Lloyds‘ (LSE:LLOY) shares have performed phenomenally well over the past few years. It’s been a beneficiary of an improving economic landscape — for banks at least.
Higher interest rates have significantly boosted Lloyds’ net interest margin — the spread between what it pays savers and charges borrowers.
Meanwhile, AI-driven efficiencies in fraud detection, credit risk modelling and customer service automation have helped compress costs, supporting the bank’s ongoing drive to improve its cost-to-income ratio.
However, there’s a scenario in which AI could become the enemy, and it’s worth considering.
AI risk: jobs disappear
The same AI wave lifting Lloyds’ margins today may carry significant risks for the bank tomorrow.
The UK economy is unusually exposed to AI-driven job displacement. Unlike Germany or Japan, Britain never rebuilt its manufacturing base after deindustrialisation, leaving it heavily dependent on white-collar service sector employment — finance, legal, accounting, consulting, marketing, back-office administration.
These are precisely the job categories AI’s forecast to hit hardest in the coming decade. In 2023, Goldman Sachs estimated that AI could automate the equivalent of 300m full-time jobs globally. Knowledge workers, it said, would be disproportionately affected.
For Lloyds specifically, this creates a structural vulnerability that doesn’t show up in current forecasts. As the UK’s largest mortgage lender, accounting for roughly one in five mortgages, the bank’s loan book’s heavily concentrated among the professional middle class — the demographic most exposed to white-collar automation.
A sustained wave of redundancies among office workers would translate directly into mortgage stress, rising arrears and potential defaults.
This is, of course, a worst-case scenario. But it absolutely should be considered as AI really is an unknown. And while I forecast an age where there is a universal basic income, the transition’s going to be incredibly messy.
Concentration risk
UK unemployment’s been creeping up and the labour market has been softening notably since 2024. In fact, unemployment hit a five-year high just this week. AI’s clearly playing a part, but not a huge one.
Lloyds is more exposed than most of its peers because of its retail-heavy, UK-only model. Unlike Barclays or HSBC, it has no significant international operation to offset a domestic employment shock. It also has no investment arm.
If the UK white-collar jobs market deteriorates, Lloyds will likely experience severe pressure.
Of course, this scenario feels like a distant possibility today. Lloyds’ lack of diversification appears to have worked in its favour in the past couple of years. Earnings have surged and the share price too. It’s actually the most expensive UK bank on a price-to-earnings basis.
What does all this mean?
The bank remains well-capitalised, profitable, and is currently benefiting from favourable conditions. But that doesn’t mean investors should ignore this AI-engendered risk.
Personally, I think investors should still consider Lloyds. For one, I maintain a sizeable holding. However, if the scenario above looks increasingly plausible, then the equation changes.
