ii view: Lloyds Bank takes short-term pain for long-term gain

First-quarter results to 31 March

• Income up 4% to £4.39 billion
• Underlying impairments of £309 million, up from £57 million
• Pre-tax profit down 7% to £1.52 billion
• Cost:income ratio of 58.1%, up from 57.2%
• Capital cushion, or CET1 ratio of 13.5%, down from 13.9% 

Guidance:

• Continues to target over £1.5 billion of additional income by 2026
• Continues to target a 2026 cost:income ratio of below 50%
• Reducing CET1 to 13% by 2026

Chief executive Charlie Nunn said:

"In the first quarter of 2025, the Group delivered sustained strength in financial performance. In particular, net income continues to grow, following the upward trajectory established in the second half of last year. We maintained our cost discipline and asset quality remains resilient. 

“Underpinned by our financial performance, strategic execution and franchise strength, we remain confident in the outlook for Lloyds Banking Group and in our 2025 and 2026 guidance."

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ii round-up:

Tracing its history back to 1695, Lloyds Banking Group (LSE:LLOY) today operates across three divisions.

The Retail division generated most income during 2024 at 58% via brands including Lloyds, HBOS, Bank of Scotland and Birmingham Midshires. 

Commercial Banking, serving small and medium-sized businesses as well as corporate and institutional clients, generated 31% of 2024 income.

Insurance, Pensions and Investments, and home to brands such as Scottish Widows and Schroders Personal Wealth, accounted for 7% of income, with equity investments most of the 4% balance. 

For a round-up of these latest results announced on 1 May, please click here.

ii view:

Lloyds Bank serves around 26 million customers across the UK via 16 different brand names. Employing around 61,000 people and headquartered in London, competitors include Barclays (LSE:BARC), HSBC Holdings (LSE:HSBA), Paragon Banking Group (LSE:PAG) and NatWest Group (LSE:NWG). Group focus under head Charlie Nunn include growing revenues from diversifying sources, continuing to digitalise its portfolio of businesses, while driving an ongoing transformation to improve efficiency and enhance customer relationships.

For investors, uncertainty regarding the final cost of settling motor finance mis-selling claims remains an overhang. Concerns regarding a possible trade war and subsequent economic slowdown caused an increase in bad debt provisions. Group costs during the quarter rose 5% year-over-year, affected by factors including redundancy payments and ongoing investments. The bank lacks the geographic and product diversity of Barclays which is having success with its investment banking business, while a price-to-net asset value above the three-year average may suggest the shares are not obviously cheap.

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On the upside, provisions regarding the mis-selling of motor finance already total £1.2 billion. Both loans and deposits increased during this latest quarter. The rise in costs, partly due to ongoing staff severance payments, should subside given reduced personnel numbers, while the balance sheet remains robust, even at a potentially reduced capital cushion, or CET1 ratio come 2026 of 13%.  

Lloyds shares have hit a barrier at 75p, but despite ongoing uncertainties, its drive to generate growth and cut costs, combined with a forecast dividend yield of close to 5%, should be enough to keep investors interested.

Positives

• Focus on reducing costs
• Attractive dividend (not guaranteed) 

Negatives

• Uncertain economic outlook
• Lacks the geographical diversity of some other banks

The average rating of stock market analysts:

Strong hold