• Customers will probably seek lower interest rate home loans
  • About $144 billion of mortgages on higher rates, analysts say

Lloyds Banking Group Plc, Britain’s largest mortgage lender, could see its profitability shrink as customers refinance their home loans with cheaper deals this year, Exane BNP Paribas said.

The London-based bank has written about 100 billion pounds ($144 billion) of mortgages over the last three years that are prone to move to lower interest rates, analysts led by Jonathan Pierce wrote in a note to clients. This could create a “substantial drag” on the bank’s profit margins in 2016. Exane cut Lloyds’s rating to underperform from neutral.

Chief Executive Officer Antonio Horta-Osorio, 51, is cutting jobs and investing in computer systems to help boost earnings after nursing the bailed-out lender back to annual profit in 2014 and resuming dividend payments. Chancellor of the Exchequer George Osborne’s plans to sell a portion of its remaining stake in Lloyds to the public in the coming months could be hobbled as the lender trades below the government’s break-even price.

“Income and in particular margin, are likely to disappoint in 2016,” the analysts wrote. “While we expect margins to hold at third-quarter 2015 levels for a while longer, we believe it will be difficult to maintain this level.”

The stock declined 1.2 percent to 68.45 pence at 11:32 a.m. in London trading, below the 73.6 pence average price the government paid bailing out the bank, as shares of other major British lenders gained.

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