TIDMLLOY

RNS Number : 4985Q

Lloyds Banking Group PLC

28 October 2021

Lloyds Banking Group plc

Q3 2021 Interim Management Statement

28 October 2021

RESULTS FOR THE NINE MONTHSED 30 SEPTEMBER 2021

"I am delighted to be introducing my first set of results as CEO of Lloyds Banking Group. It is very clear to me that the Group is a truly purpose-driven organisation with a real customer focus. The Group has a great franchise, an excellent digital proposition and a real depth of talent. I have been impressed with the Group's ability to Help Britain Recover from the pandemic, its commitment to sustainability and diversity, as well as its strong risk stewardship.

Building on the strengths of the Group and its achievements in recent years, there are clearly significant opportunities for Lloyds Banking Group to further develop its platforms and capabilities and grow through disciplined investment, empowering colleagues, enhancing collaboration and increasing agility across the Group. This can be built on the foundation strengths of customer service, distribution, and cost management. As we move into the final quarter of 2021, the Board, Group Executive Committee and I are developing the next evolution of our strategy and longer-term priorities. I look forward to working with all colleagues across the Group in continuing to build a resilient, stable Lloyds Banking Group and deliver sustainable, long-term returns for our shareholders, whilst meeting the needs of broader stakeholders."

Charlie Nunn, Group Chief Executive

 
 
     HIGHLIGHTS FOR THE NINE MONTHSED 30 SEPTEMBER 2021 
   Continued business momentum and solid financial performance 
    *    Strong progress on Strategic Review 2021 priorities, 
            including an all channel net promoter score and 
           mobile app net promoter score above 2021 targets, 
          improved capabilities in Markets products and a 12 
          per cent increase in new clients using the Group's 
                improved merchant services proposition 
 
 
    *    Statutory profit before tax of GBP5.9 billion (GBP2.0 
           billion in the quarter) and underlying profit of 
         GBP6.3 billion (GBP2.2 billion in the quarter), both 
         up significantly compared to the first nine months of 
                                 2020 
 
 
     *    Solid net income of GBP11.6 billion, up 8 per cent 
           (up 20 per cent compared to the third quarter of 
               2020), benefiting from increased average 
            interest-earning assets of GBP443.0 billion, a 
           banking net interest margin of 2.52 per cent and 
         other income of GBP3.8 billion, alongside a reduction 
                    in operating lease depreciation 
 
 
      *    Sustained cost discipline with operating costs of 
          GBP5.6 billion, up 1 per cent compared to the first 
             nine months of 2020, including the impact of 
         rebuilding variable pay. Remediation charge of GBP100 
                     million in the third quarter 
 
 
     *    Asset quality remains strong. Net impairment credit 
          of GBP740 million, including a net credit of GBP84 
         million in the third quarter, based upon improvements 
           to the macroeconomic outlook for the UK, combined 
         with robust credit performance. Management judgements 
             in respect of coronavirus of c.GBP1.2 billion 
                               retained 
 
 
       Balance sheet and capital strength further enhanced 
     *    Loans and advances at GBP450.5 billion, up GBP10.3 
         billion (GBP2.8 billion in the third quarter), driven 
            by strong growth of GBP15.3 billion in the open 
          mortgage book (GBP2.7 billion in the third quarter) 
 
 
      *    Customer deposits of GBP479.1 billion, up GBP28.4 
             billion (GBP4.7 billion in the quarter), with 
           continued inflows to the Group's trusted brands, 
         including Retail current accounts up GBP12.2 billion. 
            Resulting loan to deposit ratio of 94 per cent 
         provides a strong liquidity position and significant 
                    potential to lend into recovery 
 
 
    *    Strong capital build of 159 basis points. CET1 ratio 
               of 17.2 per cent after dividend accrual, 
          significantly ahead of the ongoing target of c.12.5 
          per cent, plus a c.1 per cent management buffer and 
                regulatory requirement of c.11 per cent 
 
 
                             Outlook 
        *    Given our solid financial performance and the 
            improved UK macroeconomic outlook, the Group is 
         enhancing its guidance for 2021. Based on the Group's 
                  current macroeconomic assumptions: 
 
 
    *    Net interest margin now expected to be modestly above 
                           250 basis points 
 
 
       *    Operating costs expected to be c.GBP7.6 billion 
 
 
     *    Impairment now expected to be a net credit for the 
                                 year 
 
 
    *    Return on tangible equity now expected to be over 10 
            per cent, excluding the c.2.5 percentage point 
                     benefit from tax rate changes 
 
 
      *    Risk-weighted assets in 2021 expected to be below 
                            GBP200 billion 
 
 
     *    The Group continues to target a return on tangible 
         equity in excess of its cost of equity in the medium 
                                 term 
 
 

Unless otherwise stated, the commentary on this page is given on an underlying basis. See page 14.

INCOME STATEMENT - UNDERLYING BASIS

 
                                  Nine      Nine              Three     Three 
                                months    months             months    months 
                                 ended     ended              ended     ended 
                                30 Sep    30 Sep             30 Sep    30 Sep 
                                  2021      2020   Change      2021      2020     Change 
                                  GBPm      GBPm        %      GBPm      GBPm          % 
 
Net interest income              8,270     8,096        2     2,852     2,618        9 
Other income                     3,753     3,449        9     1,336       988       35 
Operating lease depreciation     (382)     (734)       48     (111)     (208)       47 
                              --------  --------           --------  -------- 
Net income                      11,641    10,811        8     4,077     3,398       20 
                              --------  --------           --------  -------- 
Operating costs                (5,601)   (5,557)      (1)   (1,871)   (1,858)      (1) 
Remediation                      (525)     (254)              (100)      (77)     (30) 
                              --------  --------           --------  -------- 
Total costs                    (6,126)   (5,811)      (5)   (1,971)   (1,935)      (2) 
                              --------  --------           --------  -------- 
Underlying profit before 
 impairment                      5,515     5,000       10     2,106     1,463       44 
Impairment credit (charge)         740   (4,119)                 84     (301) 
                              --------  --------           --------  -------- 
Underlying profit                6,255       881              2,190     1,162       88 
Restructuring                    (386)     (288)     (34)     (131)     (155)       15 
Volatility and other items          65     (159)               (30)        29 
Statutory profit before 
 tax                             5,934       434              2,029     1,036       96 
Tax (expense) credit             (469)       273              (429)     (348)     (23) 
                              --------  --------           --------  -------- 
Statutory profit after 
 tax                             5,465       707              1,600       688 
                              --------  --------           --------  -------- 
 
Earnings per share                7.1p      0.5p               2.0p      0.8p 
 
Banking net interest margin      2.52%     2.54%    (2)bp     2.55%     2.42%       13bp 
Average interest-earning 
 banking assets               GBP443bn  GBP434bn        2  GBP447bn  GBP436bn        2 
Cost:income ratio                52.6%     53.8%  (1.2)pp     48.3%     56.9%    (8.6)pp 
Asset quality ratio            (0.22)%     1.24%  (146)bp   (0.07)%     0.27%     (34)bp 
Return on tangible equity        17.6%      1.1%   16.5pp     14.5%      6.0%      8.5pp 
 

KEY BALANCE SHEET METRICS

 
                                                              At 31 
                                 At 30      At 30  Change       Dec  Change 
                              Sep 2021   Jun 2021       %      2020       % 
 
Loans and advances to 
 customers(1)                 GBP451bn   GBP448bn       1  GBP440bn       2 
Customer deposits(2)          GBP479bn   GBP474bn       1  GBP451bn       6 
Loan to deposit ratio              94%        94%       -       98%   (4)pp 
Liquidity coverage ratio          130%       131%   (1)pp      136%   (6)pp 
CET1 ratio(3)                    17.2%      16.7%   0.5pp     16.2%   1.0pp 
CET1 ratio pre IFRS 9 
 transitional relief and 
 software(3,4)                   16.1%      15.5%   0.6pp     14.5%   1.6pp 
Transitional total capital 
 ratio(3)                        23.6%      23.1%   0.5pp     23.3%   0.3pp 
Transitional MREL ratio(3)       36.9%      36.3%   0.6pp     36.4%   0.5pp 
UK leverage ratio(3)              5.8%       5.8%       -      5.8%       - 
Risk-weighted assets          GBP201bn   GBP201bn       -  GBP203bn     (1) 
Tangible net assets per 
 share                           56.6p      55.6p    1.0p     52.3p    4.3p 
 

See basis of presentation. Return on tangible equity revised basis calculation shown on page 16.

