(Bloomberg) -- Lloyds Banking Group Plc missed estimates for net interest income in the first quarter as the lender faces increased pressure to offer savers better rates. 

Net interest income fell 10% to £3.18 billion ($4 billion), missing the £3.21 billion average of analyst estimates compiled by Bloomberg. Lloyds executives have been warning that the boost it’s gotten from higher interest rates was giving way to growing competition for savers and slowing demand from borrowers. 

The slump in net interest income combined with a jump in expenses caused pretax profit to drop 28% to £1.63 billion ($2 billion), according to a statement. The company said the first-quarter results were also hurt by “elevated severance charges” of £100 million, although Chief Financial Officer William Chalmers said on a conference call this was expected to even out later in the year. 

Lloyds said it has contacted 735,000 customers since the start of the year to highlight savings products offering better rates. Both customer deposits and loans slightly decreased in the quarter. 

Customers have been able to keep up with their bills despite the UK’s ongoing cost-of-living crisis, which has included more than two years of elevated inflation levels and mortgage prices that have crept higher again in recent weeks. Lloyds set aside just £57 million to cover souring loans in the quarter, well below the £296.7 million that analysts were expecting. 

Shares of Lloyds were trading 2.9% lower at 8:24 a.m. on Wednesday. The bank is the first major British lender to report first-quarter earnings. The stock had risen 7.6% so far this year through the close of trading Tuesday compared with the 8.8% advance of the FTSE All-Share Banks Index.

Guidance Reiterated

The British bank’s net interest margin — a key measure of profitability that shows the difference between what a bank pays out to depositors and collects from loans — declined 27 basis points from a year ago to 2.95%. That compares with the 2.94% analysts were expecting. 

Still, the company continues to expect that its full-year net interest margin will remain above 2.9%.

Lloyds, the UK’s biggest mortgage lender, is considered a bellwether for the national economy. At the end of 2023, it was expecting house prices to fall 2.2% during 2024. Now, the bank’s base case assumes a 1.5% increase. 

The UK entered a shallow recession in late 2023, while the Bank of England is weighing when to bring down interest rates to deliver relief to borrowers at the expense of banking margins. Lloyds continues to expect three rate cuts this year, despite rates traders scaling back the number of cuts they anticipate. 

Lloyds and its rivals across the UK banking industry have been benefitting from hedges they arranged against rising interest rates. Lloyds said income from its sterling structural hedge rose to £1 billion in the first quarter, compared with £800 million in the same period a year earlier. 

(Updates with additional information, CFO comment beginning in third paragraph.)

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