REG - Lloyds Banking Group - Half-year results <Origin Href="QuoteRef">LLOY.L</Origin> - Part 1
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Lloyds Banking Group PLC
31 July 2014
Lloyds Banking Group plc
2014 Half-Year Results
31 July 2014
BASIS OF PRESENTATION
This report covers the results of Lloyds Banking Group plc together with its subsidiaries (the Group) for the half-year ended 30 June 2014.
Statutory basisStatutory information is set out on pages 68 to 114. However, a number of factors have had a significant effect on the comparability of the Group's financial position and results. As a result, comparison on a statutory basis of the 2014 results with 2013 is of limited benefit.
Underlying basisIn order to present a more meaningful view of business performance, the results are presented on an underlying basis. The following items are excluded from underlying profit:- the amortisation of purchased intangible assets;- the unwind of acquisition-related fair value adjustments;- the effects of certain asset sales, liability management and volatile items;- volatility relating to the insurance business;- Simplification costs;- TSB build and dual running costs;- payment
protection insurance and other regulatory provisions;- certain past service pensions items in respect of the Group's Defined Benefit pension schemes; and- insurance gross up.
Unless otherwise stated, income statement commentaries throughout this document compare the half-year ended 30 June 2014 to the half-year ended 30 June 2013, and the balance sheet analysis compares the Group balance sheet as at 30 June 2014 to the Group balance sheet as at 31 December 2013.Segment informationThe segment results and balance sheet information have been restated to reflect the previously announced changes to the Group operating structure implemented from 1 January 2014.TSB's results and key
balance sheet information is reported as a separate segment in this document. The TSB numbers have been presented on a Lloyds Banking Group reporting basis. Consequently, TSB results disclosed in this document differ from the equivalent numbers disclosed in the TSB results release. These numbers have been prepared for Lloyds Banking Group investors to demonstrate the contribution of TSB to the Group. Investors in TSB should only rely on financial information published by TSB.
FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with respect to the business, strategy and plans of the Lloyds
Banking Group and its current goals and expectations relating to its future financial condition and performance. Statements
that are not historical facts, including statements about the Group or the Group's management's beliefs and expectations,
are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they
relate to future events and circumstances that will or may occur. The Group's actual future business, strategy, plans
and/or results may differ materially from those expressed or implied in these forward looking statements as a result of a
variety of factors, including, but not limited to, UK domestic and global economic and business conditions; the ability to
derive cost savings and other benefits, including as a result of the Group's Simplification programme; the ability to
access sufficient funding to meet the Group's liquidity needs; changes to the Group's credit ratings; risks concerning
borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability and
the impact of any sovereign credit rating downgrade or other sovereign financial issues; market-related risks including
changes in interest rates and exchange rates; changing demographic and market-related trends; changes in customer
preferences; changes to laws, regulation, accounting standards or taxation, including as a possible result of the
referendum on Scottish independence and also including changes to regulatory capital or liquidity requirements; the
policies, decisions and actions of governmental or regulatory authorities in the UK and other jurisdictions in which the
Group operates; the implementation of the Bank Recovery and Resolution Directive and Banking Reform Act; the ability to
attract and retain senior management and other employees; requirements or limitations imposed on the Group as a result of
HM Treasury's investment in the Group; the ability to satisfactorily dispose of certain assets or otherwise meet the
Group's EC State aid obligations; the provision of a range of banking operations services to TSB; the extent of any future
impairment charges or write-downs caused by depressed asset valuations, market disruptions and illiquid markets; the
effects of competition and the actions of competitors, including non-bank financial services and lending companies;
exposure to regulatory scrutiny, legal proceedings, regulatory and competition investigations or complaints, and other
factors. Please refer to the latest Annual Report on Form 20-F filed with the US Securities and Exchange Commission for a
discussion of certain factors together with examples of forward looking statements. The forward looking statements
contained in this announcement are made as at the date of this announcement, and the Group undertakes no obligation to
update any of its forward looking statements.
CONTENTS
Page
Key highlights 1
Consolidated income statement 2
Balance sheet and key ratios 2
Summary consolidated balance sheet 3
Group Chief Executive's statement 4
Chief Financial Officer's review of financial performance 10
Underlying basis segmental analysis 19
Underlying basis quarterly information 22
Divisional highlights
Retail 23
Commercial Banking 25
Consumer Finance 27
Insurance 29
Run-off and Central items 32
Additional information
Reconciliation between statutory and underlying basis results 33
Banking net interest margin 34
Volatility relating to the insurance business 34
Number of employees (full time equivalent) 36
TSB 36
Risk management 37
Principal risks and uncertainties 38
Credit risk portfolio 41
Funding and liquidity management 56
Capital management 61
Statutory information 68
Primary statements
Consolidated income statement 69
Consolidated statement of comprehensive income 70
Consolidated balance sheet 71
Consolidated statement of changes in equity 73
Consolidated cash flow statement 76
Notes 77
Statement of Directors' responsibilities 115
Independent review report to Lloyds Banking Group plc 116
Contacts 118
RESULTS FOR THE HALF-YEAR
Further strategic progress and improved financial performance
'In the first half of 2014, we continued to successfully execute our strategy, further enhancing our leading cost position
and low cost of equity, by investing in the products and services our customers need and further strengthening and
de-risking our balance sheet, reducing costs and increasing efficiency. As a result, we substantially improved our
underlying financial performance and delivered a statutory profit, despite further charges for legacy issues.'
