Margins under pressure at Lloyds TSB

Lloyds TSB, the UK's fifth largest bank, yesterday revealed that lending was beginning to slow on the high street and that its profitability margins were starting to erode.

Despite news that its core mortgage and credit lending had grown strongly over the past year, the bank also said its net interest margin - a core measure of how profitable its lending is - has narrowed. The figure now stands at 2.97 per cent, from 3.03 per cent in the second half of 2003. Shares in the group yesterday fell nearly 2 per cent, closing at 436p as shareholders feared that underlying profitability could be worse than indicated by the bank. It has had three years of stagnant earnings.

These interest margins become an increasingly important measure of the bank's performance as interest rates climb. If rising rates cause consumers to rein in their borrowing, banks often have to cut their rates to win business. Analysts at Teather & Greenwood were concerned yesterday that Lloyds lending growth had come at the expense of margin erosion.

In a trading statement ahead of its half-year results, Eric Daniels, the bank's chief executive, said it was on track for a "satisfactory" performance. This also did not help sentiment towards Lloyds, as investors had been hoping for a more upbeat statement on growing business wins. The bank is in the midst of revamping its performance to focus on its retail strengths. "We are continuing to make good progress in our key priority to reposition the group for sustainable growth and we remain well positioned to deliver our planned improved performance in the second half of 2004 and beyond," Mr Daniels said.

Total loans and advances have risen 9 per cent over the year to £138bn. Of that, mortgage balances increased by 13 per cent to £73.4bn over the past 12 months and new lending in the first quarter of the year was £2.6bn. Unsecured lending, which includes credit card lending, rose 12 per cent in the first quarter of 2004, and current and savings account balances were 9 per cent higher. The bank said it had improved its market share position in its core mortgage and current account markets. But the bank also said there had been "some slowdown in the demand for consumer credit".

One of Mr Daniels' main aims is to improve the performance of Scottish Widows, the savings and insurance company Lloyds paid £7bn for in 2000.