REG - Lloyds Banking Group - 2022 Full Year Results
22/02/2023 07:00
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RNS Number : 6306Q Lloyds Banking Group PLC 22 February 2023
2022 Results
News Release
Lloyds Banking Group plc
22 February 2023
CONTENTS
Page
Results for the (#Section3) full (#Section3) -year (#Section3) 1
Income statement - underlying basis and key balance sheet metrics (#Section4) 4
Quarterly information (#Section6) 6
Balance sheet analysis (#Section7) 7
Group results (#Section8) - (#Section4) statutory basis (#Section8) 8
Group Chief Executive's statement (#Section11) 10
Summary of Group results (#30cdcec8948d4546b8952b458e1dfe0d_31) 13
Segmental analysis - underlying basis (#Section38) 23
Divisional results (#3073145fb2054de4afd74c20f787d3c4_31)
Retail (#Section40) 24
Commercial Banking (#Section41) 26
Insurance, Pensions and Investments (#Section42) 28
Equity Investments and Central Items (#Section43) 33
Alternative performance measures (#Section44) 34
Risk management (#Section50)
Capital risk (#Section51) 39
Credit risk (#Section57) 46
Funding and liquidity risk (#Section70) 61
Interest rate sensitivity (#Section71) 61
Statutory information
Condensed consolidated financial statements (#Section72) 63
Consolidated income statement (#Section74) 63
Consolidated statement of comprehensive income (#Section75) 64
Consolidated balance sheet (#Section76) 65
Consolidated statement of changes in equity (#Section77) 67
Consolidated cash flow statement (#Section78) 69
Notes to the condensed consolidated financial statements (#Section79) 70
Key dates 82
Basis of presentation (#Section91) 82
Forward looking statements (#Section92) 83
Contacts (#Section93) 84
Alternative performance measures
The Group uses a number of alternative performance measures, including
underlying profit, in the description of its business performance and
financial position. These measures are labelled with a superscript 'A'
throughout this document. Further information on these measures is set out on
page 34. Unless otherwise stated, commentary on pages 1 and 2 and on pages 10
to 12 is given on an underlying basis.
Forward looking statements
This news release contains forward looking statements. For further details,
reference should be made to page 83.
RESULTS FOR THE FULL YEAR
"While the operating environment has changed significantly over the last year,
the Group has delivered a robust financial performance with strong income
growth, continued franchise strength and strong capital generation, enabling
increased capital returns for shareholders.
A year ago we announced our ambitious new strategy with the aim of growing our
business and deepening relationships with our customers, meeting more of their
financial needs. We have made a good start to delivery and remain confident in
our ability to deliver for all stakeholders.
We know that the current environment continues to be challenging for many
people and have mobilised the organisation to further support our customers.
Our purpose-driven strategy is more relevant now than ever before. We remain
committed to Helping Britain Prosper and helping the country recover from the
current economic uncertainties.
We continue to believe our strategy will create higher, more sustainable
returns, as reflected in our enhanced guidance. We are excited about the
opportunities ahead."
Charlie Nunn, Group Chief Executive
Good start to our new strategy with early evidence of delivery
• Significant additional support for customers and colleagues given cost
of living pressure
• Changing environment supports the strategic business case.
Purpose-driven strategy will enable enhanced customer support whilst
delivering efficient growth and diversification. Strategic investment of £0.9
billion in 2022
• Confidence building in strategic financial benefits with early momentum;
£0.3 billion of gross cost saves(1)
• New organisational structure, leadership team and operating model
implemented to deliver change more effectively
• Acquisition of Tusker, a vehicle management and leasing company focused
on electric and low emissions vehicles, further developing the Group's Motor
business and aligned to our sustainability ambitions
• Supporting the transition to a low carbon economy with new sector-based
2030 emissions reduction targets, a new net zero ambition for our supply
chain, alongside launching our first Group climate transition plan(2)
Robust financial performance and continued business momentum
• Statutory profit before tax of £6.9 billion (2021: £6.9 billion), with
higher net income and lower total costs offset by impairment charges as a
result of the revised economic outlook (versus a significant write-back in
2021)
• Net income of £18.0 billion, up 14 per cent, supported by continued
recovery in customer activity and UK Bank Rate changes, alongside continued
low operating lease depreciation
• Underlying net interest income up 18 per cent, primarily driven by a
stronger banking net interest margin of 2.94 per cent in the year (3.22 per
cent in the fourth quarter) and increased average interest-earning assets
• Other income of £5.2 billion, 4 per cent higher, building our
confidence in growth potential. The fourth quarter included a £0.2 billion
benefit from insurance assumption and methodology changes
• Operating costs of £8.8 billion, up 6 per cent compared to 2021 and in
line with guidance, reflecting stable business-as-usual costs despite
inflationary pressures, alongside higher planned strategic investment and new
business costs. Remediation of £0.3 billion, down 80 per cent in the year
• Underlying profit before impairment up 46 per cent to £9.0 billion in
the year (with £2.4 billion in the fourth quarter), as a result of solid net
income growth
• Asset quality remains strong and the portfolio well-positioned in the
context of cost of living pressures. Underlying impairment charge of £1.5
billion (£0.5 billion in the fourth quarter) and an asset quality ratio of 32
basis points reflect strong observed credit performance and a deteriorating
economic outlook, partly offset by COVID-19 releases
Continued franchise growth and increased capital returns
• Loans and advances to customers at £454.9 billion were up £6.3 billion
in the year, with continued growth in the open mortgage book
• Customer deposits of £475.3 billion down £1.0 billion in 2022, with
Retail current account growth of £2.5 billion more than offset by reductions
in Commercial Banking deposits. Loan to deposit ratio of 96 per cent continues
to provide robust funding and liquidity and potential for growth
• Strong pro forma capital generation of 245 basis points(3) in the year,
based on robust banking performance
• Pro forma CET1 ratio of 14.1 per cent(4) after capital distributions and
further pension contributions, remaining ahead of the ongoing target of
c.12.5 per cent, plus a management buffer of c.1 per cent
• The Board has recommended a final ordinary dividend of 1.60 pence per
share, resulting in a total ordinary dividend for 2022 of 2.40 pence per
share, up 20 per cent on prior year, and in line with the Group's progressive
and sustainable ordinary dividend policy
• Given the Group's strong capital position, the Board has also announced
its intention to implement an ordinary share buyback programme of up to £2.0
billion
• Total capital returns in respect of 2022 of up to £3.6 billion, are
equivalent to more than 10 per cent(5) of the Group's market capitalisation
value
2023 Guidance
Based on our current macroeconomic assumptions, for 2023 the Group expects:
• Banking net interest margin to be greater than 305 basis points
• Operating costs to be c.£9.1 billion
• Asset quality ratio to be c.30 basis points
• Return on tangible equity to be c.13 per cent
• Capital generation to be c.175 basis points(6)
2024 and 2026 guidance
Based on the expected macroeconomic environment, the Group's strategy and
investment and reflecting our growth potential, efficiency and the
capabilities of our people, technology and data, the Group has enhanced its
medium and longer-term guidance:
• Operating costs now expected to be c.£9.2 billion in 2024, with a
cost:income ratio of less than 50 per cent by 2026
• Asset quality ratio now expected to be c.30 basis points in 2024
• Return on tangible equity now expected to be c.13 per cent in 2024 and
greater than 15 per cent by 2026
• Additional revenues from strategic initiatives of c.£0.7 billion by
2024 and c.£1.5 billion by 2026
• Risk-weighted assets to be between £220 billion and £225 billion at
the end of 2024
• Capital generation now expected to be c.175 basis points in 2024,
increasing to greater than 200 basis points by 2026(6)
• The Group will maintain its progressive and sustainable ordinary
dividend policy, whilst the Board expects to pay down to its target CET1 ratio
by the end of 2024
Although the macroeconomic outlook remains uncertain, our people, business
model and financial strength ensure that we can continue to support our
customers and Help Britain Prosper. Our purpose-driven strategy is more
relevant now than ever before and our experience in the last year reinforces
our belief that successful strategic delivery will create a more sustainable
business and deliver increased shareholder returns in the medium to
longer-term.
(1) Includes savings from both business-as-usual and strategic initiatives.
(2 ) Published in our Environmental Sustainability Report 2022 which can
be found at www.lloydsbankinggroup.com/investors/esg-information.html.
(3) Excluding regulatory changes on 1 January 2022, ordinary dividends,
variable pension contributions and the impact of the announced ordinary share
buyback programme. Inclusive of the dividend received from the Insurance
business in February 2023.
(4) 31 December 2022 reflects the dividend received from Insurance in
February 2023 and the full impact of the announced share buyback, but excludes
the impact of the phased unwind of IFRS 9 relief on 1 January 2023.
(5) Market capitalisation as at 17 February 2023.
(6) Excluding capital distributions. Inclusive of dividends received from
the Insurance business.
INCOME STATEMENT - UNDERLYING BASIS(A) AND KEY BALANCE SHEET METRICS
2022 2021 Change
£m
£m %
Underlying net interest income 13,172 11,163 18
Underlying other income 5,249 5,060 4
Operating lease depreciation (373) (460) 19
Net income 18,048 15,763 14
Operating costs(1) (8,835) (8,312) (6)
Remediation (255) (1,300) 80
Total costs (9,090) (9,612) 5
Underlying profit before impairment 8,958 6,151 46
Underlying impairment (charge) credit(1) (1,510) 1,385
Underlying profit 7,448 7,536 (1)
Restructuring(1) (80) (452) 82
Volatility and other items (440) (182)
Statutory profit before tax 6,928 6,902
Tax expense (1,373) (1,017) (35)
Statutory profit after tax 5,555 5,885 (6)
Earnings per share 7.3p 7.5p (0.2)p
Dividends per share - ordinary 2.40p 2.00p 0.40p
Share buyback value £2.0bn £2.0bn
Banking net interest margin(A) 2.94% 2.54% 40bp
Average interest-earning banking assets(A) £452.0bn £444.6bn 2
Cost:income ratio(A,1) 50.4% 61.0% (10.6)pp
Asset quality ratio(A,1) 0.32% (0.31)%
Return on tangible equity(A) 13.5% 13.8% (0.3)pp
(A) See page 82.
(1) 2021 comparatives have been presented to reflect the new cost basis,
consistent with the current period. See page 34.
( )
At 31 Dec At 31 Dec Change
2022
2021
%
Loans and advances to customers £454.9bn £448.6bn 1
Customer deposits £475.3bn £476.3bn
Loan to deposit ratio(A) 96% 94% 2pp
CET1 ratio 15.1% 17.3% (2.2)pp
Pro forma CET1 ratio(A,1) 14.1% 16.3% (2.2)pp
Total capital ratio 19.7% 23.6% (3.9)pp
MREL ratio 31.7% 37.2% (5.5)pp
UK leverage ratio 5.6% 5.8% (0.2)pp
Risk-weighted assets £210.9bn £196.0bn 8
Wholesale funding(2) £100.3bn £93.1bn 8
Liquidity coverage ratio(2) 144% 135% 9pp
Tangible net assets per share(A) 51.9p 57.5p (5.6)p
(1 ) 31 December 2022 reflects the dividend received from Insurance in
February 2023 and the full impact of the announced share buyback, but excludes
the impact of the phased unwind of IFRS 9 relief on 1 January 2023. The
31 December 2021 comparative reflects the dividend received from Insurance in
February 2022 and the full impact of the share buyback in respect of 2021 that
completed in 2022, but excludes the impact of regulatory changes that came
into effect on 1 January 2022.
(2) Wholesale funding includes significant risk transfer securitisations
issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7
billion); the comparative has been presented on a consistent basis. The
liquidity coverage ratio is calculated as a simple average of month-end
observations over the previous 12 months.
QUARTERLY INFORMATION(A)
Quarter Quarter ended Quarter ended Quarter Quarter Quarter Quarter Quarter
30 Sep 2022
30 Jun 2022
ended
£m
£m ended ended ended ended ended
31 Dec 31 Mar 31 Dec 30 Sep 30 Jun 31 Mar
2022 2022 2021 2021 2021 2021
£m £m £m £m £m £m
Underlying net interest income 3,643 3,394 3,190 2,945 2,893 2,852 2,741 2,677
Underlying other income 1,438 1,282 1,268 1,261 1,307 1,336 1,282 1,135
Operating lease depreciation (78) (82) (119) (94) (78) (111) (123) (148)
Net income 5,003 4,594 4,339 4,112 4,122 4,077 3,900 3,664
Operating costs(1) (2,399) (2,187) (2,151) (2,098) (2,246) (2,013) (2,008) (2,045)
Remediation (166) (10) (27) (52) (775) (100) (360) (65)
Total costs (2,565) (2,197) (2,178) (2,150) (3,021) (2,113) (2,368) (2,110)
Underlying profit before impairment 2,438 2,397 2,161 1,962 1,101 1,964 1,532 1,554
Underlying impairment (charge) credit(1) (465) (668) (200) (177) 532 119 374 360
Underlying profit 1,973 1,729 1,961 1,785 1,633 2,083 1,906 1,914
Restructuring(1) (11) (22) (23) (24) (418) (24) 6 (16)
Volatility and other items (203) (199) 100 (138) (247) (30) 95 -
Statutory profit before tax 1,759 1,508 2,038 1,623 968 2,029 2,007 1,898
Tax (expense) credit (239) (299) (416) (419) (548) (429) 461 (501)
Statutory profit after tax 1,520 1,209 1,622 1,204 420 1,600 2,468 1,397
Banking net interest margin(A) 3.22% 2.98% 2.87% 2.68% 2.57% 2.55% 2.51% 2.49%
Average interest-earning banking assets(A) £453.8bn £454.9bn £451.2bn £448.0bn £449.4bn £447.2bn £442.2bn £439.4bn
Cost:income ratio(A,1) 51.3% 47.8% 50.2% 52.3% 73.3% 51.8% 60.7% 57.6%
Asset quality ratio(A,1) 0.38% 0.57% 0.17% 0.16% (0.46)% (0.10)% (0.33)% (0.33)%
Return on tangible equity(A) 16.3% 11.9% 15.6% 10.8% 2.9% 14.5% 24.4% 13.9%
Loans and advances to customers £454.9bn £456.3bn £456.1bn £451.8bn £448.6bn £450.5bn £447.7bn £443.5bn
Customer deposits £475.3bn £484.3bn £478.2bn £481.1bn £476.3bn £479.1bn £474.4bn £462.4bn
Loan to deposit ratio(A) 96% 94% 95% 94% 94% 94% 94% 96%
Risk-weighted assets £210.9bn £210.8bn £209.6bn £210.2bn £196.0bn £200.7bn £200.9bn £198.9bn
Tangible net assets per share(A) 51.9p 49.0p 54.8p 56.5p 57.5p 56.6p 55.6p 52.4p
(1 ) 2021 comparatives have been presented to reflect the new cost basis,
consistent with the current period. See page 34.
BALANCE SHEET ANALYSIS
At 31 Dec At 30 Sep Change At 30 Jun Change At 31 Dec Change
2022
2022
2022
2021
£bn
£bn %
£bn %
£bn %
Loans and advances to customers
Open mortgage book 299.6 298.4 296.6 1 293.3 2
Closed mortgage book 11.6 12.3 (6) 13.1 (11) 14.2 (18)
Credit cards(1) 14.3 14.3 14.2 1 13.8 4
UK Retail unsecured loans 8.7 8.8 (1) 8.5 2 8.1 7
UK Motor Finance 14.3 14.2 1 14.2 1 14.0 2
Overdrafts 1.0 1.0 1.0 1.0
Retail other(2) 13.8 13.0 6 12.5 10 10.9 27
Wealth(1) 0.9 1.0 (10) 1.0 (10) 1.0 (10)
Small and Medium Businesses(1) 37.7 39.8 (5) 41.1 (8) 42.5 (11)
Corporate and Institutional Banking(1) 56.0 57.6 (3) 55.7 1 50.0 12
Central items(1,3) (3.0) (4.1) (27) (1.8) 67 (0.2)
Loans and advances to customers 454.9 456.3 456.1 448.6 1
Customer deposits
Retail current accounts 114.0 115.7 (1) 113.4 1 111.5 2
Retail relationship savings accounts 166.3 165.7 165.8 164.5 1
Retail tactical savings accounts 16.1 16.2 (1) 16.9 (5) 16.8 (4)
Wealth(1) 14.4 14.9 (3) 14.9 (3) 15.6 (8)
Commercial Banking deposits 163.8 170.2 (4) 166.7 (2) 167.5 (2)
Central items(1) 0.7 1.6 (56) 0.5 40 0.4 75
Total customer deposits 475.3 484.3 (2) 478.2 (1) 476.3
Total assets 877.8 892.9 (2) 890.4 (1) 886.6 (1)
Total liabilities 830.3 846.5 (2) 840.3 (1) 833.4
Ordinary shareholders' equity 42.0 40.0 5 44.4 (5) 47.1 (11)
Other equity instruments 5.3 6.2 (15) 5.5 (4) 5.9 (10)
Non-controlling interests 0.2 0.2 0.2 0.2
Total equity 47.5 46.4 2 50.1 (5) 53.2 (11)
Ordinary shares in issue, excluding own shares 66,944m 67,464m (1) 68,702m (3) 70,996m (6)
(1 ) The portfolios shown reflect the new organisation structure;
comparatives have been presented on a consistent basis. See page 82.
(2 ) Primarily Europe.
(3 ) Includes central fair value hedge accounting adjustments.
