Lloyds Faces Regulatory Headwinds as Motor Finance Charge Hits Profits and Costs Rise

Robust Financial Performance Amid Challenges

Lloyds Banking Group has delivered a solid financial performance for the nine months ended 30 September 2025, posting a statutory profit after tax of £3.3 billion. This result, while down from £3.8 billion in the same period last year, reflects resilience in the face of an £800 million charge related to motor finance commission arrangements recognized in the third quarter.

The bank’s underlying net interest income rose 6% to £10.1 billion, supported by a banking net interest margin of 3.04%, up 10 basis points year-on-year. This improvement was driven by a growing structural hedge contribution and higher average interest-earning assets, which reached £460.4 billion. Underlying other income also grew 9%, reflecting stronger customer activity and strategic initiatives.

Strategic Acquisition and Wealth Expansion

In a significant strategic move, Lloyds completed the full acquisition of Schroders Personal Wealth in October 2025. This acquisition brings approximately £17 billion in assets under administration and accelerates Lloyds’ wealth strategy, deepening its footprint in a high-value segment. The integration of Schroders is expected to contribute positively to the Group’s income and client engagement in the coming periods.

Capital Strength and Asset Quality

The Group maintained strong capital generation, with a Common Equity Tier 1 (CET1) ratio of 13.8% at the end of September, supported by 110 basis points of capital build during the period. Excluding the motor finance charge, capital generation would have been even stronger at 141 basis points. Asset quality remains robust, with an underlying impairment charge of £618 million and an asset quality ratio of 18 basis points, reflecting stable credit conditions despite some economic uncertainties.

Costs, Provisions, and Regulatory Outlook

Operating costs rose modestly by 3% to £7.2 billion, influenced by inflationary pressures, strategic investments, and business growth. The Group’s remediation costs surged to £912 million, largely due to the motor finance commission provision, which now totals £1.95 billion. This follows the Financial Conduct Authority’s (FCA) consultation on an industry-wide redress scheme, which has introduced greater uncertainty and potential financial impact. Lloyds has expressed concerns about the FCA’s proposed redress methodology and is actively engaging with the regulator.

Revised Guidance and Outlook

Reflecting these developments, Lloyds revised its 2025 guidance, now expecting underlying net interest income of approximately £13.6 billion and operating costs around £9.7 billion, excluding the Schroders acquisition. The asset quality ratio is forecast to be near 20 basis points, and the return on tangible equity is expected to be about 12%, or 14% excluding the motor finance charge. Capital generation is projected at 145 basis points, rising to 175 basis points without the motor finance impact.

Overall, Lloyds Banking Group’s results underscore a balance between strategic growth and prudent risk management, navigating regulatory challenges while strengthening its market position.