Lloyds Banking Group (LYG.US), the UK's largest mortgage lender, reported better-than-expected profits for the first quarter of 2026. Financial results showed a first-quarter net profit of £4.785 billion, an increase of 9% compared to the same period last year. Net interest income for the quarter reached £3.569 billion, up 8% year-on-year. Pretax profit was £2.025 billion, a 33% increase and surpassing market expectations of £1.78 billion.
The bank set aside £295 million for loan loss provisions in the first quarter. A previously announced one-off charge of nearly £2 billion related to the mis-selling of car finance remains unchanged. Earlier this month, Lloyds indicated that, following the UK regulator's publication of a final industry-wide compensation scheme, it currently does not plan to increase provisions further for customer redress related to the mis-sold car loans. The bank stated it has "assessed the impact of the final rules and their consequences" and "currently believes no adjustment to the provision for this matter is required." The disclosed provision of nearly £2 billion is the highest known among its peers.
Furthermore, the bank reaffirmed its full-year 2026 guidance, anticipating net interest income to exceed £14.9 billion and a cost-to-income ratio below 50%. Lloyds CEO Charlie Nunn commented, "In the first quarter of 2026, the Group continued its strong financial performance, delivering revenue growth, maintaining cost discipline, and achieving robust profitability. Our differentiated business model continues to show resilience against the current backdrop of economic uncertainty. We remain focused on supporting UK households and businesses, helping them build financial resilience and achieve their goals."
Lloyds is the second major UK bank to report earnings this week, following Barclays. Unlike many Wall Street banks, which benefited from market volatility driven by the Middle East conflict through trading in stocks, bonds, commodities, and foreign exchange, Lloyds' performance is more closely tied to the health of UK consumers, as its business is focused on domestic retail finance.
The ongoing energy shock stemming from the Middle East conflict poses further risks to UK growth and employment, while also increasing the danger of an inflation feedback loop—where workers demand higher wages to compensate, and profit-squeezed businesses attempt to raise prices. Fears of resurgent inflation have disrupted pre-conflict market expectations for Bank of England (BoE) interest rate cuts. The BoE is set to announce its latest rate decision, with markets widely anticipating the Monetary Policy Committee (MPC) will hold the benchmark rate steady at 3.75%, awaiting greater clarity on the Middle East situation. Concurrently, the BoE is expected to lower its growth forecasts for this year and next.
Lloyds noted in its statement, "Rising energy prices have reintroduced inflationary pressures, and markets now expect a reduction in the UK base rate to be delayed until 2027." Although money markets currently price in two 25-basis-point rate cuts from the BoE this year, many economists believe the central bank is more likely to keep policy unchanged. Most economists see a high risk of stagflation for the UK economy—typically defined as a combination of slow growth, rising unemployment, and persistent price increases—providing additional rationale for holding rates steady.
The UK's growth outlook has weakened under the strain of soaring energy costs. A survey conducted between April 9 and 15 indicated economists expect the UK economy to grow 0.7% in 2026 and 1.2% in 2027, both figures lower than previous forecasts. The International Monetary Fund (IMF) also downgraded its UK growth forecast earlier this month, projecting just 0.8% growth for 2026, significantly below the previous 1.3% estimate. This was the largest downgrade among major advanced economies, reflecting the high cost of the inflationary shock from the Middle East war.
IMF Chief Economist Pierre-Olivier Gourinchas attributed the downgrade to three main factors: reliance on gas imports, lack of energy storage capacity, and weak economic growth following Chancellor Reeves's implementation of a £30 billion tax increase plan late last year. Gourinchas noted the UK's heavy dependence on gas in its energy mix—prices for which have doubled due to the conflict. While much gas is produced domestically, some must be imported at significantly higher market prices. Experts warn that household gas and electricity costs are expected to rise by nearly 20% this summer, pushing the average July bill close to £2,000.
Beyond the IMF's downgrade, recent data points to a dim growth outlook. The UK S&P Global Purchasing Managers' Index (PMI) for March fell to a six-month low of 50.3, down significantly from 53.7 and well below the preliminary estimate of 51. Although the index remains above the 50-point threshold that theoretically indicates expansion, it signals near-stagnation. Additionally, a quarterly survey of UK chief financial officers by Deloitte, one of the world's four largest accounting firms, showed the net confidence index plummeting to -57% in the second half of March from -13% at the end of 2025, its lowest level since the first quarter of 2020 during the COVID-19 pandemic. Meanwhile, businesses' expectations for inflation one year ahead rose to 3.6%, the highest since the third quarter of 2023. Chancellor Reeves has previously cited the Deloitte CFO survey as a key indicator of business sentiment.
Deloitte stated that as global energy prices surge due to worsening Middle East geopolitics, signs of global stagflation are becoming more evident, prompting businesses worldwide to rapidly shift into cost-cutting mode at the expense of hiring, discretionary spending, and long-term investment plans. The survey found that 61% of CFOs are highly concerned about rising interest rates driven by energy prices, inflation, and potential "stagflation." Deloitte's UK chief economist, Ian Stewart, said, "In the last 16 years, UK CFOs have rarely been as focused on defensive actions like cost control and cash retention as they are today." Deloitte also found that 79% of surveyed CFOs expect a significant decrease in hiring over the next 12 months, the highest proportion since the second quarter of 2020 and a sharp increase from 55% at the end of last year.
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