Lloyds annual results: Profits and profitability on the up

Lloyds posted robust results as the diversification strategy began in 2022 continues to show the bank is becoming less reliant on the interest rate cycle and is weathering motor finance claims.

Profits rose 12% to £6.7bn, ahead of expectations for £6.4bn in pre-tax profits, while revenues rose 7% to £18.3bn as its efforts to boost revenues in areas like pensions, insurance and wealth management bore fruit.The jump in profits came despite remediation costs of £968million for the year, £800mn of which were related to motor finance redress provision. Its total provision for motor finance claims is now almost £2bn.

Nevertheless, the strategy to diversify income streams away from interest rates to things like pensions, wealth and insurance, started under CEO Charlie Nunn in 2022, appears to be paying off. Net interest income was up 6% to £13.6bn, as a structural hedge to reduce the bank’s exposure to falling rates provided a boost.

Meanwhile ‘other income’, which reflects fee earnings from its pensions, wealth and insurance businesses, rose 9% to £6.1bn, representing a growing portion of the group’s revenue profile. Loans growth was solid at +5% as the mortgage market flickered into life once more on falling rates, while this also helped it to increase deposits by 3% as the recent run of outflows (as customers looked for higher rates elsewhere) turned a corner.

Return on tangible equity (Rote) was 12.9%, or 14.8% excluding a charge for motor finance commission arrangements in the third quarter. Fourth quarter return on tangible equity of 15.7%. The eye-catching bit for investors is a target of +16% Rote in 2026 as the bank’s profitability improves, with the cost-income ratio seen below 50%. Another measure of profitability, net interest margin, also improved by 11bps to 3.06% last year. With profitability improving capital generation of 147 basis points was strong and the bank targets 200bps in 2026. 

With stronger profitability now expected Lloyds can afford to increase returns – it's hiking the dividend is by 15% to 3.65p a share and announced a £1.75bn share buyback. In addition to the improvement performance outlook, we should that this comesa month after the Bank of England said it would lower capital requirements for British lenders.The BoE in December lowered the amount of Tier 1 capital – the CET1 ratio - that UK banks are required to hold by one percentage point from 145 to 13%. Lloyds reported pro forma CET1 ratio of 13.2% after the increased ordinary dividend and announced share buyback, ahead of the target 13%.

The bank booked an impairment charge of £795 million for the year, sharply up on 2024’s £433mn, though last year’s total reflects a positive adjustment that allowed it to reverse previous impairments.

Lloyds, which is due to provide a strategy update in the summer, is the first UK bank to post its full-year 2025 results.

Barclays reports full year results on 10 February, NatWest reports 13 February, with HSBC due on 25 February.

Shares in Lloyds have risen about 70% in the last year and 150% in the last two years thanks to encouraging signs from the market, good execution on the strategy, and a possible rerating for UK banks.