REG - Lloyds Banking Group - Interim Management Statement <Origin Href="QuoteRef">LLOY.L</Origin> - Part 1

Lloyds BankingAnnouncement

30/10/2014 06:15

RNS Number : 4220V
Lloyds Banking Group PLC
28 October 2014
Lloyds Banking Group plc
Q3 2014 Interim Management Statement
28 October 2014


BASIS OF PRESENTATION
This report covers the results of Lloyds Banking Group plc together with its subsidiaries (the Group) for the nine months ended 30September 2014. 
Statutory basis
Statutory information is set out on pages10 and11. 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 basis
In 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 and the unwind of acquisition-related fair value adjustments;
- the effects of certain asset sales and other items;
- volatility relating to the insurance business and insurance gross up;
- Simplification costs, TSB build and dual running costs;
- payment protection insurance and other regulatory provisions; and
- certain past service pensions items in respect of the Group's defined benefit pension schemes.
Unless otherwise stated, income statement commentaries throughout this document compare the nine months ended 30September 2014 to the nine months ended 30September 2013, and the balance sheet analysis compares the Group balance sheet as at 30September 2014 to the Group balance sheet as at 31December 2013.
TSB
The Group's consolidated results and balance sheet include TSB. Any TSB disclosures in the document are presented on a Lloyds Banking Group basis and may differ to the equivalent figures disclosed in the TSB
results release.
FORWARD LOOKING STATEMENTS
This document contains certain forward looking statements with respect to the business, strategy and plans of 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 Lloyds Banking Group's or its directors' and/or management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments fluctuations in exchange rates, stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group's credit ratings; the ability to derive cost savings; changing customer behaviour including consumer spending, saving and borrowing habits; changes to 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; technological changes and risks to cyber security; natural, pandemic and other disasters, adverse weather and similar contingencies outside the Group's control; inadequate or failed internal or external processes or systems; terrorist acts, geopolitical events and other acts of war or hostility, geopolitical, pandemic or other such events; changes in laws, regulations, accounting standards or taxation, including as a result of further Scottish devolution; changes to regulatory capital or liquidity requirements and similar contingencies outside the Group's control; the policies, decisions and actions of governmental or regulatory authorities in the UK, the European Union (EU), the US or elsewhere including the implementation of key legislation and regulation; 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; actions or omissions by the Group's directors, management or employees including industrial action; changes to the Group's post-retirement defined benefit scheme obligations; the ability to complete satisfactorily the disposal of certain assets as part of the Group's EU State Aid obligations; the provision of banking operations services to TSB Banking Group plc; the extent of any future impairment charges or write-downs; the value and effectiveness of any credit protection purchased by the Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and exposure to regulatory scrutiny, legal proceedings, regulatory and competition investigations or complaints. 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. Except as required by any applicable law or regulation, the forward looking statements contained in this document are made as of today's date, and Lloyds Banking Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements.

RESULTS FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2014
Further strategic progress; supporting and benefiting from the UK economic recovery
 Lending growth in key customer segments, and deposit growth in relationship brands
 Further TSB divestment of 11.5per cent in the third quarter with shareholding now reduced to 50per cent
 Run-off assets reduced by 10.6billion to 22.7billion and international presence reduced to seven countries
 Capital position further strengthened: fully loaded CET1 ratio of 12.0per cent (30June 2014: 11.1per cent fully loaded; 31Dec 2013: 10.3per cent pro forma) and transitional total capital ratio of 21.0per cent
 Fully loaded Basel III leverage ratio of 4.7per cent (30June 2014: 4.5per cent fully loaded; 31 Dec 2013: 3.8percent pro forma)
Substantial increase in underlying profit and returns
 Underlying profit increased 35per cent to 5,974million
 Return on risk-weighted assets increased to 3.05per cent (first nine months of 2013: 2.01per cent)
 Income of 13,898million, up 3per cent excluding St. James's Place effects in 2013
- Net interest income up 11per cent, driven by margin improvement to 2.44per cent
- Other income down 8per cent given disposals and a challenging operating environment
 Underlying costs down 6per cent and down 3per cent to 6,907million including FSCS timing effects
 Impairment charge reduced 59per cent to 1,017million; asset quality ratio improved 36basis points to 0.27per cent
Statutory profit before tax of 1,614million; tangible net asset value per share of 51.8p
 Statutory profit before tax of 1,614million (first nine months of 2013: 1,694million)
 Additional 900million provision for PPI in the third quarter
 Statutory profit after tax of 1,392million (first nine months of 2013: 280million)
 Tangible net asset value per share increased to 51.8p (30June 2014: 49.4p, 31 Dec 2013: 48.5p), driven by underlying profitability
Confidence in delivering strong and sustainable returns
 2014 full year asset quality ratio now expected to be around 30basis points; guidance previously around 35basis points for the full year
 Other guidance reconfirmed
- 2014 full year net interest margin expected to be around 2.45per cent
- Run-off assets expected to be less than 20 billion by the end of 2014
- Full year statutory profit to be significantly ahead of first half
Dividend
 Ongoing discussions with the PRA regarding the resumption of dividends


