Lloyds Q3 Profit Nearly Doubles to £2.3bn as Bank Surcharge Rises

A strong quarter that came a day after the bank tax rise

Lloyds Banking Group, which owns Bank of Scotland, reported its third-quarter results one day after Chancellor John Healey doubled the tax surcharge on bank profits. The numbers showed that one of Britain's biggest lenders can absorb the extra cost easily. They also showed that investors are now worried less about tax and more about how long the boost from higher interest rates will last.

Pre-tax profit for July to September was £2.3 billion, close to double the £1.2 billion Lloyds made in the same period of 202521. That headline overstates the improvement. Last year's third quarter included an extra provision of about £800 million for the UK motor finance compensation scheme for people mis-sold car loans21. Reports differ slightly on that comparison. Reuters puts the prior-year profit at £1 billion and the remediation charge at £875 million22, and the bank's own income statement lists third-quarter 2025 remediation of £875 million and statutory pre-tax profit of £1,174 million18. Remediation charges fell to £22 million in the latest quarter23.

The £2.33 billion figure was slightly ahead of the £2.29 billion average analyst forecast compiled by Bloomberg17. Other trackers had expected about £2.28 billion, which made the result broadly in line23. Over the first nine months of 2026, statutory pre-tax profit rose 42% to £6.6 billion26. Return on tangible equity was 17.9% for the period and 19.5% in the third quarter alone12.

The structural hedge does most of the work

Interest income drove the quarter. Underlying net interest income for the three months rose 10% from a year earlier to £3.8 billion23. Year-to-date, it rose 10% to £11.1 billion16. The banking net interest margin was 3.25% in the third quarter, up three basis points on the second quarter, and 3.21% for the nine months16.

The main reason is Lloyds' structural hedge. This is a large portfolio of interest-rate swaps that takes the benefit of higher rates and spreads it over several years. The hedge earned £1.9 billion in the quarter at an average yield of 3%. Management said that is still well below the rates at which maturing positions can now be reinvested12. Lloyds expects hedge income to exceed £7 billion in 2026 and £8 billion in 202728. The quarter-on-quarter margin breakdown shows how much depends on the hedge. It added nine basis points, while deposit pressure took away three and mortgage competition two14.

Other parts of the bank also did well. Other income rose 10% to £5.0 billion over nine months14. Operating costs rose just 1%, to £7.2 billion, which kept the cost-to-income ratio at 49.3% for the year to date and 47.2% for the quarter12. One local consultant said the bank's five-year turnaround had largely achieved what it set out to do, and that investors now want to know where growth will come from next21.

Why the shares fell anyway

Despite the profit jump, Lloyds shares fell about 5% to around 99p2614. Reports agree that the outlook, not the quarter itself, caused the drop. Management said net interest income growth in 2027 will be lower than in 2026, citing competition for loans and deposits and the chance that mortgage growth slows if rates stay high14. Lloyds also said current market conditions point to 2026 net interest income coming in only modestly above its £14.9 billion guidance16. Hargreaves Lansdown said this was a little softer than some had hoped and had pushed down forecasts for next year, though it still expects income to rise meaningfully in 2027 as hedge income comes through11.

There were other weak spots. The impairment charge for bad loans rose to £930 million from £618 million. Lloyds said its economic forecasts now reflect a worse outlook because of the Middle East conflict26. Retail deposits fell by £3.7 billion over the year. The bank blamed its own "disciplined pricing," higher energy prices and inflation, and foreign lenders competing for UK savings26. One US-focused data provider reported that earnings per share missed consensus while revenue beat it20. That shows how differently the same results can look depending on whether underlying or statutory measures are used.

The market's reaction makes sense. Lloyds is mainly a UK mortgage and deposit bank, and much of its value depends on how long rate-driven income keeps growing. A bank that says its growth rate has peaked will be marked down, however strong the current quarter. The tax change, by comparison, is a small factor.

