TIDMLLOY
RNS Number : 5457D
Lloyds Banking Group PLC
20 February 2020
2019 Results
News Release
Lloyds Banking Group plc
20 February 2020
CONTENTS
Page
Results for the full year 1
Income statement - underlying basis 2
Key balance sheet metrics 2
Quarterly information 3
Balance sheet analysis 4
Group Chief Executive's statement 5
Summary of Group results 9
Segmental analysis - underlying basis 16
Divisional results
Retail 17
Commercial Banking 19
Insurance and Wealth 21
Central items 23
Other financial information
Reconciliation between statutory and underlying basis results 24
Banking net interest margin and average interest-earning assets 25
Volatility arising in insurance businesses 25
Tangible net assets per share 26
Return on tangible equity 26
Share buyback 26
Risk management
Credit risk portfolio 27
Funding and liquidity management 33
Capital management 34
Statutory information
Condensed consolidated financial statements 41
Consolidated income statement 41
Consolidated statement of comprehensive income 42
Consolidated balance sheet 43
Consolidated statement of changes in equity 45
Consolidated cash flow statement 47
Notes to the condensed consolidated financial statements 48
Forward looking statements 59
Summary of alternative performance measures 60
Contacts 61
BASIS OF PRESENTATION
This release covers the results of Lloyds Banking Group plc together with its subsidiaries
(the Group) for the year ended 31 December 2019.
IFRS 16 and IAS 12 (further information in note 1 on page 48): The Group adopted IFRS 16 Leases
from 1 January 2019 and as permitted elected to apply the standard retrospectively with the
cumulative effect of initial application being recognised at that date; comparative information
has not been restated. The Group implemented the amendments to IAS 12 Income Taxes with effect
from 1 January 2019 and as a result tax relief on distributions on other equity instruments,
previously recognised in equity, is now reported within tax expense; comparatives have been
restated.
Statutory basis: Statutory information is set out on pages 48 to 58. However, a number of
factors have had a significant effect on the comparability of the Group's financial position
and results. Accordingly, the results are also presented on an underlying basis.
Underlying basis: The statutory results are adjusted for certain items which are listed below,
to allow a comparison of the Group's underlying performance.
* restructuring, including severance-related costs, the
rationalisation of the non-branch property portfolio,
the establishment of the Schroders partnership, the
integration of MBNA and Zurich's UK workplace
pensions and savings business;
* volatility and other items, which includes the
effects of certain asset sales, the volatility
relating to the Group's hedging arrangements and that
arising in the insurance businesses, insurance gross
up, the unwind of acquisition-related fair value
adjustments and the amortisation of purchased
intangible assets;
* payment protection insurance provisions.
Unless otherwise stated, income statement commentaries throughout this document compare the
year ended 31 December 2019 to the year ended 31 December 2018, and the balance sheet analysis
compares the Group balance sheet as at 31 December 2019 to the Group balance sheet as at 31
December 2018.
Segment information: The segment results have been restated to reflect the transfer of the
Cardnet business from Retail into Commercial Banking and certain equities business from Commercial
Banking into Central items. The underlying profit and statutory results at Group level are
unchanged as a result of these restatements.
Alternative performance measures: The Group uses a number of alternative performance measures,
including underlying profit, in the discussion of its business performance and financial position.
Further information on these measures is set out on page 60.
RESULTS FOR THE FULL YEAR
"In 2019 the Group has continued to make significant strategic
progress while delivering solid financial results in a challenging
external market. The Group's statutory performance was impacted by
a substantial PPI charge related to the deadline for claims
submission. Underlying performance was resilient, reflecting the
health of our customer franchise and the strength of the business
model.
The Group's purpose is to Help Britain Prosper, underpinned by
being the bank with the largest retail and commercial presence
throughout the UK. In 2019 we helped around 23 per cent of first
time buyers by lending GBP13.8 billion while also achieving our
target of lending GBP18 billion to businesses across the UK. We
have also targeted reducing the emissions we finance by more than
50 per cent by 2030, in line with the UK's Net Zero Goal and the
Paris Agreement.
Given our clear UK focus, our performance is inextricably linked
to the health of the UK economy. Throughout 2019, UK economic
performance has remained resilient in the face of significant
political and economic uncertainty, supported by record employment,
low interest rates and rising real wages. Although uncertainty
remains given the ongoing negotiation of international trade
agreements, there is now a clearer sense of direction and some
signs of an improving outlook. We remain well placed to Help
Britain Prosper, support our customers and deliver strong and
sustainable returns for shareholders."
António Horta-Osório
Group Chief Executive
Significant strategic progress and the right strategy in the
current environment
In 2018 we launched our ambitious strategy to transform the
Group for success in a digital world; over the last two years we
have invested GBP2 billion in strategic initiatives and:
-- Invested in building a leading customer experience, including
the Group's unique Single Customer View, supporting the largest
digital bank in the UK with 16.4 million digitally active customers
and 10.7 million mobile app users, alongside the largest branch
network in the UK
-- Enhanced comprehensive product range and maximised Group
capabilities by launch of Schroders Personal Wealth
-- Continued to digitise the Group and transform ways of working
Solid financial performance
-- Underlying profit of GBP7.5 billion, down 7 per cent in a challenging external market
- Net income of GBP17.1 billion, down 4 per cent, with stable
average interest-earning banking assets of GBP435 billion, net
interest margin of 2.88 per cent and other income down 5 per cent
to GBP5.7 billion
- Total costs of GBP8.3 billion further reduced by 5 per cent,
driven by action to reduce operating costs, and lower remediation
charges; market-leading cost:income ratio improved to 48.5 per cent
with positive jaws of 1 per cent
- Credit quality remains strong with net asset quality ratio of 29 basis points
-- Statutory profit after tax of GBP3.0 billion after GBP2.45
billion PPI charge and GBP1.4 billion tax expense in the year
-- Total ordinary dividend of 3.37 pence per share, up 5 per cent
-- Balance sheet strength maintained with free capital build of
86 basis points in the year (207 basis points pre-PPI charge) and
CET1 ratio of 13.8 per cent after dividends
-- The Group is targeting an ongoing CET1 capital ratio of
c.12.5 per cent plus a management buffer of c.1 per cent.
-- Sustainable growth in targeted segments including GBP1.0
billion in UK Motor Finance, GBP0.3 billion in SME and GBP3.2
billion in Retail current accounts, as well as growth of GBP3.5
billion in the open mortgage book, including the Tesco
acquisition
-- Underlying return on tangible equity remains strong at 14.8
per cent with statutory return on tangible equity at 7.8 per cent,
largely driven by the PPI charge
Guidance for 2020 reflects the Group's confidence in the
business model and future performance
-- Net interest margin of 2.75 to 2.80 per cent
-- Operating costs to be less than GBP7.7 billion with the cost:income ratio lower than in 2019
-- Net asset quality ratio expected to be less than 30 basis points
-- Capital build expected to be within the Group's ongoing
guidance range of 170 to 200 basis points per year and
risk-weighted assets to be broadly in line with 2019
-- Expect increased statutory return on tangible equity of 12 to
13 per cent, driven by resilient underlying profit and lower below
the line charges
INCOME STATEMENT - UNDERLYING BASIS
2019 2018 Change
GBPm GBPm %
Net interest income 12,377 12,714 (3)
Other income 5,732 6,010 (5)
Operating lease depreciation (967) (956) (1)
-------- --------
Net income 17,142 17,768 (4)
-------- --------
Operating costs (7,875) (8,165) 4
Remediation (445) (600) 26
-------- --------
Total costs (8,320) (8,765) 5
-------- --------
Trading surplus 8,822 9,003 (2)
Impairment (1,291) (937) (38)
-------- --------
Underlying profit 7,531 8,066 (7)
Restructuring (471) (879) 46
Volatility and other items (217) (477) 55
Payment protection insurance provision (2,450) (750)
-------- --------
Statutory profit before tax 4,393 5,960 (26)
Tax expense(1) (1,387) (1,454) 5
-------- --------
Statutory profit after tax(1) 3,006 4,506 (33)
-------- --------
Earnings per share 3.5p 5.5p (36)
Dividends per share - ordinary 3.37p 3.21p 5
Share buyback value - GBP1.1bn
Banking net interest margin 2.88% 2.93% (5)bp
Average interest-earning banking assets GBP435bn GBP436bn -
Cost:income ratio 48.5% 49.3% (0.8)pp
Asset quality ratio 0.29% 0.21% 8bp
Underlying return on tangible equity 14.8% 15.5% (0.7)pp
Return on tangible equity 7.8% 11.7% (3.9)pp
KEY BALANCE SHEET METRICS
At 31 Dec At 31 Dec Change
2019 2018 %
Loans and advances to customers(2) GBP440bn GBP444bn (1)
Customer deposits(3) GBP412bn GBP416bn (1)
Loan to deposit ratio 107% 107% -
Capital build(4) 86bp 210bp (124)bp
Pro forma CET1 ratio(5) 13.8% 13.9% (0.1)pp
Pro forma transitional MREL ratio(5) 32.6% 32.6% -
Pro forma UK leverage ratio(5) 5.2% 5.6% (0.4)pp
Pro forma risk-weighted assets(5) GBP203bn GBP206bn (1)
Tangible net assets per share 50.8p 53.0p (2.2)p
2018 restated to reflect amendments to IAS 12, see basis of presentation.
(1)
Excludes reverse repos of GBP54.6 billion (31 December 2018: GBP40.5
(2) billion).
Excludes repos of GBP9.5 billion (31 December 2018: GBP1.8 billion).
(3)
Capital build is reported on a pro forma basis, reflecting the
(4) dividend paid up by the Insurance business in the subsequent first
quarter period and is also reported before accruing for ordinary
dividends, the cancellation of the remaining 2019 share buyback
and the acquisition of Tesco Bank's UK prime residential mortgage
portfolio.
The CET1, MREL, leverage ratios and risk-weighted assets at 31
(5) December 2019 and 31 December 2018 are reported on a pro forma
basis, reflecting the dividend paid up by the Insurance business
in the subsequent first quarter period. The pro forma CET1 ratio
at 31 December 2018 incorporates the effects of the share buyback
announced in February 2019 and is reported post dividend accrual.
QUARTERLY INFORMATION
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
ended ended ended ended ended ended ended ended
31 Dec 30 Sept 30 June 31 Mar 31 Dec 30 Sept 30 June 31 Mar
2019 2019 2019 2019 2018 2018 2018 2018
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 3,102 3,130 3,062 3,083 3,170 3,200 3,173 3,171
Other income 1,267 1,315 1,594 1,556 1,400 1,486 1,713 1,411
Operating lease
depreciation (236) (258) (254) (219) (225) (234) (245) (252)
-------- -------- -------- -------- -------- -------- -------- --------
Net income 4,133 4,187 4,402 4,420 4,345 4,452 4,641 4,330
-------- -------- -------- -------- -------- -------- -------- --------
Operating costs (2,058) (1,911) (1,949) (1,957) (2,151) (1,990) (2,016) (2,008)
Remediation (219) (83) (123) (20) (234) (109) (197) (60)
-------- -------- -------- -------- -------- -------- -------- --------
Total costs (2,277) (1,994) (2,072) (1,977) (2,385) (2,099) (2,213) (2,068)
-------- -------- -------- -------- -------- -------- -------- --------
Trading surplus 1,856 2,193 2,330 2,443 1,960 2,353 2,428 2,262
Impairment (341) (371) (304) (275) (197) (284) (198) (258)
-------- -------- -------- -------- -------- -------- -------- --------
Underlying profit 1,515 1,822 2,026 2,168 1,763 2,069 2,230 2,004
Restructuring (191) (98) (56) (126) (267) (235) (239) (138)
Volatility and other
items 122 126 (126) (339) (270) (17) (16) (174)
Payment protection
insurance provision - (1,800) (550) (100) (200) - (460) (90)
-------- -------- -------- -------- -------- -------- -------- --------
Statutory profit
before tax 1,446 50 1,294 1,603 1,026 1,817 1,515 1,602
Tax expense(1) (427) (288) (269) (403) (260) (394) (369) (431)
-------- -------- -------- -------- -------- -------- -------- --------
Statutory profit
(loss) after tax(1) 1,019 (238) 1,025 1,200 766 1,423 1,146 1,171
-------- -------- -------- -------- -------- -------- -------- --------
Banking net interest
margin 2.85% 2.88% 2.89% 2.91% 2.92% 2.93% 2.93% 2.93%
Average GBP437bn GBP435bn GBP433bn GBP433bn GBP436bn GBP435bn GBP436bn GBP437bn
interest-earning
banking assets
Cost:income ratio 55.1% 47.6% 47.1% 44.7% 54.9% 47.1% 47.7% 47.8%
Asset quality ratio 0.30% 0.33% 0.27% 0.25% 0.18% 0.25% 0.18% 0.23%
Gross asset quality
ratio 0.39% 0.40% 0.38% 0.30% 0.30% 0.30% 0.26% 0.27%
Underlying return on
tangible equity 12.2% 14.3% 15.6% 17.0% 13.6% 15.9% 17.3% 15.4%
Return on tangible
equity 11.0% (2.8)% 10.5% 12.5% 7.8% 14.8% 11.9% 12.3%
Loans and advances to GBP440bn GBP447bn GBP441bn GBP441bn GBP444bn GBP445bn GBP442bn GBP445bn
customers(2)
Customer deposits(3) GBP412bn GBP419bn GBP418bn GBP417bn GBP416bn GBP422bn GBP418bn GBP413bn
Loan to deposit ratio 107% 107% 106% 106% 107% 105% 106% 108%
Pro forma GBP203bn GBP209bn GBP207bn GBP208bn GBP206bn GBP207bn GBP207bn GBP211bn
risk-weighted
assets(4)
Tangible net assets
per share 50.8p 52.0p 53.0p 53.4p 53.0p 51.3p 52.1p 52.3p
Comparatives for 2018 restated to reflect amendments to IAS 12,
(1) see basis of presentation.
Excludes reverse repos.
(2)
Excludes repos.
(3)
Risk-weighted assets at 30 June 2018 are reported on a pro forma
(4) basis reflecting the sale of the Irish mortgage portfolio.
BALANCE SHEET ANALYSIS
At 31 Dec At 30 Sept At 30 June At 31 Dec
2019 2019 Change 2019 Change 2018 Change
GBPbn GBPbn % GBPbn % GBPbn %
Loans and advances to customers
Open mortgage book 270.1 271.0 - 264.9 2 266.6 1
Closed mortgage book 18.5 19.1 (3) 19.8 (7) 21.2 (13)
Credit cards 17.7 17.7 - 17.7 - 18.1 (2)
UK Retail unsecured loans 8.4 8.4 - 8.2 2 7.9 6
UK Motor Finance 15.6 15.6 - 15.5 1 14.6 7
Overdrafts 1.3 1.3 - 1.2 8 1.3 -
Retail other(1) 9.0 9.2 (2) 9.0 - 8.6 5
SME(2) 32.1 32.4 (1) 32.3 (1) 31.8 1
Mid Markets(3) 29.1 30.7 (5) 30.6 (5) 31.7 (8)
Global Corporates and Financial
Institutions 30.8 33.7 (9) 34.7 (11) 34.4 (10)
Commercial Banking other 5.2 5.2 - 4.3 21 4.3 21
Wealth 0.9 0.9 - 0.9 - 0.9 -
Central items 1.7 2.0 (15) 1.9 (11) 3.0 (43)
--------- ---------- ---------- ---------
Loans and advances to customers(4) 440.4 447.2 (2) 441.0 - 444.4 (1)
--------- ---------- ---------- ---------
Customer deposits
Retail current accounts 76.9 76.1 1 76.0 1 73.7 4
Commercial current accounts(2,5) 34.9 34.6 1 34.0 3 34.9 -
Retail relationship savings
accounts 144.5 144.3 - 144.4 - 145.9 (1)
Retail tactical savings accounts 13.3 14.1 (6) 15.3 (13) 16.8 (21)
Commercial deposits(2,6) 127.6 135.8 (6) 133.2 (4) 130.1 (2)
Wealth 13.7 13.6 1 13.8 (1) 14.1 (3)
Central items 0.9 0.7 29 0.9 - 0.8 13
--------- ---------- ---------- ---------
Total customer deposits(7) 411.8 419.2 (2) 417.6 (1) 416.3 (1)
--------- ---------- ---------- ---------
Total assets(8) 833.9 858.5 (3) 822.2 1 797.6 5
Total liabilities(8) 786.1 810.4 (3) 773.2 2 747.4 5
Shareholders' equity 41.7 42.5 (2) 43.4 (4) 43.4 (4)
Other equity instruments 5.9 5.4 9 5.4 9 6.5 (9)
Non-controlling interests 0.2 0.2 - 0.2 - 0.3 (33)
--------- ---------- ---------- ---------
Total equity 47.8 48.1 (1) 49.0 (2) 50.2 (5)
--------- ---------- ---------- ---------
Ordinary shares in issue,
excluding own shares 70,031m 70,007m - 70,740m (1) 71,149m (2)
Primarily Europe.
(1)
Includes Retail Business Banking.
(2)
Includes Mid Corporates (31 December 2019: GBP5.3 billion; 30 September
(3) 2019: GBP5.2 billion; 30 June 2019: GBP5.4 billion; 31 December
2018: GBP5.8 billion)
Excludes reverse repos.
(4)
Primarily non-interest-bearing Commercial Banking current accounts.
(5)
Primarily Commercial Banking interest-bearing accounts.
(6)
Excludes repos.
(7)
The adoption of IFRS 16 on 1 January 2019 resulted in the recognition
(8) of a right-of-use asset of GBP1.7 billion and lease liabilities
of GBP1.8 billion.
[
GROUP CHIEF EXECUTIVE'S STATEMENT
In 2019 the Group has continued to deliver for customers while
making significant strategic progress and delivering a solid
financial performance in a challenging external market. While it is
disappointing that this was impacted by the additional PPI charge
in the year, as a result of this performance, the Board has been
able to recommend an increased total ordinary dividend of 3.37
pence per share.
In February 2018 we announced an ambitious plan to transform the
Group for success in a digital world, supported by over GBP3
billion of strategic investment. We are now two-thirds of the way
through the plan and have made significant progress in further
digitising the Group, enhancing customer experience, maximising our
capabilities as an integrated financial services provider and
transforming the way we work.
We have made significant progress in our customer proposition.
For example, our unique Single Customer View capability provides
customers with the ability to view their pensions and long-term
savings products alongside their banking products. Insurance and
Wealth has seen strong growth in life and pensions sales, driven by
new members in existing workplace schemes, increased auto enrolment
workplace contributions and bulk annuities. In partnership with
Schroders, during the third quarter of 2019 we launched Schroders
Personal Wealth, with the ambition of becoming a top three
financial planning business by the end of 2023. Also in the third
quarter, the Group announced the acquisition of Tesco Bank's prime
UK residential mortgage portfolio, which complements our organic
strategy.
Historic conduct issues remain disappointing but we continue to
be focused on doing the right thing for our customers. The Group is
fully committed to implementing all of the recommendations
contained within Sir Ross Cranston's report relating to HBOS
Reading and ensuring that victims of the HBOS Reading fraud have
their claims assessed in an open and transparent manner. We have
apologised to those impacted and are determined to put things
right.
Given our clear UK focus, our performance is inextricably linked
to the health of the UK economy. During 2019, UK economic
performance has remained resilient in the face of significant
political and economic uncertainty, supported by record employment,
low interest rates and rising real wages. Although uncertainty
remains given the ongoing negotiation of international trade
agreements, there is now a clearer sense of direction and we remain
well placed to Help Britain Prosper, support our customers and
deliver strong and sustainable returns for shareholders.
