Lloyds reported third quarter net income of £4.6bn, up 7% year-on-year. Within that, both interest income and other income were higher than last year. Banking net interest margin was up from 2.95% to 3.06%.
Underlying profit fell 30% to £1.3bn (£1.1bn expected), mainly due to an expected £800mn motor finance charge. Non-performing loans remain at low levels.
The group’s CET1 ratio, a key measure of financial strength, is 13.8% (target minimum = 13.0%).
Full year underlying net interest income is now expected around £13.6bn (previously £13.5bn).
The shares were broadly flat in early trading.
Our view
Third quarter results were solid, though the headline profit drop will grab attention after Lloyds took an extra £800mn provision for the motor finance issue – something well flagged ahead of today. Investors should look through the noise: underlying profits were comfortably ahead of consensus thanks to lower impairments, resilient borrowers, and improving fundamentals.
Lloyds has a focus on traditional lending, so net interest margin (NIM - a measure of profitability in borrowing/lending) is key. There was a drop over 2024, but improving trends mean margins have stabilised at a nice level.
There are still a couple of small headwinds to monitor. The mortgage market is very competitive, so profitability is facing a squeeze. Then, we’re seeing savers shift from non-interest deposit accounts to longer-term interest-bearing accounts as they look to lock in rates. That deposit migration has eased, but is still a small margin headwind.
Loan growth is key, so it was good to see ongoing momentum here. Mortgages benefited in the first quarter from the pull forward of demand as buyers looked to beat stamp duty changes. Still, demand should continue to be resilient from here with real wages rising, and the potential for a rate cut before the year end.
The structural hedge has the potential to be a main driver of income over the medium term. Balances are being reinvested at higher rates and that’s expected to bring in an extra £1.2bn of hedge income in 2025.
The flip side of the focus on traditional lending is higher exposure to potential loan defaults. For now, UK borrowers are remaining resilient to pressures, and Lloyds has one of the higher-quality asset portfolios. But this remains a risk to monitor.
Very aware of its reliance on traditional financing, Lloyds has invested heavily in its other income plays (credit card fees, insurance, investment management). This should help provide an income tailwind when rates aren’t as supportive, and progress has been good.
The key risk in the short term is the investigation into the mis-selling of motor finance. Lloyds is more exposed than other peers and has now set aside a total of around £2bn for potential compensation. We think this is now a low-risk event moving forward and we’re getting closer to drawing a line under this saga.
Lloyds remains one of our preferred names in the sector, with strong capital levels that will hopefully support returns to shareholders over the next few years. That said, the valuation isn’t as attractive as it once was and there are no guarantees.
Environmental, social, and governance (ESG) risk
The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security is also an increasingly important risk for banks and diversified financial firms. Business ethics, ESG integration and labour relations are also worth monitoring.
According to Sustainalytics, Lloyds’ management of material ESG issues is strong.
The FCA’s investigation into historical auto-lending practices between 2007 and 2021 is a risk for Lloyds. Provisions have been taken and following updates from both the Supreme Court and FCA, we now have more clarity on the impact. There’s room for improvement in product governance and responsible marketing, though it demonstrates strong progress in integrating ESG factors into asset management and corporate financing.
Lloyds key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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