LONDON Lloyds Banking Group reported a 14% fall in first half pretax profit to 3.3 billion pounds ($4.25 billion) on Thursday, just above forecasts, but tougher than expected trading conditions and rising costs hit its shares.

Analysts had expected Britain's biggest mortgage lender to report statutory pretax profit of 3.21 billion pounds for the six months to end-June, and 1.58 billion pounds for the second quarter, according to consensus estimates supplied by the bank.

Britain's largest domestic-focused banks, Lloyds and rival NatWest, have enjoyed robust profits in recent years as central bank interest rates rose, but Britain's economy remains in a slow growth rut that threatens their longer term prospects.

Chief Executive Charlie Nunn said the environment was tougher than expected when he set out the bank's new strategy last year, pointing to stubborn inflation and a slower economic recovery than anticipated.

Operating costs rose 7% over the period to 4.7 billion pounds.

Lloyds shares fell 3% in early trading, amid a wider sell-off in UK stocks which saw the benchmark FTSE 100 index fall 0.7%. Still, the bellwether bank's first-half results offered some signs of optimism.

The bank reported a 2.94% net interest margin (NIM) for the first half of its financial year, a key profit metric that measures the gap between what the bank pays savers and charges borrowers, matching forecasts.

Lloyds also left its performance guidance for the rest of the year unchanged, saying it was confident in meeting its targets for this year and out to 2026, a positive sign for other lenders due to report earnings this week and next.

It pledged to pay an interim ordinary dividend of 1.06 pence per share, up 15% on the prior year and equivalent to 662 million pounds.

With public debt at almost 100% of gross domestic product and taxes at their highest since just after World War Two, new Prime Minister Keir Starmer has little ammunition with which to kickstart an economy predicted to grow at just 1% this year.

Still, the UK housing market, from which Lloyds derives much of its earnings power, remains resilient, with two Bank of England base rate cuts expected this year, Nunn told reporters in a conference call.

Prices were 1.5% higher this June than the same month last year, mortgage lender Nationwide said on July 1, partly as higher wages made homes more affordable.

"Maintaining momentum post H1 earnings will be key, competition for mortgages is heating up with sub 4% mortgages becoming available," Max Georgiou, analyst at Third Bridge said in a note.

"Lloyds needs to try and drive loyalty through service offerings to try and protect areas such as NIM," he added.

Lloyds said its impairment charge for bad loans fell to 101 million pounds from 662 million pounds in the same end-June period last year, thanks to changes in its forward-looking economic scenarios, particularly around house prices.

  - Reuters