Lloyds gains momentum as profit surges and 2026 targets remain intact

Profit growth keeps Lloyds on track for 2026 targets

Lloyds Banking Group plc (ASX:LO1) increased statutory profit before tax by 42% to £6.625 billion for the nine months ended 30 September 2026, up from £4.678 billion a year earlier. Underlying profit rose 36% to £6.582 billion, while return on tangible equity reached 17.9%.

The result was supported by a 10% increase in underlying net interest income to £11.084 billion and a similar rise in other income to £4.996 billion. Management said current market conditions imply full-year net interest income will be modestly above the existing target of more than £14.9 billion. The bank also retained its other 2026 guidance, including a cost:income ratio below 50%, an asset quality ratio of about 25 basis points and return on tangible equity above 16%.

The scale of the improvement is partly flattered by the prior period, which included an £800 million charge linked to motor finance commission arrangements. Remediation costs fell to £61 million from £912 million, although the group said its existing provision remains its best estimate while legal and regulatory challenges continue.

Margin momentum continues as lending expands

Banking net interest margin rose to 3.21% for the nine months, from 3.04% a year earlier, with structural hedge income benefiting as maturing positions were reinvested at higher rates. Third-quarter margin improved further to 3.25%, although the quarter-on-quarter increase narrowed to three basis points as asset margin compression and competition for deposits weighed on performance.

Average interest-earning banking assets increased 4% to £477.5 billion. Underlying loans and advances rose £14.4 billion, or 3%, to £495.5 billion, with £9.2 billion of growth in Commercial Banking and £6.8 billion in Retail after adjusting for a £1.8 billion mortgage securitisation. The balance sheet expansion builds on the 2025 lending growth, when the bank reported loans and advances of £481.1 billion.

Customer deposits grew more slowly, rising 1% to £502.8 billion. Commercial Banking deposits increased by £9.6 billion during the year, offsetting a £3.7 billion reduction in Retail deposits as Lloyds maintained pricing discipline in a competitive market. The loan-to-deposit ratio consequently rose to 99%, from 97% at the end of 2025, while liquidity remained substantial with a 143% liquidity coverage ratio.

Credit costs rise despite stable arrears

The underlying impairment charge increased 50% to £930 million, producing an asset quality ratio of 25 basis points. Lloyds attributed the higher charge to more normalised impairment, balance-sheet growth, model updates and fewer one-off Commercial Banking releases. An £88 million charge from updated economic scenarios included the effect of a weaker outlook associated with the conflict in the Middle East.

The bank said arrears remained low and stable across Retail and Commercial Banking. Its probability-weighted expected credit loss allowance stood at £3.254 billion, below £3.353 billion at the end of 2025, although the severe downside scenario would produce an allowance of £5.031 billion. That gap illustrates the sensitivity of credit provisioning to the economic assumptions embedded in the models.

Capital returns compete with regulatory and legal uncertainty

Lloyds generated 153 basis points of capital in the first nine months, leaving its CET1 ratio at 13.3% after dividends, buybacks and the acquisition of Curve. The group completed its £1.75 billion 2025 buyback in September and had repurchased £200 million under a further £1 billion programme by the end of the quarter. Management intends to pay the CET1 ratio down to about 13% by the end of 2026.

That capital plan sits alongside a 5% increase in risk-weighted assets to £247.4 billion. Lloyds expects Basel 3.1 implementation on 1 January 2027 to reduce risk-weighted assets by about £6 billion to £8 billion, but said the final outcome remains uncertain while its Retail secured models are reviewed by the PRA. Separately, implementation of the FCA's motor finance redress schemes has been delayed, with challenges scheduled for an Upper Tribunal hearing in the second half of February 2027. The result is strong enough to preserve the guidance narrative, but the next test will be whether income momentum survives without relying on lower remediation charges and favourable capital mechanics.