Credit update: Unlocking 5.8% Opportunities from a Leading UK Bank – Lloyds

• Lloyds continue to benefit from structural hedge income and higher consumer activities. Net income and profit before tax increased by 9% and 33.5% YoY to £4,.785m and £2,025m respectively.
• Asset quality and capital position remain broadly stable, with the non-performing loan ratio declined marginally to 1.68%. and CET1 ratio of 13.4%.
• Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) remain well above the regulatory requirement of 100%.
• Overall, we continue to hold a positive stance. Investors may consider its existing issuances (as mentioned below) across different currencies, which is yielding in the range of 4.5%–5.8%.

Overview

Lloyds Banking Group plc (LBG) is a leading UK-based financial services group, headquartered in London with its registered office in Edinburgh. The Group serves more than 30 million customers through a portfolio of well-established brands, including Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows.

LBG offers a comprehensive range of financial services and holds a particularly strong position in the UK mortgage market, alongside significant market shares in credit cards, unsecured lending and commercial banking.

As of 30 June 2026, the Group is the UK’s third-largest bank (by market cap), with a market capitalisation of approximately £64.51 billion.

Chart 1: Top UK Banks (by market cap - £ billion)

Financials

In Q1FY2026, Lloyds’s net income increased by 9% YoY to £4,785 million, primarily driven by higher net interest income, which rose by 8% YoY to £3,569 million. This reflected continued benefits from higher structural hedge income and an increase in average interest-earning assets.

In addition, other income (comprising fee and commission income and investment-related income) grew by 11% YoY, mainly supported by stronger customer activity and improved performance from its investment initiatives.

Furthermore, Lloyds’s cost-saving initiatives helped reduce operating costs by 3% YoY. The Group also incurred lower severance costs during the quarter. Supported by higher income and lower operating expenses, Lloyds reported a lower cost ratio of 51.9%, compared with 55.7% in Q4FY2025, as income growth outpaced the increase in costs, reflecting disciplined cost management.

Overall, the Group reported a higher statutory profit before tax of £2,025 million. Looking ahead, we believe the bank is well positioned to sustain growth in both net interest income and net interest margin, supported by stronger structural hedge income and the potential for further interest rate hikes amid persistently elevated inflation and rising oil prices.

Table 1: Profitability indicators (£m)

	1QFY2025	1QFY2026	YoY change
Net income	4,391	4,785	9.0%
Operating costs	(2,550)	(2,474)	-3.0%
Statutory profit before tax	1,517	2,025	33.5%

Source: Company Reports, iFAST Compilations. Data as of 31 March 2026.

Credit Metrics

1)      Asset Quality

Lloyds’s credit performance remains stable and well within the bank’s guidance for FY2026. The Asset Quality Ratio (AQR) stood at 0.25% in Q1FY2026, a slight improvement from 0.27% in Q1FY2025, despite a higher multiple economic scenario (MES)* charge of £101 million, largely driven by the deterioration in the economic outlook resulting from the Middle East conflict.

*MES is a forward-looking risk model that assesses multiple economic scenarios (e.g. upside, baseline and downside) to determine the level of provisions a bank should set aside for potential future loan losses.

In addition, the bank’s non-performing loan ratio improved marginally to 1.68% (FY2025: 1.71%), despite underlying loans and advances to customers increasing by 1% to £486.2 billion.

The bank’s expected credit loss (ECL) remained broadly stable in the first quarter at £3,343 million (FY2025: £3,353 million). This reflected offsetting factors: while the weaker economic outlook resulted in higher expected credit loss provisions, these were largely offset by reductions arising from quarterly model recalibrations.

Nevertheless, investors should remain mindful of the inherent risks within Lloyds’s business model. Approximately 70% of the Group’s total loan book comprises residential mortgages, highlighting its significant concentration risk in the UK mortgage market.

Chart 2: Loan Portfolio

2)      Capital position

From a capital perspective, Lloyds’ CET1 ratio stood at 13.4%, compared with 14.0% as at 31 December 2025, despite the bank generating 0.41% of capital in the first quarter. The decline primarily reflected the full impact of the 2025 share buyback programme and dividend payment, which reduced the CET1 ratio by 0.80% and 0.21% respectively.

Management expects the CET1 ratio to moderate to around 13% as it seeks to optimise capital and maximise return on tangible equity (RoTE). As such, we anticipate further share buyback activity and/or higher dividend payouts during 2026.

Compared with its peers, the CET1 ratios of other major UK banks also trended lower in Q1FY2026 relative to FY2025. We view this as a structural shift rather than a sign of balance sheet deterioration, as major banks seek to optimise capital and enhance shareholder returns through capital distribution initiatives, including share buybacks and dividend payouts. This strategy is aimed at improving return on tangible equity (RoTE) while maintaining competitiveness within the sector.

