The owner of Bank of Scotland has raised its guidance on profit margins for the full year, citing its “robust” financial performance and revised macroeconomic forecasts.

Lloyds Banking Group expressed its confidence over the outlook despite reporting a a rise in mortgage arrears, an increased impairment charge of nearly £700 million and narrowly missing profit expectations in the first half.

The bank made a pre-tax profit of £3.87 billion for the half-year to June 30, up from £3.15bn for the first half of last year, as a rise in income was “offset by expected higher operating costs and impairment charge”. The bank had booked an impairment charge of £377m in the first half of last year.

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Major UK banks such as Lloyds have been benefiting from rising interest rates in recent months which have been imposed by the Bank of England under a strategy to dampen inflation. The base rate now stands at 5%.

Lloyds yesterday reported net interest income of £7bn for the first half, with a net interest margin – broadly the difference between the interest charged on loans and that paid out on deposits – of 3.18%. This compared with 2.77% in the first half of last year. However, its net interest margin was lower at 3.14% in the second quarter, “given expected headwinds from mortgage and deposit pricing”.

The bank said it had observed “slightly increased levels of new to arrears rates in UK mortgages” as it reported an impairment charge relating to UK mortgages of £191m for the half-year to June 30.

Pre-tax profits at the bank fell to £1.6bn in the second quarter from £2.26bn in the three months ended March 31.

Lloyds enhanced its guidance for 2023 and now expects its banking net interest margin to be greater than 310 basis points, with a return on tangible equity in excess of 14%.

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But analysts questioned whether the bank was doing enough to pass on the rise in interest rates to savers. Customer deposits dipped to £469.8bn by June 30 from £473.1bn at March 31, having stood at £475.3bn at December 31.

The bank announced an interim dividend of 0.92p per share, up 15% on the prior year and equivalent to £594m.

Zoe Gillespie, investment manager at RBC Brewin Dolphin, said: “Lloyds has narrowly missed analyst expectations with its results, but the bank remains in a very strong position. Although it has highlighted potential headwinds, Lloyds has also increased its guidance for the year, buoyed by an improving net interest margin, relatively limited impairment costs, and good asset quality.

“A 15% hike to its dividend is good news for shareholders, but there will almost inevitably be more questions over rates offered to savers in the current environment. While there was no continuation of the share buyback programme announced today, Lloyds may well be keeping its powder dry and positioning itself for the opportunities that could be ahead as some financial services providers struggle.”

Lloyds’ chief executive Charlie Nunn said: “We know that rising interest rates, cost of living pressures and an uncertain economic outlook are proving challenging for many people and businesses. Guided by our purpose of Helping Britain Prosper, we remain fully focused on proactively supporting our customers and helping them navigate the current environment.

“The group delivered a robust financial performance in the first half of 2023 with strong net income and capital generation alongside resilient asset quality. We continue to make good progress on delivering our strategic initiatives. Combined with our franchise resilience, this better positions us to support our customers, both today and in the future.”

Meanwhile, Mr Nunn insisted he is not concerned about pressure on UK banks to change de-banking policies, amid the row sparked by Nigel Farage over the forced closure of his Coutts bank account. The controversy ultimately led to the depature of Alison Rose as chief executive of NatWest Group early this morning.

Mr Nunn said Lloyds does not consider a customer's political or personal beliefs when deciding to shut an account. It primarily looks at the risk of financial crime, he stressed. "Our policy is really clear. We don't include looking at political beliefs, or personal beliefs, as part of that policy", he said.

Shares in Lloyds fell nearly 3% yesterday morning before rallying partially, and closed down 1.6% at 45.38p.