Lloyds Profits Drop 36% in Q3 as Car Finance Costs Rise

Lloyds Banking Group has reported a sharp 36% decline in third-quarter profit, mainly due to rising costs from its car finance division. While the bank’s core operations, including lending and deposits, remain strong, heavy provisions for potential compensation linked to past motor-finance mis-selling have overshadowed the results.

Q3 Results at a Glance

Lloyds reported a pre-tax profit of £1.17 billion for the three months ending 30 September 2025, representing a decline of approximately 36% year-on-year from around £1.8 billion in the same period last year. 

This substantial drop comes despite the fact that net interest income rose and underlying loan volumes were healthy.

Key headline data:

• Pre-tax profit: ~£1.17 billion. 
• Underlying net interest income grew by about 6-7 % compared with the previous year. 
• The major drag: Lloyds booked approximately £800 million of extra provisions tied to historic motor-finance mis-selling. 

Why Profits Fell: Car Finance Mis-Selling and Provisioning

The central reason for the profit drop is tied to Lloyds’ exposure to the UK motor-finance marketplace and a regulatory probe into mis-selling practices.

Motor-finance mis-selling

Lloyds is a major player in car loans in the UK through its motor-finance arm and packages. The bank has had to increase its provisioning for historic deals, particularly where commission or discretionary dealer payments appear to have led to customers paying more than they should. The regulator involved is the Financial Conduct Authority (FCA). 

The impact so far

• Additional charge of about £800 million in Q3 for motor-finance redress and associated costs. 
• Total provisions for the motor-finance scandal now stand at around £1.95 billion for Lloyds. 
• Although net interest income rose, the boost was more than offset by the extra provisioning and rising operating costs. 

Why does this matter to the stock

For investors tracking Lloyds or comparing UK bank stocks, this means that while the core business (lending, deposits, interest income) remains sound, the legacy risk over motor-finance is a significant drag. It weighs on returns, drives unpredictability, and increases regulatory risk.

Core Business: Some Positive Notes

Despite the headline drop, the underlying business of Lloyds shows some encouraging elements:

• Net interest margin (NIM) rose to around 3.06%, up from ~2.95% a year earlier. 
• Loan growth remains solid: Loans and advances to customers increased by £18 billion to £477.1 billion in the first nine months. 
• Deposits also increased significantly: Customer deposits rose by £14 billion to £496.7 billion. 
• Lloyds is placing emphasis on fee-based businesses like wealth management and insurance, reducing reliance on pure interest income.

These factors suggest that the bank’s core operations are resilient, even if the Q3 results are weighed down by the motor-finance issue.

What This Means for Investors & The Stock Market

For those looking at “bank stocks” and “AI stocks” interplay

While Lloyds is not an AI stock per se, the broader stock market today sees rising interest in tech-enabled financial services. Banks that can leverage digital platforms, AI for credit assessment, and automation for cost control may outperform. In that sense, Lloyds’ digital transformation progress is an important story to watch.

If investors are evaluating the bank alongside younger fintech or AI-enabled lenders, the extent to which Lloyds upgrades its tech stack will matter.

Valuation and stock research angle

• The roughly 36 % drop in Q3 profit may lead analysts to downgrade earnings forecasts for the full year. Lloyds itself has trimmed its guidance: return on tangible equity (RoTE) will be about 12%, down from an earlier target of ~13.5%. 
• Investors should monitor the share price reaction: although the Q3 result beat some forecasts, the lingering provisions are a concern.
• Compare Lloyds to peers: How are other UK banks handling motor-finance provisioning or legacy issues? This is relevant for relative valuation and risk comparison.

Risks & Opportunities

Risks

• Further surprise provisioning if claims widen.
• Margin pressure if interest rates fall or competition drives down yields.
• Regulatory/political risk in the UK banking sector (e.g., tax, oversight).

Opportunities

• A recovery in margins and efficiency gains could improve profitability over time.
• Growth in fee-based income and digital banking could accelerate.
• If motor-finance provisions are resolved sooner rather than later, the drag may reduce and sentiment improve.

Outlook for Lloyds

Looking ahead, Lloyds will likely focus on:

• Executing its cost-discipline and digital-transformation programmes.
• Growing non-interest income streams (wealth, insurance, asset management).
• Monitoring the motor-finance redress programme closely; its resolution or input will be a key catalyst.
• Navigating the macroeconomic environment: UK GDP growth, inflation, interest-rate changes, and consumer credit quality.

For the full year, if the bank can deliver on higher net interest income and control costs, it may rebuild investor confidence, but the motor-finance drag remains a wildcard.

Conclusion

Lloyds Banking Group’s Q3 performance is a mixed bag. The core banking results are decent, with increasing interest income and strong loan/deposit growth. But the dramatic 36 % decline in pre-tax profit underscores how material the motor-finance mis-selling provisions are for the bank.

For investors and stock-market watchers, the bank remains an interesting case: a major retail-banking player with both legacy issues and digital-growth potential. The key questions now are whether Lloyds can turn its core business into a smoother growth engine, while stamping out the legacy drag. Those doing stock research on UK banks or comparing them to global peers will want to keep this story on their radar.

If you are tracking the stock, consider monitoring upcoming updates, guidance revisions, and the wider regulatory outcome of the motor-finance redress scheme. That will likely drive sentiment far more than the underlying lending numbers in the near term.

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The content shared by Meyka AI PTY LTD is solely for research and informational purposes. Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.