REG - Lloyds Banking Group - Half-year results <Origin Href="QuoteRef">LLOY.L</Origin> - Part 2
06/09/2014 22:42
- Part 2: For the preceding part double click ID:nRSe8094Na
2014 asset quality ratio to
be around 35 basis points: a further improvement from the revised guidance of around 45 basis points that we gave at the
time of our first quarter results.
Impaired loans as a percentage of closing advances reduced from 6.3 per cent at the end of December 2013 to 5.0 per cent at
the end of June 2014, driven by reductions in both the continuing and run-off portfolios. Provisions as a percentage of
impaired loans increased from 50.1 per cent to 54.0 per cent.
CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Statutory profit
Statutory profit before tax was £863 million in the first half of 2014. Further detail on the reconciliation of underlying
to statutory results is included on page 33.
Half-year to 30 June 2014 Half-year to 30 June 2013 Change Half-year to 31 Dec 2013 Change
£ million £ million % £ million %
Underlying profit 3,819 2,902 32 3,264 17
Asset sales, liability management and
volatile items:
Asset sales 94 775 (675)
Liability management (1,376) (97) (45)
Own debt volatility 225 (166) (55)
Other volatile items (73) (136) (321)
Volatility relating to the insurance business (122) 485 183
Fair value unwind (315) 36 (264)
(1,567) 897 (1,177)
Simplification and TSB costs:
Simplification costs (519) (409) (421)
TSB costs (309) (377) (310)
(828) (786) (731)
Legacy items:
Payment protection insurance provision (600) (500) (2,550)
Other regulatory provisions (500) (75) (330)
(1,100) (575) (2,880)
Other items:
Past service pensions credit (charge) 710 (104) −
Amortisation of purchased intangibles (171) (200) (195)
539 (304) (195)
Profit (loss) before tax - statutory 863 2,134 (60) (1,719)
Taxation (164) (556) (661)
Profit (loss) for the period 699 1,578 (56) (2,380)
Earnings (loss) per share 0.8p 2.2p (1.4)p (3.4)p 4.2p
Asset sales, liability management and volatile items
The net gain from asset sales of £94 million includes a gain of £122 million from the sale of Scottish Widows Investment
Partnership, offset by a number of small losses from other disposals. This compares to a net gain in the first half of 2013
of £775 million which included £780 million of gains on the sale of government securities. There were no such gains in the
first half of 2014.
In March and April of this year, the Group issued £5.35 billion of AT1 securities in exchange for £5.0 billion (nominal) of
ECNs. As a result, the Group was the first European bank to meet its AT1 requirement under the new capital framework
established under CRD IV. The exchanges benefited our leverage ratios and gave rise to a net charge of £1,136 million in
the first half. This net charge comprised liability management losses of £1,362 million, partly offset by £226 million of
gains relating to changes in the fair value of the associated embedded derivative that have been reflected within own debt
volatility.
CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
The Group's statutory profit before tax is affected by insurance volatility caused by movements in financial markets
generating a variance against expected returns, and policyholder interests volatility, which primarily reflects the gross
up of policyholder tax included in the Group tax charge. Volatility relating to the insurance business reduced the Group's
statutory profit by £122 million in the first half of 2014, principally reflecting lower than expected returns on equity
markets and cash investments. This compares to positive insurance volatility of £485 million in the first half of 2013 that
was driven by strong equity market performance in the period.
The fair value unwind moved from a net benefit of £36 million in the first half of 2013, driven by asset-related unwind, to
a net charge of £315 million, largely relating to the subordinated debt acquired as part of the HBOS acquisition in 2009.
Simplification and TSB costs
The Simplification programme continues to deliver significant efficiency savings across the Group. The programme will
complete in 2014 and is expected to realise annual run-rate cost savings of £2 billion by the end of the year. Costs
associated with the programme amounted to £519 million in the first half, with £2,210 million spent in total on the
programme to date out of a total expected to be expensed of £2.4 billion.
In the first half of 2014, the Group achieved a significant milestone in the European Commission (EC) mandated business
disposal of TSB, selling a 38.5 per cent stake in the company through an initial public offering (IPO). TSB costs in the
first half totalled £309 million and included £171 million of build costs and £138 million of dual-running costs. The dual
running costs, which include the costs of TSB's standalone treasury, finance, human resources and other head office
functions, will continue to be reflected in the Group's statutory profit until our ownership reduces to a level at which
TSB is no longer reported as a fully-consolidated subsidiary. From inception to the end of June 2014, costs associated with
the build of TSB and the dual-running of its standalone functions have totalled £1,777 million.