GROUP RESULTS - STATUTORY BASIS
Summary income statement 2022 2021 Change
£m £m %
Net interest income 13,957 9,366 49
Other income (8,149) 28,078
Total income(1) 5,808 37,444 (84)
Insurance claims and changes in insurance and investment contract 12,401 (21,120)
liabilities(1)
Total income, net of insurance claims and changes in insurance and investment 18,209 16,324 12
contract liabilities
Operating expenses (9,759) (10,800) 10
Impairment (charge) credit (1,522) 1,378
Profit before tax 6,928 6,902
Tax expense (1,373) (1,017) (35)
Profit for the year 5,555 5,885 (6)
Profit attributable to ordinary shareholders 5,021 5,355 (6)
Profit attributable to other equity holders 438 429 2
Profit attributable to non-controlling interests 96 101 (5)
Profit for the year 5,555 5,885 (6)
Ordinary shares in issue (weighted-average - basic) 68,847m 70,937m (3)
Basic earnings per share 7.3p 7.5p (0.2)p
(1 ) Includes income and expense attributable to the policyholders of the
Group's long-term assurance funds that materially offset in arriving at profit
before tax. These can, depending on market movements, lead to significant
variances on a statutory basis in total income and insurance claims and
changes in insurance and investment contract liabilities from one period to
the next.
( )
Summary balance sheet At 31 Dec 2022 At 31 Dec Change
£m 2021 %
£m
Assets
Cash and balances at central banks 91,388 76,420 20
Financial assets at fair value through profit or loss 180,609 206,771 (13)
Derivative financial instruments 24,753 22,051 12
Financial assets at amortised cost 520,322 517,156 1
Financial assets at fair value through other comprehensive income 23,154 28,137 (18)
Other assets 37,603 35,990 4
Total assets 877,829 886,525 (1)
Liabilities
Deposits from banks 7,266 7,647 (5)
Customer deposits 475,331 476,344
Repurchase agreements at amortised cost(1) 48,596 31,125 56
Financial liabilities at fair value through profit or loss 17,755 23,123 (23)
Derivative financial instruments 24,042 18,060 33
Debt securities in issue 73,819 71,552 3
Liabilities arising from insurance and investment contracts 149,868 168,463 (11)
Other liabilities 22,901 23,951 (4)
Subordinated liabilities 10,730 13,108 (18)
Total liabilities 830,308 833,373
Total equity 47,521 53,152 (11)
Total equity and liabilities 877,829 886,525 (1)
(1 ) Repurchase agreements at amortised cost, previously included within
other liabilities, are now shown separately; comparatives have been presented
on a consistent basis.
GROUP CHIEF EXECUTIVE'S STATEMENT
Throughout 2022, we have continued to deliver on our purpose of Helping
Britain Prosper, core to everything we do, whilst creating a more sustainable
and inclusive future for people and businesses. Last year we announced our
ambitious new strategy with the aim of growing our business and deepening
relationships with our customers, meeting more of their financial needs. While
the operating environment has changed significantly since then, our
purpose-driven strategy is more relevant now than ever before. Based on
significant strategic action we have made a good start and are seeing early
evidence of delivery. We believe our strategy will create higher more
sustainable returns, as reflected in our enhanced guidance and are excited
about the opportunities ahead.
During the year, the Group delivered a robust financial performance with
continued income growth supported by higher interest rates and solid business
volumes. Costs were in line with expectations despite ongoing inflationary
pressures. As a result of the Group's performance and strong pro forma capital
generation of 245 basis points in the year, the Board has recommended a final
ordinary dividend of 1.60 pence per share, resulting in a total dividend for
the year of 2.40 pence, an increase of 20 per cent on prior year and in line
with our progressive and sustainable ordinary dividend policy. In addition,
the Group has announced a share buyback programme of up to £2.0 billion,
resulting in total capital returns of up to £3.6 billion, equivalent to more
than 10 per cent of the Group's market capitalisation value.
We know that the current environment continues to be challenging for many
people and have mobilised the organisation to further support our customers.
We are committed to maintaining support for our customers, clients and
colleagues in the current environment and have invested in deep capabilities
to facilitate this. This includes training more than 4,600 colleagues to
provide financial assistance to individuals and businesses, build financial
resilience to face cost of living challenges and support customers with
tailored products if needed. We also saw over 5 million registrations for our
Your Credit Score tool, leveraging our digital strengths to help customers
take greater control of their own finances. For our colleagues, we provided
additional payments in August and December 2022 and designed a new pay deal
for 2023, focused on our lower paid colleagues, to provide greater protection
and certainty.
Robust financial performance with ongoing strength in our customer franchise
In 2022, we delivered a robust financial performance, with statutory profit
before tax of £6.9 billion. Underlying profit before impairment of
£9.0 billion was up 46 per cent on 2021, including net income of £18.0
billion, driven by increased average interest-earning assets, a strengthened
banking net interest margin, continued recovery in other income and lower
operating lease depreciation. Cost discipline was sustained, with operating
costs of £8.8 billion, up 6 per cent and in line with guidance, reflecting
stable business-as-usual costs and higher planned strategic investment and new
businesses. We saw strong observed asset quality with sustained low levels of
new to arrears and very modest deterioration in observed credit metrics.
Underlying asset quality remains strong, despite the weaker macroeconomic
environment.
The Group also benefitted from continued balance sheet growth during the year.
Loans and advances to customers were up £6.3 billion at £454.9 billion.
This included continued growth of £6.3 billion in the open mortgage book
(£1.2 billion of which was in the fourth quarter), alongside higher retail
unsecured loan and credit card balances. Commercial Banking balances increased
by £1.2 billion during the year due to attractive growth opportunities in
the Corporate and Institutional Banking portfolio, partly offset by repayments
of government-backed lending. The Group also saw growth in its open book
investments, with over £8 billion net new money in the period(1), despite
difficult market conditions. Customer deposits decreased by £1.0 billion from
the end of 2021 to £475.3 billion, with Retail deposits up £2.4 billion in
the period, including current account balances up £2.5 billion, more than
offset by reductions in Commercial Banking deposits. Group deposits are up
c.£65 billion since the end of 2019.
Significant progress on serving all stakeholders, with a good start to our new
strategy
We have a purpose-driven strategy. Core to this is our focus on building an
inclusive society and supporting the transition to a low carbon economy, while
creating new opportunities for our future growth. To build a more inclusive
society we have supported £2.1 billion of funding to the social housing
sector and lent £14.3 billion to first time buyers in the year. We have also
helped around 185,000 small businesses boost their digital capability and
technology adoption in the year. Importantly, we are also on track to reach
our gender and ethnic diversity ambitions by 2025 supported by delivering a
race education programme to our workforce in 2022.
To support the transition to a low carbon economy we have funded over £13
billion of green and sustainable financing(2,3) in 2022 and made around £12
billion of discretionary investments in climate-aware strategies through
Scottish Widows. We have also created a new partnership with Octopus Energy to
support in retrofitting the UK housing stock and launched our first Group
climate transition plan which you can find in our Environmental Sustainability
Report.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
Despite external developments and challenges, our strategy remains the right
one. It is more important than ever to deliver against our purpose-driven
outcomes that benefit all our stakeholders. We are responding to the economic
environment by increasing support to customers and colleagues, whilst
accelerating our efficiency actions to offset the significant inflationary
pressures in the business. During 2022, the Group invested £0.9 billion of
incremental strategic investment, delivering gross cost savings of £0.3
billion so far. We have extended our ambition for savings even further,
increasing our 2024 gross cost savings target by an additional £0.2 billion.
Driving revenue growth and diversification
We have made good progress on building deeper customer relationships, as well
as innovating and broadening our product offerings and improving the ease with
which our customers can access them. We remain the UK's largest digital bank
and have continued to invest in personalisation and digitisation, resulting in
a 15 per cent increase in daily logons and growing our digitally active users
by 8 per cent to 19.8 million. We have also expanded our presence in areas
where we are under-represented. For example, we grew our protection market
share by around 1 percentage point(1). In our new mass affluent business, we
saw an increase in banking balances(4) of over 5 per cent and launched new,
tailored banking products, including packaged bank accounts and credit cards,
as well as enhanced direct to consumer investments. We are building capability
as we look to launch our differentiated, digital first model in earnest later
this year. In February 2023, the Group announced the acquisition of Tusker, a
vehicle management and leasing company focused on electric and low emissions
vehicles. This will further develop the Group's Motor business in a way that
is clearly aligned with the organisation's purpose and sustainability
ambitions.
In SME, we continue to digitise and diversify our business, with positive
early momentum demonstrated by a more than 20 per cent growth in new merchant
services clients. We are also broadening our product capabilities with
strategic fintech partnerships where appropriate. Alongside, our targeted
Corporate and Institutional offering delivered c.£8 billion of green and
sustainable financing(2), driven by purpose-driven growth with businesses
transitioning to net zero. We are meeting more needs for existing clients and
growing non-lending income, supported by investment in product capabilities.
This is reflected in a c.20 per cent growth in our percentage share of wallet
for foreign exchange trading.
Investing in enablers to improve delivery
Maintaining discipline with regards to cost and capital efficiency is critical
to our strategy. To this end, increased customer engagement and continued
investment in digital propositions enable us to optimise the cost-to-serve to
customers by, for example, streamlining our branch network, whilst reducing
our office footprint by c.12 per cent. We remain committed to identifying
further efficiencies to minimise the net cost impact from inflationary
pressures and create the necessary capacity for investment. With regards to
capital efficiency, we have demonstrated RWA discipline during the year whilst
pursuing growth in capital-lite and fee generating businesses.
In order to deliver our strategy, we are focused on maximising the potential
of our people, technology and data, the key enablers. For our people, efforts
in 2022 have focused on positioning the organisation for future success. We
have established an experienced, new leadership team with significant
capabilities in strategic and digital delivery, alongside a flatter executive
structure aligned with our strategic priorities. The strengthening of our
senior leadership team is also delivering on our inclusion and diversity
objectives. In addition, we restructured our business and technology teams to
set up a new platform-based operating model that brings together expertise in
cross cutting, multi-functional teams to now drive greater accountability and
collaboration and help to effect more quickly and efficiently. Finally, we
have continued to invest in the talent, skills and capabilities needed to
deliver our long-term growth strategy with our approach extending to
consideration of international in-sourcing opportunities and how we work with
third parties.
We are investing in modernising our technology estate, improving resilience
and operational agility. During 2022 we decommissioned 5 per cent of our
legacy applications, in line with our target of a greater than 15 per cent
reduction by the end of 2024. As part of our effort to grow the role of data
in our business, we reduced our data centre estate by 10 per cent in 2022. We
also successfully ingested the first significant tranche of data onto Google's
public cloud platform and continue to target 20 per cent of our applications
to be on public and private cloud in 2024. Our experience in 2022 has enhanced
our conviction in the fundamental importance of our technology and data
transformation programme for the long-term success of the Group.
Through our purpose-driven strategy we will continue to drive revenue growth
and diversification across our main businesses, unlocking opportunities
through our consumer and commercial franchises. This growth will in turn
leverage the Group's cost and capital efficiency, building on our strong
foundations. Critical to this is our intention to maximise the potential of
our people, technology and data in supporting our ambitions.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
Outlook
Although the macroeconomic outlook remains uncertain, our people, business
model and financial strength ensure that we can continue to support our
customers and Help Britain Prosper. Our purpose-driven strategy is more
relevant now than ever before and our experience in the last year reinforces
our belief that successful strategic delivery will create a more sustainable
business and deliver increased shareholder returns in the medium to
longer-term. Based on our current macroeconomic assumptions the Group expects:
2023 guidance
• Banking net interest margin to be greater than 305 basis points
• Operating costs to be c.£9.1 billion
• Asset quality ratio to be c.30 basis points
• Return on tangible equity to be c.13 per cent
• Capital generation to be c.175 basis points
2024 and 2026 guidance
• Operating costs now expected to be c.£9.2 billion in 2024, with a
cost:income ratio of less than 50 per cent by 2026
• Asset quality ratio now expected to be c.30 basis points in 2024
• Return on tangible equity now expected to be c.13 per cent in 2024 and
greater than 15 per cent by 2026
• Additional revenues from strategic initiatives of c.£0.7 billion by
2024 and c.£1.5 billion by 2026
• Risk-weighted assets to be between £220 billion and £225 billion at
the end of 2024
• Capital generation now expected to be c.175 basis points in 2024,
increasing to greater than 200 basis points by 2026
• The Group will maintain its progressive and sustainable ordinary
dividend policy, whilst the Board expects to pay down to its target CET1 ratio
by the end of 2024
(1) See page 25.
(2) See page 26.
(3) See page 21.
(4 ) Banking balances calculated as the absolute total of Retail
customers, excluding Motor.
SUMMARY OF GROUP RESULTS
Robust financial performance and continued business momentum with increased
capital returns
Statutory results
The Group's statutory profit before tax for the year was £6,928 million, £26
million higher than 2021. The benefit of higher income and lower operating
expenses was offset by the impact of an impairment charge (compared to a
credit in the prior year), in part reflecting the deterioration in the
economic outlook. Statutory profit after tax was £5,555 million
(2021: £5,885 million, which included the benefit of a deferred tax
remeasurement). In the fourth quarter of the year, statutory profit before tax
was £1,759 million and statutory profit after tax was £1,520 million, an
increase on the third quarter of 17 per cent and 26 per cent respectively, as
a result of higher income and a lower impairment charge, following the
deterioration in the macroeconomic outlook recognised during the third
quarter.
The Group's statutory income statement includes income and expenses
attributable to the policyholders of the Group's long-term assurance funds.
These items materially offset in arriving at profit before tax but can,
depending on market movements, lead to significant variances on a statutory
basis between total income and insurance claims and changes in insurance and
investment contract liabilities from one period to the next. In 2022, due to
deteriorating market conditions, the Group recognised losses on policyholder
investments within total income, which were materially offset by the
corresponding reduction in insurance and investment contract liabilities,
recognised as a decrease in insurance claims and changes in insurance and
investment contract liabilities expense and a decrease in the amounts payable
to unit holders in the Group's consolidated open-ended investment companies,
recognised within net interest income.
Total statutory income net of insurance claims and changes in insurance and
investment contract liabilities for the year was £18,209 million, an
increase of 12 per cent on 2021, reflecting continued recovery in customer
activity and benefits from UK Bank Rate changes.
The Group maintained its focus on cost management, whilst increasing strategic
investment as planned. Operating expenses decreased due to significantly lower
remediation and restructuring costs and a reduced charge for operating lease
depreciation. Remediation costs, principally relating to pre-existing
programmes, were significantly lower than in 2021. Restructuring costs in the
year included costs associated with the integration of Embark, whereas the
prior year included a significant software write-off as the Group invested in
new technology and systems infrastructure. The reduced operating lease
depreciation charge reflected continued strength in used car prices, combined
with the ongoing impact of a reduced, but stabilising, Lex fleet size, given
industry-wide supply constraints in the new car market.
The impairment charge of £1,522 million in 2022, compared to a net credit of
£1,378 million in 2021, reflected strong observed credit performance, but was
impacted by a deteriorating economic outlook partly offset by COVID-19
releases.
The Group recognised a tax expense of £1,373 million in the year, compared to
a tax expense of £1,017 million in 2021. The tax expense in 2022 included a
£222 million benefit in relation to tax deductibility of provisions made in
2021, and a £53 million expense (2021: £954 million benefit) arising on
the remeasurement of deferred tax assets.
Loans and advances to customers increased by 1 per cent on 31 December 2021 to
£454.9 billion, including growth of £6.3 billion in the open mortgage
book, alongside higher retail unsecured loan and credit card balances.
Commercial Banking balances increased by £1.2 billion due to attractive
growth opportunities in the Corporate and Institutional Banking portfolio,
partly offset by repayments of government-backed lending. Customer deposits
have decreased by £1.0 billion since the end of 2021, to £475.3 billion.
This included Retail current account growth of £2.5 billion, more than offset
by Commercial Banking deposit reductions of £3.7 billion. In 2022, due to
market conditions, a reduction was seen in policyholder investments, primarily
within financial assets at fair value through profit or loss. This was
materially offset by a corresponding reduction in the related insurance and
investment contract liabilities.
Total equity reduced during the year as the Group's profits were more than
offset by reductions in the cash flow hedging reserve due to the rising rate
environment, the impact of pension scheme remeasurements given market
conditions and the impact of in-year distributions, including the share
buyback programme that was announced in February 2022 in respect of 2021. This
programme completed on 11 October 2022, with c.4.5 billion ordinary shares
repurchased.
SUMMARY OF GROUP RESULTS (continued)
Underlying results(A)
The Group's underlying profit for the year was £7,448 million, compared to
£7,536 million for 2021. Growth in net income and reduced total costs were
offset by an increased impairment charge, largely as a result of a
deterioration in the economic outlook for the UK, versus the underlying
impairment credit in 2021. Underlying profit before impairment for the period
was up 46 per cent to £8,958 million, driven by net income growth and lower
remediation costs. In the fourth quarter, underlying profit before impairment
was £2,438 million, up 2 per cent on the third quarter.
Net income(A)
2022 2021 Change
£m
£m %
Underlying net interest income 13,172 11,163 18
Underlying other income 5,249 5,060 4
Operating lease depreciation (373) (460) 19
Net income(A) 18,048 15,763 14
Banking net interest margin(A) 2.94% 2.54% 40bp
Average interest-earning banking assets(A) £452.0bn £444.6bn 2
Net income of £18,048 million was up 14 per cent on 2021, with higher net
interest income and other income as well as a continued low charge for
operating lease depreciation.
