TIDMLLOY
RNS Number : 5412U
Lloyds Banking Group PLC
30 July 2020
2020 Half-Year Results
News Release
Lloyds Banking Group plc
30 July 2020
Part 1 of 2
Y'
BASIS OF PRESENTATION
This release covers the results of Lloyds Banking Group plc together with its subsidiaries
(the Group) for the six months ended 30 June 2020.
Statutory basis: Statutory profit / loss before tax and statutory profit after tax are included
within this document. 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
six months ended 30 June 2020 to the six months ended 30 June 2019 and the balance sheet analysis
compares the Group balance sheet as at 30 June 2020 to the Group balance sheet as at 31 December
2019.
Segmental information: During the half-year to 30 June 2020, the Group migrated certain customer
relationships from the SME business within Commercial Banking to Business Banking within Retail.
In addition, Commercial Banking has been resegmented to reflect the division's new client
coverage model and is now analysed according to SME, Mid Corporates, Corporate & Institutional,
and Other. The Group has also revised its approach to internal funding charges, including
the adoption of the Sterling Overnight Index Average (SONIA) interest rate benchmark in place
of LIBOR. Comparatives have been restated accordingly.
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.
There have been no changes to the definitions of alternative performance measures used by
the Group; further information on these measures is set out in the summary of alternative
performance measures.
This document can also be found on the Group's website under "Financial Performance Downloads"
via this link www.lloydsbankinggroup.com/investors/financial-performance/.
In addition, the Group Chief Executive's letter to shareholders is also available from the
same link.
CONTENTS
Page
Results for the half-year 1
Income statement - underlying basis 3
Key balance sheet metrics 3
Quarterly information 4
Balance sheet analysis 5
Group Chief Executive's statement 6
Summary of Group results 10
Underlying basis segmental analysis 23
Divisional results
Retail 25
Commercial Banking 27
Insurance and Wealth 29
Central items 31
Other financial information
Reconciliation between statutory and underlying basis results 32
Banking net interest margin and average interest-earning
banking assets 33
Volatility arising in insurance businesses 33
Tangible net assets per share 34
Return on tangible equity 34
Risk management
Principal risks and uncertainties 35
Credit risk portfolio 37
Funding and liquidity management 56
Capital management 60
Statutory information
Condensed cons olidated half-year financial statements
Consolidated income statement 71
Consolidated statement of comprehensive income 72
Consolidated balance sheet 73
Consolidated statement of changes in equity 75
Consolidated cash flow statement 78
Notes to the consolidated financial statements 79
Statement of directors' responsibilities 124
Independent review report to Lloyds Banking Group plc 125
Summary of alternative performance measures 128
Contacts 129
RESULTS FOR THE HALF-YEAR
"The impact of the coronavirus pandemic in the first half of
2020 has been profound on the way we live our lives and on the
global economy. We remain fully focused on helping our customers
and the UK economy recover, in collaboration with Government and
our regulators.
I want to express my sincere gratitude to all my colleagues
across the Group for their dedication and persistence which have
allowed us to deliver vital banking services to our customers
effectively throughout the pandemic.
Although the outlook is uncertain, the Group's financial
strength and business model allow us to help Britain recover and
play our part in returning our country to prosperity. Our customer
focused strategic plan remains fully aligned with the Group's long
term strategic objectives, the position of our franchise and the
interests of shareholders."
António Horta-Osório
Group Chief Executive
Supporting customers, colleagues and the economy in difficult
times
-- Actively supporting retail, small business and commercial
customers through a range of flexible propositions
- Over GBP9 billion lending provided to businesses through
government-backed schemes, including Bounce Back Loan, Coronavirus
Business Interruption Loan and Coronavirus Large Business
Interruption Loan schemes
- Over 1.1 million payment holidays granted to retail customers
and c.33,000 capital repayment holidays provided to small
businesses and corporates to alleviate temporary financial
pressures
- Payment holidays granted on insurance premiums and advance
payments for life and critical illness claims to support customers
in financial difficulty during the pandemic
-- Job and pay security provided to all colleagues since March.
c.50,000 colleagues now working from home
-- Multi-channel distribution model, with the UK's leading
digital bank, combined with around 90 per cent of branches
remaining open throughout the lockdown, enabling the Group to
continue to serve customers
Continued strategic progress
-- Continued progress against strategy with particular focus on
building a leading customer experience, further digitising the
Group, transforming the way we work and maximising Group
capabilities. Over GBP2.4 billion invested in strategic initiatives
during GSR3 to help deliver sustainable shareholder value
creation
-- The benefits of our investments from GSR3 have positioned us well in the current environment:
- Operating the UK's leading digital bank we now have more than
17 million digitally active users, up 4 per cent during lockdown,
while recording digital customer satisfaction levels at an all-time
high, even in a period of increased demand
- Our commitment to delivering cost efficiencies and creating
capacity to invest in the business has enabled us to respond
quickly to new challenges, such as using robotics to process c.98
per cent of Bounce Back Loan applications
- Our unique Single Customer View, which added another 1 million
customers in the first half of the year, enables us to serve a
wider range of our customers' financial needs than ever before
-- The opportunity exists to accelerate our transformation, and
further enhance and adapt strategy, customer propositions and
colleague work practices as the Group learns from the crisis
RESULTS FOR THE HALF-YEAR (continued)
Financial performance reflects revised economic outlook
-- Net income of GBP7.4 billion, down 16 per cent. Lower net
interest margin of 2.59 per cent reflecting lower rates, actions
taken to support customers and changes in asset mix; average
interest earning assets were broadly stable. Other income of GBP2.5
billion, impacted by slowdown across key markets in the first
half
-- Total costs of GBP3.9 billion, 4 per cent lower, with
business as usual costs down 6 per cent, enabling continued
investment in digital projects and enhanced support for customers
during the pandemic
-- Trading surplus of GBP3.5 billion, a reduction of 26 per cent
compared to the first six months of 2019, providing still
significant capacity to absorb impairment impacts of the
coronavirus crisis
-- Impairment charge of GBP3.8 billion, including GBP2.4 billion
in the second quarter primarily reflecting a significant
deterioration in forward looking economic outlook. Loan books,
based on actual defaults to date, continue to perform well, with
the additional provisions building balance sheet resilience
-- Statutory loss before tax of GBP602 million and statutory
profit after tax of GBP19 million, both impacted by income
developments and the increased impairment charge. Tangible net
asset value per share of 51.6 pence
Balance sheet remains strong and well positioned to absorb
coronavirus impacts
-- Loans and advances at GBP440 billion were stable compared to
the year end but reduced by GBP3 billion in the second quarter with
expected reductions in the mortgage book, lower unsecured balances
and repayment of lending facilities by Corporate &
Institutional clients. This was partially offset by new SME lending
through government support schemes
-- Customer deposits increased by GBP29 billion in the half and
GBP13 billion in the second quarter as a result of reduced consumer
spending and inflows to the Group's trusted brands in an uncertain
environment, with growth in Retail deposits ahead of the market.
Commercial deposits benefited from clients' increased liquidity due
to increased government support scheme borrowing
-- Loan to deposit ratio now 100 per cent, providing significant
potential to lend into recovery, with a strong liquidity
position
-- CET1 ratio of 14.6 per cent and 13.4 per cent pre IFRS 9
transitional relief, along with lower Pillar 2A requirement,
resulting in significant headroom above lower regulatory
requirements of c.11 per cent as cushion against potential credit
impairment
-- In line with the Group's announcement on 31 March, no
shareholder distributions will be undertaken in 2020. The Board
will decide on any dividend distributions or buybacks on ordinary
shares in respect of 2020 at year end, in line with the approved
dividend policy
Outlook
-- There have been early signs of recovery in the Group's core
markets, mainly in consumer spending and the housing market, but
the outlook remains highly uncertain and the impact of lower rates
and economic fragility will continue for at least the rest of the
year. The Group's updated 2020 guidance reflects a proactive
response to the challenging economic environment and is based on
the Group's recently revised current economic assumptions, which
have deteriorated since the first quarter
- Net interest margin expected to remain broadly stable on the
second quarter level at c.240 basis points for the rest of the year
resulting in a full year margin of c.250 basis points
- Operating costs to be below GBP7.6 billion
- Impairment expected to be between GBP4.5 billion and GBP5.5 billion
- Risk-weighted assets expected to be flat to modestly up compared to the first half of 2020
-- Although the economic outlook remains uncertain, the Group's
financial strength and business model will ensure that it can
continue to support its customers and help Britain recover. This is
fully aligned with the Group's long term strategic objectives, the
position of the franchise and the interests of our shareholders
INCOME STATEMENT - UNDERLYING BASIS
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019 Change 2019 Change
GBPm GBPm % GBPm %
Net interest income 5,478 6,145 (11) 6,232 (12)
Other income 2,461 3,150 (22) 2,582 (5)
Operating lease depreciation (526) (473) (11) (494) (6)
---------- ---------- ---------
Net income 7,413 8,822 (16) 8,320 (11)
---------- ---------- ---------
Operating costs (3,699) (3,906) 5 (3,969) 7
Remediation (177) (143) (24) (302) 41
---------- ---------- ---------
Total costs (3,876) (4,049) 4 (4,271) 9
---------- ---------- ---------
Trading surplus 3,537 4,773 (26) 4,049 (13)
Impairment (3,818) (579) (712)
---------- ---------- ---------
Underlying (loss) / profit (281) 4,194 3,337
Restructuring (133) (182) 27 (289) 54
Volatility and other items (188) (465) 60 248
Payment protection insurance provision - (650) 100 (1,800) 100
---------- ---------- ---------
Statutory (loss) / profit before tax (602) 2,897 1,496
Tax credit / (expense) 621 (672) (715)
---------- ---------- ---------
Statutory profit after tax 19 2,225 (99) 781 (98)
---------- ---------- ---------
(Loss) / earnings per share (0.3)p 2.7p 0.8p
Banking net interest margin 2.59% 2.90% (31)bp 2.86% (27)bp
Average interest-earning banking assets GBP433bn GBP433bn - GBP436bn (1)
Cost:income ratio 52.3% 45.9% 6.4pp 51.3% 1.0pp
Asset quality ratio 1.73% 0.26% 147bp 0.31% 142bp
Underlying return on tangible equity (0.7)% 16.3% (17.0)pp 13.3% (14.0)pp
Return on tangible equity 0.1% 11.5% (11.4)pp 4.0% (3.9)pp
KEY BALANCE SHEET METRICS
At 30 June At 30 June Change At 31 Dec Change
2020 2019 % 2019 %
Loans and advances to customers(1) GBP440bn GBP441bn - GBP440bn -
Customer deposits(2) GBP441bn GBP418bn 6 GBP412bn 7
Loan to deposit ratio 100% 106% (6)pp 107% (7.0)pp
CET1 ratio(3) 14.6% 14.0% 0.6pp 13.8% 0.8pp
CET1 ratio pre IFRS 9 transitional relief(3,4) 13.4% 13.7% (0.3)pp 13.4% -
Transitional MREL ratio(3) 36.8% 32.2% 4.6pp 32.6% 4.2pp
UK leverage ratio(3) 5.4% 5.1% 0.3pp 5.2% 0.2pp
Risk-weighted assets(3) GBP207bn GBP207bn - GBP203bn 2
Tangible net assets per share 51.6p 53.0p (1.4)p 50.8p 0.8p
Excludes reverse repos of GBP61.1 billion (30 June 2019: GBP54.1
(1) billion; 31 December 2019: GBP54.6 billion).
Excludes repos of GBP12.3 billion (30 June 2019: GBP4.1 billion;
(2) 31 December 2019: GBP9.5 billion).
The CET1, MREL and leverage ratios and risk-weighted assets at
(3) 30 June 2019 and 31 December 2019 are reported on a pro forma basis,
reflecting the dividend paid up by the Insurance business in the
subsequent reporting period.
CET1 ratio reflecting the full impact of IFRS 9, prior to the application
(4) of transitional arrangements for capital that provide relief for
the impact of IFRS 9.
QUARTERLY INFORMATION
Quarter Quarter Quarter Quarter Quarter Quarter
ended ended ended ended ended ended
30 June 31 Mar 31 Dec 30 Sept 30 June 31 Mar
2020 2020 2019 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 2,528 2,950 3,102 3,130 3,062 3,083
Other income 1,235 1,226 1,267 1,315 1,594 1,556
Operating lease depreciation (302) (224) (236) (258) (254) (219)
-------- -------- -------- -------- -------- --------
Net income 3,461 3,952 4,133 4,187 4,402 4,420
-------- -------- -------- -------- -------- --------
Operating costs (1,822) (1,877) (2,058) (1,911) (1,949) (1,957)
Remediation (90) (87) (219) (83) (123) (20)
-------- -------- -------- -------- -------- --------
Total costs (1,912) (1,964) (2,277) (1,994) (2,072) (1,977)
-------- -------- -------- -------- -------- --------
Trading surplus 1,549 1,988 1,856 2,193 2,330 2,443
Impairment (2,388) (1,430) (341) (371) (304) (275)
-------- -------- -------- -------- -------- --------
Underlying (loss) / profit (839) 558 1,515 1,822 2,026 2,168
Restructuring (70) (63) (191) (98) (56) (126)
Volatility and other items 233 (421) 122 126 (126) (339)
Payment protection insurance provision - - - (1,800) (550) (100)
-------- -------- -------- -------- -------- --------
Statutory (loss) / profit before tax (676) 74 1,446 50 1,294 1,603
Tax credit / (expense) 215 406 (427) (288) (269) (403)
-------- -------- -------- -------- -------- --------
Statutory (loss) / profit after tax (461) 480 1,019 (238) 1,025 1,200
-------- -------- -------- -------- -------- --------
Banking net interest margin 2.40% 2.79% 2.85% 2.88% 2.89% 2.91%
Average interest-earning banking assets GBP435bn GBP432bn GBP437bn GBP435bn GBP433bn GBP433bn
Cost:income ratio 55.2% 49.7% 55.1% 47.6% 47.1% 44.7%
Asset quality ratio 2.16% 1.30% 0.30% 0.33% 0.27% 0.25%
Gross asset quality ratio 2.19% 1.35% 0.39% 0.40% 0.38% 0.30%
Underlying return on tangible equity (6.0)% 4.7% 12.2% 14.3% 15.6% 17.0%
Return on tangible equity (4.8)% 5.0% 11.0% (2.8)% 10.5% 12.5%
Loans and advances to customers(1) GBP440bn GBP443bn GBP440bn GBP447bn GBP441bn GBP441bn
Customer deposits(2) GBP441bn GBP428bn GBP412bn GBP419bn GBP418bn GBP417bn
Loan to deposit ratio 100% 103% 107% 107% 106% 106%
Risk-weighted assets(3) GBP207bn GBP209bn GBP203bn GBP209bn GBP207bn GBP208bn
Tangible net assets per share 51.6p 57.4p 50.8p 52.0p 53.0p 53.4p
Excludes reverse repos.
(1)
Excludes repos.
(2)
Risk-weighted assets at 30 June 2019 and 31 December 2019 are reported
(3) on a pro forma basis reflecting the Insurance dividend paid to
the Group in the subsequent reporting period.
BALANCE SHEET ANALYSIS
At 30 June At 31 Mar At 30 June At 31 Dec
2020 2020 Change 2019 Change 2019 Change
GBPbn GBPbn % GBPbn % GBPbn %
Loans and advances to customers
Open mortgage book 267.1 268.1 - 264.9 1 270.1 (1)
Closed mortgage book 17.5 17.9 (2) 19.8 (12) 18.5 (5)
Credit cards 15.2 16.7 (9) 17.7 (14) 17.7 (14)
UK Retail unsecured loans 8.2 8.6 (5) 8.2 - 8.4 (2)
UK motor finance 15.3 15.8 (3) 15.5 (1) 15.6 (2)
Overdrafts 1.0 1.2 (17) 1.2 (17) 1.3 (23)
Retail other(1) 9.7 9.3 4 9.0 8 9.0 8
SME(2) 38.4 32.0 20 32.3 19 32.1 20
Mid Corporates(3) 4.6 4.7 (2) 5.5 (16) 5.3 (13)
Corporate and Institutional(3) 55.0 60.9 (10) 59.8 (8) 54.6 1
Commercial Banking other 5.0 4.9 2 4.3 16 5.2 (4)
Wealth 0.9 0.9 - 0.9 - 0.9 -
Central items 2.5 2.1 19 1.9 32 1.7 47
---------- --------- ---------- ---------
Loans and advances to customers(4) 440.4 443.1 (1) 441.0 - 440.4 -
---------- --------- ---------- ---------
Customer deposits
Retail current accounts 87.5 79.9 10 76.0 15 76.9 14
Commercial current accounts(2,5) 44.2 34.5 28 34.0 30 34.9 27
Retail relationship savings
accounts 148.5 144.1 3 144.4 3 144.5 3
Retail tactical savings accounts 12.7 12.7 - 15.3 (17) 13.3 (5)
Commercial deposits(2,6) 133.8 142.5 (6) 133.2 - 127.6 5
Wealth 13.5 13.3 2 13.8 (2) 13.7 (1)
Central items 0.9 1.4 (36) 0.9 - 0.9
---------- --------- ---------- ---------
Total customer deposits(7) 441.1 428.4 3 417.6 6 411.8 7
---------- --------- ---------- ---------
Total assets 873.0 861.7 1 822.2 6 833.9 5
Total liabilities 824.1 809.0 2 773.2 7 786.1 5
Shareholders' equity 42.8 46.6 (8) 43.4 (1) 41.7 3
Other equity instruments 5.9 5.9 - 5.4 9 5.9 -
Non-controlling interests 0.2 0.2 - 0.2 - 0.2 -
---------- --------- ---------- ---------
Total equity 48.9 52.7 (7) 49.0 - 47.8 2
---------- --------- ---------- ---------
Ordinary shares in issue,
excluding own shares 70,735m 70,411m - 70,740m - 70,031m 1
Primarily Europe.
(1)
Includes Retail Business Banking.
(2)
Commercial Banking segmentation has been updated to reflect new
(3) client coverage model.
Excludes reverse repos.
(4)
Primarily non interest-bearing Commercial Banking current accounts.
(5)
Primarily Commercial Banking interest-bearing accounts.
(6)
Excludes repos.
(7)
GROUP CHIEF EXECUTIVE'S STATEMENT
In the first six months of 2020, the coronavirus pandemic has
had an unprecedented impact on the people and economies of the
world. In the UK we have witnessed the fastest contraction in
economic activity seen in modern times as the country was forced
into lockdown in March, alongside the most comprehensive and
co-ordinated set of government and central bank support packages
ever implemented. Although the economy has now started to re-open
and activity in the Group's core markets has somewhat rebounded, it
largely remains below pre-crisis levels and the economic outlook
remains uncertain. There also continues to be uncertainty relating
to the ongoing trade negotiations with the EU, the UK's largest
export market. Despite this challenging operating environment, the
Group's financial strength, business model and successful strategic
delivery have enabled us to play a significant role, together with
Government, regulators and other authorities, in helping the
country manage through this crisis and will continue to ensure that
we can support customers and help Britain recover.
Lloyds Banking Group has always been at the heart of the British
economy and I am proud of the continuing financial and social
support we have been able to provide. Thousands of colleagues
across the Group have worked tirelessly over the past few months to
ensure continued service to our customers. I would like to
sincerely thank all of them for their resilience, dedication and
professionalism during this time of difficulty and national
need.
It was with mixed emotions that, earlier this month, I announced
my intention to step down as Group Chief Executive of Lloyds
Banking Group by the end of June of next year. It has been an
honour to play my part in the transformation of large parts of our
business. I will continue to be completely focused with my
executive team on delivering the remainder of our current strategic
plan, as well as the plans put in place to address the COVID-19
pandemic effects and support our customers during these difficult
times.
Support for customers
Customers remain a priority throughout this crisis and beyond.
Working closely with the UK Government and our regulators, we have
continued to support our retail, small business and commercial
customers through a comprehensive and unprecedented range of
flexible measures.
Since the start of the crisis we have provided over 1.1 million
payment holidays in respect of mortgages, loans, cards and motor
finance to our retail customers. We also continue to support our
customers with access to a GBP500 interest free overdraft facility,
with no fees for missed payments and access to fixed term savings
accounts without charge. We have offered a dedicated phone line for
elderly customers and ensure that NHS staff calls are answered as a
priority.
Similarly, we are providing significant support for our small
business and commercial customers. We have approved over GBP9
billion in loans to businesses under the different Government
schemes, including Bounce Back Loans (BBL), Coronavirus Business
Interruption Loan Scheme (CBILS) and Coronavirus Large Business
Interruption Loan Scheme (CLBILS). We have also supported customers
through the Group's own GBP2 billion COVID-19 fund which includes
fee-free lending for new overdrafts or overdraft limit increases as
well as new or increased invoice discounting and finance facilities
and, in certain circumstances, capital repayment holidays. For our
SME customers, we are offering a mentoring service to help navigate
a path beyond the pandemic.
To support our Insurance and Wealth customers during the
pandemic, we have offered payment holidays on insurance premiums
and accelerated claims payments on life and critical illness
policies. We have also supported the NHS by providing free
additional insurance cover to its workers and by alleviating
pressure on GPs with a reduction in medical evidence required for
customers' claims.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
Beyond providing financial support, we have stood by our
customers and communities, offering a range of expert support and
guidance, to help alleviate the pressure of the current crisis. For
example, we have helped our customers to stay digitally connected
during the lockdown and have partnered with 'We Are Digital', a
leading expert in supporting people with digital skills and
financial inclusion, to deliver up to 2,000 tablet devices free of
charge to over-70s to help them keep connected. Our Lloyds Bank
Academy, which offers free digital skills training, has supported
c.32,000 individuals, charities and small businesses in the first
half of the year with online webinars and training courses. Through
additional funding from the Group, our long-term charity partner
Mental Health UK has been able to extend their mental health
services at a time when social distancing and self-isolation can
put significant pressure on many people.
We are, of course, aware that the support we are providing to
our personal and business customers to help them through the
current crisis will have a cost to the Group. We believe this is
the right thing to do, as supporting our customers directly aids
the recovery of the economy from which we benefit. We view this as
an investment in the business, which is fully aligned with our
purpose of Helping Britain Prosper and the long-term success of the
Group, and therefore in the interests of our shareholders.
