The owner of Bank of Scotland has reported better than expected profits for the third quarter as it and others in the sector benefit from customers paying more to borrow cash for mortgages, loans and credit cards.

Lloyds Banking Group, which also owns Halifax and is the UK's biggest mortgage lender, made a pre-tax profit of £1.9 billion during the three months to the end of September, up from £576 million in the same period last year. Revenues rose to £4.5bn, just below market expectations of £4.6bn.

Lloyds made £3.4bn in net interest income during the quarter, down marginally from £3.47bn in the previous three months as it paid more out to savers. Its net interest margin - a closely watched measure of the difference between the interest banks charge on loans and the rates they pay consumers on deposits - fell to 3.08% from 3.14% in the previous quarter.

READ MORE: Lloyds says house prices will keep falling until 2025

Banks have come under increasing pressure from regulators and politicians who earlier this year accused them of failing to pass on interest rates rises to their savings customers at the same pace as increasing charges for borrowers. In July, the Financial Conduct Authority (FCA) warned that banks would face "robust action" for offering unjustifiably low savings rates.

According to Moneyfacts, the average rate on a fixed two-year mortgage deal is currently 6.24%. The average easy access savings rate, the most common on the market, is 3.21%.

Lloyds said the decline in its net interest margin reflected “expected mortgage and deposit pricing headwinds” as demand for home loans fell and customers moved their money into higher-interest savings products. However, it maintained its guidance that net interest margin should be higher than 3.1% for the year as a whole, in contrast to rival Barclays which cut its outlook when it reported earnings on Tuesday.

Numis analyst Jonathan Pierce said the update from Lloyds was a "big relief" for investors in the wake of what Barclays had to say. Zoe Gillespie of RBC Brewin Dolphin agreed that the lack of any surprises from Lloyds provided some reassurance about the sector's resilience.

READ MORE: Bank of Scotland owner lifts profit guidance

"The group’s performance is in line with expectations, its loan book appears to be relatively stable despite the economic backdrop, and its guidance for the year remains unchanged," she said. "Bad debt provision is also relatively limited, but profit growth has been held back slightly by subdued demand in the current interest rate environment."

Profits were flattered by a decline in impairment charges for potential bad loans, which fell to £187m. This was down 72% on the £668m put aside for potential defaults at the same time last year amid fears of an economic downturn that could hit the UK housing market.

Lloyds said the number of customers falling behind on mortgage payments was “broadly stable” in the third quarter. Growth in defaults also slowed, but were still slightly above pre-pandemic levels.

Chief executive Charlie Nunn said Lloyds remains "focused on supporting our customers and helping them navigate the uncertain economic environment".

READ MORE: UK housing market woe on Bank of England interest rate rises

"The group continues to perform well," he added. "Robust financial performance and strong capital generation in the first nine months of the year was driven by net income growth, cost discipline and resilient asset quality. This performance allows us to reaffirm our 2023 guidance.

"As we set out in the first of our four strategic seminars earlier this month, we are successfully executing against our strategic priorities. This supports progress towards our ambition to enable higher, more sustainable returns. Together, it will better position us to deliver for all of our stakeholders as we continue to help Britain prosper."

Meanwhile, Santander posted UK profits before tax of £1.73bn in the nine months to September. The increase was driven by an 8% rise in net interest income from higher interest rates, although offset by falling lending margins.

Customer loans and deposits fell amid a slowing housing market and higher mortgage rates. The Spanish bank’s UK business has reduced mortgage lending by £10.1bn in light of the higher cost of capital.

Shares in Lloyds closed yesterday's trading more than 2% higher at 41.46p.