Lloyds Banking Group has revealed its earnings jumped by a third in the first three months of 2026 as it benefited from interest rates staying higher, but new forecasts show war in the Middle East weighing on the UK economic outlook.
The banking group reported a pre-tax profit of £2 billion for January to March, up 33% compared with the same period last year.
The earnings figure also came in ahead of the £1.8 billion that most analysts had been forecasting.
Earnings were boosted by an 8% year-on-year increase in underlying net interest income generated by the bank, meaning what it makes from loans minus what it pays out to savers.
Interest rates have been gradually coming down from a peak since 2024 but are currently held at 3.75%, with hopes of a cut among borrowers dashed since the conflict in the Middle East.
The bank’s lending book grew with total balances up by more than £5 billion.
It also reported growth in customer activity with around 790,000 new savings accounts opened during the quarter, while operating costs dipped following savings made by the bank.
Lloyds chief executive Charlie Nunn said the banking group’s business model was “resilient in the context of the current economic uncertainties”.
“We remain focused on supporting UK households and businesses as they look to strengthen their financial positions and achieve their goals,” he said.
However, new economic forecasts published by the bank reflect the possible “stagflationary consequences for the global and UK economies” of recent events including the war in the Middle East.
Stagflation refers to rising inflation at the same time as slower economic growth.
Lloyds said it was now forecasting a slower increase in gross domestic product (GDP) and a rise in the unemployment rate, higher energy prices leading to renewed inflationary pressures, and cuts to interest rates expected to be delayed until 2027.
The revised outlook includes GDP being halved to 0.5% for 2026 from the more than 1% it was previously forecasting.
The UK unemployment rate is projected to rise to 5.6% by the second half of the year, while Consumer Prices Index (CPI) inflation could hit 3.9% by the final quarter, according to the bank’s forecasts.
William Chalmers, Lloyds’ finance chief, said: “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.”
Mr Chalmers also defended the bank’s higher profits in the context of the weakening economic outlook, saying that the “profitability of banks is an incredibly important component of a successful economy”.
“You will see that, no matter what geography you look at, the most successful economies have profitable banks,” he said.