PPI
The Group increased the provision for expected PPI costs by a further £600 million in the second quarter. This brings the
total amount provided to £10,425 million, of which approximately £2,190 million relates to anticipated administrative
expenses and £2,268 million, or 22 per cent of the total provision, remained unutilised as at 30 June 2014. Total costs
incurred in the first half of 2014 were £1,139 million and included £304 million of administration costs.
The volume of reactive PPI complaints continues to fall and in the first six months of 2014 was approximately 30 per cent
lower than the same period last year, with a 7 per cent reduction between the first and second quarters. However they were
higher than forecast and, as a result, the Group is forecasting a slower decline than previously expected, with the
increased provision accounting for an extra 155,000 complaints at a cost of approximately £260 million, net of a benefit
from redress per policy being lower than expected.
The Group has made substantial progress in the proactive mailing exercise connected to the Past Business Review (PBR). As
at 30 June 2014, over 95 per cent of all PBR customers had been mailed, with some second mailings and case review activity
continuing into the second half of the year. While the response rates of most cohorts are in line with expectations,
additional mailings to some cohorts have resulted in a higher overall response rate. In addition, the PBR mailings are
leading to a higher number of policies per customer being reviewed than originally expected. These adverse trends account
for £150 million of the provision increase, net of a redress per policy benefit as above.
Given these updated complaints and PBR forecasts, the Group has also increased its estimate for administrative expenses
which accounts for £190 million of the increased provision.
The total amount provided for PPI represents our best estimate of the likely future costs. These costs are expected to
remain at around the current run-rate of £200 million per month until we have completed all payment on both PBR and
remediation activity, with ongoing costs subsequently reducing significantly. However, a number of risks and uncertainties
remain in particular in respect of complaint volumes, uphold rates, average redress costs, the cost of proactive mailings
and remediation, and the outcome of the FCA Enforcement Team investigation. The cost of these factors could differ
materially from our estimates, with the risk that a further provision could be required.
CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Other provisions
In late July, the Group reached settlements totalling £217 million (at 30 June 2014 exchange rate) with the UK Financial
Conduct Authority (FCA), the United States Commodity Futures Trading Commission (CFTC) and the United States Department of
Justice (DoJ) regarding the manipulation of submissions to the British Bankers' Association (BBA) London Interbank Offered
Rate (LIBOR) and Sterling Repo Rate between 2006 and 2009, as well as the associated systems and control failings. In
addition to these regulatory settlements, the Group has paid nearly £8 million to the Bank of England to compensate for
fees that were underpaid as a direct consequence of the manipulation of the Sterling Repo Rate in 2008 and 2009. All of
these costs have been recognised in the first half results.
A further provision of £50 million has been made relating to the past sale of interest rate hedging products to certain
small and medium-sized businesses. This brings the amount provided to £580 million, of which £218 million relates to
administration costs and £161 million remained unutilised as at 30 June 2014. During the first half, the Group has made
good progress in dealing with this issue, having reviewed 95 per cent of the sales currently in scope.
In the course of its business, the Group is engaged in discussions with the PRA, FCA and other UK and overseas regulators
and governmental authorities on a range of matters. Provisions are held against the costs expected to be incurred in
respect of these discussions and other regulatory investigations. In the second quarter, the Group made further provisions
of £225 million in respect of a limited number of matters affecting the Retail division, including potential remediation in
relation to legacy sales of investment and protection products and historic systems and controls governing legacy incentive
schemes.
Other items
As highlighted at the time of our first quarter results release, we have made a number of changes to the Group's Defined
Benefit pension schemes. These changes and other actions, which are expected to result in a reduced level of volatility in
the value of the Group's Defined Benefit pension schemes in the future, resulted in a £710 million credit in the second
quarter.
Taxation
The tax charge for the first half of 2014 was £164 million, reflecting a lower effective tax rate than the UK corporation
tax rate, largely as a result of tax exempt gains on sales of businesses in the first quarter.
CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Capital ratios and risk-weighted assets
At 30 June 2014 At 31 Dec 2013 Change
%
Fully loaded1
Common equity tier 1 capital ratio 11.1% 10.3% 0.8pp
Total capital ratio 16.8% 15.5% 1.3pp
Basel III leverage ratio2 4.5% 3.8% 0.7pp
Risk-weighted assets £256.8bn £271.9bn (6)
PRA Transitional1
Common equity tier 1 capital ratio3 11.1% 10.3% 0.8pp
Tier 1 capital ratio3 14.6% 11.7% 2.9pp
Total capital ratio3 19.7% 18.8% 0.9pp
Risk-weighted assets3 £257.4bn £272.6bn (6)
Shareholders' equity £39.6bn £39.0bn 2
1 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.
2 Estimated in accordance with January 2014 revised Basel III leverage ratio framework.
3 31 December 2013 comparatives reflect PRA transitional rules as at 1 January 2014.
The Group continued to strengthen its capital position, with the fully loaded common equity tier 1 ratio increasing to 11.1
per cent (31 December 2013: 10.3 per cent pro forma). This improvement was driven by a combination of underlying earnings,
further dividends from the insurance business, changes to the Group's Defined Benefit pension schemes, and a reduction in
risk-weighted assets. The positive effect of these items was partly offset by charges relating to legacy issues and the ECN
exchange offers, each of which reduced the ratio by 0.5 per cent.
Fully loaded risk-weighted assets reduced by 6 per cent, or £15.1 billion, in the first half of the year, to £256.8 billion
(31 December 2013: £271.9 billion), primarily due to disposals, the reduction in the run-off portfolio and improving
external economic factors.
The Group's fully loaded leverage ratio on a Basel III basis increased to 4.5 per cent from 3.8 per cent (pro forma) in
December 2013, with the AT1 issuance in April accounting for 0.5 per cent of the increase. The Group's leverage ratio
exceeds the Basel Committee's proposed minimum of 3 per cent. Final calibrations to the ratio will be completed by the
Basel Committee during 2017 and will migrate to a Pillar 1 treatment from 2018. The UK Financial Policy Committee is
currently consulting with the industry on the establishment of a leverage ratio framework in the UK.
CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Funding and liquidity
At 30 June 2014 At 31 Dec 2013 Change
%
Loans and advances to customers1 £487.1bn £495.2bn (2)
Loans and advances to customers (excluding run-off)1 £465.8bn £467.5bn −
Run-off assets £25.2bn £33.3bn (24)
Non-retail run-off assets £18.0bn £25.0bn (28)
Funded assets2 £505.6bn £510.2bn (1)
Customer deposits3 £445.1bn £438.3bn 2
Wholesale funding £119.5bn £137.6bn (13)
Wholesale funding <1 year maturity £41.5bn £44.2bn (6)
Of which money-market funding <1 year maturity4 £18.6bn £21.3bn (13)
Loan to deposit ratio 109% 113% (4)pp
Primary liquid assets5 £92.3bn £89.3bn 3
1 Excludes reverse repos of £4.2 billion (31 December 2013: £0.1 billion).
2 A breakdown of funded assets is shown on page 57.
3 Excludes repos of £nil (31 December 2013: £3.0 billion).
4 Excludes balances relating to margins of £2.2 billion (31 December 2013: £2.3 billion) and settlement accounts of £1.5 billion (31 December 2013: £1.3 billion).
5 Including off-balance sheet liquid assets.
Total loans and advances to customers were £487.1 billion at the end of the first half: 2 per cent lower than the position
at 31 December 2013, with continued growth in our key segments offset by reductions in the run-off portfolio and other
disposals. In Retail, the mortgage book (excluding specialist book and Intelligent Finance) increased by 2 per cent
year-on-year and by 1 per cent in the year to date. The growth in the first half was driven by a 44 per cent increase in
gross new mortgage lending, compared to the prior year, to £19.8 billion. In Commercial Banking, SME loans and advances
increased 5 per cent year-on-year against a contracting market. Our Consumer Finance business continues to perform very
strongly, with UK loans and advances growing by 11 per cent year-on-year and by 8 per cent year to date, driven by the
success of our Black Horse motor finance business.