Operational resilience
I am particularly pleased with how quickly the Group adapted at
scale when the lockdown began and how willing and able colleagues
were to adopt new ways of working and collaborate remotely to
support customers. Throughout the pandemic, the business has
remained fully operational and our technology infrastructure has
performed well under significant pressure. Around 90 per cent of
branches have remained open throughout the coronavirus outbreak and
importantly, our digital banking proposition has performed well in
a period of significantly heightened usage while also achieving all
time high user feedback scores. As a thank you to our front-line
colleagues we have made a range of awards, including a cash payment
for our most junior colleagues, to recognise their continued
significant contribution during the pandemic.
Market commentary and economic projections
The economic outlook remains uncertain and largely dependent on
how COVID-19 transmission responds as the economy gradually
re-opens. The outlook has clearly become more challenging since our
first quarter results, with the economic impact of lockdown much
larger than expected at that time. With the gradual easing of
social distancing measures we have more recently seen consumer
spending levels increase, housing market activities reawaken, and
the economy return to growth in May and June. However, the negative
economic impact remains profound and we have revised our
expectations accordingly. With the success of the Group
inextricably linked to the health of the UK economy, we remain
committed to being part of the national solution and putting the
Group's strength to work in support of the wider economy and its
recovery over time.
Financial performance
The effects of the coronavirus outbreak are reflected in our
financial performance. The trading surplus for the first six months
of the year of GBP3.5 billion was 26 per cent down on the prior
year, with lower interest rates and activity levels having an
impact on the top line. Due to our continued focus on efficiency,
total costs reduced by 4 per cent, with a 6 per cent reduction in
business as usual costs.
The most significant impact of COVID-19 is seen in the
impairment charge. The first half impairment charge of GBP3.8
billion includes an additional GBP2.4 billion taken in the second
quarter, mainly reflecting the significant deterioration in the
economic outlook during the quarter. The introduction of IFRS 9
requires us to look forward and estimate a future level of credit
losses based on a range of potential outcomes using multiple
economic scenarios. Consequently, our overall balance sheet
provision for impairments has increased by GBP3.1 billion in the
first half of 2020, as we built additional balance sheet
resilience. Given the economic outlook, we will inevitably be
impacted within the existing book and potentially in the new
lending we are undertaking to support our customers. However, the
Group's loan portfolio remains robust and well positioned given our
business model.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
The statutory result before tax was a loss of GBP602 million.
After tax relief from the deferred tax asset adjustment, statutory
profit after tax for the first half of the year was GBP19 million,
with the reduction on the prior year predominantly driven by
impairments and lower rates. The Group's balance sheet remains
strong, with a CET1 ratio of 14.6 per cent, significantly ahead of
updated regulatory requirements.
Dividend decision
We announced the cancellation of the final 2019 dividend on 31
March. Our decision on the outstanding 2019 dividend was taken by
the Group's Board at the specific request of our regulator, the
Prudential Regulation Authority (PRA) and was in line with all
other major UK listed banks. At that time, the Board also decided,
again in line with all other major UK listed banks, that until the
end of 2020 we will undertake no quarterly or interim dividend
payments, accrual of dividends, or share buybacks on ordinary
shares in order to improve further our capacity to serve the needs
of businesses and households through the extraordinary challenges
presented by the coronavirus pandemic.
These are difficult decisions and, while we recognise the
disappointment and frustration this causes our shareholders, in
particular those relying on dividends for income, we agreed that
this was a prudent and appropriate response to what were and are
exceptional circumstances. The Board will decide on any dividend
distributions or buybacks on ordinary shares in respect of 2020 at
year end, in line with the approved dividend policy.
In conjunction with this decision and in solidarity with the
communities in which we operate, the whole of the Group Executive
Committee have asked not to be considered for their Group
Performance Share for 2020, meaning that they will give up all of
their bonus entitlement for 2020. In addition, no cash bonuses are
payable to senior staff for the rest of 2020.
Strategic update
We have continued to make strategic progress, despite our
primary focus over the last couple of months on supporting our
customers and ensuring operational resilience during this
exceptional and challenging period. Indeed, in many respects, the
benefits of investment made over the course of our third strategic
phase, particularly in digital, transformation and Single Customer
View have positioned us well during the pandemic.
In the last six months we continued to enhance our leading
customer experience and digital capabilities, with the adoption of
digital services by our customers accelerating during the lockdown.
We operate the UK's leading digital bank with 17 million active
customers, with daily logins now exceeding 11 million, up 12 per
cent on the prior year. Our unique Single Customer View has been
expanded to include stockbroking portfolios, with over 6 million
customers now able to access their insurance and savings products
alongside their bank accounts. Our digital net promoter score of 69
is at an all-time high, up 8 per cent in the first half of the
year, despite increased usage levels.
To further enhance the functionality and accessibility of our
services, we have rolled out new features to improve our mobile
app, such as the transaction search functionality and ability to
use biometrics to authorise new payments. In Commercial, over
GBP350 million of payments per month are now processed through a
payables API launched in 2019, representing a
30-fold increase in the first half of 2020. This enables
business clients to send Faster Payments directly from their
systems without human intervention, with the payment time as fast
as less than a second.
We have also continued to develop propositions that maximise the
Group's capabilities for the benefit of our customers. We have
launched a new Scottish Widows branded equity release mortgage that
enables our retail customers to use equity in their home to help
their family members onto the housing ladder or supplement their
own retirement income. The Group has also strengthened its presence
in the open market for individual annuities since launching in
September 2019, achieving a 14 per cent share of the whole
individual annuities market as at 31 March 2020 and successfully
sourcing long-term assets in collaboration with Commercial
Banking.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
In Wealth, the transition of assets to the new Schroders
Personal Wealth platform is on track and the Group remains
committed to become a top three financial planning business by the
end of 2023.
In March, we announced a new strategic collaboration with Google
Cloud that will build on our multi-cloud strategy, accelerating our
ambition to deploy smarter technology and bring new services to our
customers quickly and at scale.
The coronavirus pandemic has accelerated many trends around ways
of working, digital adoption, societal expectations of companies,
and our external environment and sustainability. Our third Group
strategic review was and remains focused on many of these areas but
we now expect to even further accelerate our transformation, and
enhance and adapt customer propositions and colleague working
practices as the Group is learning from the crisis.
Helping Britain recover
In the face of the ongoing uncertainties facing the UK, we
remain fully committed to helping Britain recover as the economy
gradually re-opens. We believe that the pandemic provides a unique
opportunity to build a stronger bank whilst supporting a more
resilient economy, with a more sustainable future.
In our communities, we will continue our work to ensure fairer
and more inclusive societal outcomes and more even regional
development as we rebuild our country. We have made a commitment to
our four independent charitable foundations to provide the same
GBP25.5 million funding in 2021 that they have received this year,
to help the foundations plan ahead and ensure they can continue
their vital work in communities.
To help the economy to transition to a more environmentally
sustainable future, we plan to play a leading role in financing the
UK's green recovery and in helping our customers make green choices
and benefit from the clean growth opportunity.
We see all these efforts as integral to the Group's purpose and
building a more successful Lloyds Banking Group.
Strategic positioning and outlook
There have been early signs of recovery in the Group's core
markets, especially within the personal customer segment, but the
outlook remains highly uncertain and the impact of lower rates and
economic fragility will continue for at least the rest of the year.
The Group's updated 2020 guidance reflects our proactive response
to the challenging economic environment and is based on our
recently revised current economic assumptions which have
deteriorated since the first quarter.
-- Net interest margin expected to remain broadly stable on the
second quarter level at c.240 basis points for the rest of the year
resulting in a full year margin of c.250 basis points
-- Operating costs to be below GBP7.6 billion
-- Impairment expected to be between GBP4.5 billion and GBP5.5 billion
-- Risk-weighted assets expected to be flat to modestly up compared to the first half of 2020
Although the economic outlook remains uncertain, the Group's
financial strength and business model will ensure that it can
continue to support its customers and help Britain recover. This is
fully aligned with the Group's long term strategic objectives, the
position of our franchise and the interests of our
shareholders.
SUMMARY OF GROUP RESULTS
Financial performance reflects revised economic outlook
The Group's statutory loss before tax for the six months ended
30 June 2020 was GBP602 million whilst statutory profit after tax
was GBP19 million, with both being impacted by a significantly
increased impairment charge in the period of GBP3,818 million. The
increased impairment charge was primarily due to future potential
losses arising from the revised economic outlook for the UK economy
as a result of the coronavirus outbreak.
In this challenging external environment the trading surplus for
the period was GBP3,537 million, a reduction of 26 per cent
compared to the first six months of 2019, and 13 per cent on the
second six months of 2019. Net income was down 16 per cent at
GBP7,413 million, with both lower net interest income and lower
other income in the period. The Group continued its progress in
delivering cost reductions, with total costs down 4 per cent on the
prior year.
The Group's underlying loss was GBP281 million for the period,
compared to an underlying profit of GBP4,194 million in the first
six months of 2019, reflecting lower net income and significantly
higher impairment charges. Underlying return on tangible equity was
marginally negative at 0.7 per cent.
The Group's balance sheet remains strong. Loans and advances to
customers were stable compared to year end at GBP440 billion.
Growth in SME lending, primarily driven by government support
schemes, was offset by expected reductions in the mortgage book
along with reductions in credit cards and other unsecured lending,
where customer activity reduced in the second quarter of 2020.
Corporate & Institutional lending remained broadly flat.
Customer deposits increased by GBP29 billion from year end to
GBP441 billion. Retail current accounts growth was significant, in
part due to lower levels of customer spending as well as inflows to
the Group's trusted brands. Commercial Banking current account
growth reflects our strong customer relationships and SME clients
placing government lending onto deposits.
Net income
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019 Change 2019 Change
GBPm GBPm % GBPm %
Net interest income 5,478 6,145 (11) 6,232 (12)
Other income 2,461 3,150 (22) 2,582 (5)
Operating lease depreciation(1) (526) (473) (11) (494) (6)
---------- ---------- ----------
Net income 7,413 8,822 (16) 8,320 (11)
---------- ---------- ----------
Banking net interest margin 2.59% 2.90% (31)bp 2.86% (27)bp
Average interest-earning banking assets GBP433.2bn GBP433.3bn - GBP436.1bn (1)
Net of profits on disposal of operating lease assets of GBP 18
(1) million (half-year to 30 June 2019: GBP 14 million; half-year to
31 December 2019: GBP 27 million).
Net income of GBP7,413 million was 16 per cent lower than in the
first half of 2019, with both lower net interest income and lower
other income in the period alongside an increase in operating lease
depreciation.
Net interest income of GBP5,478 million was down 11 per cent
with a reduction in the banking net interest margin and broadly
stable average interest-earning banking assets. The net interest
margin reduced by 31 basis points to 2.59 per cent, reflecting the
lower rate environment, actions taken to support customers,
including free overdrafts, and a change in asset mix partly as a
result of reduced levels of customer demand during the coronavirus
pandemic. In particular, the net interest margin in the second
quarter of 2020 saw a reduction of 39 basis points to 2.40 per
cent, including a 21 basis point impact from lower interest
rates.
SUMMARY OF GROUP RESULTS (continued)
Average interest-earning banking assets were broadly stable
year-on-year at GBP433 billion with growth due to government backed
lending to support corporate clients through the coronavirus
crisis, partly offset by lower balances in the closed mortgage book
and in credit cards, as well as balance sheet optimisation within
Commercial Banking in the second half of 2019. Total average
interest-earning banking assets are expected to remain broadly
stable at the level of the first half, through the rest of the
year.
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 30 June 2020 the Group's structural hedge had an
approved capacity of GBP190 billion (yet to reflect exceptional
deposit growth in the first half of 2020), a nominal balance of
GBP180 billion (31 December 2019: GBP179 billion; 30 June 2019:
GBP172 billion) and an average duration of around two and a half
years (31 December 2019: around three years; 30 June 2019: around
three years). The Group generated GBP1.3 billion of income from the
structural hedge balances in the first half of 2020 (half-year to
30 June 2019: GBP1.3 billion). Within this, the benefit from the
hedge to the half-year was GBP0.6 billion over average LIBOR
(half-year to 30 June 2019: GBP0.5 billion) with a fixed earnings
rate of approximately 0.7 per cent over average LIBOR (30 June
2019: 0.6 per cent).
Other income decreased by 22 per cent to GBP2,461 million. In
Retail, a reduction of 9 per cent to GBP919 million included the
continuing impact of a lower Lex fleet size and lower payments
revenues following the introduction of coronavirus related lockdown
restrictions and corresponding lower levels of customer activity.
Within Commercial Banking, other income reduced by 10 per cent to
GBP658 million, primarily driven by lower transaction banking
income due to the coronavirus related trading restrictions, with
resilience in markets income. Insurance and Wealth was impacted by
increased general insurance weather-related claims in February,
reduced branch-based sales of general insurance and protection
products, and more modest activity in workplace pensions compared
to the prior year, partly offset by a one-off c.GBP90 million
benefit from methodology changes in the second quarter. In the
first half of 2019, Insurance and Wealth benefited from a GBP136
million one-off benefit due to the change in investment management
provider, a c.GBP100 million gain arising from longevity assumption
changes and the c.GBP120 million benefit from increased
auto-enrolment contributions to workplace pensions. No changes have
been made in respect of demographic assumptions (including
persistency and longevity) at the half-year. Persistency and
longevity assumption changes will be considered in the second half
of the year, with the former focusing on potential risk from higher
unemployment levels.
Other income includes a gain of GBP135 million (GBP181 million
in the first half of 2019) on the sale of gilts and other liquid
assets, which is not expected to be repeated in the second half of
the year. This was largely offset by adverse valuations in the
Group's private equity business, Lloyds Development Capital, given
market conditions, with a negative revaluation of GBP110 million
recognised in the period. The comparative for the six months to 30
June 2019 included a gain of GBP50 million relating to the sale of
the Group's interest in Vocalink.
Operating lease depreciation of GBP526 million, increased by 11
per cent despite a lower Lex fleet size and included a charge to
reflect a prudent reassessment of residual values given the
economic outlook.
Although customer activity is now starting to recover, the Group
expects the impact of economic uncertainty, lower rates, changes in
balance sheet mix and fee holidays to continue to impact income for
the rest of the year.
Based on the Group's current economic expectations, the low rate
environment and a slow resumption of activity, the Group expects
the net interest margin to remain broadly stable on the second
quarter level at c.240 basis points for the rest of the year,
resulting in a full year margin of c.250 basis points.
SUMMARY OF GROUP RESULTS (continued)
Total costs
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019 Change 2019 Change
GBPm GBPm % GBPm %
Operating costs 3,699 3,906 5 3,969 7
Remediation 177 143 (24) 302 41
---------- ---------- ---------
Total costs 3,876 4,049 4 4,271 9
---------- ---------- ---------
Business as usual costs 2,509 2,677 6 2,801 10
Cost:income ratio 52.3% 45.9% 6.4pp 51.3% 1.0pp
Total costs of GBP3,876 million were 4 per cent lower than in
the first half of 2019, driven by a reduction in operating
costs.
Operating costs of GBP3,699 million were 5 per cent lower,
despite continued investment in the Group's digital proposition and
coronavirus related costs. Business as usual costs reduced 6 per
cent on the prior year driven by continued cost discipline,
efficiencies gained through digitalisation and other process
improvements, and lower bonus accruals.
Total investment spend in the first half of 2020 amounted to
GBP1.1 billion, down 15 per cent on the prior year, with GBP0.5
billion relating to strategic investment, taking the cumulative
strategic investment since the start of GSR3 to over GBP2.4
billion. Although the investment spend was carefully managed down
in the first half of the year in response to the current operating
environment, the Group has continued to prioritise technology and
digital projects and will continue to invest through the cycle in
the strength of the business.
During the first half of 2020 the Group capitalised c.GBP0.7
billion of investment spend of which c.GBP0.5 billion related to
intangible assets, which is deducted from capital. Total
capitalised spend was equivalent to c.60 per cent of above the line
investment, which was in line with prior periods.
Remediation charges were GBP177 million (half-year to 30 June
2019: GBP143 million) and included additional charges of GBP90
million in the second quarter relating to a number of items across
existing programmes, including the Group's response to the Cranston
review in relation to HBOS Reading. During the period the Group
paid a fine of GBP64 million in relation to mortgage arrears
handling, which had largely been provided for in 2019.
The Group's cost:income ratio of 52.3 per cent was higher than
in the first half of 2019, having been impacted by lower net income
in the period to 30 June 2020.
The Group's market leading efficiency remains more important
than ever and continues to provide competitive advantage. The focus
on cost discipline will continue. The Group tailors its approach to
strategic investment to reflect changes in the operating
environment, targeting opportunities for the long-term strength of
the business. Sustainable underlying cost focus will continue in
the second half of the year and as a result operating costs are
expected to be below GBP7.6 billion in 2020.
SUMMARY OF GROUP RESULTS (continued)
Impairment
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019 Change 2019 Change
GBPm GBPm GBPm
Impairment charge 3,818 579 712
Asset quality ratio 1.73% 0.26% 147bp 0.31% 142bp
Gross asset quality ratio 1.77% 0.34% 143bp 0.40% 137bp
At 30 June At 30 June At 31 Dec
2020(1) 2019(1) Change 2019(1) Change
GBPm GBPm % GBPm %
Stage 2 gross loans and advances to customers 67,858 40,272 68 38,440 77
Stage 2 loans and advances to customers as % of total 13.4% 8.1% 5.3pp 7.7% 5.7pp
Stage 2 ECL(2) allowances 2,817 1,449 94 1,423 98
Stage 2 ECL(2) allowances as % of Stage 2 drawn balances 4.2% 3.6% 0.6pp 3.7% 0.5pp
Stage 3 loans and advances to customers 9,538 9,616 (1) 8,754 9
Stage 3 loans and advances to customers as a % of total 1.9% 1.9% - 1.8% 0.1pp
Stage 3 ECL(2) allowances 2,763 2,149 29 1,922 44
Stage 3 ECL(2) allowances as % of Stage 3 drawn
balances(3) 29.6% 23.0% 6.6pp 22.5% 7.1pp
Total loans and advances to customers 508,076 499,124 2 498,805 2
Total ECL(2) allowances 7,186 4,337 66 4,142 73
Total ECL(2) allowances as % of drawn balances 1.4% 0.9% 0.5pp 0.8% 0.6pp
Underlying basis.
(1)
Expected credit loss.
(2)
Stage 3 ECL allowances as a percentage of drawn balances are calculated
(3) excluding loans in recoveries in Retail of GBP206 million (30 June
2019: GBP260 million; 31 December 2019: GBP205 million).
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019 Change 2019 Change
GBPm GBPm % GBPm %
Charges pre-updated multiple economic scenarios
---------- ---------- ---------
Retail 578 556 (4) 482 (20)
Commercial Banking 206 65 241 15
Other 4 (42) (11)
---------- ---------- ---------
788 579 (36) 712 (11)
Coronavirus impacted restructuring cases(1) 432 - -
Updated economic outlook
---------- ---------- ---------
Retail 1,517 - -
Commercial Banking 881 - -
Other 200 - -
---------- ---------- ---------
2,598 - -
---------- ---------- ---------
Impairment charge 3,818 579 712
---------- ---------- ---------
Additional charges made during the first half of 2020 on cases
(1) subject to restructuring at the end of 2019, where the coronavirus
pandemic is considered to have had a direct affect upon the recovery
strategy.
SUMMARY OF GROUP RESULTS (continued)
The impairment charge increased significantly in the first six
months of the year to GBP3,818 million (half-year to 30 June 2019:
GBP579 million) with an additional charge of GBP2,388 million taken
in the second quarter primarily reflecting further deterioration in
the economic outlook. Impairment provisions reflect the net impact
of economic scenarios and Government support programmes with the
increase on prior year of more than GBP3 billion building
additional balance sheet resilience.
Observed credit quality remains robust with arrears and defaults
remaining low. The Group recognises that this is likely to be
influenced by the temporary support provided, including payment
holidays and furlough arrangements. The expected credit loss (ECL)
allowances of GBP7.2 billion as at 30 June 2020 assumes additional
losses will emerge as the support subsides.
The Group's stock of ECL allowances has increased by over GBP3
billion to GBP7.2 billion, and as a percentage of drawn balances
increased to 1.4 per cent from 0.8 per cent since 31 December 2019.
As referenced, the Group's outlook and IFRS 9 base case economic
scenario used to calculate ECL have been updated to reflect revised
economic assumptions, which take into account the Group's best
estimate of the impact of the coronavirus outbreak on the Group's
customer and client base.
The Group's ECL allowance continues to reflect a probability
weighted view of future economic scenarios including a 30 per cent
weighting of base case, upside and downside and a 10 per cent
weighting of severe downside, although all scenarios have
deteriorated significantly since the year end. The base case upon
which these scenarios are built assumes unemployment rate reaches
9.0 per cent in the fourth quarter of 2020 and more sustained
reductions in asset prices. Given the weightings attached to
scenarios, the ECL represents an uplift of GBP510 million from the
base case ECL.
Judgement has been applied to the model-generated severe
downside scenario to recognise the greater levels of uncertainty in
the short-term economic outlook and therefore a greater severity of
potential adverse shocks from the base case. In this scenario, this
results in a peak unemployment rate of 12.5 per cent in the second
quarter of 2021 and a GDP drop of 17.2 per cent in 2020. The impact
of this adjustment has been estimated at portfolio level but
outside the core IFRS 9 process and as such is reflected as a
central overlay of GBP200 million, reflecting an estimated GBP2
billion higher ECL provision within the severe downside
scenario.
The Group's net asset quality ratio was 173 basis points
compared with 26 basis points in the first half of 2019, largely
driven by increases in ECL (36 basis points excluding the updated
economic assumptions and coronavirus-impacted restructuring
cases).
Stage 2 loans and advances to customers increased by GBP29.4
billion, up 5.7 percentage points to 13.4 per cent as a percentage
of total lending, reflecting the deterioration of the Group's
forward looking economic assumptions, whilst Stage 3 loans and
advances were broadly stable at 1.9 per cent. In the absence of
other credit risk indicators, the granting of payment holidays for
COVID-19 related requests is not in and of itself an indication of
a significant increase in credit risk and therefore will not
automatically result in a customer balance moving from Stage 1 to
Stage 2. For the duration of the payment holiday the Group
continues to recognise interest income on an effective interest
rate basis. The Group's coverage of Stage 2 assets increased to 4.2
per cent whilst coverage of Stage 3 assets increased from 22.5 per
cent to 29.6 per cent.