Financial performance
Statutory profit before tax of GBP4.4 billion was 26 per cent
lower than 2018 and earnings per share at 3.5 pence was down 36 per
cent, due to the PPI charge of GBP2.45 billion in 2019 (2018:
GBP0.75 billion). Underlying profit of GBP7.5 billion was down 7
per cent on 2018, reflecting continued revenue pressure and higher
impairments partly offset by lower total costs. Our relentless
focus on cost efficiency has led to a reduction in operating costs,
where we enhanced our guidance twice during 2019. This was achieved
whilst increasing strategic investment and our net promoter scores.
Our cost:income ratio improved again to 48.5 per cent. Credit
quality remains strong with the Group's net asset quality ratio of
29 basis points in line with the target of less than 30 basis
points, despite two material corporate cases.
Loans and advances decreased by GBP4 billion to GBP440 billion.
The acquisition of Tesco Bank's prime UK residential mortgage
portfolio, as well as organic growth in targeted segments including
SME and UK Motor Finance, was more than offset by continued
reductions in the closed mortgage book and lower balances in Mid
Markets and Global Corporates. The reduction in Commercial balances
is due to continued optimisation of the portfolio as we actively
address low risk-adjusted return relationships.
The Group is strongly capital generative, although this has been
impacted by PPI in 2019. Given our strong capital position at the
year end, the Board has recommended a final ordinary dividend of
2.25 pence per share, bringing the total ordinary dividend for the
year to 3.37 pence per share. This represents an increase of 5 per
cent on 2018 and is in line with our progressive and sustainable
ordinary dividend policy. The Group's capital position remains
strong with a pro forma CET1 ratio of 13.8 per cent after allowing
for ordinary dividends.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
Strategic progress
The Group's ambitious three year strategic plan was launched in
February 2018 and we are on track to achieve our targeted strategic
outcomes. We have made significant progress in transforming the
Group for success in a digital world and, in line with our
commitment to invest more than GBP3 billion over the period, have
invested GBP2 billion to date across our four strategic
pillars.
In addition to completing the third stage of our strategic plan,
in 2020 we will also begin to consider the next phase of our
journey. Work will begin at pace in the summer on the new strategic
plan, which we expect to announce in February 2021, along with
updated longer-term financial targets. This work will take into
account a wide range of factors, including the evolving external
environment, emerging changes across society and changing
expectations of how companies should respond to such
challenges.
Leading customer experience
We continue to believe that our customers' evolving needs are
best served through a multi-brand, multi-channel strategy. We
operate the UK's largest digital bank and are also committed to
maintaining the UK's largest branch network and delivering
personalised, data-driven customer propositions. We have continued
to develop our digital proposition and our market leading
digitally-active customer base increased again to 16.4 million, of
which 10.7 million are active on their mobile banking app. We have
also launched a range of new features that enable our customers to
be more in control of their finances, including the ability to
change address and search bank statements via the mobile app. While
we now originate 75 per cent of products digitally, we believe that
the branch network is vital for meeting our customers' complex
needs, and our customer-facing colleagues in branch now spend
around 50 per cent of their time doing this (up from 45 per cent in
2017). We maintain the largest branch network while trialling new
branch formats. In 2019 we opened our latest flagship Bank of
Scotland branch in Glasgow, and launched Home by Halifax, an
innovative store in London dedicated to supporting customers in
buying their homes. We are also using our deep understanding of our
diverse customer base to drive growth through tailored propositions
such as Club Lloyds and the Halifax Prize Draw, leveraging our
multi-brand business model.
Digitising the Group
Investment in technology remains a key strategic priority for
the Group and enables us to improve the experience of our customers
and colleagues. Technology spend now represents 19 per cent of
operating costs and having introduced the use of automation for
simple, repetitive tasks, we have now created over 1 million
cumulative hours of colleague capacity. Virtual assistants are
currently managing up to 5,000 customer conversations daily, with
customer satisfaction increasing by more than 10 points. In
addition, around 25 per cent of queries are handled without being
passed to a colleague, a trend that is expected to increase
further. These investments deliver a more efficient, scalable and
flexible infrastructure and underpin the continuous improvement of
our products and services for our customers' benefit. In enhancing
our capabilities and accelerating our transformation, we are
working in collaboration with a number of fintech providers and we
continue to monitor opportunities in this space. In Commercial
Banking we have launched a cash management and payments API which
allows clients to send faster payments directly from their systems
without human intervention and reducing payment times to 1.5
seconds. In addition, transformation has now covered around 55 per
cent of our cost base, up from just from 12 per cent at the end of
2017 and on track to achieve our GSR 3 target of 70 per cent by the
end of 2020.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
Maximising Group capabilities
We have continued to build on our Open Banking proposition,
which is available to all of our digital customers. Open Banking
launched for current accounts in 2018 and we were the first in the
market to extend this functionality to both savings products and
credit cards in 2019. In addition, our unique Single Customer View
capability, which enables customers to view all of the pension and
long-term savings that they hold with the Group alongside their
banking products, is now available to more than five million
customers. As the sole integrated UK banking and insurance
provider, this is a unique capability. In addition, within
Insurance and Wealth we have exceeded our goal of attracting over 1
million new pension customers, a year ahead of our original target.
We have also launched Schroders Personal Wealth to the market, with
the ambition of becoming a top three financial planning business by
end of 2023. We have continued to make progress towards the target
of growing open book assets under administration by GBP50 billion
by the end of 2020, with cumulative net growth of GBP37 billion
since 2018. In Commercial Banking, we have continued to invest in
the UK economy and over 900 manufacturing apprentices, graduates
and engineers have been trained since 2018 as a result of the GBP1
million annual investment in the Lloyds Bank Advanced Manufacturing
Centre. Commercial Banking has supported Insurance and Wealth by
sourcing GBP0.6 billion of new long-term assets to support 5 new
bulk annuity transactions.
Transforming ways of working
Our colleagues remain critical to our success and we are making
our biggest ever investment in people with a focus on ensuring that
we are able to continue to attract, develop and retain the talent
and capabilities we will need in the future. We have significantly
increased the 'skills of the future' training delivered to our
colleagues to a cumulative 3.2 million hours since 2018, putting us
well on track to meet our target of 4.4 million hours by the end of
the plan period. Related to this, around 33 per cent of change is
now delivered using Agile methodologies. We have also hired over
1,200 colleagues across critical areas such as engineering, data
science and cyber security, in line with our plan to treble
strategic hiring compared to 2018 and enabling the Group to reduce
the use of external resource.
Helping Britain Prosper Plan
We are committed to the long-term success of the UK with our
purpose of Helping Britain Prosper. This is why we launched our
Helping Britain Prosper Plan in 2014 which also underpins our
environmental, social and governance efforts. For 2019 we met 20
out of 22 objectives of the Plan, and some key achievements are
outlined below.
The Group is committed to helping customers to buy a home. In
2019 we lent GBP13.8 billion to first time buyers across the UK
including through innovative products like our Lloyds Bank Lend a
Hand and Halifax Family Boost mortgages. We have also increased net
lending to start-ups, SMEs and Mid Market customers to GBP3.4
billion since 2018 together with achieving our target of lending
GBP18 billion to UK businesses in 2019.
We are working hard to help people save for the future and in
2019 in partnership with Schroders, we launched Schroders Personal
Wealth. Our open book assets under administration have increased by
GBP37 billion since the start of the current strategic plan. More
generally, our banking savings range operates transparent pricing
for all, with customers able to upgrade their accounts online with
one click when better products become available.
The Group is committed to helping the UK transition to a
sustainable, low carbon economy. Over the last five years we have
raised over GBP2.8 billion in green bonds for UK corporate issuers,
more than any other UK financial services company. We have also
supported renewable energy projects that power the equivalent of
5.1 million homes.
As we look forward, we want to play our part in tackling climate
change and we have targeted working with our customers, government
and the market to help reduce the emissions we finance by more than
50 per cent by 2030, in line with the UK's Net Zero Goal and the
Paris Agreement. We are one of the first organisations in the world
to commit to all three of The Climate Group's ambitious
sustainability initiatives, which aim to speed up the transition to
a low carbon economy by committing to source 100 per cent of our
electricity from renewable sources, improve energy productivity and
transition to electric vehicles.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
The Group was the first FTSE100 company to establish targets for
championing diversity within its business and we now have 36.8 per
cent of senior roles held by women, up almost 8 percentage points
since 2014 and we continue to aim to meet our target of 40 per cent
by the end of 2020. With 10.2 per cent of roles across the Group
held by Black, Asian and Minority Ethnic (BAME) colleagues, we have
exceeded our 2020 target of 10 per cent.
We have also helped over 700,000 individuals, small businesses
and charities to develop digital skills in 2019 and we are on track
for our target of 1.8 million by 2020. Our Digital Knowhow
workshops have also helped thousands of organisations learn how to
avoid fraud and take advantage of digital marketing techniques.
Our colleagues have also taken an active role in supporting good
causes, including raising over GBP11 million for Mental Health UK
over a two year period, as well as volunteering 246,000 hours of
their time through our Day to Make a Difference initiative.
In addition, the Group has paid GBP2.9 billion tax in 2019 and
we are proud to be the largest corporate tax payer in the UK.
We have today issued a separate presentation on our approach to
environmental, social and governance issues, which can be found on
the Group's external website.
Outlook
Over 2019, UK economic performance has remained resilient in the
face of significant political and economic uncertainty, supported
by record employment, low interest rates and rising real wages.
Although uncertainty remains given the ongoing negotiation of
international trade agreements and the rate outlook remains
challenging, there is now a clearer sense of direction and we
remain well placed to Help Britain Prosper, support our customers
and deliver strong and sustainable returns for shareholders. The
Group's confidence in the business model and future performance is
reflected in our guidance for 2020:
-- Net interest margin of 2.75 to 2.80 per cent
-- Operating costs to be less than GBP7.7 billion with the cost:income ratio lower than in 2019
-- Net asset quality ratio expected to be less than 30 basis points
-- Capital build expected to be within the Group's ongoing
guidance range of 170 to 200 basis points per year and
risk-weighted assets to be broadly in line with 2019
-- Expect increased statutory return on tangible equity of 12 to
13 per cent, driven by resilient underlying profit and lower below
the line charges
The Group faces the future with confidence. As a result, we will
continue to target a progressive and sustainable ordinary dividend.
In 2020, the Group will also commence paying dividends quarterly,
accelerating payments to shareholders, with the first dividend
being paid in June 2020.
SUMMARY OF GROUP RESULTS
Solid financial performance
The Group's statutory profit after tax was GBP3,006 million, 33
per cent lower than in 2018 with resilient underlying profit partly
offset by the significant payment protection insurance (PPI) charge
of GBP2,450 million taken in the year. The statutory return on
tangible equity was 7.8 per cent.
Trading surplus was resilient at GBP8,822 million (2018:
GBP9,003 million) with lower net income partly offset by the
Group's continued progress in delivering cost reductions.
Underlying profit was GBP7,531 million compared to GBP8,066 million
in 2018, reflecting lower net income and higher impairment charges,
partly offset by the Group's strong cost performance. The Group's
market-leading underlying return on tangible equity was 14.8 per
cent.
The Group's balance sheet remains strong with lending growth in
the open mortgage book as well as targeted segments, including SME
and UK Motor Finance. This was more than offset by lower balances
in Mid Markets and Global Corporates, primarily as a result of the
optimisation of the Commercial portfolio, as well as continued
reductions in the closed mortgage book. The Group's capital
position remains strong with a pro forma CET1 ratio of 15.0 per
cent pre dividend accrual and 13.8 per cent post dividend.
The Group is strongly capital generative and although this has
been impacted by PPI in 2019, the Board has recommended a final
ordinary dividend of 2.25 pence per share, making a total ordinary
dividend of 3.37 pence per share, an increase of 5 per cent on 2018
and in line with our progressive and sustainable ordinary dividend
policy.
Net income
2019 2018 Change
GBPm GBPm %
Net interest income 12,377 12,714 (3)
---------- ----------
Other income excluding Vocalink gain on sale 5,682 6,010 (5)
Vocalink gain on sale 50 -
---------- ----------
Other income 5,732 6,010 (5)
Operating lease depreciation(1) (967) (956) (1)
---------- ----------
Net income 17,142 17,768 (4)
---------- ----------
Banking net interest margin 2.88% 2.93% (5)bp
Average interest-earning banking assets GBP434.7bn GBP436.0bn -
Net of profits on disposal of operating lease assets of GBP41 million
(1) (2018: GBP60 million).
Net income of GBP17,142 million was 4 per cent lower than in
2018, reflecting lower net interest income and other income, while
operating lease depreciation increased by 1 per cent.
Net interest income of GBP12,377 million was down 3 per cent
with a slightly lower net interest margin and stable average
interest-earning banking assets. Net interest margin reduced in
line with guidance to 2.88 per cent, with the benefit of lower
deposit costs, higher Retail current account balances and a benefit
from aligning credit card terms, more than offset by continued
pressure on asset margins, particularly in the mortgage market.
Average interest-earning banking assets at GBP434.7 billion were
stable, with growth in targeted segments, in particular SME (GBP0.3
billion) and UK Motor Finance (GBP1.4 billion), more than offset by
lower balances in the closed mortgage book (GBP2.5 billion) and the
effect of the sale of the Irish mortgage portfolio in the first
half of 2018 (GBP1.6 billion).
SUMMARY OF GROUP RESULTS (continued)
The Group manages the risk to its earnings and capital from
movements in interest rates centrally by hedging the net
liabilities which are stable or less sensitive to movements in
rates. As at 31 December 2019 the Group's structural hedge had a
nominal balance of GBP179 billion (31 December 2018: GBP180
billion) and an average duration of around three years (31 December
2018: around four years). The Group generated GBP2.7 billion of
income from the structural hedge balances in 2019 (2018: GBP2.7
billion). Within this, the benefit from the hedge in the year was
GBP1.1 billion over LIBOR (2018: GBP1.4 billion) with a fixed
earnings rate of approximately 0.7 per cent over LIBOR (2018: 0.7
per cent).
Other income at GBP5,732 million decreased by 5 per cent with
healthy growth in new business in Insurance and Wealth more than
offset by lower other income in Commercial Banking and Retail.
Insurance and Wealth continued to perform well reflecting growth in
workplace pensions new business from increased auto enrolment
contributions in the first half of 2019 and higher general
insurance income, net of claims. Insurance and Wealth other income
also includes the benefit from the change in investment management
provider taken in the first half of 2019 and longevity assumption
change benefits. Commercial Banking was impacted by more subdued
levels of client activity given challenging external conditions
particularly in large corporate markets and Retail other income was
impacted by a lower Lex fleet size. Other income includes a gain of
GBP185 million on the sale of GBP8 billion of gilts and other
liquid assets, compared with a GBP270 million gain on sale of such
assets in 2018.
Operating lease depreciation increased by 1 per cent reflecting
some weakening in used car prices through the first three quarters
of 2019, partly offset by a lower fleet size.
Total costs
2019 2018 Change
GBPm GBPm %
Operating costs 7,875 8,165 4
Remediation 445 600 26
------ ------
Total costs 8,320 8,765 5
------ ------
Business as usual costs(1) 5,478 5,836 6
Cost:income ratio 48.5% 49.3% (0.8)pp
2018 Business as usual costs are adjusted to reflect the impact
(1) of applying IFRS 16. Excluding the impact of IFRS 16 business as
usual costs in 2018 were GBP6,048 million.
Total costs of GBP8,320 million were 5 per cent lower than in
2018, driven by the reduction in both operating costs and
remediation charges.
Operating costs of GBP7,875 million were 4 per cent lower with a
6 per cent reduction in business as usual costs, largely driven by
increased efficiency from digitalisation and process improvements,
in parallel with strategic investment of GBP1.0 billion in the
business, up 6 per cent in the year. During 2019 the Group
capitalised around GBP1.5 billion of investment spend, of which
around GBP1.0 billion related to intangible assets. Total
capitalised spend was equivalent to around 60 per cent of above the
line investment, in line with 2018.
Remediation charges of GBP445 million, including additional
charges of GBP219 million in the fourth quarter of 2019 relating to
a number of items across existing programmes, were significantly
lower than the GBP600 million in 2018.
The Group's market-leading cost:income ratio continues to
provide a competitive advantage and further strengthened to 48.5
per cent with positive jaws of 1 per cent.
The Group expects operating costs in 2020 to be less than GBP7.7
billion with the cost:income ratio lower than in 2019.
SUMMARY OF GROUP RESULTS (continued)
Impairment
2019 2018 Change
GBPm GBPm %
Impairment charge 1,291 937 (38)
Asset quality ratio 0.29% 0.21% 8bp
Gross asset quality ratio 0.37% 0.28% 9bp
At 31 Dec At 31 Dec
2019(1) 2018(1)
% % Change
Stage 2 loans and advances to customers as % of total 7.7 7.8 (0.1)pp
Stage 2 ECL(2) allowances as % of Stage 2 drawn balances 3.7 4.1 (0.4)pp
Stage 3 loans and advances to customers as a % of total 1.8 1.9 (0.1)pp
Stage 3 ECL(2) allowances as % of Stage 3 drawn balances 22.5 24.3 (1.8)pp
Total ECL(2) allowances as % of drawn balances 0.8 0.9 (0.1)pp
Underlying basis.
(1)
Expected credit loss.
(2)
Credit quality remains strong with a net asset quality ratio of
29 basis points and a gross asset quality ratio of 37 basis points
compared with 21 basis points and 28 basis points respectively in
2018. The impairment charge increased to GBP1,291 million with the
increase primarily driven by two material corporate cases in
Commercial Banking, along with some weakening in used car prices in
Black Horse.
The Group's loan portfolios continue to be well positioned,
reflecting the Group's prudent, through the cycle approach to
credit risk, and benefiting from continued low interest rates and a
resilient UK economy.
Overall credit performance in the secured book remains strong
with the average mortgage loan to value increasing slightly to 44.9
per cent (31 December 2018: 44.3 per cent). New business average
loan to value was 64.3 per cent and 88 per cent of the portfolio
has a loan to value ratio of less than 80 per cent. New to arrears
as a proportion of the total book remains low in both the secured
and unsecured books. In Commercial Banking, the book continues to
benefit from low interest rates and effective risk management,
including a prudent approach to vulnerable sectors.
The Group's outlook and IFRS 9 base case economic scenario used
to calculate expected credit loss (ECL) have remained broadly
stable throughout 2019, reflecting an orderly exit of the UK from
the European Union. During 2019 the Group made small improvements
to its economic scenario modelling. The Group's ECL allowance
continues to reflect a probability-weighted view of future economic
scenarios including a 30 per cent weighting of downside and a 10
per cent weighting of severe downside.
Stage 2 loans and advances to customers as a proportion of total
lending reduced by 0.1 percentage points to 7.7 per cent, whilst
Stage 3 loans and advances fell by the same amount to 1.8 per cent.
The Group's coverage of Stage 2 assets reduced by 0.4 percentage
points to 3.7 per cent, reflecting a number of model refinements,
including an enhanced approach to loan amortisation in the
Commercial Banking portfolio. Coverage of Stage 3 assets reduced by
1.8 percentage points to 22.5 per cent largely as a result of the
improved performance of mortgage cases in long-term default, and a
change in the mix of Commercial assets due to a combination of
write-offs and the transfer in of cases with lower likelihood of
net loss. The Group's total underlying ECL at 31 December 2019 was
GBP4.2 billion and broadly stable compared to prior year (31
December 2018: GBP4.4 billion). Total ECL allowances as a
percentage of drawn balances fell slightly to 0.8 per cent. The
Group expects the 2020 net asset quality ratio to be less than 30
basis points.
SUMMARY OF GROUP RESULTS (continued)
Statutory profit
2019 2018 Change
GBPm GBPm %
Underlying profit 7,531 8,066 (7)
Restructuring (471) (879) 46
Volatility and other items
-------- --------
Market volatility and asset sales 126 (50)
Amortisation of purchased intangibles (68) (108) 37
Fair value unwind and other (275) (319) 14
-------- --------
(217) (477) 55
Payment protection insurance provision (2,450) (750)
-------- --------
Statutory profit before tax 4,393 5,960 (26)
Tax expense(1) (1,387) (1,454) 5
-------- --------
Statutory profit after tax(1) 3,006 4,506 (33)
-------- --------
Earnings per share 3.5p 5.5p (36)
Return on tangible equity 7.8% 11.7% (3.9)pp
Comparatives restated to reflect amendments to IAS12, see basis
(1) of presentation.
