Lloyds Banking Group plc (LLOY) Ordinary 10p

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Lloyds reported fourth quarter net income of £4.7bn, up 8% year-on-year. Within that, both interest income and other income were higher than last year. Banking net interest margin was up from 2.97% to 3.10%.

Underlying profit rose 94% to £1.9bn (9% better than expected). The year-on-year growth was largely due to a one-off charge impacting last year’s figure, and the better-than-expected results were driven by lower impairments.

A final dividend of 2.43p takes the 2025 total to 3.65p, up 15%. A £1.75bn buyback was also announced.

After accounting for the dividend and buyback, the group’s CET1 ratio, a key measure of financial strength, stands at 13.2% (target minimum = 13.0%).

2026 underlying net interest income is expected to be around £14.9bn.

The shares fell 1.0% in early trading.

Our view

Lloyds is starting 2026 with reason to be optimistic. Management is pencilling in a couple of rate cuts, low single-digit house price gains and a touch of GDP growth. Put together, that paints a reasonably healthy backdrop for Lloyds to operate.

The focus on traditional lending means 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 earlier in the year from the pull-forward of demand as buyers sought to beat stamp duty changes. But we’ve been pleased to see momentum continue into the final quarter, too. Demand should continue to be resilient from here with real wages rising, and the potential for a couple of rate cuts this year

The flip side of the focus on traditional lending is higher exposure to potential loan defaults. For now, UK borrowers are remaining resilient under pressure, which we continue to see as an opportunity for Lloyds to deliver lower-than-expected costs and, therefore, better profits. Lloyds has one of the highest-quality asset portfolios, but this remains a risk to monitor.

The structural hedge should be a key driver of income over the medium term. Balances are being reinvested at higher rates, and that’s expected to bring in an extra £1.5bn of hedge income in 2026, and a further £1bn the year after.

To help diversify, 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.

We think this is now a low-risk event, but there’s still an overhang from 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.

Lloyds remains one of our preferred names in the sector, with strong capital levels that should support healthy returns to shareholders over the next few years. That said, the valuation isn’t as attractive as it once was and no returns are guaranteed.

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.

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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

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