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Lloyds Banking Group has forecast the boost from UK interest rate rises will start to fall next year and has put aside more than expected for potential defaults, even as profits almost doubled in the fourth quarter of 2022.

The lender announced statutory profits before tax of £1.8bn in the fourth quarter on Wednesday, up 80 per cent year on year and in line with analysts’ predictions. Revenues rose more than 20 per cent to £5bn, beating expectations of £4.7bn.

Lloyds also announced a £2bn share buyback and 1.6 pence per share ordinary dividend, bringing total shareholder returns in 2022 to £3.6bn.

However, the bank’s shares fell 2.3 per cent in morning trading after it warned that the benefits of rising interest rates on its net interest margin — the difference between the interest it receives on its loans and the rate it pays for deposits — would start to fade next year.

Like other high street lenders, Lloyds has benefited from rate increases from the Bank of England. Earlier this month, the UK’s central bank increased rates to a 15-year high of 4 per cent.

Lloyds’ net interest margin (NIM) increased 65 basis points year on year to 3.22 per cent in the fourth quarter, ahead of a consensus of 3.16 per cent.

But with competition for deposits and mortgages increasing and central bank rate rises nearing their peaks, Lloyds predicted a NIM of greater than 3.05 per cent for 2023, compared with expectations of 3.15 per cent, with analysts at Investec suggesting the boost from rising rates may have peaked.

Fourth-quarter “profits are ahead and a £2bn share buyback are notable positives”, said analysts at Barclays. “However, we expect focus on seemingly underwhelming [full year 2023] guidance, which includes a weaker outlook for NIM, and which we think may weigh on the shares today.”

“If Lloyds had reported first, we may have seen some disappointment, but relative to peers we think these will be taken well,” said analysts at Citigroup.

NatWest’s shares fell as much as 9 per cent on Friday in response to its guidance that NIM for 2023 would be 3.2 per cent, well below analysts’ expectations of 3.38 per cent.

Lloyds’ provisions for bad loans in the fourth quarter came in at £465mn, above analyst estimates of £380mn. In the same quarter in 2021, the bank released £532mn of provisions for pandemic-related defaults.

“Twenty per cent of customers are having to take difficult decisions around their spending,” said chief executive Charlie Nunn. “We’ve seen all kinds of pulling back on discretionary spending, such as turning towards value brands in weekly shopping and cancelling subscriptions to deal with increases in energy, food and fuel.”

Nunn also admitted that the lender was facing greater competition on savings from rivals such as JPMorgan’s Chase UK. Lloyds was among the lenders criticised by MPs earlier this month for failing to pass on the benefits from rising interest rates to savers fast enough.

William Chalmers, Lloyds’ chief financial officer, said that the bank would be passing on more of the base rate rises to customers over time.

Operating costs for the fourth quarter were £2.6bn, up 7 per cent year on year partly because of strategic investment. Over the year, Lloyds has invested £900mn towards its new growth strategy unveiled in 2022.

The lender’s bonus pool increased 12 per cent year on year to £446mn. In a board meeting in December, Alan Dickinson, chair of the bank’s remuneration committee, admitted that the decision not to pay bonuses in 2020 had led to “a considerable amount of disquiet and some heightened attrition” in 2021.

Nunn’s remuneration increased to £3.8mn, compared with the £1.3mn he received for the half year from August 16 to December 31 2021, excluding a buyout of his HSBC shares.

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