Lloyds banking group: what new investors need to know
Lloyds offers an attractive dividend and strong UK presence, but faces challenges that new investors should understand before buying shares.
What is Lloyds Banking Group?
Lloyds Banking Group is the UK's largest retail bank and a major financial institution. It provides banking services to millions of customers across the UK through several well-known brands.
The group includes Lloyds Bank, Halifax, and Bank of Scotland, making it a familiar name on the high street. It's also the UK's biggest mortgage provider, making it closely tied to the health of the UK housing market.
As a traditional bank, Lloyds makes money primarily by lending to customers at higher rates than it pays on deposits. This difference is called the "net interest margin" and is a key measure of the bank's profitability.
For new investors looking at financial shares, Lloyds represents exposure to the UK economy, particularly the housing market and consumer spending.
Recent performance
Lloyds recently reported profits of £1.53 billion for the first quarter (Q1) of 2025, which was down 13% compared to the same period last year. This was partly due to setting aside £100 million for potential US tariff impacts.
Despite this decline, there were positive signs too. The bank's income from interest payments grew by 3%, and both mortgage and deposit growth showed modest increases at 2% and 1% respectively.
Lloyds shares currently trade at around 68p, which many analysts consider undervalued. With a price-to-earnings (P/E) ratio of about 7.8, the stock is cheaper than its historical average, potentially offering good value for new share investing opportunities.
The bank's strong capital position, with more reserves than required by regulations, means it's well-prepared to weather economic challenges while continuing to pay dividends to shareholders.
Dividend potential
One of the most attractive features of Lloyds for new investors is its dividend yield of nearly 5%. This is higher than the average FTSE 100 company and significantly better than current savings account rates.
Dividends are regular payments made to shareholders from a company's profits. For income-focused investors, these payments provide a steady stream of returns regardless of share price movements.
Lloyds has maintained a consistent approach to shareholder returns in recent years. The bank aims to balance rewarding shareholders with retaining enough capital to grow the business and meet regulatory requirements.
For beginners interested in income investing, Lloyds could be a consideration within a diversified portfolio. Remember that dividends are never guaranteed and can be reduced or cancelled if a company faces financial difficulties.
Key risks to consider
The biggest challenge currently facing Lloyds is an investigation into historical car finance practices. The bank has already set aside £700 million, but total costs could reach £3.2 to £3.9 billion according to some estimates.
This investigation looks at whether customers were charged unfair interest rates due to commission arrangements between lenders and car dealers. As the UK's largest provider of motor finance, Lloyds has significant exposure to this issue.
Another risk is Lloyds' heavy dependence on the UK economy. With about 95% of its business in the UK, the bank is vulnerable to economic downturns, housing market slumps, or rises in unemployment that could affect customers' ability to repay loans.
Interest rate changes also impact Lloyds' profitability. While higher rates can increase profit margins, they may also lead to more customers struggling with repayments, potentially increasing bad loans.
Future outlook
Looking ahead, Lloyds is focusing on three main areas: strengthening its core business, investing in growth opportunities, and enhancing its digital capabilities to meet changing customer preferences.
Digital banking is a key priority, with the bank now serving over 19.5 million digital customers. This shift helps reduce costs while improving customer experience, essential for competing with newer digital-only banks.
Lloyds is also expanding into wealth management and insurance – areas that typically generate higher profits than traditional banking. This diversification could reduce its reliance on interest income and create more stable revenue.
The UK economy shows signs of improvement, with falling inflation and increasing real wages. This positive environment could benefit Lloyds' lending businesses and help support its share price over the medium term.
How to invest in Lloyds Banking Group
- Research Lloyds Banking Group by reading about its recent financial results, dividend history, and how UK economic trends might affect its business.
- Download IG Invest or open a share dealing account with us to access UK shares.
- Search for "Lloyds Banking Group" or its ticker "LLOY" in our platform or app.
- Decide how much you want to invest, remembering to only invest money you can afford to lose and to consider diversifying across different companies.
- Place your trade by buying the shares and then monitor your investment regularly, particularly when Lloyds announces results or dividend payments.
For new investors, Lloyds presents both opportunities and risks. Its strong market position and attractive dividend make it worth considering, but be aware of the challenges it faces. Remember that investing in individual shares should typically be part of a broader, diversified investment strategy.