Lloyds Banking Group has delivered a strong start to 2026, with statutory pre-tax profit surging 33% to £2.0bn in the first quarter as rising net interest income and growing fee revenues more than offset a cautious economic backdrop.
The higher-interest-rate environment and relatively stable economic backdrop are playing into Lloyds’ hands, boosting its earnings.
Underlying net interest income climbed 8% year-on-year to £3.6bn, driven by a banking net interest margin of 3.17%, up 14 basis points on the prior year and 7 basis points on the fourth quarter.
The improvement reflects the growing contribution from the structural hedge, where income rose to £1.6bn from £1.2bn a year earlier as balances were reinvested at higher rates.
The notional hedge balance now stands at £246bn, and management expects hedge earnings to exceed £7.0bn this year and £8.0bn in 2027.
Lending growth was broad-based and played a big part in profit growth. Underlying loans and advances rose 4% year-on-year to £486.2bn, with UK mortgages adding £1.6bn in the quarter despite significant maturities, credit cards up 11%, unsecured loans up 15% and Corporate and Institutional Banking growing 10%. Average interest-earning banking assets reached £473.5bn, up 4%.
“Lloyds’ first-quarter update had a lot for investors to like, with the bank beating profit expectations while keeping its full-year targets firmly intact. Performance was helped by the structural hedge and steady lending momentum, while costs are being kept under control, and credit quality still looks resilient,” said Matt Britzman, senior equity analyst, Hargreaves Lansdown.
Augmenting the impact of higher income, costs fell 3% to £2.5bn as savings programmes and lower severance expenses outweighed inflationary pressures and the addition of the wealth business.
Credit quality remained benign. The impairment charge of £295m equated to an asset quality ratio of 25 basis points, though within that sat a £151m hit from deteriorating economic scenarios linked to the Middle East conflict.
Return on tangible equity hit 17.0%, up from 12.6% a year ago, while tangible net assets per share rose to 57.9p. The CET1 ratio stood at 13.4% after the dividend accrual, with the group on track to pay down to its target of around 13.0% by year end.
Lloyds also reiterated its full 2026 guidance saying underlying net interest income now expected to be greater than £14.9bn, cost-to-income ratio below 50%, asset quality ratio of around 25 basis points, return on tangible equity above 16%, and capital generation exceeding 200 basis points.
Matt Britzman said: “The most important message is that guidance has been largely reiterated, with net interest income expectations nudged a touch higher. That suggests management still sees enough support from higher-for-longer rates to offset pressure elsewhere, including competitive mortgage pricing and a softer economic outlook.”
The share buyback announced in January is well underway, with roughly 600 million shares repurchased at a cost of £700m and an average price of 97.7p by the end of March.
The drop in Lloyds shares on Wednesday is likely a reflection of a broader market decline rather than any real disappointment with Lloyds’ update.