CONSOLIDATED INCOME STATEMENT  UNDERLYING BASIS


Nine
months
ended
30Sept
2014

Nine
months
ended
30Sept
2013

Change

Three
months
ended
30Sept
2014

Three
months
ended
30Sept
2013

Change


million

million

%

million

million

%













Net interest income

8,838

7,967

11

3,034

2,761

10
Other income

5,060

6,052

(16)

1,612

1,794

(10)
Total income

13,898

14,019

(1)

4,646

4,555

2
Total costs

(6,907)

(7,110)

3

(2,232)

(2,361)

5
Impairment 

(1,017)

(2,483)

59

(259)

(670)

61
Underlying profit

5,974

4,426

35

2,155

1,524

41













Asset sales and other items

(1,753)

188



(186)

(709)


Simplification and TSB costs

(1,064)

(1,194)



(236)

(408)


Legacy items

(2,000)

(1,325)



(900)

(750)


Other items

457

(401)



(82)

(97)


Profit (loss) before tax - statutory

1,614

1,694

(5)

751

(440)


Taxation

(222)

(1,414)



(58)

(858)


Profit (loss) for the period

1,392

280



693

(1,298)















Earnings (loss) per share1

1.7p

0.4p

1.3p

0.9p

(1.8)p

2.7p













Banking net interest margin

2.44%

2.06%

38bp

2.51%

2.17%

34bp
Average interest-earning banking assets

486.4bn

513.9bn

(5)

481.8bn

507.9bn

(5)
Cost:income ratio2

49.7% 

52.5%

(2.8)pp

48.0%

52.0%

(4.0)pp
Asset quality ratio

0.27%

0.63%

(36)bp

0.20%

0.51%

(31)bp
Return on risk-weighted assets

3.05%

2.01%

104bp

3.37%

2.14%

123bp
BALANCE SHEET AND KEY RATIOS


At 
30Sept
2014

At 
31Dec 
2013

Change
%







Loans and advances to customers3

486.3bn

495.2bn

(2)
Loans and advances to customers excluding TSB, run-off and closed portfolios3

408.9bn

404.9bn

1
Customer deposits4

445.4bn

438.3bn

2
Loan to deposit ratio

109%

113%

(4)pp
Total assets

856.4bn

847.0bn

1
Run-off assets

22.7bn

33.3bn

(32)
Wholesale funding

119.6bn

137.6bn

(13)
Wholesale funding <1 year maturity

45.2bn

44.2bn

2
PRA transitional common equity tier 1 ratio5,6

12.0%

10.3%

1.7pp
PRA transitional total capital ratio5,6

21.0%

18.8%

2.2pp
Fully loaded risk-weighted assets6

249.6bn

271.9bn

(8)
Fully loaded common equity tier 1 ratio6

12.0%

10.3%

1.7pp
Fully loaded Basel III leverage ratio6,7

4.7%

3.8%

0.9pp







Net tangible assets per share

51.8p

48.5p

3.3p
1
Earnings per share has been calculated after recognising the coupon on the Additional Tier 1 securities.
2
Excluding impact of St. James's Place.
3
Excludes reverse repos of 6.4billion (31December 2013: 0.1billion).
4
Excludes repos of nil(31December 2013: 3.0billion).
5
31December 2013 comparatives reflect PRA transitional rules as at 1January 2014.
6
31December 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 50per cent stake in Sainsbury's Bank.
7
Following PRA guidance, calculated in accordance with the January 2014 revised Basel III leverage ratio framework.