Further information on the reconciliation of underlying to statutory results is included on
page 24.
The Group's statutory profit after tax was GBP3,006 million, 33
per cent lower than in 2018 with resilient underlying profit partly
offset by the PPI charge. The return on tangible equity was 7.8 per
cent (2018: 11.7 per cent) and earnings per share was 3.5 pence
(2018: 5.5 pence).
Restructuring costs of GBP471 million were down 46 per cent,
primarily reflecting the completion of both the integration of MBNA
and the ring-fencing programme, which were partially offset by
costs associated with establishing the Schroders Personal Wealth
joint venture.
Market volatility and asset sales of GBP126 million included
adverse movements in banking volatility, a gain on the
establishment of the Schroders Personal Wealth joint venture as
well as the one-off charge for exiting the Standard Life Aberdeen
investment management agreement taken in the first half of 2019. In
2018 market volatility and asset sales included a loss on sale of
the Irish mortgage portfolio and an adjustment to past service
pension liability.
The decrease in amortisation of purchased intangibles to GBP68
million (2018: GBP108 million) and fair value unwind and other
items to GBP275 million (2018: GBP319 million) were driven by a
number of assets fully amortising in 2018 and the run down of the
subordinated liabilities acquired during the HBOS acquisition.
The PPI provision charge of GBP2,450 million was largely due to
the significant increase in PPI information requests (PIRs) leading
up to the deadline for submission of claims on 29 August 2019, and
also reflects costs relating to complaints received from the
Official Receiver as well as administration costs. An initial
review of around 60 per cent of the five million PIRs received in
the run-up to the PPI deadline has been undertaken, with the
conversion rate remaining low, and consistent with the provision
assumption of around 10 per cent. The Group has also reached final
agreement with the Official Receiver. The unutilised provision at
31 December 2019 was GBP1,578 million.
SUMMARY OF GROUP RESULTS (continued)
Taxation
The tax expense was GBP1,387 million (2018: GBP1,454 million)
representing an effective tax rate of 32 per cent (2018: 24 per
cent). This reflected the increase in non-deductible conduct
provision charges in relation to PPI, partially offset by the
release of a deferred tax liability.
The Group continues to expect a medium term effective tax rate
around 25 per cent, although this is likely to be lower in 2020 if
the UK's corporate tax rate remains unchanged, given a revaluation
of the Group's deferred tax assets.
Return on tangible equity
The underlying return on tangible equity was 14.8 per cent,
primarily reflecting resilient underlying profit and slightly lower
average tangible equity. The statutory return on tangible equity
was 7.8 per cent and was impacted by PPI.
In 2020, the Group expects an increased statutory return on
tangible equity of 12 to 13 per cent, driven by resilient
underlying profit and lower below the line charges.
Balance sheet
At 31 Dec At 31 Dec Change
2019 2018 %
Loans and advances to customers(1) GBP440bn GBP444bn (1)
Customer deposits(2) GBP412bn GBP416bn (1)
Loan to deposit ratio 107% 107% -
Wholesale funding GBP128bn GBP123bn 4
Wholesale funding <1 year maturity GBP43bn GBP33bn 31
Of which money-market funding <1 year maturity (3) GBP22bn GBP21bn 5
Liquidity coverage ratio - eligible assets(4) GBP131bn GBP126bn 4
Liquidity coverage ratio(5) 137% 128% 9pp
Excludes reverse repos of GBP54.6 billion (31 December 2018: GBP40.5
(1) billion).
Excludes repos of GBP9.5 billion (31 December 2018: GBP1.8 billion).
(2)
Excludes balances relating to margins of GBP4.2 billion (31 December
(3) 2018: GBP3.8 billion) and settlement accounts of GBP1.9 billion
(31 December 2018: GBP1.2 billion).
Eligible assets are calculated as a simple average of month end
(4) observations over the previous 12 months.
The Liquidity coverage ratio is calculated as a simple average
(5) of month end observations over the previous 12 months
Loans and advances to customers were GBP440 billion (31 December
2018: GBP444 billion). Growth in the open mortgage book and
targeted segments including SME and Motor Finance, was more than
offset by continued reductions in the closed mortgage book and
lower balances in Mid Markets and Global Corporates. Commercial
Banking has continued to optimise its portfolio in challenging
market conditions, maintaining a strong focus on risk-weighted
asset reduction and actively addressing low risk-adjusted returning
client relationships. In line with the Group's expectations, the
open mortgage book grew by GBP3.5 billion driven by the acquisition
of Tesco Bank's UK prime residential mortgage portfolio and was
broadly flat excluding the acquisition.
The Group continues to optimise funding and target current
account balance growth, with Retail current accounts up 4 per cent
at GBP76.9 billion (31 December 2018: GBP73.7 billion). The loan to
deposit ratio was flat at 107 per cent.
Wholesale funding increased by 4 per cent to GBP128 billion (31
December 2018: GBP123 billion) in part as a result of refinancing
Funding for Lending Scheme maturities in the year. The proportion
maturing in less than one year increased by 31 per cent to GBP43.4
billion (31 December 2018: GBP33.1 billion) due to higher term
funding maturities in 2020. The Group's liquidity position
continues to exceed the regulatory minimum and internal risk
appetite.
SUMMARY OF GROUP RESULTS (continued)
Capital
At 31 Dec At 31 Dec Change
2019 2018 %
Capital build(1) 86bp 210bp (124)bp
Pro forma CET1 ratio(2) 13.8% 13.9% (0.1)pp
CET1 ratio 13.6% 14.6% (1.0)pp
Pro forma transitional total capital ratio(2) 21.5% 23.1% (1.6)pp
Pro forma transitional MREL ratio(2) 32.6% 32.6% -
Pro forma UK leverage ratio(2) 5.2% 5.6% (0.4)pp
Pro forma risk-weighted assets(2) GBP203bn GBP206bn (1)
Shareholders' equity GBP42bn GBP43bn (4)
Tangible net assets per share 50.8p 53.0p (2.2)p
Capital build is reported on a pro forma basis, reflecting the
(1) dividend paid up by the Insurance business in the subsequent first
quarter period and is also reported before accruing for ordinary
dividends, the cancellation of the remaining 2019 share buyback
and the acquisition of Tesco Bank's UK prime residential mortgage
portfolio.
The CET1, total, MREL, leverage ratios and risk-weighted assets
(2) at 31 December 2019 and 31 December 2018 are reported on a pro
forma basis, reflecting the dividend paid up by the Insurance business
in the subsequent first quarter period. The pro forma CET1 ratio
at 31 December 2018 incorporates the effects of the share buyback
announced in February 2019 and is reported post dividend accrual.
The Group's capital position remains strong with the pro forma
CET1 capital ratio increasing to 15.0 per cent pre dividend
accrual. After accruing 123 basis points for the ordinary dividend,
the pro forma CET1 ratio stands at 13.8 per cent.
A summary of the CET1 capital build is set out in the table
below.
Pro forma CET1 ratio at 31 December 2018 13.9%
------
Banking business underlying capital build (bps) 180
Insurance dividends (bps) 18
Impact from the implementation of IFRS 16 on risk-weighted assets (bps) (11)
RWA and other movements (bps) 20
------
207
PPI charge (bps) (121)
------
86
Cancellation of the remaining 2019 share buyback programme (bps) 34
Capital used for the acquisition of the Tesco Bank's mortgage portfolio (bps) (9)
Ordinary dividend accrual (bps) (123)
------
Pro forma CET1 ratio at 31 December 2019 13.8%
------
The Group's CET1 capital build in the year amounted to 207 basis
points before PPI, and to 86 basis points after the in-year PPI
charge, equivalent to 121 basis points. Solid financial performance
has driven underlying capital build of 198 basis points, including
18 basis points from the dividend from the Insurance business.
Capital build also included 20 basis points from favourable
risk-weighted asset and other movements (reflecting market
movements and the continued optimisation of Commercial Banking
risk-weighted assets, net of additional pension contributions and
model updates), partly offset by the 11 basis points impact of IFRS
16. The Group's capital position also benefitted by 34 basis points
from the cancellation of the remaining c. GBP650 million of the
2019 buyback programme, as announced in September 2019. The Group
used 9 basis points of capital for the acquisition of Tesco Bank's
UK prime residential mortgage portfolio.
SUMMARY OF GROUP RESULTS (continued)
During 2019 the Prudential Regulation Authority (PRA) reduced
the Group's Pillar 2A CET1 requirement from 2.7 per cent to 2.6 per
cent. Separately, the Financial Policy Committee of the Bank of
England announced an increase in the Countercyclical Capital Buffer
(CCYB) rate for the UK from 1.0 per cent to 2.0 per cent, effective
from December 2020. During 2020 the PRA will consult on a proposed
reduction in Pillar 2A total capital requirements by 50 per cent of
this increase in the CCYB, equivalent to reducing the Pillar 2A
CET1 requirement by 28 per cent of the increase. Taking into
account the current and potential future changes to capital
requirements, the Board's view of the ongoing level of CET1 capital
required by the Group to grow the business, meet regulatory
requirements and cover uncertainties continues to be c.12.5 per
cent plus a management buffer of c.1 per cent.
The transitional total capital ratio reduced to 21.5 per cent on
a pro forma basis (31 December 2018: 23.1 per cent) and the Group's
transitional minimum requirement for own funds and eligible
liabilities (MREL), which came into force on 1 January 2020, is
32.6 per cent on pro forma basis (31 December 2018: 32.6 per cent).
The UK leverage ratio remains strong at 5.2 per cent on a pro forma
basis.
Risk-weighted assets on a pro forma basis have reduced by GBP3.0
billion to GBP203.4 billion driven primarily by the optimisation of
the Commercial Banking portfolio , offset in part by model updates
in mortgages, the implementation of IFRS 16 and the acquisition of
Tesco Bank's mortgage portfolio. We now expect risk-weighted assets
at the end of 2020 to be broadly in line with the end of 2019,
including regulatory headwinds.
Tangible net assets per share reduced by 2.2 pence in 2019 to
50.8 pence (31 December 2018: 53.0 pence) with the effects of the
Group's statutory profit after tax and positive cash flow hedge
movements being more than offset by dividends paid in 2019, the
revaluation of the Group's retirement benefit obligations, the
effects of the share buyback and other reserve movements.
Dividend
The Group has a progressive and sustainable ordinary dividend
policy whilst maintaining the flexibility to return surplus capital
through buybacks or special dividends.
Given the solid financial performance in 2019, the Board has
recommended a final ordinary dividend of 2.25 pence per share. This
is in addition to the interim ordinary dividend of 1.12 pence per
share that was announced in the 2019 half year results. The
recommended total ordinary dividend per share for 2019 is therefore
3.37 pence per share and has increased by 5 per cent from 3.21
pence per share in 2018.
The Group has announced that it will move to the payment of
quarterly dividends in 2020, with the first quarterly dividend in
respect of the first quarter of 2020 payable in June 2020. The new
approach will be to adopt three equal interim ordinary dividend
payments for the first three quarters of the year followed by,
subject to performance, a larger final dividend for the fourth
quarter of the year. The first three quarterly payments, payable in
June, September and December will be 20 per cent of the previous
year's total ordinary dividend per share. The fourth quarter
payment will be announced with the full year results, with the
amount continuing to deliver a full year dividend payment that
reflects the Group's financial performance and its objective of a
progressive and sustainable ordinary dividend. The final dividend
will continue to be paid in May, following approval at the AGM. The
Group believes that this approach will provide a more regular flow
of dividend income to all shareholders whilst accelerating the
receipt of payments.
SEGMENTAL ANALYSIS - UNDERLYING BASIS
2019
Commercial Insurance Central
Retail Banking and Wealth items Group
GBPm GBPm GBPm GBPm GBPm
Net interest income 8,807 2,918 112 540 12,377
Other income 2,014 1,422 2,021 275 5,732
Operating lease depreciation (946) (21) - - (967)
---------- ---------- ---------- --------- ----------
Net income 9,875 4,319 2,133 815 17,142
---------- ---------- ---------- --------- ----------
Operating costs (4,760) (2,081) (982) (52) (7,875)
Remediation (238) (155) (50) (2) (445)
---------- ---------- ---------- --------- ----------
Total costs (4,998) (2,236) (1,032) (54) (8,320)
---------- ---------- ---------- --------- ----------
Trading surplus 4,877 2,083 1,101 761 8,822
Impairment (1,038) (306) - 53 (1,291)
---------- ---------- ---------- --------- ----------
Underlying profit 3,839 1,777 1,101 814 7,531
---------- ---------- ---------- --------- ----------
Banking net interest margin 2.63% 3.14% 2.88%
Average interest-earning banking assets GBP341.6bn GBP92.2bn GBP0.9bn - GBP434.7bn
Asset quality ratio 0.30% 0.30% 0.29%
Return on risk-weighted assets 3.99% 2.14% 3.65%
Loans and advances to customers(1) GBP342.3bn GBP95.5bn GBP0.9bn GBP1.7bn GBP440.4bn
Customer deposits(2) GBP252.1bn GBP145.1bn GBP13.7bn GBP0.9bn GBP411.8bn
Risk-weighted assets GBP98.4bn GBP77.4bn GBP1.3bn GBP26.3bn GBP203.4bn
2018
Commercial Insurance Central
Retail(3) Banking(3) and Wealth items(3) Group
GBPm GBPm GBPm GBPm GBPm
Net interest income 9,060 3,013 123 518 12,714
Other income 2,097 1,670 1,865 378 6,010
Operating lease depreciation (921) (35) - - (956)
---------- ---------- ---------- --------- ----------
Net income 10,236 4,648 1,988 896 17,768
---------- ---------- ---------- --------- ----------
Operating costs (4,897) (2,191) (1,021) (56) (8,165)
Remediation (267) (203) (39) (91) (600)
---------- ---------- ---------- --------- ----------
Total costs (5,164) (2,394) (1,060) (147) (8,765)
---------- ---------- ---------- --------- ----------
Trading surplus 5,072 2,254 928 749 9,003
Impairment (861) (71) (1) (4) (937)
---------- ---------- ---------- --------- ----------
Underlying profit 4,211 2,183 927 745 8,066
---------- ---------- ---------- --------- ----------
Banking net interest margin 2.68% 3.27% 2.93%
Average interest-earning banking assets GBP342.3bn GBP91.2bn GBP0.8bn GBP1.7bn GBP436.0bn
Asset quality ratio 0.25% 0.06% 0.21%
Return on risk-weighted assets 4.57% 2.50% 3.86%
Loans and advances to customers(1) GBP340.1bn GBP100.4bn GBP0.9bn GBP3.0bn GBP444.4bn
Customer deposits(2) GBP252.8bn GBP148.6bn GBP14.1bn GBP0.8bn GBP416.3bn
Risk-weighted assets GBP93.5bn GBP86.5bn GBP1.2bn GBP25.2bn GBP206.4bn
Excludes reverse repos.
(1)
Excludes repos.
(2)
Prior period segmental comparatives restated. See basis of presentation.
(3)
DIVISIONAL RESULTS
RETAIL
Retail offers a broad range of financial service products to
personal and business banking customers, including current
accounts, savings, mortgages, credit cards, unsecured loans, motor
finance and leasing solutions. Its aim is to be the best bank for
customers in the UK, by building deep and enduring relationships
that deliver value, and by providing customers with choice and
flexibility, with propositions increasingly personalised to their
needs. Retail operates a multi-brand and multi-channel strategy. It
continues to simplify its business and provide more transparent
products, helping to improve service levels and reduce conduct
risks, whilst working within a prudent risk appetite.
Progress against strategic priorities
Leading customer experience
-- UK's largest digital bank with 16.4 million active digital
customers and 10.7 million mobile banking app customers, with
average customer logons at 23 times per month and 75 per cent of
new products now originated digitally
-- Maintained the largest UK branch network while trialling new
branch formats with the latest flagship Bank of Scotland branch in
Glasgow, and Home by Halifax, an innovative store dedicated to
supporting customers purchase a property
-- Branch net promoter score up 5 points with around 50 per cent
of customer facing time being spent on complex needs
-- Supporting first time buyers with further GBP13.8 billion of
lending, building on success of Lloyds Lend a Hand mortgage,
launched Halifax Family Boost mortgage, providing customers'
financial supporters with enhanced savings rates
-- Encouraging customers to talk more openly about their
finances, through the launch of the M Word campaign earlier this
year and co-funding a brand new television series with Channel 4
called 'Save Well, Spend Better'
-- Reduced complaints (excluding PPI) by 13 per cent in 2019 and
mobile app NPS increased 3 per cent since 2017
Digitising the Group
-- Recognised for innovations by being first in the Business
Insider mobile banking study, with recent updates including;
- Push notification alerts helping to plan ahead with upcoming
payment reminders and confirmations
- Statement search helping customers find transactions quicker
and easier, with c.300,000 searches per week
-- Remote mortgage applications up 30 per cent, with re-mortgage
applications starting digitally up 50 per cent in value
Maximising Group capabilities
-- Acquired Tesco Bank's UK prime residential mortgage book supporting 23,000 new customers
-- Completed the integration of MBNA, realising a return on
investment of 18 per cent, ahead of original target
-- Renewed the successful Jaguar Land Rover relationship(1)
Transforming ways of working
-- Continued progress in 'skills of the future' training
delivered to colleagues with over 750,000 additional hours in
2019
Financial performance
-- Net interest income was 3 per cent lower due to a 5 basis
point reduction in net interest margin with continued pressure on
mortgages margin, partly offset by lower funding costs and a
benefit from aligning credit card terms
-- Other income reduced 4 per cent reflecting a lower Lex fleet
size. Operating lease depreciation includes an associated benefit,
more than offset by some weakening in used car prices through the
first three quarters of 2019
-- Operating costs reduced 3 per cent, as increased investment
in the business was more than offset by efficiency savings.
Remediation decreased 11 per cent to GBP238 million
-- Impairment increased 21 per cent, with some weakening in used
car prices, methodology refinements and lower cash recoveries
following prior year debt sales, while underlying drivers remain
strong, particularly in the mortgage book
-- Customer lending increased by 1 per cent with the acquisition
of Tesco Bank's mortgage portfolio and growth in UK Motor Finance,
partly offset by closed book mortgages. Organic open mortgage
balances remained flat year on year
-- Customer deposits include current account growth, stable
relationship savings and reduced low margin tactical savings
-- Risk-weighted assets increased by 5 per cent mainly driven by
mortgage model refinements and the Tesco acquisition
Subject to contract.
(1)
Retail performance summary
2019 2018(1) Change
GBPm GBPm %
Net interest income 8,807 9,060 (3)
Other income 2,014 2,097 (4)
Operating lease depreciation (946) (921) (3)
---------- ----------
Net income 9,875 10,236 (4)
---------- ----------
Operating costs (4,760) (4,897) 3
Remediation (238) (267) 11
---------- ----------
Total costs (4,998) (5,164) 3
---------- ----------
Trading surplus 4,877 5,072 (4)
Impairment (1,038) (861) (21)
---------- ----------
Underlying profit 3,839 4,211 (9)
---------- ----------
Banking net interest margin 2.63% 2.68% (5)bp
Average interest-earning banking assets GBP341.6bn GBP342.3bn -
Asset quality ratio 0.30% 0.25% 5bp
Return on risk-weighted assets 3.99% 4.57% (58)bp
At 31 Dec At 31 Dec
2019 2018 Change
GBPbn GBPbn %
Open mortgage book 270.1 266.6 1
Closed mortgage book 18.5 21.2 (13)
Credit cards 17.7 18.1 (2)
UK unsecured loans 8.4 7.9 6
UK Motor Finance 15.6 14.6 7
Business Banking 1.7 1.8 (6)
Overdrafts 1.3 1.3 -
Other(2) 9.0 8.6 5
--------- ---------
Loans and advances to customers 342.3 340.1 1
Operating lease assets 4.3 4.7 (9)
--------- ---------
Total customer assets 346.6 344.8 1
--------- ---------
Current Accounts 76.9 73.7 4
Relationship savings(3) 161.9 162.3 -
Tactical savings 13.3 16.8 (21)
--------- ---------
Customer deposits 252.1 252.8 -
--------- ---------
Risk-weighted assets 98.4 93.5 5
Prior period comparatives restated. See basis of presentation.