(1) Excludes reverse repos of GBP52.2 billion (30 June 2021: GBP52.7 billion; 31 December 2020: GBP58.6 billion).

(2) Excludes repos of GBP6.1 billion (30 June 2021: GBP7.9 billion; 31 December 2020: GBP9.4 billion).

(3) Incorporating profits for the quarter that remain subject to formal verification.

(4) CET1 ratio 'pre IFRS 9 transitional relief and software' reflects (a) the full impact of IFRS 9, prior to the application of transitional relief arrangements and (b) the reversal of the beneficial treatment currently applied to intangible software assets.

QUARTERLY INFORMATION

 
                    Quarter   Quarter   Quarter   Quarter   Quarter   Quarter   Quarter 
                      ended     ended     ended     ended     ended     ended     ended 
                         30        30        31        31        30        30        31 
                        Sep       Jun       Mar       Dec       Sep       Jun       Mar 
                       2021      2021      2021      2020      2020      2020      2020 
                       GBPm      GBPm      GBPm      GBPm      GBPm      GBPm      GBPm 
 
Net interest 
 income               2,852     2,741     2,677     2,677     2,618     2,528     2,950 
Other income          1,336     1,282     1,135     1,066       988     1,235     1,226 
Operating lease 
 depreciation         (111)     (123)     (148)     (150)     (208)     (302)     (224) 
                   --------  --------  --------  --------  --------  --------  -------- 
Net income            4,077     3,900     3,664     3,593     3,398     3,461     3,952 
                   --------  --------  --------  --------  --------  --------  -------- 
Operating costs     (1,871)   (1,879)   (1,851)   (2,028)   (1,858)   (1,822)   (1,877) 
Remediation           (100)     (360)      (65)     (125)      (77)      (90)      (87) 
                   --------  --------  --------  --------  --------  --------  -------- 
Total costs         (1,971)   (2,239)   (1,916)   (2,153)   (1,935)   (1,912)   (1,964) 
                   --------  --------  --------  --------  --------  --------  -------- 
Underlying profit 
 before 
 impairment           2,106     1,661     1,748     1,440     1,463     1,549     1,988 
Impairment credit 
 (charge)                84       333       323     (128)     (301)   (2,388)   (1,430) 
                   --------  --------  --------  --------  --------  --------  -------- 
Underlying profit 
 (loss)               2,190     1,994     2,071     1,312     1,162     (839)       558 
Restructuring         (131)      (82)     (173)     (233)     (155)      (70)      (63) 
Volatility and 
 other 
 items                 (30)        95         -     (202)        29       233     (421) 
Payment 
 protection 
 insurance 
 provision                -         -         -      (85)         -         -         - 
                   --------  --------  --------  --------  --------  --------  -------- 
Statutory profit 
 (loss) 
 before tax           2,029     2,007     1,898       792     1,036     (676)        74 
Tax (expense) 
 credit               (429)       461     (501)     (112)     (348)       215       406 
                   --------  --------  --------  --------  --------  --------  -------- 
Statutory profit 
 (loss) 
 after tax            1,600     2,468     1,397       680       688     (461)       480 
                   --------  --------  --------  --------  --------  --------  -------- 
 
Banking net 
 interest 
 margin               2.55%     2.51%     2.49%     2.46%     2.42%     2.40%     2.79% 
Average 
interest-earning 
banking assets     GBP447bn  GBP442bn  GBP439bn  GBP437bn  GBP436bn  GBP435bn  GBP432bn 
 
Cost:income ratio     48.3%     57.4%     52.3%     59.9%     56.9%     55.2%     49.7% 
 
Asset quality 
 ratio              (0.07)%   (0.30)%   (0.29)%     0.11%     0.27%     2.16%     1.30% 
 
Return on 
 tangible equity      14.5%     24.4%     13.9%      5.9%      6.0%    (6.1%)      3.7% 
 
Loans and 
advances to 
customers(1)       GBP451bn  GBP448bn  GBP444bn  GBP440bn  GBP439bn  GBP440bn  GBP443bn 
Customer 
deposits(2)        GBP479bn  GBP474bn  GBP462bn  GBP451bn  GBP447bn  GBP441bn  GBP428bn 
Loan to deposit 
 ratio                  94%       94%       96%       98%       98%      100%      103% 
Risk-weighted 
assets             GBP201bn  GBP201bn  GBP199bn  GBP203bn  GBP205bn  GBP207bn  GBP209bn 
Tangible net 
 assets 
 per share            56.6p     55.6p     52.4p     52.3p     52.2p     51.6p     57.4p 
 

See basis of presentation. Return on tangible equity revised basis calculation shown on page 16.

(1) Excludes reverse repos.

(2) Excludes repos.

BALANCE SHEET ANALYSIS

 
                                    At 30    At 30            At 30            At 31 
                                      Sep      Jun              Sep              Dec 
                                     2021     2021  Change     2020  Change     2020    Change 
                                    GBPbn    GBPbn       %    GBPbn       %    GBPbn         % 
 
Loans and advances to 
 customers 
Open mortgage book                  292.6    289.9       1    270.6       8    277.3       6 
Closed mortgage book                 14.8     15.3     (3)     17.0    (13)     16.5    (10) 
Credit cards                         13.8     13.6       1     14.8     (7)     14.3     (3) 
UK Retail unsecured 
 loans                                8.1      8.0       1      8.2     (1)      8.0       1 
UK Motor Finance                     14.1     14.4     (2)     14.8     (5)     14.7     (4) 
Overdrafts                            1.0      1.0       -      1.0       -      0.9      11 
Retail other(1)                      10.8     10.5       3     10.2       6     10.4       4 
SME(2)                               39.8     40.4     (1)     40.0     (1)     40.6     (2) 
Mid Corporates                        3.7      3.8     (3)      4.4    (16)      4.1    (10) 
Corporate and Institutional          46.6     44.9       4     50.2     (7)     46.0       1 
Commercial Banking other              4.4      3.9      13      4.6     (4)      4.3       2 
Wealth and Central items              0.8      2.0    (60)      3.4    (76)      3.1    (74) 
                                  -------  -------          -------          ------- 
Loans and advances to 
 customers(3)                       450.5    447.7       1    439.2       3    440.2       2 
                                  -------  -------          -------          ------- 
 
Customer deposits 
Retail current accounts             109.6    107.3       2     91.7      20     97.4      13 
Commercial current accounts(2,4)     50.7     49.5       2     45.7      11     47.6       7 
Retail relationship 
 savings accounts                   162.6    161.3       1    149.9       8    154.1       6 
Retail tactical savings 
 accounts                            16.8     16.4       2     12.5      34     14.0      20 
Commercial deposits(2,5)            123.8    124.5     (1)    132.9     (7)    122.7       1 
Wealth and Central items             15.6     15.4       1     14.5       8     14.9       5 
                                  -------  -------          -------          ------- 
Total customer deposits(6)          479.1    474.4       1    447.2       7    450.7       6 
                                  -------  -------          -------          ------- 
 
Total assets                        882.0    879.7       -    868.9       2    871.3       1 
Total liabilities                   829.4    827.8       -    819.4       1    821.9       1 
 
Ordinary shareholders' 
 equity                              46.5     45.8       2     43.4       7     43.3       7 
Other equity instruments              5.9      5.9       -      5.9       -      5.9       - 
Non-controlling interests             0.2      0.2       -      0.2       -      0.2       - 
                                  -------  -------          -------          ------- 
Total equity                         52.6     51.9       1     49.5       6     49.4       6 
                                  -------  -------          -------          ------- 
 
Ordinary shares in issue, 
 excluding own shares             70,979m  70,956m       -  70,776m       -  70,812m       - 
 

(1) Primarily Europe.