Run-off assets reduced to £25.2 billion in the first half, down 24 per cent from £33.3 billion at December 2013. Disposals
from Commercial Banking's Specialist Finance and Commercial Real Estate (CRE) run-off portfolios, coupled with disposals
from the Irish corporate book and foreign exchange movements, accounted for the majority of the £8.1 billion reduction in
run-off assets during the first half. In light of the strong progress made in the year to date we now expect to reduce the
run-off portfolio to below £20 billion by the end of the year.
Customer deposits amounted to £445.1 billion as at June 2014: an increase of £6.8 billion or 2 per cent from £438.3 billion
at 31 December 2013. This has been driven by growth of 2 per cent in Retail relationship deposits, partly offset by an 8
per cent reduction in Retail tactical brands. This growth in deposits, coupled with a reduction in total loans and advances
across the Group, led to a 4 percentage point strengthening of the loan to deposit ratio to 109 per cent from 113 per cent
at the end of 2013. These movements similarly enabled the Group to reduce its wholesale funding by £18.1 billion, or 13 per
cent, to £119.5 billion in the year to date, with 65 per cent of the Group's wholesale funding at the end of June having a
maturity of greater than one year.
CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
The Group's liquidity position remains strong, with primary liquid assets of £92.3 billion (31 December 2013: £89.3
billion). Primary liquid assets represent approximately 5.0 times our money-market funding with a maturity of less than one
year, and approximately 2.2 times our total short-term wholesale funding, in turn providing a substantial buffer in the
event of market dislocation. In addition to primary liquid assets, the Group has significant secondary liquidity holdings
of £119.2 billion (31 December 2013: £105.4 billion). Total liquid assets represent approximately 5.1 times our short-term
wholesale funding.
Audit tender
In our 2013 Annual Report and Accounts we confirmed that we were considering putting the external audit out to tender with
a view to appointing a new audit firm, or re-appointing PricewaterhouseCoopers (PwC), with effect from January 2016. The
Group has since undertaken a comprehensive tender process which was completed in the second quarter. After careful
consideration of the strength of each proposal, the Board accepted the recommendation from the Audit Committee to retain
the services of PwC. Accordingly, subject to shareholders' approval, PwC will be reappointed as Auditor. There will be a
mandatory rotation for the 2021 audit (if not earlier).
Conclusion
The Group delivered a strong underlying performance and statutory profits in the first half of 2014 despite further legacy
charges, with growth in net interest income and the net interest margin, lower costs and a significant reduction in
impairments. The Group also continued to make progress in reducing balance sheet risk and in further strengthening its key
capital and leverage ratios in the first half. These achievements support the Group's positioning as a low risk bank with a
strong and sustainable earnings outlook that is well positioned to support the UK economic recovery.
George Culmer
Chief Financial Officer
UNDERLYING BASIS - SEGMENTAL ANALYSIS
Half-year to 30 June 2014 Retail Commercial Banking Consumer Finance Insurance Run-off and Central items TSB1 Group
£m £m £m £m £m £m £m
Net interest income 3,493 1,234 645 (64) 96 400 5,804
Other income 700 984 675 854 163 72 3,448
Total underlying income 4,193 2,218 1,320 790 259 472 9,252
Total costs (2,207) (1,033) (708) (329) (203) (195) (4,675)
Impairment (276) (29) (78) − (324) (51) (758)