(1)
Includes Europe and run-off.
(2)
Includes Business Banking.
(3)
COMMERCIAL BANKING
Commercial Banking has a client-led, low risk, capital efficient
strategy committed to supporting UK-based clients and international
clients with a link to the UK. Through its segmented client
coverage model, it provides clients with a range of products and
services such as lending, transaction banking, working capital
management, risk management and debt capital markets. Continued
investment in capabilities and digital propositions enables the
delivery of a leading customer experience, supported by
increasingly productive relationship managers, with more time spent
on value-adding activity.
Progress against strategic priorities
Leading customer experience
-- 95 per cent of SME and Mid Market clients migrated onto
Commercial Banking Online platform with customers now having 24/7
access to their accounts, and 5 years of transaction history. The
platform sees around 130,000 payments processed every day and
around 1.2 million log ons per month
-- Awarded 'Business Bank of the Year' at the FDs' Excellence
Awards for the 15(th) consecutive year
Digitising the Group
-- Cash management and payments API launched, allowing clients
to send faster payments directly from their systems without human
intervention and reducing payment times to 1.5 seconds
-- Launched Asset Finance Broker API, linking new business
proposals directly from broker to Group, reducing manual
intervention by 87 per cent, enabling quicker and more accurate
credit decisions with real-time updates
-- Improved eTrading capability, enabling larger clients to undertake foreign exchange trades electronically 24 hours per day across multiple geographies and supporting clients in automating their businesses
Maximising Group capabilities
-- Achieved the committed GBP18 billion gross new lending to UK
businesses; a further GBP18 billion committed for 2020
-- On track to meet the Group's target of GBP3 billion of
investment in the UK manufacturing sector by the end of 2020
-- Over 900 manufacturing apprentices, graduates and engineers
trained since 2018 as a result of the GBP1 million annual
investment in the Lloyds Bank Advanced Manufacturing Centre
-- Beat the sustainability target of supporting energy efficient
improvements for a further one million square feet of commercial
real estate in 2019 and have supported renewable energy projects
capable of powering 5 million homes by the end of 2019
Transforming ways of working
-- Completed rollout of the SME Business Lending Tool, freeing
up relationship manager time for increased client engagement, and
new auto-credit decisioning capability with around 25 per cent of
SME annual renewals now automated
-- Continued progress in developing colleagues with the skills
and capabilities needed for the future, with 210,000 colleague
training hours completed in 2019, exceeding the year-end target
Financial performance
-- In challenging market conditions, maintained a strong focus
on risk-weighted asset (RWA) optimisation and actively addressed
low returning client relationships, delivering a significant
reduction in RWA of over GBP9 billion
-- Net interest income of GBP2,918 million reduced 3 per cent,
reflecting asset margin pressure
-- Other income of GBP 1,422 million was 15 per cent lower than
in 2018, driven by lower levels of client activity in challenging
market conditions in Global Corporates and Financial
Institutions
-- Operating costs of GBP2,081 million reduced 5 per cent, as
increased investment in the business was more than offset by
continued focus on efficiency savings
-- Asset quality ratio of 30 basis points was 24 basis points
higher, largely driven by material charges raised against two
corporate cases, with stable underlying portfolio trends
-- Return on risk-weighted assets of 2.14 per cent was 36 basis
points lower, despite the acceleration of risk-weighted asset
optimisation in the second half, driven by two material corporate
impairment charges
-- SME lending balances up c.1 per cent, continuing to grow slightly ahead of the market
-- Customer deposits at GBP145.1 billion, down 2 per cent,
reflecting funding optimisation activity including a reduction in
short-term financial institutions deposits with growth in current
accounts of 3 per cent in the second half of the year
Commercial Banking performance summary
2019 2018(1) Change
GBPm GBPm %
Net interest income 2,918 3,013 (3)
Other income 1,422 1,670 (15)
Operating lease depreciation (21) (35) 40
--------- ---------
Net income 4,319 4,648 (7)
--------- ---------
Operating costs (2,081) (2,191) 5
Remediation (155) (203) 24
--------- ---------
Total costs (2,236) (2,394) 7
--------- ---------
Trading surplus 2,083 2,254 (8)
Impairment (306) (71)
--------- ---------
Underlying profit 1,777 2,183 (19)
--------- ---------
Banking net interest margin 3.14% 3.27% (13)bp
Average interest-earning banking assets GBP92.2bn GBP91.2bn 1
Asset quality ratio 0.30% 0.06% 24bp
Return on risk-weighted assets 2.14% 2.50% (36)bp
At 31 Dec At 31 Dec
2019 2018 Change
GBPbn GBPbn %
SME 30.4 30.0 1
Mid Markets(2) 29.1 31.7 (8)
Global Corporates and Financial Institutions 30.8 34.4 (10)
Other 5.2 4.3 21
--------- ---------
Loans and advances to customers 95.5 100.4 (5)
--------- ---------
SME including Retail Business Banking 32.1 31.8 1
Customer deposits 145.1 148.6 (2)
Current accounts including Retail Business Banking 34.9 34.9 -
Other deposits including Retail Business Banking 127.6 130.1 (2)
Risk-weighted assets 77.4 86.5 (11)
Prior period comparatives restated. See basis of presentation.
(1)
Includes Mid Corporates (31 December 2019: GBP5.3 billion; 31 December
(2) 2018: GBP5.8 billion).
INSURANCE AND WEALTH
Insurance and Wealth offers insurance, investment and wealth
management products and services. It supports over 10 million
customers with assets under administration of GBP170 billion and
annualised annuity payments in retirement of over GBP1 billion. The
Group continues to invest significantly in the development of the
business, with the aims of capturing considerable opportunities in
pensions and financial planning, offering customers a single home
for their banking and insurance needs and driving growth across
intermediary and relationship channels through a strong
distribution model.
Progress against strategic priorities
Leading customer experience
-- Scottish Widows now offers its standard annuities on the open
market allowing a wider range of customers to access the product
and secure income for retirement. Aiming to achieve a 15 per cent
market share by end of 2020
-- Successful migration of around 400,000 policies from a number
of legacy systems to a single platform managed by the Group's
partner Diligenta, enabling customers to better manage their
policies with Scottish Widows
-- New 'Plan and Protect' life and critical illness cover
launched in 2019 helps create financially resilient families by
understanding their needs and protecting what matters most,
providing a safety net if the worst happens
-- Scottish Widows won 5 star service awards at the Financial
Adviser Service Awards for the fourth consecutive year
Digitising the Group
-- Significant progress on Single Customer View, with home
insurance and individual pension customers added in 2019. Over 5
million customers now able to access their insurance products
alongside their bank account
-- Addressing an underserved customer need for home contents
insurance for renters through a partnership with the fintech firm
Trov. New online low cost product offers a flexible on-demand
monthly subscription policy
Maximising Group capabilities
-- Schroders Personal Wealth launched with ambition of becoming
a top 3 financial planning business by end of 2023
-- Provided new functionality and customer choice in general
insurance with full rollout in the last quarter of a flexible,
multi-channel home insurance product offering to the branch
network
-- Continued progress towards target of growing open book assets
under administration by GBP50 billion by the end of 2020, with
strong customer net inflows of GBP18 billion (including Zurich
transfer) in 2019. Cumulative net inflows of GBP30 billion and
market movements give overall growth of GBP37 billion since the
start of the current strategic plan in 2018
-- Sourced GBP0.6 billion of new long-term assets in
collaboration with Commercial Banking to support five bulk annuity
transactions, generating over GBP2 billion of new business
premiums
Financial performance
-- Strong growth in life and pensions sales, up 22 per cent,
driven by increases in new members in existing workplace schemes,
increased auto enrolment workplace contributions and bulk
annuities. On track to achieve 15 per cent market share of
workplace business by end of 2020 compared to 10 per cent market
share at start of 2018
-- New underwritten household premiums increased 19 per cent,
resulting in number one market share for new business earlier than
expected; total underwritten premiums decreased 3 per cent driven
by a competitive renewal market
-- Life and pensions new business income up 19 per cent to
GBP628 million. Lower existing business income due to equity
hedging strategy to reduce capital and earnings volatility. Higher
experience and other items includes one-off benefit from the change
in investment management provider. General insurance benefitted
from benign weather in 2019
-- Wealth income and operating costs impacted by the transfer of
assets to Schroders Personal Wealth in October 2019
-- Underlying profit increased by 19 per cent to GBP1,101
million. Net income increased by GBP145 million to GBP2,133
million, whilst operating costs decreased by GBP39 million with
cost savings offsetting higher investment in the business
Insurance capital
-- Estimated pre final dividend Solvency II ratio of 170 per
cent. The rise in the ratio over 2019 includes the impact of an
equity hedge partly offset by lower long term interest rates. A
final dividend of GBP250 million and a special dividend of GBP185
million related to the gain on the establishment of the Schroders
Personal Wealth joint venture, were paid to the Group in February
2020, with total dividends paid in respect of 2019 performance of
GBP535 million.
Insurance and Wealth performance summary
2019 2018 Change
GBPm GBPm %
Net interest income 112 123 (9)
Other income 2,021 1,865 8
-------- --------
Net income 2,133 1,988 7
-------- --------
Operating costs (982) (1,021) 4
Remediation (50) (39) (28)
-------- --------
Total costs (1,032) (1,060) 3
-------- --------
Trading surplus 1,101 928 19
Impairment - (1)
-------- --------
Underlying profit 1,101 927 19
-------- --------
Life and pensions sales (PVNBP)(1) 17,515 14,384 22
General insurance underwritten new GWP(2) 127 107 19
General insurance underwritten total GWP(2) 671 690 (3)
General insurance combined ratio 82% 89% (7)pp
At 31 Dec At 31 Dec
2019 2018 Change
GBPbn GBPbn %
Insurance Solvency II ratio(3) 170% 165% 5pp
UK Wealth Loans and advances to customers 0.9 0.9 -
UK Wealth Customer deposits 13.7 14.1 (3)
UK Wealth Risk-weighted assets 1.3 1.2 8
Total customer assets under administration 170.0 141.3 20
Income by product group
2019 2018
------------------------- -------------------------
New Existing New Existing
business business Total business business Total
GBPm GBPm GBPm GBPm GBPm GBPm
Workplace, planning and retirement 387 120 507 333 153 486
Individual and bulk annuities 209 68 277 160 84 244
Protection 21 24 45 20 22 42
Longstanding LP&I 11 384 395 13 414 427
-------- -------- ----- -------- -------- -----
628 596 1,224 526 673 1,199
Life and pensions experience and other items 255 143
General insurance 326 272
----- -----
1,805 1,614
Wealth 328 374
----- -----
Net income 2,133 1,988
----- -----
Present value of new business premiums. Further information on
(1) page 60.
Gross written premiums.
(2)
Equivalent regulatory view of ratio (including With Profits funds)
(3) at 31 December 2019 was 154 per cent (31 December 2018: 156 per
cent).
CENTRAL ITEMS
2019 2018(1) Change
GBPm GBPm %
Net income 815 896 (9)
----- -------
Operating costs (52) (56) 7
Remediation (2) (91) 98
----- -------
Total costs (54) (147) 63
----- -------
Trading surplus 761 749 2
Impairment 53 (4)
----- -------
Underlying profit 814 745 9
----- -------
Prior periods restated. See basis of presentation.
(1)
Central items includes income and expenditure not attributed to
divisions, including the costs of certain central and head office
functions, and the Group's private equity business, Lloyds
Development Capital.
Net income includes the central recovery of the Group's
distributions on other equity instruments and gains and losses on
the sale of gilts and other liquid assets.
During 2019, impairment included releases relating to the
reassessment of credit risk associated with debt instruments held
within the Group's equity investments business.
OTHER FINANCIAL INFORMATION
1. Reconciliation between statutory and underlying basis results
The tables below set out the reconciliation from the statutory
results to the underlying basis results, the principles of which
are set out on the inside front cover.
Removal of:
-------------------------------
Volatility
Statutory and other Insurance Underlying
basis items(1,2) gross up(3) PPI basis
2019 GBPm GBPm GBPm GBPm GBPm
Net interest income 10,180 379 1,818 - 12,377
Other income, net of insurance claims 8,179 (426) (2,021) - 5,732
Operating lease depreciation (967) - - (967)
--------- ---------- ----------- ------ ----------
Net income 18,359 (1,014) (203) - 17,142
Operating expenses(4) (12,670) 1,697 203 2,450 (8,320)
--------- ---------- ----------- ------ ----------
Trading surplus 5,689 683 - 2,450 8,822
Impairment (1,296) 5 - - (1,291)
--------- ---------- ----------- ------ ----------
Profit before tax 4,393 688 - 2,450 7,531
--------- ---------- ----------- ------ ----------
2018
Net interest income 13,396 152 (834) - 12,714
Other income, net of insurance claims 5,230 107 673 - 6,010
Operating lease depreciation (956) - - (956)
--------- ---------- ----------- ------ ----------
Net income 18,626 (697) (161) - 17,768
Operating expenses(4) (11,729) 2,053 161 750 (8,765)
--------- ---------- ----------- ------ ----------
Trading surplus 6,897 1,356 750 9,003
Impairment (937) - - - (937)
--------- ---------- ----------- ------ ----------
Profit before tax 5,960 1,356 - 750 8,066
--------- ---------- ----------- ------ ----------
In the year ended 31 December 2019 this comprises the effects of
(1) market volatility and asset sales (gains of GBP126 million); the
amortisation of purchased intangibles (GBP68 million); restructuring
(GBP471 million, comprising severance related costs, the integration
of Zurich's UK workplace pensions and savings business and costs
associated with the establishment of the Schroders Personal Wealth
Joint venture); and the fair value unwind and other items (losses
of GBP275 million).
In the year ended 31 December 2018 this comprises the effects of
(2) market volatility and asset sales (losses of GBP50 million); the
amortisation of purchased intangibles (GBP108 million); restructuring
(GBP879 million, comprising severance related costs, the rationalisation
of the non-branch property portfolio, the work on implementing
the ring-fencing requirements and the integration of MBNA and Zurich's
UK workplace pensions and savings business); and the fair value
unwind and other items (losses of GBP319 million).
The Group's insurance businesses' income statements include income
(3) and expenditure which are attributable to the policyholders of
the Group's long-term assurance funds. These items have no impact
in total upon the profit attributable to equity shareholders and,
in order to provide a clearer representation of the underlying
trends within the business, these items are shown net within the
underlying results.
The statutory basis figure is the aggregate of operating costs
(4) and operating lease depreciation.
OTHER FINANCIAL INFORMATION (continued)
2. Banking net interest margin and average interest-earning assets
2019 2018
Group net interest income - statutory basis (GBPm) 10,180 13,396
Insurance gross up (GBPm) 1,818 (834)
Volatility and other items (GBPm) 379 152
------- -------
Group net interest income - underlying basis (GBPm) 12,377 12,714
Non-banking net interest expense (GBPm)(1) 145 54
------- -------
Banking net interest income - underlying basis (GBPm) 12,522 12,768
------- -------
Net loans and advances to customers (GBPbn)(2) 440.4 444.4
Impairment provision and fair value adjustments (GBPbn) 3.9 4.0
Non-banking items:
Fee-based loans and advances (GBPbn) (6.3) (7.2)
Other non-banking (GBPbn) (3.1) (4.7)
------- -------
Gross banking loans and advances (GBPbn) 434.9 436.5
Averaging (GBPbn) (0.2) (0.5)
------- -------
Average interest-earning banking assets (GBPbn) 434.7 436.0
------- -------
Banking net interest margin (%) 2.88 2.93
2019 includes impact from the implementation of IFRS 16.
(1)
Excludes reverse repos.
(2)
3. Volatility arising in insurance businesses
Volatility included in the Group's statutory results before tax
comprises the following:
2019 2018
GBPm GBPm
Insurance volatility 230 (506)
Policyholder interests volatility 193 46
------ ------
Total volatility 423 (460)
Insurance hedging arrangements (347) 357
------ ------
Total 76 (103)
------ ------
The Group's insurance business has policyholder liabilities that
are supported by substantial holdings of investments. IFRS requires
that the changes in both the value of the liabilities and
investments are reflected within the income statement. The value of
the liabilities does not move exactly in line with changes in the
value of the investments. As the investments are substantial,
movements in their value can have a significant impact on the
profitability of the Group. Management believes that it is
appropriate to disclose the division's results on the basis of an
expected return. The impact of the actual return on these
investments differing from the expected return is included within
insurance volatility.
In-year volatility movements were largely driven by insurance
volatility arising from interest rate and credit spread movements.
The capital impact of equity market movements is now hedged within
Insurance and this also reduces the IFRS earnings exposure to
equity market movements.
The Group actively manages its exposures to interest rate,
foreign currency exchange rate, inflation and market movements
within the banking book through a comprehensive hedging strategy.
This helps to mitigate earnings volatility and reduces the impact
of market movements on the capital position.
OTHER FINANCIAL INFORMATION (continued)
4. Tangible net assets per share
The table below sets out a reconciliation of the Group's
shareholders' equity to its tangible net assets.
At 31 Dec At 31 Dec
2019 2018
GBPm GBPm
Shareholders' equity 41,697 43,434
Goodwill (2,324) (2,310)
Intangible assets (3,808) (3,347)
Purchased value of in-force business (247) (271)
Other, including deferred tax effects 269 228
--------- ---------
Tangible net assets 35,587 37,734
--------- ---------
Ordinary shares in issue, excluding own shares 70,031m 71,149m
Tangible net assets per share 50.8p 53.0p
5. Return on tangible equity
2019 2018
Average shareholders' equity (GBPbn) 43.0 43.0
Average intangible assets (GBPbn) (5.9) (5.4)
------ ------
Average tangible equity (GBPbn) 37.1 37.6
------ ------
Underlying profit after tax (GBPm)(1) 5,690 6,057
Add back amortisation of intangible assets (post tax) (GBPm) 364 296
Less profit attributable to non-controlling interests and other equity holders (GBPm)(1) (547) (531)
------ ------
Adjusted underlying profit after tax (GBPm) 5,507 5,822
------ ------
Underlying return on tangible equity (%) 14.8 15.5
Group statutory profit after tax (GBPm)(1) 3,006 4,506
Add back amortisation of intangible assets (post tax) (GBPm) 364 296
Add back amortisation of purchased intangible assets (post tax) (GBPm) 74 111
Less profit attributable to non-controlling interests and other equity holders (GBPm)(1) (547) (531)
------ ------
Adjusted statutory profit after tax (GBPm) 2,897 4,382
------ ------
Statutory return on tangible equity (%) 7.8 11.7
Prior period restated to reflect amendments to IAS 12, see basis
(1) of presentation .
6. Share buyback
During 2019, the Group completed GBP1.1 billion of the announced
up to GBP1.75 billion share buyback programme, with an average
price paid of 57.89 pence per share. Through a reduction in the
weighted average number of ordinary shares in issue, share buybacks
have the effect of increasing earnings per share and, depending on
the average price paid per share, can either increase or decrease
the tangible net assets per share. The 2019 share buyback had the
effect of increasing the earnings per share by 0.1 pence and
decreasing the tangible net assets per share by 0.2 pence.