Overall the Group's loan portfolio continues to be well
positioned, reflecting a prudent, through the cycle approach to
credit risk and high levels of security. The Retail portfolio is
heavily weighted to high quality mortgage lending where improved
loan to values provide security against potential risks. The prime
consumer finance portfolio also benefits from high quality growth
and the Group's prudent risk appetite. The commercial portfolio
reflects a diverse client base with limited exposure to the most
vulnerable sectors affected by the coronavirus outbreak. Within
Commercial, the Group's management of concentration risk includes
single name and country limits as well as controls over the overall
exposure to certain higher risk and vulnerable sectors and asset
classes.
SUMMARY OF GROUP RESULTS (continued)
In the Retail secured book, credit performance remains strong
with the average mortgage loan to value improving slightly to 44.0
per cent (31 December 2019: 44.9 per cent). New business average
loan to value was 63.0 per cent and around 90 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 mortgage book remains low.
The impairment charge for the first half of 2020 was GBP603
million, compared with a GBP38 million release for the same period
in 2019, largely as a result of the change to economic outlook, and
impacting the second quarter in particular given the additional
reduction in house price forecasts.
The impairment charge in the credit card book increased by
GBP389 million to GBP656 million in the first half of 2020, largely
due to updates to the Group's economic outlook (GBP487 million of
the charge). Coverage for credit card lending increased to 6.3 per
cent (31 December 2019: 3.4 per cent); including coverage of 43.9
per cent on the Stage 3 cards portfolio, which employs a proactive
charge off policy at 4 months in arrears. While the credit card
portfolios were the last to receive payment holidays, the Group has
seen a large uptake in the second quarter of 2020, which has
resulted in very low levels of flows into arrears.
The motor finance portfolio continues to benefit from a prudent
approach to residual values at origination and reassessment of
provisions through the loan lifecycle. The impairment charge
increased to GBP241 million for the first half of 2020, compared to
GBP104 million for the same period in 2019 and coverage for the
portfolio increased to 3.6 per cent (31 December 2019: 2.4 per
cent). This reflects the impact of the updated economic outlook on
anticipated levels of defaults and the severity of losses given
anticipated reductions in used car prices. In addition to credit
risk, this coverage also includes a specific provision for residual
value risk on returned vehicles of GBP191 million as at 30 June
2020, GBP10 million lower than the provision held as at 31 December
2019. In relation to this residual value risk, no material charge
was needed in the first half of this year, with sufficient
provision already raised to accommodate the expected temporary
price volatility in the automotive market.
The Commercial Banking impairment charge in the first six months
increased significantly to GBP1,519 million compared with GBP65
million in the first half of 2019, with the ECL provision stock
increasing by GBP1.4 billion to GBP2.7 billion at 30 June 2020. The
increased impairment charge largely reflects the updates to the
economic outlook, with a charge of GBP881 million. Additional
charges of GBP432 million were raised against a small number of
existing Stage 3 large corporate restructuring cases in the BSU
where the coronavirus pandemic has hampered the client's existing
recovery strategy. The Commercial Banking impairment charge pre
revised economic outlook and before the existing restructuring
cases was GBP206 million.
Further detail on the impairment charge by division and product
can be found on page 38.
Significant uncertainty in the economic outlook remains and the
extent of the annual impairment charge will depend on the severity
and the duration of the economic shock experienced in the UK. The
Group has increased provisions by over GBP3 billion in the period,
largely for assets that have not currently defaulted.
Assuming current economic assumptions, the impairment charge is
expected to be between GBP4.5 billion and GBP5.5 billion for the
full year 2020, reflecting additional charges in the second half of
2020 for provisions taken on new assets, future losses on stage 1
assets as the 12 month provision window rolls forward and
experience variance.
SUMMARY OF GROUP RESULTS (continued)
Statutory profit
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019 Change 2019 Change
GBPm GBPm % GBPm %
Underlying (loss) / profit (281) 4,194 3,337
Restructuring (133) (182) 27 (289) 54
Volatility and other items
---------- ---------- ---------
Market volatility and asset sales (43) (296) 422
Amortisation of purchased intangibles (34) (34) - (34) -
Fair value unwind and other (111) (135) 18 (140) 21
---------- ---------- ---------
(188) (465) 60 248
Payment protection insurance provision - (650) 100 (1,800) 100
---------- ---------- ---------
Statutory (loss) / profit before tax (602) 2,897 1,496
Tax credit / (expense) 621 (672) (715)
---------- ---------- ---------
Statutory profit after tax 19 2,225 (99) 781 (98)
---------- ---------- ---------
(Loss) / earnings per share (0.3)p 2.7p 0.8p
Return on tangible equity 0.1% 11.5% (11.4)pp 4.0% (3.9)pp
Further information on the reconciliation of underlying to statutory results is included on
page 32.
The Group's statutory profit after tax of GBP19 million was
impacted by lower income and a significantly increased impairment
charge of GBP3,818 million given the revised economic outlook.
Restructuring costs of GBP133 million were down 27 per cent
compared to the first half of 2019 mainly driven by the completion
of MBNA integration and lower severance costs relating to the
Group's strategic investment plans. The latter was in part due to
the deferral of redundancy programmes given the coronavirus
pandemic.
Market volatility and asset sales of GBP43 million included
GBP370 million of negative insurance volatility, largely driven by
falling equity markets and widening corporate bond credit spreads,
partly offset by positive banking volatility of GBP308 million,
primarily reflecting exchange rate movements. The comparatives for
the first half of 2019 include a one-off charge for exiting the
Standard Life Aberdeen investment management agreement.
Amortisation of purchased intangibles was flat at GBP34 million.
Fair value unwind and other items reduced to GBP111 million
(half-year to 2019: GBP135 million) reflecting the run down of
subordinated liabilities acquired during the HBOS acquisition.
No further provision has been taken for PPI in the first half of
2020. Good progress has been made with the review of PPI
information requests received and the conversion rate remains low
and consistent with the provision assumption of around 10 per cent,
albeit operations have been impacted by the coronavirus pandemic in
the second quarter. The unutilised provision at 30 June 2020 was
GBP745 million.
SUMMARY OF GROUP RESULTS (continued)
Taxation
The Group recognised a tax credit of GBP621 million in the
period, primarily as a result of statutory losses and an uplift in
the value of deferred tax assets of GBP354 million following the
announcement by the Government that it would maintain the
corporation tax rate at 19 per cent, which was substantively
enacted on 17 March 2020.
Return on tangible equity
The return on tangible equity was 0.1 per cent and the
underlying return on tangible equity was a negative 0.7 per
cent.
Balance sheet
At 30 June At 31 Mar Change At 30 June Change At 31 Dec Change
2020 2020 % 2019 % 2019 %
Loans and advances to customers(1) GBP440bn GBP443bn (1) GBP441bn - GBP440bn -
Customer deposits(2) GBP441bn GBP428bn 3 GBP418bn 6 GBP412bn 7
Loan to deposit ratio 100% 103% (3)pp 106% (6)pp 107% (7)pp
Wholesale funding(3) GBP125bn GBP126bn (1) GBP126bn (1) GBP124bn 1
Wholesale funding <1 year
maturity(3) GBP40bn GBP39bn 3 GBP39bn 2 GBP39bn 2
Of which money-market funding <1
year maturity (3) GBP26bn GBP26bn (1) GBP27bn (4) GBP25bn 4
Liquidity coverage ratio -
eligible assets(4) GBP138bn GBP132bn 5 GBP132bn 4 GBP131bn 5
Liquidity coverage ratio(5) 140% 138% 2pp 132% 8pp 137% 3pp
Excludes reverse repos of GBP61.1 billion (31 March 2020: GBP55.2
(1) billion; 30 June 2019: GBP54.1 billion; 31 December 2019: GBP54.6
billion).
Excludes repos of GBP12.3 billion (31 March 2020: GBP9.4 billion;
(2) 30 June 2019: GBP4.1 billion; 31 December 2019: GBP9.5 billion).
Excludes balances relating to margins of GBP6.9 billion (31 December
(3) 2019: GBP4.2 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 stable compared to year end
at GBP440 billion. Corporate & Institutional lending was
broadly flat, while SME lending, primarily driven by government
support schemes, increased. This growth was offset by expected
reductions in the mortgage book along with reductions in credit
cards and other unsecured lending, given reduced customer activity
in the second quarter of 2020. In the second quarter, loans and
advances to customers decreased by GBP3 billion from GBP443 billion
at 31 March 2020 as repayments of revolving credit facilities in
Commercial Banking and reductions in mortgage and consumer finance
balances more than offset new government supported lending within
SME.
In the first half of the year, Commercial Banking has focused on
supporting SME clients through the access to government lending
schemes and providing access to liquidity facilities for Corporate
and Institutional clients. SME balances have increased 20 per cent
(GBP6 billion) over the last six months as clients made use of the
government backed lending schemes to safeguard their cash flow in
response to the coronavirus lockdown. Bounce Back Loans granted
currently total GBP7.3 billion, including to Retail Business
Banking customers. Lending to Corporate and Institutional clients
increased 1 per cent over the last six months with a significant
draw down of facilities in response to the coronavirus outbreak in
the first quarter largely reversed in the second quarter as other
sources of funding became available.
The Group has seen some signs of recovery in activity levels
since the middle of the second quarter in its core markets, mainly
in Retail, with a gradual pick-up in consumer spending and
re-opening of the housing market as the social distancing measures
were eased.
In mortgages, application levels have rebounded, with June
volumes outperforming the same period last year. Also, in motor
finance, new business levels rose strongly in June as car
dealerships reopened. However, it remains unclear whether this is a
sustainable development or reflects pent up demand. In cards,
whilst consumer spending levels have begun to recover slightly in
the second quarter, the demand for new credit cards remains
subdued, reinforced by credit tightening.
SUMMARY OF GROUP RESULTS (continued)
At the same time, in Commercial Banking, transaction and payment
volumes have increased as the economy has started to reopen but
currently remain below pre-lockdown levels.
Activity levels in Insurance and Wealth remain subdued. It is
too early to estimate the timing and speed at which activity will
recover, or the long term economic impact of the pandemic. This may
become clearer in the second-half of the year.
Customer deposits increased by GBP13 billion in the quarter to
30 June 2020 with a 10 per cent increase in Retail current accounts
as a result of reduced consumer spending during the coronavirus
lockdown period and reflecting the strength of the Group's trusted
brands, and a 28 per cent increase in Commercial current accounts
partly due to SME clients placing government lending balances onto
deposits. This was partly offset by a reduction in Commercial
deposits as corporate clients repaid revolving credit facilities
and moved term deposits to more liquid current accounts.
The Group has maintained its strong funding and liquidity
position with a liquidity coverage ratio (LCR) of 140 per cent
(based on a 12 month rolling average). In addition to its liquid
asset buffer averaging GBP137.5 billion over the last 12 months,
the Group has a significant amount of pre-positioned collateral
eligible for use in a range of central bank facilities, including
the Bank of England's Term Funding Scheme with additional
incentives for SMEs (TFSME) against which GBP1 billion of funds
have been drawn down as at 30 June 2020.
The Group continues to access wholesale funding markets across a
variety of currencies and markets to maintain a stable and diverse
source of funds. Despite the more challenging funding conditions
around the end of the first quarter, the Group has seen strong
demand in a number of public issuances, and completed GBP8.5
billion of funding in the first half of 2020 across the Group's
main issuing entities. In addition, the Group has been active in
offering liquidity to investors through buyback activity, whilst
maintaining a prudent approach to managing funding and liquidity
with term funding buyback volumes of GBP5.6 billion in the first
half of 2020. Overall, total wholesale funding increased slightly
to GBP125.1 billion as at 30 June 2020 (31 December 2019: GBP124.2
billion).
The Group's credit ratings continue to reflect the resilience of
the Group's business model and the strength of the balance sheet.
In March, Fitch revised the outlooks on all the Group's rated
entities, alongside the majority of other UK banks, to Negative,
citing concerns around the coronavirus pandemic. In addition, Fitch
upgraded the Senior Unsecured rating of Lloyds Bank Corporate
Markets to A+. In April, S&P revised the outlook on the Group's
banking entities, alongside the majority of other large UK banks,
to Negative, citing the potential earnings pressures arising from
the economic and market impact of the coronavirus pandemic. The
Negative outlooks that Moody's assigned on Lloyds Banking Group plc
and Lloyds Bank plc, to reflect the weakening of the country's
finances and the potential impact on asset quality and
profitability, remain in place.
SUMMARY OF GROUP RESULTS (continued)
Payment holidays(1)
Retail payment holiday characteristics
Mortgages Cards Loans Motor
As of 24 July 2020
Total payment holidays granted (000s) 472 299 234 126
Total payment holidays matured (000s) 193 74 145 70
Repaying (%) 72% 74% 67% 59%
At 24 July 2020 mortgage maturities exclude c.5,000 St James Place,
(1) Intelligent Finance and Tesco portfolio payment holidays; motor
finance maturities exclude c.12,000 Lex Autolease payment holidays.
As at 24 July 2020, over 1.1 million retail payment holidays
have been granted to help alleviate temporary financial pressure on
customers during the crisis, of which around 750,000 are still in
force. Payment holidays of up to three months have been granted
across a range of retail products including mortgages, personal
loans, credit cards and motor finance, with extensions available of
up to three months should customers request them. Of the original
payment holidays that have matured, 69 per cent have restarted
payments.
Mortgages account for the largest proportion of the payment
holidays, with a total of around 472,000 granted. As at 24 July,
nearly 41 per cent, c.193,000 had matured, with 72 per cent of
those having resumed repayments, around 23 per cent having extended
their payment holidays and the remainder in early arrears.
Customers extending their mortgage payment holidays generally have
weaker risk characteristics than those without a payment holiday,
however, the average LTV for customers extending their payment
holidays remains relatively low at 52 per cent, compared to 42 per
cent for customers who have never taken a payment holiday and 44
per cent for the total mortgage book. Approximately 84 per cent, of
customers extending their payment holiday, have an LTV of less than
80 per cent.
As indicated, payment holidays have also been granted across all
other main consumer finance and unsecured products with c.126,000
in motor finance, c.234,000 in personal loans and c.299,000 on
credit cards. Given the payment holidays on other retail products
commenced later than for mortgages repayment trends are less
developed. However, as outlined in the table above, current
experience of maturity of initial payment holidays indicates that a
broadly similar number of customers resume payment (74 per cent
cards, 67 per cent loans, 59 per cent motor finance). The higher
percentage of personal loan and motor finance holidays maturing and
slightly lower proportion of customers resuming payment is largely
driven by the fact that initial payment holidays were generally for
one month before being extended for an additional two months i.e.
total of three months.
Across all products, customers who have sought to extend their
payment holiday are typically of a lower credit quality and tend to
have higher average balances and lower credit scores than customers
who have never taken a payment holiday.
The Group continues to recognise interest income for the
duration of payment holidays and in the absence of other credit
risk indicators, the granting of a coronavirus-related payment
holiday does not result in a transfer between stages for the
purposes of IFRS 9.
The Group is confident that the modelled ECL is appropriate at
portfolio level, adequately covering the potential elevated risk of
customers on payment holidays. The GBP19 billion increase in Stage
2 assets to GBP51 billion reflects the modelled increase in credit
risk and at the end of June 2020 approximately 25 per cent of
outstanding Retail payment holidays were in Stage 2, broadly
consistent with customers on payment holidays who have not
recommenced payment. As a sensitivity, moving all remaining Stage 1
payment holiday customers at June into Stage 2 at the end of June
2020 would drive an estimated additional GBP0.3 billion ECL
charge.
SUMMARY OF GROUP RESULTS (continued)
Capital
At 30 June At 30 June Change At 31 Dec Change
2020 2019 % 2019 %
CET1 ratio(1) 14.6% 14.0% 0.6pp 13.8% 0.8pp
CET1 ratio pre IFRS 9 transitional relief(1,2) 13.4% 13.7% (0.3)pp 13.4% -
Transitional total capital ratio(1) 22.3% 21.7% 0.6pp 21.5% 0.8pp
Transitional MREL ratio(1) 36.8% 32.2% 4.6pp 32.6% 4.2pp
UK leverage ratio(1) 5.4% 5.1% 0.3pp 5.2% 0.2pp
Risk-weighted assets(1) GBP207bn GBP207bn - GBP203bn 2
Shareholders' equity GBP43bn GBP43bn (1) GBP42bn 3
Tangible net assets per share 51.6p 53.0p (1.4)p 50.8p 0.8p
The CET1, total, MREL and leverage ratios and risk-weighted assets
(1) at 30 June 2019 and 31 December 2019 are reported on a pro forma
basis, reflecting the dividend paid up by the Insurance business
in the subsequent reporting period.
CET1 ratio reflecting the full impact of IFRS 9, prior to the application
(2) of transitional arrangements for capital that provide relief for
the impact of IFRS 9.
Pro forma CET1 ratio at 31 December 2019 13.8%
------
Banking business underlying capital build excluding impairment charge (bps) 100
Impairment charge (bps) (153)
------
Banking business underlying capital build (bps) (53)
IFRS 9 transitional relief (bps) 79
RWA and other movements (bps) 11
Pensions contributions (bps) (39)
Reversal of FY 2019 ordinary dividend accrual (bps) 83
------
CET1 ratio at 30 June 2020 14.6%
------
The Group's CET1 capital ratio increased by 81 basis points to
14.6 per cent over the first six months of the year. Underlying
capital build before impairment charge of 100 basis points was more
than offset by the 153 basis points of impairment charge. Further
reductions were incurred for pension contributions (39 basis points
reflecting the full 2020 contribution to the Group's three main
defined benefit pension schemes), partially offset by risk-weighted
asset and other movements (11 basis points), which included
increases related to market movements (17 basis points) and the
excess expected loss offset against the increase in impairment
provisions (11 basis points) less a reduction of 15 basis points
from the increase in underlying risk-weighted assets. However,
given the benefit of the in-year IFRS 9 transitional relief (79
basis points) and the reversal of the full year 2019 ordinary
dividend (83 basis points), the capital ratio increased to 14.6 per
cent.
The Group has applied the IFRS 9 transitional arrangements for
capital set out under European capital regulations since 1 January
2018. This provides temporary capital relief for the increase in
accounting impairment provisions following the initial
implementation of IFRS 9 ('static' relief) and subsequent relief
for any increases in Stage 1 and Stage 2 expected credit losses
('dynamic' relief). Both static relief and dynamic relief amortise
over a set transition period. Following recent changes to the
regulation, dynamic relief is now based on any increase in Stage 1
and Stage 2 expected credit losses since 1 January 2020. In
addition, the amortisation factor for dynamic relief has now been
set at 100 per cent for 2020 and 2021 (prior to reducing in stages
over subsequent years) thereby mitigating the capital impact of
Stage 1 and Stage 2 increases during this period. The transitional
arrangements do not cover Stage 3 expected credit losses. It is
expected that dynamic relief will reduce materially in the second
half of the year and the first half of 2021, as a result of ongoing
credit migrations (i.e. movements into Stage 3).
Whilst the net increase in IFRS 9 transitional relief in the
first six months of the year amounted to 79 basis points, the
Group's total relief recognised at 30 June 2020 amounted to 116
basis points including the static relief.
SUMMARY OF GROUP RESULTS (continued)
Risk-weighted assets increased by GBP3.7 billion over the first
six months, with a significant increase in the first quarter
partially offset by a smaller reduction in the second quarter. The
six month increase is largely a result of the impact of credit
migrations and retail model calibrations (c.GBP3.9 billion);
regulatory changes resulting from the full implementation of the
new securitisation framework (GBP2.3 billion) partly offset by the
impact of the revised SME supporting factor (GBP1.4 billion);
foreign currency impacts and increases in counterparty credit risk
and credit valuation adjustment risk (GBP1.6 billion); and other
various movements (GBP1.7 billion). These increases have been
partially offset by the reduction in underlying lending balances
(excluding government backed lending schemes that attract limited
to no risk-weighted assets) (c.GBP2 billion) and optimisation
activity undertaken in Commercial Banking (c.GBP2.4 billion).
Going forward, risk-weighted assets will continue to be affected
by credit migration and potential movements in the balance sheet.
The Group expects some further credit migration in the second half
of the year, but this is expected to be largely offset by
Commercial Banking optimisation and reduced balances in Retail,
resulting in risk-weighted assets at the end of the year to be flat
to modestly up compared to the first half of 2020.
During the first half of 2020 the PRA reduced the Group's Pillar
2A CET1 requirement from 2.6 per cent to 2.3 per cent. The PRA has
also concluded its consultation on a proposed reduction in Pillar
2A to partially offset increased CET1 requirements from the UK
countercyclical capital buffer rate in normal conditions being set
at 2 per cent (currently set at 0 per cent). This is expected to
reduce the Group's Pillar 2A CET1 requirement by a further 0.3 per
cent when it becomes effective later this year.
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 is around 12.5 per cent, plus a management
buffer of around 1 per cent.
Following the decision by the PRA to reduce the UK
countercyclical capital buffer rate to zero, combined with the
Pillar 2A adjustment noted above, the Group's CET1 capital
regulatory requirement has reduced to c.11 per cent and
subsequently headroom over requirements has increased.
The transitional total capital ratio increased to 22.3 per cent
(31 December 2019: 21.5 per cent on a pro forma basis) and the
Group's transitional minimum requirement for own funds and eligible
liabilities (MREL), which came into force on 1 January 2020, is
36.8 per cent (31 December 2019: 32.6 per cent on a pro forma
basis). The UK leverage ratio increased to 5.4 per cent.
Tangible net assets per share increased by 0.8 pence to 51.6
pence at 30 June 2020 from 50.8 pence at 31 December 2019. This was
largely due to an increase in the net pension asset driven by wider
credit spreads in the first quarter and an increase in the Group's
cash flow hedge reserve. In the second quarter of 2020 tangible net
assets per share reduced by 5.8 pence as a result of the increased
impairment charge and some reversal of the credit spread movements
seen in the first quarter.
During 2020 the Group was scheduled to make GBP798 million of
additional deficit contributions to its three main schemes under
the current recovery plan with the trustees. These payments were
made in full during the first half of the year. The next funding
valuation for these schemes, with an effective date of 31 December
2019, is currently in progress and is due to be completed by March
2021.
SUMMARY OF GROUP RESULTS (continued)
Dividend
On 31 March, the Group announced the cancellation of its final
2019 ordinary dividend. This decision was taken by the Board at the
specific request of the regulator, the PRA, and was in line with
all other major UK listed banks. At that time, the Board also
decided, again in line with all other major UK listed banks, that
until the end of 2020 the Group will undertake no quarterly or
interim dividend payments, accrual of dividends, or share buybacks
on ordinary shares. This will help the Group to further serve the
needs of businesses and households through the extraordinary
challenges presented by the coronavirus crisis.