Net interest income of £13,172 million was up 18 per cent, driven by a
stronger banking net interest margin of 2.94 per cent (2021: 2.54 per cent)
and higher average interest-earning banking assets. The net interest margin
benefitted from UK Bank Rate increases, structural hedge earnings from the
rising rate environment and continued funding and capital optimisation, partly
offset by lower mortgage margins. In the fourth quarter, the net interest
margin increased to 3.22 per cent from 2.98 per cent in the third quarter, in
part due to timing benefits from UK Bank Rate rises. Average interest-earning
banking assets were up 2 per cent compared to 2021 at £452.0 billion,
supported by continued growth in the open mortgage book. The Group now expects
the banking net interest margin for 2023 to be greater than 305 basis points.
The Group manages the risk to its earnings and capital from movements in
interest rates by hedging the net liabilities which are stable or less
sensitive to movements in rates. As at 31 December 2022, the Group's
structural hedge had an approved capacity of £255 billion (up £15 billion
on 31 December 2021). Customer deposits have increased by c.£65 billion
since the end of 2019; hedge capacity increased by £70 billion during the
same period, of which c.£45 billion came from deposit growth and c.£25
billion from investment of existing deposits. The Group continues to review
the stability of underlying deposits and their eligibility for the structural
hedge. The nominal balance of the structural hedge was £255 billion at
31 December 2022 (31 December 2021: £240 billion) with a weighted-average
duration of approximately three-and-a-half years (31 December 2021:
approximately three-and-a-half years). The Group generated £2.6 billion of
total gross income from structural hedge balances in 2022, representing growth
over the prior year (2021: £2.2 billion).
Underlying other income of £5,249 million was 4 per cent higher compared to
£5,060 million in 2021, including £1,438 million in the fourth quarter, up
12 per cent on the third quarter. This reflected improved performance across
Retail and Commercial Banking while Insurance, Pensions and Investments
(previously Insurance and Wealth) benefitted from assumption changes from the
annual basis review.
SUMMARY OF GROUP RESULTS (continued)
Within Retail, other income was up 8 per cent on prior year, including
improved current account and credit card performance. Retail other income was
up slightly in the fourth quarter. Commercial Banking was up 9 per cent
versus the prior year reflecting higher financial markets activity, also
driving growth in the fourth quarter and strong performance in transaction
banking, partly offset by lower levels of corporate financing activity.
Insurance, Pensions and Investments other income was 12 per cent higher than
the prior year. This largely reflected the impact of increased workplace
pension income and bulk annuity deals along with the inclusion of Embark
income and a benefit from assumption changes. Growth was partly offset by a
decrease in the general insurance business contribution, primarily driven by
pricing pressures and severe weather event claims of £108 million (2021: £11
million). Assumption and methodology changes of £348 million in the year
(2021: £111 million), included £229 million in the fourth quarter,
relating to updated longevity assumptions and a significant improvement in
persistency assumptions. Other income associated with the Group's equity
investments businesses, including Lloyds Development Capital, of £468 million
was £214 million lower than the previous year after particularly strong
contributions in 2021.
The Group delivered good organic growth in Insurance, Pensions and Investments
and Wealth (reported within Retail) assets under administration (AuA), with
combined £9 billion net new money(1) in open book AuA over the year. In
total, open book AuA stand at £160 billion.
Looking forward, IFRS 17 will impact the phasing of profit recognition for
insurance contracts. From the first quarter of 2023 insurance new business
revenue within other income will be spread over the period the Group provides
services to its policyholders (versus recognised up front under outgoing IFRS
4 accounting standards). Similarly, impacts from assumption changes will be
spread over the life of the relevant contracts.
Operating lease depreciation of £373 million (2021: £460 million), reflected
continued strength in used car prices, combined with the ongoing impact of a
reduced, but stabilising, Lex fleet size, given industry-wide supply
constraints in the new car market.
(1) Excludes market movements and Embark assets transferred on acquisition;
includes post acquisition Embark net flows.
Total costs(A)
2022 2021 Change
£m £m %
Operating costs(A,1) 8,835 8,312 (6)
Remediation 255 1,300 80
Total costs(A,1) 9,090 9,612 5
Cost:income ratio(A,1) 50.4% 61.0% (10.6)pp
(1) 2021 comparatives have been presented to reflect the new cost basis,
consistent with the current period. See page 34.
Cost discipline remains a core focus for the Group. The Group's cost:income
ratio was 50.4 per cent, compared to 61.0 per cent in 2021. Total costs of
£9,090 million were 5 per cent lower than in 2021 (with £2,565 million in
the fourth quarter). Within this, lower remediation costs (down 80 per cent)
were partially offset by increased operating costs of £8,835 million (up 6
per cent), reflecting higher planned strategic investment and costs in new
businesses. Business-as-usual costsA were stable, with ongoing cost discipline
in the context of inflationary pressures and increased staff payments.
Operating costs are expected to be higher in 2023 at c.£9.1 billion (2022:
£8.8 billion), given inflationary pressure and the peak of the Group's
planned strategic investment, partially mitigated by continued cost
efficiency.
In 2022 the Group recognised remediation costs of £255 million (£166 million
in the fourth quarter). These principally relate to pre-existing programmes
and are significantly lower than 2021 (£1,300 million). Within remediation
there was an additional charge of £50 million relating to HBOS Reading in the
fourth quarter. The provision held in respect of HBOS Reading continues to
reflect the Group's best estimate of its full liability, albeit uncertainties
remain.
SUMMARY OF GROUP RESULTS (continued)
Underlying impairment(A)
2022 2021(1,2) Change
£m
£m %
Charges (credits) pre-updated MES(3)
Retail 773 672 (15)
Commercial Banking 122 (357)
Other 20 (1)
915 314
Updated economic outlook
Retail 600 (1,120)
Commercial Banking 395 (579)
Other (400) -
595 (1,699)
Underlying impairment charge (credit)(A) 1,510 (1,385)
Asset quality ratio(A) 0.32% (0.31)%
(1 ) Non lending-related fraud costs, previously reported within
underlying impairment, are now included within operating costs. Comparatives
have been presented on a consistent basis.
(2) Impairment charges for Retail, Commercial Banking and Other reflect the
new organisation structure; comparatives have been presented on a consistent
basis. See page 82.
3 Impairment charges excluding the impact from updated economic outlook
taken each quarter. Coronavirus impacted restructuring cases, previously
disclosed separately, are now reported within charges pre-updated MES
(multiple economic scenarios); comparatives have been presented on a
consistent basis.
Asset quality remains strong, with sustained low levels of new to arrears and
very modest evidence of deterioration in observed credit metrics, despite the
inflationary pressures on affordability during the latter half of the year.
Underlying impairment was a net charge of £1,510 million (2021: credit of
£1,385 million), resulting in an asset quality ratio of 32 basis points.
This reflects a more normalised, but still low, pre-updated multiple economic
scenarios (MES) charge of £915 million in the year (2021: £314 million, net
of £357 million release in Commercial Banking largely driven by write-backs),
equivalent to an asset quality ratio of 20 basis points. In addition, the
Group recognised a net £595 million MES charge, including £82 million in
the fourth quarter (2021: a credit of £1,699 million), as a result of
updates to the Group's economic outlook and associated scenarios. The updated
outlook addresses risks from a higher inflation and interest rate environment
that have emerged over the year. A charge of £1,145 million relating to these
risks is partly offset by a credit of £550 million from the release of
COVID-19 judgements, including the £400 million release of the COVID-19
central adjustment.
The fourth quarter saw an impairment charge of £465 million. This included a
pre-updated MES charge of £383 million and also captures a further material
charge in Commercial Banking on a pre-existing single case. The fourth quarter
pre-updated MES charge includes additional expected credit loss (ECL)
allowance build in Stage 1 as it rolls forward, picking up the elevated
defaults expected in the fourth quarter of 2023, as well as recent observed
behaviour. The small observed increase in defaults has been partially offset
by an improvement in observed loss rates, largely within UK mortgages and
unsecured portfolios as a result of collections policy changes and enhanced
customer support initiatives.
The Group's loan portfolio continues to be well-positioned, reflecting a
prudent through-the-cycle approach to lending with high levels of security,
reflected in strong recovery performance. Observed credit performance remains
strong, with very modest evidence of deterioration and the flow of assets into
arrears, defaults and write-offs remaining at low levels and largely below
pre-pandemic levels.
SUMMARY OF GROUP RESULTS (continued)
The Group's ECL allowance increased by £0.3 billion in the fourth quarter to
£5.3 billion (31 December 2021: £4.5 billion). The ECL allowance is high
by historical standards, £1.1 billion above 31 December 2019 and assumes that
a large proportion of expected losses will crystallise over the next 12 to 18
months, before run rate losses return to around pre-pandemic levels. This
uplift in defaults is forecast given the expected deterioration across a
number of macroeconomic measures. The Group's base case predicts affordability
pressures from inflation peaking at 10.3 per cent in the first quarter of
2023, alongside UK Bank Rate peaking at 4.0 per cent, with unemployment
expected to build to 5.3 per cent in the first quarter of 2025. The economic
outlook assumptions remain similar to those of the third quarter, with some
fourth quarter ECL increases driven by models responding to updates to HPI and
GDP forecasts, and additional management judgements raised in the quarter for
affordability risks. The ECL uplift in the fourth quarter is also driven by a
material update in the individual assessment of a pre-existing single case in
Commercial Banking and model calibrations as mentioned above.
The ECL allowance continues to reflect a probability-weighted view of future
economic scenarios built out from the base case and its associated
conditioning assumptions. A 30 per cent weighting is applied to the base case,
upside and downside scenarios and a 10 per cent weighting to the severe
downside. All scenarios deteriorated during 2022 following the changes made to
the base case outlook. The probability-weighted ECL is particularly impacted
by the significance and non-linearity of losses from the severe downside
scenario. In June 2022, the Group included an adjusted severe downside
scenario to incorporate high CPI inflation and UK Bank Rate profiles and
decided to adopt this adjusted scenario to calculate the Group's ECL. Given
the increased severity of this severe downside scenario, there is a greater
proportionate increase in ECL which builds further in the fourth quarter of
2022 due to sensitivity to model calibrations and new judgements introduced
for inflationary and interest rate pressures.
Overall, management judgement adjustments have significantly reduced in the
year, reflecting the balance of risks shifting from more idiosyncratic
COVID-19 risks to broader macroeconomic risks from inflationary pressures and
rising interest rates within the Group's base case and wider economic
scenarios. Management judgements in respect of COVID-19 have been removed as
the risks have either dissipated, or are now captured in model calibrations or
other wider related judgements. Of the £0.8 billion released since
31 December 2021, £0.6 billion drives a credit to the impairment charge in
the year, as prior risks have not emerged, with the remaining £0.2 billion
now captured within ECL portfolio models, where previously distorted data or
trends have now normalised. Judgemental adjustments for risks in relation to
inflationary pressures, not deemed to be fully captured by models, are £0.2
billion at 31 December 2022. These are across Retail portfolios where the
perceived affordability risks to certain segments are adjusted, largely
through default assumptions, at customer level.
Observed portfolio performance remains strong, with impact on Stage 2 loans
and advances to customers mostly due to the effect from updated MES or model
changes driven by CRD IV regulatory requirements(1). As a result, Stage 2
loans and advances to customers increased to £66 billion (31 December 2021:
£42 billion), with 93 per cent up to date (31 December 2021: 86 per cent).
Of the £24 billion increase, £8 billion of the increase was due to changes
in credit risk measurement and modelling associated with CRD IV regulatory
requirements(1) within UK mortgages in the first half of the year. £15
billion occurred in the third quarter as a result of the updated economic
outlook reflected in the MES, largely in UK mortgages and Commercial Banking
(99 per cent of which related to up to date loans). In the fourth quarter
Stage 2 assets increased by £2 billion, all of which are up to date accounts,
largely in Retail as a result of model calibrations and additional management
judgements. Stage 3 assets were £11 billion as at 31 December 2022 (31
December 2021: £9 billion) and stable compared to 30 September 2022. The
£2 billion increase in Stage 3 assets over the year is primarily driven by
changes in credit risk measurement and modelling associated with CRD IV
regulatory requirements(1) since the end of 2021 and not reflective of
observed deterioration.
On the basis of the current economic assumptions, the Group expects the asset
quality ratio to be c.30 basis points in 2023.
(1) As previously outlined, on 1 January 2022 the Group amended its
definition of Stage 3 for UK mortgages, maintaining alignment between IFRS 9
and regulatory definitions of default. For UK mortgages, default was
previously deemed to have occurred no later than when a payment was 180 days
past due. In line with CRD IV this definition has now been reduced to 90
days, as well as including end-of-term payments on past due interest-only
accounts and any non-performing loans. Furthermore, additional assets moved to
Stage 2 given the consequential change in approach to the prediction and
modelling of up to date accounts and their likelihood of reaching the new
broader definition of default in the future. Given the accounts that moved to
Stage 2 were up to date with low probability of default, there was no material
ECL impact.
SUMMARY OF GROUP RESULTS (continued)
Restructuring, volatility and other items
2022 2021 Change
£m
£m %
Underlying profit(A) 7,448 7,536 (1)
Restructuring(1) (80) (452) 82
Volatility and other items
Market volatility and asset sales (252) 87
Amortisation of purchased intangibles (70) (70)
Fair value unwind (118) (199) 41
(440) (182)
Statutory profit before tax 6,928 6,902
Tax expense (1,373) (1,017) (35)
Statutory profit after tax 5,555 5,885 (6)
Earnings per share 7.3p 7.5p (0.2)p
Return on tangible equity(A) 13.5% 13.8% (0.3)pp
Tangible net assets per share(A) 51.9p 57.5p (5.6)p
(1) 2021 comparatives have been presented to reflect the new cost basis,
consistent with the current period. See page 34.
Restructuring costs of £80 million included costs associated with the
integration of Embark and were significantly lower than in 2021
(£452 million), which included a software write-off as the Group invested in
new technology and systems infrastructure. Since the first quarter of 2022 all
restructuring costs, with the exception of merger, acquisition and integration
costs, have been reported as part of the Group's operating costs.
Volatility and other items were a net loss of £440 million for the year,
comprising £252 million of negative market volatility and £188 million
relating to amortisation of purchased intangibles and fair value unwind.
Market volatility included negative insurance volatility of £148 million due
to rising interest rates and wider bond spreads partially offset by inflation
(net of hedging), in addition to negative banking volatility of £46 million.
This compares to gains during 2021 of £87 million, including positive
insurance and banking volatility, partly offset by liability management losses
and other statutory items. In the fourth quarter, a market volatility loss of
£157 million included £120 million of negative banking volatility,
principally from sterling strengthening.
Further information on the reconciliation of underlying to statutory results
is included on page 36.
Tax
The Group recognised a tax expense of £1,373 million for the year (2021:
£1,017 million), with £239 million in the fourth quarter. The expense for
the year included a £222 million benefit recognised in the fourth quarter in
relation to tax deductibility of provisions made in 2021 and a £53 million
expense (2021: £954 million benefit) arising primarily on the remeasurement
of deferred tax assets following the substantive enactment of the previously
announced reduction in the rate of banking surcharge from 8 per cent to 3 per
cent.
The Group expects a medium-term effective tax rate of around 27 per cent,
which includes the impact of the reduction in the rate of banking surcharge
and the increase in corporation tax rate from 19 per cent to 25 per cent, both
of which come into effect from 1 April 2023. An explanation of the
relationship between the tax expense and the Group's accounting profit for the
year is set out on page 71 and in note 14 of the 2022 Annual Report and
Accounts.
Tangible net assets and returns(A)
Tangible net assets per share were 51.9 pence, down from 57.5 pence at
31 December 2021. The favourable impact from profits supported strong
distributions, with further benefits from a reduction in shares from the share
buyback (3.4 pence) more than offset by cash flow hedge reserve movements as
a result of increased interest rates (7.5 pence). In the fourth quarter,
tangible net assets per share were up 2.9 pence (30 September 2022: 49.0
pence), driven by the favourable impact from profits and cash flow hedge
reserve movements.
SUMMARY OF GROUP RESULTS (continued)
The return on tangible equity for 2022 was 13.5 per cent, reflecting the
Group's robust financial performance (2021: 13.8 per cent). The Group
expects the return on tangible equity to be c.13 per cent in 2023. Earnings
per share were 7.3 pence (2021: 7.5 pence). In the comparative period of
2021, both the return on tangible equity and earnings per share benefitted
from a net impairment credit and remeasurement of deferred tax assets.
Balance sheet
At 31 Dec At 31 Dec Change
2022
2021
%
Loans and advances to customers £454.9bn £448.6bn 1
Customer deposits £475.3bn £476.3bn
Loan to deposit ratio(A) 96% 94% 2pp
Wholesale funding(1) £100.3bn £93.1bn 8
Wholesale funding <1 year maturity £37.5bn £30.3bn 24
Of which money-market funding <1 year maturity(2) £24.8bn £16.1bn 54
Liquidity coverage ratio - eligible assets(3) £144.7bn £140.2bn 3
Liquidity coverage ratio(4) 144% 135% 9pp
(1) Wholesale funding includes significant risk transfer securitisations
issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7
billion); the comparative has been presented on a consistent basis.
(2) Excludes balances relating to margins of £2.6 billion (31 December
2021: £3.8 billion).
(3) Eligible assets are calculated as an average of month end observations
over the previous 12 months post any liquidity haircuts.
(4) The liquidity coverage ratio is calculated as a simple average of
month-end observations over the previous 12 months.
Loans and advances to customers increased by 1 per cent on 31 December 2021 to
£454.9 billion, including growth of £6.3 billion in the open mortgage
book, alongside higher retail unsecured loan and credit card balances.
