Lloyds beats bank blues with bullish outlook on profits and respite on PPI

Investors were also pleased with the lack of further provisions for payment protection insurance

Lloyds surprised the market by saying that it would beat expectations for profit margins (Getty Images)

Shares in Lloyds Banking Group leapt after it surprised the market by saying that it would beat expectations for profit margins. It also said that, for only the third time in four years, it had not had to top up its reserves for paying PPI compensation.

The results were seen in the City as a rare relative bright spot in the midst of an otherwise downbeat and lacklustre set of banking results.

Lloyds reported an 11 per cent fall in pre-tax profits due to a £660m loss on the spin-off of TSB, and a £745m hit when costs from that bank’s branch network were included.

Lloyds was forced to spin off TSB – now in the process of being taken over by the Spanish bank Sabadell – as the price of the billions of pounds of state aid it received from the taxpayer to keep the business going during the financial crisis. But Lloyds’ underlying earnings, stripping out one-offs such as the TSB loss, surged by 21 per cent to £2.2bn as total income skipped up 3 per cent and bad loans fell by 59 per cent.

Antonio Horta-Osorio described the results as a ‘strong performance’ (EPA)

The City hailed the bank’s pledge to beat its previous guidance for net interest margins – the difference between what a bank pays savers and charges borrowers – which came in at 2.65 per cent. Margins have been squeezed across the banking sector because of Britain’s historically low interest rates.

Investors were also pleased with the lack of further provisions for payment protection insurance. The bank has set aside £12bn for PPI mis-selling, of which £1.7bn is left.

Before the current quarter, the bank had been forced to top up provisions during every three-month reporting period since the start of 2011, with the exception of the first three months of 2013 and 2014. But it has still not ruled out further provisions, as compensation claims continue to flood in, fuelled by claims companies that have spent millions on advertising their services to aggrieved customers.

The chief executive, Antonio Horta-Osorio, described the results as “a strong performance moving into the new phase of our strategy”. He also dismissed fears that the general election will hurt the economy. “We continue to see the economy going quite well, with 2.5 to 3 per cent growth in GDP. We don’t think this will change any time soon.”

The 7 per cent rise in the bank’s shares to 82.85p came on a day when rivals were either flat or falling.

Jefferies analyst Joseph Dickerson hailed “a good set of numbers”. Investec’s Ian Gordon was more cautious, however, calling the news on margins and PPI “an encouragement” but saying the banking sector’s performance was “pretty depressing so far”.

Lloyds will have to work hard to hit its target of growing its mortgage business at the market rate. Amid a pre-election slowdown, this rose 1.6 per cent over the quarter, but Lloyds managed only 1.2 per cent. Bosses say they will catch up by the end of the year.

By contrast Virgin Money said its gross mortgage lending leapt 34 per cent in the first quarter, with the bank winning a 3.6 per cent share of the market. The lender also gushed about a “strong pipeline” of new business.