GROUP CHIEF EXECUTIVE'S STATEMENT
In the first nine months, we have continued to invest in our core UK franchise to improve our products, services and processes to support customers and the UK economy. We have delivered substantial improvements to profitability while at the same time continuing to address historical legacy issues. The business is performing strongly and we are well positioned to continue to support and benefit from UK economic growth. 
Results overview
In terms of financial performance, our underlying profit increased by 35per cent to 5,974million and our return on
risk-weighted assets improved to 3.05per cent from 2.01per cent. The improvement in underlying profit was driven by an increase in net interest income, further reduced costs and lower impairments. Excluding the effect of the disposal of our shares in St.James's Place in 2013, underlying profit has increased by 52per cent.
Statutory profit before tax was 1,614million, a decrease of 5per cent on the same period in 2013. This includes charges relating to legacy provisions of 2,000million, including an additional 900million for PPI in the third quarter. Statutory profit after tax was 1,392million which compares to 280million in the first nine months of 2013.
Our fully loaded common equity tier 1 ratio now stands at 12.0per cent, up from 10.3 per cent (pro forma) at the end of 2013, and our fully loaded Basel III leverage ratio has increased to 4.7per cent. 
As the business is performing strongly and the balance sheet has continued to strengthen, we are in ongoing discussions with the PRA regarding the resumption of dividend payments.
Delivery of strategy
Lending has increased in our key customer segments and we have grown deposits, mainly through our Retail relationship brands and in Commercial Transaction Banking. We have further improved our leading cost position through the delivery of our Simplification programme. Run-rate benefits total 1.9billion at the end of September and the Group's market leading cost:income ratio now stands at 49.7per cent, improved from 52.5per cent in 2013.
We reduced run-off assets in the first nine months to 22.7billion, from 33.3billion at the end of 2013. Following an initial sell down of 38.5 per cent of the shares in TSB in June, a further 11.5 per cent of our shareholding was sold in September, reducing the Group's shareholding to 50per cent.
I am pleased to report that we have progressed further towards our goal of becoming the best bank for customers with customer satisfaction continuing to improve.
Helping Britain Prosper
As the largest retail and commercial bank in the UK, I am very aware of our responsibility to do everything we can to support the UK economy. Our Helping Britain Prosper Plan, launched in the first quarter, sets out high level commitments outlining how we are approaching this challenge. We are making excellent progress. 
In UK housing, we continue to be the largest lender to first-time buyers, providing one in four mortgages, and lending 8.8billion to more than 67,000 first-time buyers in the first nine months. Through our commitment to the commercial sector, we have supported over 75,000 business start ups and remain the largest participant in the Funding for Lending Scheme, committing more than 11.5billion of gross funds to customers so far in 2014.
Helping Britain Prosper will remain central to the Group's purpose and I look forward to updating you on further progress at the end of the year.
The Group is performing strongly. We have met or exceeded the strategic objectives set out in 2011 and are ready to move on to the next stage in our development. The details of this are outlined in today's strategic update.
Antnio Horta-Osrio
Group Chief Executive


CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE
Overview: strong underlying profitability and balance sheet
In the first nine months of 2014, underlying profit grew 35per cent to 5,974million, with a 1per cent reduction in income more than offset by a 3per cent reduction in costs and a 59per cent improvement in impairments. Excluding St. James's Place, which benefited our 2013 results, underlying income was up 3per cent and underlying profit up 52per cent. 
Statutory profit before tax was 1,614million and included provisions for legacy items totalling 2,000million, a net charge of 1,086million relating to Enhanced Capital Notes (ECNs) as well as a 710million net benefit resulting from changes to the Group's defined benefit pension schemes and other actions. The statutory profit before tax of 1,694million in the nine months to 30September 2013 included 786million of gains on the sale of government securities and charges for legacy items of 1,325million. The statutory profit after tax was 1,392million compared to 280million in 2013, largely as a result of the high tax charge in 2013 due to the impact of announced changes in corporation tax on the deferred tax asset and the write down of the deferred tax asset in respect of Australian trading losses.
In the third quarter net lending balances increased in key customer segments, relationship deposit balances increased and run-off assets fell by a further 2.5billion to 22.7billion at 30 September 2014. As a result, the Group's loan to deposit ratio was maintained at 109per cent.
The combination of strong underlying profitability and continued reduction in risk-weighted assets resulted in a further improvement in the Group's fully loaded common equity tier 1 ratio to 12.0per cent at 30 September 2014 (31December 2013: 10.3per cent pro forma) and the BaselIII leverage ratio to 4.7per cent (31 December 2013: 3.8per cent proforma). The increase in the leverage ratio also reflects the issue of Additional Tier 1 securities (AT1) in the second quarter. 
Total income


Nine
months
ended
30Sept
2014

Nine
months
ended
30Sept
2013

Change


million

million

%







Net interest income

8,838

7,966

11
Other income

5,060

5,505

(8)
Total underlying income excluding St. James's Place

13,898

13,471

3
St.James's Place


548


Total income

13,898

14,019

(1)