RISK MANAGEMENT
CREDIT RISK PORTFOLIO
Overview
-- Credit quality remains strong despite an uncertain environment
-- The Group's loan portfolios continue to be well positioned,
reflecting the Group's effective risk management and continue to
benefit from a low interest rate environment
-- The net asset quality ratio increased to 29 basis points
(2018: 21 basis points) as did the impairment charge to GBP1,291
million (2018: GBP937 million). This was primarily driven by
material charges against two corporate cases in Commercial Banking,
along with some weakening in used car prices in Retail
-- Stage 2 loans as a proportion of total loans and advances to
customers reduced by 0.1 percentage points to 7.7 per cent (31
December 2018: 7.8 per cent). Stage 2 loans and advances were
broadly flat at GBP38.4 billion
-- Stage 2 expected credit loss allowances as a percentage of
drawn balances (coverage) decreased to 3.7 per cent (31 December
2018: 4.1 per cent) largely driven by a reduction in expected
credit loss (ECL) allowances in SME due to an enhanced approach to
loan amortisation within the IFRS 9 model and a number of other
model refinements
-- Stage 3 loans as a proportion of total loans and advances to
customers fell to 1.8 per cent (31 December 2018: 1.9 per cent),
with Stage 3 loans and advances down GBP0.5 billion to GBP8.8
billion. Coverage of Stage 3 assets reduced by 1.8 percentage
points to 22.5 per cent largely as a result of the improved
performance of mortgage cases in long-term default, and a change in
the mix of Commercial assets due to a combination of write-offs and
the transfer in of cases with lower likelihood of net loss
Low risk culture and prudent risk appetite
-- The Group continues to take a prudent approach to credit
risk, with robust credit quality and affordability controls at
origination and a prudent through the cycle credit risk
appetite
-- Although not immune, credit portfolios are well positioned
against an uncertain economic outlook and potential market
volatility
-- The Group continues to grow lending to targeted segments in
line with strategy, without relaxing credit criteria
-- The Group's effective risk management seeks to ensure early
identification and management of customers and counterparties who
may be showing signs of distress
-- Sector concentrations within the portfolios are closely
monitored and controlled, with mitigating actions taken where
appropriate. Sector and product caps limit exposure to certain
higher risk and vulnerable sectors and asset classes
Impairment charge by division
Financial
assets at
Loans fair value
and through other
advances comprehensive Undrawn 2019
to customers income balances Total 2018(1)
GBPm GBPm GBPm GBPm GBPm
Retail 1,063 - (25) 1,038 861
Commercial Banking 297 (1) 10 306 71
Insurance and Wealth - - - - 1
Central Items (53) - - (53) 4
------------ ------------- -------- ------ -------
Total impairment charge 1,307 (1) (15) 1,291 937
------------ ------------- -------- ------ -------
Asset quality ratio 0.29% 0.21%
Gross asset quality ratio 0.37% 0.28%
Segmental comparatives restated. See basis of presentation.
(1)
CREDIT RISK PORTFOLIO (continued)
Credit Risk basis of presentation
The analyses which follow have been presented on two bases; the
statutory basis which is consistent with the presentation in the
Group's accounts and the underlying basis which is used for
internal management purposes. Reconciliations between the two bases
have been provided.
In the following statutory basis tables, purchased or originated
credit-impaired (POCI) assets include a fixed pool of mortgages
that were purchased as part of the HBOS acquisition at a deep
discount to face value reflecting credit losses incurred from the
point of origination to the date of acquisition. The residual
expected credit loss (ECL) allowance and resulting low coverage
ratio on POCI assets reflects further deterioration in the
creditworthiness from the date of acquisition. Over time, these
POCI assets will run off as the loans redeem, pay down or losses
are crystallised.
The Group uses the underlying basis to monitor the
creditworthiness of the lending portfolio and related ECL
allowances because it provides a better indication of the credit
performance of the POCI assets purchased as part of the HBOS
acquisition. The underlying basis assumes that the lending assets
acquired as part of a business combination were originated by the
Group and are classified as either Stage 1, 2 or 3 according to the
change in credit risk over the period since origination. Underlying
ECL allowances have been calculated accordingly.
Group loans and advances to customers - statutory basis
Stage 2 Stage 3
Total Stage 1 Stage 2 Stage 3 POCI as % of as % of
GBPm GBPm GBPm GBPm GBPm total total
At 31 December 2019
Retail 344,218 305,502 22,518 2,484 13,714 6.5 0.7
Commercial Banking 96,763 87,323 5,993 3,447 - 6.2 3.6
Insurance and Wealth 862 753 32 77 - 3.7 8.9
Central items 56,404 56,397 - 7 - - -
-------- -------- ------- -------- -------
Total gross lending 498,247 449,975 28,543 6,015 13,714 5.7 1.2
ECL allowance on drawn balances (3,259) (675) (995) (1,447) (142)
-------- -------- ------- -------- -------
Net balance sheet carrying value 494,988 449,300 27,548 4,568 13,572
-------- -------- ------- -------- -------
ECL allowances (drawn and undrawn) as a
percentage of gross lending (%)(1) 0.7 0.2 3.8 25.0 1.0
At 31 December 2018(2)
Retail 341,682 305,160 18,741 2,390 15,391 5.5 0.7
Commercial Banking 101,824 92,002 6,592 3,230 - 6.5 3.2
Insurance and Wealth 865 804 6 55 - 0.7 6.4
Central items 43,637 43,565 6 66 - - 0.2
-------- -------- ------- -------- -------
Total gross lending 488,008 441,531 25,345 5,741 15,391 5.2 1.2
ECL allowance on drawn balances (3,150) (525) (994) (1,553) (78)
-------- -------- ------- -------- -------
Net balance sheet carrying value 484,858 441,006 24,351 4,188 15,313
-------- -------- ------- -------- -------
ECL allowances (drawn and undrawn) as a
percentage of gross lending (%)(1) 0.7 0.1 4.2 28.4 0.5
Stage 3 ECL allowances as a percentage of drawn balances are calculated
(1) excluding loans in recoveries in Retail of GBP205 million (31 December
2018: GBP250 million).
Segmental comparatives restated. See basis of presentation.
(2)
CREDIT RISK PORTFOLIO (continued)
Group loans and advances to customers - underlying basis
Stage 2 Stage 3
Total Stage 1 Stage 2 Stage 3 as % of as % of
GBPm GBPm GBPm GBPm total total
At 31 December 2019(1)
Retail 344,776 307,138 32,415 5,223 9.4 1.5
Commercial Banking 96,763 87,323 5,993 3,447 6.2 3.6
Insurance and Wealth 862 753 32 77 3.7 8.9
Central items 56,404 56,397 - 7 - -
-------- -------- -------- --------
Total gross lending 498,805 451,611 38,440 8,754 7.7 1.8
ECL allowance on drawn balances (3,965) (702) (1,346) (1,917)
-------- -------- -------- --------
Net balance sheet carrying value 494,840 450,909 37,094 6,837
-------- -------- -------- --------
ECL allowances (drawn and undrawn) as a percentage
of gross lending (%)(2) 0.8 0.2 3.7 22.5
At 31 December 2018(1,3)
Retail 342,559 305,048 31,647 5,864 9.2 1.7
Commercial Banking 101,824 92,002 6,592 3,230 6.5 3.2
Insurance and Wealth 865 804 6 55 0.7 6.4
Central items 43,637 43,565 6 66 - 0.2
-------- -------- -------- --------
Total gross lending 488,885 441,419 38,251 9,215 7.8 1.9
ECL allowance on drawn balances (4,236) (556) (1,506) (2,174)
-------- -------- -------- --------
Net balance sheet carrying value 484,649 440,863 36,745 7,041
-------- -------- -------- --------
ECL allowances (drawn and undrawn) as a percentage
of gross lending (%)(2) 0.9 0.2 4.1 24.3
These balances exclude the impact of the HBOS and MBNA acquisition
(1) related adjustments.
Stage 3 ECL allowances as a percentage of drawn balances are calculated
(2) excluding loans in recoveries in Retail of GBP205 million (31 December
2018: GBP250 million).
Segmental comparatives restated. See basis of presentation.
(3)
Group total expected credit loss allowance - statutory basis
At 31 Dec At 31 Dec
2019 2018
GBPm GBPm
Customer related balances
--------- ---------
Drawn 3,259 3,150
Undrawn 177 193
--------- ---------
3,436 3,343
Other assets 19 19
--------- ---------
Total ECL allowance 3,455 3,362
--------- ---------
CREDIT RISK PORTFOLIO (continued)
Group total expected credit loss allowance - underlying
basis
At 31 Dec At 31 Dec
2019 2018
GBPm GBPm
Customer related balances
--------- ---------
Drawn 3,965 4,236
Undrawn 177 193
--------- ---------
4,142 4,429
Other assets 19 19
--------- ---------
Total ECL allowance 4,161 4,448
--------- ---------
Reconciliation between statutory and underlying basis of Group
gross loans and advances to customers
Total Stage 1 Stage 2 Stage 3 POCI
GBPm GBPm GBPm GBPm GBPm
At 31 December 2019
Underlying basis 498,805 451,611 38,440 8,754 -
-------- -------- --------- -------- --------
POCI assets - (1,718) (9,903) (2,740) 14,361
Acquisition fair value adjustment (558) 82 6 1 (647)
-------- -------- --------- -------- --------
(558) (1,636) (9,897) (2,739) 13,714
-------- -------- --------- -------- --------
Statutory basis 498,247 449,975 28,543 6,015 13,714
-------- -------- --------- -------- --------
At 31 December 2018
Underlying basis 488,885 441,419 38,251 9,215 -
-------- -------- --------- -------- --------
POCI assets - - (12,917) (3,476) 16,393
Acquisition fair value adjustment (877) 112 11 2 (1,002)
-------- -------- --------- -------- --------
(877) 112 (12,906) (3,474) 15,391
-------- -------- --------- -------- --------
Statutory basis 488,008 441,531 25,345 5,741 15,391
-------- -------- --------- -------- --------
Reconciliation between statutory and underlying basis of Group
expected credit loss allowances on drawn balances
Total Stage 1 Stage 2 Stage 3 POCI
GBPm GBPm GBPm GBPm GBPm
At 31 December 2019
Underlying basis 3,965 702 1,346 1,917 -
-------- ------- ------- ------- --------
POCI assets - - (334) (455) 789
Acquisition fair value adjustment (706) (27) (17) (15) (647)
-------- ------- ------- ------- --------
(706) (27) (351) (470) 142
-------- ------- ------- ------- --------
Statutory basis 3,259 675 995 1,447 142
-------- ------- ------- ------- --------
At 31 December 2018
Expected credit losses on drawn balances
Underlying basis 4,236 556 1,506 2,174 -
-------- ------- ------- ------- --------
POCI assets - - (481) (599) 1,080
Acquisition fair value adjustment (1,086) (31) (31) (22) (1,002)
-------- ------- ------- ------- --------
(1,086) (31) (512) (621) 78
-------- ------- ------- ------- --------
Statutory basis 3,150 525 994 1,553 78
-------- ------- ------- ------- --------
CREDIT RISK PORTFOLIO (continued)
Group expected credit loss allowances (drawn and undrawn) as a
percentage of loans and advances to customers - statutory basis
Total Stage 1 Stage 2 Stage 3 POCI
------------ ---------- ------------- -------------- ----------
GBPm %(1) GBPm %(1) GBPm %(1) GBPm %(1,2) GBPm %(1)
At 31 December 2019
Retail 2,090 0.6 639 0.2 819 3.6 490 21.5 142 1.0
Commercial Banking 1,313 1.4 115 0.1 252 4.2 946 27.4 - -
Insurance and Wealth 17 2.0 6 0.8 1 3.1 10 13.0 - -
Central items 16 - 10 - - - 6 85.7 - -
------ ---- ------ ------ ----
Total 3,436 0.7 770 0.2 1,072 3.8 1,452 25.0 142 1.0
------ ---- ------ ------ ----
At 31 December 2018(1,3)
Retail 1,768 0.5 493 0.2 713 3.8 484 22.6 78 0.5
Commercial Banking 1,486 1.5 111 0.1 338 5.1 1,037 32.1 - -
Insurance and Wealth 18 2.1 6 0.7 1 16.7 11 20.0 - -
Central items 71 0.2 38 0.1 6 100.0 27 40.9 - -
------ ---- ------ ------ ----
Total 3,343 0.7 648 0.1 1,058 4.2 1,559 28.4 78 0.5
------ ---- ------ ------ ----
As a percentage of drawn balances.
(1)
Stage 3 ECL allowances as a percentage of drawn balances are calculated
(2) excluding loans in recoveries in Retail of GBP205 million (31 December
2018: GBP250 million).
Segmental comparatives restated. See basis of presentation.
(3)
Group expected credit loss allowances (drawn and undrawn) as a
percentage of loans and advances to customers - underlying
basis
Total Stage 1 Stage 2 Stage 3
------------ ---------- ------------- --------------
GBPm %(2) GBPm %(2) GBPm %(2) GBPm %(2,3)
At 31 December 2019(1)
Retail 2,796 0.8 666 0.2 1,170 3.6 960 19.1
Commercial Banking 1,313 1.4 115 0.1 252 4.2 946 27.4
Insurance and Wealth 17 2.0 6 0.8 1 3.1 10 13.0
Central items 16 - 10 - - - 6 85.7
------ ---- ------ ------
Total 4,142 0.8 797 0.2 1,423 3.7 1,922 22.5
------ ---- ------ ------
At 31 December 2018(1,4)
Retail 2,854 0.8 524 0.2 1,225 3.9 1,105 19.7
Commercial Banking 1,486 1.5 111 0.1 338 5.1 1,037 32.1
Insurance and Wealth 18 2.1 6 0.7 1 16.7 11 20.0
Central items 71 0.2 38 0.1 6 100.0 27 40.9
------ ---- ------ ------
Total 4,429 0.9 679 0.2 1,570 4.1 2,180 24.3
------ ---- ------ ------
Balances exclude the impact of the HBOS and MBNA related acquisition
(1) adjustments.
As a percentage of drawn balances.
(2)
Stage 3 ECL allowances as a percentage of drawn balances are calculated
(3) excluding loans in recoveries in Retail of GBP205 million (31 December
2018: GBP250 million).
Segmental comparatives restated. See basis of presentation.
(4)
CREDIT RISK PORTFOLIO (continued)
Additional information
The measurement of ECL reflects an unbiased probability-weighted
range of possible future economic outcomes. The Group achieves this
by selecting four economic scenarios to reflect the range of
outcomes; the central scenario reflects the Group's base case
assumptions used for medium term planning purposes, an upside and a
downside scenario are also selected together with a severe downside
scenario. The base case, upside and downside scenarios carry a 30
per cent weighting; the severe downside is weighted at 10 per cent.
The table below shows the decomposition of the final
probability-weighted ECL for each forward-looking economic
scenario. The stage allocation for an asset is based on the overall
scenario probability-weighted PD and, hence, the Stage 2 allocation
is constant across all the scenarios.
The table below shows the ECL calculated under each scenario on
both an underlying and a statutory basis.
Probability- Severe
weighted Upside Base case Downside Downside
GBPm GBPm GBPm GBPm GBPm
Statutory basis
Secured 569 317 464 653 1,389
Other Retail 1,521 1,443 1,492 1,564 1,712
Commercial 1,315 1,211 1,258 1,382 1,597
Other 50 50 50 50 50
------------ ------ --------- -------- --------
At 31 December 2019 3,455 3,021 3,264 3,649 4,748
------------ ------ --------- -------- --------
Probability- Severe
weighted Upside Base case Downside Downside
GBPm GBPm GBPm GBPm GBPm
Underlying basis
Secured 1,216 964 1,111 1,300 2,036
Other Retail 1,580 1,502 1,551 1,623 1,771
Commercial 1,315 1,211 1,258 1,382 1,597
Other 50 50 50 50 50
------------ ------ --------- -------- --------
At 31 December 2019 4,161 3,727 3,970 4,355 5,454
------------ ------ --------- -------- --------
FUNDING AND LIQUIDITY MANAGEMENT
The Group has maintained its strong funding and liquidity
position with a stable loan to deposit ratio of 107 per cent.
During 2019, the Group repaid its Funding for Lending Scheme
(FLS) contractual maturities of GBP12.1 billion and early repaid
GBP4.5 billion of its Term Funding Scheme (TFS) drawings,
representing all of its 2020 TFS maturities. This has reduced the
balance of FLS outstanding to GBP1 billion and the balance of TFS
to GBP15.4 billion as at 31 December 2019.
The Group's liquidity coverage ratio (LCR) was 137 per cent
(based on a monthly rolling average over the previous 12 months) as
at 31 December 2019, calculated on a consolidated basis based on
the EU Delegated Act. Following the implementation of structural
reform, liquidity risk is managed at a legal entity level with the
Group consolidated LCR representing the composite of the
ring-fenced bank and non ring-fenced bank entities.
The Group's credit ratings continue to reflect its robust
balance sheet, resilient underlying profitability and bail-in
capital position. There were no changes to the ratings over 2019,
although in November Moody's revised the Group's and Lloyds Bank
plc's outlooks to negative due to concern relating to the UK's exit
from the European Union. In March Fitch placed the majority of UK
banks, including the Group's entities, on Ratings Watch Negative
before stabilising the ratings in December as future economic and
political direction became clearer.
CAPITAL MANAGEMENT
Analysis of capital position
The Group's pro forma CET1 capital build amounted to 207 basis
points before PPI, and to 86 basis points after the in-year PPI
charge, reflecting:
-- underlying capital build (198 basis points), including the
dividend paid up by the Insurance business in February 2020 in
relation to its 2019 earnings (18 basis points)
-- other movements (20 basis points), reflecting market
movements and the continued optimisation of Commercial Banking
risk-weighted assets, net of additional pension contributions and
model updates
-- offset by a reduction of 121 basis points relating to the
in-year PPI charge and 11 basis points relating to the impact of
the implementation of IFRS 16 on risk-weighted assets
The Group's capital position also benefitted by 34 basis points
as a result of the cancellation of the remaining c.GBP650 million
of the 2019 buyback programme, as announced in September 2019. The
Group used 9 basis points of capital for the acquisition of Tesco
Bank's UK prime residential mortgage portfolio.
Overall the Group's CET1 capital ratio is 15.0 per cent on a pro
forma basis before ordinary dividends and 13.8 per cent on a pro
forma basis after ordinary dividends (31 December 2018: 13.9 per
cent pro forma, after ordinary dividends and incorporating the
effects of the share buyback announced in February 2019).
Excluding the Insurance dividend paid in February 2020 the
Group's actual CET1 ratio is 13.6 per cent after ordinary dividends
(31 December 2018: 14.6 per cent).
The accrual for foreseeable dividends reflects the recommended
final ordinary dividend of 2.25 pence per share.
The transitional total capital ratio, after ordinary dividends,
reduced to 21.3 per cent (21.5 per cent on a pro forma basis),
largely reflecting the reduction in CET1 capital and the net
reduction in AT1 capital instruments, partially offset by the
reduction in risk-weighted assets.
The UK leverage ratio, after ordinary dividends, reduced from
5.6 per cent on a pro forma basis to 5.2 per cent on a pro forma
basis, largely reflecting the reduction in the fully loaded tier 1
capital position, partially offset by a reduction in the exposure
measure.
CAPITAL MANAGEMENT (continued)
Target capital ratio
The Board's view of the ongoing level of CET1 capital required
by the Group to grow the business, meet regulatory requirements and
cover uncertainties continues to be c.12.5 per cent plus a
management buffer of c.1 per cent. This takes into account, amongst
other things:
-- the minimum Pillar 1 CET1 capital requirement of 4.5 per cent of risk--weighted assets
-- the Group's Pillar 2A set by the PRA. During the year the PRA
reduced the Group's Pillar 2A requirement from 4.7 per cent to 4.6
per cent of risk-weighted assets at 31 December 2019, of which 2.6
per cent must be met by CET1 capital
-- the capital conservation buffer (CCB) requirement of 2.5 per cent of risk-weighted assets
-- the Group's current countercyclical capital buffer (CCYB)
requirement of 0.9 per cent of risk-weighted assets, which is set
to increase following the FPC's decision to increase the UK CCYB
rate from 1.0 per cent to 2.0 per cent, effective from December
2020. In conjunction the PRA will consult during 2020 on a proposed
reduction in Pillar 2A total capital requirements by 50 per cent of
this increase in the CCYB, equivalent to reducing the Pillar 2A
CET1 requirement by 28 per cent of the increase.