Commercial Banking balances increased by £1.2 billion due to attractive
growth opportunities in the Corporate and Institutional Banking portfolio,
partly offset by repayments of government-backed lending. Customer deposits
have decreased by £1.0 billion since the end of 2021, to £475.3 billion.
This included Retail current account growth of £2.5 billion, more than offset
by Commercial Banking deposit reductions of £3.7 billion. Deposits were down
£9.0 billion in the fourth quarter with reductions in Commercial Banking and
Retail. Commercial Banking deposits were down £6.4 billion, as the expected
outflows of short term Corporate and Institutional Banking deposits
materialised, alongside the seasonality and the impact of management actions.
Retail deposits were down £1.7 billion, with reductions in current accounts,
partially offset by increased savings balances.
In January 2023, the Group successfully completed a transaction under which
£2.5 billion of legacy Retail mortgage loans were securitised with much of
the risk placed in the market. The transaction results in the derecognition of
the mortgage assets from the Group's balance sheet, supporting the Group's
capital and risk management.
The Group has maintained its strong funding and liquidity position with a loan
to deposit ratio of 96 per cent, stable on 2021, continuing to provide robust
funding and liquidity and potential for growth. The Group's funding and
liquidity position is further discussed on page 61.
The Group continued to access wholesale funding across a range of currencies
and markets. Issuance volumes in 2022 totalled £9.3 billion (31 December
2021: £3.4 billion), of which £7.7 billion at 31 December 2022 was issued by
Lloyds Banking Group plc across senior unsecured, T2 and AT1 (31 December
2021: £2.8 billion). Total wholesale funding increased to £100.3 billion at
31 December 2022 (31 December 2021: £93.1 billion) as a result of short term
funding which has increased towards more normalised levels and maintains the
Group's access to diverse sources and tenors of funding. The total outstanding
amount of drawings from the Term Funding Scheme with additional incentives for
SMEs (TFSME) has remained stable at £30.0 billion at 31 December 2022 (31
December 2021: £30.0 billion), with maturities in 2025, 2027 and beyond.
SUMMARY OF GROUP RESULTS (continued)
Capital
At 31 Dec At 31 Dec Change
2022
2021
%
CET1 ratio 15.1% 17.3% (2.2)pp
Pro forma CET1 ratio(A,1) 14.1% 16.3% (2.2)pp
Total capital ratio 19.7% 23.6% (3.9)pp
MREL ratio 31.7% 37.2% (5.5)pp
UK leverage ratio 5.6% 5.8% (0.2)pp
Risk-weighted assets £210.9bn £196.0bn 8
(1) 31 December 2022 reflects the dividend received from Insurance in
February 2023 and the full impact of the announced share buyback, but excludes
the impact of the phased unwind of IFRS 9 relief on 1 January 2023. The
31 December 2021 comparative reflects the dividend received from Insurance in
February 2022 and the full impact of the share buyback in respect of 2021 that
completed in 2022, but excludes the impact of regulatory changes that came
into effect on 1 January 2022.
Pro forma CET1 ratio as at 31 December 2021(1) 16.3%
Regulatory change on 1 January 2022 (bps) (230)
Pro forma CET1 ratio as at 1 January 2022 14.0%
Banking build (including impairment charge) (bps) 230
Insurance dividend (bps) 21
Risk-weighted assets (bps) 14
Fixed pension deficit contributions (bps) (31)
Other movements (bps) 11
Capital generation (bps) 245
Ordinary dividends (bps) (81)
Share buyback accrual (bps) (104)
Further variable pension contributions (bps) (52)
Pro forma CET1 ratio as at 31 December 2022(2) 14.1%
(1 ) 31 December 2021 ratio reflects the dividend received from Insurance
in February 2022 and the full impact of the share buyback in respect of 2021
that completed in 2022.
(2 ) 31 December 2022 ratio reflects the dividend received from Insurance
in February 2023 and the full impact of the announced share buyback.
The Group's pro forma CET1 capital ratio reduced from 16.3 per cent at 31
December 2021 to 14.1 per cent at 31 December 2022. This was driven by a
reduction of 230 basis points on 1 January 2022 for regulatory changes (as
previously reported), subsequently offset by strong pro forma capital
generation of 245 basis points during the year. Capital generation reflected
banking build of 230 basis points, including a net impairment impact of
44 basis points which benefitted from IFRS 9 transitional relief as described
below. A further 21 basis points reflected the dividends received from the
Insurance business in July 2022 (£300 million) and February 2023 (£100
million). Capital generation further benefitted from a post 1 January 2022
reduction in risk-weighted assets (excluding threshold movements), after
foreign exchange impacts (which are hedged), equivalent to 14 basis points and
other movements of 11 basis points. This was offset in part by 31 basis points
relating to the full 2022 fixed pension deficit contributions for the Group's
defined benefit pension schemes. Capital generation during the fourth quarter
was 54 basis points.
Excluding the Insurance dividend received in February 2023 and the impact of
the announced ordinary share buyback programme, the Group's CET1 capital ratio
at 31 December 2022 was 15.1 per cent (31 December 2021: 17.3 per cent).
The net impairment impact of 44 basis points for the year reflects the
impairment charge of 59 basis points, offset by IFRS 9 dynamic transitional
relief of 15 basis points resulting from the increase in Stage 1 and Stage 2
expected credit losses in the second half of the year. On 1 January 2023 IFRS
9 static transitional relief came to an end and the transitional factor
applied to IFRS 9 dynamic relief reduced by a further 25 per cent, resulting
in an overall reduction of 15 basis points. The Group's pro forma CET1 capital
ratio at 31 December 2022 does not include the impact of the reduced relief.
SUMMARY OF GROUP RESULTS (continued)
In relation to capital usage, the impact of the interim ordinary dividend paid
in September 2022 and the accrual for the recommended final ordinary dividend
equates to 81 basis points, with a further 104 basis points utilised to cover
the accrual for the announced ordinary share buyback programme.
During the year, a total of £2.2 billion in pension deficit contributions
(both fixed and variable) has been paid into the Group's three main defined
benefit pension schemes. As previously announced, the fixed contributions for
the year of £800 million (equivalent to 31 basis points) were paid in full
during the first quarter. Variable contributions of £1,442 million paid
during the year cover the full amount of agreed contributions relating to
30 per cent of in-year shareholder distributions of £1,042 million (in
accordance with the current agreement with the Trustee), plus an additional
£400 million paid in December (aggregate variable contributions equivalent to
52 basis points in total). The additional payment represents an acceleration
of future planned contributions, following the strong capital generation in
2022 and ahead of the triennial renegotiation of pension contributions.
Risk-weighted assets were £196 billion at 31 December 2021 and increased by
£16 billion to £212 billion (pro forma) on 1 January 2022, reflecting
regulatory changes which include the anticipated impact of the implementation
of new CRD IV models to meet revised regulatory standards for modelled
outputs. The new CRD IV models remain subject to finalisation and approval by
the PRA and therefore the resultant risk-weighted asset impact also remains
subject to this. Risk-weighted assets reduced by £1 billion during the year
(subsequent to the 1 January 2022 regulatory changes) to £211 billion at
31 December 2022. This largely reflected optimisation activity and Retail
model reductions from the strong underlying credit performance, partly offset
by the growth in balance sheet lending and the impact of foreign exchange
movements. The Group expects risk-weighted assets to be between £220 billion
and £225 billion at the end of 2024.
As previously indicated, capital generation in 2022 was strong at 245 basis
points. The Group experienced a number of tailwinds, including the low charge
for operating lease depreciation, transitional relief in relation to
impairment, risk-weighted asset reductions (post 1 January 2022 regulatory
changes), high Insurance dividends and the low effective tax rate charge.
Looking forward, while these tailwinds are unlikely to repeat, banking capital
generation is nonetheless expected to continue to be strong. The Group now
expects capital generation in 2023 to be c.175 basis points.
The PRA reduced the Group's Pillar 2A CET1 capital requirement during the
fourth quarter to around 1.5 per cent of risk-weighted assets (previously
around 2 per cent of risk-weighted assets).
In December 2022 the UK countercyclical capital buffer rate increased to 1 per
cent, increasing the Group's countercyclical capital buffer (CCyB) to around
0.9 per cent. This increase was partially offset by the removal of the CCyB
related element of the PRA buffer. The planned increase in the UK
countercyclical capital buffer rate to 2 per cent from July 2023 will lead to
a further increase in the Group's CCyB to around 1.8 per cent.
The Financial Policy Committee (FPC) have amended the other systemically
important institution (O-SII) buffer framework, changing the metric for
determining the buffer rate from total assets to the leverage exposure measure
of the Ring-Fenced Bank sub-group (RFB). This will apply from the next review
point in December 2023 which will refer to the leverage exposure measure as at
31 December 2022, with any changes applying from 1 January 2025. Currently,
the RFB's O-SII buffer is 2.0 per cent of risk-weighted assets, which equates
to 1.7 per cent of risk-weighted assets at Group level. Based on the RFB's
leverage exposure measure as at 31 December 2022, the O-SII buffer rate will
be maintained at 2.0 per cent.
The current sum of the Group's regulatory CET1 capital requirement and capital
buffers remains at around 11 per cent. The Board's view of the ongoing level
of CET1 capital required to grow the business, meet current and future
regulatory requirements and cover uncertainties continues to be around
12.5 per cent, plus a management buffer of around 1 per cent.
SUMMARY OF GROUP RESULTS (continued)
Pensions
The Group's three main defined benefit pension schemes continue to have an
actuarial funding deficit, but are in a significantly stronger financial
position than at 31 December 2021, when the deficit was c.£4 billion. During
2022, deficit contributions of £2.2 billion were paid into these schemes. The
Group expects to make a further fixed contribution of £0.8 billion in the
first half of 2023, consistent with 2021 and 2022. The Group has discussed
with the Trustee the likelihood that further variable contributions will not
be necessary in 2023 and beyond, dependent upon the outcome of the triennial
valuation as at 31 December 2022. The Group expects to have substantially
agreed the triennial valuation with the Trustee by the end of the third
quarter of 2023, along with a revised contribution schedule in respect of any
remaining deficit. Trustee agreement will be conditional upon prior feedback
from the Pensions Regulator. The Group also expects that future contributions
will become increasingly contingent in nature, such that they are only paid
into the schemes if required. This will be reported on in future periods.
The schemes' funding position remained robust and did not experience any
material impact from the market volatility seen in the latter part of the
year. Asset prices fell in line with the broader market and hedges fell in
value as interest rates rose. A similar impact was experienced on liability
valuations which also fell in value given the portfolio was almost fully
hedged. The Group's schemes used liability-driven investment strategies to
achieve this outcome and as the hedging was maintained throughout the crisis,
the strategy performed as expected.
Dividend and share buyback
The Group has a progressive and sustainable ordinary dividend policy whilst
maintaining the flexibility to return surplus capital through buybacks or
special dividends. The Board intends to pay down to its capital target within
the course of the current plan, by the end of 2024.
In February 2022, the Board decided to return surplus capital in respect of
2021 through a share buyback programme of up to £2 billion. This commenced in
February 2022 and completed in October 2022, with c.4.5 billion shares
purchased.
The Board has recommended a final ordinary dividend of 1.60 pence per share,
which, together with the interim ordinary dividend of 0.80 pence per share
totals 2.40 pence per share, an increase of 20 per cent, in line with the
Board's commitment to capital returns. The Board has also announced its
intention to implement an ordinary share buyback of up to £2.0 billion which
will commence as soon as is practicable and is expected to be completed by
31 December 2023. The Board intends to return surplus capital by way of a
further buyback programme given the amount of surplus capital, the growth in
ordinary dividends and the flexibility that a buyback programme offers. Based
on the total ordinary dividend and the intended ordinary share buyback the
total capital return in respect of 2022 will be up to £3.6 billion.
SEGMENTAL ANALYSIS - UNDERLYING BASIS(A)
2022 Retail Commercial Insurance, Pensions and Investments Equity Group
£m Banking £m Investments £m
£m and Central
Items
£m
Underlying net interest income 9,774 3,447 (101) 52 13,172
Underlying other income 1,731 1,565 1,576 377 5,249
Operating lease depreciation (368) (5) - - (373)
Net income 11,137 5,007 1,475 429 18,048
Operating costs (5,175) (2,496) (1,042) (122) (8,835)
Remediation (92) (133) (30) - (255)
Total costs (5,267) (2,629) (1,072) (122) (9,090)
Underlying profit before impairment 5,870 2,378 403 307 8,958
Underlying impairment (charge) credit (1,373) (517) (12) 392 (1,510)
Underlying profit 4,497 1,861 391 699 7,448
Banking net interest margin(A) 2.76% 3.93% 2.94%
Average interest-earning banking assets(A) £362.0bn £90.0bn - - £452.0bn
Asset quality ratio(A) 0.38% 0.52% 0.32%
Loans and advances to customers £364.2bn £93.7bn - (£3.0bn) £454.9bn
Customer deposits £310.8bn £163.8bn - £0.7bn £475.3bn
Risk-weighted assets £111.7bn £74.3bn £0.1bn £24.8bn £210.9bn
2021 Retail(1) Commercial Insurance, Pensions and Investments(1) Equity Investments and Central Group
£m Banking(1) £m Items £m
£m £m
Underlying net interest income(2) 8,577 2,602 (103) 87 11,163
Underlying other income 1,597 1,442 1,406 615 5,060
Operating lease depreciation (442) (18) - - (460)
Net income 9,732 4,026 1,303 702 15,763
Operating costs(3) (4,988) (2,288) (899) (137) (8,312)
Remediation (360) (830) (123) 13 (1,300)
Total costs (5,348) (3,118) (1,022) (124) (9,612)
Underlying profit before impairment 4,384 908 281 578 6,151
Underlying impairment credit(3) 447 936 - 2 1,385
Underlying profit 4,831 1,844 281 580 7,536
Banking net interest margin(A,2) 2.50% 2.96% 2.54%
Average interest-earning banking assets(A,2) £353.4bn £91.2bn - - £444.6bn
Asset quality ratio(A,3) (0.13)% (0.98)% (0.31)%
Loans and advances to customers £356.3bn £92.5bn - (£0.2bn) £448.6bn
Customer deposits £308.4bn £167.5bn - £0.4bn £476.3bn
Risk-weighted assets £96.4bn £72.7bn £0.1bn £26.8bn £196.0bn
(1) The portfolios shown reflect the new organisation structure;
comparatives have been presented on a consistent basis. See page 82.
(2 ) During 2022, the Group revised its liquidity transfer pricing
methodology. Comparative segmental net interest income has been presented on a
consistent basis. Total Group figures are unaffected by these changes.
(3) 2021 comparatives have been presented to reflect the new cost basis,
consistent with the current period. See page 34.
DIVISIONAL RESULTS
Retail
Retail offers a broad range of financial services products to personal
customers, including current accounts, savings, mortgages, credit cards,
unsecured loans, motor finance and leasing solutions. Its aim is to build deep
and enduring relationships that meet more of its customers' financial needs
and improve their financial resilience throughout their lifetime, with
personalised products and services. Retail operates the largest digital bank
and branch network in the UK and continues to improve service levels and
reduce conduct risk, whilst working within a prudent risk appetite. Through
investment in strategic priority areas, alongside increasing use of data,
Retail will deepen existing consumer relationships and broaden its
intermediary offering, to improve customer experience, operational efficiency
and enable increasingly tailored propositions.
Strategic progress
• UK's largest digital bank, with 19.8 million digitally active users and
customers logging in over 5 billion times during 2022, up 15 per cent on prior
year
• Market-leading apps rated ahead of competitors in 2022(1). Record mobile
app releases, including enhanced in-app and chat integrated search
functionality used over 19 million times by customers
• Acquisition of Tusker, a vehicle management and leasing company focused
on electric and low emissions vehicles, further developing the Group's Motor
business and aligned to its sustainability ambitions
• Tailored mass affluent banking products launched across current accounts
and credit cards
• Continued net open mortgage book growth of £6.3 billion and £14.3
billion lending to first time buyers
• Proactively contacted customers to offer support due to the rising cost
of living, including mortgage customers on standard variable rates who could
benefit from a product transfer
• Over 5,000 daily visits(2) to the Cost of Living Support Hub. In excess
of 5 million customers have registered for the Group's credit checking tool,
Your Credit Score. In the year 147,000 customers(3) have moved out of
persistent debt (2021: 128,000)
• £3.5 billion of green mortgage lending(4), on track to meet 2024
target. Home retrofit partnership created with Octopus Energy and over
1 million visits to online Home Ecosystem
• £2.1 billion financing and leasing for battery electric and plug-in
hybrid vehicles, on track to meet 2024 target with over 70 per cent of
deliveries in the year by Lex being battery electric or plug-in hybrid cars
Financial performance
• Underlying net interest income 14 per cent higher, benefitting from the
rising rate environment in liabilities and higher unsecured lending balances,
partly offset by mortgage margin compression
• Underlying other income 8 per cent higher from improved levels of
customer activity across current accounts and credit cards. Operating lease
depreciation decreased 17 per cent, due to the continued strength of used car
prices given industry-wide supply constraints in the new car market
• Operating costs 4 per cent higher reflecting higher planned strategic
investment costs and the rebuilding of variable pay, partly offset by
continued benefit from efficiency initiatives. Remediation charges, relating
to pre-existing programmes, decreased to £92 million
• Underlying impairment charge £1,373 million. Portfolio remains
resilient with a modest trend towards normalising credit performance during
the second half. Updated economic scenarios, including inflation and interest
rate pressures, have contributed to an increased charge (compared to a credit
in the prior year)
• Customer lending increased 2 per cent in the period with continued net
open mortgage book growth of £6.3 billion and growth across credit cards and
loans, partially offset by the continued run off of the closed mortgage book
• Customer deposits increased 1 per cent in the period. Overall balances
are resilient, in the context of cost of living impacts on customers and
increased competition, with current account balances up by 2 per cent
• Risk-weighted assets up 16 per cent in the period, driven by regulatory
changes on 1 January 2022. Excluding these changes, risk-weighted assets are
lower, benefitting from optimisation activity and strong underlying credit
performance
(1) Across Google Play and App Store, out of 36,000 written reviews, 76 per
cent of customers rated the Group's apps 5-star (84 per cent 4-star and
above).
