By Scott Wright

SHARES in Lloyds Banking Group edged more than two per cent higher after it returned to profit in the third quarter and booked “significantly lower” impairments to cover bad debts linked to the coronavirus pandemic.

But while the Bank of Scotland owner said it has been encouraged by its recovery, it warned the outlook continues to be “uncertain” as the UK economy grapples with a second wave of coronavirus, Government restrictions to combat infection rates, the ending of the furlough scheme, and the ongoing Brexit negotiations.

Lloyds, which will part with boss Antonio Horta-Osorio when he steps down next year, made a statutory profit before tax of £1.036 billion for the three months ended September 30, following a £676 million loss in the previous quarter. In July, the bank plunged to a pre-tax loss of £602m for the first half as it set aside another £2.4bn to cover bad debts as it prepared for the economic fall-out of the pandemic crisis.

At that time, Lloyds said it expected charges for Covid-related losses to come in at between £4.5bn and £5.5bn. With the lender stating yesterday that impairments had been “benign” in the third quarter, it now expects charges for the full year to be at the lower end of that range.

However, its third-quarter results underlined the impact of continuing, ultra-low interest rates. Net income for the period was £3.4bn, 19 per cent lower than the third quarter of 2019, and was down 17% for the first nine months at £10.8bn. It said the decline reflected both lower net interest income and lower other income, as well as a marginal increase in operating lease depreciation.

Net interest income of £2.62bn was reported in the third quarter, down from £3.1bn over the same period last year, as its net interest margin declined to 2.54%. Analyst Susanna Streeter at Hargreaves Lansdown noted that net margins had come under pressure not just from ultra-low interest rates but customer 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,” Ms Streeter added.

Lloyds reported that it has provided around 1.2 million payment holidays and about £11bn of lending through various Government coronavirus support schemes.

Yesterday, the bank flagged a £3.5bn increase in open mortgage book lending in the quarter, and highlighted a 22% market share of approvals and a “strong pipeline”.

It noted that its capital performance over the period allowed it to strengthen its common equity Tier 1 capital position to 15.2%.

John Moore, senior investment manager at Brewin Dolphin, said: “Like Barclays earlier in the week, there are tentative signs of recovery in Lloyds’ results. The bank’s net interest margin has continued to come under pressure, but there are some positives to be taken in relatively low impairment charges, increased capital buffers, and a return to profit, while the bank’s modernisation programme will place it relatively well for the new ways of doing business.

“Whilst the outlook looks increasingly uncertain in the face of a second wave of Covid-19 in the UK, not to mention Brexit as well, Lloyds can bring cost savings to the table to help offset pressure. There is a relatively positive tone to today’s statement, but the next few months could be particularly challenging for Lloyds.”

Meanwhile, Lloyds said yesterday that outgoing chairman Lord Blackwell will step down from the post and resign from the board on January 1. Robin Budenberg will succeed Lord Blackwell as chairman and chair of the bank’s nomination and governance committees from that date.

Mr Horta-Osorio said: “Although the outlook remains uncertain, our customer-focused strategy and the strength of the group’s business model will allow us to continue to help Britain recover and play our part in helping to return the UK to prosperity. This is fully aligned with the group’s long-term strategic objectives, the position of the franchise and the interests of our shareholders.”

Shares closed up 2.3% at 28.28p.

Last month, Lloyds announce 865 job cuts relating mainly to plans to simplify its business that were delayed because of coronavirus.