Banking net interest margin

2.44%

2.06%

38bp
Average interest-earning banking assets

486.4bn

513.9bn

(5)
Loan to deposit ratio

109%

114%

(5)pp
Total income of 13,898million was 1per cent lower than in the first nine months of 2013, with strong growth in net interest income offset by lower other income. The reduction in other income largely reflected business disposals and the smaller run-off portfolio. Excluding St. James's Place, total underlying income increased by 3per cent.
Net interest income increased 11per cent to 8,838million, reflecting the continued improvement in net interest margin and loan growth in our key customer segments, partly offset by reduced net interest income from disposals and the
run-off portfolio. Net interest margin increased to 2.44per cent, up 38basis points, and is in line with our guidance of around 2.45per cent for the full year. The net interest margin continues to benefit from improved deposit pricing and lower funding costs, partly offset by continued pressure on asset prices, principally for mortgages. The net interest margin in the first nine months of 2014 benefited by around 6basis points from the replacement of the Group's ECNs with AT1 securities in the second quarter.


CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Excluding St. James's Place, other income in the first nine months was 8per cent, or 445million, lower at 5,060million. The reduction reflects the impact of business disposals, the challenging market conditions in Capital and Financial Markets within Commercial Banking as well as the effects of regulatory changes in the pensions market.
Total costs


Nine
months
ended
30Sept
2014

Nine
months
ended
30Sept
2013

Change


million

million

%







Total costs

6,907

7,110

3
Cost:income ratio1

49.7%

52.5%

(2.8)pp
Simplification savings annual run-rate

1,901

1,315

45
1
Excluding impact of St. James's Place.
Total costs of 6,907million were 3per cent, or 203million, lower than in the nine months to 30September 2013. Adjusting for a change in timing of the recognition of FSCS costs, costs were 6per cent lower than in the nine months to 30 September 2013. The reduction was driven by savings from the Simplification programme and business disposals, partly offset by increased investment in the business. Excluding St. James's Place from both income and expenses, income grew by 3per cent and expenses fell by 5per cent. Total costs excluding TSB running costs in the nine months to 30September were 6,626million and we continue to expect that costs on this basis will be around 9billion for the full year.
Impairment


Nine
months
ended
30Sept
2014

Nine
months
ended
30Sept
2013

Change


million

million

%







Total impairment charge

1,017

2,483

59
Asset quality ratio

0.27%

0.63%

(36)bp
















At
30Sept
2014

At
31Dec
2013




%

%









Impaired loans as a % of closing advances

4.5%

6.3%

(1.8)pp
Provisions as a % of impaired loans

56.6%

50.1%

6.5pp
The impairment charge was 1,017million, 59per cent lower than in the nine months to 30September 2013. The reduction reflects lower levels of new impairment as a result of effective risk management, improving economic conditions and the continued low interest rate environment. The charge benefits from significant provision releases but at lower levels than seen in the same period in 2013. The asset quality ratio in the first nine months of 2014 was 27basis points and, given the continued strong performance, we now expect the ratio for the full year will be around 30basis points.
Impaired loans as a percentage of closing advances reduced from 6.3per cent at the end of December 2013 to 4.5per cent at the end of September 2014, driven by reductions within both the continuing and the run-off portfolios. Provisions as a percentage of impaired loans increased from 50.1per cent to 56.6per cent.


CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Statutory profit
Statutory profit before tax was 1,614million in the first nine months of 2014. Further detail on the reconciliation of underlying to statutory results is included on page 12.


Nine months ended 
30Sept
2014

Nine
months ended 
30Sept 
2013


million

million





Underlying profit

5,974

4,426
Asset sales and other items:




Asset sales

79

(637)
Sale of government securities


786
Liability management

(1,378)

(97)
Own debt volatility

264

(167)
Other volatile items

(50)

(243)
Volatility arising in insurance businesses

(197)

637
Fair value unwind

(471)

(91)


(1,753)

188
Simplification and TSB costs:




Simplification costs

(650)

(608)
TSB build and dual running costs

(414)

(586)


(1,064)

(1,194)
Legacy items:




Payment Protection Insurance provision

(1,500)

(1,250)
Other regulatory provisions

(500)

(75)


(2,000)

(1,325)
Other items:




Past service pension credit (charge)

710

(104)
Amortisation of purchased intangibles

(253)

(297)


457

(401)
Profit before tax - statutory

1,614

1,694
Taxation

(222)