António Horta-Osório
Group Chief Executive
Supporting and benefiting from the UK economic recovery; delivering benefits for customers and shareholders
· Lending growth in key customer segments, and deposit growth in relationship brands
· Launched our Helping Britain Prosper plan, formalising commitments to households, businesses and communities
· Continue to invest in channels and products to meet customer needs whilst improving customer service
Further substantial increase in underlying profit and returns
· Underlying profit increased 32 per cent to £3,819 million (up 58 per cent excluding St. James's Place)
· Return on risk-weighted assets increased to 2.90 per cent (half-year to 30 June 2013: 1.95 per cent)
· Underlying income of £9,252 million, up 4 per cent excluding St. James's Place effects in 2013
- Net interest income up 12 per cent, driven by margin improvement to 2.40 per cent
- Other income down 8 per cent given disposals and a challenging environment
· Underlying costs down 2 per cent to £4,675 million, and down 6 per cent excluding FSCS timing effects
· Impairment charge reduced 58 per cent to £758 million; asset quality ratio improved 39 basis points to 0.30 per cent
Statutory profit before tax of £863 million; tangible net asset value per share of 49.4p
· Statutory profit before tax of £863 million, including charge for legacy issues of £1,100 million (half-year to 30
June 2013: £2,134 million)
· Tangible net asset value per share increased to 49.4p (31 Dec 2013: 48.5p); down 1.3p in second quarter principally
due to legacy charges
Reshaping and strengthening of Group to create a focused, low-risk business substantially complete
· TSB Initial Public Offering successfully completed: 38.5 per cent sold
· Run-off portfolio reduced by £8 billion in first half to £25 billion and international presence reduced to eight
countries
· Capital position further strengthened: fully loaded CET1 ratio of 11.1 per cent (31 Mar 2014: 10.7 per cent pro
forma; 31 Dec 2013: 10.3 per cent pro forma) and total capital ratio of 19.7 per cent
· Fully loaded Basel III leverage ratio of 4.5 per cent (31 Mar 2014: 4.5 per cent pro forma; 31 Dec 2013: 3.8 per cent
pro forma)
Confident in delivering strong and sustainable returns: margin, impairment and run-off guidance enhanced
· 2014 full year net interest margin now likely to be around 2.45 per cent
· Following strong first half performance, now expect full year asset quality ratio of around 35 basis points
· Now expect run-off assets to be less than £20 billion by the end of 2014
· Expect full year statutory pre-tax profit to be significantly ahead of the first half
· Will apply to the Prudential Regulatory Authority (PRA) in the second half of 2014 to restart dividend payments
· Strategic update will be presented to the market in the autumn
CONSOLIDATED INCOME STATEMENT − UNDERLYING BASIS
Half-year to 30 June 2014 Half-year to 30 June 2013 Half-year to 31 Dec 2013
£ million £ million £ million
Net interest income 5,804 5,206 5,679
Other income 3,448 4,258 3,662
Total underlying income 9,252 9,464 9,341
Total costs (4,675) (4,749) (4,886)
Impairment (758) (1,813) (1,191)
Underlying profit 3,819 2,902 3,264
Asset sales, liability management and volatile items (1,567) 897 (1,177)
Simplification and TSB costs (828) (786) (731)
Legacy items (1,100) (575) (2,880)
Other items 539 (304) (195)
Profit (loss) before tax - statutory 863 2,134 (1,719)
Taxation (164) (556) (661)
Profit (loss) for the period 699 1,578 (2,380)
Earnings (loss) per share1 0.8p 2.2p (3.4)p
Banking net interest margin 2.40% 2.01% 2.23%
Average interest-earning banking assets £488.7bn £517.0bn £504.9bn
Cost:income ratio (excluding St. James's Place) 50.5% 52.7% 53.1%
Asset quality ratio 0.30% 0.69% 0.45%
Return on risk-weighted assets 2.90% 1.95% 2.34%
BALANCE SHEET AND KEY RATIOS
At 30 June 2014 At 31 Dec 2013 Change
%
Loans and advances to customers2 £487.1bn £495.2bn (2)
Customer deposits3 £445.1bn £438.3bn 2
Loan to deposit ratio 109% 113% (4)pp
Total assets £843.9bn £847.0bn −
Run-off assets £25.2bn £33.3bn (24)
Wholesale funding £119.5bn £137.6bn (13)
Wholesale funding <1 year maturity £41.5bn £44.2bn (6)
PRA transitional common equity tier 1 ratio4,5 11.1% 10.3% 0.8pp
PRA transitional total capital ratio4,5 19.7% 18.8% 0.9pp
Fully loaded risk-weighted assets5 £256.8bn £271.9bn (6)