These are difficult decisions and while the Group recognises the
disappointment and frustration this will cause shareholders, in
particular those relying on dividends for income, this is a prudent
and appropriate response to exceptional circumstances. The Board
will decide on any dividend distributions or buybacks on ordinary
shares in respect of 2020 at year end, in line with the approved
dividend policy.
Outlook
There have been early signs of recovery in the Group's core
markets, especially within the personal customer segment, but the
outlook remains highly uncertain and the impact of lower rates and
economic fragility will continue for at least the rest of the year.
The Group's updated 2020 guidance reflects the proactive response
to the challenging economic environment and is based on the Group's
recently revised current economic assumptions which have
deteriorated since the first quarter.
-- Net interest margin expected to remain broadly stable on the
second quarter level at c.240 basis points for the rest of the year
resulting in a full year margin of c.250 basis points
-- Operating costs to be below GBP7.6 billion
-- Impairment expected to be between GBP4.5 billion and GBP5.5 billion
-- Risk-weighted assets expected to be flat to modestly up compared to the first half of 2020
Although the economic outlook remains uncertain, the Group's
financial strength and business model will ensure that it can
continue to support its customers and help Britain recover. This is
fully aligned with the Group's long term strategic objectives, the
position of the franchise and the interests of our
shareholders.
UNDERLYING BASIS SEGMENTAL ANALYSIS
Half-year to 30 June 2020
Commercial Insurance Central
Retail Banking and Wealth items Group
GBPm GBPm GBPm GBPm GBPm
Net interest income 4,233 1,222 14 9 5,478
Other income 919 658 853 31 2,461
Operating lease depreciation (518) (8) - - (526)
---------- ---------- ---------- --------- ----------
Net income 4,634 1,872 867 40 7,413
---------- ---------- ---------- --------- ----------
Operating costs (2,277) (906) (459) (57) (3,699)
Remediation (50) (115) (19) 7 (177)
---------- ---------- ---------- --------- ----------
Total costs (2,327) (1,021) (478) (50) (3,876)
---------- ---------- ---------- --------- ----------
Trading surplus 2,307 851 389 (10) 3,537
Impairment (2,095) (1,519) (10) (194) (3,818)
---------- ---------- ---------- --------- ----------
Underlying profit / (loss) 212 (668) 379 (204) (281)
---------- ---------- ---------- --------- ----------
Banking net interest margin 2.59% 2.92% 2.59%
Average interest-earning banking assets GBP342.3bn GBP90.0bn GBP0.9bn - GBP433.2bn
Asset quality ratio 1.23% 3.12% 1.73%
Return on risk-weighted assets 0.43% (1.70)% (0.27)%
Loans and advances to customers(1) GBP341.0bn GBP96.0bn GBP0.9bn GBP2.5bn GBP440.4bn
Customer deposits(2) GBP272.2bn GBP154.5bn GBP13.5bn GBP0.9bn GBP441.1bn
Risk-weighted assets GBP99.4bn GBP78.4bn GBP1.3bn GBP28.0bn GBP207.1bn
Half-year to 30 June 2019
Commercial Insurance Central
Retail(3) Banking(3) and Wealth(3) items(3) Group
GBPm GBPm GBPm GBPm GBPm
Net interest income 4,561 1,449 40 95 6,145
Other income 1,009 731 1,183 227 3,150
Operating lease depreciation (461) (12) - - (473)
---------- ---------- ------------- --------- ----------
Net income 5,109 2,168 1,223 322 8,822
---------- ---------- ------------- --------- ----------
Operating costs (2,328) (1,031) (539) (8) (3,906)
Remediation (48) (90) (25) 20 (143)
---------- ---------- ------------- --------- ----------
Total costs (2,376) (1,121) (564) 12 (4,049)
---------- ---------- ------------- --------- ----------
Trading surplus 2,733 1,047 659 334 4,773
Impairment (556) (65) - 42 (579)
---------- ---------- ------------- --------- ----------
Underlying profit 2,177 982 659 376 4,194
---------- ---------- ------------- --------- ----------
Banking net interest margin 2.79% 3.24% 2.90%
Average interest-earning banking assets GBP340.1bn GBP92.3bn GBP0.9bn - GBP433.3bn
Asset quality ratio 0.33% 0.13% 0.26%
Return on risk-weighted assets 4.64% 2.33% 4.09%
Loans and advances to customers(1) GBP338.4bn GBP99.8bn GBP0.9bn GBP1.9bn GBP441.0bn
Customer deposits(2) GBP253.5bn GBP149.5bn GBP13.8bn GBP0.8bn GBP417.6bn
Risk-weighted assets GBP95.8bn GBP83.0bn GBP1.3bn GBP26.4bn GBP206.5bn
Excludes reverse repos.
(1)
Excludes repos.
(2)
Restated to reflect migration of certain customer relationships
(3) from the SME business within Commercial Banking to Business Banking
within Retail. Segmental net interest income also restated to
reflect the Group's adoption of the Sterling Overnight Index Average
(SONIA).
UNDERLYING BASIS SEGMENTAL ANALYSIS (continued)
Half-year to 31 December 2019
Commercial Insurance Central
Retail(1) Banking(1) and Wealth(1) items(1) Group
GBPm GBPm GBPm GBPm GBPm
Net interest income 4,623 1,443 37 129 6,232
Other income 1,010 686 838 48 2,582
Operating lease depreciation (485) (9) - - (494)
---------- ---------- ------------- --------- ----------
Net income 5,148 2,120 875 177 8,320
---------- ---------- ------------- --------- ----------
Operating costs (2,440) (1,042) (443) (44) (3,969)
Remediation (190) (65) (25) (22) (302)
---------- ---------- ------------- --------- ----------
Total costs (2,630) (1,107) (468) (66) (4,271)
---------- ---------- ------------- --------- ----------
Trading surplus 2,518 1,013 407 111 4,049
Impairment (482) (241) - 11 (712)
---------- ---------- ------------- --------- ----------
Underlying profit 2,036 772 407 122 3,337
---------- ---------- ------------- --------- ----------
Banking net interest margin 2.76% 3.20% 2.86%
Average interest-earning banking assets GBP343.7bn GBP91.5bn GBP0.9bn - GBP436.1bn
Asset quality ratio 0.28% 0.46% 0.31%
Return on risk-weighted assets 4.14% 1.89% 3.21%
Loans and advances to customers(2) GBP342.6bn GBP95.2bn GBP0.9bn GBP1.7bn GBP440.4bn
Customer deposits(3) GBP253.2bn GBP144.0bn GBP13.7bn GBP0.9bn GBP411.8bn
Risk-weighted assets GBP98.4bn GBP77.4bn GBP1.3bn GBP26.3bn GBP203.4bn
Restated to reflect migration of certain customer relationships
(1) from the SME business within Commercial Banking to Business Banking
within Retail. Segmental net interest income also restated to reflect
the Group's adoption of the Sterling Overnight Index Average (SONIA).
Excludes reverse repos.
(2)
Excludes repos.
(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,
flexibility and propositions increasingly personalised to their
needs. Retail operates a multi-brand and multi-channel strategy. It
continues to simplify its business enhancing customer journeys and
helping to improve service levels and reduce conduct risks, whilst
working within a prudent risk appetite.
COVID-19 response
-- Flexible and sensitive treatment of customers with over 1.1
million payment holidays granted across mortgages, credit cards,
unsecured loans and motor finance, whilst removing fees for missed
payments
-- Implementation of safeguarding measures across the UK's
largest branch network to protect customers and colleagues, with
around 90 per cent of branches remaining open during lockdown and
ATM availability exceeding 95 per cent
-- Over 440,000 calls from NHS workers and over 70s customers
handled through dedicated telephone lines, and partnership with 'We
Are Digital' to support vulnerable customers get online
-- Over 120 million proactive letters, emails and SMS messages
sent to customers outlining available support with over 600,000
proactive outbound calls to vulnerable and elderly customers
-- GBP500 interest free overdraft buffer was automatically made
available to over 9 million customers
-- Around 19,000 colleagues able to work from home with over
12,000 laptops distributed to colleagues. Over 1,000 colleagues
redeployed to coronavirus related activities to support customer
based demand
Progress against strategic priorities
Leading customer experience
-- UK's largest digital bank with 17 million active digital
customers, with daily logins now exceeding 11 million, up 12 per
cent on prior year. Digital net promoter score of 69, an all-time
high, with improvement of 8 per cent in year
-- Supporting first time buyers with over GBP30 billion of
lending since 2017, ahead of target with GBP5 billion in first half
of 2020
-- First bank to launch confirmation of payee for online
banking, helping keep customers safe against Authorised Push
Payment scam ahead of industry adoption deadline, with over 20
million name checks already carried out
Digitising the Group
-- Increased cheque scanning limit to GBP1,000, with over 80 per
cent rise in number of cheques being deposited, and increased
contactless card limit to GBP45, contributing to additional 29
million contactless transactions since 1 April
Maximising Group capabilities
-- Launched Scottish Widows branded equity release mortgage in
collaboration with Insurance & Wealth, enabling customers to
use equity in their home to help their family onto housing ladder
and/or supplementing retirement income
Financial performance
-- Net interest income 7 per cent lower with the continued
reduction of mortgage reversionary book, lower overdraft income
including the impact of GBP500 interest free buffer to support
customers, partly offset by lower funding costs
-- Other income reduced 9 per cent with lower payments revenues
and continued impact of a lower Lex fleet size, whilst operating
lease depreciation included a charge to reflect a reassessment of
residual values
-- Operating costs were 2 per cent lower, with efficiency
savings and lower investment spend, more than offsetting an
increase in costs relating to response of the coronavirus outbreak.
Remediation remained broadly flat
-- Impairment increased significantly to GBP2,095 million,
primarily reflecting a material deterioration in the economic
outlook
-- Customer lending broadly flat with expected reductions in the
mortgage book and lower unsecured balances as customer activity
reduced, partly offset by support for business banking customers
with government schemes
-- Customer deposits increased by 8 per cent from growth in
current accounts and relationship savings given lower spend
activity and increased Bounce Back Loan driven deposits. Low margin
tactical savings continued to decrease
-- Risk-weighted assets increased 1 per cent driven by impacts
of risk profile changes partly offset by lower balances
Retail performance summary
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019(1) Change 2019(1) Change
GBPm GBPm % GBPm %
Net interest income 4,233 4,561 (7) 4,623 (8)
Other income 919 1,009 (9) 1,010 (9)
Operating lease depreciation (518) (461) (12) (485) (7)
---------- ---------- ----------
Net income 4,634 5,109 (9) 5,148 (10)
---------- ---------- ----------
Operating costs (2,277) (2,328) 2 (2,440) 7
Remediation (50) (48) (4) (190) 74
---------- ---------- ----------
Total costs (2,327) (2,376) 2 (2,630) 12
---------- ---------- ----------
Trading surplus 2,307 2,733 (16) 2,518 8
Impairment (2,095) (556) (482)
---------- ---------- ----------
Underlying profit 212 2,177 (90) 2,036 (90)
---------- ---------- ----------
Banking net interest margin 2.59% 2.79% (20)bp 2.76% (17)bp
Average interest-earning banking assets GBP342.3bn GBP340.1bn 1 GBP343.7bn -
Asset quality ratio 1.23% 0.33% 90bp 0.28% 95bp
Return on risk-weighted assets 0.43% 4.64% (421)bp 4.14% (371)bp
At 30 June At 30 June At 31 Dec
2020 2019(1) Change 2019(1)
GBPbn GBPbn % GBPbn %
Open mortgage book 267.1 264.9 1 270.1 (1)
Closed mortgage book 17.5 19.8 (12) 18.5 (5)
Credit cards 15.2 17.7 (14) 17.7 (14)
UK unsecured loans 8.2 8.2 - 8.4 (2)
UK motor finance 15.3 15.5 (1) 15.6 (2)
Business Banking 7.0 2.1 2.0
Overdrafts 1.0 1.2 (17) 1.3 (23)
Other(2) 9.7 9.0 8 9.0 8
---------- ---------- ---------
Loans and advances to customers 341.0 338.4 1 342.6 -
Operating lease assets 4.1 4.5 (9) 4.3 (5)
---------- ---------- ---------
Total customer assets 345.1 342.9 1 346.9 (1)
---------- ---------- ---------
Current Accounts 87.5 76.0 15 76.9 14
Relationship savings(3) 172.0 162.2 6 163.0 6
Tactical savings 12.7 15.3 (17) 13.3 (5)
---------- ---------- ---------
Customer deposits 272.2 253.5 7 253.2 8
---------- ---------- ---------
Risk-weighted assets 99.4 95.8 4 98.4 1
Restated to reflect migration of certain customer relationships
(1) from the SME business within Commercial Banking to Business Banking
within Retail. Also restated to reflect the Group's adoption of
the Sterling Overnight Index Average (SONIA).
Includes Europe and run-off.
(2)
Includes Business Banking.
(3)
COMMERCIAL BANKING
Commercial Banking has a client-led, low risk, capital efficient
strategy and is 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.
COVID-19 response
-- Actively supported clients with over GBP9 billion of
government backed lending, c.33,000 capital repayment holidays,
c.20,000 fee-free overdrafts as part of the GBP2 billion COVID-19
fund to support clients with turnover of up to GBP100 million
-- Registered as a commercial paper dealer to provide clients
with access to the Covid Corporate Financing Facility
-- Implemented an extensive Client Outreach Programme across SME
& Mid Corporates in response to the COVID-19 crisis, reaching
c.60,000 businesses impacted by the pandemic
-- SME mentoring service launched in partnership with Be The
Business to support help clients recover from the pandemic
-- Increased deployment of robotics to automate the loan
application process for Bounce Back Loans, allowing the majority of
clients to receive funds within 24 hours
-- Upgraded the Business Banking Online Lending Tool to
accommodate the Government's COVID-19 lending schemes, enabling
faster decision making and freeing up Relationship Manager time to
help customers
-- Redeployed a significant number of colleagues across
operational teams to manage client demand and strengthen critical
processes during the pandemic
Progress against strategic priorities
Leading customer experience
-- Launched the Business Finance Assistant pilot, an accounting
and business insight tool for SMEs, in collaboration with Fintech
partner OneUp, helping clients to save time on financial
administration and manage finances more effectively
-- Launched a new Green Buildings Tool to inform customers of
measures to make their properties more energy efficient
Digitising the Group
-- Over GBP350 million of payments per month processed through
the payables API, a 30-fold increase since the start of the year,
allowing clients to send Faster Payments directly from their
systems without human intervention
-- Increased the online cheque deposit limit from GBP1,000 to
GBP2,000, a 40 per cent increase in cheques processed
Maximising Group capabilities
-- Exceeded the Group's target to provide GBP6 billion of
additional net lending to start-up, SME and Mid Market clients by
year end 2020 and on track to meet the committed GBP18 billion
gross new lending to UK businesses for 2020
-- Completed the Bank's first UK Export Finance backed Export Development Guarantee transaction
Financial performance
-- Net interest income of GBP1,222 million was down 16 per cent
on prior year, reflecting competitive asset markets, lower income
on deposits following the bank base rate reduction and ongoing
business optimisation
-- Other income decreased by 10 per cent to GBP658 million
primarily driven by lower transaction banking income due to the
coronavirus-related trading restrictions, with markets income
resilient
-- Operating costs were 12 per cent lower reflecting continued
investment in efficiency initiatives
-- Impairments increased significantly to GBP1,519 million,
largely driven by the updated economic outlook, as well as a small
number of single name charges
-- Customer lending increased by 1 per cent to GBP96 billion
driven by the increased government backed lending in SME
-- Customer deposits grew by 7 per cent to GBP155 billion,
significantly exceeding lending growth, as customers increased
their liquidity positions in uncertain market conditions
-- Risk-weighted assets increased 1 per cent to GBP78 billion
driven by the implementation of the new securitisation framework,
credit migrations and exchange rates, offset by the revised SME
supporting factor and on-going optimisation
Commercial Banking performance summary
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019(1) Change 2019(1) Change
GBPm GBPm % GBPm %
Net interest income 1,222 1,449 (16) 1,443 (15)
Other income 658 731 (10) 686 (4)
Operating lease depreciation (8) (12) 33 (9) 11
---------- ---------- ---------
Net income 1,872 2,168 (14) 2,120 (12)
---------- ---------- ---------
Operating costs (906) (1,031) 12 (1,042) 13
Remediation (115) (90) (28) (65) (77)
---------- ---------- ---------
Total costs (1,021) (1,121) 9 (1,107) 8
---------- ---------- ---------
Trading surplus 851 1,047 (19) 1,013 16
Impairment (1,519) (65) (241)
---------- ---------- ---------
Underlying (loss) / profit (668) 982 772
---------- ---------- ---------
Banking net interest margin 2.92% 3.24% (32)bp 3.20% (28)bp
Average interest-earning banking assets GBP90.0bn GBP92.3bn (2) GBP91.5bn (2)
Asset quality ratio 3.12% 0.13% 299bp 0.46% 266bp
Return on risk-weighted assets (1.70)% 2.33% (403)bp 1.89% (359)bp
At 30 June At 30 June At 31 Dec
2020 2019(1) Change 2019(1) Change
GBPbn GBPbn % GBPbn %
SME 31.4 30.2 4 30.1 4
Mid Corporates 4.6 5.5 (16) 5.3 (13)
Corporate and Institutional 55.0 59.8 (8) 54.6 1
Other 5.0 4.3 16 5.2 (4)
---------- ---------- ---------
Loans and advances to customers 96.0 99.8 (4) 95.2 1
---------- ---------- ---------
SME including Retail Business Banking 38.4 32.3 19 32.1 20
Customer deposits 154.5 149.5 3 144.0 7
Current accounts including Retail Business Banking 44.2 34.0 30 34.9 27
Other deposits including Retail Business Banking 133.8 133.2 - 127.6 5
Risk-weighted assets 78.4 83.0 (6) 77.4 1
Restated to reflect migration of certain customer relationships
(1) from the SME business within Commercial Banking to Business Banking
within Retail. Also restated to reflect the Group's adoption of
the Sterling Overnight Index Average (SONIA).
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 GBP160 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 the 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.
COVID-19 response
-- Offered payment holidays on insurance premiums and
accelerated claims payments for life and critical illness
policyholders to support customers in financial difficulty during
the pandemic
-- Supported the NHS by providing free additional insurance
cover to its workers and alleviating pressure on GPs by reducing
requirements for medical evidence
-- Over 3,700 laptops distributed to colleagues to enable them
to work from home and continue to serve customer needs
Progress against strategic initiatives
Leading customer experience
-- Further strengthened presence in the open market for
individual annuities since launch in September 2019. Achieved a 14
per cent share of the whole individual annuities market as at 31
March 2020
-- On track to achieve 15 per cent market share of workplace
business by end of 2020, up from 10 per cent at start of 2018
-- Launched a new responsible investment and stewardship
framework to enhance sustainability practices
-- Scottish Widows won Best Retirement Provider and Best
Financial Education Initiative Money Marketing Awards (July)
Digitising the Group
-- Single Customer View expanded to include stockbroking
portfolios with over 6 million customers able to access their
insurance and wealth products alongside their bank account (up from
over 5 million at the end of 2019)
-- Enabled customers to notify us of their home insurance claims
online - a significant development in the digital journey
Maximising Group capabilities
-- Completed the transfer of GBP77 billion of Insurance assets to Schroders
-- Transition of customers to the new Schroders Personal Wealth
platform on track. Remain committed to become a top three financial
planning business by the end of 2023
Financial performance
-- Life and pensions sales, excluding the non-recurring benefit
from workplace auto-enrolment step-ups in 2019, increased by c.15
per cent. New business income, excluding this benefit of c.GBP120
million from the first half of 2019, was resilient. On a reported
basis, life and pension sales and new business income both
decreased year on year, by 8 and 28 per cent, respectively.
Protection sales were adversely affected by branch traffic as a
result of lockdown
-- General insurance combined operating ratio remains strong at
89 per cent despite absorbing additional claims caused by storms in
early 2020. Total gross written premiums remain resilient despite
the reduction in branch footfall
-- Life and pensions experience and other items decreased by
GBP158 million, where prior year included the GBP136 million
one-off benefit from the change in investment management provider
and a c.GBP100 million gain from longevity assumption changes,
whilst the impact of methodology changes in the current period
included a c.GBP90 million benefit. No changes to demographic
assumptions (including longevity and persistency) have been made in
the first six months of the year
-- The reduction in Wealth income reflects the transfer of
business to Schroders Personal Wealth in 2019 (c.GBP50 million,
cost impact was c.GBP40 million). Stockbroking income more than
doubled, with daily average trades increasing over twofold
Insurance capital
-- Estimated Solvency II ratio of 140 per cent, reflects the
dividend paid in February, continued investment in new business,
and the impact of lower interest rates. Credit asset portfolio is
average 'A' rated, well diversified and non-cyclical, with less
than 1 per cent sub investment grade or unrated; the Group
continues to actively monitor and manage the portfolio in light of
the potential impact of the COVID-19 pandemic
Insurance and Wealth performance summary
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019(1) Change 2019(1) Change
GBPm GBPm % GBPm %
Net interest income 14 40 (65) 37 (62)
Other income 853 1,183 (28) 838 2
---------- ---------- ---------
Net income 867 1,223 (29) 875 (1)
---------- ---------- ---------
Operating costs (459) (539) 15 (443) (4)
Remediation (19) (25) 24 (25) 24
---------- ---------- ---------
Total costs (478) (564) 15 (468) (2)
---------- ---------- ---------
Trading surplus 389 659 (41) 407 (4)
Impairment (10) - -
---------- ---------- ---------
Underlying profit 379 659 (42) 407 (7)
---------- ---------- ---------
Life and pensions sales (PVNBP)(2) 7,880 8,568 (8) 8,947 (12)
General insurance underwritten new GWP(3) 56 64 (13) 63 (11)
General insurance underwritten total GWP(3) 327 335 (2) 336 (3)
General insurance combined ratio 89% 80% 9pp 82% 7pp
At 30 June At 30 June At 31 Dec
2020 2019 Change 2019 Change
GBPbn GBPbn % GBPbn %
Insurance Solvency II ratio(4) 140% 149% (9)pp 170% (30)pp
UK Wealth Loans and advances to customers 0.9 0.9 - 0.9 -
UK Wealth Customer deposits 13.5 13.8 (2) 13.7 (1)
UK Wealth Risk-weighted assets 1.3 1.3 - 1.3 -
Total customer assets under administration 159.6 155.0 3 170.0 (6)
Income by product group
Half-year to 30 June 2020 Half-year to 30 June 2019 Half-year
----------------------------- -----------------------------
New Existing New Existing to 31 Dec
business business Total business business Total 2019(1)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Workplace, planning and
retirement 121 62 183 245 56 301 206
Individual and bulk annuities 108 41 149 78 34 112 165
Protection 11 10 21 11 12 23 22
Longstanding LP&I 4 175 179 6 191 197 198
---------- ---------- ----- ---------- ---------- ----- ---------
244 288 532 340 293 633 591
Life and pensions experience
and other items 72 230 (10)
General insurance 155 179 147
----- ----- ---------
759 1,042 728
Wealth 108 181 147
----- ----- ---------
Net income 867 1,223 875
----- ----- ---------
Restated to reflect the Group's adoption of the Sterling Overnight
(1) Index Average (SONIA).
