Authored by Mr. Kunal Sawhney, CEO, Kalkine Media

Last week several London-listed companies announced their third-quarter results amid economic instability and political drama. Among these was Lloyds Banking Group Plc, a country’s leading banking and financial services provider and a constituent of the FTSE 100 index.

Like other banking stocks, Lloyds shares are also cyclical, meaning they reflect the state of the economy. Banks tend to do well when the economy is in good shape, but during economic headwinds, they are impacted as their customers fail to repay loans and debts.

Lloyds posted solid results for the third quarter of this year, credited to the rising interest rates and the steep rise in mortgage rates since the previous chancellor Kwasi Kwarteng brought forward his mini-budget in September. The mortgage rates, which were below 5% before the mini-budget, hit as much as 6.5% after the tax-cutting bonanza. It only had shown signs of easing since last week when Rishi Sunak became the prime minister.

The lender reported a 12% increase in net income to £13 billion due to soaring interest rates. However, due to the current inflationary pressures, banks are also putting aside a significant amount for loan or mortgage defaults. Lloyds has been taking a careful approach to a potential increase in bad loans due to the cost-of-living crisis and warnings of a recession. Its pre-tax profits fell 26% to £1.5 billion as the impairment charges surged to £668 million from £119 million during the same period last year.

The net interest margins are a big plus to banks as they are rising significantly on the back of the interest rate hikes by the Bank of England. Lloyds has upped its guidance for net interest rates from 2.8% earlier to 2.9%.

While there are concerns about the recession, the higher net interest rate margins may shield banks’ profits. Bad debts are likely to impact, but since the banks are already preparing for them and setting aside significant chunks of money, the situation may not be that bad. Now that Liz Truss is out of the office and Rishi Sunak looks better at calming the financial markets than his predecessor, the economic forecasts are looking better than they did a month ago.