Lloyds Banking Group has reported a significant jump in earnings for the first quarter of 2026, with pre-tax profit rising by a third to £2 billion. However, the bank has issued a somber new forecast for the UK economy, citing the ongoing conflict in the Middle East as a major drag.
Strong First-Quarter Performance
For the three months ending in March, Lloyds posted a pre-tax profit of £2 billion, a 33% increase compared to the same period last year. This figure surpassed analyst expectations, which had averaged around £1.8 billion. The earnings boost was driven by an 8% year-on-year increase in underlying net interest income, which measures the difference between what the bank earns from loans and what it pays to savers.
Interest rates, while gradually declining from their 2024 peak, remain at 3.75%. Hopes for further cuts have been dampened by the Middle East turmoil. Lloyds also saw its lending book expand, with total balances increasing by more than £5 billion. Customer activity remained robust, with approximately 790,000 new savings accounts opened during the quarter. Operating costs edged lower, reflecting cost-saving measures implemented by the bank.
Charlie Nunn, Lloyds' chief executive, described the bank's business model as "resilient in the context of the current economic uncertainties." He added: "We remain focused on supporting UK households and businesses as they look to strengthen their financial positions and achieve their goals."
Worsening Economic Outlook
Despite the strong earnings, Lloyds' new economic forecasts paint a gloomy picture for the UK. The bank warns of potential "stagflationary consequences for the global and UK economies" stemming from recent events, particularly the Middle East conflict. Stagflation refers to a combination of rising inflation and slower economic growth.
Lloyds now expects UK gross domestic product (GDP) growth to halve to just 0.5% in 2026, down from its previous forecast of over 1%. The unemployment rate is projected to rise to 5.6% by the second half of the year. Meanwhile, Consumer Prices Index (CPI) inflation could hit 3.9% by the final quarter, driven by higher energy prices and renewed inflationary pressures. As a result, interest rate cuts are now not expected until 2027.
William Chalmers, Lloyds' finance chief, clarified: "This is not a recessionary environment, to be clear. This is a slowdown in growth expectations versus where we were at the beginning of the year, caused by the Middle East conflict. It is against an expectation that that conflict de-escalates over the course of the year, which is essentially the same as the markets are assuming. In the event that that changes, obviously, we’ll need to look at it at the time."
Defending Bank Profitability
Mr. Chalmers also defended the bank's higher profits in light of the weakening economic outlook, arguing that "the profitability of banks is an incredibly important component of a successful economy." He noted: "You will see that, no matter what geography you look at, the most successful economies have profitable banks."