Fully loaded common equity tier 1 ratio5 11.1% 10.3% 0.8pp
Fully loaded Basel III leverage ratio5,6 4.5% 3.8% 0.7pp
Net tangible assets per share 49.4p 48.5p 0.9p
1 Earnings per share has been calculated after recognising the coupon on the Additional Tier 1 securities.
2 Excludes reverse repos of £4.2 billion (31 December 2013: £0.1 billion).
3 Excludes repos of £nil (31 December 2013: £3.0 billion).
4 31 December 2013 comparatives reflect PRA transitional rules as at 1 January 2014.
5 31 December 2013 ratios and risk-weighted assets were reported on a pro forma basis and included the benefit of the sales of Heidelberger Leben, Scottish Widows Investment Partnership and the Group's 50 per cent stake in Sainsbury's Bank.
6 Estimated in accordance with January 2014 revised Basel III leverage ratio framework.
SUMMARY CONSOLIDATED BALANCE SHEET
At 30 June At 31 Dec
2014 2013
Assets £ million £ million
Cash and balances at central banks 50,845 49,915
Trading and other financial assets at fair value through profit or loss 147,187 142,683
Derivative financial instruments 27,241 33,125
Loans and receivables:
Loans and advances to customers 491,345 495,281
Loans and advances to banks 21,589 25,365
Debt securities 1,266 1,355
514,200 522,001
Available-for-sale financial assets 50,348 43,976
Other assets 54,119 55,330
Total assets 843,940 847,030
Liabilities
Deposits from banks 11,851 13,982
Customer deposits 445,091 441,311
Trading and other financial liabilities at fair value through profit or loss 63,046 43,625
Derivative financial instruments 25,285 30,464
Debt securities in issue 77,729 87,102
Liabilities arising from insurance and investment contracts 111,958 110,758
Subordinated liabilities 25,675 32,312
Other liabilities 37,427 48,140
Total liabilities 798,062 807,694
Shareholders' equity 39,601 38,989
Other equity instruments 5,329 −
Non-controlling interests 948 347
Total equity 45,878 39,336
Total liabilities and equity 843,940 847,030
847,030
GROUP CHIEF EXECUTIVE'S STATEMENT
In the first half of 2014, we continued to successfully execute our strategy, further enhancing our leading cost position
and low cost of equity, by investing in the products and services our customers need, further strengthening and de-risking
our balance sheet, reducing costs and increasing efficiency. As a result, we substantially improved our underlying
financial performance and delivered a statutory profit, despite further charges for legacy issues.
The first half also saw us reach two major milestones. The UK government made further progress towards returning the Group
to full private ownership by reducing its shareholding to 24.9 per cent, the second time it has successfully sold part of
its stake in the Group; and we sold 38.5 per cent of TSB via a well received Initial Public Offering, an important step
towards completing our European Commission State Aid commitments.
We continue to be well placed to support and benefit from the strengthening UK economic recovery and to deliver strong and
sustainable returns to shareholders. As a result, and as previously stated, we will be applying to the Prudential
Regulatory Authority (PRA) in the second half of 2014 to restart dividend payments, commencing at a modest level.
Results overview
We delivered a significantly improved underlying financial performance in the first half of 2014. Underlying profit
increased by 32 per cent to £3,819 million (when compared to the first half of 2013) and our return on risk-weighted assets
improved to 2.90 per cent from 1.95 per cent. Excluding the effect of the disposal of our shares in St. James's Place in
2013, we grew underlying profit by 58 per cent.
Net interest income grew by 12 per cent (excluding St. James's Place) as a result of higher lending in our key customer
segments and an improvement in the net interest margin of 39 basis points to 2.40 per cent. Underlying costs reduced by 6
per cent, excluding FSCS timing effects, and the impairment charge reduced by 58 per cent to £758 million.
Group statutory profit before tax was £863 million and included charges of £1,100 million for legacy issues as well as a
net charge of £1,136 million relating to Enhanced Capital Notes (ECNs), partly offset by a pensions credit of £710 million.