Present value of new business premiums.
(2)
Gross written premiums.
(3)
Equivalent regulatory view of ratio (including With Profits funds)
(4) was 135 per cent (30 June 2019: 141 per cent; 31 December 2019:
154 per cent).
CENTRAL ITEMS
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019(1) Change 2019(1) Change
GBPm GBPm % GBPm %
Net income 40 322 (88) 177 (77)
---------- ---------- ---------
Operating costs (57) (8) (44) (30)
Remediation 7 20 (65) (22)
---------- ---------- ---------
Total costs (50) 12 (66) 24
---------- ---------- ---------
Trading surplus (10) 334 111
Impairment (194) 42 11
---------- ---------- ---------
Underlying (loss) / profit (204) 376 122
---------- ---------- ---------
Restated to reflect the Group's adoption of the Sterling Overnight
(1) Index Average (SONIA).
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 (LDC).
Within net income, the Group's private equity business, LDC,
generating net positive other income, was adversely impacted by
c.GBP110 million of negative market valuations in the period on
investments impacted by the coronavirus pandemic. Net income also
includes a gain of GBP135 million on the sale of gilts and other
liquid assets, which is not expected to be repeated in the second
half of the year, compared with a GBP181 million gain on sale of
such assets in 2019. The net income comparative for the six months
to 30 June 2019 included a gain of GBP50 million relating to the
sale of the Group's interest in Vocalink.
Remediation in the half-year to 30 June 2019 reflected the
release of provisions relating to discontinued business.
The impairment charge incurred in the six months to 30 June 2020
included a GBP200 million central overlay applied in respect of
updates to the Group's severe scenario used to calculate expected
credit loss provisions. In the first half of 2019 impairment
included releases relating to the reassessment of credit risk
associated with debt instruments held within the Group's equity
investment 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(1,2,3) gross up(4) PPI basis
Half-year to 30 June 2020 GBPm GBPm GBPm GBPm GBPm
Net interest income 6,556 54 (1,132) - 5,478
Other income, net of insurance claims 1,339 104 1,018 - 2,461
Operating lease depreciation (526) - - (526)
--------- ------------ ----------- ------ ----------
Net income 7,895 (368) (114) - 7,413
Operating expenses(5) (4,668) 689 103 - (3,876)
--------- ------------ ----------- ------ ----------
Trading surplus 3,227 321 (11) - 3,537
Impairment (3,829) - 11 - (3,818)
--------- ------------ ----------- ------ ----------
(Loss) / profit before tax (602) 321 - - (281)
--------- ------------ ----------- ------ ----------
Half-year to 30 June 2019
Net interest income 4,639 203 1,303 - 6,145
Other income, net of insurance claims 4,492 76 (1,418) - 3,150
Operating lease depreciation (473) - - (473)
--------- ------------ ----------- ------ ----------
Net income 9,131 (194) (115) - 8,822
Operating expenses(5) (5,655) 841 115 650 (4,049)
--------- ------------ ----------- ------ ----------
Trading surplus 3,476 647 - 650 4,773
Impairment (579) - - - (579)
--------- ------------ ----------- ------ ----------
Profit before tax 2,897 647 - 650 4,194
--------- ------------ ----------- ------ ----------
Half-year to 31 December 2019
Net interest income 5,541 176 515 - 6,232
Other income, net of insurance claims 3,687 (502) (603) - 2,582
Operating lease depreciation (494) - - (494)
--------- ------------ ----------- ------ ----------
Net income 9,228 (820) (88) - 8,320
Operating expenses(5) (7,015) 856 88 1,800 (4,271)
--------- ------------ ----------- ------ ----------
Trading surplus 2,213 36 - 1,800 4,049
Impairment (717) 5 - - (712)
--------- ------------ ----------- ------ ----------
Profit before tax 1,496 41 - 1,800 3,337
--------- ------------ ----------- ------ ----------
Half-year to 30 June 2020 comprises the effects of market volatility
(1) and asset sales (losses of GBP43 million); the amortisation of purchased
intangibles (GBP34 million); restructuring (GBP133 million, comprising
severance related costs, the rationalisation of the non-branch property
portfolio, the integration of Zurich's UK workplace pensions and
savings business); and the fair value unwind and other items (losses
of GBP111 million).
Half-year to 30 June 2019 comprises the effects of market volatility
(2) and asset sales (losses of GBP296 million); the amortisation of
purchased intangibles (GBP34 million); restructuring (GBP182 million,
comprising severance related costs, the rationalisation of the non-branch
property portfolio, the integration of MBNA and Zurich's UK workplace
pensions and savings business); and the fair value unwind and other
items (losses of GBP135 million).
Half-year to 31 December 2019 comprises the effects of market volatility
(3) and asset sales (gains of GBP422 million); the amortisation of purchased
intangibles (GBP34 million); restructuring (GBP289 million, comprising
severance related costs, the rationalisation of the non-branch property
portfolio, the integration of Zurich's UK workplace pensions and
savings business); and the fair value unwind and other items (losses
of GBP140 million).
The Group's insurance businesses' income statements include income
(4) 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 and
(5) operating lease depreciation.
2. Banking net interest margin and average interest-earning banking assets
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019 2019
Group net interest income - statutory basis (GBPm) 6,556 4,639 5,541
Insurance gross up (GBPm) (1,132) 1,303 515
Volatility and other items (GBPm) 54 203 176
---------- ---------- ---------
Group net interest income - underlying basis (GBPm) 5,478 6,145 6,232
Non-banking net interest expense (GBPm) 110 79 66
---------- ---------- ---------
Banking net interest income - underlying basis (GBPm) 5,588 6,224 6,298
---------- ---------- ---------
Net loans and advances to customers (GBPbn)(1) 440.4 441.0 440.4
Impairment provision and fair value adjustments (GBPbn) 6.6 4.0 3.9
Non-banking items:
Fee-based loans and advances (GBPbn) (6.5) (7.5) (6.3)
Other non-banking (GBPbn) (2.4) (2.5) (3.1)
---------- ---------- ---------
Gross banking loans and advances (GBPbn) 438.1 435.0 434.9
Averaging (GBPbn) (4.9) (1.7) 1.2
---------- ---------- ---------
Average interest-earning banking assets (GBPbn) 433.2 433.3 436.1
---------- ---------- ---------
Banking net interest margin (%) 2.59 2.90 2.86
(1) Excludes reverse repos.
3. Volatility arising in insurance businesses
Volatility included in the Group's statutory results before tax
comprises the following:
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019 2019
GBPm GBPm GBPm
Insurance volatility (393) 221 9
Policyholder interests volatility (205) 105 88
---------- ---------- ---------
Total volatility (598) 326 97
Insurance hedging arrangements 228 (299) (48)
---------- ---------- ---------
Total insurance volatility (370) 27 49
---------- ---------- ---------
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.
Insurance volatility movements in the six months to 30 June 2020
were largely driven by significant movements in global equity
markets, credit spreads and interest rate movements. Although the
Group manages its exposures to equity, interest rate, foreign
currency exchange rate, inflation and market movements within the
Insurance division, it does so by balancing the importance of
managing the impacts on both capital and earnings volatility. For
example, equity market movements is hedged within Insurance on a
Solvency II capital basis and whilst this also reduces the IFRS
earnings exposure to equity market movements, the hedge is not
perfect from an IFRS earnings perspective.
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 30 June At 30 June At 31 Dec
2020 2019 2019
GBPm GBPm GBPm
Shareholders' equity 42,734 43,448 41,697
Goodwill (2,324) (2,314) (2,324)
Intangible assets (3,985) (3,615) (3,808)
Purchased value of in-force business (234) (255) (247)
Other, including deferred tax effects 309 203 269
---------- ---------- ---------
Tangible net assets 36,500 37,467 35,587
---------- ---------- ---------
Ordinary shares in issue, excluding own shares 70,735m 70,740m 70,031m
Tangible net assets per share 51.6p 53.0p 50.8p
5. Return on tangible equity
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019 2019
Average shareholders' equity (GBPbn) 43.7 43.6 42.6
Average intangible assets (GBPbn) (6.2) (5.8) (6.1)
---------- ---------- ---------
Average tangible equity (GBPbn) 37.5 37.8 36.5
---------- ---------- ---------
Underlying (loss) / profit after tax (GBPm) (93) 3,160 2,530
Add back amortisation of intangible assets (post tax) (GBPm) 212 178 186
Less profit attributable to non-controlling interests and other equity
holders (GBPm) (253) (283) (264)
---------- ---------- ---------
Adjusted underlying (loss) / profit after tax (GBPm) (134) 3,055 2,452
---------- ---------- ---------
Underlying return on tangible equity (%) (0.7) 16.3 13.3
Group statutory profit after tax (GBPm) 19 2,225 781
Add back amortisation of intangible assets (post tax) (GBPm) 212 178 186
Add back amortisation of purchased intangible assets (post tax) (GBPm) 35 38 36
Less profit attributable to non-controlling interests and other equity
holders (GBPm) (253) (283) (264)
---------- ---------- ---------
Adjusted statutory profit after tax (GBPm) 13 2,158 739
---------- ---------- ---------
Statutory return on tangible equity (%) 0.1 11.5 4.0
RISK MANAGEMENT
PRINCIPAL RISKS AND UNCERTAINTIES
The significant risks faced by the Group are detailed below.
There has been no change to the definition of these risks since
disclosed in the Group's 2019 Annual Report and Accounts.
The external risks faced by the Group may also impact the
success of delivering against the Group's long-term strategic
objectives. They include, but are not limited to the coronavirus
pandemic, global macro-economic conditions, regulatory developments
and the exit of the UK from the European Union.
Through the coronavirus pandemic, the Group has offered help and
support to customers with a range of measures, for example with
payment holidays and government lending schemes, and continues to
actively monitor the outcomes to ensure fair customer treatment.
The Group has been required to take a series of unprecedented
actions to protect colleagues, and has been proactive in limiting
the impact with a number of mitigating actions to support their
safety and wellbeing. Transition planning, including continued
engagement with colleagues, remains a key focus in ensuring that
the Group continues to protect colleagues and services to customers
as the situation continues to evolve, and that any lessons learned
from the pandemic can be embedded into future working
practices.
The Group's key cyber controls have continued to operate
effectively during the coronavirus pandemic. During this period,
the Group has also enhanced monitoring of key suppliers to protect
the services received by the Group and its ability to protect and
maintain services to customers. The Group continues to work with
the regulators constructively with regular engagement to ensure
they are aware of the impacts on, and mitigating actions taken by
the Group.
The Group's principal risks and uncertainties are reviewed and
reported regularly to the Board in alignment with the Group's
Enterprise Risk Management Framework and the specific challenges of
COVID-19 and proposed responses have been actively discussed.
Climate risk is also being introduced as a new principal risk
category, reflecting the focus in this key area, and work already
undertaken by the Group.
Change / Execution - The risk that, in delivering the change
agenda, the Group fails to ensure compliance with laws and
regulation, maintain effective customer service and availability,
and/or operate within the Group's approved risk appetite.
Data - The risk that the Group fails to effectively govern,
manage, and control data (including data processed by third party
suppliers) leading to unethical decisions, poor customer outcomes,
loss of value to the Group and mistrust.
Operational Resilience - The risk that the Group fails to design
resilience into business operations, underlying infrastructure and
controls (people, process, technology) so that it is able to
withstand external or internal events which could impact the
continuation of operations, and fails to respond in a way which
meets customer and stakeholder expectations and needs when the
continuity of operations is compromised.
Strategic - The risks which result from strategic plans which do
not adequately reflect trends in external factors, ineffective
business strategy execution, or failure to respond in a timely
manner to external environments or changes in stakeholder
behaviours and expectations.
Credit - The risk that parties with whom the Group has
contracted, fail to meet their financial obligations (both on and
off balance sheet). For example observed, anticipated or unexpected
changes in the economic environment could impact profitability due
to an increase in delinquency, defaults, write-downs and/or
expected credit losses.
Regulatory and Legal - The risk of financial penalties,
regulatory censure, criminal or civil enforcement action or
customer detriment as a result of failure to identify, assess,
correctly interpret, comply with, or manage regulatory and/or legal
requirements.
RISK MANAGEMENT (continued)
Conduct - The risk of customer detriment across the customer
lifecycle including: failures in product management, distribution
and servicing activities; from other risks materialising, or other
activities which could undermine the integrity of the market or
distort competition, leading to unfair customer outcomes,
regulatory censure, reputational damage or financial loss.
Operational - The risk of loss from inadequate or failed
internal processes, people and systems, or from external
events.
People - The risk that the Group fails to provide an appropriate
colleague and customer-centric culture, supported by robust reward
and wellbeing policies and processes; effective leadership to
manage colleague resources; effective talent and succession
management; and robust control to ensure all colleague-related
requirements are met.
Insurance Underwriting - The risk of adverse developments in the
timing, frequency and severity of claims for insured / underwritten
events and in customer behaviour, leading to reductions in earnings
and/or value.
Capital - The risk that the Group has a sub-optimal quantity or
quality of capital or that capital is inefficiently deployed across
Lloyds Banking Group.
Funding and Liquidity - Funding risk is the risk that the Group
does not have sufficiently stable and diverse sources of funding or
the funding structure is inefficient. Liquidity risk is the risk
that the Group does not have sufficient financial resources to meet
commitments when they fall due, or can only secure them at
excessive cost.
Governance - The risk that the organisational infrastructure
fails to provide robust oversight of decision making and the
control mechanisms to ensure strategies and management instructions
are implemented effectively.
Market - The risk that the Group's capital or earnings profile
is affected by adverse market rates, in particular interest rates
and credit spreads in the banking business, equity, credit spreads
and interest rates in the Insurance business, and credit spreads in
the Group's defined benefit pension schemes.
Model - The risk of financial loss, regulatory censure,
reputational damage or customer detriment, as a result of
deficiencies in the development, application and ongoing operation
of models and rating systems.
CREDIT RISK PORTFOLIO
Overview
-- Economic conditions worsened in the first half of 2020 as a result of the coronavirus crisis
-- However, with c.85 per cent of the Group's lending secured,
with robust LTVs, and a prudent approach to credit risk appetite
and risk management, the credit portfolios were well positioned
ahead of the crisis
-- The Group is actively supporting its customers in these
challenging times and continues to offer a range of flexible
options and payment holidays across major products as well as
lending through the various UK Government support schemes. There is
however an expectation of increased arrears and defaults as these
various arrangements designed to help alleviate short term
financial pressures come to an end
-- Given the challenging external environment and expectations
of further economic deterioration, the impairment charge has
increased significantly during the first half of 2020 to GBP3,818
million (half-year to 30 June 2019: GBP579 million), predominantly
driven by updates to the Group's economic outlook as well as the
impact on restructuring cases and single name charges in the
Commercial Banking Business Support Unit (BSU). As a result,
expected credit loss allowances increased to GBP7,186 million at 30
June 2020 (31 December 2019: GBP4,142 million)
-- Stage 2 loans and advances to customers as a percentage of
total lending have increased by 5.7 percentage points to 13.4 per
cent at 30 June 2020, reflecting the deterioration of the Group's
forward looking economic assumptions (31 December 2019: 7.7 per
cent). Stage 2 coverage increased to 4.2 per cent (31 December
2019: 3.7 per cent)
-- Stage 3 loans and advances increased by GBP784 million to
GBP9,538 million (31 December 2019: GBP8,754 million), although as
a percentage of total lending remained broadly stable at 1.9 per
cent (31 December 2019: 1.8 per cent). Stage 3 coverage increased
by 7.1 percentage points to 29.6 per cent (31 December 2019: 22.5
per cent) largely driven by additional provisions predominantly
raised against historical restructuring cases in Commercial
Banking's BSU and to a lesser extent in Retail, due to the change
in the Group's economic forecast of collateral values for Secured
and Motor
-- There are a number of headwinds which have the potential to
further impact the portfolios, including uncertainty around future
UK and global economic conditions, the risk of a second wave of the
virus and further, perhaps deeper, measures worsening the economy
and the financial health of the Group's customers. Outside of
these, the possibility still remains of no-deal at the end of the
transition period of the UK exit from the European Union
-- In the context of numerous uncertainties, the Group's risk
appetite and risk management approach continues to help ensure the
Group takes timely and proactive actions
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 and a prudent
through the cycle credit risk appetite
-- Providing support under the UK Government schemes does
however mean that in certain circumstances, for example lending
under the Coronavirus Business Interruption Loan Scheme (CBILS),
which is 80 per cent UK Government guaranteed, the Group has
extended its lending risk appetite in line with the scheme
guidelines
-- The Group's effective risk management seeks to ensure early
identification and management of customers and counterparties who
may be showing signs of financial difficulty
-- The Group continues to work closely with its customers and
clients to ensure they receive the appropriate level of support,
including where payment holidays are maturing
-- Sector concentrations within the portfolios are closely
monitored and controlled, with mitigating actions taken where
appropriate. Sector and product controls help manage exposure to
certain higher risks, vulnerable sectors and asset classes
CREDIT RISK PORTFOLIO (continued)
Impairment charge by division
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec
2020 2019 Change 2019 Change
GBPm GBPm % GBPm %
Retail:
---------- ---------- ---------
Secured 603 (38) (130)
Credit Cards 656 267 146 236 178
UK Motor Finance 241 104 132 99 143
Other 595 223 167 277 115
---------- ---------- ---------
2,095 556 277 482 335
Commercial Banking:
---------- ---------- ---------
SME 257 (48) (17)
Other 1,262 113 1,017 258 389
---------- ---------- ---------
1,519 65 2,237 241 530
Insurance and Wealth 10 - -
Central items 194 (42) (11)
---------- ---------- ---------
Total impairment charge 3,818 579 559 712 436
---------- ---------- ---------
Asset quality ratio 1.73% 0.26% 147bp 0.31% 142bp
Gross asset quality ratio 1.77% 0.34% 143bp 0.40% 137bp
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 on page 43.
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
will be 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.
CREDIT RISK PORTFOLIO (continued)
Group loans and advances to customers - statutory basis
Stage 2 Stage 3
Total Stage 1 Stage 2 Stage 3 POCI as % as %
At 30 June 2020 GBPm GBPm GBPm GBPm GBPm Total Total
Retail:
-------- -------- -------- -------- -------
Secured 285,727 236,577 34,307 1,800 13,043 12.0 0.6
Credit Cards 15,895 13,439 2,088 368 - 13.1 2.3
UK Motor Finance 15,830 12,674 2,920 236 - 18.4 1.5
Other(1) 26,780 24,239 2,061 480 - 7.7 1.8
-------- -------- -------- -------- -------
344,232 286,929 41,376 2,884 13,043 12.0 0.8
Commercial Banking:
-------- -------- -------- -------- -------
SME 31,769 25,742 5,181 846 - 16.3 2.7
Other 66,841 52,320 11,559 2,962 - 17.3 4.4
-------- -------- -------- -------- -------
98,610 78,062 16,740 3,808 - 17.0 3.9
Insurance and Wealth 871 765 23 83 - 2.6 9.5
Central items 63,781 63,773 - 8 - - -
-------- -------- -------- -------- -------
Total gross lending 507,494 429,529 58,139 6,783 13,043 11.5 1.3
ECL allowance on drawn balances (5,986) (1,332) (2,168) (2,161) (325)
-------- -------- -------- -------- -------
Net balance sheet carrying value 501,508 428,197 55,971 4,622 12,718
-------- -------- -------- -------- -------
ECL allowance (drawn and undrawn) as
a percentage of gross lending (%)(2) 1.3 0.4 4.1 33.4
Retail Other includes Business Banking, Loans, Overdrafts, Europe
(1) and Retail run-off.
Stage 3 ECL allowances as a percentage of drawn balances are calculated
(2) excluding loans in recoveries in Credit Cards of GBP77 million and
GBP129 million in Loans, Overdrafts and Business Banking within
Retail other.
CREDIT RISK PORTFOLIO (continued)
Group loans and advances to customers - statutory basis
(continued)
Stage 2 Stage 3
Total Stage 1 Stage 2 Stage 3 POCI as % as %
At 31 December 2019(1) GBPm GBPm GBPm GBPm GBPm Total Total
Retail:
-------- -------- ------- -------- -------
Secured 289,198 257,043 16,935 1,506 13,714 5.9 0.5
Credit Cards 18,198 16,132 1,681 385 - 9.2 2.1
UK Motor Finance 15,976 13,884 1,942 150 - 12.2 0.9
Other(2) 21,111 18,692 1,976 443 - 9.4 2.1
-------- -------- ------- -------- -------
344,483 305,751 22,534 2,484 13,714 6.5 0.7
Commercial Banking:
-------- -------- ------- -------- -------
SME 30,433 27,206 2,507 720 - 8.2 2.4
Other 66,065 59,868 3,470 2,727 - 5.3 4.1
-------- -------- ------- -------- -------
96,498 87,074 5,977 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 allowance (drawn and undrawn) as a
percentage of gross lending (%)(3) 0.7 0.2 3.8 25.0 1.0
Restated to reflect migration of certain customer relationships
(1) from the SME business within Commercial Banking to Business Banking
within Retail.
Retail Other includes Business Banking, Loans, Overdrafts, Europe
(2) and Retail run-off.
Stage 3 ECL allowances as a percentage of drawn balances are calculated
(3) excluding loans in recoveries in Credit Cards of GBP80 million and
GBP125 million in Loans, Overdrafts and Business Banking within
Retail other.
