Lloyds Banking Group PLC 2026 Q3 Earnings Call

Please go ahead. Thank you, operator, and good morning, everyone.

Thank you for joining our Q3 results call. As usual, I will run through the group's financial performance before we then open the line for Q&A. Let me start with an overview on slide 2. In the third quarter, the group again delivered sustained strength in financial performance. We demonstrated continued income growth, improving operating leverage, and strong and stable credit quality. We are on track to meet our 2026 guidance. The group is continuing its strategic delivery, focusing on supporting U.K. households and businesses while laying firm foundations for Accelerate 2030. The business is performing well, and we are excited to execute on the opportunity ahead. Let me now talk to our financials on slide 3. As said, Lloyds Banking Group again demonstrated sustained strength in financial performance during the first nine months of the year. Statutory profit after tax was GBP 4.8 billion.

Within this, we delivered net income of GBP 14.8 billion, up 9% on the previous year, driven by broad-based growth across our businesses. Q3 net income was 2% higher than Q2. We remain disciplined on costs. Year-to-date operating costs of GBP 7.2 billion were up 1% year-on-year, supporting a cost income ratio for the first nine months of 49.3%. The cost income ratio for the third quarter was 47.2%. Credit performance remains strong and stable. The year-to-date impairment charge of GBP 930 million equates to an asset quality ratio of 25 basis points. Together, this delivered underlying profit of GBP 6.6 billion for the first nine months, GBP 2.4 billion in Q3. Our performance year to date has resulted in a return on tangible equity of 17.9%, strong capital generation of 153 basis points, and a CET1 ratio of 13.3%.

Let me now turn to slide 4 to look at developments in our customer franchise. We have seen solid growth across both the lending and deposit franchises so far this year. Focusing on the third quarter, group lending balances of GBP 495.5 billion were up GBP 4 billion, or GBP 5 billion excluding movements in hedge accounting. We saw growth across all business lines. Within retail, mortgages increased GBP 0.3 billion in Q3. We realized slightly higher mortgage completion margins quarter-on-quarter at circa 75 basis points, although this remains below maturity margins. The market remains highly competitive. Elsewhere in retail lending, we saw continued growth in each of our cards, loans, and motor businesses, as well as European retail, again, in competitive markets. Commercial lending balances, meanwhile, were up again in the quarter by GBP 3.3 billion or 3%.

As has been the case throughout the year, this reflects strong broad-based growth in CIB across sectors. BCB also continued to grow, with balances increasing GBP 0.2 billion after the impact of government-backed lending repayments. As we look forward across the lending businesses, we believe higher rates, if sustained, may start to slow asset growth. As always, our strategy will be to balance volume and returns. Turning to liability franchise, we saw a solid performance in deposits, up GBP 1.9 billion in the quarter. Total retail deposits were broadly stable, with growth of GBP 0.2 billion in U.K. deposits and a decline of GBP 0.5 billion in Europe. We were pleased to see PCA growth of GBP 0.6 billion in the quarter, again increasing our market share of balances in this core product and helping deepen customer relationships. This more than offset a small decline in U.K. savings of GBP 0.3 billion.

Commercial deposits increased by GBP 2.1 billion, reflecting growth in targeted sectors across both CIB and BCB and continuing recent strength in this area. As called out throughout the year, we have again seen a competitive quarter in the deposit market. For now, these conditions look set to persist, and we continue to manage for both franchise enhancement and sustainable value. Let me now turn to net interest income on slide five. Net interest income continues to grow robustly. Year to date, NII was up 10% year-on-year to GBP 11.1 billion. This included 3% growth in Q3, helped a little by day count.

Income growth continues to be supported by positive but slowing momentum in the net interest margin at 325 basis points in Q3, up three basis points on the second quarter. Driving this in Q3, the growing structural hedge contribution continued to more than offset mortgage refinancing and deposit churn headwinds. Structural hedge earnings were GBP 1.9 billion, with an average yield of 3%, still well below current market refinancing rates. Within this, the notional of GBP 246 billion and the weighted average life of around 3.75 years was stable in the quarter. We continue to expect hedge income to grow to greater than GBP 7 billion in 2026 and greater than GBP 8 billion in 2027, based on our economic assumptions. NII strength was also supported by the growth in our franchise, with average interest earning assets of GBP 481 billion in Q3, up over GBP 3 billion on Q2.