These legacy charges included a further provision for Payment Protection Insurance (PPI) of £600 million, and a £226
million charge relating to the settlement of LIBOR and BBA repo rate issues. This statutory profit represented a reduction
of £1,271 million compared to the first half of 2013, which had benefited from a profit of £780 million from the sale of
government bonds in the period.
Strengthening the balance sheet
The delivery of a statutory profit together with the management actions we took in the half-year, which included the
payment of dividends totalling £0.7 billion to the Group by our Insurance business, the changes to our pensions schemes and
the successful offers for the ECNs, further strengthened the Group's balance sheet.
Our fully loaded common equity tier 1 ratio increased to 11.1 per cent from 10.3 per cent pro forma at the end of 2013,
while our fully loaded Basel III leverage ratio improved to 4.5 per cent. We also maintained good deposit growth, driven by
our relationship brands and, as a result, our loan to deposit ratio improved to 109 per cent, down from 113 per cent at the
end of 2013.
Helping Britain Prosper and investing in our business
Our Helping Britain Prosper plan was launched in March of this year and incorporates bold, public commitments to help
address some of the big issues facing Britain today. Supporting our goal to be the best bank for customers, our plan covers
the areas where we can make the biggest difference to our customers across households, businesses and communities. Our aim
is to create value for our customers and to support the UK economy by building our business model around the customer. The
support we give to the UK economy has also been recognised externally as, in July, the Group was named for the second year
running as the best UK bank at the Euromoney Awards for Excellence. In the first half of 2014, all of our divisions have
made good progress in implementing the Helping Britain Prosper plan, and importantly, we delivered lending growth in key
customer segments.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
Retail delivered a strong financial performance in the first half of 2014. Underlying profit increased to £1,710 million,
up 32 per cent compared to the first half of 2013, and net interest margin improved to 2.28 per cent, an increase of 31
basis points.
We are on track to exceed our lending commitment to new-to-market customers, providing one-in-four of all mortgages to
first-time buyers in the first half, with lending of £5.7 billion to over 43,000 customers. Gross new mortgage lending was
£20 billion, £6 billion higher than in the first half of 2013. We have lent almost £1 billion through the UK government's
Help to Buy mortgage guarantee scheme, in which we are the largest participant, since launch in 2013.
We continued to launch innovative products, including the Lloyds Bank 'Club Lloyds' account, which rewards customers with a
combination of credit interest and exclusive mortgage and savings loyalty offers. We also launched flexible loans across
all our high street brands, allowing customers to repay loans without early settlement fees.
In Retail Business Banking, we supported over 52,000 business start-ups, and are continuing to integrate the support of
small business customers into the Retail infrastructure.
We have continued to invest in our branches as well as in our telephony and digital services. Customers increasingly value
the convenience of the digital channel and during the first half of 2014, our active online user base grew to over 10
million customers, which includes more than 4.5 million active mobile users.
Commercial Banking continues to make good progress in improving profitability and returns despite a challenging trading
environment in financial and capital markets. Underlying profit increased to £1,156 million, up 35 per cent from £854
million in the first half of 2013, driven by a very strong impairment performance, with return on risk-weighted assets
improving to 1.96 per cent from 1.38 per cent in the first half of 2013, well on the way to achieving our target of more
than 2 per cent in 2015.
The division also continued to take a leading role in supporting the UK economic recovery. We grew lending to SMEs by 5 per
cent in the last 12 months, against a market contraction of 3 per cent. Similarly, our lending to mid-market corporates
grew marginally, against a contracting market. In Global Corporates, we improved returns thanks to capital optimisation and
a resilient income performance in challenging markets, despite lending falling as a result of our selective participation
strategy and some large repayments in the first quarter. We remain strong supporters of the Funding for Lending scheme and
committed over £6.5 billion to UK customers and around £0.6 billion to UK manufacturing in the last six months, and in the
capital markets we helped clients access £3.9 billion of non-bank lending.
Our focus on customers was again recognised by the award for the 10th year in a row of the Business Bank of the Year at the
FD's Excellence Awards.
Regulatory driven change and higher than expected weather-related claims meant that the first half of 2014 was a
challenging period for Insurance. Underlying profit fell from £559 million in the first half of 2013 to £461 million.
Performance was affected by a £100 million charge for the proposed fee cap on corporate pensions, as well as the annuity
changes announced in the 2014 Budget.
We relaunched the Scottish Widows brand in February 2014, demonstrating our continued commitment to being a leader in the
life planning and retirement market. The response from our customers has been positive.