The surcharge: smaller than feared, and possibly not temporary

In his first Budget, Healey raised the bank corporation tax surcharge from 3% to 6% on profits above £100 million2. The higher rate runs from 1 January 2027 to 31 March 20287, which means banks pay 31% in total on top of the standard 25% corporation tax4. The extra money will help pay for household energy support, including a £100 payment to 20 million households as the Middle East conflict pushes up energy prices5.

Estimates of the revenue differ. The Office for Budget Responsibility puts it at about £1.5 billion, after allowing for roughly £190 million lost because some banks are expected to move profits outside the UK1. One accountancy publication cited Budget documents showing £1.4 billion7.

Most reports agree that the banks got off lightly. Before the Budget, industry sources expected the surcharge to go back to 8%, the level it was at before an earlier Conservative cut6. The TUC had called for 16%6. Analysts had also discussed other options, such as directly taxing the interest banks earn on their reserves at the central bank1. Bank shares rose on Budget day. Lloyds, NatWest and Barclays gained between 1% and 2%4.

The cost to profits is real but limited. RBC Capital Markets estimates the hit to 2027 net attributable profit at 3.8% for Lloyds and 4% for NatWest and Nationwide. Barclays, HSBC and Santander are less exposed because more of their profit is earned outside the UK10. Shore Capital's Gary Greenwood also put the earnings effect at around 4% and said Lloyds still has room for more returns to shareholders26. Lloyds' finance chief said the Budget does little to change the bank's views on capital28.

The bigger question is whether the increase will really end in March 2028. Lloyds CFO William Chalmers called it "unhelpful" to growth and urged the government to keep it temporary26. He also criticised the chancellor for linking the tax rise to energy bill support24. Quilter Cheviot's Will Howlett said the time limit should be taken "with a pinch of salt"1, and RBC pointed to Spain, where bank taxes have lasted longer than first planned10. TUC general secretary Paul Nowak said the chancellor should be ready to extend the rise and increase it further if profits stay high1. On balance, the sceptics have the stronger case. A government short of money is unlikely to drop a £1 billion-a-year tax while bank profits are rising.

Competitiveness, Wall Street and the regulatory picture

The industry's main argument is about international competition. UK Finance says the total tax rate on London-based banks will rise to between 48.5% and 49% while the higher surcharge applies. It compares that with 42.2% in Amsterdam, 39.1% in Frankfurt, 29% in Dublin and 27.9% in New York4. US banks are part of the lobbying effort. JPMorgan chief executive Jamie Dimon warned in May that the bank could drop plans for a £3 billion London headquarters if the government became hostile to banks6. Healey's moderate increase, though, mainly affects UK-focused retail lenders, not the large investment banks Dimon was speaking for. The RBC estimates show this split clearly10.

Whether customers pay is still unclear. UBS analyst Jason Napier has described this kind of tax as a cost that banks would pass on through slightly more expensive loans and lower savings rates2. Former chancellor Jeremy Hunt warned that mortgage rates could rise26. There is also a partial offset for banks. Healey said he expects the Bank of England to come up with further proposals to make UK capital rules more internationally competitive10. Lloyds already expects a £6 billion to £8 billion positive effect on risk-weighted assets, a measure used in calculating capital requirements, when the Basel 3.1 rules take effect on 1 January 202728.

What to watch next

The next test for this business model is the Bank of England's 5 November decision, at which a rate rise is widely expected because inflation remains high5. In the short term, higher rates will help the hedge and the margin. But Lloyds itself warns that higher rates could slow lending growth28, and its larger impairment charge suggests it is preparing for more customers struggling to repay. Lloyds is also about to set out its Accelerate 2030 strategy20.

The overall picture is that UK banks are making strong profits from interest rates, have absorbed a tax rise that is noticeable but not damaging, and face a political debate over that tax that is likely to continue past March 2028. For Lloyds shareholders, slowing interest-income growth matters more than the higher surcharge.