Lloyds Banking Group has today reported a slide in quarterly profit, as the lender braced for a potential rise in loan defaults as inflation squeezes borrowers.
Britain's biggest mortgage lender posted pre-tax profit of £1.5 billion for the three months from July to September.
This was below the £1.8 billion average analyst forecast provided by the bank and down from £2 billion a year earlier.
The results were dented by a £668m provision taken to cover potentially soured loans, which it said reflected the deteriorating economic outlook.
The mixed update from Lloyds with profits sliding and bad loans rising but the bank still increased its guidance for several key performance metrics showed the unusual environment Britain's banks are now in.
Rising central bank interest rates aimed at combating inflation also boost banks' income, but those same pressures of inflation and higher rates on mortgages are squeezing household budgets, risking defaults on loans later down the line.
"The current environment is concerning for many people and we are committed to maintaining support for our customers," said Lloyds chief executive Charlie Nunn.
Britain's new prime minister Rishi Sunak has said the country faces a "profound economic crisis" as he seeks to fix the mistakes made by his predecessor Liz Truss.
Market turmoil sparked by Truss' tax-cutting plans pushed up the country's borrowing costs and led lenders to ratchet up mortgage rates, piling further pressure on households.
Analysts have argued Lloyds could be particularly vulnerable to any increase in loan defaults because of its huge mortgage book and significant share of the credit card market.
Banks are also concerned Sunak's new government could slap additional taxes on the industry, with a surcharge on bank profits under review by finance minister Jeremy Hunt.
Rivals including Barclays and HSBC reported robust results this week, but investors are wary the rising cost of living will hurt consumers and businesses and damage bank finances in the long term.
Despite its lower profit, Lloyds said the strength of its underlying performance meant it could raise its forecast on several performance metrics for the year.
Net interest margin, which measures how much the bank makes on the spread between what it pays savers and charges borrowers, will be 290 basis points rather than 280, it said, and the bank will generate more capital.
However, Lloyds said asset quality - measuring potential loan defaults - was expected to be slightly worse this year. Actual loan defaults remained low for the time being, it added.
