Lloyds Banking Group Q1 2025: Profit holds at £1.1bn as impairments surge and regulatory risks loom

How Did Lloyds Banking Group Perform Financially in Q1 2025?

Lloyds Banking Group plc reported a statutory post-tax profit of £1.1 billion for the first quarter ended 31 March 2025, underscoring the group’s ability to generate stable earnings amid persistent economic uncertainty. The statutory profit before tax came in at £1.52 billion, down 7 percent from £1.63 billion a year earlier, primarily due to a notable increase in credit impairment charges and cost-related headwinds. Nevertheless, Lloyds delivered income growth and maintained capital discipline, affirming its strategic focus on sustainable profitability.

Total group income rose to £4.39 billion in Q1 2025, marking a 4 percent year-on-year increase. Net interest income climbed 3 percent to £3.29 billion, benefiting from a higher banking net interest margin of 3.03 percent compared to 2.95 percent in Q1 2024. This expansion was supported by growth in average interest-earning banking assets, which reached £455.5 billion during the quarter. Chief Executive Charlie Nunn stated that Lloyds’ UK-focused franchise continued to demonstrate operational resilience, highlighting that stable deposit inflows, prudent credit provisioning, and income momentum reinforced the bank’s earnings foundation.

Operating costs increased to £2.55 billion, reflecting a 6 percent rise from Q1 2024, largely due to front-loaded severance costs tied to the group’s strategic transformation programme. Lloyds also reported higher operating lease depreciation of £355 million, driven by lower residual values on electric vehicles and increased fleet expansion in its car finance segment. These elements contributed to an overall tightening in operating leverage during the quarter, although underlying income strength cushioned the impact.

Why Did Lloyds’ Profit Decline Despite Income Growth?

The decline in statutory profit was largely attributable to a sharp increase in credit impairments. Lloyds recognised an underlying impairment charge of £309 million in the first quarter, up significantly from £57 million in the same period last year. This led to an asset quality ratio of 27 basis points, up from 6 basis points in Q1 2024, and signalled the impact of updated macroeconomic scenarios and heightened caution over forward-looking risks.

Included in the charge was a £100 million central adjustment reflecting downside risks related to recent U.S. tariff actions and potential global trade disruptions. These adjustments were partially offset by the strong performance of the retail loan book, which continued to exhibit low levels of default and stable collections. Commercial Banking, however, saw adverse credit model outcomes due to recalibrated economic assumptions. The prior-year comparison was also flattered by the non-recurrence of a one-time impairment model release booked in Commercial Banking during Q1 2024.

In contrast, income from the group’s structural hedge rose to £1.2 billion in the quarter, up from £1.0 billion in the year-ago period. This continued to act as a vital buffer against rising funding costs and supported net interest margin stability. Lloyds anticipates a further £1.2 billion uplift in full-year structural hedge earnings in 2025, reinforcing the durability of interest income in a potentially peaking rate environment.

How Does Lloyds’ Balance Sheet Look in 2025?

Lloyds Banking Group maintained strong balance sheet metrics during the quarter, with customer lending increasing by £7.1 billion to £466.2 billion. This was led by a £4.8 billion increase in UK mortgage lending, affirming the group’s dominant position in the domestic home loans market. Deposits grew by £5.0 billion to reach £487.7 billion, supported by inflows across both Retail and Commercial divisions. The loan-to-deposit ratio remained unchanged at 96 percent, reflecting stable liquidity coverage and conservative funding practices.

Capital strength also remained robust. The group reported a Common Equity Tier 1 (CET1) capital ratio of 13.5 percent, down from 14.2 percent at the end of 2024. This reduction was primarily due to temporary RWA inflation resulting from hedging adjustments. Tangible net asset value per share improved to 54.4 pence, up from 52.4 pence in Q4 2024, supported by retained earnings and the reversal of a cash flow hedge reserve. Liquidity remained ample, with a liquidity coverage ratio of 145 percent and a net stable funding ratio of 128 percent, providing the group with a strong buffer against market dislocations and regulatory shocks.

