By Scott Wright

SHARES in Lloyds Banking Group, owner of Bank of Scotland and Scottish Widows, leapt by more than four per cent after the lender beat earnings forecasts for the first half and upgraded profit expectations for the full year.

But the bank underlined its concern over the worsening economic backdrop, setting £377 million aside to provide for potential loan and mortgage defaults as inflation continues to surge.

Lloyds reported a statutory profit before tax of £3.66 billion for the half year to June 30, down 6% but up on the £3.2bn forecast. The bank noted that higher income in the first half had been offset by the impact of an impairment release at the same stage last year, when it eased provisions for the impact on customers from the pandemic.

First-half net income surged by 12% to £8.45bn, boosted by moves by the Bank of England to increase the base rate to combat surging inflation. Higher base rates help banks charge more interest on loans and mortgages. The base rate was increased by the Bank to 1.25% in June.

Lloyds said revenue growth in its first half had also been supported by the continued recovery of customer activity, with loans and advances to customers up £7.5bn to £456.1bn, and customer deposits up £1.9bn at £478.2bn.

While the bank set £377m aside for bad debts arising from the deteriorating economic conditions, it said the quality of its assets remains strong. The bank, which had booked a credit impairment of £734m at the same stage last year, said this year’s first-half provision reflected a “stable and benign observed performance, Covid-19 releases and [an] updated economic outlook including inflationary pressures”.

Mulling the outlook, the bank said it had enhanced its guidance for 2022 following its first-half performance, and upgraded expectations for its net interest margin and return on tangible equity.

Lloyds declared an interim dividend of 0.8p per share, up 20% on last year.

John Moore at Brewin Dolphin said: “Lloyds’ results have come in ahead of expectations, with rising interest rates helping its net interest margin and little sign of a deterioration in credit quality. However, there is a note of caution in today’s update about the effects of inflation and the impact this will have on consumer spending, with more cash being put aside to cover potential bad loans.

"Still, Lloyds is in reasonable shape to weather a tougher macro-economic environment, with its restructuring programme keeping costs in check and new services in the offing. But there are still loose ends to tie up – for instance, its ownership of Scottish Widows – and investors will be looking for updates on these fronts in the next set of statements.”

Lloyds’ chief executive Charlie Nunn said: “Whilst the impact of the coronavirus pandemic has continued to recede, the persistency and potential impact of higher inflation remains a source of uncertainty for the UK economy as many consumers grapple with cost of living pressures. We are well-positioned to support our 26 million customers through this challenging environment, although to date the vast majority of them are demonstrating resilience, adapting behaviours and many increasing their savings.

“Given the nature of our customer base, the positioning of our balance sheet and our conservative risk appetite, we see a resilient franchise today and looking forward. However, where required and enabled by our deep customer insight, we stand ready to proactively help potentially impacted customers through financial health checks and support to manage debt and spending.”

Shares closed up 1.87p at 45.4p.