Credit Update: Investors may consider Lloyds bonds with a YTM of about 6.8%

-Asset quality and capital position remain broadly stable, with the non-performing loan ratio declining to 1.7%. and CET1 ratio of 14%.

- Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) remain well above the regulatory requirement of 100%.

- Investors should be aware that the key risks are concentration risk and liquidity risk.

- Overall, we maintain a positive stance. Investors may consider its existing issuances (as mentioned below) across different currencies, which yield in the range of 4.5%–6.8%.

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

The Group provides a wide range of financial services, with a particularly strong position in mortgages and significant market share in credit cards, unsecured lending and commercial banking.

As of 23 March 2026, it is the UK’s second-largest bank, with a market capitalisation of approximately £54.4 billion.

Previous article update: Credit Update: Lloyds Banking Group maintains strong performance amid lower rate

Financial Highlights

In FY25, Lloyds’ total income rose modestly by 8% YoY to £19,422 million. This was largely driven by higher net interest income, despite the UK entering a rate-cutting cycle. The increase was supported by higher average interest-earning assets and an improved net interest margin, underpinned by stronger structural hedge income as eligible balances were reinvested in a higher-rate environment.

Income from other business divisions remained broadly stable. Although trading income declined to £1,485 million from £1,812 million in FY24, this was offset by higher insurance service income and other operating income.

Operating costs increased by 3% YoY to £9,800 million, reflecting ongoing strategic investment (such as higher severance costs and business growth initiatives) as well as inflationary pressures. Nevertheless, the Group’s cost-to-income ratio improved to 58.6% (FY24: 60.4%), as income growth outpaced the rise in costs, supported by disciplined cost management.

Overall, the Group reported a higher statutory profit before tax of £6,661 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 rate hikes amid persistently elevated inflation and rising oil prices.

 Table 1: Profitability indicators (£ m, unless otherwise stated)

^{*There were presentation changes (reclassifications) in total income in FY24 and FY25, while accounting policies remained unchanged.}

Source: Company Reports, iFAST compilations. Data as of 31 Dec 2025.

Credit Metrics

1) Asset Quality

In terms of its loan portfolio, Lloyds has maintained stable and resilient credit performance across its portfolios, with the non-performing loan ratio declining to 1.7%.

In addition, the bank’s Stage 3 coverage ratio fell to 15.9%. We do not view the lower coverage ratio as indicating a weaker buffer. Rather, given that a large proportion of the loans are secured by collateral (such as property), and supported by stable housing prices, the bank is likely to achieve higher recovery values in the event of borrower default. As a result, there is lesser need to set aside additional provisions.

^{^Stage 3 Coverage ratio = (Provisions for stage 3 / stage 3 loans), is a measure of how much loss provisions a bank has set aside for its non-performing loans}

Chart 1: Non-performing ratio and Stage 3 coverage ratio (%)

Lloyds’ asset quality ratio (AQR)* remained sound, despite a slight increase to 0.17% in FY25 from 0.10% in FY24. The rise was mainly driven by higher impairment charges.

 We view this as a normalisation rather than a deterioration, as the unusually low AQR in FY24 largely reflected a one-off release of provisions, following an improved economic outlook, stronger economic performance, and rising house prices.

^{*Asset quality ratio = (underlying impairment charge / average gross loans and advances). The ratio measures the overall quality within a bank’s asset portfolio.}

The bank’s expected credit loss (ECL) allowance—often seen as an “emergency buffer”—improved slightly to £3,353 million (FY24: £3,651 million). This was due to a reduction in Stage 3 loans (fewer defaulted loans) and a more resilient economic environment.

Nevertheless, investors should be aware of the inherent risks in Lloyds’ business. Around 70% of the total loan book consists of mortgages, underscoring the Group’s significant concentration risk in the UK mortgage market.

Chart 2: Loan Portfolio

2) Capital Generation

Despite a slight decline in its CET1 ratio, Lloyds continues to maintain a healthy capital position, reporting a ratio of 14% in FY25 (FY24: 14.2%). The modest reduction reflects management’s deliberate strategy, following significant returns to shareholders through dividend payouts and share buybacks in 2025.

Compared with its peers, other major banks are pursuing similar strategies, reducing CET1 ratios to enhance attractiveness by boosting return on tangible equity (RoTE). We believe Lloyds will continue its share buyback programme, targeting a CET1 ratio of around 13%—still comfortably above the regulatory minimum of 12%—to return additional capital to shareholders via dividends.

Overall, we consider the bank’s capital buffer to remain solid despite the lower CET1 ratio, leaving it well-positioned to withstand potential adverse economic conditions.

Table 2: CET1 ratio