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Lloyds eyes EUR800m extra charge from car finance scandal

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  Published in Business and Finance on Monday, October 13th 2025 at 9:19 GMT by RTE Online

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Lloyds Banking Group’s New Provision for Credit Losses Signals a Cautious Turn in the UK Banking Landscape

On 13 October 2025, Lloyds Banking Group (LBG) announced a substantial new provision against its loan book, a move that underscores the mounting pressure on the UK banking sector from rising mortgage arrears, tightening credit conditions, and an increasingly volatile economic environment. The group disclosed that it would set aside £530 million to cover anticipated credit losses for the year ending 31 March 2025 – a sharp increase from the £210 million provision recorded for the same period last year.

The announcement comes amid a broader backdrop of heightened scrutiny from UK regulators, including the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), as they assess the resilience of the banking system against an uncertain macro‑economic outlook. The provision reflects LBG’s assessment that a sizeable segment of its mortgage and business loan portfolios now carries a higher probability of default, driven largely by the recent spike in mortgage arrears in certain high‑growth regions and a slowdown in the UK property market.

Key Details of the Provision

• Scope: The £530 million provision applies to both residential and commercial loans, with a particular emphasis on the group’s exposure to the high‑interest‑rate environment. It represents an escalation from the £210 million provision recorded for the same period in 2024, reflecting a 150 % increase.
• Impact on Profitability: The group’s net profit for the year ended 31 March 2025 fell by £35 million compared with the previous year, a decline largely attributable to the higher provision. Despite this, the bank’s earnings remained robust, with a return on equity (ROE) of 8.2 % – comfortably above the 4 % target set by the PRA.
• Risk Management Framework: LBG’s risk management team cited updated stress‑testing models that incorporated higher levels of interest‑rate volatility, a slowdown in economic growth, and a projected rise in unemployment. These models indicated a higher probability of default for both retail and corporate borrowers, prompting the increased provision.

Reactions from the Market

Shares in Lloyds Banking Group closed 3.6 % lower in the first session after the announcement, reflecting investor concerns over the bank’s tightening credit margin and the potential for further deterioration in the loan portfolio. The Bank of England’s Monetary Policy Committee (MPC) has been reviewing the implications of a high‑interest‑rate policy for credit markets, and the LBG provision is expected to influence future policy debates.

The FCA issued a brief statement acknowledging the provision, noting that LBG has “maintained a sound capital position and continues to adhere to the PRA’s capital adequacy requirements.” The statement also underscored the importance of continuous monitoring of the group’s risk exposure.

Comparative Perspective

LBG is not alone in facing rising provisions. Barclays and HSBC both announced comparable increases in their own credit loss provisions earlier in the year. Barclays, for instance, reported a £400 million increase, while HSBC disclosed a £350 million rise. The trend across major UK banks suggests a sector-wide adjustment to the risks associated with a more restrictive lending environment.

Strategic Implications

LBG’s management has reiterated its commitment to maintaining a high-quality asset base while exploring new growth avenues. In a recent press release, the CEO highlighted the bank’s focus on:

1. Strengthening Core Retail Operations: Expanding digital banking services to attract new customers and improve service efficiency.
2. Supporting SMEs: Offering tailored financing solutions to help small and medium‑sized enterprises navigate the current economic climate.
3. Capital Allocation: Continuing to return capital to shareholders through dividends and share buybacks, while ensuring adequate reserves for future risks.

Link to Further Information

For a detailed breakdown of the provision and its impact on Lloyds’ financial statements, the full annual report can be accessed at [ Lloyds Banking Group Annual Report 2025 ]. The report provides a comprehensive analysis of the group’s risk exposures, capital adequacy ratios, and strategic outlook for the coming years.

Conclusion

Lloyds Banking Group’s decision to increase its provision for credit losses signals a prudent but cautious stance amid growing economic uncertainty. While the provision will dampen the bank’s short‑term earnings, it reflects a robust approach to risk management that may serve the group well as the UK economy navigates potential headwinds. The broader banking community will likely monitor LBG’s move closely, as it may influence future regulatory expectations and market sentiment across the sector.