(2) Refers to average daily visits since launch in July 2022.
(3) Data is 11 months to 30 November 2022. Comparator is 11 months to 30
November 2021.
(4) As at 30 September 2022.
DIVISIONAL RESULTS (continued)
Retail (continued)
Retail performance summary(A)
2022 2021(1) Change
£m £m %
Underlying net interest income(2) 9,774 8,577 14
Underlying other income 1,731 1,597 8
Operating lease depreciation (368) (442) 17
Net income 11,137 9,732 14
Operating costs(3) (5,175) (4,988) (4)
Remediation (92) (360) 74
Total costs (5,267) (5,348) 2
Underlying profit before impairment 5,870 4,384 34
Underlying impairment (charge) credit(3) (1,373) 447
Underlying profit 4,497 4,831 (7)
Banking net interest margin(A,2) 2.76% 2.50% 26bp
Average interest-earning banking assets(A) £362.0bn £353.4bn 2
Asset quality ratio(A,3) 0.38% (0.13)%
(1) Reflects the new organisation structure; comparatives have been
presented on a consistent basis. See page 82.
(2) During 2022, the Group revised its liquidity transfer pricing
methodology. Comparative segmental net interest income has been presented on a
consistent basis.
(3) 2021 comparatives have been presented to reflect the new cost basis,
consistent with the current period. See page 34.
At 31 Dec 2022 At 31 Dec 2021 Change
£bn
£bn
%
Open mortgage book 299.6 293.3 2
Closed mortgage book 11.6 14.2 (18)
Credit cards(1) 14.3 13.8 4
UK unsecured loans 8.7 8.1 7
UK Motor Finance 14.3 14.0 2
Overdrafts 1.0 1.0
Wealth 0.9 1.0 (10)
Other(2) 13.8 10.9 27
Loans and advances to customers 364.2 356.3 2
Operating lease assets 4.8 4.1 17
Total customer assets 369.0 360.4 2
Current accounts 114.0 111.5 2
Relationship savings 166.3 164.5 1
Tactical savings 16.1 16.8 (4)
Wealth 14.4 15.6 (8)
Customer deposits 310.8 308.4 1
Risk-weighted assets 111.7 96.4 16
(1) Reflects the new organisation structure; comparatives have been
presented on a consistent basis. See page 82.
(2) Primarily Europe.
DIVISIONAL RESULTS (continued)
Commercial Banking
Commercial Banking serves small and medium businesses as well as corporate and
institutional clients, providing lending, transactional banking, working
capital management, debt financing and risk management services. Through
investment in digital capability and product development, Commercial Banking
will deliver an enhanced customer experience via a digital first Business
model and expanded client propositions, generating diversified capital
efficient growth and supporting customers on their transition to net zero.
Strategic progress
• Proactively contacted more than 550,000 customers to offer support in
maintaining financial resilience through the cost of living challenges; driven
by analytically led client engagement utilising financial wellbeing tools
• Digitising business and transforming customer journeys; strengthening
invoice finance proposition through a strategic fintech partnership which will
deliver the first end-to-end digital single platform solution offered by a UK
bank
• Exceeded full year target of 20 per cent growth in new merchant services
clients, with strong foundations for growth as the Group continues to invest
in products and digital onboarding capabilities
• Delivered c.£8 billion(1) of Corporate and Institutional green and
sustainable financing in 2022, demonstrating significant progress towards the
£15 billion commitment by the end of 2024. Supported purpose-driven growth
within loan origination and businesses transitioning to net zero
• Increased the number and scale of commodity hedging solution trades to
help clients manage their exposure to highly volatile energy markets,
including the launch of carbon emission allowance transactions(2)
• Strengthened originate to distribute capability, including entering into
our first strategic co-investment partnership to support clients' long term
needs and increase balance sheet efficiency for the Group
• Upgraded rates digital product offering and foreign exchange pricing in
addition to delivering the first phase of the new foreign exchange platform
• Enhancing cash management capabilities in the Islands business,
onboarding to the new platform with leading API functionality
• Developing data-driven insights including launch of Lloyds Bank Market
Intelligence, a product leveraging the Group's data and customer transactions
to support clients' strategic goals
Financial performance
• Underlying net interest income increased 32 per cent to £3,447 million,
reflecting the higher rate environment and strong portfolio management across
both assets and liabilities
• Underlying other income of £1,565 million, up 9 per cent on the prior
year, driven by higher financial markets activity and strong performance in
transactional banking, partly offset by lower levels of corporate financing
activity
• Operating costs 9 per cent higher, reflecting higher planned strategic
investment costs and the rebuilding of variable pay, partly offset by
continued benefit from efficiency initiatives
• Remediation charges of £133 million, including a charge related to HBOS
Reading in the fourth quarter
• Underlying impairment charge of £517 million (compared to a credit in
the prior year) driven by the revised macroeconomic outlook and a further
material charge on a pre-existing single case; the portfolio performance
remains strong, with only modest evidence of deterioration observed in the
fourth quarter
• Customer lending 1 per cent higher at £93.7 billion due to attractive
growth opportunities and foreign exchange movements in the Corporate and
Institutional portfolio, partly offset by net repayments within Small and
Medium Businesses including government-backed lending
• Customer deposits decreased to £163.8 billion, reflecting pricing
decisions based on Group liquidity requirements
• Risk-weighted assets increased 2 per cent to £74.3 billion, driven by
the impact of regulatory changes on 1 January 2022, capital accretive balance
sheet growth and foreign exchange movements, partly offset by ongoing
optimisation
(1) Includes the clean growth finance initiative, Commercial Real Estate
green lending, renewable energy financing, sustainability linked loans and
green and social bond facilitation.
(2 ) Under the UK Emissions Trading Scheme.
DIVISIONAL RESULTS (continued)
Commercial Banking (continued)
Commercial Banking performance summary(A)
2022 2021(1) Change
£m £m %
Underlying net interest income(2) 3,447 2,602 32
Underlying other income 1,565 1,442 9
Operating lease depreciation (5) (18) 72
Net income 5,007 4,026 24
Operating costs(3) (2,496) (2,288) (9)
Remediation (133) (830) 84
Total costs (2,629) (3,118) 16
Underlying profit before impairment 2,378 908
Underlying impairment (charge) credit(3) (517) 936
Underlying profit 1,861 1,844 1
Banking net interest margin(A,2) 3.93% 2.96% 97bp
Average interest-earning banking assets(A) £90.0bn £91.2bn (1)
Asset quality ratio(A,3) 0.52% (0.98%)
(1) Reflects the new organisation structure; comparatives have been
presented on a consistent basis. See page 82.
(2) During 2022, the Group revised its liquidity transfer pricing
methodology. Comparative segmental net interest income has been presented on a
consistent basis.
(3) 2021 comparatives have been presented to reflect the new cost basis,
consistent with the current period. See page 34.
At 31 Dec 2022 At 31 Dec 2021(1) Change
£bn
£bn %
Small and Medium Businesses 37.7 42.5 (11)
Corporate and Institutional Banking 56.0 50.0 12
Loans and advances to customers 93.7 92.5 1
Customer deposits 163.8 167.5 (2)
Risk-weighted assets 74.3 72.7 2
(1) Reflects the new organisation structure; comparatives have been
presented on a consistent basis. See page 82.
DIVISIONAL RESULTS (continued)
Insurance, Pensions and Investments
Insurance, Pensions and Investments supports over 10 million customers with
Assets under Administration (AuA) of £197 billion (excluding Wealth) and
annualised annuity payments of over £1.1 billion. The Group continues to
invest significantly in the development of the business, including investment
propositions to support the Group's mass affluent strategy, innovating
intermediary propositions through the Cavendish Online acquisition and Embark,
and accelerating the transition to a low carbon economy.
Strategic progress
• Growth in investment and retirement business, with over £8 billion net
new open book money(1) in the period, despite difficult market conditions.
Open book AuA of £146 billion (23 per cent growth), including Embark
• Workplace Pensions business saw a 12 per cent increase in total regular
contributions to pensions administered, with £6.2 billion net AuA flows and
16 per cent AuA share as at 31 December 2022
• Direct to consumer ready-made investment offering now launched into the
mobile banking apps, leveraging capability acquired with Embark and supporting
the development of the Group's new mass affluent proposition
• On track to meet the target of between £20 billion and £25 billion
invested in climate-aware investment strategies through Scottish Widows by
2025, with £12 billion invested in 2022 in line with the Climate Action Plan
• Deployed new features and enhancements to Individual Annuity products,
including increasing the maximum age on Open Market products and introducing
Value Protection, supporting the target of maintaining 15 per cent market
share
• Progress towards the goal of being a top three protection provider by
2025, acquiring Cavendish Online and protecting over 25,000 families (up c.50
per cent) through the Group's direct channels. Grew market share c.1
percentage point(2)
• Investing in the General Insurance business to digitise customer claims
and servicing journeys and expand the Group's brand presence through MBNA.
Supporting profitable growth in the long term through improved customer
experience
• Migrated c.3.5 million policies to strategic platforms, and
decommissioned over 40 legacy applications. Added drawdown functionality to
core pension products, enhancing the experience for customers when they reach
retirement
• Scottish Widows awarded five stars in the Financial Service Awards
across Insurance, Pensions and Investments for the seventh year in a row
Financial performance
• Strong net income growth (13 per cent) with increased new business and
£348 million assumption changes, reflecting improved persistency and updated
longevity assumptions, though General Insurance net income decreased
• Life, Pensions and Investments (LP&I) new business income increased
by £109 million (34 per cent), with underlying volumes up 8 per cent
• Inclusion of Embark contributes £45 million net income since
acquisition, with estimated £3 billion sales volumes
• Strengthened the Workplace proposition, with £44 million growth in new
business income
• Investment in the annuity business supporting 78 per cent new business
income growth (£62 million) and £967 million bulk annuities sales
• Continued to grow the Protection offering, with new business income up
31 per cent
• General Insurance income net of claims decreased £167 million, with
£108 million severe weather related claims (including £52 million from the
adverse weather in December) and a reduction in sales volumes, driven by
market challenges as insurers have reacted to pricing reforms
• Stockbroking income increased 25 per cent to £50 million with interest
income benefitting from rate rises
• Operating costs increased by £143 million (16 per cent) reflecting
higher planned strategic investment costs, the rebuilding of variable pay and
the inclusion of Embark
• Underlying profit increased by £110 million to £391 million, including
a benefit from a reduction in remediation costs
Insurance capital and liquidity
• Strong capital position supported a final dividend of £100 million paid
to Lloyds Banking Group (following £300 million in July 2022), with an
estimated Insurance Solvency II ratio of 163 per cent (159 per cent after
proposed dividend)
• Credit asset portfolio remains strong, rated 'A -' on average, well
diversified, with less than 1 per cent of assets backing annuities being sub
investment grade or unrated. Strong liquidity position with c.£3.5 billion
cash and cash like assets
(1) Excludes market movements and Embark assets transferred on acquisition;
includes post acquisition Embark net flows.
(2) ABI data for nine months ended 30 September 2022.
DIVISIONAL RESULTS (continued)
Insurance, Pensions and Investments (continued)
Insurance, Pensions and Investments performance summary(A)
2022 2021(1) Change
£m £m %
Underlying net interest income(2) (101) (103) 2
Underlying other income 1,576 1,406 12
Net income 1,475 1,303 13
Operating costs(3) (1,042) (899) (16)
Remediation (30) (123) 76
Total costs (1,072) (1,022) (5)
Underlying profit before impairment 403 281 43
Underlying impairment charge(3) (12) -
Underlying profit 391 281 39
Life and pensions sales (PVNBP)(4) 21,687 17,289 25
General insurance underwritten new gross written premiums 55 87 (37)
General insurance underwritten total gross written premiums 486 655 (26)
General insurance combined ratio(5) 113% 101% 12pp
At 31 Dec 2022 At 31 Dec 2021 Change
£bn
£bn %
Insurance Solvency II ratio (pre-dividend)(6) 163% 191% (28)pp
Total customer assets under administration(1) 197.3 179.2 10
(1) Reflects the new organisation structure; comparatives have been
presented on a consistent basis. See page 82.
(2) During 2022, the Group revised its liquidity transfer pricing
methodology. Comparative segmental net interest income has been presented on a
consistent basis.
(3) 2021 comparatives have been presented to reflect the new cost basis,
consistent with the current period. See page 34.
(4) Present value of new business premiums.
(5) General insurance combined ratio for 2022 includes £108 million
relating to event weather claims (storm, subsidence and freeze) (2021: £11
million). 2021 also includes the £91 million regulatory fine relating to the
way the Group historically communicated with home insurance customers
regarding their renewals. Excluding these items and reserve releases the ratio
was 94 per cent (2021: 87 per cent).
(6) Equivalent estimated regulatory view of ratio (including With Profits
funds and post-dividend) was 152 per cent (31 December 2021: 169 per cent).
DIVISIONAL RESULTS (continued)
Insurance, Pensions and Investments (continued)
Income by product group
2022 2021
New Existing Total New Existing Total
business business £m business business £m
£m £m £m £m
Workplace, planning and retirement 240 130 370 201 110 311
Individual and bulk annuities 141 101 242 79 83 162
Protection 42 22 64 32 20 52
Longstanding 9 303 312 11 286 297
Total LP&I 432 556 988 323 499 822
Life and pensions experience and other items 279 161
General insurance 113 280
Embark 45
Stockbroking 50 40
Net income 1,475 1,303
Volatility arising in the insurance business
Volatility included in the Group's statutory results before tax comprises the
following:
2022 2021
£m £m
Insurance volatility (735) 503
Policyholder interests volatility 236 366
Total volatility (499) 869
Insurance equity hedging arrangements 351 (592)
Total (148) 277
The Group's insurance business has policyholder liabilities that are supported
by substantial holdings of investments. IFRS requires that the changes in both
the value of the liabilities and the investments are reflected within the
income statement. The value of the liabilities does not move exactly in line
with changes in the value of the investments. As the investments are
substantial, movements in their value can have a significant impact on the
profitability of the Group. Management believes that it is appropriate to
disclose the division's results on the basis of an expected return. The impact
of the actual return on these investments differing from the expected return
is included within insurance volatility.
Insurance volatility movements during 2022 were largely driven by significant
increases in interest rates, equity falls and bond spreads widening, offset to
some extent by inflation increases (net of inflation hedging). Although the
Group manages its exposures to equity, interest rate, foreign currency
exchange rate, inflation and market movements within the Insurance division,
it does so by managing the impacts on both capital and earnings volatility,
though the extent to which these bases are hedged needs to be balanced. For
example, equity market movements are hedged within Insurance on a Solvency II
capital basis and whilst this also reduces the IFRS earnings exposure to
equity market movements, the hedge works to a lesser extent from an IFRS
earnings perspective.
DIVISIONAL RESULTS (continued)
Insurance, Pensions and Investments (continued)
Changes in insurance assumptions and methodology
The following impacts from assumption changes are included within Insurance,
Pensions and Investments underlying other income.
2022 2021
£m £m
Persistency 229 (15)
Mortality, longevity and morbidity 112 149
Expense assumptions 9 (94)
Other (2) 3
Total assumption changes 348 43
Methodology changes - 68
Total assumption and methodology changes 348 111
Key life and pensions assumptions and methodologies are formally updated
through the annual basis review in the fourth quarter of each year. However,
assumptions are monitored throughout the year and are updated at half-year
where there is a compelling reason to do so.
The current period assumptions and methodology changes impact of £348
million, includes a benefit from updating to the latest industry longevity
assumptions and a significant improvement in persistency assumptions
(including benefit from adding drawdown functionality to the Group's core
pension products).
Implementation of IFRS 17
IFRS 17 is an accounting standard that changes the way profit is recognised
for insurance contracts. Rather than recognise the expected profit for an
insurance contract at its inception, IFRS 17 requires that the expected profit
for providing insurance contract services is recognised over the period
insurance contract services are provided. The profit is calculated based on
discounted best estimate cash flows and an associated risk adjustment and is
recognised by the creation of a contractual service margin (CSM) on the
balance sheet, which is released to the income statement over the contract
period. As a result, both new business profit, which is currently recognised
in other income at the outset of the contract, and the impact of certain
assumption changes, which is recognised in other income at the time the
assumption is changed, will be recognised in the CSM and subsequently released
to the income statement over the period of contractual service under IFRS 17.
Existing business will continue to be recognised in the income statement over
the period of the contract. Losses on groups of onerous contracts and
recoveries of such losses, to the extent they are covered by reinsurance
contracts held, are recognised in the income statement immediately. The Group
will continue to recognise market volatility outside of underlying profit.
Whilst IFRS 17 impacts the timing of profit recognition for insurance
contracts, it will have no impact on the total profit recognised over the
lifetime of these contracts, Group capital or capital generation, the economic
value of the insurance business or its capital position. The new standard is
not expected to impact the ability of the Insurance business to pay dividends
within the Group structure, which will continue to be driven by the Solvency
II position.
