Bank of Scotland owner Lloyds Banking Group has been boosted by rising interest rates to a £2.3 billion profit in three months.

The lending giant posted a profit increase of 46 per cent against the same time last year when it was £1.5bn. One analyst said the bank could also stand to benefit from changes in the sector in the longer term after US lender failures impacted share value.

Lloyds said the rise in numbers of customers struggling to repay loans was low, deposits fell slightly, and uncertainty around macroeconomics remains.

It took an impairment charge of £243 million, up from £177m a year ago, despite a slightly improved economic outlook for the UK.

It said it was seeing modest increases in borrowers falling into arrears and defaulting on loans amid the cost-of-living crisis but said levels remain at or below those seen before the pandemic struck.

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Arrears mostly relate to mortgages written in 2006 to 2008, at a time when borrowers could over-stretch themselves, with many of these loans also on variable rates, making them vulnerable to base rate increases.

However, William Chalmers, the group's chief financial officer, said: "It's very modest and doesn't cause us any alarm."

The group now expects the economy to fall by 0.6% in 2023 overall, against its prediction in February for a 1.2% decline, but still slip into a mild recession over the first three quarters, before returning to growth.

House prices are likely to fall by a more muted 5.3% this year and 1.2% in 2024, it added.

Lloyds said deposits fell £2.2bn, or 0.5%, including a £3.5bn drop in retail current account balances, partially offset by a £2.7bn rise in the commercial banking division.

READ MORE: Investors exit major UK banks amid collapse of Silicon Valley

Charlie Nunn, Lloyds chief executive, said: "The macroeconomic outlook remains uncertain. We know that this is challenging for many people."

Troubles in the sector continue, with US regulators this week seizing First Republic Bank and selling all of its deposits and most of its assets to JPMorgan Chase in a bid to head off further banking turmoil in America.

San Francisco-based First Republic was the third mid-size bank to fail in two months. Mr Chalmers said the impact of this on the UK sector has so far been "very limited".

It also comes alongside the collapse of Credit Suisse in Europe.

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Lloyds said lower deposits were partly as a result of customers spending more on utilities and bills due to the cost crisis, as well as seasonal tax payments and as people looked to take advantage of better savings rates across the industry.

Mr Chalmers said Lloyds does not believe there was a flight to safety amid the worries over a global banking crisis in recent months, sparked by the collapse of Silicon Valley Bank, then Signature Bank in the US.

John Moore, senior investment manager at RBC Brewin Dolphin, said: “Lloyds has followed the other major UK banks with a strong set of results that have beaten expectations.

“A higher net interest margin – among other factors – has boosted profits for the quarter.

“While an increase to costs takes a little shine off the bank’s performance, there is still a lot to be positive about.”

He added: “First Republic’s collapse has hit US banks’ shares, but looking longer term Lloyds could be among the beneficiaries in that some challenger banks don’t have the strength and depth to navigate through the current environment.

"This could create opportunities for Lloyds, which may see the bank retain some of its firepower, rather than going too hard on dividends and share buybacks.”

The figures come after HSBC on Tuesday revealed profits more than tripled in the first three months of the year to $12.9bn, or £10.3bn, also buoyed by higher interest rates.

Barclays and NatWest beat profit expectations when they reported last week.

Michael Hewson, chief market analyst at CMC Markets, said: “Three months ago, Lloyds full year numbers showed a statutory pre-tax profit of £6.9bn, despite setting aside £1.51bn in impairments, and is still very profitable compared to its peers, with healthy margins.

“This trend has been borne out with another set of decent quarterly number.”

He said: “Operating costs did see a modest increase over the quarter to £2.17bn but are still lower than this time last year.”

Shares in Lloyds Banking Group closed down 3.57%, or 1.7p at 45.98p.