(2) Includes Retail Business Banking.

(3) Excludes reverse repos.

(4) Primarily non interest-bearing Commercial Banking current accounts.

(5) Primarily Commercial Banking interest-bearing accounts.

(6) Excludes repos.

GROUP RESULTS - STATUTORY BASIS

The results below are prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards (IFRSs). The underlying results are shown on page 3 . A reconciliation between the statutory and underlying results is shown on page 15.

Income statement

 
                                            Nine     Nine 
                                          months   months 
                                           ended    ended 
                                          30 Sep   30 Sep 
                                            2021     2020    Change 
                                            GBPm     GBPm         % 
 
Net interest income                        7,073    9,173    (23) 
Other income                              20,012    4,126 
                                        --------  ------- 
Total income(1)                           27,085   13,299 
Insurance claims(1)                     (14,803)  (1,719) 
                                        --------  ------- 
Total income, net of insurance claims     12,282   11,580       6 
Operating expenses                       (7,194)  (7,020)     (2) 
Impairment credit (charge)                   846  (4,126) 
                                        --------  ------- 
Profit before tax                          5,934      434 
Tax (expense) credit                       (469)      273 
                                        --------  ------- 
Profit for the period                      5,465      707 
                                        --------  ------- 
 

Balance sheet

 
                                                      At 30    At 31 
                                                        Sep      Dec 
                                                       2021     2020    Change 
                                                       GBPm     GBPm         % 
 
Assets 
Cash and balances at central banks                   68,873   73,257     (6) 
Financial assets at fair value through profit 
 or loss(2)                                         202,655  191,169       6 
Derivative financial instruments                     23,191   29,613    (22) 
Financial assets at amortised cost                  519,478  514,994       1 
Financial assets at fair value through other 
 comprehensive income                                27,958   27,603       1 
Other assets                                         39,842   34,633      15 
                                                    -------  ------- 
Total assets                                        881,997  871,269       1 
                                                    -------  ------- 
 
Liabilities 
Deposits from banks                                  14,291   31,465    (55) 
Customer deposits                                   485,177  460,068       5 
Financial liabilities at fair value through 
 profit or loss                                      26,667   22,646      18 
Derivative financial instruments                     18,262   27,313    (33) 
Debt securities in issue                             80,509   87,397     (8) 
Liabilities arising from insurance and investment 
 contracts                                          163,931  154,512       6 
Other liabilities                                    27,074   24,194      12 
Subordinated liabilities                             13,444   14,261     (6) 
                                                    -------  ------- 
Total liabilities                                   829,355  821,856       1 
                                                    -------  ------- 
Total equity                                         52,642   49,413       7 
                                                    -------  ------- 
Total equity and liabilities                        881,997  871,269       1 
                                                    -------  ------- 
 

(1) Includes income and expense attributable to the policyholders of the Group's long-term assurance funds that materially offset in arriving at profit attributable to equity shareholders. These can, depending on market movements, lead to significant variances on a statutory basis in total income and insurance claims from one period to the next.

(2) Contains assets measured at fair value through profit or loss arising from contracts held with reinsurers, previously included within other assets; comparatives have been restated.

REVIEW OF PERFORMANCE

Strong strategic progress

During the first nine months of 2021, the Group has made meaningful progress across our Helping Britain Recover priority areas. We have expanded the availability of affordable and quality homes with new lending of c.GBP12.8 billion to first-time buyers, exceeding our full year 2021 target of GBP10 billion. In addition, we have continued to help businesses recover, adapt and grow through supporting over 70,000 businesses in start up and helping more than 130,000 small businesses boost their digital capabilities. The Group continues to contribute to the transition to a low carbon economy, including introducing a flagship fossil fuel-free fund allowing pension savers to invest with positive environmental impact.

We are making strong strategic progress against our customer focused ambitions. During the first nine months of 2021, the Group has continued to focus on its aim of being the preferred financial partner for personal customers with net open mortgage book growth of more than GBP15 billion. Our all channel NPS and mobile app NPS have both continued to improve in 2021 and are ahead of the targets we outlined in February. The Group generated GBP5 billion net new open book Assets Under Administration in Insurance and Wealth, as well as enhancing our Wealth offering through the announced acquisition of Embark Group. In our vision to become the best bank for business, during the first nine months of 2021, we have delivered more than 50 per cent growth in SME products originated via a digital source compared to the same period in 2020. Alongside this, we have continued to improve our ranking in core Markets areas, such as GBP rates.

The Group continues to enhance its capabilities, including an improved merchant services proposition and distribution capabilities, delivering 12 per cent new client growth in the first nine months of 2021. We have continued the roll out of hybrid ways of workings and remain on track for an 8 per cent reduction in office space in 2021, with 5 per cent delivered so far. We are continuing to build our data-driven organisation with more than 25 per cent increase in SME client engagement following the roll out of data-driven targeted marketing in June 2021.

Statutory results

The Group's statutory profit before tax for the nine months ended 30 September 2021 was GBP5,934 million, benefiting from continued business momentum and a net impairment credit based upon the improved macroeconomic outlook. Statutory profit after tax was GBP5,465 million.

The Group's balance sheet reflects continued franchise growth. Loans and advances to customers, excluding reverse repurchase agreements, were 2 per cent higher at GBP450.5 billion, compared to GBP440.2 billion at 31 December 2020, driven by strong growth in the open mortgage book of GBP15.3 billion. Customer deposits, excluding repurchase agreements, have increased by GBP28.4 billion since the end of 2020, with continued inflows to the Group's trusted brands.

Underlying results

The Group's underlying profit for the first nine months of the year was GBP6,255 million, compared to GBP881 million for the same period in 2020, reflecting both solid financial performance and the improved macroeconomic outlook for the UK. Underlying profit before impairment for the period of GBP5,515 million continues to recover, up 10 per cent against the nine months to 30 September 2020. In the third quarter underlying profit before impairment was GBP2,106 million and underlying profit was GBP2,190 million, up 27 per cent and 10 per cent respectively on the second quarter of 2021.

Net income performance of GBP11,641 million was solid, up 8 per cent on the first nine months of 2020 with stronger net interest income and other income. Net interest income of GBP8,270 million was up 2 per cent year on year, benefiting from average interest-earning banking asset growth and a banking net interest margin of 2.52 per cent (nine months to 30 September 2020: 2.54 per cent). The Group's banking net interest margin in the third quarter of 2.55 per cent was up 4 basis points on the second quarter, reflecting increased structural hedge earnings, funding benefits and higher retail overdraft balances. Average interest-earning banking assets were up 2 per cent compared to the first nine months of 2020 at GBP443.0 billion, driven by strong growth in the open mortgage book and the impact of three quarters of government-backed lending during 2021, compared to two quarters in 2020. This was partially offset by continued optimisation in Commercial Banking, the repayment of revolving credit facilities provided to support commercial clients during the pandemic and lower average balances in credit cards and Motor Finance for the year to date.