CREDIT RISK PORTFOLIO (continued)
Group loans and advances to customers - underlying basis
Stage 2 Stage 3
Total Stage 1 Stage 2 Stage 3 as % as %
At 30 June 2020(1) GBPm GBPm GBPm GBPm Total Total
Retail:
-------- -------- -------- --------
Secured 286,379 237,787 44,035 4,557 15.4 1.6
Credit Cards 15,825 13,380 2,079 366 13.1 2.3
UK Motor Finance 15,830 12,674 2,920 236 18.4 1.5
Other(2) 26,780 24,239 2,061 480 7.7 1.8
-------- -------- -------- --------
344,814 288,080 51,095 5,639 14.8 1.6
Commercial Banking:
-------- -------- -------- --------
SME 31,769 25,742 5,181 846 16.3 2.7
Other 66,841 52,320 11,559 2,962 17.3 4.4
-------- -------- -------- --------
98,610 78,062 16,740 3,808 17.0 3.9
Insurance and Wealth 871 765 23 83 2.6 9.5
Central items 63,781 63,773 - 8 - -
-------- -------- -------- --------
Total gross lending 508,076 430,680 67,858 9,538 13.4 1.9
ECL allowance on drawn balances (6,685) (1,355) (2,602) (2,728)
-------- -------- -------- --------
Net balance sheet carrying value 501,391 429,325 65,256 6,810
-------- -------- -------- --------
ECL allowance (drawn and undrawn) as a
percentage of gross lending (%)(3) 1.4 0.4 4.2 29.6
These balances exclude the impact of the HBOS and MBNA acquisition
(1) related adjustments.
Retail Other includes Business Banking, Loans, Overdrafts, Europe
(2) and Retail run-off.
Stage 3 ECL allowances as a percentage of drawn balances are calculated
(3) excluding loans in recoveries in Credit Cards of GBP77 million and
GBP129 million in Loans, Overdrafts and Business Banking within
Retail other.
CREDIT RISK PORTFOLIO (continued)
Group loans and advances to customers - underlying basis
(continued)
Stage 2 Stage 3
Total Stage 1 Stage 2 Stage 3 as % as %
At 31 December 2019(1,2) GBPm GBPm GBPm GBPm Total Total
Retail:
-------- -------- -------- --------
Secured 289,845 258,760 26,838 4,247 9.3 1.5
Credit Cards 18,110 16,052 1,675 383 9.2 2.1
UK Motor Finance 15,976 13,884 1,942 150 12.2 0.9
Other(3) 21,110 18,691 1,976 443 9.4 2.1
-------- -------- -------- --------
345,041 307,387 32,431 5,223 9.4 1.5
Commercial Banking:
-------- -------- -------- --------
SME 30,433 27,206 2,507 720 8.2 2.4
Other 66,065 59,868 3,470 2,727 5.3 4.1
-------- -------- -------- --------
96,498 87,074 5,977 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 allowance (drawn and undrawn) as a
percentage of gross lending (%)(4) 0.8 0.2 3.7 22.5
These balances exclude the impact of the HBOS and MBNA acquisition
(1) related adjustments.
Restated to reflect migration of certain customer relationships
(2) from the SME business within Commercial Banking to Business Banking
within Retail.
Retail Other includes Business Banking, Loans, Overdrafts, Europe
(3) and Retail run-off.
Stage 3 ECL allowances as a percentage of drawn balances are calculated
(4) excluding loans in recoveries in Credit Cards of GBP80 million
and GBP125 million in Loans, Overdrafts and Business Banking within
Retail other.
Group total expected credit loss allowance - statutory basis
At 30 June At 31 Dec
2020 2019
GBPm GBPm
Customer related balances
---------- ---------
Drawn 5,986 3,259
Undrawn 501 177
---------- ---------
6,487 3,436
Other assets 54 19
---------- ---------
Total ECL allowance 6,541 3,455
---------- ---------
Group total expected credit loss allowance - underlying
basis
At 30 June At 31 Dec
2020 2019
GBPm GBPm
Customer related balances
---------- ---------
Drawn 6,685 3,965
Undrawn 501 177
---------- ---------
7,186 4,142
Other assets 54 19
---------- ---------
Total ECL allowance 7,240 4,161
---------- ---------
CREDIT RISK PORTFOLIO (continued)
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 30 June 2020
Underlying basis 508,076 430,680 67,858 9,538 -
-------- -------- -------- -------- -------
POCI assets - (1,210) (9,728) (2,757) 13,695
Acquisition fair value adjustment (582) 59 9 2 (652)
-------- -------- -------- -------- -------
(582) (1,151) (9,719) (2,755) 13,043
-------- -------- -------- -------- -------
Statutory basis 507,494 429,529 58,139 6,783 13,043
-------- -------- -------- -------- -------
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
-------- -------- -------- -------- -------
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 30 June 2020
Underlying basis 6,685 1,355 2,602 2,728 -
------ ------- ------- ------- ------
POCI assets - - (416) (561) 977
Acquisition fair value adjustment (699) (23) (18) (6) (652)
------ ------- ------- ------- ------
(699) (23) (434) (567) 325
------ ------- ------- ------- ------
Statutory basis 5,986 1,332 2,168 2,161 325
------ ------- ------- ------- ------
At 31 December 2019
Expected credit losses on drawn balances
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
------ ------- ------- ------- ------
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
----------------- ----------------- ----------------- ------------------- ------------
At 30 June
2020 GBPm %(1) (,2) GBPm %(1) (,2) GBPm %(1) (,2) GBPm %(1,2) (,3) GBPm %(1,2)
Retail:
------ ------ ------ ------ ----
Secured 1,111 0.4 108 - 491 1.4 187 10.4 325 2.5
Credit Cards 944 6.0 403 3.0 420 20.1 121 41.6 - -
UK Motor
Finance(4) 563 3.6 194 1.5 217 7.4 152 64.4 - -
Other(5) 897 3.4 341 1.4 383 18.6 173 49.3 - -
------ ------ ------ ------ ----
3,515 1.0 1,046 0.4 1,511 3.7 633 23.6 325 2.5
Commercial
Banking:
------ ------ ------ ------ ----
SME 502 1.6 115 0.4 269 5.2 118 13.9 - -
Other 2,238 3.3 210 0.4 602 5.2 1,426 48.1 - -
------ ------ ------ ------ ----
2,740 2.8 325 0.4 871 5.2 1,544 40.5 - -
Insurance and
Wealth 25 2.9 11 1.4 1 4.3 13 15.7 - -
Central items 207 0.3 201 0.3 - - 6 75.0 - -
------ ------ ------ ------ ----
Total 6,487 1.3 1,583 0.4 2,383 4.1 2,196 33.4 325 2.5
------ ------ ------ ------ ----
At 31
December 2019
Retail:
------ ------ ------ ------ ----
Secured 569 0.2 24 - 281 1.7 122 8.1 142 1.0
Credit Cards 546 3.0 203 1.3 218 13.0 125 41.0 - -
UK Motor
Finance(4) 387 2.4 216 1.6 87 4.5 84 56.0 - -
Other(5) 588 2.8 196 1.0 233 11.8 159 50.0 - -
------ ------ ------ ------ ----
2,090 0.6 639 0.2 819 3.6 490 21.5 142 1.0
Commercial
Banking:
------ ------ ------ ------ ----
SME 273 0.9 45 0.2 127 5.1 101 14.0 - -
Other 1,040 1.6 70 0.1 125 3.6 845 31.0 - -
------ ------ ------ ------ ----
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
------ ------ ------ ------ ----
As a percentage of drawn balances.
(1)
ECL allowances as a percentage of drawn balances as at 31 December
(2) 2019 restated to reflect migration of certain customer relationships
from the SME business within Commercial Banking to Business Banking
within Retail.
Stage 3 ECL allowances as a percentage of drawn balances are calculated
(3) excluding loans in recoveries in Credit Cards of GBP77 million
(31 December 2019: GBP80 million) and GBP129 million (31 December
2019: GBP125 million) in Loans, Overdrafts and Business Banking
within Retail other.
UK motor finance for Stages 1 and 2 include GBP191 million (31
(4) December 2019: GBP201 million) relating to provisions against residual
values of vehicles subject to finance leasing agreements. These
provisions are included within the calculation of coverage ratios.
Retail Other includes Business Banking, Loans, Overdrafts, Europe
(5) and Retail run-off.
CREDIT RISK PORTFOLIO (continued)
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) (,3) GBPm %(2) (,3) GBPm %(2) (,3) GBPm %(2,3) (,4)
At 30 June 2020 (1)
Retail:
------ ------ ------ ------
Secured 1,763 0.6 108 - 907 2.1 748 16.4
Credit Cards 991 6.3 426 3.2 438 21.1 127 43.9
UK Motor Finance(5) 563 3.6 194 1.5 217 7.4 152 64.4
Other(6) 897 3.4 341 1.4 383 18.6 173 49.3
------ ------ ------ ------
4,214 1.2 1,069 0.4 1,945 3.8 1,200 22.1
Commercial Banking:
------ ------ ------ ------
SME 502 1.6 115 0.4 269 5.2 118 13.9
Other 2,238 3.3 210 0.4 602 5.2 1,426 48.1
------ ------ ------ ------
2,740 2.8 325 0.4 871 5.2 1,544 40.5
Insurance and Wealth 25 2.9 11 1.4 1 4.3 13 15.7
Central items 207 0.3 201 0.3 - - 6 75.0
------ ------ ------ ------
Total 7,186 1.4 1,606 0.4 2,817 4.2 2,763 29.6
------ ------ ------ ------
At 31 December 2019(1)
Retail:
------ ------ ------ ------
Secured 1,216 0.4 26 - 614 2.3 576 13.6
Credit Cards 606 3.4 230 1.4 236 14.1 140 46.2
UK Motor Finance(5) 387 2.4 216 1.6 87 4.5 84 56.0
Other(6) 587 2.8 194 1.0 233 11.8 160 50.3
------ ------ ------ ------
2,796 0.8 666 0.2 1,170 3.6 960 19.1
Commercial Banking:
------ ------ ------ ------
SME 273 0.9 45 0.2 127 5.1 101 14.0
Other 1,040 1.6 70 0.1 125 3.6 845 31.0
------ ------ ------ ------
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
------ ------ ------ ------
These balances exclude the impact of the HBOS and MBNA acquisition
(1) related adjustments. Stage 2 up to date loans are assigned to PD
movement if they also meet other triggers. This represents a change
in presentation for Commercial Banking where these loans were reported
in Other at 31 December 2019.
As a percentage of drawn balances.
(2)
ECL allowances as a percentage of drawn balances as at 31 December
(3) 2019 restated to reflect migration of certain customer relationships
from the SME business within Commercial Banking to Business Banking
within Retail.
Stage 3 ECL allowances as a percentage of drawn balances are calculated
(4) excluding loans in recoveries in Credit Cards of GBP77 million
(31 December 2019: GBP80 million) and GBP129 million (31 December
2019: GBP125 million) in Loans, Overdrafts and Business Banking
within Retail other.
UK motor finance for Stages 1 and 2 include GBP191 million (31
(5) December 2019: GBP201 million) relating to provisions against residual
values of vehicles subject to finance leasing agreements. These
provisions are included within the calculation of coverage ratios.
Retail Other includes Business Banking, Loans, Overdrafts, Europe
(6) and Retail run-off.
CREDIT RISK PORTFOLIO (continued)
Group Stage 2 loans and advances to customers - statutory
basis
Up to date 1-30 days past due Over 30 days past
due
-------------------------------------------- -------------------- --------------------
PD movements Other
---------------------- --------------------
Gross Gross Gross Gross
lending ECL lending ECL lending ECL lending ECL
GBPm GBPm %(1) GBPm GBPm %(1) GBPm GBPm %(1) GBPm GBPm %(1)
At 30 June
2020
Retail:
------- ------ ------- ---- ------- ---- ------- ----
Secured 21,032 191 0.9 9,602 139 1.4 1,488 41 2.8 2,185 120 5.5
Credit
Cards 1,562 295 18.9 439 96 21.9 64 18 28.1 23 11 47.8
UK Motor
Finance 784 57 7.3 1,871 67 3.6 142 40 28.2 123 53 43.1
Other(2) 947 192 20.3 793 104 13.1 183 55 30.1 138 32 23.2
------ ------- ---- ------- ---- ------- ----
24,325 735 3.0 12,705 406 3.2 1,877 154 8.2 2,469 216 8.7
Commercial
Banking:
------- ------ ------- ---- ------- ---- ------- ----
SME 4,702 234 5.0 245 11 4.5 139 17 12.2 95 7 7.4
Other 11,018 592 5.4 239 5 2.1 29 2 6.9 273 3 1.1
------ ------- ---- ------- ---- ------- ----
15,720 826 5.3 484 16 3.3 168 19 11.3 368 10 2.7
Insurance
and Wealth 1 - - - - - - - - 22 1 4.5
Central - - - - - - - - - - - -
items
------- ------ ------- ---- ------- ---- ------- ----
Total 40,046 1,561 3.9 13,189 422 3.2 2,045 173 8.5 2,859 227 7.9
------- ------ ------- ---- ------- ---- ------- ----
At 31
December
2019
Retail:
------- ------ ------- ---- ------- ---- ------- ----
Secured 10,846 83 0.8 2,593 107 4.1 1,876 33 1.8 1,620 58 3.6
Credit
Cards 1,093 129 11.8 423 47 11.1 124 26 21.0 41 16 39.0
UK Motor
Finance 543 27 5.0 1,232 30 2.4 135 21 15.6 32 9 28.1
Other(2) 893 102 11.4 711 54 7.6 238 50 21.0 134 27 20.1
------ ------- ---- ------- ---- ------- ----
13,375 341 2.5 4,959 238 4.8 2,373 130 5.5 1,827 110 6.0
Commercial
Banking:
------- ------ ------- ---- ------- ---- ------- ----
SME 2,014 104 5.2 410 17 4.1 56 6 10.7 27 - -
Other 1,881 75 4.0 1,290 47 3.6 61 2 3.3 238 1 0.4
------ ------- ---- ------- ---- ------- ----
3,895 179 4.6 1,700 64 3.8 117 8 6.8 265 1 0.4
Insurance
and Wealth - - - 28 1 3.6 1 - - 3 - -
Central - - - - - - - - - - - -
items
------- ------ ------- ---- ------- ---- ------- ----
Total 17,270 520 3.0 6,687 303 4.5 2,491 138 5.5 2,095 111 5.3
------- ------ ------- ---- ------- ---- ------- ----
ECL allowances as a percentage of drawn balances as at 31 December
(1) 2019 restated to reflect migration of certain customer relationships
from the SME business within Commercial Banking to Business Banking
within Retail. Stage 2 up to date loans are assigned to PD movement
if they also meet other triggers. This represents a change in presentation
for Commercial Banking where these loans were reported in Other
at 31 December 2019.
Retail Other includes Business Banking, Loans, Overdrafts, Europe
(2) and Retail run-off.
CREDIT RISK PORTFOLIO (continued)
Group Stage 2 loans and advances to customers - underlying
basis
Up to date 1-30 days past due Over 30 days past
due
-------------------------------------------- -------------------- --------------------
PD movements Other
---------------------- --------------------
Gross Gross Gross Gross
lending ECL lending ECL lending ECL lending ECL
GBPm GBPm %(2) GBPm GBPm %(2) GBPm GBPm %(2) GBPm GBPm %(2)
At 30 June
2020(1)
Retail:
------- ------ ------- ---- ------- ---- ------- ----
Secured 26,507 352 1.3 11,122 210 1.9 2,403 78 3.2 4,003 267 6.7
Credit
Cards 1,555 309 19.9 438 98 22.4 63 19 30.2 23 12 52.2
UK Motor
Finance 784 57 7.3 1,871 67 3.6 142 40 28.2 123 53 43.1
Other(3) 947 192 20.3 793 104 13.1 183 55 30.1 138 32 23.2
------- ------ ------- ---- ------- ---- ------- ----
29,793 910 3.1 14,224 479 3.4 2,791 192 6.9 4,287 364 8.5
Commercial
Banking:
------- ------ ------- ---- ------- ---- ------- ----
SME 4,702 234 5.0 245 11 4.5 139 17 12.2 95 7 7.4
Other 11,018 592 5.4 239 5 2.1 29 2 6.9 273 3 1.1
------- ------ ------- ---- ------- ---- ------- ----
15,720 826 5.3 484 16 3.3 168 19 11.3 368 10 2.7
Insurance
and Wealth 1 - - - - - - - - 22 1 4.5
Central - - - - - - - - - - - -
items
------- ------ ------- ---- ------- ---- ------- ----
Total 45,514 1,736 3.8 14,708 495 3.4 2,959 211 7.1 4,677 375 8.0
------- ------ ------- ---- ------- ---- ------- ----
At 31
December
2019(1)
Retail:
------- ------ ------- ---- ------- ----
Secured 16,100 192 1.2 3,730 171 4.6 3,517 84 2.4 3,491 167 4.8
Credit
Cards 1,088 139 12.8 422 49 11.6 124 30 24.2 41 17 41.5
UK Motor
Finance 543 27 5.0 1,232 30 2.4 135 21 15.6 32 9 28.1
Other(3) 892 103 11.5 712 54 7.6 238 49 20.6 134 28 20.9
------- ------ ------- ---- ------- ---- ------- ----
18,623 461 2.5 6,096 304 5.0 4,014 184 4.6 3,698 221 6.0
Commercial
Banking:
------- ------ ------- ---- ------- ---- ------- ----
SME 2,014 104 5.2 410 17 4.1 56 6 10.7 27 - -
Other 1,881 75 4.0 1,290 47 3.6 61 2 3.3 238 1 0.4
------- ------ ------- ---- ------- ---- ------- ----
3,895 179 4.6 1,700 64 3.8 117 8 6.8 265 1 0.4
Insurance
and Wealth - - - 28 1 3.6 1 - - 3 - -
Central - - - - - - - - - - - -
items
------- ------ ------- ---- ------- ---- ------- ----
Total 22,518 640 2.8 7,824 369 4.7 4,132 192 4.6 3,966 222 5.6
------- ------ ------- ---- ------- ---- ------- ----
These balances exclude the impact of the HBOS and MBNA acquisition
(1) related adjustments. Stage 2 up to date loans are assigned to PD
movement if they also meet other triggers. This represents a change
in presentation for Commercial Banking where these loans were reported
in Other at 31 December 2019.
ECL allowances as a percentage of drawn balances as at 31 December
(2) 2019 restated to reflect migration of certain customer relationships
from the SME business within Commercial Banking to Business Banking
within Retail. Stage 2 up to date loans are assigned to PD movement
if they also meet other triggers. This represents a change in presentation
for Commercial Banking where these loans were reported in Other at
31 December 2019.
Retail Other includes Business Banking, Loans, Overdrafts, Europe
(3) and Retail run-off.
CREDIT RISK PORTFOLIO (continued)
Retail
-- On entering the COVID-19 pandemic, the credit quality of the
Retail portfolio was robust and well positioned. Risk management
has strengthened since the financial crisis of 2008 to 2009, with
strong affordability and indebtedness controls for both existing
and new lending and a prudent approach to risk appetite. This is
evident in the significant improvement in credit quality and low
arrears rates. However, customers have been significantly impacted
by the pandemic and credit performance is expected to be
impacted
-- Throughout the current period of uncertainty, the Group has
continued to support Retail customers. Since March 2020, the Group
has approved over 1.1 million payment holidays. All personal
current accounts customers have been offered up to GBP500 interest
free for arranged overdrafts
-- The first payment holidays have started to end with the
majority of customers resuming payment. Performance so far shows a
small portion of customers are requesting a further payment holiday
extension, granted in line with the government guidelines
-- There are a number of headwinds which have the potential to
further impact the portfolios. The Group has taken targeted steps
to implement tighter credit quality controls across the Retail
product offering, for example, to indebtedness and credit scores,
to ensure customers and the bank are protected
-- Retail has also participated in the Bounce Back Loans Scheme
for Retail Business Banking customers. GBP5.8 billion of lending
through the Bounce Back Loans Scheme has been lent in line with the
British Business Bank and UK Government scheme guidelines, which
has a full government backed guarantee
-- The impairment charge increased to GBP2,095 million for the
first half of 2020 compared to GBP556 million for the same period
in 2019, largely driven by updates to the Group's economic forecast
following the coronavirus outbreak
-- In the absence of other credit risk indicators, the granting
of coronavirus-related concessions does not necessarily result in
an automatic transfer between stages for the purposes of IFRS 9.
Existing staging rules and triggers have been maintained, with
transfers between stages being primarily driven by credit risk
rating movements and the estimated impact of the economic factors
on a customer's forward looking default risk
-- Total Retail expected credit loss (ECL) allowance as a
percentage of drawn loans and advances (coverage) increased to 1.2
per cent (31 December 2019: 0.8 per cent) due to the updates in the
Group's economic forecast. There has been a notable increase in
cases classified as 'Stage 2' under IFRS 9 which reflect cases
which have observed a 'Significant Increase in Credit Risk since
origination' (SICR). The proportion of Stage 2 loans and advances
comprised a total 14.8 per cent of the Retail portfolio (31
December 2019: 9.4 per cent), of which 86.1 per cent is up to
date
-- Coverage for Stage 2 loans and advances increased to 3.8 per
cent (31 December 2019: 3.6 per cent), following updates to the
Group's economic forecast. This was offset by a slight reduction in
Secured coverage where a greater proportion of Stage 2 was from
lower risk up to date accounts, transferred into Stage 2 based on
the forward looking view on their credit performance
-- Stage 3 loans and advances increased slightly to 1.6 per cent
of total loans and advances (31 December 2019: 1.5 per cent),
noting that the impact on flows into this category was mitigated by
the take up of payment holidays. Coverage for Stage 3 loans and
advances increased to 22.1 per cent (31 December 2019: 19.1 per
cent) due to the Secured and Motor Finance portfolios where the
impact of the coronavirus outbreak on collateral values is expected
to result in increased loss given default
Portfolios
Secured
-- The Secured portfolio is well positioned with low arrears and
a strong LTV profile. Over a number of years the portfolio has
improved with robust affordability and credit controls, whilst the
balances of higher risk portfolios originated prior to 2008 have
continued to reduce
-- In recent months, the significant uptake of payment holidays
by customers has lowered the new arrears rate below usual
levels
-- In line with regulatory guidance, the Group has suspended all
repossession activity on mortgage accounts until 31 October 2020.
