Lloyds Banking Group received a significant boost on Thursday as analysts at UBS slapped a ‘Buy’ rating on the financial services giant’s shares. The upgrade comes as Lloyds is poised to benefit from an elevated interest rate path, which is expected to bolster its bottom line.
UBS Analyst Highlights Strong Profit Momentum
Jason Napier, analyst at UBS, said: “Given the tailwinds from rate hedges… we see strong future momentum in profits as a relatively low risk expectation.” The bank’s net interest margin, a key indicator of profitability from lending, swelled to 3.17 per cent in the first quarter of 2026, up seven basis points from the end of 2025. This improvement was largely attributed to the firm’s structural hedge, which banks use to shield against interest rate volatility. Income from hedging for the year is now expected to exceed £7bn.
Interest Rate Outlook and Profit Forecasts
Lloyds’ net interest income is also expected to be “greater than” its previous target of £14.9bn for the year after a complete turn in the interest rate cutting cycle. Following surging oil prices triggered by the Iran war, the Bank of England has adopted a more hawkish outlook after the global energy shock fanned the flames of inflation. Lloyds, along with its peers, is tipped to bring in a greater cash haul on the back of this as interest rates stay higher for longer. In the bank’s own analysis, it predicted the first interest rate cut would arrive in the third quarter of 2027.
Tactical Challenges and Potential Bank Tax
Despite the bullish upgrade, Napier noted there was still some hesitancy in going all in on UK banking stocks. “We understand that the tactical challenges of buying a UK domestic bank into the 7 May local elections,” Napier said. Industry sceptics are already beginning to circle the wagons as rumours of a potential bank tax rise circulate. The FTSE 100’s Big Five – Lloyds, Natwest, Standard Chartered, HSBC and Barclays – are tipped to report record profits in 2026.
Neil Wilson, investor strategist at Saxo Markets, added: “Banks could also be ripe for a tax grab soon” following Lloyds’ bumper first-quarter. Fears have risen that a nightmare local elections for Labour could see Prime Minister Sir Keir Starmer ousted and with him, Chancellor Rachel Reeves. Reeves has opted not to tax the banks in her last two Budgets, despite relentless lobbying from think tanks, rival politicians and even former Deputy Prime Minister Angela Rayner, who is tipped to take the helm should Starmer go.
Lloyds Finance Boss Defends Profitability
When the tax question was raised on Wednesday, Lloyds’ finance boss William Chalmers said: “I would say that the profitability of banks is an incredibly important component of a successful economy. We’ve seen over £6bn lending over the course of this quarter. The only reason we’re able to do that lending is because we’re a profitable, successful institution that’s in the economy’s best interests.”
