October 29, 2026
The Budget punished UK banks less than feared
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Hey there, bargain hunter. The market spent three weeks pricing Lloyds (LLOY / LYG) for fiscal execution, and then the executioner showed up with a penknife.
Scoreboard
Lloyds reported Q3 statutory profit before tax of £2.332 billion, double the £1.174 billion a year earlier and in line with analyst forecasts. Underlying profit rose 83% to £2.367 billion, and net income for the first nine months rose 9% to £14.819 billion. For the first nine months, statutory profit before tax rose 42% to £6.625 billion. The stock is down roughly 4% in early London trading. That reaction tells you everything about how stretched expectations had become.
What Actually Happened
Third-quarter profit doubled year-on-year largely because the year-ago quarter carried big remediation charges tied to motor finance. Last year’s comparison quarter carried £875 million in charges. Strip those out, and the underlying business grew solidly. Underlying net interest income rose 10% year-on-year to £3.806 billion, helped by higher structural hedge income and loan growth, and the banking net interest margin widened 3 basis points from the second quarter to 3.25%.
Return on tangible equity was 19.5%, and the cost-to-income ratio improved to 47.2% from 68.4%. A cost-to-income ratio below 50% is where efficient banks want to be. The underlying impairment charge was £313 million, an asset quality ratio of 25 basis points, with arrears low and stable. Loans rose 3% so far this year to £495.5 billion, and customer deposits rose 1% to £502.8 billion.
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The Budget: Less Bite Than the Bark
Before these results landed, the sector had already done something remarkable: it sold itself off. Over the past month alone, Lloyds shares fell more than 8%, leaving them down almost 12% from the 2026 high of 118p hit in August. The reason was fear. The bank surcharge was widely rumoured to rise as part of Chancellor John Healey’s Budget.
Then the actual number arrived. Chancellor John Healey raised the Bank Corporation Tax Surcharge from 3% to 6% for 15 months, less than feared, and the government said it is expected to raise about £1.5 billion. The Budget documents set the period as 1 January 2027 to 31 March 2028. No fiscal crisis. No permanent structural wound.
Is It Cheap?
At roughly 104p, Lloyds trades on a forward P/E of around 9.4x. The analyst consensus target price sits around the mid-120s pence, roughly 20% above the last closing price of about 104p. The forward dividend yield is approximately 5%. That is real income while you wait, and the 15-month surcharge is exactly the kind of time-limited headwind that creates a window.
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The bank said it remained on track to meet its performance targets for the year. NatWest reports tomorrow, which will give another read on whether this is a Lloyds-specific story or a sector-wide one.
Bull / Base / Bear
- Bull: Surcharge expires on 31 March 2028, structural hedge tailwind continues into 2027, buybacks resume, and the stock re-rates toward consensus in the mid-120s pence. A 5% yield while you wait is not nothing.
- Base: Net interest income grows modestly, credit quality holds, the surcharge costs hit earnings 3-4%, but capital returns continue. The common equity tier 1 capital ratio at 13.3% leaves room for distributions even under the new tax regime.
- Bear: Revenue and margin land a touch light versus expectations and that casts doubt on 2027 net interest income consensus. Deposit competition bites harder than modelled. Motor finance liability resurfaces.
Cheap Investor Checklist
- Q3 pre-tax profit: £2.332bn vs £1.174bn a year ago. Pass.
- Net interest margin: 3.25%, up 3bps quarter-on-quarter. Watch for Q4 direction.
- Cost-to-income ratio: 47.2%. Efficient. Pass.
- CET1 capital: 13.3%. Adequate for continued buybacks. Pass.
- Surcharge: up 3 percentage points to 6%, for 15 months. Survivable. Pass.
- Consensus target: mid-120s pence vs current ~104p. Gap exists. Track.
- Dividend yield: approximately 5% forward. Income floor in place.
- NatWest results tomorrow: sector confirmation or Lloyds-specific read.
Action Plan
The selloff was priced for a 5-point surcharge hike that lasted forever. The market got a 3-point hike that lasts 15 months. If you were waiting for the Budget to clear before sizing up, the clearing just happened. A scale-in approach makes sense: start a position at current levels around 104p, add if the stock pulls back toward the 99-101p range on sector noise, and set your exit thesis around the 120-126p analyst target band over a 12-18 month horizon.
Bottom Line
If the 15-month surcharge is the worst of it, and this morning’s numbers suggest the underlying business can absorb it, then Lloyds at 104p with a 5% yield and a £2.332 billion quarterly profit is a bank that got punished for a crime the Chancellor decided not to fully commit. That gap between fear and fact is where bargains live.
