Lloyds + Barclays: Budget looms over UK banks’ Q3 earnings this week

Shares of UK-focused lenders have enjoyed a strong run this year, as higher interest rates have improved margins and profits picked up. This week we consider whether this positive story can survive the third-quarter earnings season, as well the forthcoming Budget on 26, November.

Barclays

Barclays is scheduled to report its Q3 results on Wednesday, 22 October. Shares have risen 35% this year, hitting their highest level since 2008 during the summer.

Investors will be expecting fresh updates on progress along its three-year plan to revamp its business. The programme is designed to reduce reliance on the investment bank - another key question will be whether it’s enjoyed the same kind of uplift in trading and investment banking earnings as its big Wall Street rivals.

Over halfway through: In its H1 results in June Barclays highlighted the midpoint of its 3-year revamp and noted it had achieved over half (£17bn) of the c.£30bn planned UK risk weighted assets (RWAs) growth, half of the target income growth and realised two-thirds of the £2bn planned gross cost efficiency savings.

Group income of £14.9bn was up 12% year-on-year, with group net interest income (NII) up 13% to £6.1bn. Group return on tangible equity (RoTE), a key profitability metric for banks, was 13.2%, up from 11.1% in the first half of 2024,with profit before tax of £5.2bn (H124: £4.2bn). Barclays also announced a fresh £1bn share buyback, having committed to £10bn to shareholders by 2026.

Barclays Investment Bank (IB) income increased 10%, driven by a surge in trading activity, partially offset by Investment Banking. Equities trading revenues rose 16% while income from its fixed income desks rose 23%. Chief executive CS Venkatakrishnan said he was pleased with the performance of the investment bank but investors are noting the fee-generating business was lagging behind US peers. Banking fees and revenue from underwriting fell 16%, while income from advisory work was down 11%.

Investors will be keen to see if there are any costs from its Tesco Bank deal. In H1, credit impairment charges increased by around £200mn to £1.112bn, which Barclays said was primarily driven by the acquisition of Tesco Bank.

Here’s what Barclays guided for the full year and next year at its H1 results in June.

2025 guidance

• Returns: RoTE of c.11%

• Capital returns: progressive increase in total capital returns versus 2024

• Income: Group NII excluding IB and Head Office of greater than £12.5bn, of which Barclays UK NII of greater than £7.6bn

• Costs: Group cost: income ratio of c.61%. This includes total gross efficiency savings of c.£500m in 2025

• Impairment: LLR of 50-60bps through the cycle

• Capital: CET1 ratio target range of 13-14%

2026 targets

• Returns: RoTE of greater than 12%

• Capital returns: plan to return at least £10bn of capital to shareholders between 2024 and 2026, through dividends and share buybacks, with a continued preference for buybacks

• Income: Group total income of c.£30bn

• Costs: Group cost: income ratio of high 50s in percentage terms, implying Group total operating expenses of c.£17bn, based on targeted Group total income of c.£30bn. Cost target includes total gross efficiency savings of c.£2bn by 2026

• Impairment: expect an LLR of 50-60bps through the cycle

• Capital: CET1 ratio target range of 13-14%

Lloyds

Lloyds is due to report its third quarter 2025 earnings on Thursday 23, October. It enjoyed a strong first half of the year, posting £8.9 billion in net income, underlying profit of £3.6 billion and raised its net interest margin to 3.04%. Net interest income rose 5% to £6.7 billion. All this allowed it to increase the dividend by 15%. Shares are up 50% YTD and trade at their highest in at least a decade.

Momentum in its core retail and commercial businesses remained good with underlying loans and advances rising 3% and customer deposits up 2%.

Motor finance compensation has been a bit of a blot during Q3 – Lloyds had to increase its provision for this by £800mn to almost £2bn. We need to see whether this impacts management forecasts for the full year and 2026.

Lloyds Q3 expectations

Revenues are seen rising almost 10% to £4.73bn, with net income at £1.02bn. NII is expected to rise 6% £3.43bn. One question is what NIMs do as the Bank of England cuts rates.

The key for the stock will be on the full-year outlook and the forecast for next year. Investors will pay close attention to guidance on full-year capital generation and shareholder returns.

This is what Lloyds said in its first-half results in July.

Based on current macroeconomic assumptions, for 2025 the group continues to expect:

• Underlying net interest income of c.£13.5 billion

• Operating costs of c.£9.7 billion

• Asset quality ratio of c.25 basis points

• Return on tangible equity of c.13.5%

• Capital generation to be c.175 basis points

and for 2026:

• Cost:income ratio of less than 50%

• Return on tangible equity of greater than 15%

• Capital generation of greater than 200 basis points

 • To pay down to a CET1 ratio of c.13.0%

Budget looms

UK bank profits have risen in recent years, and this makes them a potential target to raise revenues – and politically safe one at that. The bank surcharge of 3% on top of the main corporate tax rate of 25% could be raised, while the Treasury could change rules so banks would have to pay tax on the interest received on funds they hold at the Bank of England.

Estimates vary but raising the surcharge to 5% would entail a hit of up to 2.5% on profits for the banks, with Lloyds and NatWest the most affected. Changing the way the BoE pays interest on bank deposits is not an easy option, but the government could opt for a model along the lines of the European Central Bank, which requires banks to hold 1% of assets earnings no interest. This could have another |2% hit to profits next year.

However, increasing taxation on the sector could have a negative impact on the economy, as bank lending is a key driver of growth. This may steer the chancellor towards a less punitive agenda.