In Pensions, we have over 1 million individual customers and corporate customers representing more than 1 million
employees. We have so far supported almost 1,500 employers this year, representing more than 140,000 employees, through
auto enrolment, and this is likely to increase significantly in the second half of the year as smaller companies come
within the scope of auto enrolment.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
At the start of the year, we created a new Consumer Finance division to increase our focus on the asset finance and credit
card markets, where we have identified specific growth opportunities. Results in the first half of 2014 have been
encouraging, with underlying profit increasing to £534 million, up from £509 million in 2013, driven by significant
reductions in impairment charges across the portfolio and strong loan growth in our UK asset finance business.
In Black Horse motor finance, new business increased by 70 per cent whilst in consumer credit cards, there was a 5 per cent
increase in new accounts opened and an 11 per cent increase in the volume of balance transfers received from new and
existing customers.
Simplifying the Group to improve efficiency and service
We continue to make good progress with Simplification, and the programme is now in its final year. In the first half of
2014 we successfully implemented our new, more customer focused, Retail Business Banking proposition, and commenced the
roll out of our internet banking platform across our branch networks and telephone banking operation. We also introduced an
enhanced and automated General Insurance claims decision solution.
Since 2011, we have achieved cost reductions from simplifying the business while delivering a substantial improvement in
customer satisfaction and reduction in complaints, as processes are made less complex, more automated and faster for
customers. As a result, our customer service scores have continued to improve in the half-year, with our Net Promoter
Scores increasing by 4 per cent since the end of 2013.
Run-rate savings from the programme are now £1.8 billion, more than originally targeted, and we remain on track to meet the
increased target of £2 billion per annum savings by the end of this year. Effective cost management has become, and will
remain, a core competence of Lloyds Banking Group. Good control of costs ensures that we can continue to provide products
and services to customers at a price that is attractive to them, and, at the same time, provide a good return for
shareholders.
Initial Public Offering of TSB
In June, we made a significant step towards completing our State Aid commitments through the successful sale of 38.5 per
cent of TSB via an Initial Public Offering (IPO). The size of the offer was increased from the originally contemplated 25
per cent, given strong demand from both institutional and retail investors. This reflected TSB's strong challenger brand,
its approximately 4.5 million retail customers and around a 6 per cent share of retail branches, and its capacity for
growth. It also reflected its strong balance sheet, which has been further evidenced by TSB having reported in its results
for the first half of 2014 a pro forma common equity tier 1 ratio of 18.2 per cent and a loan to deposit ratio of 94.9 per
cent as at 30 June 2014, as well as TSB's significant economic protection against legacy issues, and the absence of
non-core assets from its balance sheet. The success of the IPO positions us well for further sales to meet the European
Commission mandated deadline of the end of 2015 to complete the full divestment of TSB.
Legacy
Addressing historic conduct issues continued to be a key theme in UK retail banks. As announced earlier this week, we have
now reached settlements totalling £218 million to resolve with UK and US federal authorities legacy issues regarding the
manipulation several years ago of Group companies' submissions to the British Bankers' Association (BBA) London Interbank
Offered Rate (LIBOR) and Sterling repo rate. In addition, the Group has paid nearly £8 million to compensate the Bank of
England for amounts underpaid by Lloyds TSB and HBOS and the other banks that used the Special Liquidity Scheme (SLS). The
behaviours and actions identified by the investigations into these matters, including into submissions and communications
between 2006 and 2009, were absolutely unacceptable. Together, the Board and the Group's management team have taken
vigorous action over the last three years to prevent this kind of behaviour, through implementing a customer-focused,
UK-centric strategy, changing our culture and values, closing our legacy investment banking activities, improving systems
and processes, and implementing more effective controls. Our aim is to be the best bank for our retail and commercial
customers, and we are determined to make Lloyds Banking Group a company of the highest integrity and standards.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
At the half-year, we have also taken provisions totalling £875 million in respect of a number of legacy issues, including
increasing our provision for PPI by a further £600 million, based on revised expectations for complaint volumes, proactive
mailing response rates and administrative expenses. Further detail on provisions for legacy issues is given in the Chief
Financial Officer's review of financial performance on page 14, and in note 23 on page 97 of this news release.
Regulation
As the regulatory environment continues to evolve, we believe that we are well placed to respond as a result of our
strategy to create a simple, low risk, UK-centric, retail and commercial bank, focused around the customer.
The Prudential Regulatory Authority (PRA) and the European Banking Authority (EBA) announced the details of their stress
tests on banks in April. The breadth and depth of the stress tests are extensive, and we are currently working with both
authorities to agree our position. We expect to be able to confirm the outcome of the tests towards the end of this year.
In addition, the consultation announced by the Bank of England in July into the capital framework for banks, focusing on
bank leverage, is likely to provide further clarity, once its outcome is known, on the overall prudential framework in
which UK banks will operate. Currently we are in a comfortable position, with a fully loaded Basel III leverage ratio of
4.5 per cent, up from 3.8 per cent at the half year 2013.
