Lloyds Banking Group plc Q1 FY2025 earnings call

Key Messages

• Continued to deliver on purpose-driven strategy with sustained financial performance in Q1.
• Income growth seen, with net interest income and other operating income contributing. Cost discipline maintained, and asset quality remains strong.

Operational Highlights

• Launched propositions like BlackHorse Flex Pay, embedded finance, and Lloyds Bank Connected.
• Strong lending and deposit growth in Q1, with mortgage growth of £4.8 billion but expected slower pace in Q2.
• Operating lease depreciation higher due to fleet growth, but efforts to manage ongoing. Strategic transformation progress seen in various business areas.

In Q1, Lloyds Banking Group demonstrated sustained financial strength. Statutory profit after tax was £1.1 billion with a return on tangible equity of 12.6%. Net income was £4.4 billion, up 4% year-on-year. Net interest income was £3.3 billion, 1% higher quarter-on-quarter and 3% higher year-on-year. Other operating income was £1.5 billion, up 8% year-on-year. Operating costs were £2.6 billion, up 6% year-on-year. Asset quality was resilient with an impairment charge of £309 million (27 basis points). Group lending balances were £466.2 billion, up £7.1 billion (2%) in Q1, with mortgage growth of £4.8 billion. Deposits grew by £5 billion (1%) in Q1, with retail deposits up £2.7 billion, savings up £1.5 billion, current accounts up £1.2 billion. Insurance, pensions, and investments had £0.8 billion of net new money, bringing assets under administration to £183 million.

Net Interest Income

• Expect net interest income of around £13.5 billion in 2025, including £1.2 billion year-on-year growth in structural hedge income.

Return on Tangible Equity

• Expect return on tangible equity of circa 13.5% for the full year.

Capital Generation

• Expect capital generation of circa 175 basis points for the full year. Target CET1 ratio to be 13% by end of 2026, with 2025 as a staging post.

• Evolving global economic risks, including potential impact of tariffs.
• Uncertainty around interest rate cuts and mortgage spread competition.
• Impact of tariffs on economic scenarios and need for additional provisions.
• Volatility in swap rates affecting net interest income.

Q: On net interest income guidance and mortgage spreads A: William Chalmers discussed net interest income guidance, noting a good start with NIM up 6 basis points, and mentioned mortgage spread competition with a slightly more competitive market in Q2 and beyond, while maintaining confidence in the £13.5 billion NII guidance.

Q: On operating lease depreciation and ECL A: William Chalmers explained visibility on operating lease depreciation, noting it's part of a profitable transportation business with mitigants in place, and discussed ECL considerations, including a £100 million tariff adjustment to account for potential risks.

Q: On severance charge and ring-fencing A: William Chalmers discussed severance charge being front-loaded for cost efficiency, and commented on ring-fencing, stating a cost-benefit approach is appropriate given the regulated sector and prudential regime advancements.