(1,414)
Profit for the period

1,392

280
Earnings per share

1.7p

0.4p
Asset sales and other items
The net gain from asset sales of 79million includes a gain of 122 million from the sale of Scottish Widows Investment Partnership, offset by a number of small losses from other disposals. In 2013 there was a net loss in asset sales of 637million and a 786million gain on the sale of government securities. The net losses for liability management in 2014 of 1,378million largely relate to the Group's ECN exchange offers in the second quarter.
Own debt volatility largely relates to the movement in value of the Group's ECNs. The credit of 264million in the nine months to September 2014 mainly reflects the change in value of the ECNs in the first quarter prior to the exchange offers.
Negative volatility relating to the insurance business was 197million in the first nine months of 2014, principally reflecting lower than expected returns on equity markets and cash investments. This compares to positive insurance volatility of 637 million in the first nine months of 2013 driven by strong equity market performance in that period.
The fair value unwind was a net charge of 471million compared with a net charge of 91million in 2013. The charge largely relates to the subordinated debt acquired as part of the HBOS acquisition in 2009.

CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Simplification and TSB costs
Simplification programme costs were 650million and the total spent on the programme to the end of September 2014 was 2,341million out of a total expected to be expensed of around 2.4billion. The programme has delivered annual run-rate savings of 1.9billion and is expected to realise 2.0billion by the end of the year. 
In September, the Group sold a further 11.5per cent holding in TSB. Following the completion of the sale, the Group now holds 50per cent of TSB's Ordinary Shares. TSB build and dual running costs in the first nine months were 197million and 217million, respectively. 
Payment Protection Insurance
During the quarter, the Group has increased the PPI provision by 900million, due to increased reactive complaints and expected increased remediation and uphold rates.
Average weekly PPI reactive complaint volumes are down 18per cent on the same quarter last year but marginally higher than last quarter and expectations. As a result of this trend in reactive complaint volumes, the Group has modelled and re-estimated a higher level of total future complaints, and consequently, an increase in future redress payments and associated administration costs of approximately 660million. Since the end of the third quarter, we have seen a fall in complaint levels. However, the provision remains sensitive to future trends; as an example, were reactive complaint levels in the fourth quarter to remain broadly in line with the third quarter then the revised modelled total complaints would increase the provision by approximately 600million.
The charge in the quarter also reflects expected increased remediation and a marginally higher uphold rate which accounts for approximately 240million. The 900million increase brings the total amount provided for PPI to 11,325million (of which approximately 2,450million relates to administration costs) with 2,550million unutilised. Total costs incurred in the three months to 30 September 2014 were 622 million, including 156 million of administration costs which was in line with expectations.
As previously outlined, the Group anticipates that the cash spend will remain around current levels per month until the end of the second quarter next year when the past business review and remediation activity will be substantially complete. At that time, the Group expects the monthly costs to be substantially lower and predominantly in relation to reactive complaints.
The PPI provision represents the Group's best estimate of total costs but a number of risks and uncertainties remain, in particular as outlined above, the total expected future complaint volumes.
Other items
The Group made a number of changes to its defined benefit pension schemes in the first half of the year. These changes and other actions resulted in a 710million credit which was recognised in the second quarter.
Taxation
The tax charge for the nine months to 30September 2014 was 222million, representing an effective tax rate of 14per cent which is lower than the UK corporation tax rate, largely as a result of tax exempt gains on sales of businesses in the first half and a lower deferred tax liability in respect of the value of in-force assets for the life business.


CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Capital ratios


At 
30Sept
2014

At
31Dec 
2013

Change
%







Fully loaded1






Common equity tier 1 capital ratio

12.0%

10.3%

1.7pp
Total capital ratio

18.1%

15.5%

2.6pp
Basel III leverage ratio2

4.7%

3.8%

0.9pp
Risk-weighted assets

249.6bn

271.9bn

(8)







PRA transitional1






Common equity tier 1 capital ratio3

12.0%

10.3%

1.7pp
Tier 1 capital ratio3

15.6%

11.7%

3.9pp
Total capital ratio3

21.0%

18.8%

2.2pp
Risk-weighted assets3

249.6bn

272.6bn

(8)