The Financial Conduct Authority (FCA) announced a number of reviews across the retail financial services sector in the
first half of 2014, including reviews of certain elements of personal current accounts, savings, credit cards and pensions.
The nature of the conduct regime in the UK banking and financial services market has changed significantly in recent years
and we are confident that our customer focused, low risk business model will place the Group in the best possible position
to adapt to changes in the regulatory environment over the longer term.
In July, the Competition and Markets Authority (CMA) announced that it will be consulting on its provisional decision that
there should be a market investigation into the markets for personal current accounts and SME banking. Lloyds Banking Group
is committed to ensuring that the markets for SMEs and personal current accounts remain competitive and we will be
collaborating with the CMA over the coming months as it consults on the recommendation.
We also continue to work with the relevant authorities on the evolution of regulation connected to the Financial Services
(Banking Reform) Act 2013, which will result in the ring fencing of retail and commercial banking operations to separate
them from investment banking activities. Given that we are a UK focused retail and commercial bank, we anticipate that the
vast majority of our business will be within the ring fence when it comes into effect at the beginning of 2019.
UK housing market and the Mortgage Market Review
The Group is a leading provider of mortgages, and our focus as a key element of our Helping Britain Prosper plan is on
supporting our customers, particularly first-time buyers, in being able to purchase their homes.
The increase in house prices that we have seen across the majority of the UK in 2014 is helping to increase confidence, and
is resulting in an increase in net mortgage lending growth, which we estimate will be around 1.6 per cent in 2014, compared
to 0.8 per cent in 2013. Outside London and parts of the South East, while house prices have risen, increases have been
relatively modest, and many areas remain below their peak levels of 2007. In April, we took further pre-emptive action by
limiting our lending for mortgages of over £500,000 to a multiple of four times income.
At an industry level, the Mortgage Market Review (MMR) also aims to ensure that customers are able to afford their mortgage
repayments not only now, but sustainably in the future. Similarly, the Bank of England's June announcement asking the PRA
and the FCA to ensure that mortgage lenders do not extend more than 15 per cent of their total number of new residential
mortgages at loan to income ratios at or greater than 4.5, is a further step in limiting the potential for future risk in
the housing market.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
We are comfortable with the effect of these measures on our business, given that we have been operating the MMR equivalent
underwriting standards for some time, and given that only around 10 per cent of our new residential mortgages are written
above the 4.5 income multiple.
The Referendum on Scottish Independence
Looking ahead to the second half of the year, the Scottish Referendum in September is an issue that we will be watching
with great interest. While we believe this is a decision for the Scottish people to make, the outcome could be of
significant importance to the Group given that our registered office and more than 16,000 members of staff are based in
Scotland, as well as our holding a significant branch presence through the Bank of Scotland and trading under the Scottish
Widows business and brand.
In the event of a 'yes' vote, the scale of potential change is currently unclear, but we have been undertaking contingency
planning. There will however be a period between the referendum and the implementation of separation should a 'yes' vote be
successful that we believe is sufficient to address any material consequences and take any actions that we believe
necessary.
Colleagues
At Lloyds Banking Group, we recognise the importance of colleague engagement and the effect this has on our ability to
deliver high levels of service to our customers. Our latest colleague survey results show that Employee Engagement has
increased by 3 percentage points to 59 per cent when compared to 2013. Performance Excellence scores also remain above the
UK norm, with scores for using customer feedback to improve processes and for colleagues getting the right training to keep
up with customer requirements significantly above their respective UK benchmarks.
In 2014, we took the opportunity to introduce additional questions into the colleague survey to help us understand the
progress we're making towards becoming the best bank for customers. The results are encouraging and reflect the work we are
doing to embed the Group's values and to encourage behaviours which support our desired culture. Confidence and trust
scores are above the UK norm, due in part to the continued focus on building and strengthening capability and talent across
the Group, although we recognise there is more to do in this regard.
Working with our communities
Our Helping Britain Prosper plan also details our efforts to engage with our communities on a more holistic level,
particularly in the areas of charitable giving, supporting community initiatives and colleague volunteering.
In 2014 we continued to support the
Alzheimer's Society and Alzheimer Scotland as our designated Charity of the Year. Our campaign was launched just 18 months
ago with the ambition to raise £2 million in two years and we are very proud to say that colleagues in Lloyds Banking Group
have already raised in excess of £4.6 million, more than double the target.
Among many other initiatives, we also continue to work in the communities where we operate through our Lloyds Bank, Bank of
Scotland and Halifax brands, and we have committed to donate at least £100 million to the Bank's Foundations between now
and 2020. So far in 2014, we have committed £16.3 million towards this target, and through colleague volunteering, have
completed over 20,000 volunteering days.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
Outlook and guidance
We have made substantial progress on the delivery of our strategic plan, and have significantly improved the Group's
performance and resilience. Our strong momentum is reflected in the upgrades to our guidance which we have announced in
these results.
