Providing some relief to the bank will be the Office for Budget Responsibility’s prediction that the UK should avoid a recession this year. Lloyds has subsequently revised its assumptions for key economic indicators versus what it had predicted at its full-year results in February.
“For 2023, it now expects UK GDP to slip 0.6% versus previous expectations of a 1.2% decline; house prices are now expected to fall by 5.3% compared with its earlier forecast of a 6.9% decline; and CPI inflation is expected to be 6.4% versus an earlier prediction of 8.3% for this year. They suggest a more favourable backdrop for the company on a relative basis to previous forecasts, albeit not necessarily one where the company can be complacent.
“While the backdrop is not as gloomy as a few months ago, the lack of positive economic activity still means the bank must keep a close eye on bad debts.
“Lloyds predicts that the Bank of England base rate will remain at 4.25% for the rest of 2023 before progressively declining next year. However, many people think the base rate could go up at the next Bank of England meeting on 11 May. In either situation, rates staying at these elevated levels will continue to put pressure on consumers and businesses, meaning that banks in general will need to stay focused on customer arrears rather than simply look at the profit line.”