REVIEW OF PERFORMANCE (continued)

As at 30 September 2021 the Group's structural hedge had an approved capacity of GBP240 billion. This represents an increase from GBP225 billion at 30 June 2021, GBP210 billion at year end 2020 and GBP185 billion at year end 2019, on the basis of substantially greater deposit inflows since year end 2019 (inflows of GBP67 billion). The nominal balance of the structural hedge was GBP225 billion at 30 September 2021 (31 December 2020: GBP186 billion) with a weighted-average duration of around three-and-a-half years (31 December 2020: around two-and-a-half years). The Group generated GBP1.6 billion of total gross income from the structural hedge balances in the period (nine months to 30 September 2020: GBP1.9 billion), with income in the third quarter of GBP0.6 billion, showing an increase versus the first half run rate of GBP0.5 billion per quarter.

Other income of GBP3,753 million was 9 per cent higher compared to GBP3,449 million in the first nine months of 2020, with GBP1,336 million in the third quarter. Performance reflected gradually increasing customer activity, particularly strong returns in the Group's equity investment business (including Lloyds Development Capital) both in the third quarter, and the year to date, partly offset by a reduced Lex fleet size and lower levels of gilt sales. In the third quarter, Retail other income benefited from increased customer activity levels, whilst Insurance and Wealth was broadly stable. Commercial Banking, although up on the third quarter of 2020, was down slightly against the second quarter of 2021 due to lower Markets and corporate financing activity. The Group's equity investment business generated c.GBP250 million of other income in the quarter, with Lloyds Development Capital c.GBP100 million above its typical run rate. Operating lease depreciation reduced to GBP382 million (nine months to 30 September 2020: GBP734 million) as a result of stronger used car prices, combined with the continued impact of a reduced Lex fleet size.

Total costs of GBP6,126 million were 5 per cent higher than in the first nine months of 2020, due to both slightly higher operating costs and a higher remediation charge in the period. In the context of continued stronger than expected financial performance in income and impairments, as announced at the half-year, the Group accelerated the rebuild of variable pay, which has resulted in the increase in operating costs. The Group continues to maintain its focus on cost management, with a market-leading cost:income ratio of 52.6 per cent.

Remediation charges increased to GBP525 million (GBP100 million in the third quarter), which included the previously announced GBP91 million regulatory fine relating to the past communication of historical home insurance renewals, redress and operational costs in respect of HBOS Reading and litigation costs and charges relating to other ongoing legacy programmes. Year to date, GBP190 million has been recognised in relation to HBOS Reading redress and operational costs, including GBP40 million in the third quarter. As previously indicated, further significant charges in relation to HBOS Reading could be required in future quarters, although it is not possible to reliably estimate the potential impact or timings at this stage.

Asset quality remains strong, with sustained low levels of new to arrears. Impairment was a net credit of GBP740 million, compared to a net charge of GBP4,119 million in the first nine months of 2020. Within this, the first nine months of the year have seen a low impairment charge of GBP411 million before the impact of economic outlook revisions (first nine months of 2020: GBP1,192 million), including GBP159 million in the third quarter, reflecting continued strong asset quality. The net credit in the period was significantly driven by a GBP1,098 million release of expected credit loss (ECL) allowances based upon improvements to the macroeconomic outlook for the UK. Of this macroeconomic outlook driven release of ECL, GBP261 million was recognised in the third quarter of 2021.

The Group's ECL allowance reduced in the first nine months of the year by GBP1.6 billion to GBP5.2 billion, c.GBP1 billion higher than at the end of 2019 (31 December 2020: GBP6.9 billion, 31 December 2019: GBP4.2 billion). As noted above, observed credit performance remained robust in the period, with the flow of assets into arrears, defaults and write-offs remaining at low levels. The Group has retained the judgemental overlays that were in place at the half-year, with management judgements in respect of coronavirus of c.GBP1.2 billion (31 December 2020: c.GBP0.9 billion), including the central GBP400 million overlay introduced at year end, as well as c.GBP800 million of judgements within the underlying credit portfolios (31 December 2020: c.GBP500 million).

REVIEW OF PERFORMANCE (continued)

Capital

The Group's CET1 capital ratio increased to 17.2 per cent after dividend accrual, compared to 16.2 per cent at 31 December 2020. The strong capital build of 159 basis points during the first nine months of the year largely reflected banking profitability (pre-impairment credit) of 186 basis points, with a limited impairment offset of 17 basis points, being the net impact of IFRS 9 transitional relief reduction and the impairment credit year to date. Capital build also benefited from a reduction in underlying risk-weighted assets of 18 basis points, more than offset by pension and other movements of 28 basis points, primarily reflecting the full 2021 fixed contributions for the Group's three main defined benefit pension schemes. The CET1 capital ratio reduced by a further 56 basis points in respect of the ordinary dividend accrual for 2021.

The PRA have confirmed their intention to remove the beneficial treatment currently applied to intangible software assets and reinstate the original requirement to deduct these assets in full. This change will be implemented on 1 January 2022 and is expected to reduce the Group's reported CET1 ratio by c.50 basis points at that time. The Group continues to apply IFRS 9 transitional arrangements for capital, with the total relief recognised at 30 September 2021 amounting to 60 basis points. Excluding the IFRS 9 transitional relief and removing the current beneficial treatment applied to intangible software assets would reduce the Group's CET1 capital ratio from 17.2 per cent to 16.1 per cent, on the basis of the position at 30 September 2021.

The PRA recently reduced the Group's nominal Pillar 2A CET1 requirement, resulting in a reduction from the equivalent of around 2.2 per cent at 30 June 2021 to the equivalent of around 2.0 per cent on the basis of the position at 30 September 2021. The Group's CET1 regulatory capital requirement remains at around 11 per cent. The Board's view of the ongoing level of CET1 capital required to grow the business, meet regulatory requirements and cover uncertainties continues to be around 12.5 per cent, plus a management buffer of around 1 per cent.

Risk-weighted assets at GBP201 billion reduced by GBP2.0 billion in the first nine months of the year, primarily driven by continued optimisation activity undertaken in Commercial Banking, partially offset by limited credit migration and balance sheet growth. The Group continues to expect risk-weighted assets to be below GBP200 billion at the end of the year. On 1 January 2022, regulatory headwinds from the implementation of new CRD IV models (predominantly relating to mortgages) and changes to counterparty credit risk rules (SA-CCR) are expected to increase risk-weighted assets by between GBP15 billion and GBP20 billion. The exact outcome remains subject to the finalisation of the new CRD IV models and as such the Group's estimate carries a degree of uncertainty.

IFRS 17

IFRS 17, an accounting standard that will be effective from 1 January 2023, impacts the phasing of profit recognition for insurance contracts. Upon implementation, the Group's insurance-related retained earnings will be restated and the reporting of insurance new business revenue within other income will be spread over time as the Group provides service to its policyholders (versus recognised up front under current accounting standards), with the quantum and timing of the impact dependent on, inter alia, the amount and mix of new business and extent of assumption changes in any given year following implementation. The cash flow and economic value generated by the Group's Insurance business does not change. There will be no impact on the Group's or the Insurance business' capital position, nor the ability of Insurance to pay dividends to Group. Following implementation, recognition of Insurance income will be more stable. Reduction in the Group's shareholders' equity from, inter alia, the removal of value in force from the Insurance business, remeasurement of insurance liabilities and the creation of a contractual service margin (CSM) liability, is expected to drive a mid-single digit pence per share reduction in the Group's tangible net asset value.

