Lloyds reported statutory profit before tax of £6.7bn, up 12% from £6.0bn the year before, beating market expectations. The group's performance was supported by both higher income and a stable credit picture, even though costs and provisions rose.
At first glance, the timing looks odd. Interest rates have been falling from their recent peaks. Yet Lloyds' engine still ran strongly. Underlying net interest income rose 6% to £13.6bn, helped by a stronger banking net interest margin of 3.06% (up 11 basis points) and growth in interest-earning assets to £462.9bn.
This reflects an important point often missed outside the City: banks do not feel rate changes instantly. Lloyds has a large "structural hedge" on its stable deposit base, meaning it locks in returns over time. In 2025, it generated £5.5bn of total income from sterling structural hedge balances, and expects hedge earnings to rise further in 2026. So even as the Bank of England cuts, Lloyds is still enjoying the afterglow of the high-rate era.
Not just interest: fee income is growing
Lloyds is also trying to become less dependent on interest rates. Underlying other income rose 9% to £6.1bn, driven by stronger customer activity and strategic initiatives.
That matters because mortgage-heavy banks tend to suffer when competition squeezes margins. Lloyds' answer is to deepen customer relationships and sell more products - insurance, pensions, investments, and business services - rather than simply fight for mortgage volume.
The group says it delivered £1.4bn of annualised additional revenues from strategic initiatives in 2025 and now expects around £2bn by end-2026, ahead of its earlier target.
Operating costs rose to £9.8bn (+3%), reflecting investment, inflation and severance expenses. Remediation costs remained high at £968m, including £800m linked to the UK's motor finance commission scandal.
Despite these costs, Lloyds is flush with capital. The bank generated 147 basis points of capital in 2025 (or 178 bps excluding the motor finance charge).
That strength funds shareholder generosity. Lloyds announced a final dividend of 2.43p, bringing the full-year ordinary dividend to 3.65p (+15%), a new £1.75bn share buyback and a shift to reviewing excess capital distributions every half-year, not annually.
The upgraded target, and the AI twist
The most striking change is strategic. Lloyds now expects a return on tangible equity above 16% in 2026, a meaningful upgrade.
To hit that, Lloyds is leaning hard into technology. It says it has around 50 major live Gen AI use cases, delivering £50m of value in 2025, and it now targets over £100m of incremental profit benefit from Gen AI in 2026. Management is looking to increase the use of automation to reduce costs, speed up processes, and serve customers with fewer staff hours.
Analysts at Jefferies said Lloyds delivered everything investors hoped for: an implicit 2026 profit upgrade, confirmation the hedge will add about £1bn of extra income in 2027, a move to half-year buybacks, and clearer evidence Basel 3.1 will cut RWAs materially - supporting the view that market forecasts for 2026–28 shareholder distributions are around 20% too low. Even if 2026 net interest income guidance looks slightly cautious, Jefferies believes the bank should still generate £6–7bn a year of free capital, enabling bigger buybacks/dividends and leaving the shares looking cheap on future earnings and cash returns.
Investors welcomed the results, the bank's stock was up 1.8% this morning.