-- the RFB sub-group's systemic risk buffer (SRB) of 2.0 per
cent of risk-weighted assets, which equates to 1.7 per cent of
risk-weighted assets at Group level
-- the Group's PRA Buffer, which the PRA sets after taking
account of the results of the annual PRA stress test and other
information, as well as outputs from the Group's internal stress
tests. The PRA requires the PRA Buffer itself to remain
confidential between the Group and the PRA
Capital resources
An analysis of the Group's capital position as at 31 December
2019 is presented in the following section on both a CRD IV
transitional arrangements basis and a CRD IV fully loaded basis, as
amended by provisions of the revised Capital Requirements
Regulation (CRR II) that came into force in June 2019. In addition
the Group's capital position reflects the application of the
transitional arrangements for IFRS 9.
The following table summarises the consolidated capital position
of the Group.
CAPITAL MANAGEMENT (continued)
Transitional Fully loaded
-------------------- --------------------
At 31 Dec At 31 Dec At 31 Dec At 31 Dec
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
Common equity tier 1
Shareholders' equity per balance sheet 41,697 43,434 41,697 43,434
Adjustment to retained earnings for foreseeable dividends (1,586) (1,523) (1,586) (1,523)
Deconsolidation adjustments(1) 2,337 2,273 2,337 2,273
Adjustment for own credit 26 (280) 26 (280)
Cash flow hedging reserve (1,504) (1,051) (1,504) (1,051)
Other adjustments 247 (19) 247 (19)
--------- --------- --------- ---------
41,217 42,834 41,217 42,834
less: deductions from common equity tier 1
Goodwill and other intangible assets (4,179) (3,667) (4,179) (3,667)
Prudent valuation adjustment (509) (529) (509) (529)
Excess of expected losses over impairment provisions and value
adjustments (243) (27) (243) (27)
Removal of defined benefit pension surplus (531) (994) (531) (994)
Securitisation deductions (185) (191) (185) (191)
Significant investments(1) (4,626) (4,222) (4,626) (4,222)
Deferred tax assets (3,200) (3,037) (3,200) (3,037)
--------- --------- --------- ---------
Common equity tier 1 capital 27,744 30,167 27,744 30,167
--------- --------- --------- ---------
Additional tier 1
Other equity instruments 5,881 6,466 5,881 6,466
Preference shares and preferred securities(2) 4,127 4,008 - -
Transitional limit and other adjustments (2,474) (1,804) - -
--------- --------- --------- ---------
7,534 8,670 5,881 6,466
less: deductions from tier 1
Significant investments(1) (1,286) (1,298) - -
--------- --------- --------- ---------
Total tier 1 capital 33,992 37,539 33,625 36,633
--------- --------- --------- ---------
Tier 2
Other subordinated liabilities(2) 13,003 13,648 13,003 13,648
Deconsolidation of instruments issued by insurance entities(1) (1,796) (1,767) (1,796) (1,767)
Adjustments for transitional limit and non-eligible instruments 2,278 1,504 (2,204) (1,266)
Amortisation and other adjustments (3,101) (2,717) (3,101) (2,717)
--------- --------- --------- ---------
10,384 10,668 5,902 7,898
less: deductions from tier 2
Significant investments(1) (960) (973) (2,246) (2,271)
--------- --------- --------- ---------
Total capital resources 43,416 47,234 37,281 42,260
--------- --------- --------- ---------
Risk-weighted assets (unaudited) 203,431 206,366 203,431 206,366
Common equity tier 1 capital ratio(3) 13.6% 14.6% 13.6% 14.6%
Tier 1 capital ratio 16.7% 18.2% 16.5% 17.8%
Total capital ratio 21.3% 22.9% 18.3% 20.5%
(1) For regulatory capital purposes, the Group's Insurance business is deconsolidated and replaced
by the amount of the Group's investment in the business. A part of this amount is deducted
from capital (via 'significant investments' in the table above) and the remaining amount is
risk-weighted, forming part of threshold risk-weighted assets.
(2) Preference shares, preferred securities and other subordinated liabilities are categorised
as subordinated liabilities in the balance sheet.
(3) The common equity tier 1 ratio is 13.8 per cent on a pro forma basis upon recognition of the
dividend paid by the Insurance business in February 2020 in relation to its 2019 earnings
(31 December 2018: 13.9 per cent pro forma, incorporating the effects of the share buyback
announced in February 2019).
CAPITAL MANAGEMENT (continued)
Minimum requirement for own funds and eligible liabilities
(MREL)
As the Group is not classified as a global systemically
important bank (G-SIB) it is not directly subject to the CRR II
MREL requirements that came into force in June 2019. However the
Group remains subject to the Bank of England's MREL statement of
policy (MREL SoP) and must therefore maintain a minimum level of
MREL resources from 1 January 2020.
Applying the Bank of England's MREL SoP to current minimum
capital requirements, the Group's indicative MREL requirement,
excluding regulatory capital and leverage buffers, is as
follows:
-- from 1 January 2020, the higher of 2 times Pillar 1 plus
Pillar 2A, equivalent to 20.6 per cent of risk-weighted assets, or
6.5 per cent of the UK leverage ratio exposure measure
-- from 1 January 2022, the higher of 2 times Pillar 1 plus 2
times Pillar 2A, equivalent to 25.2 per cent of risk-weighted
assets, or 6.5 per cent of the UK leverage ratio exposure
measure.
In addition, CET1 capital cannot be used to meet both MREL
requirements and capital or leverage buffers.
The Bank of England will review the calibration of MREL in 2020
before setting final end-state requirements to be met from 2022.
This review will take into consideration any changes to the capital
framework, including the finalisation of the Basel III reforms.
An analysis of the Group's current transitional MREL position is
provided in the table below.
Transitional (2)
--------------------
At 31 Dec At 31 Dec
2019 2018
GBPm GBPm
Total capital resources (transitional basis) 43,416 47,234
Ineligible AT1 and tier 2 instruments(1) (874) (613)
Amortised portion of eligible tier 2 instruments issued by Lloyds Banking Group plc 24 -
Senior unsecured securities issued by Lloyds Banking Group plc 23,554 20,213
--------- ---------
Total MREL resources(2) 66,120 66,834
--------- ---------
Risk-weighted assets 203,431 206,366
MREL ratio(3) 32.5% 32.4%
Leverage exposure measure 654,387 663,277
MREL leverage ratio 10.1% 10.1%
(1) Instruments with less than one year to maturity or governed under non-EEA law without a contractual
bail-in clause.
(2) Until 2022, externally issued regulatory capital in operating entities can count towards the
Group's MREL to the extent that such capital would count towards the Group's consolidated
capital resources.
(3) The MREL ratio is 32.6 per cent on a pro forma basis upon recognition of the dividend paid
up by the Insurance business in February 2020 in relation to its 2019 earnings (31 December
2018: 32.6 per cent pro forma).
During 2019, the Group issued externally GBP3.5 billion
(sterling equivalent) of senior unsecured securities from Lloyds
Banking Group plc which, while not included in total capital, are
eligible to meet MREL requirements. Combined with previous
issuances made over the last few years the Group remains
comfortably positioned to meet MREL requirements from 1 January
2020 and, as at 31 December 2019, had a transitional MREL ratio of
32.5 per cent of risk-weighted assets.
CAPITAL MANAGEMENT (continued)
Risk-weighted assets
At 31 Dec At 31 Dec
2019 2018
GBPm GBPm
Foundation Internal Ratings Based (IRB) Approach 53,842 60,555
Retail IRB Approach 63,208 59,522
Other IRB Approach 18,544 15,666
--------- ---------
IRB Approach 135,594 135,743
Standardised (STA) Approach 24,420 25,757
--------- ---------
Credit risk 160,014 161,500
Counterparty credit risk 5,083 5,718
Contributions to the default fund of a central counterparty 210 830
Credit valuation adjustment risk 584 702
Operational risk 25,482 25,505
Market risk 1,790 2,085
--------- ---------
Underlying risk-weighted assets 193,163 196,340
Threshold risk-weighted assets(1) 10,268 10,026
--------- ---------
Total risk-weighted assets 203,431 206,366
--------- ---------
(1) Threshold risk-weighted assets reflect the element of significant investments and deferred
tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital.
Significant investments primarily arise from investment in the Group's Insurance business.
Stress testing
The Group undertakes a wide-ranging programme of stress testing
providing a comprehensive view of the potential impacts arising
from the risks to which the Group and its key legal entities are
exposed. One of the most important uses of stress testing is to
assess the resilience of the operational and strategic plans of the
Group and its legal entities to adverse economic conditions and
other key vulnerabilities. As part of this programme the Group
conducted a macroeconomic stress test of the four year operating
plan in the first quarter of the year.
The Group also participates in the UK wide Annual Cyclical
Scenario stress tests run by the Bank of England. In the 2019 Bank
of England stress test the Group exceeded the capital and leverage
hurdles on a transitional basis after the application of management
actions and was not required to take any action as a result of the
test.
For the Annual Cyclical Scenario stress tests, the Bank of
England has taken action to avoid an unwarranted de facto increase
in capital requirements that could result from the interaction of
IFRS 9. Under this scenario, the stress hurdle rates for banks
participating in the exercise are adjusted to recognise the
additional resilience provided by the earlier provisions taken
under IFRS 9. The Bank of England is considering options for a more
enduring treatment of IFRS 9 provisions in the capital framework
and alternative options will be explored further during the 2020
Bank of England annual stress test.
Leverage ratio
The Group is currently subject to the following minimum
requirements under the UK Leverage Ratio Framework:
-- a minimum leverage ratio requirement of 3.25 per cent of the total leverage exposure measure
-- a countercyclical leverage buffer (CCLB) of 0.3 per cent of
the total leverage exposure measure
-- an additional leverage ratio buffer (ALRB) of 0.7 per cent of
the total leverage exposure measure applies to the RFB sub-group,
which equates to 0.6 per cent at Group level.
CAPITAL MANAGEMENT (continued)
The countercyclical leverage buffer is set to increase in
proportion to the increase in the countercyclical capital buffer
following the FPC's decision to increase the UK CCYB rate to 2.0
per cent, effective from December 2020. At least 75 per cent of the
3.25 per cent minimum leverage ratio requirement as well as 100 per
cent of all regulatory leverage buffers must be met with CET1
capital.
The table below summarises the component parts of the Group's
leverage ratio.
Fully loaded
----------------------
At 31 Dec At 31 Dec
2019 2018
GBPm GBPm
Total tier 1 capital for leverage ratio
Common equity tier 1 capital 27,744 30,167
Additional tier 1 capital 5,881 6,466
---------- ----------
Total tier 1 capital 33,625 36,633
---------- ----------
Exposure measure
Statutory balance sheet assets
Derivative financial instruments 26,369 23,595
Securities financing transactions 67,424 69,301
Loans and advances and other assets 740,100 704,702
---------- ----------
Total assets 833,893 797,598
---------- ----------
Qualifying central bank claims (49,590) (50,105)
Deconsolidation adjustments(1)
Derivative financial instruments (1,293) (1,376)
Securities financing transactions (334) (487)
Loans and advances and other assets (167,410) (130,048)
---------- ----------
Total deconsolidation adjustments (169,037) (131,911)
---------- ----------
Derivatives adjustments
Adjustments for regulatory netting (11,298) (8,828)
Adjustments for cash collateral (12,551) (10,536)
Net written credit protection 458 539
Regulatory potential future exposure 16,337 18,250
---------- ----------
Total derivatives adjustments (7,054) (575)
---------- ----------
Securities financing transactions adjustments 1,164 40
Off-balance sheet items 53,191 56,393
Regulatory deductions and other adjustments (8,180) (8,163)
Total exposure measure(2) 654,387 663,277
---------- ----------
Average exposure measure(3) 667,433
UK Leverage ratio(2,5) 5.1% 5.5%
Average UK leverage ratio(3) 5.0%
CRD IV exposure measure(4) 703,977 713,382
CRD IV leverage ratio(4) 4.8% 5.1%
(1) Deconsolidation adjustments relate to the deconsolidation of certain Group entities that fall
outside the scope of the Group's regulatory capital consolidation, being primarily the Group's
Insurance business.
(2) Calculated in accordance with the UK Leverage Ratio Framework which requires qualifying central
bank claims to be excluded from the leverage exposure measure.
(3) The average UK leverage ratio is based on the average of the month end tier 1 capital position
and average exposure measure over the quarter (1 October 2019 to 31 December 2019). The average
of 5.0 per cent compares to 4.9 per cent at the start and 5.1 per cent at the end of the quarter.
(4) Calculated in accordance with CRD IV rules which include central bank claims within the leverage
exposure measure.
(5) The UK leverage ratio is 5.2 per cent on a pro forma basis upon recognition of the dividend
paid up by the Insurance business in February 2020 in relation to its 2019 earnings (31 December
2018: 5.6 per cent pro forma).
CAPITAL MANAGEMENT (continued)
Application of IFRS 9 on a full impact basis for capital and
leverage
IFRS 9 full impact
--------------------
At 31 Dec At 31 Dec
2019 2018
Common equity tier 1 (GBPm) 27,002 29,592
Transitional tier 1 (GBPm) 33,249 36,964
Transitional total capital (GBPm) 43,153 47,195
Total risk-weighted assets (GBPm) 203,083 206,614
Common equity tier 1 ratio (%) 13.3% 14.3%
Transitional tier 1 ratio (%) 16.4% 17.9%
Transitional total capital ratio (%) 21.2% 22.8%
UK leverage ratio exposure measure (GBPm) 653,643 663,182
UK leverage ratio (%) 5.0% 5.4%
The Group has opted to apply paragraph 4 of CRR Article 473a
(the 'transitional rules') which allows for additional capital
relief in respect of any post 1 January 2018 increase in Stage 1
and Stage 2 IFRS 9 expected credit loss provisions (net of
regulatory expected losses) during the transition period. As at 31
December 2019 no additional capital relief has been recognised.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
2019 2018(1)
Note GBPm GBPm
Interest and similar income 16,861 16,349
Interest and similar expense (6,681) (2,953)
-------- ---------
Net interest income 10,180 13,396
-------- ---------
Fee and commission income 2,756 2,848
Fee and commission expense (1,350) (1,386)
-------- ---------
Net fee and commission income 1,406 1,462
Net trading income 18,288 (3,876)
Insurance premium income 9,574 9,189
Other operating income 2,908 1,920
-------- ---------
Other income 32,176 8,695
-------- ---------
Total income 42,356 22,091
Insurance claims (23,997) (3,465)
-------- ---------
Total income, net of insurance claims 18,359 18,626
-------- ---------
Regulatory provisions (2,895) (1,350)
Other operating expenses (9,775) (10,379)
-------- ---------
Total operating expenses (12,670) (11,729)
-------- ---------
Trading surplus 5,689 6,897
Impairment (1,296) (937)
-------- ---------
Profit before tax 4,393 5,960
Tax expense 3 (1,387) (1,454)
-------- ---------
Profit for the year 3,006 4,506
-------- ---------
Profit attributable to ordinary shareholders 2,459 3,975
Profit attributable to other equity holders 466 433
-------- ---------
Profit attributable to equity holders 2,925 4,408
Profit attributable to non-controlling interests 81 98
-------- ---------
Profit for the year 3,006 4,506
-------- ---------
Basic earnings per share 4 3.5p 5.5p
Diluted earnings per share 4 3.4p 5.5p
Restated, see note 1.
(1)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
2019 2018(1)
GBPm GBPm
Profit for the year 3,006 4,506
Other comprehensive income
Items that will not subsequently be reclassified to profit or loss:
Post-retirement defined benefit scheme remeasurements:
------- -------
Remeasurements before tax (1,433) 167
Tax 316 (47)
------- -------
(1,117) 120
Movements in revaluation reserve in respect of equity shares held at fair value through other
comprehensive income:
------- -------
Change in fair value - (97)
Tax 12 22
------- -------
12 (75)
Gains and losses attributable to own credit risk:
------- -------
Gains (losses) before tax (419) 533
Tax 113 (144)
------- -------
(306) 389
Share of other comprehensive income of associates and joint ventures - 8
Items that may subsequently be reclassified to profit or loss:
Movements in revaluation reserve in respect of debt securities held at fair value through
other comprehensive income:
------- -------
Change in fair value (30) (37)
Income statement transfers in respect of disposals (196) (275)
Impairment recognised in the income statement (1) -
Tax 71 119
------- -------
(156) (193)
Movements in cash flow hedging reserve:
------- -------
Effective portion of changes in fair value taken to other comprehensive income 1,209 234
Net income statement transfers (608) (701)
Tax (148) 113
------- -------
453 (354)
Currency translation differences (tax: nil) (12) (8)
------- -------
Other comprehensive income for the year, net of tax (1,126) (113)
------- -------
Total comprehensive income for the year 1,880 4,393
------- -------
Total comprehensive income attributable to ordinary shareholders 1,333 3,862
Total comprehensive income attributable to other equity holders 466 433
------- -------
Total comprehensive income attributable to equity holders 1,799 4,295
Total comprehensive income attributable to non-controlling interests 81 98
------- -------
Total comprehensive income for the year 1,880 4,393
------- -------
Restated, see note 1.
(1)
CONSOLIDATED BALANCE SHEET
At 31 Dec At 31 Dec
2019(1) 2018
GBPm GBPm
Assets
Cash and balances at central banks 55,130 54,663
Items in the course of collection from banks 313 647
Financial assets at fair value through profit or loss 160,189 158,529
Derivative financial instruments 26,369 23,595
--------- ---------
Loans and advances to banks 9,775 6,283
Loans and advances to customers 494,988 484,858
Debt securities 5,544 5,238
--------- ---------
Financial assets at amortised cost 510,307 496,379
Financial assets at fair value through other comprehensive income 25,092 24,815
Investments in joint ventures and associates 304 91
Goodwill 2,324 2,310
Value of in-force business 5,558 4,762
Other intangible assets 3,808 3,347
Property, plant and equipment 13,104 12,300
Current tax recoverable 7 5
Deferred tax assets 2,666 2,453
Retirement benefit assets 681 1,267
Assets arising from reinsurance contracts held 23,567 7,860
Other assets 4,474 4,575
--------- ---------
Total assets 833,893 797,598
--------- ---------
Reflects the implementation of IFRS16, see note 1.
(1)
CONSOLIDATED BALANCE SHEET (continued)
At 31 Dec At 31 Dec
2019(1) 2018
Equity and liabilities GBPm GBPm
Liabilities
Deposits from banks 28,179 30,320
Customer deposits 421,320 418,066
Items in course of transmission to banks 373 636
Financial liabilities at fair value through profit or loss 21,486 30,547
Derivative financial instruments 25,779 21,373
Notes in circulation 1,079 1,104
Debt securities in issue 97,689 91,168
Liabilities arising from insurance contracts and participating investment contracts 111,449 98,874
Liabilities arising from non-participating investment contracts 37,459 13,853
Other liabilities 20,333 19,633
Retirement benefit obligations 257 245
Current tax liabilities 187 377
Deferred tax liabilities 44 -
Other provisions 3,323 3,547
Subordinated liabilities 17,130 17,656
--------- ---------
Total liabilities 786,087 747,399
Equity
--------- ---------
Share capital 7,005 7,116
Share premium account 17,751 17,719
Other reserves 13,695 13,210
Retained profits 3,246 5,389
--------- ---------
Shareholders' equity 41,697 43,434
Other equity instruments 5,906 6,491
--------- ---------
Total equity excluding non-controlling interests 47,603 49,925
Non-controlling interests 203 274
--------- ---------
Total equity 47,806 50,199
--------- ---------
Total equity and liabilities 833,893 797,598
--------- ---------
Reflects the implementation of IFRS16, see note 1.
