Lloyds Banking Group, the UK’s largest domestic lender, reported a significant decline in profits for the first quarter of the year, largely attributed to intensified competition in the deposits and mortgages market.

The FTSE 100 bank disclosed that its pre-tax profits for the first quarter plummeted by 28 per cent to £1.63 billion, down from £2.26 billion in the same period last year. This decline aligns closely with expectations from City analysts, who anticipated profits to hover around £1.66 billion.

One of the primary factors contributing to this profit dip is the contraction in net interest margin, which fell to 2.95 per cent from 3.22 per cent a year ago. Lloyds attributed this decrease to challenges arising from deposit churn and asset margin compression, particularly within the mortgage sector, as the bank navigates a lower margin environment amidst refinancing activities.

Net interest margins serve as a vital metric for assessing bank profitability, and the recent decline reflects the heightened competition for deposits and mortgages. While margins had experienced a surge following interest rate hikes by the Bank of England in late 2021, subsequent improvements in savings rates and increased deposit mobility have eroded profitability.

Furthermore, intensified competition in the mortgage market compared to the previous year has added pressure on margins, exacerbating the challenges faced by Lloyds. With expectations of a base interest rate cut by the Bank of England looming, commercial lenders are poised to face further strain.

As a prominent player in the UK’s financial landscape, Lloyds’ performance is closely monitored as a barometer for the country’s economic health. The bank’s revised economic forecasts, including an upgraded projection for house price growth, signal shifting dynamics within the housing market.

Additionally, Lloyds’ involvement in motor finance through its Black Horse business has garnered attention, with ongoing scrutiny from the Financial Conduct Authority over concerns regarding unfair commissions on car loans. While the bank has set aside provisions to address potential costs and customer compensation related to this inquiry, no additional provisions were made in the latest disclosure.

Lloyds Banking Group’s challenges underscore the evolving landscape of the financial sector, characterised by increased competition and regulatory scrutiny, as it navigates the complexities of the UK’s economic climate.