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Lloyds Banking Group, Britain’s largest lender, has announced it is taking a £1.5bn provision for bad loans, ahead of a potential “mortgage shock” that could hit around 200,000 of its home loan customers.

Charlie Nunn of Lloyds Banking group has warned of a “mortgage shock” that is set to affect 200,000 of its home loan customers, saying that 10% of them were due to exit a fixed rate deal this year. Given the price hikes of the recent year, many of these customers may be about to find themselves struggling to afford their mortgages.

Nunn said that the bank is focusing on looking at the customers who are going to see a jump in their mortgage interests as a percentage of their income. These customers will be giving up a huge percentage of their take-home pay just to stay afloat with their mortgage debts. Nunn estimates that less than 1% of their customers will face a shock like this. 

He has revealed that Lloyds Group has a provision of £1.5 billion for bad loans ahead, £500 million of which was for the final quarter. This is because the group fears defaults could rise because of the higher interest rates.

Interest rates have risen because of the Bank of England’s efforts to combat inflation. This has also had the effect of raising the cost of living, meaning people’s budgets are even tighter. There may be some borrowers who are completely unable to keep up with their loan repayments, who will end up needing to default. 

Lloyds has reported a 12% increase in its bonus pool for 2022. This is despite pre-tax profits remaining flat on the previous year. This 12% rise has brought the bonus pool to £446 million, which is above the peak rate of inflation seen over the past year.

Of that sum, Nunn received £1.33 million, according to the bank’s yearly report. Along with this, he also received a long-term plan award of 150% of his salary, taking his total earnings to £3.8 million. The group also announced it would pay a 1.6p per share final dividend and a share buyback of up to £2 billion, totalling £3.6 billion of shareholder returns. 

Despite the positive financial results, Lloyds shares fell back by 2% at the market opening. Senior investment manager at RBC Brewin Dolphin, John Moore, said, “Lloyds has finished off the major UK banks’ results season with a performance that is 80% NatWest and 20% Barclays. Profits have been flat year-on-year, with bad loan provisions adding extra costs, among other moving parts.”

Lloyds says that it has been making efforts to support its customers through these challenging times. The bank claims that it had approved more than 21,000 loans under the government’s Coronavirus Business Interruption Loan Scheme (CBILS) and backed over 175,000 bounce back loans (BBLs) as of December 2021.

On top of that, Lloyds is investing in new initiatives such as its green finance products to help customers and clients transition to a more sustainable future. The bank has set a target of helping its clients generate £2bn in net zero financing by 2030 and providing £5bn in sustainable finance solutions.