(1)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
-----------------------------------------
Share
capital Other Non -
and Other Retained equity controlling
premium reserves profits Total instruments interests Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 January 2019 24,835 13,210 5,389 43,434 6,491 274 50,199
Comprehensive income
Profit for the year - - 2,925 2,925 - 81 3,006
Other comprehensive
income
--------- --------- --------- -------- ----------- ----------- -------
Post-retirement defined
benefit scheme
remeasurements, net of
tax - - (1,117) (1,117) - - (1,117)
Movements in revaluation
reserve in respect of
financial assets held at
fair value through
other comprehensive
income, net of tax:
Debt securities - (156) - (156) - - (156)
Equity shares - 12 - 12 - - 12
Gains and losses
attributable to own
credit risk, net of tax - - (306) (306) - - (306)
Movements in cash flow
hedging reserve, net of
tax - 453 - 453 - - 453
Currency translation
differences (tax: GBPnil) - (12) - (12) - - (12)
--------- --------- --------- -------- ----------- ----------- -------
Total other comprehensive
income - 297 (1,423) (1,126) - - (1,126)
--------- --------- --------- -------- ----------- ----------- -------
Total comprehensive income - 297 1,502 1,799 - 81 1,880
--------- --------- --------- -------- ----------- ----------- -------
Transactions with owners
--------- --------- --------- -------- ----------- ----------- -------
Dividends - - (2,312) (2,312) - (138) (2,450)
Distributions on other
equity instruments - - (466) (466) - - (466)
Issue of ordinary shares 107 - - 107 - - 107
Share buyback (189) 189 (1,095) (1,095) - - (1,095)
Redemption of preference
shares 3 (3) - - - - -
Issue of other equity
instruments - - (3) (3) 896 - 893
Redemptions of other
equity instruments - - - - (1,481) - (1,481)
Movement in treasury
shares - - (3) (3) - - (3)
Value of employee
services:
Share option schemes - - 71 71 - - 71
Other employee award
schemes - - 165 165 - - 165
Changes in non-controlling
interests - - - - - (14) (14)
--------- --------- --------- -------- ----------- ----------- -------
Total transactions with
owners (79) 186 (3,643) (3,536) (585) (152) (4,273)
--------- --------- --------- -------- ----------- ----------- -------
Realised gains and losses
on equity shares held at
fair value through other
comprehensive
income - 2 (2) - - - -
--------- --------- --------- -------- ----------- ----------- -------
Balance at 31 December
2019 24,756 13,695 3,246 41,697 5,906 203 47,806
--------- --------- --------- -------- ----------- ----------- -------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity shareholders
-----------------------------------------
Share
capital Other Non -
and Other Retained equity controlling
premium reserves profits Total instruments interests Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 January 2018 24,831 13,553 3,976 42,360 5,355 237 47,952
Comprehensive income
Profit for the year(1) - - 4,408 4,408 - 98 4,506
Other comprehensive
income
-------- --------- --------- --------- ----------- ----------- --------
Post-retirement defined
benefit scheme
remeasurements, net of
tax - - 120 120 - - 120
Share of other
comprehensive income of
joint ventures and
associates - - 8 8 - - 8
Movements in revaluation
reserve in respect of
financial assets held at
fair value through
other comprehensive
income, net of tax:
Debt securities - (193) - (193) - - (193)
Equity shares - (75) - (75) - - (75)
Gains and losses
attributable to own
credit risk, net of tax - - 389 389 - - 389
Movements in cash flow
hedging reserve, net of
tax - (354) - (354) - - (354)
Currency translation
differences (tax:
GBPnil) - (8) - (8) - - (8)
-------- --------- --------- --------- ----------- ----------- --------
Total other comprehensive
income - (630) 517 (113) - - (113)
-------- --------- --------- --------- ----------- ----------- --------
Total comprehensive
income - (630) 4,925 4,295 - 98 4,393
-------- --------- --------- --------- ----------- ----------- --------
Transactions with owners
Dividends - - (2,240) (2,240) - (61) (2,301)
Distributions on other
equity instruments(1) - - (433) (433) - - (433)
Issue of ordinary shares 162 - - 162 - - 162
Share buyback (158) 158 (1,005) (1,005) - - (1,005)
Issue of other equity
instruments - - (5) (5) 1,136 - 1,131
Movement in treasury
shares - - 40 40 - 40
Value of employee
services: -
Share option schemes - - 53 53 - - 53
Other employee award
schemes - - 207 207 - - 207
-------- --------- --------- --------- ----------- ----------- --------
Total transactions with
owners 4 158 (3,383) (3,221) 1,136 (61) (2,146)
-------- --------- --------- --------- ----------- ----------- --------
Realised gains and losses
on equity shares held at
fair value through other
comprehensive
income - 129 (129) - - - -
-------- --------- --------- --------- ----------- ----------- --------
Balance at 31 December
2018 24,835 13,210 5,389 43,434 6,491 274 50,199
-------- --------- --------- --------- ----------- ----------- --------
Restated, see note 1.
(1)
CONSOLIDATED CASH FLOW STATEMENT
2019 2018
GBPm GBPm
Profit before tax 4,393 5,960
Adjustments for:
Change in operating assets (11,049) (4,472)
Change in operating liabilities 3,642 (8,673)
Non-cash and other items 15,573 (2,892)
Tax paid (1,278) (1,030)
-------- --------
Net cash provided by (used in) operating activities 11,281 (11,107)
-------- --------
Cash flows from investing activities
Purchase of financial assets (9,730) (12,657)
Proceeds from sale and maturity of financial assets 9,631 26,806
Purchase of fixed assets (3,442) (3,514)
Proceeds from sale of fixed assets 1,432 1,334
Acquisition of businesses, net of cash acquired (21) (49)
Disposal of businesses, net of cash disposed - 1
-------- --------
Net cash (used in) provided by investing activities (2,130) 11,921
-------- --------
Cash flows from financing activities
Dividends paid to ordinary shareholders (2,312) (2,240)
Distributions on other equity instruments (466) (433)
Dividends paid to non-controlling interests (138) (61)
Interest paid on subordinated liabilities (1,178) (1,268)
Proceeds from issue of subordinated liabilities - 1,729
Proceeds from issue of other equity instruments 893 1,131
Proceeds from issue of ordinary shares 36 102
Share buyback (1,095) (1,005)
Repayment of subordinated liabilities (818) (2,256)
Redemption of other equity instruments (1,481) -
-------- --------
Net cash used in financing activities (6,559) (4,301)
Effects of exchange rate changes on cash and cash equivalents (5) 3
-------- --------
Change in cash and cash equivalents 2,587 (3,484)
Cash and cash equivalents at beginning of year 55,224 58,708
-------- --------
Cash and cash equivalents at end of year 57,811 55,224
-------- --------
Cash and cash equivalents comprise cash and balances at central
banks (excluding mandatory deposits) and amounts due from banks
with a maturity of less than three months. Included within cash and
cash equivalents at 31 December 2019 is GBP49 million (31 December
2018: GBP40 million) held within the Group's life funds, which is
not immediately available for use in the business.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting policies, presentation and estimates
These condensed consolidated financial statements as at and for
the year to 31 December 2019 have been prepared in accordance with
the Listing Rules of the Financial Conduct Authority (FCA) relating
to Preliminary Announcements and comprise the results of Lloyds
Banking Group plc (the Company) together with its subsidiaries (the
Group). They do not include all of the information required for
full annual financial statements. Copies of the 2019 Annual Report
and Accounts will be available on the Group's website and upon
request from Investor Relations, Lloyds Banking Group plc, 25
Gresham Street, London EC2V 7HN.
Except as noted below, the accounting policies are consistent
with those applied by the Group in its 2018 Annual Report and
Accounts.
The Group adopted IFRS 16 Leases from 1 January 2019. IFRS 16
replaces IAS 17 Leases and addresses the classification and
measurement of all leases. The Group's accounting as a lessor under
IFRS 16 is substantially unchanged from its approach under IAS 17;
however for lessee accounting there is no longer a distinction
between the accounts for finance and operating leases. For all
assets the lessee recognises a right-of-use asset and a
corresponding liability at the date at which the leased asset is
available for use. Assets and liabilities arising from a lease are
initially measured on a present value basis. The lease payments are
discounted using the interest rate implicit in the lease, if that
rate can be determined, or the lessee's incremental borrowing rate.
Lease payments are allocated between the liability and finance
cost. The finance cost is charged to profit or loss over the lease
period so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period. The
right-of-use asset is depreciated over the shorter of the asset's
useful life and the lease term on a straight-line basis. Payments
associated with leases with a lease term of 12 months or less and
leases of low-value assets are recognised as an expense in profit
or loss on a straight-line basis.
The Group elected to apply the standard retrospectively with the
cumulative effect of initial application being recognised at 1
January 2019, comparatives have therefore not been restated. There
was no impact on shareholders' equity.
The Group has also implemented the amendments to IAS 12 Income
Taxes with effect from 1 January 2019 and as a result tax relief on
distributions on other equity instruments, previously taken
directly to retained profits, is reported within tax expense in the
income statement. Comparatives have been restated. Adoption of
these amendments to IAS 12 has resulted in a reduction in tax
expense and an increase in profit for the year in 2019 of GBP115
million (2018: GBP106 million). There is no impact on shareholders'
equity or on earnings per share.
The Group has early adopted the hedge accounting amendments
Interest Rate Benchmark Reform, issued by the IASB as a response to
issues arising from the planned replacement of interest rate
benchmarks in a number of jurisdictions. The amendments confirm
that entities applying hedge accounting can continue to assume that
the interest rate benchmark on which the hedged cash flows and cash
flows of the hedging instrument are based is not altered as a
result of the uncertainties of the interest rate benchmark reform.
Comparatives have not been restated.
The Group's accounting policies are set out in full in the 2019
Annual Report and Accounts.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
0 2. Critical accounting judgements and estimates
At 31 December 2019 the Group's expected credit loss allowance
(ECL) was GBP3,455 million (31 December 2018: GBP3,362 million), of
which GBP3,278 million (31 December 2018: GBP3,169 million) was in
respect of drawn balances.
The calculation of the Group's ECL allowances and its provisions
against loan commitments and guarantees under IFRS 9 requires the
Group to make a number of judgements, assumptions and estimates. In
particular, the measurement of expected credit losses is required
to reflect an unbiased probability-weighted range of possible
future outcomes. In order to do this, the Group has developed an
economic model to project a wide range of key impairment drivers
using information derived mainly from external sources. These
drivers include factors such as the unemployment rate, the house
price index, commercial property prices and corporate credit
spreads. The model-generated economic scenarios for the six years
beyond 2019 are mapped to industry-wide historical loss data by
portfolio. Combined losses across portfolios are used to rank the
scenarios by severity of loss. Alongside a defined central scenario
three further scenarios are generated by averaging a group of
individual scenarios around specified points along the loss
distribution to reflect the range of outcomes. The central scenario
reflects the Group's base case assumptions used for medium-term
planning purposes, an upside and a downside scenario are also
produced together with a severe downside scenario. Rare occurrences
of adverse economic events can lead to relatively large credit
losses which means that typically the most likely outcome is less
than the probability-weighted outcome of the range of possible
future events. To allow for this a relatively unlikely severe
downside scenario is therefore included. At 31 December 2018 and 31
December 2019, the base case, upside and downside scenarios each
carry a 30 per cent weighting; the severe downside scenario is
weighted at 10 per cent. The choice of alternative scenarios and
scenario weights is a combination of quantitative analysis and
judgemental assessment to ensure that the full range of possible
outcomes and material non-linearity of losses are captured.
For each major product grouping models have been developed which
utilise historical credit loss data to produce probabilities of
default (PDs) for each scenario; an overall weighted-average PD is
used to assist in determining the staging of financial assets and
related ECL.
The key UK economic assumptions made by the Group averaged over
a five-year period are shown below:
Economic assumptions
Severe
Base case Upside Downside downside
% % % %
At 31 December 2019
Interest rate 1.25 2.04 0.49 0.11
Unemployment rate 4.3 3.9 5.8 7.2
House price growth 1.3 5.0 (2.6) (7.1)
Commercial real estate price growth (0.2) 1.8 (3.8) (7.1)
At 31 December 2018
Interest rate 1.25 2.34 1.30 0.71
Unemployment rate 4.5 3.9 5.3 6.9
House price growth 2.5 6.1 (4.8) (7.5)
Commercial real estate price growth 0.4 5.3 (4.7) (6.4)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Critical accounting judgements and estimates (continued)
The Group's base-case economic scenario has changed little over
the year and reflects a broadly stable outlook for the economy.
Although there remains uncertainty about the economic consequences
of the UK's exit from the European Union, the Group considers that
at this stage the range of possible outcomes is adequately
reflected in its choice and weighting of scenarios. The averages
shown below do not fully reflect the peak to trough changes in the
stated assumptions over the period. The tables below illustrate the
variability of the assumptions from the start of the scenario
period to the peak and trough.
Economic assumptions - start to peak
Severe
Base case Upside Downside downside
% % % %
At 31 December 2019
Interest rate 1.75 2.56 0.75 0.75
Unemployment rate 4.6 4.6 6.9 8.3
House price growth 6.0 26.3 (1.9) (2.3)
Commercial real estate price growth 0.1 10.4 (0.6) (1.1)
At 31 December 2018
Interest rate 1.75 4.00 1.75 1.25
Unemployment rate 4.8 4.3 6.3 8.6
House price growth 13.7 34.9 0.6 (1.6)
Commercial real estate price growth 0.1 26.9 (0.5) (0.5)
Economic assumptions - start to trough
Severe
Base case Upside Downside downside
% % % %
At 31 December 2019
Interest rate 0.75 0.75 0.35 0.01
Unemployment rate 3.8 3.4 3.9 3.9
House price growth (1.9) (0.8) (14.8) (33.1)
Commercial real estate price growth (0.9) 0.3 (17.5) (30.9)
At 31 December 2018
Interest rate 0.75 0.75 0.75 0.25
Unemployment rate 4.1 3.5 4.3 4.2
House price growth 0.4 2.3 (26.5) (33.5)
Commercial real estate price growth (0.1) 0.0 (23.8) (33.8)
The following table shows the extent to which a higher ECL
allowance has been recognised to take account of forward looking
information from the weighted multiple economic scenarios. The most
significant difference between these bases arises on UK mortgages
as the probability weighted ECL includes the impact of house price
movements on the loss given default. For other portfolios
adjustment is made only for the probability of default. All
non-modelled provisions, including post model adjustments, are
based on the probability weighted modelled ECL across all
scenarios.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Critical accounting judgements and estimates (continued)
Impact of multiple economic scenarios
At 31 December 2019 At 31 December 2018
------------------------------ ------------------------------
Base Probability Base Probability
case -weighted Difference case -weighted Difference
GBPm GBPm GBPm GBPm GBPm GBPm
UK mortgages 464 569 105 253 460 207
Other Retail 1,492 1,521 29 1,294 1,308 14
Commercial 1,258 1,315 57 1,472 1,513 41
Other 50 50 - 81 81 -
----- ----------- ---------- ----- ----------- ----------
3,264 3,455 191 3,100 3,362 262
----- ----------- ---------- ----- ----------- ----------
The table below shows the Group's expected credit loss for the
upside and downside scenarios using a 100 per cent weighting, with
stage allocation based on each specific scenario.
At 31 December 2019 At 31 December 2018
--------------------------------
Upside Downside Upside Downside
GBPm GBPm GBPm GBPm
ECL allowance 3,001 3,677 2,775 3,573
-------------------- --------- -------------------- ---------
The impact of changes in the UK unemployment rate and House
Price Index (HPI) have also been assessed. Although such changes
would not be observed in isolation, as economic indicators tend to
be correlated in a coherent scenario, this gives insight into the
sensitivity of the Group's ECL to changes in these two critical
economic factors. The assessment has been made against the base
case with the reported staging unchanged. The changes to HPI and
the unemployment rate have been phased in to the forward-looking
economic outlook over three years.
The table below shows the impact on the Group's ECL resulting
from a decrease/increase in Loss Given Default for a 10 percentage
point (pp) increase/decrease in the UK House Price Index (HPI).
At 31 December 2019 At 31 December 2018
-------------------------------- --------------------------------
10pp 10pp 10pp 10pp
increase decrease increase decrease
in HPI in HPI in HPI in HPI
GBPm GBPm GBPm GBPm
ECL impact (110) 147 (114) 154
-------------------- --------- -------------------- ---------
The table below shows the impact on the Group's ECL resulting
from a 1 percentage point (pp) increase/decrease in the UK
unemployment rate.
At 31 December 2019 At 31 December 2018
-------------------------- --------------------------
1pp 1pp 1pp 1pp
increase in decrease in increase in decrease in
unemployment unemployment unemployment unemployment
GBPm GBPm
ECL impact 141 (143) 172 (155)
------------ ------------ ------------ ------------
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. Taxation
The UK corporation tax rate for the year was 19 per cent (2018:
19 per cent). An explanation of the relationship between tax
expense and accounting profit is set out below:
2019 2018(1)
GBPm GBPm
Profit before tax 4,393 5,960
------- --------
UK corporation tax thereon (835) (1,132)
Impact of surcharge on banking profits (364) (409)
Non-deductible costs: conduct charges (370) (101)
Non-deductible costs: bank levy (43) (43)
Other non-deductible costs (121) (90)
Non-taxable income 40 87
Tax relief on coupons on other equity instruments 89 83
Tax-exempt gains on disposals 102 124
Recognition (derecognition) of losses that arose in prior years 18 (9)
Remeasurement of deferred tax due to rate changes (6) 32
Differences in overseas tax rates (14) 6
Policyholder tax (67) (62)
Policyholder deferred tax asset in respect of life assurance expenses (53) 73
Adjustments in respect of prior years 237 (13)
------- --------
Tax expense (1,387) (1,454)
------- --------
Restated, see note 1.
(1)
During the December 2019 election campaign, the UK government
stated its intention to maintain the corporation tax rate at 19 per
cent on 1 April 2020. Had this rate change been substantively
enacted at 31 December 2019, the effect would have been to increase
net deferred tax assets by c.GBP300 million.
4. Earnings per share
2019 2018(1)
GBPm GBPm
Profit attributable to equity shareholders - basic and diluted 2,459 3,975
----- -------
Restated, see note 1.
(1)
p
2019 2018
million million
Weighted average number of ordinary shares in issue - basic 70,603 71,638
Adjustment for share options and awards 682 641
------- -------
Weighted average number of ordinary shares in issue - diluted 71,285 72,279
------- -------
Basic earnings per share 3.5p 5.5p
Diluted earnings per share 3.4p 5.5p
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Provisions for liabilities and charges
Payment protection insurance (excluding MBNA)
The Group increased the provision for PPI costs by a further
GBP2,450 million in the year ended 31 December 2019, bringing the
total amount provided to GBP21,875 million.
The PPI provision charge of GBP2,450 million was largely due to
the significant increase in PPI information requests (PIRs) leading
up to the deadline for submission of claims on 29 August 2019, and
also reflects costs relating to complaints received from the
Official Receiver as well as administration costs. An initial
review of around 60 per cent of the five million PIRs received in
the run-up to the PPI deadline has been undertaken, with the
conversion rate remaining low, and consistent with the provision
assumption of around 10 per cent. The Group has reached final
agreement with the Official Receiver.
At 31 December 2019, a provision of GBP1,578 million remained
unutilised relating to complaints and associated administration
costs excluding amounts relating to MBNA. Total cash payments were
GBP2,201 million during the year ended 31 December 2019.
