Many banks in the UK still struggle with profitability, but Lloyds Bank’s 2017 performance may provide hope for the future. Its net interest margin (NIM) rose by 15 basis points to 2.86%, which reflects its continued progress.
NIM shows the difference between what a bank pays to get deposits and what it charges to lend money. It measures the difference between the interest income generated and the amount of interest paid out to lenders (for example, deposits) relative to the amount of interest-earning assets.
Lloyds Bank recorded the biggest turnaround in average profitability in 2017. Recent financial results confirm its positive performance, with sustainable profits, strong capital generation, and significant lending into the UK economy.
The bank’s NIM improvement was driven by lower funding costs, increased levels of new lending, and the restructuring of impaired loans at sustainable margins. It also benefitted from subdued interest rates offered to savers across the banking sector. Lloyds intends to pay a £3bn ($4.2bn) dividend to shareholders, as its profits rose 24% to £5.3bn. This payment is made possible by the bank’s strong profitability.
If we closely observe movements in Lloyds Bank’s net interest income and NIM, it was positively affected by a +7 basis points contribution from MBNA, a credit card business with total assets of around £7bn and millions of customers in the UK.
Lloyds completed the acquisition of MBNA in 2017, and its belief the deal would improve its NIM (given MBNA’s focus on high-margin consumer lending) appears to have been well founded.
As pressures on profitability persist, other major UK banks will have to drive similar competencies within their banks in order to remain profitable.