UK lender Lloyds (LON:LLOY) announced new medium-term return targets together with a new £1 billion share buyback. The updated guidance came as the bank posted pre-tax profit for Q2 which topped analysts’ forecasts.
New return targets
Lloyds reiterated its financial guidance for FY26, and added new RoTE (Return on Tangible Equity) targets for FY28 and FY30. It aims to generate RoTE of 18% in FY28 and 20% in FY20 against this year’s target of above 16%.
For H1, pre-tax profit rose almost 23% to £4.3 billion thanks to higher total income and tight cost control. For Q2, profit rose 14% to £2.27 billion, beating the £2.1 billion consensus and taking the RoTE to 17.1%
H1 underlying net interest income rose 9% to £7.3 billion due to a higher net interest margin and the structural hedge. Other income rose 11% driven by ‘strengthening customer activity and the continued benefit of investments in strategic initiatives’.
Operating costs were flat on 1H25 at £4.9 billion, showing good discipline but also a plateauing in investment. Charges for expected credit losses were £617 million, up £175 million including £80 million for changed economic growth assumptions.
CEO Charlie Nunn said the bank delivered ‘sustained strength in financial performance, with continued income growth, improving operating leverage, strong credit performance, growing capital generation and increasing shareholder returns’. Nunn added: ‘Our strategy will allow us to unlock the next phase of growth and sustainable value creation for our shareholders.’
Overall these are decent results from Lloyds and the market has marked the shares up. There’s also a £1 billion buyback and a 30% hike in the interim dividend, which never goes down badly.
However, when we look at what customers are doing it’s a similar picture to Barclays (LON:BARC) if not worse. Loan growth in H1 was a paltry 2% while deposit growth was even weaker at 1%. The bank decided to lower some deposit rates at the end of the tax year, resulting in retail customers pulling their savings.
The increase in provisions for a change in economic assumptions is based on higher unemployment and lower house prices. As the nation’s biggest mortgage lender, that’s not a great message to the market albeit it shows prudence.
Having gained 15% this year and more than doubled since early 2024 when interest rates started falling, the stock looks up with events. We suspect the total return from here will depend more on dividends and buybacks than further share price appreciation.