Sensitivities
The total amount provided for PPI represents the Group's best
estimate of the likely future cost. A number of risks and
uncertainties remain including processing the remaining PIRs and
outstanding complaints. The cost could differ from the Group's
estimates and the assumptions underpinning them, and could result
in a further provision being required. These may also be impacted
by any further regulatory changes and potential additional
remediation arising from the continuous improvement of the Group's
operational practices.
For every one per cent increase in PIR conversion rate on the
stock as at the industry deadline, the Group would expect an
additional charge of approximately GBP100 million.
Payment protection insurance (MBNA)
MBNA increased its PPI provision by GBP367 million in the year
ended 31 December 2019 but the Group's exposure continues to remain
capped at GBP240 million under the terms of the sale and purchase
agreement.
.
.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Provisions for liabilities and charges (continued)
Other provisions for legal actions and regulatory matters
In the course of its business, the Group is engaged in
discussions with the PRA, FCA and other UK and overseas regulators
and other governmental authorities on a range of matters. The Group
also receives complaints in connection with its past conduct and
claims brought by or on behalf of current and former employees,
customers, investors and other third parties and is subject to
legal proceedings and other legal actions. Where significant,
provisions are held against the costs expected to be incurred in
relation to these matters and matters arising from related internal
reviews. During the year ended 31 December 2019 the Group charged a
further GBP445 million in respect of legal actions and other
regulatory matters, and the unutilised balance at 31 December 2019
was GBP528 million (31 December 2018: GBP861 million). The most
significant items are as follows.
Arrears handling related activities
The Group has provided an additional GBP188 million in the year
ended 31 December 2019 for the costs of identifying and rectifying
certain arrears management fees and activities, taking the total
provided to date to GBP981 million. The Group has put in place a
number of actions to improve its handling of customers in these
areas and has made good progress in reimbursing arrears fees to
impacted customers.
Packaged bank accounts
The Group had provided a total of GBP795 million up to 31
December 2018 in respect of complaints relating to alleged
mis-selling of packaged bank accounts, with no further amounts
provided during the year ended 31 December 2019. A number of risks
and uncertainties remain, particularly with respect to future
volumes.
Customer claims in relation to insurance branch business in
Germany
The Group continues to receive claims in Germany from customers
relating to policies issued by Clerical Medical Investment Group
Limited (subsequently renamed Scottish Widows Limited), with
smaller numbers received from customers in Austria and Italy. The
industry-wide issue regarding notification of contractual 'cooling
off' periods continued to lead to an increasing number of claims in
2016 and 2017. Whilst complaint volumes have declined, new
litigation claim volumes per month have remained fairly constant
throughout 2019. Up to 31 December 2019 the Group had provided a
total of GBP656 million. The validity of the claims facing the
Group depends upon the facts and circumstances in respect of each
claim. As a result, the ultimate financial effect, which could be
significantly different from the current provision, will be known
only once all relevant claims have been resolved.
HBOS Reading - review
The Group has now completed its compensation assessment for all
71 business customers within the customer review, with more than 98
per cent of these offers to individuals accepted. In total, more
than GBP100 million in compensation has been offered to victims of
the HBOS Reading fraud prior to the publication of Sir Ross
Cranston's independent quality assurance review of the customer
review, of which GBP94 million has so far been accepted, in
addition to GBP9 million for ex-gratia payments and GBP6 million
for the re-imbursements of legal fees. Sir Ross's review was
concluded on 10 December 2019 and made a number of recommendations,
including a re-assessment of direct and consequential losses by an
independent panel. The Group has committed to implementing Sir
Ross's recommendations in full. In addition, further ex gratia
payments of GBP35,000 have been made to 200 individuals in
recognition of the additional delay which will be caused whilst the
Group takes steps to implement Sir Ross's recommendations. It is
not possible to estimate at this stage what the financial impact
will be.
HBOS Reading - FCA investigation
The FCA's investigation into the events surrounding the
discovery of misconduct within the Reading-based Impaired Assets
team of HBOS has concluded. The Group has settled the matter with
the FCA and paid a fine of GBP45.5 million, as per the FCA's final
notice dated 21 June 2019.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. Contingent liabilities and commitments
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the Group
is not involved in the ongoing litigation (as described below)
which involves card schemes such as Visa and Mastercard. However,
the Group is a member / licensee of Visa and Mastercard and other
card schemes. The litigation in question is as follows:
-- litigation brought by retailers against both Visa and
Mastercard continues in the English Courts (and includes appeals
heard by the Supreme Court, judgment awaited); and
-- litigation brought on behalf of UK consumers in the English Courts against Mastercard.
Any impact on the Group of the litigation against Visa and
Mastercard remains uncertain at this time. Insofar as Visa is
required to pay damages to retailers for interchange fees set prior
to June 2016, contractual arrangements to allocate liability have
been agreed between various UK banks (including the Group) and Visa
Inc, as part of Visa Inc's acquisition of Visa Europe in 2016.
These arrangements cap the maximum amount of liability to which the
Group may be subject, and this cap is set at the cash consideration
received by the Group for the sale of its stake in Visa Europe to
Visa Inc in 2016.
LIBOR and other trading rates
In July 2014, the Group announced that it had reached
settlements totalling GBP217 million (at 30 June 2014 exchange
rates) to resolve with UK and US federal authorities legacy issues
regarding the manipulation several years ago of Group companies'
submissions to the British Bankers' Association (BBA) London
Interbank Offered Rate (LIBOR) and Sterling Repo Rate. The Swiss
Competition Commission concluded its investigation against Lloyds
Bank plc in June 2019. The Group continues to cooperate with
various other government and regulatory authorities, including a
number of US State Attorneys General, in conjunction with their
investigations into submissions made by panel members to the bodies
that set LIBOR and various other interbank offered rates.
Certain Group companies, together with other panel banks, have
also been named as defendants in private lawsuits, including
purported class action suits, in the US in connection with their
roles as panel banks contributing to the setting of US Dollar,
Japanese Yen and Sterling LIBOR and the Australian BBSW Reference
Rate. Certain of the plaintiffs' claims have been dismissed by the
US Federal Court for Southern District of New York (subject to
appeals).
Certain Group companies are also named as defendants in (i) UK
based claims; and (ii) two Dutch class actions, raising LIBOR
manipulation allegations. A number of the claims against the Group
in relation to the alleged mis-sale of interest rate hedging
products also include allegations of LIBOR manipulation.
It is currently not possible to predict the scope and ultimate
outcome on the Group of the various outstanding regulatory
investigations not encompassed by the settlements, any private
lawsuits or any related challenges to the interpretation or
validity of any of the Group's contractual arrangements, including
their timing and scale.
UK shareholder litigation
In August 2014, the Group and a number of former directors were
named as defendants in a claim by a number of claimants who held
shares in Lloyds TSB Group plc (LTSB) prior to the acquisition of
HBOS plc, alleging breaches of duties in relation to information
provided to shareholders in connection with the acquisition and the
recapitalisation of LTSB. Judgment was delivered on 15 November
2019. The Group and former directors successfully defended the
claims. The claimants have sought permission to appeal. It is
currently not possible to determine the ultimate impact on the
Group (if any).
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. Contingent liabilities and commitments (continued)
Tax authorities
The Group has an open matter in relation to a claim for group
relief of losses incurred in its former Irish banking subsidiary,
which ceased trading on 31 December 2010. In 2013 HMRC informed the
Group that their interpretation of the UK rules which allow the
offset of such losses denies the claim for group relief of losses.
If HMRC's position is found to be correct, management estimate that
this would result in an increase in current tax liabilities of
approximately GBP800 million (including interest) and a reduction
in the Group's deferred tax asset of approximately GBP250 million.
The Group does not agree with HMRC's position and, having taken
appropriate advice, does not consider that this is a case where
additional tax will ultimately fall due. There are a number of
other open matters on which the Group is in discussion with HMRC
(including the tax treatment of certain costs arising from the
divestment of TSB Banking Group plc), none of which is expected to
have a material impact on the financial position of the Group.
Mortgage arrears handling activities- FCA investigation
On 26 May 2016, the Group was informed that an enforcement team
at the FCA had commenced an investigation in connection with the
Group's mortgage arrears handling activities. It is not currently
possible to make a reliable assessment of any liability resulting
from the investigation including any financial penalty.
Other legal actions and regulatory matters
In addition, during the ordinary course of business the Group is
subject to other complaints and threatened or actual legal
proceedings (including class or group action claims) brought by or
on behalf of current or former employees, customers, investors or
other third parties, as well as legal and regulatory reviews,
challenges, investigations and enforcement actions, both in the UK
and overseas. All such material matters are periodically
reassessed, with the assistance of external professional advisers
where appropriate, to determine the likelihood of the Group
incurring a liability. In those instances where it is concluded
that it is more likely than not that a payment will be made, a
provision is established to management's best estimate of the
amount required at the relevant balance sheet date. In some cases
it will not be possible to form a view, for example because the
facts are unclear or because further time is needed properly to
assess the merits of the case, and no provisions are held in
relation to such matters. In these circumstances, specific
disclosure in relation to a contingent liability will be made where
material. However the Group does not currently expect the final
outcome of any such case to have a material adverse effect on its
financial position, operations or cash flows.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. Dividends on ordinary shares
The directors have recommended a final dividend, which is
subject to approval by the shareholders at the Annual General
Meeting, of 2.25 pence per share (2018: 2.14 pence per share)
totalling GBP1,586 million. These financial statements do not
reflect the recommended dividend.
Shareholders who have already joined the dividend reinvestment
plan will automatically receive shares instead of the cash
dividend. Key dates for the payment of the dividends are:
Shares quoted ex-dividend 16 April 2020
Record date 17 April 2020
Final date for joining or leaving the dividend reinvestment plan 4 May 2020
Dividends paid 27 May 2020
In May 2019 the Group announced that it will move to the payment
of quarterly dividends in 2020, with the first quarterly dividend
in respect of Q1 2020 payable in June 2020. The new approach will
be to adopt three equal interim ordinary dividend payments for the
first three quarters of the year followed by, subject to
performance, a larger final dividend for the fourth quarter of the
year. The first three quarterly payments, payable in June,
September and December will be 20 per cent of the previous year's
total ordinary dividend per share. The fourth quarter payment will
be announced with the full year results, with the amount continuing
to deliver a full year dividend payment that reflects the Group's
financial performance and its objective of a progressive and
sustainable ordinary dividend. The final dividend will continue to
be paid in May, following approval at the AGM. The Group believes
that this approach will provide a more regular flow of dividend
income to all shareholders whilst accelerating the
receipt of payments.
The key dates for the payment of the three interim dividends
are:
First interim dividend
Shares quoted ex-dividend 4 June 2020
Record date 5 June 2020
Final date for joining or leaving the dividend reinvestment plan 19 June 2020
Dividends paid 30 June 2020
Second interim dividend
Shares quoted ex-dividend 6 August 2020
Record date 7 August 2020
Final date for joining or leaving the dividend reinvestment plan 21 August 2020
Dividends paid 14 September 2020
Third interim dividend
Shares quoted ex-dividend 5 November 2020
Record date 6 November 2020
Final date for joining or leaving the dividend reinvestment plan 20 November 2020
Dividends paid 11 December 2020
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. Other information
The financial information contained in this document does not
constitute statutory accounts within the meaning of section 434 of
the Companies Act 2006 (the Act). The statutory accounts for the
year ended 31 December 2019 will be published on the Group's
website. The report of the auditor on those accounts was
unqualified, did not draw attention to any matters by way of
emphasis and did not include a statement under sections 498(2) or
498(3) of the Act. The statutory accounts for the year ended 31
December 2018 have been filed with the Registrar of Companies.
FORWARD LOOKING STATEMENTS
This document contains certain forward looking statements within
the meaning of Section 21E of the US Securities Exchange Act of
1934, as amended, and section 27A of the US Securities Act of 1933,
as amended, with respect to the business, strategy, plans and/or
results of Lloyds Banking Group plc together with its subsidiaries
(the Group) and its current goals and expectations relating to its
future financial condition and performance. Statements that are not
historical facts, including statements about the Group's or its
directors' and/or management's beliefs and expectations, are
forward looking statements. Words such as 'believes',
'anticipates', 'estimates', 'expects', 'intends', 'aims',
'potential', 'will', 'would', 'could', 'considered', 'likely',
'estimate' and variations of these words and similar future or
conditional expressions are intended to identify forward looking
statements but are not the exclusive means of identifying such
statements. Examples of such forward looking statements include,
but are not limited to: projections or expectations of the Group's
future financial position including profit attributable to
shareholders, provisions, economic profit, dividends, capital
structure, portfolios, net interest margin, capital ratios,
liquidity, risk-weighted assets (RWAs), expenditures or any other
financial items or ratios; litigation, regulatory and governmental
investigations; the Group's future financial performance; the level
and extent of future impairments and write-downs; statements of
plans, objectives or goals of the Group or its management including
in respect of statements about the future business and economic
environments in the UK and elsewhere including, but not limited to,
future trends in interest rates, foreign exchange rates, credit and
equity market levels and demographic developments; statements about
competition, regulation, disposals and consolidation or
technological developments in the financial services industry; and
statements of assumptions underlying such statements. By their
nature, forward looking statements involve risk and uncertainty
because they relate to events and depend upon circumstances that
will or may occur in the future. Factors that could cause actual
business, strategy, plans and/or results (including but not limited
to the payment of dividends) to differ materially from forward
looking statements made by the Group or on its behalf include, but
are not limited to: general economic and business conditions in the
UK and internationally; market related trends and developments;
fluctuations in interest rates, inflation, exchange rates, stock
markets and currencies; any impact of the transition from IBORs to
alternative reference rates; the ability to access sufficient
sources of capital, liquidity and funding when required; changes to
the Group's credit ratings; the ability to derive cost savings and
other benefits including, but without limitation as a result of any
acquisitions, disposals and other strategic transactions; the
ability to achieve strategic objectives; changing customer
behaviour including consumer spending, saving and borrowing habits;
changes to borrower or counterparty credit quality; concentration
of financial exposure; management and monitoring of conduct risk;
instability in the global financial markets, including Eurozone
instability, instability as a result of uncertainty surrounding the
exit by the UK from the European Union (EU) and as a result of such
exit and the potential for other countries to exit the EU or the
Eurozone and the impact of any sovereign credit rating downgrade or
other sovereign financial issues; political instability including
as a result of any UK general election; technological changes and
risks to the security of IT and operational infrastructure,
systems, data and information resulting from increased threat of
cyber and other attacks; natural, pandemic and other disasters,
adverse weather and similar contingencies outside the Group's
control; inadequate or failed internal or external processes or
systems; acts of war, other acts of hostility, terrorist acts and
responses to those acts, geopolitical, pandemic or other such
events; risks relating to climate change; changes in laws,
regulations, practices and accounting standards or taxation,
including as a result of the exit by the UK from the EU, or a
further possible referendum on Scottish independence; changes to
regulatory capital or liquidity requirements and similar
contingencies outside the Group's control; the policies, decisions
and actions of governmental or regulatory authorities or courts in
the UK, the EU, the US or elsewhere including the implementation
and interpretation of key legislation and regulation together with
any resulting impact on the future structure of the Group; the
ability to attract and retain senior management and other employees
and meet its diversity objectives; actions or omissions by the
Group's directors, management or employees including industrial
action; changes to the Group's post-retirement defined benefit
scheme obligations; the extent of any future impairment charges or
write-downs caused by, but not limited to, depressed asset
valuations, market disruptions and illiquid markets; the value and
effectiveness of any credit protection purchased by the Group; the
inability to hedge certain risks economically; the adequacy of loss
reserves; the actions of competitors, including non-bank financial
services, lending companies and digital innovators and disruptive
technologies; and exposure to regulatory or competition scrutiny,
legal, regulatory or competition proceedings, investigations or
complaints. Please refer to the latest Annual Report or Form 20-F
filed by Lloyds Banking Group plc with the US Securities and
Exchange Commission for a discussion of certain factors and risks
together with examples of forward looking statements. Lloyds
Banking Group may also make or disclose written and/or oral forward
looking statements in reports filed with or furnished to the US
Securities and Exchange Commission, Lloyds Banking Group annual
reviews, half-year announcements, proxy statements, offering
circulars, prospectuses, press releases and other written materials
and in oral statements made by the directors, officers or employees
of Lloyds Banking Group to third parties, including financial
analysts. Except as required by any applicable law or regulation,
the forward looking statements contained in this document are made
as of today's date, and the Group expressly disclaims any
obligation or undertaking to release publicly any updates or
revisions to any forward looking statements contained in this
document to reflect any change in the Group's expectations with
regard thereto or any change in events, conditions or circumstances
on which any such statement is based. The information, statements
and opinions contained in this document do not constitute a public
offer under any applicable law or an offer to sell any securities
or financial instruments or any advice or recommendation with
respect to such securities or financial instruments.
Summary of alternative performance measures
The Group calculates a number of metrics that are used
throughout the banking and insurance industries on an underlying
basis. A description of these measures and their calculation is set
out below.
Asset quality ratio The underlying impairment charge for the period (on an annualised basis) in
respect of loans
and advances to customers after releases and write-backs, expressed as a
percentage of average
gross loans and advances to customers for the period
Banking net interest margin Banking net interest income on customer and product balances in the banking
businesses as
a percentage of average gross banking interest-earning assets for the period
=============================================================================
Business as usual costs Operating costs, less investment expensed and depreciation
=============================================================================
Cost:income ratio Total costs as a percentage of net income calculated on an underlying basis
=============================================================================
Gross asset quality ratio The underlying impairment charge for the period (on an annualised basis) in
respect of loans
and advances to customers before releases and write-backs, expressed as a
percentage of average
gross loans and advances to customers for the period
=============================================================================
Loan to deposit ratio Loans and advances to customers net of allowance for impairment losses and
excluding reverse
repurchase agreements divided by customer deposits excluding repurchase
agreements on an underlying
basis
=============================================================================
Jaws The difference between the period on period percentage change in net income
and the period
on period change in total costs calculated on an underlying basis
=============================================================================
Present value of new business premium The total single premium sales received in the period (on an annualised
basis) plus the discounted
value of premiums expected to be received over the term of the new regular
premium contracts
=============================================================================
Return on Underlying profit before tax divided by average risk-weighted assets
risk-weighted assets
=============================================================================
Return on tangible equity Statutory profit after tax adjusted to add back amortisation of intangible
assets, and to
deduct profit attributable to non-controlling interests and other equity
holders, divided
by average tangible net assets
=============================================================================
Tangible net assets per share Net assets excluding intangible assets such as goodwill and
acquisition-related intangibles
divided by the weighted average number of ordinary shares in issue
=============================================================================
Trading surplus Underlying profit before impairment charge
=============================================================================
Underlying, 'or above the line' profit Statutory profit adjusted for certain items as detailed in the Basis of
Presentation
=============================================================================
Underlying return on tangible equity Underlying profit after tax at the standard UK corporation tax rate adjusted
to add back amortisation
of intangible assets, and to deduct profit attributable to non-controlling
interests and other
equity holders, divided by average tangible net assets
=============================================================================
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Douglas Radcliffe
Group Investor Relations Director
020 7356 1571
douglas.radcliffe@lloydsbanking.com
Edward Sands
Director of Investor Relations
020 7356 1585
edward.sands@lloydsbanking.com
Nora Thoden
Director of Investor Relations
020 7356 2334
nora.thoden@lloydsbanking.com
CORPORATE AFFAIRS
Grant Ringshaw
External Relations Director
020 7356 2362
grant.ringshaw@lloydsbanking.com
Matt Smith
Head of Media Relations
020 7356 3522
matt.smith@lloydsbanking.com
Copies of this interim management statement may be obtained
from:
Investor Relations, Lloyds Banking Group plc, 25 Gresham Street,
London EC2V 7HN
The statement can also be found on the Group's website -
www.lloydsbankinggroup.com
Registered office: Lloyds Banking Group plc, The Mound,
Edinburgh, EH1 1YZ
Registered in Scotland No. 95000
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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