Table 2: CET1 ratio (peers comparison)

Banks	FY2025	Q12026	Regulatory requirement
HSBC	14.90%	14.00%	10.5% (target 14-14.5%)
Barclays	14.30%	14.10%	12.2% (Target: 13-14%)
Natwest	14.00%	14.30%	10.3% (target: 13 - 14%)
Standard Chartered	14.10%	13.40%	10.3% (Target: 13-14%)
Lloyds	14.00%	13.40%	12% (Target: 13.0%)

Source: Company Reports, iFAST Compilations. Data as of 31 March 2026.

3)      Funding / Liquidity

Lloyds’s balance sheet remains resilient, with its loan-to-deposit ratio consistently maintained above 95% (Q1FY2026: 98%).

The Group also maintains a strong liquidity position, with both the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) remaining comfortably above the regulatory minimum requirement of 100% (Q1FY2026: 144% and 123%, respectively).

Risks to consider

High concentration in UK market: Unlike many of its peers, Lloyds Banking Group has limited geographical diversification, with its business largely concentrated in the UK. As a result, the group’s performance is heavily tied to the performance of the UK economy, making its earnings less diversified compared to international peers such as HSBC.

Liquidity risk: Lloyds’ loan-to-deposit ratio is relatively high. While this reflects efficient use of deposits, it also indicates a potential vulnerability: in the event of significant deposit withdrawals or a bank run, the Group could face financial strain. However, this risk is mitigated by its Liquidity Coverage Ratio (LCR) of 144%, which indicates that Lloyds holds sufficient high-quality liquid assets to cover projected net cash outflows over a 30-day period of severe financial stress.

Our view

Overall, Lloyds’s earnings profile remains resilient, supported by growth in average interest-earning assets and a stable balance sheet.

That said, investors should remain mindful of certain risks. Lloyds’s strong concentration in the UK market makes the Group more sensitive to domestic economic conditions than its more geographically diversified peers. In addition, its relatively high loan-to-deposit ratio, while reflecting efficient deployment of customer deposits, could increase funding and liquidity risks in the event of significant deposit outflows.

Given our positive view on Lloyds’s earnings profile and medium-term outlook, we maintain our recommendations as set out below.

For AUD investors, the newly issued LLOYDS 5.831% 11Jun2032 Corp (AUD) may be considered, offering a yield of 5.69%. Alternatively, LLOYDS 7.086% 31Aug2033 Corp (AUD) also presents an attractive investment opportunity, with a yield of approximately 5.78%.

For USD, investors may consider LLOYDS 3.574% 07Nov2028 Corp (USD) and LLOYDS 6.068% 13Jun2036 Corp (USD), yielding at around 4.48% and 5.76%. 

For GBP, investors may consider LLOYDS 2.000% 12Apr2028 Corp (GBP), yielding at around 4.58% level. Additionally, LLOYDS 7.500% Perpetual Corp (GBP) could also be a good choice, as we believe the risk–reward profile is justified with yield to call of approximately 6.47%. However, investors should be aware of the features / risks associated with perpetual bonds (e.g., interest deferral, non-call risk etc).

Table 3: Recommended Bonds

Bonds	Years to next call / Years to maturity	Yield to next call / Yield to maturity
LLOYDS 5.831% 11Jun2032 Corp (AUD)	4Y11M / 5Y11M	5.69% / 5.70%
LLOYDS 7.086% 31Aug2033 Corp (AUD)	2Y1M / 7Y1M	5.78% / 6.81%
LLOYDS 4.750% 23May2028 Corp (AUD)	- / 1Y10M	- / 5.30%
LLOYDS 5.802% 17Mar2029 Corp (AUD)	1Y8M / 2Y8M	5.30% / 5.72%
LLOYDS 5.189% 28May2031 Corp (AUD)	4Y2M / 5Y2M	5.50% /5.58%
LLOYDS 3.574% 07Nov2028 Corp (USD)	1Y4M / 2Y4M	4.48% / 4.59%
LLOYDS 6.068% 13Jun2036 Corp (USD)	8Y11M / 9Y11M	5.76% / 5.76%
LLOYDS 8.000% Perpetual Corp (USD)	3Y2M / -	5.81% / -
LLOYDS 6.750% Perpetual Corp (USD)	5Y2M / -	6.16% / -
LLOYDS 2.000% 12Apr2028 Corp (GBP)	9Y / 1Y9M	4.58%/ 4.62%
LLOYDS 7.500% Perpetual Corp (GBP)	3Y11M / -	6.47% / -
LLOYDS 8.500% Perpetual Corp (GBP)	1Y8M / -	5.47% / -

Source: BSM, iFAST Compilations. Data as of 16 July 2026.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.