ADDITIONAL IMPAIRMENT INFORMATION

The analyses which follow have been presented on an underlying basis.

Impairment pre and post updated economic outlook on an underlying basis

 
                                        Nine     Nine             Three    Three 
                                      months   months            months   months 
                                       ended    ended             ended    ended 
                                      30 Sep   30 Sep            30 Sep   30 Sep 
                                        2021     2020   Change     2021     2020    Change 
                                        GBPm     GBPm        %     GBPm     GBPm         % 
 
Charges pre-updated multiple 
 economic scenarios(1) : 
                                     -------  -------           -------  ------- 
Retail                                   733      976       25      206      398      48 
Commercial Banking                     (318)      211              (46)        5 
Other                                    (4)        5               (1)        1 
                                     -------  -------           -------  ------- 
                                         411    1,192       66      159      404      61 
Coronavirus impacted restructuring 
 cases(2)                               (53)      434                18        2 
Updated economic outlook: 
                                     -------  -------           -------  ------- 
Retail                                 (690)    1,442             (146)     (75)      95 
Commercial Banking                     (408)      851             (115)     (30) 
Other                                      -      200                 -        - 
                                     -------  -------           -------  ------- 
                                     (1,098)    2,493             (261)    (105) 
                                     -------  -------           -------  ------- 
Impairment (credit) charge             (740)    4,119              (84)      301 
                                     -------  -------           -------  ------- 
 
Asset quality ratio                  (0.22)%    1.24%  (146)bp  (0.07%)    0.27%    (34)bp 
 

(1) Charges based on economic outlook as at 31 December 2019, prior to the impact of the coronavirus pandemic on expected losses.

(2) Additional (credits) charges on cases subject to restructuring at the end of 2019, where the coronavirus pandemic is considered to have had a direct effect upon the recovery strategy.

Movements in ECL by division on an underlying basis

 
                          Opening                  Income             Closing 
                           ECL at               statement              ECL at 
                           31 Dec  Write-offs    (credit)    Net ECL   30 Sep 
                             2020   and other      charge   decrease     2021 
                             GBPm        GBPm        GBPm       GBPm     GBPm 
 
 
 UK Mortgages               1,605        (36)       (212)      (248)    1,357 
 Credit cards                 958       (301)          87      (214)      744 
 Loans and overdrafts         715       (360)         204      (156)      559 
 UK Motor Finance             501        (40)        (42)       (82)      419 
 Other                        229        (28)           6       (22)      207 
                          -------  ----------  ----------  ---------  ------- 
Retail                      4,008       (765)          43      (722)    3,286 
 SME                          502        (10)       (190)      (200)      302 
 Corporate and other(1)     1,900       (126)       (589)      (715)    1,185 
                          -------  ----------  ----------  ---------  ------- 
Commercial Banking          2,402       (136)       (779)      (915)    1,487 
Other                         450           1         (4)        (3)      447 
                          -------  ----------  ----------  ---------  ------- 
Total(2)                    6,860       (900)       (740)    (1,640)    5,220 
                          -------  ----------  ----------  ---------  ------- 
 
 

(1) Corporate and other primarily comprises Mid Corporates and Corporate and Institutional.

(2) Total ECL includes GBP25 million relating to other non customer-related assets (31 December 2020: GBP28 million).

ADDITIONAL IMPAIRMENT INFORMATION (continued)

Group loans and advances to customers and expected credit loss allowances - underlying basis

 
                                    Stage    Stage    Stage 
                                        1        2        3    Total 
                                                                       Stage   Stage 
                                                                           2       3 
                                                                        as %    as % 
                                                                          of      of 
At 30 September 2021                 GBPm     GBPm     GBPm     GBPm   total   total 
 
Loans and advances to customers 
 UK Mortgages                     269,807   34,699    4,261  308,767    11.2     1.4 
 Credit cards                      11,080    2,966      305   14,351    20.7     2.1 
 Loans and overdrafts               7,818    1,473      287    9,578    15.4     3.0 
 UK Motor Finance                  12,143    2,170      217   14,530    14.9     1.5 
 Other(1)                          17,285    1,617      467   19,369     8.3     2.4 
                                  -------  -------  -------  -------  ------  ------ 
Retail(2)                         318,133   42,925    5,537  366,595    11.7     1.5 
 SME(1)                            27,945    2,884      852   31,681     9.1     2.7 
 Corporate and other(1)            49,890    3,772    2,157   55,819     6.8     3.9 
                                  -------  -------  -------  -------  ------  ------ 
Commercial Banking                 77,835    6,656    3,009   87,500     7.6     3.4 
Insurance and Wealth                  906       29       64      999     2.9     6.4 
Central items(1)                   52,417        -        8   52,425       -       - 
                                  -------  -------  -------  -------  ------  ------ 
Total gross lending               449,291   49,610    8,618  507,519     9.8     1.7 
                                                                      ------  ------ 
ECL allowance on drawn balances   (1,101)  (1,754)  (2,034)  (4,889) 
                                  -------  -------  -------  ------- 
Net balance sheet carrying 
 value                            448,190   47,856    6,584  502,630 
                                  -------  -------  -------  ------- 
 
Group ECL allowance (drawn 
 and undrawn) 
 UK Mortgages                         124      651      582    1,357    48.0    42.9 
 Credit cards                         161      449      134      744    60.3    18.0 
 Loans and overdrafts                 158      269      132      559    48.1    23.6 
 UK Motor Finance(3)                  150      126      143      419    30.1    34.1 
 Other                                 49      102       56      207    49.3    27.1 
                                  -------  -------  -------  -------  ------  ------ 
Retail(2)                             642    1,597    1,047    3,286    48.6    31.9 
 SME                                   87      115      100      302    38.1    33.1 
 Corporate and other                   97      203      882    1,182    17.2    74.6 
                                  -------  -------  -------  -------  ------  ------ 
Commercial Banking                    184      318      982    1,484    21.4    66.2 
Insurance and Wealth                    9        1       10       20     5.0    50.0 
Central items                         400        -        5      405       -     1.2 
                                  -------  -------  -------  -------  ------  ------ 
Total ECL allowance (drawn 
 and undrawn)                       1,235    1,916    2,044    5,195    36.9    39.3 
                                  -------  -------  -------  -------  ------  ------ 
 
Group ECL allowances (drawn 
 and undrawn) as a % of loans 
 and advances to customers(4) 
 UK Mortgages                           -      1.9     13.7      0.4 
 Credit cards                         1.5     15.1     57.0      5.2 
 Loans and overdrafts                 2.0     18.3     61.4      5.9 
 UK Motor Finance                     1.2      5.8     65.9      2.9 
 Other                                0.3      6.3     21.0      1.1 
                                  -------  -------  -------  ------- 
Retail(2)                             0.2      3.7     20.2      0.9 
 SME                                  0.3      4.0     13.7      1.0 
 Corporate and other                  0.2      5.4     41.0      2.1 
                                  -------  -------  -------  ------- 
Commercial Banking                    0.2      4.8     34.1      1.7 
Insurance and Wealth                  1.0      3.4     15.6      2.0 
Central items                         0.8        -     62.5      0.8 
                                  -------  -------  -------  ------- 
Total ECL allowances (drawn 
 and undrawn) as a % of loans 
 and advances to customers            0.3      3.9     25.1      1.0 
                                  -------  -------  -------  ------- 
 

(1) Retail other, SME and Corporate and other include BBLS related assets. Central items includes reverse repos of GBP52.2 billion.