Given our strong first half performance, we are further increasing our guidance for the Group's 2014 full year net interest
margin, which we now expect to be around 2.45 per cent, an increase of around 16 basis points on the guidance given at our
full year 2013 results. Similarly, we are also improving our impairment guidance, and now expect the Group's asset quality
ratio to be around 35 basis points for the 2014 full year, compared to our prior expectation, given in our full year 2013
results, of around 50 basis points. We have also substantially reduced our run-off portfolio in the first half of this
year, ahead of expectations. We now expect it to reduce to less than £20 billion by the end of this year, compared to our
previous guidance of a reduction to around £23 billion.
Summary
As the UK economy normalises, the benefits of the strategic decisions we made in 2011 are now being seen. In the first half
of 2014 we increased income and grew lending in our key customer segments, while reducing our cost base and impairments
substantially. The 32 per cent increase in our underlying profit, and the increase in our fully loaded common equity tier 1
ratio to 11.1 per cent from 10.3 per cent pro forma at the end of 2013 while addressing a number of legacy issues,
demonstrates the strength of the business model we have created.
By placing customers at the heart of everything we do, simplifying our business and re-investing in enhanced processes and
new technology, we have been able to improve customer service levels and increase customer service scores. Our Helping
Britain Prosper plan further underpins our commitment to our goal of being the best bank for customers.
As a result, in the first half of 2014, the UK government has further reduced its stake in the Group and we have taken
another significant step towards completing our EC State Aid commitments following the successful IPO of TSB.
At the same time we have continued to resolve legacy issues as we progress towards our goal of delivering strong and stable
statutory profits, and will be applying to the PRA in the second half of 2014 to resume dividend payments commencing at a
modest level.
It has been a successful first half for the Group. With our initial three-year strategic plan now substantially complete,
we are progressing our plans for how we will take the Group forward into 2015 and beyond, and take advantages of the new
growth phase of the UK economy. We intend to share these plans with you in the autumn.
António Horta-Osório
Group Chief Executive
CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE
Overview: significantly improved underlying profitability and balance sheet further strengthened
In the first half of 2014, the continued successful execution of our strategy resulted in further improvements in the
Group's underlying profitability and returns. Underlying profit grew 32 per cent to £3,819 million, with the 2 per cent
reduction in underlying income more than offset by a 2 per cent reduction in costs and a 58 per cent improvement in
impairments. Excluding St. James's Place, which benefited our 2013 results, underlying income was up 4 per cent and
underlying profit up 58 per cent.
Statutory profit before tax was £863 million (first half 2013: £2,134 million) and included provisions for legacy items
totalling £1,100 million, a net charge of £1,136 million relating to ECNs as well as a £710 million benefit resulting from
changes to the Group's Defined Benefit pension schemes and other actions. The statutory profit before tax of £2,134 million
in the first half of 2013 included £780 million of gains on the sale of government securities and charges for legacy items
of £575 million.
We further strengthened the Group's balance sheet and capital position in the first half of the year, with the significant
increase in underlying earnings and risk reduction driving a 0.8 per cent improvement in our fully loaded common equity
tier 1 ratio to 11.1 per cent. These factors, coupled with the issue of £5.35 billion of Additional Tier 1 (AT1) securities
as part of the ECN exchange offers, also resulted in an increase in our fully loaded Basel III leverage ratio to 4.5 per
cent (31 December 2013: 3.8 per cent pro forma). Continued strong deposit growth and an £8.1 billion reduction in the
run-off portfolio also enabled us to improve the Group's loan to deposit ratio to 109 per cent (31 December 2013: 113 per
cent) while continuing to grow lending in our key customer segments.
Total underlying income
Half-year to 30 June 2014 Half-year to 30 June 2013 Change Half-year to 31 Dec 2013 Change
£ million £ million % £ million %
Net interest income 5,804 5,205 12 5,679 2
Other income 3,448 3,729 (8) 3,530 (2)
Total underlying income excluding St. James's Place 9,252 8,934 4 9,209 −
St. James's Place − 530 132
Total underlying income 9,252 9,464 (2) 9,341 (1)
Banking net interest margin 2.40% 2.01% 39bp 2.23% 17bp
Average interest-earning banking assets £488.7bn £517.0bn (5) £504.9bn (3)
Loan to deposit ratio 109% 117% (8)pp 113% (4)pp
Total underlying income of £9,252 million was 2 per cent, or £212 million, lower than the first half of 2013, with the
strong growth in net interest income offset by reductions in other income, which largely reflected the divestment of St.
