Lloyds reported fourth quarter net income of £4.4bn, up 3% and slightly better than expected. Within that, net interest income was marginally lower than last year, offset by an increase in other income. Banking net interest margin was broadly flat at 2.97%.
Underlying profit fell 43% to £1.0bn, the drop almost entirely driven by a £700mn provision taken in relation to ongoing motor finance investigations. Non-performing loans remain at low levels.
There was a 2% rise in both loans and deposits. The group’s CET1 ratio, a key measure of financial strength, is 14.2% - well ahead of its target minimum of 13.0%.
A final dividend of 2.11p per share was announced, along with a £1.7bn buyback.
For 2025, underlying net interest income is expected around £13.5bn (2024: 12.8bn).
The shares rose 2.9% in early trading.
Our view
Markets have looked past a large provision set aside for potential motor finance charges, and rewarded shares on the day for strong underlying performance. Full year results put to bed fears that higher rates would cause trouble for borrowers. Instead, conditions look good, and Lloyds has seen a material rerating over 2024 as a result.
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 the year, but trends improved in the final quarters and are expected to tick higher again into 2025.
Margins faced two headwinds over 2024. The first was mortgages refinancing in a lower margin environment and the second was savers moving into higher rate, longer term, products. Both trends are easing and shouldn’t be as material into the new year.
Loan growth is key, so it was good to see that continue into the final quarter. We’d expect those trends to continue as the mortgage environment in particular settles down after a volatile period.
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 FCA’s investigation into the mis-selling of motor finance. Lloyds is more exposed than other peers and has now set aside a total of £1.2bn in preparation for potential costs. We’re cautiously optimistic that provisions, plus what’s already been reflected in the valuation, will be sufficient. But It’s hard to say what the outcome will be.
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 the overhang from the FCA investigation could act as a brake on any further rerating. 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 but the scale of the potential impact is still largely unknown, more details should come later in the year. 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.
ESG data sourced from Sustainalytics.
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.
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