(2) Retail balances exclude the impact of the HBOS and MBNA acquisition related adjustments.

(3) UK Motor Finance for Stages 1 and 2 include GBP135 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

(4) Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in credit cards of GBP70 million, loans and overdrafts of GBP72 million, Retail other of GBP200 million, SME of GBP124 million and Corporate and other of GBP4 million.

ADDITIONAL IMPAIRMENT INFORMATION (continued)

Group loans and advances to customers and expected credit loss allowances - underlying basis (continued)

 
                                    Stage    Stage    Stage 
                                        1        2        3    Total 
                                                                       Stage   Stage 
                                                                           2       3 
                                                                        as %    as % 
                                                                          of      of 
At 31 December 2020                  GBPm     GBPm     GBPm     GBPm   total   total 
 
Loans and advances to customers 
 UK Mortgages                     253,043   37,882    4,459  295,384    12.8     1.5 
 Credit cards                      11,454    3,264      339   15,057    21.7     2.3 
 Loans and overdrafts               7,710    1,519      307    9,536    15.9     3.2 
 UK Motor Finance                  12,786    2,216      199   15,201    14.6     1.3 
 Other(1)                          17,879    1,304      184   19,367     6.7     1.0 
                                  -------  -------  -------  -------  ------  ------ 
Retail(2)                         302,872   46,185    5,488  354,545    13.0     1.5 
 SME(1)                            27,015    4,500      791   32,306    13.9     2.4 
 Corporate and other(1)            43,543    9,816    2,733   56,092    17.5     4.9 
                                  -------  -------  -------  -------  ------  ------ 
Commercial Banking                 70,558   14,316    3,524   88,398    16.2     4.0 
Insurance and Wealth                  832       13       70      915     1.4     7.7 
Central items(1)                   61,264        -        7   61,271       -       - 
                                  -------  -------  -------  -------  ------  ------ 
Total gross lending               435,526   60,514    9,089  505,129    12.0     1.8 
                                                                      ------  ------ 
ECL allowance on drawn balances   (1,385)  (2,493)  (2,495)  (6,373) 
                                  -------  -------  -------  ------- 
Net balance sheet carrying 
 value                            434,141   58,021    6,594  498,756 
                                  -------  -------  -------  ------- 
 
Group ECL allowance (drawn 
 and undrawn) 
 UK Mortgages                         110      798      697    1,605    49.7    43.4 
 Credit cards                         250      548      160      958    57.2    16.7 
 Loans and overdrafts                 224      344      147      715    48.1    20.6 
 UK Motor Finance(3)                  197      171      133      501    34.1    26.5 
 Other                                 46      124       59      229    54.1    25.8 
                                  -------  -------  -------  -------  ------  ------ 
Retail(2)                             827    1,985    1,196    4,008    49.5    29.8 
 SME                                  142      234      126      502    46.6    25.1 
 Corporate and other                  217      507    1,169    1,893    26.8    61.8 
                                  -------  -------  -------  -------  ------  ------ 
Commercial Banking                    359      741    1,295    2,395    30.9    54.1 
Insurance and Wealth                   11        1       11       23     4.3    47.8 
Central items                         400        -        6      406       -     1.5 
                                  -------  -------  -------  -------  ------  ------ 
Total ECL allowance (drawn 
 and undrawn)                       1,597    2,727    2,508    6,832    39.9    36.7 
                                  -------  -------  -------  -------  ------  ------ 
 
Group ECL allowances (drawn 
 and undrawn) as a % of loans 
 and advances to customers(4) 
 UK Mortgages                           -      2.1     15.6      0.5 
 Credit cards                         2.2     16.8     58.8      6.4 
 Loans and overdrafts                 2.9     22.6     64.2      7.6 
 UK Motor Finance                     1.5      7.7     66.8      3.3 
 Other                                0.3      9.5     39.3      1.2 
                                  -------  -------  -------  ------- 
Retail(2)                             0.3      4.3     22.5      1.1 
 SME                                  0.5      5.2     19.1      1.6 
 Corporate and other                  0.5      5.2     42.9      3.4 
                                  -------  -------  -------  ------- 
Commercial Banking                    0.5      5.2     38.2      2.7 
Insurance and Wealth                  1.3      7.7     15.7      2.5 
Central items                         0.7        -     85.7      0.7 
                                  -------  -------  -------  ------- 
Total ECL allowances (drawn 
 and undrawn) as a % of loans 
 and advances to customers            0.4      4.5     28.6      1.4 
                                  -------  -------  -------  ------- 
 

(1) Retail other, SME and Corporate and other include BBLS related assets. Central items includes reverse repos of GBP58.6 billion.

(2) Retail balances exclude the impact of the HBOS and MBNA acquisition related adjustments.

(3) UK Motor Finance for Stages 1 and 2 include GBP192 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

(4) Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in credit cards of GBP67 million, loans and overdrafts of GBP78 million, Retail other of GBP34 million, SME of GBP132 million and Corporate and other of GBP6 million.

ADDITIONAL IMPAIRMENT INFORMATION (continued)

UK economic assumptions - Base case scenario by quarter

Key quarterly assumptions made by the Group are shown below. Gross domestic product is presented quarter on quarter, house price growth and commercial real estate growth are presented year on year and UK Bank Rate is presented end quarter. Unemployment is presented as the average for the quarter.

 
                           First    Second     Third    Fourth     First    Second     Third      Fourth 
                         quarter   quarter   quarter   quarter   quarter   quarter   quarter     quarter 
                            2021      2021      2021      2021      2022      2022      2022        2022 
At 30 September 2021           %         %         %         %         %         %         %           % 
 
Gross domestic product     (1.6)       4.8       1.4       1.5       0.9       0.9       0.6       0.3 
UK Bank Rate                0.10      0.10      0.10      0.10      0.10      0.25      0.25      0.50 
Unemployment rate            4.9       4.7       4.7       5.8       5.7       5.6       5.4       5.4 
House price growth           6.5       8.7       5.2       4.8       4.6       2.9       2.0       1.4 
Commercial real estate 
 price growth              (2.9)       3.4       3.5       2.1       1.3     (1.3)     (0.6)       0.4 
 

UK economic assumptions - Scenarios by year

Key annual assumptions made by the Group are shown below. Gross domestic product is presented as an annual change, house price growth and commercial real estate price growth are presented as the growth in the respective indices within the period. UK Bank Rate and unemployment rate are averages for the period.

 
                                                                 2021-2025 
                          2021    2022    2023    2024   2025      average 
At 30 September 2021         %       %       %       %      %            % 
 
Upside 
Gross domestic product     6.7     5.5     1.1     1.4    1.4        3.2 
UK Bank Rate              0.26    1.57    1.62    1.78   2.03       1.45 
Unemployment rate          4.6     4.1     4.0     3.8    3.8        4.1 
House price growth         5.8     4.5     5.2     5.2    4.2        5.0 
Commercial real estate 
 price growth              7.7     6.5     2.6     1.8    0.5        3.8 
 
Base case 
Gross domestic product     6.3     5.0     1.5     1.3    1.3        3.1 
UK Bank Rate              0.10    0.28    0.50    0.69   0.94       0.50 
Unemployment rate          5.0     5.5     5.2     4.9    4.7        5.1 
House price growth         4.8     1.4     0.1     1.1    1.1        1.7 
Commercial real estate 
 price growth              2.1     0.4     1.3     1.4    0.7        1.2 
 
Downside 
Gross domestic product     6.1     4.1     1.1     1.3    1.4        2.8 
UK Bank Rate              0.11    0.16    0.17    0.19   0.28       0.18 
Unemployment rate          5.3     6.9     6.8     6.4    6.0        6.3 
House price growth         3.6   (4.8)   (7.6)   (5.3)  (2.7)      (3.4) 
Commercial real estate 
 price growth            (1.2)   (5.7)   (1.4)     0.0    0.2      (1.6) 
 