As a consequence of this, the volume of cases in late stage arrears
has increased
CREDIT RISK PORTFOLIO (continued)
-- Total Secured loans and advances were GBP286.4 billion (31
December 2019: GBP289.8 billion), with an average indexed loan to
value (LTV) of 44.0 per cent (31 December 2019: 44.9 per cent). The
proportion of balances with an LTV of greater than 90 per cent
decreased to 1.6 per cent (31 December 2019: 2.5 per cent). The
average LTV of new business decreased to 63.0 per cent (31 December
2019: 64.3 per cent)
-- The impairment charge was GBP603 million for the first half
of 2020 compared to a release of GBP38 million for the same period
in 2019. This reflects provision charges due to updates to the
Group's economic outlook. Total ECL allowance as a percentage of
loans and advances (coverage) increased to 0.6 per cent (31
December 2019: 0.4 per cent)
-- Stage 2 loans and advances increased to 15.4 per cent of the
portfolio (31 December 2019: 9.3 per cent) which has contributed to
a slight reduction in coverage for Stage 2 loans and advances to
2.1 per cent (31 December 2019: 2.3 per cent). This dynamic is
observed due to a greater proportion of Stage 2 balances coming
from lower risk up to date accounts, transferred into Stage 2 based
on the forward looking view on their credit performance. This
results in a reduction in overall Stage 2 coverage as the coverage
on these accounts is generally lower than the rest of Stage 2
-- Coverage for Stage 3 loans and advances increased to 16.4 per
cent (31 December 2019: 13.6 per cent) largely due to the revised
outlook in house prices across the multiple economic scenarios
utilised for IFRS 9 provisioning
Cards
-- Loans and advances on the cards portfolio decreased to
GBP15.8 billion (31 December 2019: GBP18.1 billion) due to reduced
customer spend. Lower balances have resulted in reduced customer
utilisation, including a reduction in the volume of customers with
highly utilised cards
-- The Group credit card book has performed well in recent
years, with lower arrears rates than the market
-- The impairment charge increased to GBP656 million for the
first half of 2020 compared to GBP267 million for the same period
in 2019, as a result of updates to the Group's economic forecast.
Coverage increased to 6.3 per cent (31 December 2019: 3.4 per
cent). Coverage of Stage 2 loans and advances has increased to 21.1
per cent (31 December: 14.1 per cent) following updates to the
Group's economic outlook. Stage 3 coverage remains broadly stable
as a result of the Group's policy to charge off customers that
enter recoveries. This contributes to lower provisions held on the
balance sheet as well as more stable coverage
Motor
-- The Motor Finance portfolio decreased slightly from GBP16.0
billion to GBP15.8 billion which constitutes a change from the
growth seen over recent years, and reflects the reduced market
activity due to the pandemic
-- The impairment charge increased to GBP241 million for the
first half of 2020 compared to GBP104 million for the same period
in 2019, following the updates to the Group's economic forecast.
Coverage increased to 3.6 per cent (31 December 2019: 2.4 per
cent), equivalent to GBP563 million (31 December 2019: GBP387
million)
-- Updates to Residual Value (RV) risk of Personal Contract
Purchase (PCP) products are included within the impairment charge,
however because the Group has adopted a prudent approach to
modelling this risk in recent years, the updates to the Group's
economic outlook have not resulted in a material change to
provisions, which remained relatively unchanged at GBP191 million
as at 30 June 2020 (31 December: GBP201 million)
-- Coverage of Stage 2 loans and advances increased to 7.4 per
cent (31 December 2019: 4.5 per cent) and coverage of Stage 3 loans
and advances increased to 64.4 per cent (31 Dec 2019: 56.0 per
cent) both of which were due principally to the updates to the
Group's outlook on used car prices. Credit and RV provisioning are
aligned in the assumption of an anticipated near-term reduction in
car prices, expected to largely reverse by the end of 2021
CREDIT RISK PORTFOLIO (continued)
Other
-- Other loans and advances increased by GBP6 billion to GBP27
billion. The increase was largely driven by the Retail Business
Banking portfolio as a result of lending through the Bounce Back
Loan Scheme (BBLS), which is fully guaranteed by the UK
Government
-- The impairment charge was GBP595 million for the first half
of 2020 compared to GBP223 million for the same period in 2019.
This increase is primarily due to updates to the Group's economic
forecast increasing both coverage of Stage 2 loans and advances to
18.6 per cent (31 December 2019: 11.8 per cent) and overall
coverage to 3.4 per cent (31 December 2019: 2.8 per cent)
Retail UK secured loans and advances to customers - statutory
basis
At 30 June At 31 Dec
2020 (1) 2019(1)
GBPm GBPm
Mainstream 226,090 227,975
Buy-to-let 48,094 49,086
Specialist 11,543 12,137
Total 285,727 289,198
The balances include the impact of HBOS related acquisition adjustments.
(1)
Retail mortgages greater than three months in arrears (excluding
repossessions) - underlying basis
Total Total
Number of cases mortgage accounts Value of loans(1) mortgage balances
30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec
2020 2019 2020 2019 2020 2019 2020 2019
Cases Cases % % GBPm GBPm % %
Mainstream 26,074 24,393 1.4 1.3 2,874 2,619 1.3 1.1
Buy-to-let 4,699 3,863 1.1 0.9 597 502 1.2 1.0
Specialist 6,560 6,059 7.5 6.6 1,092 998 9.4 8.2
Total 37,333 34,315 1.6 1.4 4,563 4,119 1.6 1.4
(1) Value of loans represents total gross book value of mortgages more than three months in arrears;
the balances exclude the impact of HBOS related acquisition adjustments.
The stock of repossessions decreased to 727 cases at 30 June
2020 compared to 1,171 cases at 31 December 2019.
CREDIT RISK PORTFOLIO (continued)
Period end and average LTVs across the Retail mortgage
portfolios - underlying basis
Mainstream Buy-to-let Specialist Total
% % % %
At 30 June 2020
Less than 60% 53.1 58.4 65.6 54.5
60% to 70% 17.1 24.6 17.3 18.4
70% to 80% 17.2 14.7 9.9 16.4
80% to 90% 11.0 1.7 3.3 9.1
90% to 100% 1.4 0.2 1.1 1.2
Greater than 100% 0.2 0.4 2.8 0.4
Total 100.0 100.0 100.0 100.0
Average loan to value(1) :
Stock of residential mortgages 42.8 50.8 42.5 44.0
New residential lending 64.3 56.8 n/a 63.0
At 31 December 2019
Less than 60% 51.8 54.1 62.7 52.7
60% to 70% 16.4 25.1 17.5 18.0
70% to 80% 16.9 18.0 11.7 16.8
80% to 90% 12.0 2.0 4.1 10.0
90% to 100% 2.6 0.4 1.2 2.1
Greater than 100% 0.3 0.4 2.8 0.4
Total 100.0 100.0 100.0 100.0
Average loan to value(1) :
Stock of residential mortgages 43.6 52.3 44.0 44.9
New residential lending 65.2 58.2 n/a 64.3
(1) Average loan to value is calculated as total gross loans and advances as a percentage of the
indexed total collateral of these loans and advances; the balances exclude the impact of HBOS
related acquisition adjustments.
CREDIT RISK PORTFOLIO (continued)
Commercial Banking
-- Commercial Banking has actively supported its customers
during this difficult time, through a range of propositions,
including capital repayment holidays, working capital line
increases and financial covenant waivers, as well as supporting
small businesses and corporates through full use of UK Government
schemes
-- Where new facilities and concessions relating to existing
facilities have been granted, the Group's credit risk appetite has
remained robust with credit analysis undertaken to ensure continued
financial viability, notwithstanding any short-term coronavirus
related pressure. With the exception of certain risk appetite
extensions made to accommodate UK Government scheme guidelines,
particularly Bounce Back Loans and to a lesser extent, Coronavirus
Business Interruption Loans, lending continues to be in line with
the usual approach to credit risk, with robust credit quality and
affordability assessments undertaken. For these schemes government
guarantees are in place at 100 per cent and 80 per cent,
respectively
-- The spread of coronavirus has resulted in widespread industry
disruption, with some sectors such as Travel, Transportation,
Retail and Hospitality particularly impacted. As a proportion of
the Group's overall lending, these sectors remain relatively
modest. The Group expects recovery to be slow in a number of
vulnerable sectors and anticipates longer term structural changes.
As a result, sector and credit risk appetite continues to be
proactively managed to ensure the Group is protected and clients
are supported in the right way
-- Although the portfolios were well positioned pre crisis,
deterioration has been seen with downgrades in credit risk ratings
observed in both value and volume, although more so in the larger
corporates segment of Commercial, than in the SME book. Risk rating
downgrades to sub investment grade or equivalent have, however,
been more modest
-- The SME portfolio remains well secured and credit impacts
have been relatively muted to date, although the Group expects
arrears and defaults to increase in the second half of 2020 and
into 2021 as payment holidays and various government support
schemes come to an end
-- Credit sanctioning activities were rapidly aligned to the
increase in volumes on a risk based approach and more vulnerable
clients supported early through focused risk management via the
Group's Watchlist, Local Support or Business Support procedures
-- In addition, thorough credit processes and plans have been
developed in anticipation of maturing payment holidays over the
coming months. Activities also include monitoring client liquidity
lines for risk of over-trading and working capital shortfalls as
the lockdown eases, and consideration of longer term funding
options once debt capacity is reached for otherwise viable
businesses. In all cases, the Group's plans carefully balance usual
prudent risk management with ensuring support for financially
viable clients on their road to recovery
-- The Commercial Banking impairment charge in the first six
months increased significantly to GBP1,519 million compared with
GBP65 million in the first half of 2019. The increase largely
reflects an IFRS 9 related charge of GBP881 million following
updates to the economic outlook, together with GBP432 million for a
small number of existing Stage 3 large corporate restructuring
cases in the BSU, where coronavirus has directly hampered the
client's existing recovery strategy. The remaining charge of GBP206
million is a result of impairments crystallising on a small number
of new cases in the second quarter following an increase in flows
into the BSU. The expected credit loss provision stock increasing
by GBP1,427 million to GBP2,740 million at 30 June 2020
-- Stage 3 loans and advances have increased to GBP3,808 million
from GBP3,447 million at 31 December 2019. As a proportion of total
loans and advances to customers, these increased to 3.9 per cent
(31 December 2019: 3.6 per cent). Stage 3 ECL allowance as a
percentage of Stage 3 drawn balances has increased to 40.5 per cent
(31 December 2019: 27.4 per cent) predominantly driven by the
additional provisions raised against the existing restructuring
cases in the BSU
-- It is noted that significant volumes of payment holidays
granted in SME and, to a lesser extent in the Corporate and
Institutional and Mid Corporates portfolios, could potentially be
distorting the underlying credit profile, although such concessions
are only granted to customers considered financially viable. The
Group recognises that credit quality is likely to be influenced by
the temporary measures provided by the UK Government schemes and
the existing expected credit loss provision balance as at 30 June
2020 assumes additional losses will emerge as the support
subsides
CREDIT RISK PORTFOLIO (continued)
-- Stage 2 loans and advances have increased by GBP10,763
million since 31 December 2019, to GBP16,740 million, largely
driven by IFRS 9 forward look PD staging trigger, rather than
actual PD deterioration, with 97 per cent of Stage 2 balances being
up to date. As a result, Stage 2 loans as a proportion of total
loans and advances to customers increased to 17.0 per cent (31
December 2019: 6.2 per cent). Stage 2 ECL allowances as a
percentage of Stage 2 drawn balances were higher at 5.2 per cent
(31 December 2019: 4.2 per cent) with the increase in coverage a
direct result of the forward look multiple economic scenarios
Commercial Banking UK Direct Real Estate
-- Total UK Direct Real Estate gross lending across Commercial
Banking stood at GBP13.8 billion at 30 June 2020 (excluding
exposures subject to protection through Significant Risk Transfer
securitisations). The Group has a further GBP0.9 billion of UK
Direct Real Estate exposure in Business Banking within the Retail
Division
-- The Group classifies Direct Real Estate as exposure which is
directly supported by cash flows from property activities (as
opposed to trading activities, such as hotels, care homes and house
builders). Exposures to social housing providers are also
excluded
-- Recognising this is a cyclical sector, appropriate caps are
in place to control exposure. Focus remains on the UK market and
business propositions have been written in line with a prudent,
through the cycle risk appetite with conservative LTVs, strong
quality of income and proven management teams
-- Overall performance has remained good, although an increase
in cases moving to Watchlist and the BSU has been seen, especially
in the retail/shopping centres sub sector. Overall rent collection
for the second quarter of the year is expected to be more
challenged than in the first quarter, particularly in the retail
space given the number of closed stores, though the office sub
sector is expected to be reasonably robust. Despite these
challenges the portfolio is relatively well positioned and
proactively managed with appropriate risk mitigants in place:
- Over 70 per cent of investment exposures greater than GBP1
million have an LTV of less than 60 per cent, with an average LTV
of 49 per cent for the real estate portfolio
- c.75 per cent of exposures greater than GBP5 million have an
interest cover ratio of greater than 2.5 times and in SME LTV at
origination has been typically limited to c.55 per cent given
prudent repayment cover criteria (including a notional base rate
stress)
- Approximately 70 per cent of the portfolio relates to
commercial real estate (with no speculative development lending)
with the remainder related to residential real estate
- The underlying sub-sector split is diversified with 15 percent
of the portfolio secured by Retail assets, with appetite tightened
since 2018
- The Office portfolio is focused on prime locations with strong
sponsors and low LTVs and no speculative commercial development
- Use of Significant Risk Transfer (SRT) securitisations also
acts as a risk mitigant, with run off of these carefully managed
and tracked
CREDIT RISK PORTFOLIO (continued)
Lending in key coronavirus-impacted sectors(1)
At 30 June 2020 Drawn Undrawn Drawn as a % of Group Loans and Advances
GBPbn GBPbn %
Retail non-food 2.4 1.8 0.5
Automotive dealerships(2) 2.4 1.5 0.5
Oil and gas 1.4 2.7 0.3
Construction 1.3 1.7 0.3
Hotels 1.9 0.3 0.4
Passenger transport 1.3 0.6 0.3
Leisure 0.8 0.5 0.2
Restaurants and bars 0.8 0.5 0.2
Lending classified using ONS SIC codes at legal entity level.
(1)
Automotive dealerships includes Black Horse Motor Wholesale lending
(2) (within Retail Division).
Additional information
The following table shows the extent to which a higher ECL
allowance has been recognised to take account of forward looking
information from multiple economic scenarios. The Group's
probability-weighted ECL allowance reflects a 30 per cent weighting
of base case, upside and downside and a 10 per cent weighting of
adjusted severe downside. See statutory basis table on page 83. The
majority of post model adjustments, and all individually assessed
provisions although assessed on range of multiple case specific
outcomes, are reported flat against each economic scenario
CREDIT RISK PORTFOLIO (continued)
Probability- Severe
weighted Upside Base case Downside Downside
GBPm GBPm GBPm GBPm GBPm
Underlying basis
Secured 1,763 1,425 1,581 1,916 2,866
Other Retail 2,451 2,255 2,430 2,557 2,788
Commercial 2,763 2,416 2,656 2,954 3,553
Other 263 63 63 64 2,064
At 30 June 2020 7,240 6,159 6,730 7,491 11,271
Probability- Severe
weighted Upside Base case Downside Downside
GBPm GBPm GBPm GBPm GBPm
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
Net AQR
Half-year Economic Pre economic Half-year
to 30 June update and update and to 30 June
2020 restructuring restructuring 2019 Increase
bps bps bps bps bps
Retail 123 89 34 33 90
Mortgages 42 40 2 (3) 45
Other 539 340 199 222 317
Commercial Banking 312 270 42 13 299
Total 173 137 36 26 147
ECL Income ECL
At 30 June Net ECL Write-offs Statement At 31 Dec
2020 increase and other charge 2019
GBPm GBPm GBPm GBPm GBPm
Retail 4,214 1,418 (677) 2,095 2,796
Mortgages 1,763 547 (56) 603 1,216
Other 2,451 871 (621) 1,492 1,580
Commercial Banking 2,763 1,448 (71) 1,519 1,315
Other 263 213 9 204 50
Total 7,240 3,079 (739) 3,818 4,161
Assuming current economic assumptions, the impairment charge is
expected to be between GBP4.5 billion and GBP5.5 billion for the
full year 2020, reflecting additional charges in the second half of
2020 for provisions taken on new assets, future losses on stage 1
assets as the 12 month provision window rolls forward and
experience variance.
FUNDING AND LIQUIDITY MANAGEMENT
The Group has maintained its strong funding and liquidity
position with a loan to deposit ratio of 100 per cent as at 30 June
2020 (107 per cent as at 31 December 2019).
The Group's liquid assets continue to exceed the regulatory
minimum and internal risk appetite, with a liquidity coverage ratio
(LCR) of 140 per cent (based on a 12 month rolling average) as at
30 June 2020 calculated on a Group consolidated basis. Liquidity 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.
In addition to its sizable liquid asset buffer the Group has a
significant amount of pre-positioned collateral eligible for use in
a range of central bank facilities, including the Bank of England's
Term Funding Scheme with additional incentives for SMEs
(TFSME).
During the first half of 2020, the Group early repaid the
remaining GBP1 billion outstanding of its Funding for Lending
Scheme (FLS) drawings and GBP5 billion of Term Funding Scheme (TFS)
drawings in advance of contractual maturity. This has reduced the
balance of TFS to GBP10.4 billion as at 30 June 2020. Additionally
GBP1 billion of Term Funding Scheme with additional incentives for
SMEs (TFSME) funds have been drawn as at 30 June 2020.
The Group saw a significant increase in deposits in the first
half given reduced customer spending and customers depositing
government lending scheme balances. This increased the Group's cash
reserves balance held at the Bank of England and alongside
available TFSME capacity reduces the need for additional wholesale
funding in 2020.
The Group continues to access wholesale funding markets across a
variety of currencies and markets to maintain a stable and diverse
source of funds. Despite the more challenging funding conditions
around the end of the first quarter, the Group has seen strong
demand in a number of public issuances, and completed GBP8.5
billion of long term funding in the first half of 2020 across the
Group's main issuing entities. In addition, the Group has been
active in offering liquidity to investors through buyback activity,
whilst maintaining a prudent approach to managing funding and
liquidity with term funding buyback volumes of GBP5.6 billion in
the first half of 2020. Overall, total wholesale funding increased
to GBP125.1 billion as at 30 June 2020 (31 December 2019: GBP124.2
billion).
The Group's credit ratings continue to reflect the resilience of
the Group's business model and the strength of the balance sheet.
In March, Fitch revised the outlooks on all the Group's rated
entities, alongside the majority of other UK banks, to Negative,
citing concerns around the coronavirus pandemic. In addition, Fitch
upgraded the Senior Unsecured rating of Lloyds Bank Corporate
Markets to A+. In April, S&P revised the outlook on the Group's
banking entities, alongside the majority of other large UK banks,
to Negative, citing the potential earnings pressures arising from
the economic and market impact of the coronavirus pandemic. The
Negative outlooks that Moody's assigned on Lloyds Banking Group plc
and Lloyds Bank plc to reflect the weakening of the country's
finances and the potential impact on asset quality and
profitability remain in place.
FUNDING AND LIQUIDITY MANAGEMENT (continued)
At 30 June At 31 Dec
2020 2019 Change
GBPbn GBPbn %
Funding requirement
Loans and advances to customers(1) 440.4 440.4 -
Loans and advances to banks(2) 8.5 8.1 5
Debt securities at amortised cost 2.8 3.9 (28)
Financial assets at fair value through other comprehensive income - non-LCR
eligible(3) 0.7 0.1
Cash and balances at central bank - non-LCR eligible(4) 5.7 5.7 -
Funded assets 458.1 458.2 -
Other assets(5) 261.2 251.7 4
719.3 709.9 1
On balance sheet LCR eligible liquid assets
Reverse repurchase agreements 63.7 56.2 13
Cash and balances at central banks(4) 72.4 49.4 47
Debt securities at amortised cost 2.8 1.6 75
Financial assets at fair value through other comprehensive income 26.5 25.0 6
Trading and fair value through profit and loss 5.2 4.0 30
Repurchase agreements (16.9) (12.2) 39
153.7 124.0 24
Total Group assets 873.0 833.9 5
Less: other liabilities(5) (246.5) (234.7) 5
Funding requirement 626.5 599.2 5
Funded by
Customer deposits(6) 441.1 411.8 7
Wholesale funding(7) 125.1 124.2 1
566.2 536.0 6
Term funding schemes(8) 11.4 15.4 (26)
Total equity 48.9 47.8 2
Total funding 626.5 599.2 5
(1) Excludes reverse repos of GBP61.1 billion (31 December 2019: GBP54.6 billion).
(2) Excludes GBP0.1 billion (31 December 2019: GBP0.1billion) of loans and advances to banks within
the Insurance business and GBP2.6 billion (31 December 2019: GBP1.6 billion) of reverse repurchase
agreements.
(3) Non-LCR eligible liquid assets comprise a diversified pool of highly rated unencumbered collateral
(including retained issuance).
(4) Cash and balances at central banks are combined in the Group's balance sheet.
(5) Other assets and other liabilities primarily include balances in the Group's Insurance business
and the fair value of derivative assets and liabilities.
(6) Excludes repos of GBP12.3 billion (31 December 2019: GBP9.5 billion).
(7) The Group's definition of wholesale funding aligns with that used by other international market
participants; including bank deposits, debt securities in issue and subordinated liabilities.
31 December 2019 has been restated to exclude margins.
(8) Includes the Bank of England's Term Funding Scheme (TFS) and Term Funding Scheme with additional
incentives for SMEs (TFSME).
FUNDING AND LIQUIDITY MANAGEMENT (continued)
Fair value
Included in Repos and and other
funding collateral accounting Balance
analysis received methods sheet
At 30 June 2020 GBPbn GBPbn GBPbn GBPbn
Deposits from banks 6.2 26.1 1.8 34.1
Debt securities in issue 102.9 - (3.0) 99.9
Subordinated liabilities 16.0 - 1.7 17.7
Total wholesale funding(1,2) 125.1 26.1
Customer deposits 441.1 12.3 - 453.4
Total 566.2 38.4
At 31 December 2019
Deposits from banks 5.5 22.8 (0.1) 28.2
Debt securities in issue 102.1 - (4.4) 97.7
Subordinated liabilities 16.6 - 0.5 17.1
Total wholesale funding(1,2) 124.2 22.8
Customer deposits 411.8 9.5 - 421.3
Total 536.0 32.3
(1) The Group's definition of wholesale funding aligns with that used by other international market
participants; including bank deposits, debt securities and subordinated liabilities.
(2) Excludes balances relating to margins of GBP6.9 billion (31 December 2019: GBP4.2 billion).
