Lloyds Banking Group Reports Robust Annual Profits Amid Car Finance Compensation Charges
Lloyds Banking Group has delivered a stronger-than-expected annual financial performance for 2025, with pre-tax profits surging by 12% to reach £6.66 billion. This impressive result marks a significant increase from the £5.97 billion recorded in the previous year, prompting the high street lender to upgrade its outlook for key performance metrics in 2026.
Substantial Remediation Costs for Mis-Sold Car Loans
The robust profit figures were achieved despite the group incurring substantial "remediation costs" totalling £968 million throughout the year. A significant portion of this amount, approximately £800 million, was allocated during the third quarter specifically to compensate customers affected by mis-sold car finance agreements. This latest provision pushes the group's total bill for addressing this issue to an estimated £1.95 billion.
The annual profit surge was particularly bolstered by an exceptionally strong final quarter in 2025, where profits more than doubled to reach £1.98 billion. This performance comfortably surpassed market forecasts and represented a substantial increase from the £824 million reported during the same period a year earlier.
Upgraded Financial Guidance and Shareholder Returns
Looking ahead to 2026, Lloyds now expects underlying net interest income to reach approximately £14.9 billion, up from £13.6 billion in 2025. The group also revealed plans to increase returns for shareholders, announcing intentions for up to another £1.75 billion in share buybacks alongside a 15% increase in the dividend for 2025.
In recognition of staff contributions, Lloyds will distribute a £405 million share bonus pool among workers, representing a 10% increase compared to 2024 allocations. The bank stated this reflects both financial performance and delivery against strategic objectives.
Economic Outlook and Credit Performance
The banking group has slightly upgraded its economic outlook for 2026, now expecting gross domestic product to rise by 1.2% over the year. It forecasts house price growth to accelerate to 1.6%, boosted by anticipated interest rate cuts. However, the bank also predicts unemployment may increase to 5.3% during the first half of the year.
Underlying bad debt charges nearly doubled last year to £795 million, up from £433 million in 2024. Despite this increase, the group emphasised that the total remains relatively low and reflects what it describes as a "strong and stable credit performance."
Strategic Focus on Artificial Intelligence Investment
Chief executive Charlie Nunn highlighted the group's commitment to investing in generative artificial intelligence, revealing that AI implementation directly contributed a £50 million profit boost during 2025. Rather than cutting jobs in response to technological advancements, the firm is focusing on reskilling its 64,000 workers, though Nunn acknowledged the group would "reduce some jobs in some areas" as part of its digital transformation efforts.
Ongoing Car Finance Compensation Discussions
Regarding motor finance compensation, the group is awaiting the results of the Financial Conduct Authority's consultation into its proposed compensation scheme, expected in March. Under current proposals, approximately 14 million car finance deals could become eligible for compensation, with customers potentially receiving an average of £700 per agreement.
Nunn confirmed that Lloyds has submitted suggestions for reforming the compensation scheme, advocating for a closer link to actual consumer harm. He expressed reservations about the current proposals, stating "we didn't think the way the compensation was set out was the right way to go about it." The regulator's plans have faced significant pushback from various lenders across the industry.
Nunn summarised the group's performance, stating: "The group demonstrated sustained strength in financial performance in 2025, including in the final quarter, with continued balance sheet and income growth, as well as strong cost discipline and credit performance." He added that looking ahead to 2026, "our continued business momentum and strategic delivery enable us to upgrade guidance."