Shareholders' equity

41.2bn

39.0bn

6
1
31December 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 50per cent stake in Sainsbury's Bank.
2
Following PRA guidance, calculated in accordance with the January 2014 revised Basel III leverage ratio framework. The European Commission has recently finalised its proposals to amend the CRD IV rules on the calculation of the leverage ratio in order to align with its interpretation of the revised Basel III leverage ratio framework. The Group considers there to be minimal difference between the Commission's final proposals and the 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 (CET1) ratio increasing to 12.0per cent (31 December 2013: 10.3 per cent pro forma). The improvement was driven by a combination of underlying profit, 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 which reduced the CET1 ratio by 0.9per cent and the ECN exchange offers which reduced the ratio by 0.5per cent. The improvement in the CET1 ratio in the third quarter of 0.9per cent was mainly driven by increased underlying profit and further risk-weighted asset reduction, partly offset by the additional charge relating to legacy issues.
Fully loaded risk-weighted assets reduced by 8per cent, or 22.3billion, in the first nine months of the year, to 249.6billion (31December 2013: 271.9 billion pro forma), primarily due to disposals and other reductions in the run-off portfolio and changes in external economic factors.
The Group's fully loaded leverage ratio on a Basel III basis increased to 4.7per cent from 3.8per cent (pro forma) in December 2013, with the AT1 issuance in April, where the Group repurchased the equivalent of 5billion nominal (4billion regulatory value) of ECNs and issued 5.3billion of new AT1 securities, accounting for 0.5per cent of the increase. 
EBA stress test
The Group announced yesterday that it had met all the capital benchmarks set out in the EU-wide stress test conducted by the European Banking Authority (EBA). In the adverse scenario the Group's estimated CET1 ratio, using the CRD IV transitional rules as implemented in the UK by the PRA, falls from 10.2 per cent at 31 December 2013 to 6.2 per cent at 31 December 2016. The Group is not required to take any action as a result of this stress test and will continue to ensure that its robust capital position is maintained. The stress tests were calculated using a prescribed and standardised methodology and are based on a static balance sheet as at 31 December 2013. 
The CRD IV rules as implemented in the UK are significantly more onerous than the minimum transitional rules allowed for in CRD IV and generally applied across other European jurisdictions in the EBA stress test. If the Group's results were restated on that basis then its CET1 ratio would start at 13.8 per cent at 31 December 2013 and fall to around 9.6per cent at 31 December 2016 in the adverse scenario.
Due to the materially different approaches to transitional phasing of CRD IV rules across Europe, the EBA have also disclosed the results on a CRD IV fully loaded basis for comparability purposes. The Group's result on this basis is a CET1 ratio of 6.0 per cent in 2016.

CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Given the results are based on a static balance sheet; the significant progress made by the Group in 2014 is not reflected on either a transitional or fully loaded basis. In the first half of 2014 the Group generated a 1 per cent increase in its CET1 ratio from underlying earnings growth and de-risking of the balance sheet with further progress seen through the third quarter. The Group has also issued Additional Tier 1 contingent capital in the first half of 2014 which, if it were included, would contribute around a further 2 per cent to the CET1 ratio in the stress scenario.
The PRA continues to monitor UK banks against its own stress scenarios, which contain material methodology differences to those of the EBA test. This limits the ability to draw direct comparisons between the two. The results of the PRA stress test will be disclosed on 16 December 2014.
Funding and liquidity


At 
30Sept
2014

At 
31Dec 
2013

Change


bn

bn

%







Loans and advances to customers1

486.3bn

495.2bn

(2)
Loans and advances to customers excluding TSB, run-off and closed portfolios1