Severe downside 
Gross domestic product     5.5     2.4     0.8     1.2    1.4        2.3 
UK Bank Rate              0.08    0.01    0.03    0.03   0.05       0.04 
Unemployment rate          5.9     9.1     9.1     8.4    7.7        8.0 
House price growth         3.1   (7.9)  (13.1)  (10.1)  (6.4)      (7.0) 
Commercial real estate 
 price growth            (7.2)  (16.4)   (7.3)   (2.2)    0.4      (6.7) 
 

ADDITIONAL IMPAIRMENT INFORMATION (continued)

ECL sensitivity to economic assumptions

The table below shows the Group's ECL for the upside, base case, downside and severe downside scenarios. The stage allocation for an asset is based on the probability-weighted scenario view and, hence, the Stage 2 allocation is constant across all scenarios, in line with reported amounts. ECL applied through individual assessments and post-model adjustments is reported flat against each economic scenario, reflecting the basis on which they are evaluated. The base case, upside and downside scenarios carry a 30 per cent weighting; the severe downside is weighted at 10 per cent.

 
                Probability-                                  Severe 
                    weighted  Upside  Base case  Downside   downside 
Underlying basis        GBPm    GBPm       GBPm      GBPm       GBPm 
 
At 30 September 2021   5,220   4,584      4,904     5,577      7,002 
At 31 December 2020    6,860   5,766      6,354     7,468      9,838 
 

INTEREST RATE SENSITIVITY INFORMATION

Illustrative cumulative impact of parallel shifts in interest rate curve(1)

The table below shows the banking book net interest income sensitivity to an instantaneous parallel up or down basis points change to interest rates. Sensitivities reflect shifts in the forward rate curve. The net interest income impact from the shift is driven by structural hedge maturity reinvestment and benefit on certain deposit balances. The actual impact will also depend on the prevailing regulatory and competitive environment at the time. This sensitivity is illustrative and does not reflect new business margin implications and/or pricing actions, other than as outlined.

The following assumptions have been applied:

   --     Instantaneous parallel shift in GBP interest rate curve, including bank base rate 
   --     Balance sheet remains constant 

-- Assumes an illustrative 50 per cent pass-through on deposits, but could be different in practice

   --     Customer deposits and interest rates floored at 0 per cent 
 
             Year       Year       Year 
                1          2          3 
             GBPm       GBPm       GBPm 
 
+50bps    c.425      c.600      c.850 
+25bps    c.225      c.300      c.425 
+15bps    c.125      c.175      c.250 
-10bps    c.(150)    c.(200)    c.(250) 
 

(1) Sensitivity based on modelled impact on banking book net interest income, including the structural hedge. Annual impacts are presented for illustrative purposes only and are based on a number of assumptions which are subject to change. Year 1 reflects the 12 months from 30 September 2021 balance sheet position.

ALTERNATIVE PERFORMANCE MEASURES

In addition to the statutory basis of presentation, the results are also presented on an underlying basis. The Group Executive Committee, which is the chief operating decision maker for the Group, reviews the Group's results on an underlying basis in order to assess performance and allocate resources. Management uses underlying profit before tax, an alternative performance measure, as a measure of performance and believes that it provides important information for investors because it allows for a comparable representation of the Group's performance by removing the impact of certain items including volatility caused by market movements outside the control of management.

In arriving at underlying profit, statutory profit before tax is adjusted for the items below, to allow a comparison of the Group's underlying performance:

- Restructuring, including severance-related costs, property transformation, technology research and development, regulatory programmes and merger, acquisition and integration costs

- 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 business, the unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets

   -    Payment protection insurance provisions 

The Group's statutory income statement includes income and expense attributable to the policyholders of the Group's long-term assurance funds. These items materially offset in arriving at profit attributable to equity shareholders but can, depending on market movements, lead to significant variances on a statutory basis in total income and insurance claims from one period to the next. The Group nets down this volatility in the underlying basis presentation in order to improve comparability between periods.

The analysis of lending and expected credit loss (ECL) allowances is presented on an underlying basis. On a statutory basis, 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. Over time, these POCI assets will run off as the loans redeem, pay down or losses crystallise. 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. The Group uses the underlying basis to monitor the creditworthiness of the lending portfolio and related ECL allowances.

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, which remain unchanged, is set out on page 125 of the 2021 Half-Year Results News Release.

ALTERNATIVE PERFORMANCE MEASURES (continued)

Reconciliation between statutory and underlying basis financial information

 
                                                 Removal of: 
 
                                             Volatility  Insurance 
                                 Statutory    and other      gross  Underlying 
                                     basis   items(1,2)      up(3)       basis 
Nine months ended 30 September 
 2021                                 GBPm         GBPm       GBPm        GBPm 
 
Net interest income                  7,073          136      1,061       8,270 
Other income, net of insurance 
 claims                              5,209        (258)    (1,198)       3,753 
Operating lease depreciation                      (382)          -       (382) 
                                 ---------  -----------  ---------  ---------- 
Net income                          12,282        (504)      (137)      11,641 
Operating expenses(4)              (7,194)          931        137     (6,126) 
Impairment credit                      846        (106)          -         740 
                                 ---------  -----------  ---------  ---------- 
Profit before tax                    5,934          321          -       6,255 
                                 ---------  -----------  ---------  ---------- 
 
Nine months ended 30 September 
 2020 
Net interest income                  9,173          112    (1,189)       8,096 
Other income, net of insurance 
 claims                              2,407           13      1,029       3,449 
Operating lease depreciation                      (734)          -       (734) 
                                 ---------  -----------  ---------  ---------- 
Net income                          11,580        (609)      (160)      10,811 
Operating expenses(4)              (7,020)        1,056        153     (5,811) 
Impairment charge                  (4,126)            -          7     (4,119) 
                                 ---------  -----------  ---------  ---------- 
Profit before tax                      434          447          -         881 
                                 ---------  -----------  ---------  ---------- 
 

(1) In the nine months to 30 September 2021 this comprises the effects of market volatility and asset sales (gain of GBP269 million); the amortisation of purchased intangibles (GBP52 million); restructuring (GBP386 million, including severance costs (GBP91 million), property transformation (GBP72 million), technology research and development (GBP104 million), regulatory programmes (GBP46 million) and merger, acquisition, integration costs and other (GBP73 million)); and fair value unwind (losses of GBP152 million).

(2) In the nine months to 30 September 2020 this comprises the effects of market volatility and asset sales (gain of GBP65 million); the amortisation of purchased intangibles (GBP52 million); restructuring (GBP288 million, including severance costs (GBP65 million), property transformation (GBP95 million), technology research and development (GBP35 million), regulatory programmes (GBP29 million) and merger, acquisition, integration costs and other (GBP64 million)); and fair value unwind (losses of GBP172 million).

(3) The Group's insurance businesses' income statements include income and expense attributable to the policyholders of the Group's long-term assurance funds. These items have no impact in total upon profit attributable to equity shareholders and, to provide a clearer representation of the underlying trends within the business, these items are shown net within the underlying results.

(4) The statutory basis figure is the aggregate of operating costs and operating lease depreciation. The Group's cost:income ratio is calculated dividing total costs by net income on an underlying basis. On an underlying basis operating lease depreciation is included in net income.