Underlying profit (loss) 1,710 1,156 534 461 (268) 226 3,819
Banking net interest margin 2.28% 2.63% 6.69% 2.40%
Asset quality ratio 0.18% 0.05% 0.78% 0.30%
Return on risk-weighted assets 4.82% 1.96% 5.20% 2.90%
Key balance sheet items £bn £bn £bn £bn £bn £bn £bn
at 30 June 2014
Loans and advances to customers 315.2 104.7 19.9 24.7 22.6 487.1
Customer deposits 284.3 117.2 17.4 2.5 23.7 445.1
Total customer balances 599.5 221.9 37.3 27.2 46.3 932.2
Risk-weighted assets2 70.8 114.0 21.5 46.3 4.8 257.4
1 See note 5, page 36.
2 Risk-weighted assets under rules prevailing on 1 January 2014.
UNDERLYING BASIS - SEGMENTAL ANALYSIS
Half-year to 30 June 20131 Retail Commercial Banking Consumer Finance Insurance Run-off and Central items TSB2 Group
£m £m £m £m £m £m £m
Net interest income 3,036 1,009 670 (49) 235 305 5,206
Other income 733 1,154 681 945 657 88 4,258
Total underlying income 3,769 2,163 1,351 896 892 393 9,464
Total costs (2,007) (1,024) (665) (337) (442) (274) (4,749)
Impairment (462) (285) (177) − (830) (59) (1,813)
Underlying profit (loss) 1,300 854 509 559 (380) 60 2,902
Banking net interest margin 1.97% 2.16% 7.04% 2.01%
Asset quality ratio 0.29% 0.55% 1.84% 0.69%
Return on risk-weighted assets 3.21% 1.38% 4.67% 1.95%
Key balance sheet items £bn £bn £bn £bn £bn £bn £bn
at 30 June 2013
Loans and advances to customers 312.6 104.5 19.0 43.6 24.2 503.9
Customer deposits 278.8 105.9 20.1 2.8 23.0 430.6
Total customer balances 591.4 210.4 39.1 46.4 47.2 934.5
Risk-weighted assets3 79.5 124.2 22.0 57.5 5.5 288.7
1 Segment information has been restated to reflect previously announced changes to the Group operating structure implemented from 1 January 2014.
2 See note 5, page 36.
3 Determined under rules prevailing on 31 December 2013.
UNDERLYING BASIS - SEGMENTAL ANALYSIS
Half-year to 31 December 20131
£m £m £m £m £m £m £m
Net interest income 3,464 1,104 663 (58) 196 310 5,679
Other income 702 1,105 678 919 183 75 3,662
Total underlying income 4,166 2,209 1,341 861 379 385 9,341
Total costs (2,153) (1,060) (719) (332) (333) (289) (4,886)
Impairment (298) (113) (166) − (564) (50) (1,191)
Underlying profit (loss) 1,715 1,036 456 529 (518) 46 3,264
Banking net interest margin 2.22% 2.26% 6.84% 2.23%
Asset quality ratio 0.18% 0.21% 1.68% 0.45%
Return on risk-weighted assets 4.43% 1.69% 4.30% 2.34%
Key balance sheet items £bn £bn £bn £bn £bn £bn £bn
at 31 December 2013
Loans and advances to customers 314.3 108.0 19.1 30.3 23.5 495.2
Customer deposits 283.2 110.5 18.7 2.8 23.1 438.3
Total customer balances 597.5 218.5 37.8 33.1 46.6 933.5
Risk-weighted assets3 73.1 120.8 20.1 44.1 5.8 263.9
1 Segment information has been restated to reflect previously announced changes to the Group operating structure implemented from 1 January 2014.
2 See note 5, page 36.
3 Determined under rules prevailing on 31 December 2013.
UNDERLYING BASIS - QUARTERLY INFORMATION
Quarter Quarter
ended ended
30 June 31 Mar
2014 2014
£m £m
Net interest income 2,993 2,811
Other income 1,730 1,718
Total underlying income 4,723 4,529
Total underlying income excl. SJP 4,723 4,529
Total costs (2,377) (2,298)
Impairment (327) (431)
Underlying profit 2,019 1,800
Asset sales, liability management and volatile items (1,687) 120
Simplification and TSB costs (362) (466)
Legacy provisions (1,100) −
Other statutory items 624 (85)
Statutory (loss) profit (506) 1,369
Banking net interest margin 2.48% 2.32%
Asset quality ratio 0.26% 0.35%
Return on risk-weighted assets 3.09% 2.71%
Cost:income ratio (excl. SJP) 50.3% 50.7%
Cost:income ratio 50.3% 50.7%
Quarter Quarter Quarter Quarter
ended ended ended ended
31 Dec 30 Sept 30 June 31 Mar
2013 2013 2013 2013
£m £m £m £m
Net interest income 2,918 2,761 2,653 2,553
Other income 1,868 1,794 1,922 2,336
Total underlying income 4,786 4,555 4,575 4,889
Total underlying income excl. SJP 4,672 4,537 4,525 4,409
Total costs (2,525) (2,361) (2,341) (2,408)
Impairment (521) (670) (811) (1,002)
Underlying profit 1,740 1,524 1,423 1,479
Asset sales, liability management and volatile items (468) (709) (176) 1,073
Simplification and TSB costs (323) (408) (377) (409)
Legacy provisions (2,130) (750) (575) −
Other statutory items (98) (97) (201) (103)
Statutory (loss) profit (1,279) (440) 94 2,040
Banking net interest margin 2.29% 2.17% 2.06% 1.96%
Asset quality ratio 0.40% 0.51% 0.57% 0.80%
Return on risk-weighted assets 2.55% 2.14% 1.93% 1.96%
Cost:income ratio (excl. SJP) 54.0% 52.0% 51.7% 53.6%
Cost:income ratio 52.8% 51.8% 51.2% 49.3%
DIVISIONAL HIGHLIGHTS
RETAIL
Retail offers a broad range of financial service products, including current accounts, savings, personal loans and
mortgages, in the UK to retail customers, and now incorporates wealth and small business customers. It is also a
distributor of insurance, protection and credit cards, and through Wealth, a range of long-term savings and investment
products. We have continued to make progress in delivering our customer-led, multi-brand and multi-channel strategy to be
the best bank for customers in the UK, with a primary focus on meeting the needs of our customers through investment in
service, products and distribution.