408.9bn

404.9bn

1
Run-off assets 

22.7bn

33.3bn

(32)
Non-retail run-off assets

15.9bn

25.0bn

(36)
Funded assets

503.2bn

510.2bn

(1)
Customer deposits2

445.4bn

438.3bn

2
Wholesale funding

119.6bn

137.6bn

(13)
Wholesale funding <1 year maturity

45.2bn

44.2bn

2
Of which money-market funding <1 year maturity3

19.3bn

21.3bn

(9)
Loan to deposit ratio

109%

113%

(4)pp
Primary liquid assets4

95.3bn

89.3bn

7
1
Excludes reverse repos of 6.4billion (31 December 2013: 0.1billion).
2
Excludes repos of nil (31December 2013: 3.0billion).
3
Excludes balances relating to margins of 2.3billion (31 December 2013: 2.3billion) and settlement accounts of 1.3billion (31December 2013: 1.3billion).
4
Includes off-balance sheet liquid assets; includes TSB 3.6billion (31December 2013: nil).
Total loans and advances to customers were 486.3billion at 30 September 2014, 2per cent lower than at 31December 2013, with continued growth in mortgages, SME lending and UK Consumer Finance offset by reductions in lending to Global Corporates and in the run-off portfolio. 
Customer deposits were 445.4billion at 30 September 2014, an increase of 7.1billion, or 2per cent, since 31December 2013 with growth of relationship deposits, partly offset by a reduction in tactical brands. The growth in deposits, together with the reduction in total loans and advances, resulted in the loan to deposit ratio improving to 109per cent from 113 per cent at the end of 2013, and has reduced the Group's wholesale funding requirement. Wholesale funding at 30September 2014 was 119.6billion, with 62per cent having a maturity of greater than one year.
The Group's liquidity position remains strong, with primary liquid assets of 95.3billion (31 December 2013: 89.3billion). Primary liquid assets represent approximately five times our money-market funding with a maturity of less than one year, and over two 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 105.6billion (31December 2013: 105.4 billion). Total liquid assets represent approximately four times our short-term wholesale funding.
Conclusion
The Group has continued to deliver a strong underlying performance and growth in statutory profit after tax. The strong profit performance together with further progress in reducing balance sheet risk, has driven the continued improvement in the key capital and leverage ratios.
George Culmer
Chief Financial Officer

STATUTORY CONSOLIDATED INCOME STATEMENT (UNAUDITED)


Nine
months ended
30 Sept
2014

Nine
months ended 
30 Sept
2013


million

million





Interest and similar income

14,492

15,961
Interest and similar expense

(6,402)

(10,989)
Net interest income

8,090

4,972
Fee and commission income

2,771

3,209
Fee and commission expense

(937)

(1,025)
Net fee and commission income

1,834

2,184
Net trading income

6,620

14,657
Insurance premium income

5,125

6,240
Other operating income

(126)

2,647
Other income

13,453

25,728
Total income

21,543

30,700
Insurance claims

(9,386)

(16,496)
Total income, net of insurance claims

12,157

14,204
Regulatory provisions

(2,000)

(1,325)
Other operating expenses

(7,677)

(8,892)
Total operating expenses

(9,677)

(10,217)
Trading surplus

2,480

3,987
Impairment

(866)

(2,293)
Profit before tax

1,614

1,694
Taxation

(222)

(1,414)
Profit for the period

1,392

280





Profit attributable to ordinary shareholders

1,144

256
Profit attributable to other equity holders1

189

Profit attributable to equity holders

1,333

256
Profit attributable to non-controlling interests

59

24
Profit for the period

1,392

280





Basic earnings per share

1.7p

0.4p
Diluted earnings per share

1.6p

0.4p
1
The profit after tax attributable to other equity holders of 189million (nine months to 30September 2013: nil) is offset in reserves by a tax credit attributable to ordinary shareholders of 46million.


SUMMARY CONSOLIDATED BALANCE SHEET (UNAUDITED)


At
30Sept
2014

At
31Dec
2013


million

million
Assets




Cash and balances at central banks

46,991

49,915
Trading and other financial assets at fair value through profit or loss

153,654

142,683
Derivative financial instruments

32,715

33,125
Loans and receivables:




Loans and advances to banks

21,401

25,365
Loans and advances to customers

492,744

495,281
Debt securities

1,292

1,355


515,437

522,001
Available-for-sale financial assets

52,594

43,976
Other assets

54,974

55,330
Total assets

856,365

847,030
Liabilities




Deposits from banks

11,154

13,982
Customer deposits

445,389

441,311
Trading and other financial liabilities at fair value through profit or loss

66,175

43,625
Derivative financial instruments

30,741

30,464
Debt securities in issue

79,345

87,102
Liabilities arising from insurance and investment contracts

112,621

110,758
Subordinated liabilities

25,220

32,312
Other liabilities

38,018

48,140
Total liabilities

808,663

807,694




Shareholders' equity

41,179

38,989
Other equity instruments

5,329

Non-controlling interests

1,194

347
Total equity

47,702

39,336
Total equity and liabilities

856,365

847,030


APPENDIX 1
RECONCILIATION BETWEEN STATUTORY AND UNDERLYING BASIS RESULTS
The tables below set out a reconciliation from the statutory results to the underlying basis results, the principles of which are set out on the inside front cover.