The Group has adopted IFRS 17 from 1 January 2023 and as required by the
standard, will restate its total equity at 1 January 2022 and its income
statement for 2022. The Group's total equity under IFRS 17 at 1 January 2022
was £51.3 billion, approximately £1.9 billion lower than under IFRS 4. The
reduction in equity is driven by the derecognition of the value in-force asset
and the move to best estimate of contract liabilities, the creation of the new
CSM liability (approximately £1.9 billion, net of reinsurance) and the
establishment of the risk adjustment (approximately £1.5 billion, net of
reinsurance).
During 2022, on the current IFRS 4 accounting basis, Insurance contributed
£1,576 million to the Group's underlying other income, including new business
income of £432 million and net gains arising from assumption changes of
£348 million, both of which will be largely deferred to the CSM. Including
these items, of the total 2022 reported underlying other income in Insurance,
Pensions and Investments of £1,576 million, c.£1,300 million will be subject
to a revised treatment under IFRS 17.
DIVISIONAL RESULTS (continued)
Insurance, Pensions and Investments (continued)
Under IFRS 17, income arising from insurance contracts will primarily be
recognised through the release of the CSM and the risk adjustment (for
non-financial risks such as mortality and persistency), rather than separately
for new business and existing business. The Group estimates that c.£300
million of the CSM and risk adjustment, gross of reinsurance, held at 1
January 2022 would have been released to the income statement during 2022 on
both a statutory and underlying basis.
During 2022, the Group added a drawdown feature to its existing long-standing
and workplace pension business as a significant customer enhancement. This is
a contract modification that results in a substantially different contract
boundary. IFRS 17 requires that the contracts and their associated CSM
(approximately £0.4 billion) at the time of the modification are derecognised
and the modified contracts together with a new CSM (approximately £1.7
billion) are recognised as if they were new contracts. These contract
modifications in 2022 are estimated to increase the CSM by approximately £1.3
billion and will result in the Group recognising a charge to its 2022 restated
income statement of approximately £1.3 billion. While there may be contract
modifications in the future, they are unlikely to be of this materiality.
Given the scale of this modification and its impact on the 2022 income
statement, it will be recognised outside of underlying profit. The release of
the new CSM following modification will be disclosed in the insurance service
result given the expected materiality of the annual release to the income
statement. The Group will undertake further work during the first quarter of
2023 to finalise the financial impact of the contract modification and does
not expect the final impact on equity at 31 December 2022 to differ
materially from this estimate. This contract modification does not affect the
capital position of the insurance business or the Group. Further information
is given in note 55 of the 2022 Annual Report and Accounts.
Under IFRS 17, the Group's reported results will continue to be impacted by
market and economic factors, albeit the treatment and basis of estimation of
certain items is being modified. Under IFRS 4, both the volatility relating to
the Group's unit-linked business and policyholder interests volatility on the
value in-force asset (VIF) are recognised in the income statement immediately.
Under IFRS 17, the volatility relating to the unit-linked business will be
recognised in the CSM and released to the income statement in subsequent years
except where the Group has applied the risk mitigation option. In addition,
policyholder interests volatility on the VIF will not exist under IFRS 17. The
removal of these two components together are estimated to adversely impact
volatility by c.£0.4 billion in the 2022 income statement restated for IFRS
17 versus IFRS 4. The consequent increased adverse volatility which remains in
the income statement under IFRS 17 reflects the significant market volatility
seen in 2022.
Equity Investments and Central Items
2022 2021 Change
£m £m %
Net income 429 702 (39)
Operating costs(1) (122) (137) 11
Remediation - 13
Total costs (122) (124) 2
Underlying profit before impairment 307 578 (47)
Underlying impairment credit 392 2
Underlying profit 699 580 21
(1) 2021 comparatives have been presented to reflect the new cost basis,
consistent with the current period. See page 34.
Equity Investments and Central Items contains the Group's equity investments
businesses, including Lloyds Development Capital (LDC) and the Group's share
of the Business Growth Fund (BGF), as well as Citra Living. Also included are
income and expenses not attributed to other divisions, including residual
underlying net interest income after transfer pricing (which includes the
central recovery of the Group's distributions on other equity instruments), in
period gains from gilt sales and the unwind of associated hedging costs.
During 2022, the Group's equity investment businesses contributed net income
of £419 million compared to £573 million in 2021. This is lower given the
above run rate gains in LDC in 2021 and charges of c.£40 million in relation
to the BGF in 2022. During 2022 LDC has continued to deliver strong investment
performance. The business continues to build its investment portfolio with
attractive returns and opportunities to further integrate with the Group
offering.
Underlying impairment for the period was a credit of £392 million compared to
£2 million in 2021, relating to the full release of the ECL central
adjustment held at the end of 2021 (31 December 2021: £400 million). This
adjustment was not allocated to specific portfolios and was applied in respect
of uncertainty in the economic outlook, relating to the risks of COVID-19.
ALTERNATIVE PERFORMANCE MEASURES
The statutory results are supplemented with those presented on an underlying
basis and also with other alternative performance measures. This is to enable
a comprehensive understanding of the Group and facilitate comparison with
peers. The Group Executive Committee, which is the chief operating decision
maker for the Group, reviews the Group's results on an underlying basis in
order to assess performance and allocate resources. Management uses underlying
profit before tax, an alternative performance measure, as a measure of
performance and believes that it provides important information for investors.
This is because it allows for a comparable representation of the Group's
performance by removing the impact of items such as volatility caused by
market movements outside the control of management.
In arriving at underlying profit, statutory profit before tax is adjusted for
the items below, to allow a comparison of the Group's underlying performance:
• Restructuring costs relating to merger, acquisition and integration
activities
• Volatility and other items, which includes the effects of certain asset
sales, the volatility relating to the Group's hedging arrangements and that
arising in the insurance business, the unwind of acquisition-related fair
value adjustments and the amortisation of purchased intangible assets
As announced at the 2021 full-year, in the first quarter of 2022 the Group
adopted a new basis for cost reporting, including all restructuring costs,
with the exception of merger, acquisition and integration costs, within
operating costs. Non lending-related fraud costs, previously included within
underlying impairment, are also now reported as part of operating costs. This
has not impacted the statutory impairment charge. Comparatives have been
presented on a consistent basis.
The analysis of lending and expected credit loss (ECL) allowances is presented
on both a statutory and an underlying basis and a reconciliation between the
two is shown on page 49. On a statutory basis, purchased or originated
credit-impaired (POCI) assets include a fixed pool of mortgages that were
purchased as part of the HBOS acquisition at a deep discount to face value
reflecting credit losses incurred from the point of origination to the date of
acquisition. Over time, these POCI assets will run off as the loans redeem,
pay down or losses crystallise. The underlying basis assumes that the lending
assets acquired as part of a business combination were originated by the Group
and are classified as either Stage 1, 2 or 3 according to the change in credit
risk over the period since origination. Underlying ECL allowances have been
calculated accordingly. The Group uses the underlying basis to monitor the
creditworthiness of the lending portfolio and related ECL allowances.
ALTERNATIVE PERFORMANCE MEASURES (continued)
The Group calculates a number of metrics that are used throughout the banking
and insurance industries on an underlying basis. These metrics are not
necessarily comparable to similarly titled measures presented by other
companies and are not any more authoritative than measures presented in the
financial statements, however management believes that they are useful in
assessing the performance of the Group and in drawing comparisons between
years. A description of these measures and their calculation, is given below.
Alternative performance measures are used internally in the Group's Monthly
Management Report.
Asset quality ratio The underlying impairment charge or credit for the period in respect of loans
and advances to customers, both drawn and undrawn, expressed as a percentage
of average gross loans and advances to customers for the period. This measure
is useful in assessing the credit quality of the loan book
Banking net interest margin Banking net interest income on customer and product balances in the banking
businesses as a percentage of average gross interest-earning banking assets
for the period. This measure is useful in assessing the profitability of the
banking business
Business-as-usual costs Total operating costs less strategic investment and new businesses, including
Embark and Citra Living
Cost:income ratio Total costs as a percentage of net income calculated on an underlying basis.
This measure is useful in assessing the profitability of the Group's
operations before the effects of the underlying impairment credit or charge
Loan to deposit ratio Loans and advances to customers divided by customer deposits
Operating costs Operating expenses adjusted to remove the impact of remediation, restructuring
costs, operating lease depreciation, the amortisation of purchased
intangibles, the insurance gross up and other statutory items
Pro forma CET1 ratio CET1 ratio adjusted for the effects of the dividend paid up by the Insurance
business in the subsequent quarter period and the impact of the announced
ordinary share buyback programme. December 2021 pro forma CET1 ratios include
the impact of the share buyback programme in respect of 2021, announced in
February 2022
Return on tangible equity Profit attributable to ordinary shareholders, divided by average tangible net
assets. This measure is useful in providing a consistent basis with which to
measure the Group's performance
Tangible net assets per share Net assets excluding intangible assets such as goodwill and
acquisition-related intangibles divided by the number of ordinary shares in
issue. This measure is useful in assessing shareholder value
Underlying profit before impairment Underlying profit adjusted to remove the underlying impairment credit or
charge. This measure is useful in allowing for a comparable representation of
the Group's performance before the effects of the forward-looking underlying
impairment credit or charge
Underlying profit Statutory profit before tax adjusted for certain items as detailed above. This
measure allows for a comparable representation of the Group's performance by
removing the impact of certain items including volatility caused by market
movements outside the control of management
ALTERNATIVE PERFORMANCE MEASURES (continued)
Statutory basis Removal of: Underlying basis(A)
£m Volatility Insurance £m
and other gross up(3)
items(1,2) £m
£m
2022
Net interest income 13,957 226 (1,011) 13,172 Underlying net interest income
Other income, net of insurance claims and changes in insurance and investment 4,252 120 877 5,249 Underlying other income
contract liabilities
(373) - (373) Operating lease depreciation
Total income, net of insurance claims and changes in insurance and investment 18,209 (27) (134) 18,048 Net income
contract liabilities
Operating expenses(4) (9,759) 535 134 (9,090) Total costs(4)
Impairment charge (1,522) 12 - (1,510) Underlying impairment charge
Profit before tax 6,928 520 - 7,448 Underlying profit
2021
Net interest income 9,366 255 1,542 11,163 Underlying net interest income
Other income, net of insurance claims and changes in insurance and investment 6,958 (139) (1,759) 5,060 Underlying other income
contract liabilities
(460) - (460) Operating lease depreciation
Total income, net of insurance claims and changes in insurance and investment 16,324 (344) (217) 15,763 Net income
contract liabilities
Operating expenses(4) (10,800) 971 217 (9,612) Total costs(4,5)
Impairment credit 1,378 7 - 1,385 Underlying impairment credit(5)
Profit before tax 6,902 634 - 7,536 Underlying profit
(1) In the year ended 31 December 2022 this comprised the effects of market
volatility and asset sales (loss of £252 million); the amortisation of
purchased intangibles (loss of £70 million); restructuring costs (loss of
£80 million); and fair value unwind (loss of £118 million).
(2) In the year ended 31 December 2021 this comprised the effects of market
volatility and asset sales (gain of £87 million); the amortisation of
purchased intangibles (loss of £70 million); restructuring costs (loss of
£452 million); and fair value unwind (loss of £199 million).
(3) The Group's insurance businesses' income statements include income and
expense attributable to the policyholders of the Group's long-term assurance
funds. These items have no impact in total upon profit attributable to equity
shareholders and, to provide a clearer representation of the underlying trends
within the business, these items are shown net within the underlying results.
(4) Statutory operating expenses includes operating lease depreciation. On
an underlying basis operating lease depreciation is included in net income.
(5) 2021 comparatives have been presented to reflect the new cost basis,
consistent with the current period. See page 34.
ALTERNATIVE PERFORMANCE MEASURES (continued)
2022 2021
Asset quality ratio(A)
Underlying impairment (charge) credit (£m) (1,510) 1,385
Remove non-customer underlying impairment (£m) 27 (7)
Underlying customer related impairment (charge) credit (£m) (1,483) 1,378
Loans and advances to customers (£bn) 454.9 448.6
Add back expected credit loss allowance (drawn) (£bn) 4.5 3.8
Add back acquisition related fair value adjustments (£bn) 0.4 0.4
Underlying gross loans and advances to customers (£bn) 459.8 452.8
Averaging (£bn) (2.9) (2.4)
Average underlying gross loans and advances to customers (£bn) 456.9 450.4
Asset quality ratio(A) 0.32% (0.31)%
Banking net interest margin(A)
Underlying net interest income (£m) 13,172 11,163
Remove non-banking underlying net interest expense (£m) 111 108
Banking underlying net interest income (£m) 13,283 11,271
Underlying gross loans and advances to customers (£bn) 459.8 452.8
Adjustment for non-banking and other items:
Fee-based loans and advances (£bn) (8.4) (5.1)
Other (£bn) 5.0 1.3
Interest-earning banking assets (£bn) 456.4 449.0
Averaging (£bn) (4.4) (4.4)
Average interest-earning banking assets (£bn)(A) 452.0 444.6
Banking net interest margin(A) 2.94% 2.54%
Cost:income ratio(A)
Total costs (£m) 9,090 9,612
Net income (£m) 18,048 15,763
Cost:income ratio(A) 50.4% 61.0%
Operating costs(A)
Operating expenses (£m) 9,759 10,800
Adjustment for:
Remediation (£m) (255) (1,300)
Restructuring (£m)(1) (80) (452)
Operating lease depreciation (£m) (373) (460)
Amortisation of purchased intangibles (£m) (70) (70)
Insurance gross up (£m) (134) (217)
Other statutory items (£m)(1) (12) 11
Operating costs (£m)(A,1) 8,835 8,312
Remove costs related to strategic initiatives and new businesses (£m) (489) -
Business-as-usual costs (£m)(A) 8,346 8,312
(1) 2021 comparatives have been presented to reflect the new cost basis,
consistent with the current period. See page 34.
ALTERNATIVE PERFORMANCE MEASURES (continued)
2022 2021
Return on tangible equity(A)
Profit attributable to ordinary shareholders (£m) 5,021 5,355
Average shareholders' equity (£bn) 43.9 45.2
Remove average intangible assets (£bn) (6.7) (6.3)
Average tangible equity (£bn) 37.2 38.9
Return on tangible equity(A) 13.5% 13.8%
Underlying profit before impairment(A)
Statutory profit before tax 6,928 6,902
Remove impairment charge (credit) 1,522 (1,378)
Remove volatility and other items including restructuring 508 627
Underlying profit before impairment(A) 8,958 6,151
( )
( )
At 31 Dec 2022 At 31 Dec 2021
Loan to deposit ratio(A)
Loans and advances to customers (£bn) 454.9 448.6
Customer deposits (£bn) 475.3 476.3
Loan to deposit ratio(A) 96% 94%
Pro forma CET1 ratio(A)
CET1 ratio 15.1% 17.3%
Insurance dividend and share buyback accrual(1) (1.0)% (1.0)%
Pro forma CET1 ratio(A) 14.1% 16.3%
Tangible net assets per share(A)
Ordinary shareholders' equity (£m) 41,980 47,011
Remove goodwill (£m) (2,655) (2,320)
Remove purchased value of in-force business (£m) (175) (197)
Remove other intangible assets (£m) (4,786) (4,196)
Deferred tax effects and other adjustments (£m) 396 538
Tangible net assets (£m) 34,760 40,836
Ordinary shares in issue, excluding own shares 66,944m 70,996m
Tangible net assets per share(A) 51.9p 57.5p
(1) Dividend paid up by the Insurance business in the subsequent quarter
period and the impact of the announced ordinary share buyback programmes.
RISK MANAGEMENT
CAPITAL RISK
Analysis of capital position
The Group's pro forma CET1 capital ratio reduced by 222 basis points from 16.3
per cent at 31 December 2021 to 14.1 per cent at 31 December 2022.
This initially reflected a reduction of 230 basis points on 1 January 2022 for
regulatory changes which included an increase in risk-weighted assets, in
addition to other related modelled impacts on CET1 capital, following:
• The anticipated impact of the implementation of new CRD IV mortgage,
retail unsecured and commercial banking models to meet revised regulatory
standards for modelled outputs
• The UK implementation of the remainder of CRR 2 which included a new
standardised approach for measuring counterparty credit risk (SA-CCR)
This was in addition to the reinstatement of the full deduction treatment for
intangible software assets and phased reductions in IFRS 9 transitional
relief.
The new CRD IV models remain subject to finalisation and approval by the PRA
and therefore uncertainty over the final impact remains.
The impact of the regulatory changes on 1 January 2022 was subsequently offset
by strong pro forma capital generation of 245 basis points during the year
which reflected the following:
• Banking profitability of 230 basis points, including a net impairment
charge of 44 basis points reflecting the impact of the impairment charge for
the year (59 basis points) net of IFRS 9 dynamic relief (15 basis points)
following the increase in Stage 1 and Stage 2 expected credit losses in the
second half of the year
• 21 basis points for both the £300 million dividend received from the
Insurance business in July 2022 and the £100 million dividend received in
February 2023
• A reduction in risk-weighted assets (excluding threshold movements),
post 1 January 2022 regulatory changes, generating an increase equivalent to
14 basis points and other movements of 11 basis points
• Offset in part by 31 basis points related to the full 2022 fixed
contributions to the Group's three main defined benefit pension schemes
Capital usage resulted in a further reduction of 237 basis points on a pro
forma basis, reflecting:
• 81 basis points in total for the interim ordinary dividend of 0.80 pence
per share paid in September 2022 and the accrual for the recommended final
ordinary dividend for 2022 of 1.60 pence per share
• 104 basis points to cover the accrual for the full amount of the
announced £2.0 billion ordinary share buyback programme
• 52 basis points for variable pension contributions made to the main
defined benefit pension schemes, including £400 million of additional
contributions paid in December, representing an acceleration of future planned
contributions, ahead of the triennial pension fund renegotiation
The ordinary share buyback will commence as soon as is practicable and the
full impact will be accrued for through the Group's actual capital position
during the first quarter of 2023.