Progress against strategic initiatives
· Further success in simplifying the business, improving processes and enhancing the customer experience with Net
Promoter Scores increasing by 4 per cent since the end of 2013.
· Continued development of our digital capability with our active online user base increasing to over 10 million
customers, including more than 4.5 million active mobile users, and the launch of new mobile banking applications.
· Continue to attract new customers with net positive switching in the first half of 2014, particularly in our Halifax
challenger brand.
· Launched innovative products, including the Lloyds Bank 'Club Lloyds' proposition, which rewards customers with a
combination of credit interest, lifestyle benefits and exclusive mortgage and savings loyalty offers. Over 320,000
customers have joined since launch in March.
· Two new unsecured lending products launched in 2014; flexible loans, enabling customers to repay loans without early
settlement fees, and e-loans, allowing customers to manage their loan online.
· Launched an 18-month cash ISA and extended our ISA Promise to stocks and shares transfers following recent government
announcements.
· Continuing to exceed our lending commitment to first-time buyers with lending of £5.7 billion to over 43,000
customers. In the first half of the year, we lent £892 million through the Help to Buy mortgage guarantee scheme, in which
we are the largest participant, and provided one-in-five of all mortgage loans to customers buying their homes in the UK.
· Supported over 52,000 new business start-ups during the first half of 2014, and are continuing to integrate the
support of small business customers into the Retail infrastructure.
· Continued progress integrating Wealth into the Retail infrastructure with branch referrals up by over 15 per cent
compared with the end of 2013.
Financial performance
· Underlying profit increased 32 per cent to £1,710 million.
· Net interest income increased 15 per cent. Margin performance was strong, increasing 31 basis points year-on-year to
2.28 per cent, driven by improved deposit mix and margin, more than offsetting reduced lending rates.
· Other income down 5 per cent, with lower income from branch protection sales and Wealth related fee income due to the
residual impact of regulatory changes.
· Total costs up 10 per cent to £2,207 million, primarily reflecting timing of recognition of FSCS costs as well as
higher indirect overheads previously absorbed in the TSB segment.
· Impairment reduced 40 per cent to £276 million, with secured and unsecured charges decreasing consistent with lower
impaired loan balances.
Balance sheet
· Loans and advances to customers were slightly ahead of December 2013 at £315.2 billion. Lending books open to new
business (excludes specialist book and Intelligent Finance) grew 2 per cent year-on-year. Gross new mortgage lending in the
first half was £19.8 billion, an increase of 44 per cent compared to the first half of 2013, outperforming market growth.
· Customer deposits increased to £284.3 billion with relationship balances (including Lloyds, Halifax and BoS) up 5 per
cent year-on-year.
· Risk-weighted assets decreased by £2.1 billion to £70.8 billion driven by improving house prices and an improvement
in the credit quality of retail assets.