Removal of:


Nine months to 30September2014

Lloyds
Banking
Group
statutory
Acquisition
related and
other items1
Volatility
relating to the
insurance
business
Insurance
gross up
Legal and
regulatory
provisions2
Fair value
unwind
Underlying
basis


m

m

m

m

m

m

m















Net interest income

8,090

5


278


465

8,838
Other income, net of insurance claims

4,067

1,071

197

(372)


97

5,060
Total income
12,157

1,076

197

(94)


562

13,898
Operating expenses3

(9,677)

646


94

2,000

30

(6,907)
Impairment

(866)

(30)




(121)

(1,017)
Profit before tax

1,614

1,692

197


2,000

471

5,974




Removal of:


Nine months to 30September2013

Lloyds
Banking
Group
statutory
Acquisition
related and
other items4
Volatility
relating to the
insurance
business
Insurance
gross up
Legal and
regulatory
provisions2
Fair value
unwind
Underlying
basis


m

m

m

m

m

m

m















Net interest income

4,972

(16)

5

2,576


430

7,967
Other income, net of insurance claims

9,232

112

(642)

(2,699)


49

6,052
Total income

14,204

96

(637)

(123)


479

14,019
Operating expenses3

(10,217)

1,618


123

1,325

41

(7,110)
Impairment

(2,293)

239




(429)

(2,483)
Profit (loss) before tax

1,694

1,953

(637)


1,325

91

4,426
1
Comprises the effects of asset sales (gain of 79million), volatile items (gain of 214million), liability management (loss of 1,378million), Simplification costs related to severance, IT and business costs of implementation (650million), TSB costs (414million), the past service pensions credit (710million) and the amortisation of purchased intangibles (253million).
2
Comprises the payment protection insurance provision (nine months to 30September 2014: 1,500million; nine months to 30September 2013: 1,250million) and other regulatory provisions (nine months to 30September 2014: 500million; nine months to 30September 2013: 75million).
3
On an underlying basis, this is described as total costs.
4
Comprises the effects of asset sales (gain of 149million), volatile items (loss of 410million), liability management (loss of 97million), Simplification costs related to severance, IT and business costs of implementation (608million), TSB costs (586million), the past service pensions charge (104million) and the amortisation of purchased intangibles (297million).


APPENDIX 2
QUARTERLY UNDERLYING BASIS INFORMATION


Quarter
ended
30Sept
2014

Quarter
ended
30June
2014

Quarter
ended
31Mar
2014


m

m

m







Net interest income

3,034

2,993

2,811
Other income

1,612

1,730

1,718
Total income

4,646

4,723

4,529
Total costs

(2,232)

(2,377)

(2,298)
Impairment

(259)

(327)

(431)
Underlying profit

2,155

2,019

1,800
Asset sales and other items

(186)

(1,687)

120
Simplification and TSB costs

(236)

(362)

(466)
Legacy provisions

(900)

(1,100)

Other items

(82)

624

(85)
Statutory profit (loss)

751

(506)

1,369







Banking net interest margin

2.51%

2.48%

2.32%
Asset quality ratio

0.20%

0.26%

0.35%
Return on risk-weighted assets

3.37%

3.09%

2.71%
Cost:income ratio

48.0%

50.3%

50.7%


Quarter
ended
31Dec
2013

Quarter
ended
30Sept
2013

Quarter
ended
30 June
2013

Quarter
ended
31Mar
2013


m

m

m

m









Net interest income

2,918

2,761

2,653

2,552
Other income

1,754

1,776

1,872

1,857
St. James's Place

114

18

50

480
Total income

4,786

4,555

4,575

4,889
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 and other items

(468)

(709)

(176)

1,073
Simplification and TSB costs

(323)

(408)

(377)

(409)
Legacy provisions

(2,130)

(750)

(575)

Other 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 ratio1

54.0%

52.0%

51.7%

53.6%
1
Excluding impact of St. James's Place.

CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Douglas Radcliffe
Interim Investor Relations Director
020 7356 1571
douglas.radcliffe@finance.lloydsbanking.com
Mike Butters
Director of Investor Relations
020 7356 1187
mike.butters@finance.lloydsbanking.com
Duncan Heath
Director of Investor Relations
020 7356 1585
duncan.heath@finance.lloydsbanking.com
CORPORATE AFFAIRS
Matthew Young
Group Corporate Affairs Director
020 7356 2231
matt.young@lloydsbanking.com
Ed Petter
Group Media Relations Director
020 8936 5655
ed.petter@lloydsbanking.com
Copies of this interim management statement may be obtained from:
Investor Relations, Lloyds Banking Group plc, 25GreshamStreet, London EC2V 7HN
The statement can also be found on the Group's website - www.lloydsbankinggroup.com
Registered office: Lloyds Banking Group plc, The Mound, Edinburgh EH1 1YZ
Registered in Scotland no. SC95000

This information is provided by RNS
The company news service from the London Stock Exchange
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