Excluding the pro forma Insurance dividend received in February 2023 and the
full impact of the announced ordinary share buyback programme, the Group's
CET1 capital ratio at 31 December 2022 was 15.1 per cent (31 December 2021:
17.3 per cent).
As at 31 December 2022, static relief under the IFRS 9 transitional
arrangements amounted to £232 million (31 December 2021: £353 million)
and dynamic relief amounted to £358 million (31 December 2021: £428
million) through CET1 capital. On 1 January 2023 IFRS 9 static relief came to
an end and the transitional factor applied to IFRS 9 dynamic relief reduced
by a further 25 per cent, resulting in an overall reduction of 15 basis
points. The Group's pro forma CET1 capital ratio at 31 December 2022 does not
include the impact of the reduced relief.
The Group's total capital ratio reduced to 19.7 per cent (31 December 2021:
23.6 per cent) reflecting the reduction in CET1 capital, the derecognition of
legacy AT1 and Tier 2 capital instruments following the completion of the
transition to end-point eligibility rules for regulatory capital on 1 January
2022, instrument repurchases, the impact of interest rate increases and
regulatory amortisation on eligible Tier 2 capital instruments and the
increase in risk-weighted assets. This was partially offset by the issuance of
new AT1 and Tier 2 capital instruments, the impact of sterling depreciation
and an increase in eligible provisions recognised through Tier 2 capital.
CAPITAL RISK (continued)
The Group's minimum requirement for own funds and eligible liabilities (MREL)
ratio reduced to 31.7 per cent (31 December 2021: 37.2 per cent), reflecting
the increase in risk-weighted assets, reduction in total capital and a
reduction in other eligible liabilities. The latter largely reflected the
derecognition of senior unsecured debt instruments with less than one year to
maturity, calls and interest rate increases, partially offset by new issuances
and sterling depreciation.
The Group's UK leverage ratio reduced to 5.6 per cent (31 December 2021: 5.8
per cent) reflecting the reduction in the total tier 1 capital position,
partially offset by a decrease in the leverage exposure measure following
reductions in securities financing transactions and the measure for
off-balance sheet items.
Target capital ratio
The Board's view of the ongoing level of CET1 capital required by the Group to
grow the business, meet current and future regulatory requirements and cover
uncertainties continues to be around 12.5 per cent plus a management buffer of
around 1 per cent. This takes into account, amongst other considerations:
• The minimum Pillar 1 CET1 capital requirement of 4.5 per cent of
risk-weighted assets
• The Group's Pillar 2A CET1 capital requirement, set by the PRA, which is
the equivalent of around 1.5 per cent of risk-weighted assets.
• The Group's countercyclical capital buffer (CCyB) requirement which is
currently 0.9 per cent of risk-weighted assets, following the increase in the
UK CCyB rate to 1 per cent in December 2022. The Financial Policy Committee
(FPC) has previously announced that the UK CCyB rate will increase to 2 per
cent from July 2023 which would represent an equivalent increase in the
Group's CCyB to 1.8 per cent based upon the concentration of Group exposures
to the UK market at 31 December 2022.
• The capital conservation buffer (CCB) requirement of 2.5 per cent of
risk-weighted assets
• The RFB sub-group's other systemically important institution (O-SII)
buffer of 2.0 per cent of risk-weighted assets, which equates to 1.7 per cent
of risk-weighted assets at Group level. The FPC have amended the other
systemically important institution (O-SII) buffer framework, changing the
metric for determining the buffer rate from total assets to the leverage
exposure measure of the Ring-Fenced Bank sub-group (RFB). This will apply from
the next review point in December 2023 which will refer to the leverage
exposure measure as at 31 December 2022, with any changes applying from 1
January 2025. Based on the RFB's leverage exposure measure as at 31 December
2022, the O-SII buffer rate will be maintained at 2.0 per cent.
• The Group's PRA Buffer, which the PRA sets after taking account of the
results of any PRA stress tests and other information, as well as outputs from
the Group's own internal stress tests. The PRA requires this buffer to
remain confidential
• The desire to maintain a progressive and sustainable ordinary dividend
policy in the context of year to year earnings movements
Total capital requirement
The Group's total capital requirement (TCR) as at 31 December 2022, being the
aggregate of the Group's Pillar 1 and current Pillar 2A capital requirements,
was £22,550 million (31 December 2021: £22,986 million).
Stress testing
The Group undertakes a wide-ranging programme of stress testing, providing a
comprehensive view of the potential impacts arising from the risks to which
the Group and its key legal entities are exposed. One of the most important
uses of stress testing is to assess the resilience of the operational and
strategic plans of the Group and its legal entities to adverse economic
conditions and other key vulnerabilities.
As part of this programme the Group has participated in the delayed 2022
Annual Cyclical Scenario stress test run by the Bank of England, which was
submitted to the regulator during January 2023. This assesses the Group's
resilience to a severe economic shock where the House Price Index (HPI) falls
by 31 per cent, Commercial Real Estate (CRE) falls by 45 per cent,
unemployment peaks at 8.5 per cent and the Base Rate peaks at 6 per cent. The
results of this exercise will be published by the Bank of England in the third
quarter of 2023. In 2022 the Group also internally assessed vulnerabilities to
inflation and rising energy prices.
CAPITAL RISK (continued)
Capital resources
An analysis of the Group's actual capital position as at 31 December 2022 is
presented in the following table. The capital position reflects the
application of the transitional arrangements for IFRS 9.
At 31 Dec At 31 Dec 2021
2022 £m
£m
Common equity tier 1
Shareholders' equity per balance sheet 41,980 47,011
Adjustment to retained earnings for foreseeable dividends (1,062) (947)
Deconsolidation adjustments(1) 3,058 2,486
Cash flow hedging reserve 5,476 457
Other adjustments (80) 547
49,372 49,554
less: deductions from common equity tier 1
Goodwill and other intangible assets (4,982) (3,026)
Prudent valuation adjustment (434) (457)
Removal of defined benefit pension surplus (2,803) (3,200)
Significant investments(1) (4,843) (4,573)
Deferred tax assets (4,445) (4,483)
Common equity tier 1 capital 31,865 33,815
Additional tier 1
Other equity instruments 5,271 5,879
Preference shares and preferred securities(2) 470 2,149
Regulatory adjustments(3) (470) (1,598)
5,271 6,430
less: deductions from tier 1
Significant investments(1) (1,100) (1,100)
Total tier 1 capital 36,036 39,145
Tier 2
Other subordinated liabilities(2,3) 10,260 10,959
Deconsolidation of instruments issued by insurance entities(1) (1,430) (1,753)
Regulatory adjustments(3) (2,323) (1,056)
6,507 8,150
less: deductions from tier 2
Significant investments(1) (963) (961)
Total capital resources(3) 41,580 46,334
Risk-weighted assets 210,859 195,967
Common equity tier 1 capital ratio 15.1% 17.3%
Tier 1 capital ratio 17.1% 20.0%
Total capital ratio 19.7% 23.6%
(1) For regulatory capital purposes, the Group's Insurance business is
deconsolidated and replaced by the amount of the Group's investment in the
business. A part of this amount is deducted from capital (via 'significant
investments' in the table above) and the remaining amount is risk-weighted,
forming part of threshold risk-weighted assets.
(2) Preference shares, preferred securities and other subordinated
liabilities are reported as subordinated liabilities in the balance sheet.
(3) Following the completion of the transition to end-point eligibility
rules on 1 January 2022, legacy tier 1 and tier 2 capital instruments subject
to the original CRR transitional rules have now been fully removed from
regulatory capital. Included in other subordinated liabilities is a single
legacy tier 2 capital instrument of £5 million that remains eligible under
the extended transitional rules of CRR 2. Excluding this instrument, total
capital resources at 31 December 2022 are £41,575 million and the total
capital ratio is 19.7 per cent.
CAPITAL RISK (continued)
Minimum requirement for own funds and eligible liabilities (MREL)
The Group is not classified as a global systemically important bank (G-SIB)
but is subject to the Bank of England's MREL statement of policy (MREL SoP)
and must therefore maintain a minimum level of MREL resources.
Applying the MREL SoP to current minimum capital requirements at 31 December
2022, the Group's MREL, excluding regulatory capital and leverage buffers, is
the higher of 2 times Pillar 1 plus 2 times Pillar 2A, equivalent to 21.4 per
cent of risk-weighted assets, or 6.5 per cent of the UK leverage ratio
exposure measure.
In addition, CET1 capital cannot be used to meet both MREL and capital or
leverage buffers.
An analysis of the Group's current MREL resources is provided in the table
below.
At 31 Dec At 31 Dec 2021
2022 £m
£m
Total capital resources 41,580 46,334
Ineligible AT1 and tier 2 instruments(1) (181) (163)
Amortised portion of eligible tier 2 instruments issued by Lloyds Banking 1,346 713
Group plc
Other eligible liabilities issued by Lloyds Banking Group plc(2) 24,085 26,070
Total MREL resources 66,830 72,954
Risk-weighted assets 210,859 195,967
MREL ratio 31.7% 37.2%
Leverage exposure measure 638,815 664,362
MREL leverage ratio 10.5% 11.0%
(1) Instruments with less than or equal to one year to maturity or
instruments not issued out of the holding company.
(2) Includes senior unsecured debt.
CAPITAL RISK (continued)
Risk-weighted assets
At 31 Dec At 31 Dec 2021
2022 £m
£m
Foundation Internal Ratings Based (IRB) Approach 46,500 47,255
Retail IRB Approach 81,091 65,450
Other IRB Approach(1) 19,764 22,572
IRB Approach 147,355 135,277
Standardised (STA) Approach(1) 23,119 21,628
Credit risk 170,474 156,905
Securitisation(1) 6,397 5,945
Counterparty credit risk 5,911 5,261
Credit valuation adjustment risk 621 678
Operational risk 24,241 24,025
Market risk 3,215 3,153
Risk-weighted assets 210,859 195,967
Of which threshold risk-weighted assets(2) 11,883 12,359
(1) Threshold risk-weighted assets are now included within Other IRB
Approach and Standardised (STA) Approach. In addition securitisation
risk-weighted assets are now shown separately. Comparatives have been
presented on a consistent basis.
(2) Threshold risk-weighted assets reflect the element of significant
investments and deferred tax assets that are permitted to be risk-weighted
instead of being deducted from CET1 capital. Significant investments primarily
arise from investment in the Group's Insurance business.
Risk-weighted assets have increased by £15 billion in the year, primarily
reflecting:
• The £16 billion increase on 1 January 2022, reflecting regulatory
changes which include the anticipated impact of the implementation of new CRD
IV models to meet revised regulatory standards for modelled outputs. The new
CRD IV models remain subject to finalisation and approval by the PRA and
therefore the resultant risk-weighted asset impact also remains subject to
this.
• Risk-weighted assets reduced by £1 billion during the year (subsequent
to the 1 January 2022 regulatory changes) to £211 billion at 31 December
2022. This largely reflected optimisation activity and Retail model reductions
from the strong underlying credit performance, partly offset by the growth in
balance sheet lending and the impact of foreign exchange movements.
CAPITAL RISK (continued)
Leverage ratio
The Group is currently subject to the following minimum requirements under the
UK Leverage Ratio Framework:
• A minimum leverage ratio requirement of 3.25 per cent of the total
leverage exposure measure
• A countercyclical leverage buffer (CCLB) which is currently 0.3 per cent
of the total leverage exposure measure. Following the FPC's current intention
to increase the UK CCyB rate to 2 per cent in July 2023, the Group's CCLB
would be expected to increase to 0.6 per cent, based upon the concentration of
Group exposures to the UK market at 31 December 2022
• An additional leverage ratio buffer (ALRB) of 0.7 per cent of the total
leverage exposure measure applies to the RFB sub-group, which equates to 0.6
per cent at Group level
At least 75 per cent of the 3.25 per cent minimum leverage ratio requirement
as well as 100 per cent of all regulatory leverage buffers must be met with
CET1 capital.
The table below summarises the component parts of the Group's leverage ratio.
At 31 Dec At 31 Dec 2021
2022 £m
£m
Total tier 1 capital (fully loaded) 36,036 38,594
Exposure measure
Statutory balance sheet assets
Derivative financial instruments 24,753 22,051
Securities financing transactions 56,646 69,673
Loans and advances and other assets 796,430 794,801
Total assets 877,829 886,525
Qualifying central bank claims (91,125) (72,741)
Deconsolidation adjustments(1)
Derivative financial instruments 712 (166)
Loans and advances and other assets (168,531) (186,965)
Total deconsolidation adjustments (167,819) (187,131)
Derivatives adjustments (7,414) (3,506)
Securities financing transactions adjustments 2,645 1,946
Off-balance sheet items 42,463 57,496
Amounts already deducted from tier 1 capital (12,033) (10,324)
Other regulatory adjustments(2) (5,731) (7,903)
Total exposure measure 638,815 664,362
Average exposure measure(3) 658,435
UK leverage ratio 5.6% 5.8%
Average UK leverage ratio(3) 5.5%
Leverage exposure measure (including central bank claims) 729,940 737,103
Leverage ratio (including central bank claims) 4.9% 5.2%
(1) Deconsolidation adjustments relate to the deconsolidation of certain
Group entities that fall outside the scope of the Group's regulatory capital
consolidation, primarily the Group's Insurance business.
(2) Includes adjustments to exclude lending under the UK Government's Bounce
Back Loan Scheme (BBLS).
(3) The average UK leverage ratio is based on the average of the month end
tier 1 capital position and average exposure measure over the quarter (1
October 2022 to 31 December 2022). The average of 5.5 per cent compares to 5.3
per cent at the start and 5.6 per cent at the end of the quarter.
CREDIT RISK
Overview
The Group's portfolios are well-positioned and the Group retains a prudent
approach to credit risk appetite and risk management, with strong credit
origination criteria and robust LTVs in the secured portfolios.
Observed credit performance remains strong, despite the continued economic
uncertainty with very modest evidence of deterioration and sustained low
levels of new to arrears. Looking forward, there are risks from a higher
inflation and interest rate environment as modelled in the Group's expected
credit loss (ECL) allowance via the multiple economic scenarios (MES). The
Group continues to monitor the economic environment carefully through a suite
of early warning indicators and governance arrangements that ensure risk
mitigating action plans are in place to support customers and protect the
Group's positions.
The underlying impairment charge in 2022 was £1,510 million, compared to a
release of £1,385 million in 2021, reflecting a more normalised, but still
low, pre-updated MES charge of £915 million (2021: a charge of £314 million)
and a £595 million charge from economic outlook revisions (2021: a credit of
£1,699 million). The latter includes a £400 million release from the
Group's central adjustment which addressed downside risk outside of the base
case conditioning assumptions in relation to COVID-19.
This reporting period also coincided with the implementation of CRD IV
regulatory requirements, which resulted in updates to credit risk measurement
and modelling to maintain alignment between IFRS 9 and regulatory definitions
of default. Most notably for UK mortgages, default was previously deemed to
have occurred no later than when a payment was 180 days past due; in line with
CRD IV this has now been reduced to 90 days. In addition, other indicators of
mortgage default are added including end-of-term payments on past due
interest-only accounts and loans considered non-performing due to recent
arrears or forbearance.
The Group's underlying ECL allowance on loans and advances to customers
increased in the period to £5,222 million (31 December 2021: £4,477
million), largely due to the impact of the updated MES. Changes related to CRD
IV default definitions have resulted in material movements between stages,
although these have not materially impacted total ECL as management judgements
were previously held in lieu of anticipated changes.
Predominantly as a result of the CRD IV definition changes and updated MES,
Stage 2 loans and advances to customers increased from £41,710 million to
£65,728 million and as a percentage of total lending increased by 5.1
percentage points to 14.3 per cent (31 December 2021: 9.2 per cent). Of the
total Group Stage 2 loans and advances, 92.7 per cent are up to date
(31 December 2021: 86.5 per cent) with sustained low levels of new to
arrears. Stage 2 coverage reduced to 3.2 per cent (31 December 2021: 3.5 per
cent).
Similarly, Stage 3 loans and advances increased in the period to £10,753
million (31 December 2021: £8,694 million), and as a percentage of total
lending increased to 2.3 per cent (31 December 2021: 1.9 per cent). Stage 3
coverage decreased by 2.1 percentage points to 22.6 per cent (31 December
2021: 24.7 per cent) largely driven by comparatively better quality assets
moving into Stage 3 through these CRD IV changes. In the period since the CRD
IV changes, Stage 3 loans and advances have been stable.