RETAIL (continued)
Half-year to 30 June 2014 Half-year to 30 June 20131 Change Half-year to 31 Dec 20131 Change
£m £m % £m %
Net interest income 3,493 3,036 15 3,464 1
Other income 700 733 (5) 702 −
Total underlying income 4,193 3,769 11 4,166 1
Total costs2 (2,207) (2,007) (10) (2,153) (3)
Impairment (276) (462) 40 (298) 7
Underlying profit 1,710 1,300 32 1,715 −
Banking net interest margin 2.28% 1.97% 31bp 2.22% 6bp
Asset quality ratio 0.18% 0.29% (11)bp 0.18% −
Return on risk-weighted assets 4.82% 3.21% 161bp 4.43% 39bp
Key balance sheet items At At Change
30 June 31 Dec
2014 20131
£bn £bn %
Loans and advances to customers 315.2 314.3 −
Customer deposits 284.3 283.2 −
Total customer balances 599.5 597.5 −
Risk-weighted assets under rules prevailing on 1 January 2014 70.8 72.9 (3)
Risk-weighted assets under rules prevailing on 31 December 2013 73.1
1 Restated to reflect previously announced changes to the Group operating structure implemented from 1 January 2014.
2 Includes costs that in 2013 were allocated to TSB but following separation have been charged to Retail. In 2013, the costs allocated to TSB were £105 million in the first half and £112 million in the second half.
COMMERCIAL BANKING
Commercial Banking is client led, focusing on SME, Mid Markets, Global Corporates and Financial Institution clients
providing products across Lending, Global Transaction Banking, Financial Markets and Debt Capital Markets, and private
equity financing through Lloyds Development Capital.
Progress against strategic initiatives
· Continued progress towards our 2015 target of delivering sustainable returns on risk-weighted assets of over 2 per
cent through the delivery of our low risk, client focused strategy.
· Continued to Help Britain Prosper: net growth in SME lending of 5 per cent in the last 12 months, against market
contraction of 3 per cent; committed over £6.5 billion to UK customers through Funding for Lending and around £0.6 billion
to UK manufacturing in the last six months; and helped clients access £3.9 billion of non-bank lending.
· Improved our SME client experience by doubling the lending discretion of our most senior relationship managers and
reducing the number of clients per relationship manager. The transfer of small business clients with less complex needs to
Retail has enabled our larger SME clients to benefit from improved service from their Relationship Manager.
· Increased the number of Mid Markets clients through our local relationship management offering, with particularly
strong performance in the Manufacturing, Business Services, and Local Authorities sectors.
· Enhanced returns in Global Corporates as a result of continued capital optimisation and a resilient income
performance in challenging market conditions.
· Year-on-year income growth in Financial Institutions through meeting a broader range of clients' needs; launched the
first Environmental, Social and Governance bond by any UK bank.
· Continued to invest in our core infrastructure, implementing significant upgrades to deliver scalability and
functionality in our Global Transaction Banking and Financial Markets platforms.
Financial performance
· Underlying profit of £1,156 million, up 35 per cent on 2013, driven by strong income growth in Mid Markets and
Financial Institutions and significantly lower impairments across all client segments.
· Income increased by 3 per cent to £2,218 million as a result of increased net interest income in all client segments
offset by a softer performance in other income reflecting difficult financial market conditions.
· Net interest margin increased 47 basis points as a result of disciplined pricing of new lending, customer repricing
in deposits and a reduction in funding costs helped by the increase in Global Transaction Banking deposits.
· Other income decreased 15 per cent due to lower client volumes in Debt Capital Markets and Financial Markets in line
with the wider external market.
· Asset quality ratio improved 50 basis points reflecting lower gross charges, improved credit quality and continuing
progress in executing our strategy of building a low risk commercial bank
· Return on risk-weighted assets increased by 58 basis points to 1.96 per cent.
Balance sheet
· Lending has decreased by 3 per cent as a result of selective participation in Global Corporates, partially offset by
growth in SME and Financial Institutions.
· Customer deposits increased by 6 per cent as a result of growth in Global Transaction Banking balances, growing by 11
per cent year-on-year with growth in all client segments.
· Risk-weighted assets have decreased by £10 billion with reductions in Credit and Market risk-weighted assets driven
by active portfolio optimisation in Global Corporates to improve returns.