Based on these developments, we are on track to meet our 2026 NII guidance of greater than GBP 14.9 billion. In the current competitive market conditions, we expect to deliver modestly above GBP 14.9 billion. Looking further forward, these same conditions will likely impact 2027 NII growth, partly offsetting benefits from higher volumes and hedge income. While still healthy, the pace of NII growth in 2027 is likely to be lower than in 2026. Let me now turn to other income on slide six. We continue to deliver strong momentum in other income across our franchise. Year to date, other income was GBP 5.0 billion, up 10% on the prior year. Q3 OOI is up 8% year-on-year at GBP 1.7 billion. Within this, Q3 was very slightly lower than Q2. This reflects continued strength in transport, current accounts, and Lloyds Living.

These factors were offset by increased subsidence claims within general insurance, lower markets income within commercial banking, and the non-repeat of certain second quarter gains as we flagged in July. Excluding weather claims, third quarter underlying OOI growth was over 10% year-on-year, continuing the strong performance that we've seen in recent periods. Income diversification remains a strategic focus and indeed our base case expectation. We continue to see good progress in our strategic initiatives, as laid out on the slide. These include strong momentum within Tusker, as well as the successful launch of new propositions, for example, Lloyds Accept within BCB. Such developments and upcoming plans will maintain our forward momentum. Briefly turning to operating lease depreciation. The Q3 charge of GBP 420 million has decreased from Q2, largely due to the non-repeat of the revaluation charge for used car price adversity that we recognized at the half year.

This is partly offset by the quarterly run rate, which is increasing in line with fleet growth. Moving to costs on slide seven. Cost discipline continues to be an imperative. Operating costs for the first nine months were GBP 7.2 billion, up 1% year-on-year. Our robust performance reflects business cost growth, inflationary pressures, and costs related to Lloyds Wealth, largely offset by continued cost savings and lower investment at this stage of our current strategic cycle. Third quarter costs of GBP 2.4 billion were down 1% versus Q2. As we look forward, Q4 will see higher costs due to the usual seasonal factors, including bank levy as well as investment timing. The remediation charge was GBP 22 million in the quarter, taking the year-to-date charge to GBP 61 million. Taken together, this resulted in a cost to income ratio of 47.2% in Q3 and 49.3% for the first nine months.

Importantly, we remain on track to deliver a full year cost to income ratio below 50% and operating costs of less than GBP 9.9 billion in 2026. Let me turn to credit performance on slide eight. Credit performance remains strong and stable. This reflects our prudent approach to lending and resilient customer base. Arrears and early warning indicators across our portfolios remain benign. The year-to-date impairment charge is GBP 930 million, equivalent to an asset quality ratio of 25 basis points. Compared to the prior year, the increased charge is driven by retail model updates both last year and this year, and a more normalized level of impairment in 2026, as well as lower one-off releases within commercial. The charge of GBP 313 million in the third quarter also represents an asset quality ratio of 25 basis points and reflects stable underlying development alongside model updates.

It incorporates a small MES charge of GBP 8 million in the quarter. Our performance year to date means that we are on track to meet our guidance for a full year asset quality ratio of around 25 basis points. Let me now address returns and TNAV on slide nine. The group delivered a strong return on tangible equity of 17.9% for the first nine months and 19.5% in Q3. Below the line, the third quarter restructuring charge and volatility and other items were modest. Tangible net assets per share ended the quarter at 55.4p, down by 1.6p per share both year to date and in the quarter. Growth from attributable profits and the reduction in share count from the buyback were offset by shareholder distributions, and in particular, the temporary impact of higher rates on the cash flow hedge reserve.

Looking ahead, we continue to expect material TNAV per share growth over the medium term. We remain on track to deliver a return on tangible equity of greater than 16% in 2026. Indeed, given our current TNAV, we expect to comfortably exceed this. Turning now to capital generation on Slide 10. Our business performance has driven strong capital generation. Within this, total RWAs ended the quarter at GBP 247.4 billion, up GBP 11.9 billion from the year end. This increase reflects strength in lending and market and other movements, partly offset by optimization activities. Turning to Q3, RWAs increased GBP 5.6 billion, again driven by customer and bank lending growth, but with limited optimization in the quarter. Q4 should be more active in this respect. Looking forward, we continue to expect a GBP 6 billion-GBP 8 billion positive day one impact from Basel 3.1 on the 1st of January 2027.