Lloyds Earnings: Strong Guidance for 2026 and Structural Hedge Point to Improving Returns

Key Morningstar Metrics for Lloyds Banking Group

What We Thought of Lloyds Banking Group’s Earnings

Lloyds reported fourth-quarter results, closing a decent year despite the motor finance probe provisions. Guidance for 2026 and the structural hedge outlook is strong.

Why it matters: Interest rates in the UK remain elevated, with markets pricing in only one more rate cut to 3.5% this year. The five-year swap curve continues to allow UK banks, including Lloyds, to book growing structural hedge income until at least 2027 before petering out.

• The headwind of the motor finance probe weighed on 2025 performance, but underlying performance was still good. Net income grew 7% versus just 3% growth in operating expenses. The credit cost of 17 basis points was good as well.
• Return on tangible equity guidance for 2026 of above 16% and £1 billion in additional structural hedge income in 2026 and £1.5 billion in 2027 were all strong signals for improved capital generation.

The bottom line: We raise our fair value estimate to GBX 97 per share after rolling our model one year forward and revising our net interest margin estimates upward materially based on the strong outlook of the structural hedge income. Our narrow moat rating is unchanged.

• We had previously anticipated that competitive dynamics would offset more of the structural hedge tailwind over the medium term, with the structural hedge peaking toward the end of 2027. Current market rates point to flat to slightly upward structural hedge income starting in 2028.
• We now assume a midcycle return on tangible equity of around 15%, versus slightly above 13% previously, primarily due to the structural hedge and our expectation for further cost savings the bank can achieve.

Bears say: Organic levers of value creation for Lloyds are diminishing in potency. We expect some further operating expense savings in the future to eventually lead to peak returns on tangible equity above 18% by 2028.