 
                                          At 30 Sep  At 30 Jun  At 31 Dec 
                                               2021       2021       2020 
                                               GBPm       GBPm       GBPm 
Tangible net assets per share 
Ordinary shareholders' equity                46,490     45,761     43,278 
Goodwill                                    (2,320)    (2,320)    (2,320) 
Intangible assets                           (4,346)    (4,299)    (4,140) 
Purchased value of in-force business          (203)      (209)      (221) 
Other, including deferred tax effects           558        552        459 
                                          ---------  ---------  --------- 
Tangible net assets                          40,179     39,485     37,056 
                                          ---------  ---------  --------- 
 
Ordinary shares in issue, excluding own 
 shares                                     70,979m    70,956m    70,812m 
 
Tangible net assets per share                 56.6p      55.6p      52.3p 
 

ALTERNATIVE PERFORMANCE MEASURES (continued)

 
                                                              Nine     Nine 
                                                            months   months 
                                                             ended    ended 
                                                            30 Sep   30 Sep 
                                                              2021     2020 
Asset quality ratio 
Underlying basis impairment release (charge) (GBPm)            740  (4,119) 
Remove non-customer impairment (GBPm)                          (6)       16 
                                                           -------  ------- 
Underlying customer related impairment release (charge) 
 (GBPm)                                                        734  (4,103) 
 
Statutory net loans and advances to customers (GBPbn)(1)     450.5    439.2 
Add back expected credit loss allowance (drawn) (GBPbn)        4.4      5.9 
Acquisition related fair value adjustments (GBPbn)             0.4      0.6 
                                                           -------  ------- 
Underlying gross loans and advances to customers 
 (GBPbn)                                                     455.3    445.7 
Averaging (GBPbn)                                            (6.1)    (2.0) 
                                                           -------  ------- 
Average underlying gross loans and advances to customers 
 (GBPbn)                                                     449.2    443.7 
                                                           -------  ------- 
 
Asset quality ratio                                        (0.22)%    1.24% 
 
Banking net interest margin 
Net interest income - underlying basis (GBPm)                8,270    8,096 
Non-banking net interest expense (GBPm)                         86      151 
                                                           -------  ------- 
Banking net interest income - underlying basis (GBPm)        8,356    8,247 
                                                           -------  ------- 
 
Underlying gross loans and advances to customers 
 (GBPbn)                                                     455.3    445.7 
Non-banking items: 
 Fee-based loans and advances (GBPbn)                        (5.4)    (5.5) 
 Other non-banking (GBPbn)                                     0.9    (3.7) 
                                                           -------  ------- 
Interest-earning banking assets                              450.8    436.5 
Averaging (GBPbn)                                            (7.8)    (2.2) 
                                                           -------  ------- 
Average interest-earning banking assets (GBPbn)              443.0    434.3 
                                                           -------  ------- 
 
Banking net interest margin                                  2.52%    2.54% 
 
Return on tangible equity 
Profit attributable to ordinary shareholders (GBPm)          5,064      319 
 
Average shareholders' equity (GBPbn)                          44.7     43.6 
Average intangible assets (GBPbn)                            (6.3)    (6.2) 
                                                           -------  ------- 
Average tangible equity (GBPbn)                               38.4     37.4 
                                                           -------  ------- 
 
Return on tangible equity (%) (,2)                            17.6      1.1 
 
Underlying profit before impairment 
Statutory profit before tax (GBPm)                           5,934      434 
Statutory impairment (release) charge (GBPm)                 (846)    4,126 
Volatility and other items including restructuring 
 (GBPm)                                                        427      447 
Insurance gross up (GBPm)                                        -      (7) 
Underlying profit before impairment (GBPm)                   5,515    5,000 
                                                           -------  ------- 
 

(1) Excludes reverse repos of GBP52.2 billion (30 September 2020: GBP60.0 billion).

(2) As announced at the full year 2020 results, the Group has revised its definition of return on tangible equity. Statutory profit after tax is adjusted to deduct profit attributable to non-controlling interests and other equity holders and is divided by average tangible equity. 30 September 2020 disclosed on the revised basis.

BASIS OF PRESENTATION

This release covers the results of Lloyds Banking Group plc together with its subsidiaries (the Group) for the nine months ended 30 September 2021. Unless otherwise stated, income statement commentaries throughout this document compare the nine months ended 30 September 2021 to the nine months ended 30 September 2020, and the balance sheet analysis compares the Group balance sheet as at 30 September 2021 to the Group balance sheet as at 31 December 2020. The Group uses a number of alternative performance measures, including underlying profit, in the discussion of its business performance and financial position. These measures are labelled with a ' ' throughout this document. Further information on these measures is set out on page 14. Unless otherwise stated, commentary on page 1 is given on an underlying basis. Capital and leverage ratios reported as at 30 September 2021 incorporate profits for the quarter that remain subject to formal verification in accordance with the Capital Requirements Regulation. The Q3 2021 Interim Pillar 3 Report can be found at: https://www.lloydsbankinggroup.com/investors/financial-downloads/

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 Lloyds Banking Group plc together with its subsidiaries (the Group) and its current goals and expectations. Statements that are not historical or current facts, including statements about the Group's or its directors' and/or management's beliefs and expectations, are forward looking statements. Words such as, without limitation, 'believes', 'achieves', 'anticipates', 'estimates', 'expects', 'targets', 'should', 'intends', 'aims', 'projects', 'plans', 'potential', 'will', 'would', 'could', 'considered', 'likely', 'may', 'seek', 'estimate', 'probability', 'goal', 'objective', 'deliver', 'endeavour', 'prospects', 'optimistic' and similar expressions or variations on these expressions are intended to identify forward looking statements. These statements concern or may affect future matters, including but 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; the Group's ESG targets and/or commitments; statements of plans, objectives or goals of the Group or its management and other statements that are not historical fact; expectations about the impact of COVID-19; 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 include, but are not limited to: general economic and business conditions in the UK and internationally; market related risks, trends and developments; fluctuations in interest rates, inflation, exchange rates, stock markets and currencies; volatility in credit markets; 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; potential changes in dividend policy; the ability to achieve strategic objectives; management and monitoring of conduct risk; exposure to counterparty risk; credit rating risk; instability in the global financial markets, including within the Eurozone, and as a result of uncertainty surrounding the exit by the UK from the European Union (EU) and the effects of the EU-UK Trade and Cooperation Agreement; political instability including as a result of any UK general election and any further possible referendum on Scottish independence; 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 (including but not limited to the COVID-19 pandemic) and other disasters; inadequate or failed internal or external processes or systems; acts of hostility or terrorism and responses to those acts, or other such events; geopolitical unpredictability; risks relating to sustainability and climate change (and achieving climate change ambitions), including the Group's ability along with the government and other stakeholders to measure, manage and mitigate the impacts of climate change effectively; changes in laws, regulations, practices and accounting standards or taxation; changes to regulatory capital or liquidity requirements and similar contingencies; the policies and actions of governmental or regulatory authorities or courts together with any resulting impact on the future structure of the Group; projected employee numbers and key person risk; the impact of competitive conditions; and exposure to legal, regulatory or competition proceedings, investigations or complaints. A number of these influences and factors are beyond the Group's control. Please refer to the latest Annual Report on Form 20-F filed by Lloyds Banking Group plc with the US Securities and Exchange Commission (the SEC), which is available on the SEC's website at www.sec.gov, for a discussion of certain factors and risks. Lloyds Banking Group plc may also make or disclose written and/or oral forward-looking statements in other written materials and in oral statements made by the directors, officers or employees of Lloyds Banking Group plc 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 whether as a result of new information, future events or otherwise. 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.

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

Eileen Khoo

Director of Investor Relations

07385 376435

eileen.khoo@lloydsbanking.com

Nora Thoden

Director of Investor Relations - ESG

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

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