James's Place as well as other disposals. Excluding St. James's Place, total underlying income increased by 4 per cent, or
£318 million.
Net interest income increased 12 per cent to £5,804 million, reflecting loan growth in our key customer segments and the
continued improvement in net interest margin, partly offset by reduced net interest income from disposals and the run-off
portfolio. Net interest margin increased to 2.40 per cent, up 39 basis points and 17 basis points compared to the first and
second half of 2013 respectively. This was driven by improved deposit pricing and lower funding costs, partly offset by
continued pressure on asset prices, principally in the mortgages segment. In addition, the net interest margin in the first
half of 2014 benefited by around 5 basis points from the replacement of the Group's ECNs with AT1 securities, as the
coupons on the AT1 securities are reported as distributions from equity reserves rather than within net interest income.
CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Given the strong net interest margin performance in the first half of the year, we now expect the full year 2014 net
interest margin to be around 2.45 per cent, a further improvement on the revised guidance of 2.40 per cent that we gave
with our first quarter results. This reflects better than expected deposit and asset pricing trends and a seven basis point
benefit for the year from the ECN exchanges completed in March and April.
Other income was resilient in a challenging operating environment, increasing by 1 per cent in the second quarter of the
year, principally due to lower insurance claims. Excluding St. James's Place, other income in the first half was 8 per cent
or £281 million lower at £3,448 million, with £107 million of the reduction relating to the smaller run-off portfolio and
the effect of other business disposals. Other factors included the impact of regulatory changes across our key businesses,
the challenging operating environment in Capital and Financial Markets within Commercial Banking, as well as higher
weather-related insurance claims and a £100 million one-off charge relating to the implementation of an industry-wide
proposed fee cap on corporate pensions. The effect of these factors was partly offset by the positive impact of investments
in higher yielding assets within our Insurance business and improved economics benefiting the life and pensions business.
Given the continued resilient performance of the business, we would expect other income in each of the third and fourth
quarters of 2014 to be close to the level of other income in the second quarter.
Total costs
Half-year to 30 June 2014 Half-year to 30 June 2013 Change Half-year to 31 Dec 2013 Change
£ million £ million % £ million %
Total costs 4,675 4,749 2 4,886 4
Cost:income ratio 50.5% 52.7% (2.2)pp 53.1% (2.6)pp
(excluding St. James's Place)
Cost:income ratio 50.5% 50.2% 0.3pp 52.3% (1.8)pp
Simplification savings annual run-rate 1,764 1,160 52 1,457 21
Total costs of £4,675 million were 2 per cent, or £74 million, lower than the first half of last year. Following a change
in accounting guidance, costs reflect a change in timing of the recognition of FSCS costs. Adjusting for this, costs were 6
per cent lower than in the first half of 2013. This reduction was driven by savings from the Simplification programme, the
reduction in the run-off portfolio and disposals, partly offset by our continued investment in the business. Excluding St.
James's Place from both underlying income and expenses, income grew by 4 per cent and expenses fell by 5 per cent.
The Group has made good progress on Simplification, increasing the run-rate of annual cost savings by £307 million to
£1,764 million during the course of the first half. We remain on track to achieve our £2 billion annual cost savings
run-rate target for the Simplification programme by the end of this year. We also continue to expect total costs, excluding
TSB running costs, to reduce to around £9.0 billion in 2014, with the equivalent figure in the first half amounting to £4.5
billion.
The Group's key efficiency metrics continue to improve as we reduce costs across the business and grow income. Our
cost:income ratio excluding St. James's Place reduced by 2.2 percentage points to 50.5 per cent compared to the first half
of last year.
CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Impairment
Half-year to 30 June 2014 Half-year to 30 June 2013 Change Half-year to 31 Dec 2013 Change
£ million £ million % £ million %
Total impairment charge 758 1,813 58 1,191 36
Asset quality ratio 0.30% 0.69% (39)bp 0.45% (15)bp
Group impaired loans as a % of closing advances 5.0% 7.7% (2.7)pp 6.3% (1.3)pp
Group provisions as a % of impaired loans 54.0% 51.1% 2.9pp 50.1% 3.9pp
The impairment charge decreased by £1,055 million, or 58 per cent, to £758 million compared to the first half of 2013, with
reductions in all divisions leading to a significant improvement in our asset quality ratio to 30 basis points in the first
half of the year (first half 2013: 69 basis points). Impairment trends continue to benefit from the Group's effective
portfolio management and prudent credit risk appetite, coupled with improving economic conditions, the low interest rate
environment, provision releases and the smaller run-off portfolio. In light of the better than expected impairment trends
across our portfolios, we are revising our guidance for impairment and now expect the full year
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