What Is the Strategic Outlook for Lloyds in 2025?

Lloyds reaffirmed its full-year 2025 guidance, projecting underlying net interest income of approximately £13.5 billion. The group also reiterated its operating cost target of around £9.7 billion, with an asset quality ratio expected to stabilise near 25 basis points. Return on tangible equity is forecast at 13.5 percent, and capital generation is estimated at around 175 basis points, excluding shareholder distributions.

The group’s transformation plan remains underway, with a focus on enhancing digital service delivery, optimising its branch footprint, and simplifying operations. As part of this effort, Lloyds commenced its £2 billion share buyback programme for 2025, repurchasing 0.3 billion shares by the end of March. These moves, coupled with a conservative capital management framework, support the bank’s goal to reduce its CET1 ratio to around 13 percent by the end of 2026, while retaining strategic flexibility to accommodate evolving regulatory demands, including the impact of CRD IV and Basel IV capital reforms.

In the Insurance, Pensions and Investments (IP&I) division, Lloyds reported net inflows of £0.9 billion into open book assets under administration, bringing total AuA to £199 billion. This growth reflects ongoing demand for wealth products and multi-channel distribution across its Halifax and Scottish Widows platforms.

What Is the Market Sentiment Around Lloyds’ Stock?

Lloyds Banking Group’s stock (LSE: LLOY) has remained broadly rangebound following the Q1 2025 earnings release, trading between 49.5 and 50.2 pence. The share price reaction was muted, suggesting that results were in line with consensus expectations. On a year-to-date basis, Lloyds has gained around 2.5 percent, underperforming the FTSE 100, which is up approximately 4.1 percent.

Market participants appear cautiously optimistic. Lloyds’ reaffirmation of its full-year guidance, combined with its ongoing capital return strategy, has been positively received by long-only institutional investors. However, the sharp rise in impairment charges and the regulatory overhang from the Financial Conduct Authority’s ongoing review of motor finance commissions have kept some portfolio managers on the sidelines. Volumes have returned to 30-day averages following a brief uptick post-results, with no notable block trades reported by foreign institutional investors.

Brokerage sentiment remains mixed. Barclays and HSBC maintain “Buy” ratings with price targets of 60 and 58 pence, respectively, citing Lloyds’ capital resilience and structural hedge support. Jefferies and Citi remain neutral with targets around 51–52 pence, while Goldman Sachs remains cautious with a “Sell” rating and a 47 pence target. The average target across major houses stands at approximately 53.5 pence, offering modest upside from current levels.

What Should Investors Watch Going Forward?

Looking ahead, Lloyds faces a critical period marked by regulatory uncertainty and evolving macroeconomic risk. The UK Supreme Court is expected to deliver a verdict by July 2025 on legacy motor finance commission claims, which could have reputational and financial implications not only for Lloyds but for the broader UK banking sector. Additionally, the FCA’s ongoing probe into discretionary commissions continues to pose headline risk.

Externally, investor attention will remain fixed on the Bank of England’s policy trajectory, especially given signs of slowing inflation and uneven consumer confidence across the UK. Any shifts in interest rate guidance or fiscal measures aimed at households and SMEs could influence Lloyds’ retail lending performance and deposit dynamics.

On the internal front, successful execution of its strategic transformation programme and further growth in wealth management flows will be key performance indicators. With stable funding, disciplined cost control, and solid capital buffers, Lloyds remains well positioned to deliver on its 2025 return targets—though earnings volatility could persist in the face of elevated credit provisioning and legal uncertainties.

Lloyds Banking Group’s Q1 2025 results demonstrate stability amid sectoral and economic turbulence. Despite rising impairments and regulatory clouds on the horizon, the bank continues to deliver consistent income, capital discipline, and steady returns. While the share price may remain rangebound in the near term, its strong balance sheet, domestic franchise strength, and shareholder-friendly capital strategy ensure that it remains a cornerstone of the UK banking landscape for cautious investors seeking yield-backed defensiveness.