Analysis of total wholesale funding by residual maturity
Less Nine More Total Total
than One to Three Six to months One to Two to than at at
one three to six nine to one two five five 30 June 31 Dec
month months months months year years years years 2020 2019
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Deposit from banks 3.9 0.9 0.6 0.1 0.1 0.2 0.4 - 6.2 5.5
Debt securities in
issue:
Certificates of
deposit 3.1 1.9 4.4 1.7 0.5 0.2 - - 11.8 10.6
Commercial paper 3.2 2.5 1.8 0.8 0.3 - - - 8.6 8.9
Medium-term notes - 1.0 0.2 1.1 1.8 2.9 29.1 15.1 51.2 48.0
Covered bonds 1.4 - 1.8 2.4 0.9 4.7 10.8 4.8 26.8 28.7
Securitisation 0.4 - 1.0 0.2 0.2 1.5 1.2 - 4.5 5.9
8.1 5.4 9.2 6.2 3.7 9.3 41.1 19.9 102.9 102.1
Subordinated
liabilities 0.4 - 0.8 - 0.5 - 5.8 8.5 16.0 16.6
Total wholesale
funding(1,2) 12.4 6.3 10.6 6.3 4.3 9.5 47.3 28.4 125.1 124.2
(1) The Group's definition of wholesale funding aligns with that used by other international market
participants; including bank deposits, debt securities and subordinated liabilities.
(2) Excludes balances relating to margins of GBP6.9 billion (31 December 2019: GBP4.2 billion).
FUNDING AND LIQUIDITY MANAGEMENT (continued)
Analysis of 2020 term issuance
Other
Sterling US Dollar Euro Currencies Total
GBPbn GBPbn GBPbn GBPbn GBPbn
Medium-term notes 1.3 2.8 2.7 - 6.8
Covered bonds 1.0 - - - 1.0
Private placements(1) - 0.1 0.1 0.2 0.4
Subordinated liabilities - - 0.3 - 0.3
Total issuance 2.3 2.9 3.1 0.2 8.5
(1) Private placements include structured bonds.
Liquidity portfolio
At 30 June 2020, the Group had GBP137.5 billion of highly
liquid, unencumbered, LCR eligible assets (31 December 2019:
GBP130.7 billion), based on a 12 month rolling average. These
assets are available to meet cash and collateral outflows and
regulatory requirements. The increase in cash and central bank
reserves was driven by customer deposit trends seen over the course
of the first half. The Insurance business manages a separate
liquidity portfolio to mitigate insurance liquidity risk.
The Group also has a significant amount of non-LCR eligible
liquid assets which are eligible for use in a range of central bank
or similar facilities. Future use of such facilities will be based
on prudent liquidity management and economic considerations, having
regard for external market conditions.
LCR eligible assets
Average(1) Average(2)
2020 2019 Change
GBPbn GBPbn %
Level 1
Cash and central bank reserves 60.1 50.9 18
High quality government/MDB/agency bonds(3) 73.0 76.4 (4)
High quality covered bonds 2.7 1.9 42
Total 135.8 129.2 5
Level 2(4) 1.7 1.5 13
Total LCR eligible assets 137.5 130.7 5
Designated multilateral development bank (MDB).
(1) Based on 12 months rolling average to 30 June 2020.
(2) Based on 12 months rolling average to 31 December 2019.
(3) Designated multilateral development bank (MDB).
(4) Includes Level 2A and Level 2B.
Encumbered assets
The Board and Group Asset and Liability Committee monitor and
manage total balance sheet encumbrance using a number of risk
appetite metrics. At 30 June 2020, the Group had GBP53.9 billion
(31 December 2019: GBP60.6 billion) of externally encumbered on
balance sheet assets with counterparties other than central banks.
The decrease in encumbered assets was primarily driven by
securitisation and covered bond redemptions during the first half
of 2020. The Group also had GBP692.6 billion (31 December 2019:
GBP639.5 billion) of unencumbered on balance sheet assets, and
GBP126.5 billion (31 December 2019: GBP133.7 billion) of
pre-positioned and encumbered assets held with central banks.
Primarily, the Group encumbers mortgages, unsecured lending and
credit card receivables through the issuance programmes and
tradable securities through securities financing activity. The
Group mainly positions mortgage assets at central banks. The 2019
Annual Report and Accounts includes further details on how the
Group classifies assets for encumbrance purposes.
CAPITAL MANAGEMENT
Analysis of capital position
The Group's CET1 capital ratio increased by 81 basis points over
the first six months of the year, increasing from 13.8 per cent
(pro forma) at 31 December 2019 to 14.6 per cent at 30 June 2020.
This reflected the following:
-- underlying capital build before impairment charge of 100
basis points, which was more than offset by the 153 basis points of
impairment charge
-- further reductions for pension contributions (39 basis
points), partially offset by risk-weighted asset and other
movements (11 basis points), which included increases related to
market movements (17 basis points) and the excess expected loss
offset against the increase in impairment provisions (11 basis
points) less a reduction of 15 basis points from the increase in
underlying risk-weighted assets.
-- the application of IFRS 9 transitional arrangements for
capital, which provides temporary relief for the impact of the
increase in the impairment charge, contributed 79 basis points
-- the reversal of the full year 2019 ordinary dividend accrual
which contributed 83 basis points
Excluding the application of the IFRS 9 transitional
arrangements for capital the Group's CET1 capital ratio would be
13.4 per cent (31 December 2019: 13.4 per cent pro forma).
The transitional total capital ratio increased to 22.3 per cent,
largely reflecting the increase in CET1 capital and an increase in
tier 2 capital mainly resulting from foreign exchange and other
movements, partially offset by the increase in risk-weighted
assets.
The UK leverage ratio increased from 5.2 per cent on a pro forma
basis to 5.4 per cent, primarily reflecting the increase in the
fully loaded tier 1 capital position, partially offset by an
increase in the exposure measure resulting from an increase in the
measures for derivatives and securities financing transactions
(SFTs).
Total capital requirement
The Group's total capital requirement (TCR) as at 30 June 2020,
being the aggregate of the Group's Pillar 1 and current Pillar 2A
capital requirements, was GBP25,178 million (31 December 2019:
GBP25,608 million).
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 is around 12.5 per cent, plus a management
buffer of around 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 period the
PRA reduced the Group's Pillar 2A requirement from c.4.6 per cent
to c.4.2 per cent of risk-weighted assets at 30 June 2020, of which
2.3 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 which is around 0 per cent of risk-weighted assets,
reflecting the decision made by the PRA during the period to reduce
the UK countercyclical capital buffer rate to zero
-- 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 buffer itself to remain confidential
between the Group and the PRA
The Group is not currently classified as a global systemically
important institution (G-SII) but has been identified as an 'other'
systemically important institution (O-SII) by the PRA. The O-SII
buffer is currently set to zero in the UK.
CAPITAL MANAGEMENT (continued)
Capital resources
An analysis of the Group's capital position as at 30 June 2020
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, both the
transitional and fully loaded positions presented reflect 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 30 June At 31 Dec At 30 June At 31 Dec
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Common equity tier 1
Shareholders' equity per balance sheet 42,734 41,697 42,734 41,697
Adjustment to retained earnings for foreseeable dividends - (1,586) - (1,586)
Deconsolidation adjustments(1) 2,343 2,337 2,343 2,337
Adjustment for own credit 28 26 28 26
Cash flow hedging reserve (1,962) (1,504) (1,962) (1,504)
Other adjustments 1,729 247 1,729 247
44,872 41,217 44,872 41,217
less: deductions from common equity tier 1
Goodwill and other intangible assets (4,321) (4,179) (4,321) (4,179)
Prudent valuation adjustment (495) (509) (495) (509)
Excess of expected losses over impairment provisions and value
adjustments (32) (243) (32) (243)
Removal of defined benefit pension surplus (1,712) (531) (1,712) (531)
Securitisation deductions (182) (185) (182) (185)
Significant investments(1) (4,410) (4,626) (4,410) (4,626)
Deferred tax assets (3,531) (3,200) (3,531) (3,200)
Common equity tier 1 capital 30,189 27,744 30,189 27,744
Additional tier 1
Other equity instruments 5,881 5,881 5,881 5,881
Preference shares and preferred securities(2) 4,569 4,127 - -
Transitional limit and other adjustments (3,468) (2,474) - -
6,982 7,534 5,881 5,881
less: deductions from tier 1
Significant investments(1) (1,140) (1,286) - -
Total tier 1 capital 36,031 33,992 36,070 33,625
Tier 2
Other subordinated liabilities(2) 13,148 13,003 13,148 13,003
Deconsolidation of instruments issued by insurance entities(1) (1,884) (1,796) (1,884) (1,796)
Adjustments for transitional limit and non-eligible
instruments 2,205 2,278 (1,666) (2,204)
Amortisation and other adjustments (2,413) (3,101) (2,413) (3,101)
11,056 10,384 7,185 5,902
less: deductions from tier 2
Significant investments(1) (941) (960) (2,081) (2,246)
Total capital resources 46,146 43,416 41,174 37,281
Risk-weighted assets (unaudited) 207,052 203,431 207,052 203,431
Common equity tier 1 capital ratio 14.6% 13.6% 14.6% 13.6%
Tier 1 capital ratio 17.4% 16.7% 17.4% 16.5%
Total capital ratio 22.3% 21.3% 19.9% 18.3%
(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.
CAPITAL MANAGEMENT (continued)
Movements in capital resources
The key difference between the transitional capital calculation
as at 30 June 2020 and the fully loaded equivalent is primarily
related to capital securities that previously qualified as tier 1
or tier 2 capital, but that do not fully qualify under the
regulation, which can be included in additional tier 1 (AT1) or
tier 2 capital (as applicable) up to specified limits which reduce
by 10 per cent per annum until 2022. In addition, following
revisions to eligibility criteria for capital instruments under CRR
II, certain tier 1 capital instruments of the Group that will
transition to tier 2 capital by 2022 will cease to qualify as
regulatory capital in June 2025. The key movements on a
transitional basis are set out in the table below.
Common Additional Total
equity tier 1 tier 1 Tier 2 capital
GBPm GBPm GBPm GBPm
At 31 December 2019 27,744 6,248 9,424 43,416
Banking profit attributable to ordinary shareholders(1) 174 - - 174
Movement in foreseeable dividends(2) 1,586 - - 1,586
Dividends received from the Insurance business(1) 250 - - 250
IFRS 9 transitional adjustment to retained earnings 1,542 - - 1,542
Pension movements:
Removal of defined benefit pension surplus (1,181) - - (1,181)
Movement through other comprehensive income 514 - - 514
Fair value through other comprehensive income reserve (171) - - (171)
Prudent valuation adjustment 14 - - 14
Deferred tax asset (331) - - (331)
Goodwill and other intangible assets (142) - - (142)
Excess of expected losses over impairment provisions and value
adjustments 211 - - 211
Significant investments 216 146 19 381
Movements in other equity, subordinated debt and other tier 2
items:
Repurchases, redemptions and other - (552) 672 120
Issuances - - - -
Other movements (237) - - (237)
At 30 June 2020 30,189 5,842 10,115 46,146
(1) Under the regulatory framework, profits made by Insurance are removed from CET1 capital. However,
when dividends are paid to the Group by Insurance these are recognised through CET1 capital.
(2) Reflects the reversal of the accrual for the Group's 2019 full year ordinary dividend which
was cancelled during the period.
CET1 capital resources have increased by GBP2,445 million during
the period, primarily reflecting:
-- underlying banking profits, pre impairment charge with the
impairment charge partially mitigated through the increase in IFRS
9 transitional relief
-- the reversal of the foreseeable dividend accrual following
the cancellation of the 2019 full year ordinary dividend
-- dividends received from the Insurance business in respect of
their 2019 full year ordinary dividend
-- the reduction in excess expected losses following the
increase in offsetting IFRS 9 expected credit losses
-- a reduction in the amount of significant investments deducted from capital
-- offset in part by pensions contributions made during the
period, an increase in deferred tax assets and intangibles deducted
from capital, fair value movements through OCI and other
movements
CAPITAL MANAGEMENT (continued)
AT1 capital resources have reduced by GBP406 million during the
period, primarily reflecting the annual reduction in the
transitional limit applied to grandfathered AT1 capital
instruments, offset in part by a reduction in the significant
investments deduction.
Tier 2 capital resources have increased by GBP691 million during
the period, largely reflecting foreign exchange and other
movements, along with a recent liability management exercise that
resulted in the exchange of a grandfathered tier 2 instrument for a
full count tier 2 instrument. This was partially offset by the
application of the reduced transitional limit to grandfathered tier
2 capital instruments.
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.
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, currently equivalent to 20.2 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, currently equivalent to 24.3 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.
During the second half of 2020 the Bank of England will review
the final end-state requirements which are to be met from 1 January
2022.
CAPITAL MANAGEMENT (continued)
An analysis of the Group's current transitional MREL position is
provided in the table below.
Transitional(2)
At 30 June At 31 Dec
2020 2019
GBPm GBPm
Total capital resources (transitional basis) 46,146 43,416
Ineligible AT1 and tier 2 instruments(1) (553) (874)
Amortised portion of eligible tier 2 instruments issued by Lloyds Banking Group plc 115 24
Senior unsecured securities issued by Lloyds Banking Group plc 30,567 23,554
Total MREL resources(2) 76,275 66,120
Risk-weighted assets 207,052 203,431
MREL ratio 36.8% 32.5%
Leverage exposure measure 665,789 654,387
MREL leverage ratio 11.5% 10.1%
(1) Instruments with less than or equal to 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.
During the period, the Group issued externally GBP4.9 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.
Total MREL resources increased by GBP10.2 billion, largely
reflecting the increase in total capital resources and issuances,
foreign exchange and other movements connected to senior unsecured
securities.
CAPITAL MANAGEMENT (continued)
Risk-weighted assets
At 30 June At 31 Dec
2020 2019
GBPm GBPm
Foundation Internal Ratings Based (IRB) Approach 54,058 53,842
Retail IRB Approach 64,589 63,208
Other IRB Approach 19,109 18,544
IRB Approach 137,756 135,594
Standardised (STA) Approach 24,046 24,420
Credit risk 161,802 160,014
Counterparty credit risk 5,675 5,083
Contributions to the default fund of a central counterparty 235 210
Credit valuation adjustment risk 629 584
Operational risk 25,437 25,482
Market risk 1,953 1,790
Underlying risk-weighted assets 195,731 193,163
Threshold risk-weighted assets(1) 11,321 10,268
Total risk-weighted assets 207,052 203,431
(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.
Risk-weighted assets movement by key driver
Credit
risk Credit risk Credit risk Counterparty Market Operational
credit
IRB STA total (1) risk(2) risk risk Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Total risk-weighted
assets at 31
December 2019 203,431
Less threshold
risk-weighted
assets(3) (10,268)
Risk-weighted assets
as at 31 December
2019 135,594 24,420 160,014 5,877 1,790 25,482 193,163
Asset size (2,488) (1,227) (3,715) 628 - - (3,087)
Asset quality 3,881 212 4,093 (105) - - 3,988
Model updates - - - - 307 - 307
Methodology and
policy (12) 445 433 - (277) - 156
Acquisitions and
disposals - - - - - - -
Movements in risk
levels (market risk
only) - - - - 133 - 133
Foreign exchange
movements 781 196 977 139 - - 1,116
Other - - - - - (45) (45)
Risk-weighted assets
as at 30 June 2020 137,756 24,046 161,802 6,539 1,953 25,437 195,731
Threshold
risk-weighted
assets(3) 11,321
Risk-weighted assets
as at 30 June 2020 207,052
(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 investments in the Group's Insurance business.
(2) Credit risk includes securitisation risk-weighted assets.
(3) Counterparty credit risk includes movements in contributions to the default fund of central
counterparties and movements in credit valuation adjustment risk.
CAPITAL MANAGEMENT (continued)
The risk-weighted assets movement table provides analysis of the
movement in risk-weighted assets in the period by risk type and an
insight into the key drivers of the movements.
Credit risk, risk-weighted assets:
-- Asset size reduction of GBP3.7 billion predominantly reflects
reduced lending volumes in Retail portfolios and optimisation
activity in Commercial Banking
-- Asset quality increase of GBP4.1 billion primarily relates to
model calibrations and a change in credit quality, reflecting the
current economic climate
-- Methodology and policy changes increased risk-weighted assets
by GBP0.4 billion which includes regulatory changes in respect of
the final stage application of the new securitisation framework,
offset by a revision to the SME supporting factor
Counterparty credit risk: increased by GBP0.6 billion due to
movements in market rates during the period
Market risk, risk-weighted assets: increase driven by an
increase in interest rate risk exposure in the trading books
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) which is currently
around 0 per cent of the total leverage exposure measure,
reflecting the decision made by the PRA during the period to reduce
the UK countercyclical capital buffer rate to zero
-- 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.
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.
Analysis of leverage movements
The Group's fully loaded UK leverage ratio increased to 5.4 per
cent during the period, primarily driven by the increase in tier 1
capital. The leverage exposure measure increased by GBP11.4 billion
during the period, largely reflecting the increase in the
derivative and SFT exposure measures in addition to other balance
sheet movements, partially offset by the accelerated implementation
for the netting of regular-way purchases and sales awaiting
settlement. Following a direction received from the PRA the Group
is permitted to exclude lending under the UK Government's Bounce
Back Loan Scheme (BBLS) from the leverage exposure measure.
The derivatives exposure measure, representing derivative
financial instruments per the balance sheet net of deconsolidation
and derivatives adjustments, increased by GBP2.1 billion during the
period, largely as a result of the increase in the replacement cost
measure which was primarily driven by market movements.
The SFT exposure measure, representing SFT assets per the
balance sheet net of deconsolidation and other SFT adjustments,
increased by GBP9.2 billion during the period, reflecting both an
increase in volumes and an increase in the counterparty credit risk
add-on.
The average UK leverage ratio was 5.3 per cent over the quarter,
increasing to 5.4 per cent towards the end which largely reflected
the increase in tier 1 capital over the period.
CAPITAL MANAGEMENT (continued)
The table below summarises the component parts of the Group's
leverage ratio.
Fully loaded
At 30 June At 31 Dec
2020 2019
GBPm GBPm
Total tier 1 capital for leverage ratio
Common equity tier 1 capital 30,189 27,744
Additional tier 1 capital 5,881 5,881
Total tier 1 capital 36,070 33,625
Exposure measure
Statutory balance sheet assets
Derivative financial instruments 32,978 26,369
Securities financing transactions 75,287 67,424
Loans and advances and other assets 764,729 740,100
Total assets 872,994 833,893
Qualifying central bank claims (73,098) (49,590)
Deconsolidation adjustments (1)
Derivative financial instruments (1,681) (1,293)
Securities financing transactions - (334)
Loans and advances and other assets (159,667) (167,410)
Total deconsolidation adjustments (161,348) (169,037)
Derivatives adjustments
Adjustments for regulatory netting (13,447) (11,298)
Adjustments for cash collateral (14,423) (12,551)
Net written credit protection 462 458
Regulatory potential future exposure 16,201 16,337
Total derivatives adjustments (11,207) (7,054)
Securities financing transactions adjustments 2,190 1,164
Off-balance sheet items 53,541 53,191
Regulatory deductions and other adjustments(5) (17,283) (8,180)
Total exposure measure (2) 665,789 654,387
Average exposure measure(3) 674,641 667,433
UK Leverage ratio (2) 5.4% 5.1%
Average UK leverage ratio (3) 5.3% 5.0%
CRD IV exposure measure(4) 738,887 703,977
CRD IV leverage ratio (4) 4.9% 4.8%
(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 April 2020 to 30 June 2020). The average
of 5.3 per cent compares to 5.3 per cent at the start and 5.4 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) Includes adjustments to exclude lending under the UK Government's Bounce Back Loan Scheme
(BBLS) and the accelerated implementation for the netting of regular-way purchases and sales
awaiting settlement in accordance with CRR Article 500d.
CAPITAL MANAGEMENT (continued)
Application of IFRS 9 on a full impact basis for capital and
leverage
IFRS 9 full impact
At 30 June At 31 Dec
2020 2019
Common equity tier 1 (GBPm) 27,583 27,002
Transitional tier 1 (GBPm) 33,425 33,249
Transitional total capital (GBPm) 44,691 43,153
Total risk-weighted assets (GBPm) 205,595 203,083
Common equity tier 1 ratio (%) 13.4% 13.3%
Transitional tier 1 ratio (%) 16.3% 16.4%
Transitional total capital ratio (%) 21.7% 21.2%
UK leverage ratio exposure measure (GBPm) 663,181 653,643
UK leverage ratio (%) 5.0% 5.0%
The Group applies the full extent of the IFRS 9 transitional
arrangements for capital as set out under the recent revisions to
CRR Article 473a.
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 after the application of management actions and was not
required to take any action as a result of the test. The 2020 Bank
of England stress test was cancelled in March 2020 as part of the
supervisory response to the coronavirus pandemic.
Regulatory capital developments
Over recent months, UK and European regulators have introduced a
series of regulatory measures in response to the coronavirus
pandemic. These comprise of temporary or transitional arrangements
to provide capital relief to banks to ensure the resilience of the
financial system and to support lending to the economy during this
period. These measures include the recent revisions to the IFRS 9
transitional arrangements for capital and the accelerated
implementation of the revised SME supporting factor under CRR
II.
The regulatory response to the coronavirus pandemic also impacts
the timing of forthcoming changes, which include a one year
deferral of UK policy changes on mortgage risk-weighted asset
modelling to 1 January 2022 and of the final Basel III reforms
which are now expected to phase in from 1 January 2023. In
addition, the final Basel III reforms will be subject to adoption
via the UK legislative process following the end of the Brexit
transition period. The remaining majority of CRR II requirements
will continue to be implemented in June 2021.
Half-year Pillar 3 disclosures
The Group will publish a condensed set of half-year Pillar 3
disclosures in August, prepared in accordance with the revised
European Banking Authority (EBA) guidelines on Pillar 3 disclosure
formats and frequency that were issued in December 2016.
A copy of the half-year Pillar 3 disclosures will be available
to view from mid-August at:
www.lloydsbankinggroup.com/investors/ financial
-performance/
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
IR DDGDRUXDDGGC
(END) Dow Jones Newswires
July 30, 2020 02:00 ET (06:00 GMT)
Grafico Azioni Lloyds Banking (LSE:LLOY)
Storico
Da Mar 2024 a Apr 2024
Grafico Azioni Lloyds Banking (LSE:LLOY)
Storico
Da Apr 2023 a Apr 2024