COMMERCIAL BANKING (continued)
Half-year to 30 June 2014 Half-year to 30 June 20131 Change Half-year to 31 Dec 20131 Change
£m £m % £m %
Net interest income 1,234 1,009 22 1,104 12
Other income 984 1,154 (15) 1,105 (11)
Total underlying income 2,218 2,163 3 2,209 −
Total costs (1,033) (1,024) (1) (1,060) 3
Impairment (29) (285) 90 (113) 74
Underlying profit 1,156 854 35 1,036 12
Banking net interest margin 2.63% 2.16% 47bp 2.26% 37bp
Asset quality ratio 0.05% 0.55% (50)bp 0.21% (16)bp
Return on risk-weighted assets 1.96% 1.38% 58bp 1.69% 27bp
Key balance sheet items At At Change
30 June 31 Dec
2014 20131
£bn £bn %
Loans and advances to customers 104.7 108.0 (3)
Debt securities and available-for-sale financial assets 1.7 1.7 −
106.4 109.7 (3)
Customer deposits 117.2 110.5 6
Risk-weighted assets under rules prevailing on 1 January 2014 114.0 124.0 (8)
Risk-weighted assets under rules prevailing on 31 December 2013 120.8
1 Restated to reflect previously announced changes to the Group operating structure implemented from 1 January 2014.
CONSUMER FINANCE
The Consumer Finance division comprises our consumer and corporate Credit Card businesses, along with the Black Horse motor
financing and Lex Autolease car leasing businesses in Asset Finance. The Group's European deposits and Dutch retail
mortgage businesses are managed within Asset Finance.
Progress against strategic initiatives
· UK loan growth of 11 per cent year-on-year, up from 9 per cent at the first quarter of 2014.
· New business growth of 70 per cent within Black Horse, supported by the launch of the Jaguar Land Rover partnership
in the first quarter of 2014 and strong underlying business performance.
· Growth of 17 per cent in new Lex Autolease vehicle deliveries with leads from the franchise in the first half of 2014
exceeding full year 2013.
· Growth in new consumer credit cards including a 5 per cent increase in new accounts opened and an 11 per cent
increase in balance transfer volumes from new and existing customers.
· Growth in transaction volumes within the Cardnet Acquiring Solutions business, driven in part by new partnerships.
· Customer needs re-emphasised as the central driver of our product and service offerings through the launch of the
division-wide Customer First operating model.
Financial performance
· Underlying profit increased by 5 per cent to £534 million driven by significant reductions in impairment charges
across the portfolio and income growth across Asset Finance, partially offset by a fall in income attributable to Cards.
· Net interest income reduced by 4 per cent to £645 million driven by new business acquisition within Cards from which
benefits are expected to follow in future periods, partly offset by net lending growth in Black Horse and pricing
reductions in Online Deposits. Other income was broadly in line with the first half of 2013.
· Net interest margin reduced by 35 basis points to 6.69 per cent, reflecting a strong focus on acquiring balance
transfers in Cards, coupled with a greater mix of balances from Asset Finance lending, offset by the deposit re-pricing in
the Online Deposits business.
· Total cost increases of 6 per cent were driven by investment as we began in the second half of 2013 to reposition the
portfolio for growth.
· Impairment charges reduced by 56 per cent to £78 million driven by both a continued underlying improvement of
portfolio quality and the sale of recoveries assets in the Credit Cards and Asset Finance portfolios.
· Return on risk-weighted assets increased to 5.20 per cent driven by low levels of impairment across the portfolio and
a strong performance within the Asset Finance businesses. We do not expect this trend to continue in the short-term as we
focus on investing for sustainable growth and expect a normalisation of impairment charges.
Balance sheet
· Net lending increased by 4 per cent since December to £19.9 billion and by 5 per cent year-on-year, driven by growth
across both the underlying and the Jaguar Land Rover portfolios within Black Horse.
· Operating lease assets increased by 4 per cent since December to £2.9 billion and by 6 per cent year-on-year,
reflecting growth in the Lex Autolease fleet where the stock of vehicles has grown by 3 per cent since December and by 5
per cent year-on-year.
· Customer deposits reduced by 7 per cent since December, and by 13 per cent year-on-year, within Online Deposits
following deposit re-pricing activity.
· Risk-weighted assets increased by 7 per cent broadly in line with growth in net lending.
CONSUMER FINANCE (continued)
Half-year to 30 June 2014 Half-year to 30 June 20131 Change Half-year to 31 Dec 20131 Change
£m £m % £m %
Net interest income 645 670 (4) 663 (3)
Other income 675 681 (1) 678 −
Total underlying income 1,320 1,351 (2) 1,341 (2)
Total costs (708) (665) (6) (719) 2
Impairment (78) (177) 56 (166) 53
Underlying profit 534 509 5 456 17
Banking net interest margin 6.69% 7.04% (35)bp 6.84% (15)bp
Asset quality ratio 0.78% 1.84% (106)bp 1.68%
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