Prudent risk appetite and risk management
• The Group continues to take a prudent and proactive approach to credit
risk management and credit risk appetite, whilst working closely with
customers to help them through cost of living pressures and any deterioration
in broader economic conditions
• Sector, asset and product concentrations within the portfolios are
closely monitored and controlled, with mitigating actions taken where
appropriate. Sector and product risk appetite parameters help manage exposure
to certain higher risk and cyclical sectors, segments and asset classes
• The Group's effective risk management seeks to ensure early
identification and management of customers and counterparties who may be
showing signs of distress
• The Group will continue to work closely with its customers to ensure
that they receive the appropriate level of support, including where repayments
under the UK Government scheme lending fall due
CREDIT RISK (continued)
Statutory impairment charge (credit) by division
Loans and Loans and Debt Financial Other Undrawn 2022 2021(1)
£m
advances to advances securities assets at £m balances £m
customers to banks £m fair value £m
£m £m through other
comprehensive
income
£m
Retail 1,311 - - - - 62 1,373 (447)
Commercial 439 12 6 - - 60 517 (931)
Banking
Insurance, - 2 - - 22 - 24 2
Pensions and
Investments
Equity Investments (399) - 1 6 - - (392) (2)
and Central Items
Total impairment charge (credit) 1,351 14 7 6 22 122 1,522 (1,378)
(1) Reflects the new organisation structure. See page 82.
( )
Underlying impairment charge (credit)(A) by division
Loans and Loans and Debt Financial Other Undrawn 2022 2021(1,2)
£m
advances to advances securities assets at £m balances £m
customers to banks £m fair value £m
£m £m through other
comprehensive
income
£m
Retail 1,311 - - - - 62 1,373 (447)
Commercial 439 12 6 - - 60 517 (936)
Banking
Insurance, - 2 - - 10 - 12 -
Pensions and
Investments
Equity Investments (399) - 1 6 - - (392) (2)
and Central Items
Total impairment 1,351 14 7 6 10 122 1,510 (1,385)
charge (credit)
Asset quality ratio(A) 0.32% (0.31%)
(1) Reflects the new organisation structure. See page 82.
(2) Non lending-related fraud costs, previously reported within underlying
impairment, are now included within operating costs. Comparatives have been
presented on a consistent basis.
CREDIT RISK (continued)
Credit risk balance sheet basis of presentation
The balance sheet analyses which follow have been presented on two bases; the
statutory basis which is consistent with the presentation in the Group's
accounts and the underlying basis which is used for internal management
purposes. A reconciliation between the two bases has been provided.
In the following statutory basis tables, purchased or originated
credit-impaired (POCI) assets include a fixed pool of mortgages that were
purchased as part of the HBOS acquisition at a deep discount to face value
reflecting credit losses incurred from the point of origination to the date of
acquisition. The residual expected credit loss (ECL) allowance and resulting
low coverage ratio on POCI assets reflects further deterioration in the
creditworthiness from the date of acquisition. Over time, these POCI assets
will run off as the loans redeem, pay down or as losses are written off.
The Group uses the underlying basis to monitor the creditworthiness of the
lending portfolio and related ECL allowances because it provides a better
indication of the credit performance of the POCI assets purchased as part of
the HBOS acquisition. The underlying basis assumes that the lending assets
acquired as part of a business combination were originated by the Group and
are classified as either Stage 1, 2 or 3 according to the change in credit
risk over the period since origination. Underlying ECL allowances have been
calculated accordingly.
Total expected credit loss allowance
Statutory basis Underlying basis(A)
At 31 Dec 2022 At 30 Sep 2022 At 31 Dec At 31 Dec 2022 At 30 Sep 2022 At 31 Dec
£m
£m
2021
£m
£m
2021
£m
£m
Customer related balances
Drawn 4,518 4,272 3,820 4,899 4,685 4,277
Undrawn 323 286 200 323 286 200
4,841 4,558 4,020 5,222 4,971 4,477
Loans and advances to banks 15 7 1 15 7 1
Debt securities 9 6 3 9 6 3
Other assets 38 33 18 38 33 18
Total ECL allowance 4,903 4,604 4,042 5,284 5,017 4,499
CREDIT RISK (continued)
Reconciliation between statutory and underlying bases of gross loans and
advances to customers and expected credit loss allowance on drawn balances
Gross loans and advances to customers Expected credit loss allowance on drawn balances
Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total
£m £m £m £m £m £m £m £m £m £m
At 31 December 2022
Underlying basis(A) 383,317 65,728 10,753 - 459,798 700 1,936 2,263 - 4,899
POCI assets (2,326) (4,564) (3,113) 10,003 - - (128) (506) 634 -
Acquisition fair - - - (381) (381) - - - (381) (381)
value adjustment
(2,326) (4,564) (3,113) 9,622 (381) - (128) (506) 253 (381)
Statutory basis 380,991 61,164 7,640 9,622 459,417 700 1,808 1,757 253 4,518
At 30 September 2022
Underlying basis(A) 385,685 63,912 11,422 - 461,019 632 1,847 2,206 - 4,685
POCI assets (1,626) (5,578) (3,202) 10,406 - - (189) (529) 718 -
Acquisition fair - - - (413) (413) - - - (413) (413)
value adjustment
(1,626) (5,578) (3,202) 9,993 (413) - (189) (529) 305 (413)
Statutory basis 384,059 58,334 8,220 9,993 460,606 632 1,658 1,677 305 4,272
At 31 December 2021
Underlying basis(A) 402,415 41,710 8,694 - 452,819 919 1,377 1,981 - 4,277
POCI assets (2,392) (6,781) (2,251) 11,424 - (1) (259) (397) 657 -
Acquisition fair 13 2 - (447) (432) (3) (4) (3) (447) (457)
value adjustment
(2,379) (6,779) (2,251) 10,977 (432) (4) (263) (400) 210 (457)
Statutory basis 400,036 34,931 6,443 10,977 452,387 915 1,114 1,581 210 3,820
CREDIT RISK (continued)
Movements in total expected credit loss allowance - statutory basis
Opening ECL at 31 Dec 2021(1) Write-offs Income Net ECL Closing ECL at 31 Dec 2022
£m and other(2) statement increase £m
£m charge (credit) (decrease)
£m £m
UK mortgages 837 77 295 372 1,209
Credit cards 521 (329) 571 242 763
Loans and overdrafts 445 (266) 499 233 678
UK Motor Finance 298 (44) (2) (46) 252
Other 82 (6) 10 4 86
Retail 2,183 (568) 1,373 805 2,988
Small and Medium Businesses 459 (98) 188 90 549
Corporate and Institutional Banking 974 17 329 346 1,320
Commercial Banking 1,433 (81) 517 436 1,869
Insurance, Pensions and Investments 18 (2) 24 22 40
Equity Investments and Central Items 408 (10) (392) (402) 6
Total(3) 4,042 (661) 1,522 861 4,903
(1) Reflects the new organisation structure. See page 82.
(2) Contains adjustments in respect of purchased or originated
credit-impaired financial assets.
(3) Total ECL includes £62 million relating to other non customer-related
assets (31 December 2021: £22 million).
Movements in total expected credit loss allowance - underlying basis(A)
Opening ECL at 31 Dec 2021(1) Write-offs Income Net ECL Closing ECL at 31 Dec 2022
£m and other statement increase £m
£m charge (credit) (decrease)
£m £m
UK mortgages 1,284 11 295 306 1,590
Credit cards 531 (339) 571 232 763
Loans and overdrafts 445 (266) 499 233 678
UK Motor Finance 298 (44) (2) (46) 252
Other 82 (6) 10 4 86
Retail 2,640 (644) 1,373 729 3,369
Small and Medium Businesses 459 (98) 188 90 549
Corporate and Institutional Banking 974 17 329 346 1,320
Commercial Banking 1,433 (81) 517 436 1,869
Insurance, Pensions and Investments 18 10 12 22 40
Equity Investments and Central Items 408 (10) (392) (402) 6
Total(2) 4,499 (725) 1,510 785 5,284
(1) Reflects the new organisation structure. See page 82.
(2) Total ECL includes £62 million relating to other non customer-related
assets (31 December 2021: £22 million).
CREDIT RISK (continued)
Loans and advances to customers and expected credit loss allowance - statutory
basis
At 31 December 2022 Stage 1 Stage 2 Stage 3 POCI Total Stage 2 Stage 3
£m £m £m £m £m as % of as % of
total total
Loans and advances to customers
UK mortgages 257,517 41,783 3,416 9,622 312,338 13.4 1.1
Credit cards 11,416 3,287 289 - 14,992 21.9 1.9
Loans and overdrafts 8,357 1,713 247 - 10,317 16.6 2.4
UK Motor Finance 12,174 2,245 154 - 14,573 15.4 1.1
Other 13,990 643 157 - 14,790 4.3 1.1
Retail 303,454 49,671 4,263 9,622 367,010 13.5 1.2
Small and Medium Businesses 30,781 5,654 1,760 - 38,195 14.8 4.6
Corporate and Institutional Banking 49,728 5,839 1,611 - 57,178 10.2 2.8
Commercial Banking 80,509 11,493 3,371 - 95,373 12.1 3.5
Equity Investments and Central Items(1) (2,972) - 6 - (2,966)
Total gross lending 380,991 61,164 7,640 9,622 459,417 13.3 1.7
ECL allowance on drawn balances (700) (1,808) (1,757) (253) (4,518)
Net balance sheet carrying value 380,291 59,356 5,883 9,369 454,899
Customer related ECL allowance (drawn and undrawn)
UK mortgages 92 553 311 253 1,209
Credit cards 173 477 113 - 763
Loans and overdrafts 185 367 126 - 678
UK Motor Finance(2) 95 76 81 - 252
Other 16 18 52 - 86
Retail 561 1,491 683 253 2,988
Small and Medium Businesses 129 271 149 - 549
Corporate and Institutional Banking 144 231 925 - 1,300
Commercial Banking 273 502 1,074 - 1,849
Equity Investments and Central Items - - 4 - 4
Total 834 1,993 1,761 253 4,841
Customer related ECL allowance (drawn and undrawn) as a percentage of loans
and advances to customers(3)
UK mortgages - 1.3 9.1 2.6 0.4
Credit cards 1.5 14.5 50.9 - 5.1
Loans and overdrafts 2.2 21.4 64.6 - 6.6
UK Motor Finance 0.8 3.4 52.6 - 1.7
Other 0.1 2.8 33.1 - 0.6
Retail 0.2 3.0 16.5 2.6 0.8
Small and Medium Businesses 0.4 4.8 12.9 - 1.5
Corporate and Institutional Banking 0.3 4.0 57.5 - 2.3
Commercial Banking 0.3 4.4 38.9 - 2.0
Equity Investments and Central Items - 66.7 -
Total 0.2 3.3 25.5 2.6 1.1
(1) Contains centralised fair value hedge accounting adjustments.
(2) UK Motor Finance for Stages 1 and 2 include £92 million relating to
provisions against residual values of vehicles subject to finance leasing
agreements. These provisions are included within the calculation of coverage
ratios.
(3) Total and Stage 3 ECL allowances as a percentage of drawn balances
exclude loans in recoveries in Credit cards of £67 million, Loans and
overdrafts of £52 million, Small and Medium Businesses of £607 million and
Corporate and Institutional Banking of £1 million.
CREDIT RISK (continued)
Loans and advances to customers and expected credit loss allowance - statutory
basis (continued)
At 30 September 2022 Stage 1 Stage 2 Stage 3 POCI Total Stage 2 Stage 3
£m £m £m £m £m as % of as % of
total total
Loans and advances to customers
UK mortgages 257,915 40,575 3,411 9,993 311,894 13.0 1.1
Credit cards 12,018 2,526 292 - 14,836 17.0 2.0
Loans and overdrafts 8,723 1,339 255 - 10,317 13.0 2.5
UK Motor Finance 12,335 1,949 169 - 14,453 13.5 1.2
Other 13,294 650 158 - 14,102 4.6 1.1
Retail 304,285 47,039 4,285 9,993 365,602 12.9 1.2
Small and Medium Businesses 31,783 6,266 2,279 - 40,328 15.5 5.7
Corporate and Institutional Banking 52,001 5,029 1,650 - 58,680 8.6 2.8
Commercial Banking 83,784 11,295 3,929 - 99,008 11.4 4.0
Equity Investments and Central Items(1) (4,010) - 6 - (4,004)
Total gross lending 384,059 58,334 8,220 9,993 460,606 12.7 1.8
ECL allowance on drawn balances (632) (1,658) (1,677) (305) (4,272)
Net balance sheet carrying value 383,427 56,676 6,543 9,688 456,334
Customer related ECL allowance (drawn and undrawn)
UK mortgages 48 516 294 305 1,163
Credit cards 182 382 118 - 682
Loans and overdrafts 175 273 138 - 586
UK Motor Finance(2) 107 85 93 - 285
Other 15 18 48 - 81
Retail 527 1,274 691 305 2,797
Small and Medium Businesses 104 292 153 - 549
Corporate and Institutional Banking 133 243 832 - 1,208
Commercial Banking 237 535 985 - 1,757
Equity Investments and Central Items - - 4 - 4
Total 764 1,809 1,680 305 4,558
Customer related ECL allowance (drawn and undrawn) as a percentage of loans
and advances to customers(3)
UK mortgages - 1.3 8.6 3.1 0.4
Credit cards 1.5 15.1 54.4 - 4.6
Loans and overdrafts 2.0 20.4 72.6 - 5.7
UK Motor Finance 0.9 4.4 55.0 - 2.0
Other 0.1 2.8 30.4 - 0.6
Retail 0.2 2.7 16.7 3.1 0.8
Small and Medium Businesses 0.3 4.7 13.0 - 1.4
Corporate and Institutional Banking 0.3 4.8 50.5 - 2.1
Commercial Banking 0.3 4.7 34.9 - 1.8
Equity Investments and Central Items - 66.7 -
Total 0.2 3.1 24.1 3.1 1.0
(1) Contains centralised fair value hedge accounting adjustments.
(2) UK Motor Finance for Stages 1 and 2 include £93 million relating to
provisions against residual values of vehicles subject to finance leasing
agreements. These provisions are included within the calculation of coverage
ratios.
(3) Total and Stage 3 ECL allowances as a percentage of drawn balances
exclude loans in recoveries in Credit cards of £75 million, Loans and
overdrafts of £65 million, Small and Medium Businesses of £1,104 million and
Corporate and Institutional Banking of £1 million.
CREDIT RISK (continued)
Loans and advances to customers and expected credit loss allowance - statutory
basis (continued)
At 31 December 2021 Stage 1 Stage 2 Stage 3 POCI Total Stage 2 Stage 3
£m £m £m £m £m as % of as % of
total total
Loans and advances to customers
UK mortgages 273,629 21,798 1,940 10,977 308,344 7.1 0.6
Credit cards(1) 11,918 2,077 292 - 14,287 14.5 2.0
Loans and overdrafts 8,181 1,105 271 - 9,557 11.6 2.8
UK Motor Finance 12,247 1,828 201 - 14,276 12.8 1.4
Other(1) 11,198 593 169 - 11,960 5.0 1.4
Retail 317,173 27,401 2,873 10,977 358,424 7.6 0.8
Small and Medium Businesses(1) 36,134 4,992 1,747 - 42,873 11.6 4.1
Corporate and Institutional Banking(1) 46,585 2,538 1,816 - 50,939 5.0 3.6
Commercial Banking 82,719 7,530 3,563 - 93,812 8.0 3.8
Equity Investments and Central Items(2) 144 - 7 - 151 - 4.6
Total gross lending 400,036 34,931 6,443 10,977 452,387 7.7 1.4
ECL allowance on drawn balances (915) (1,114) (1,581) (210) (3,820)
Net balance sheet carrying value 399,121 33,817 4,862 10,767 448,567
Customer related ECL allowance (drawn and undrawn)
UK mortgages 49 394 184 210 837
Credit cards(1) 144 249 128 - 521
Loans and overdrafts 136 170 139 - 445
UK Motor Finance(3) 108 74 116 - 298
Other(1) 15 15 52 - 82
Retail 452 902 619 210 2,183
Small and Medium Businesses(1) 104 176 179 - 459
Corporate and Institutional Banking(1) 68 122 782 - 972
Commercial Banking 172 298 961 - 1,431
Equity Investments and Central Items 400 - 6 - 406
Total 1,024 1,200 1,586 210 4,020
Customer related ECL allowance (drawn and undrawn) as a percentage of loans
and advances to customers(4)
UK mortgages - 1.8 9.5 1.9 0.3
Credit cards(1) 1.2 12.0 56.9 - 3.7
Loans and overdrafts 1.7 15.4 67.5 - 4.7
UK Motor Finance 0.9 4.0 57.7 - 2.1
Other(1) 0.1 2.5 30.8 - 0.7
Retail 0.1 3.3 22.6 1.9 0.6
Small and Medium Businesses(1) 0.3 3.5 14.5 - 1.1
Corporate and Institutional Banking(1) 0.1 4.8 43.1 - 1.9
Commercial Banking 0.2 4.0 31.6 - 1.5
Equity Investments and Central Items(5) - - 85.7 - 4.0
Total 0.3 3.4 27.4 1.9 0.9
(1) Reflects the new organisation structure. See page 82.
(2) Contains centralised fair value hedge accounting adjustments.
(3) UK Motor Finance for Stages 1 and 2 include £95 million relating to
provisions against residual values of vehicles subject to finance leasing
agreements. These provisions are included within the calculation of coverage
ratios.
(4) Total and Stage 3 ECL allowances as a percentage of drawn balances
exclude loans in recoveries in Credit cards of £67 million, Loans and
overdrafts of £65 million, Small and Medium Businesses of £515 million and
Corporate and Institutional Banking of £3 million.
(5) Equity Investments and Central Items excludes the £400 million ECL
central adjustment.
CREDIT RISK (continued)
Loans and advances to customers and expected credit loss allowance -
underlying basis(A)
At 31 December 2022 Stage 1 Stage 2 Stage 3 Total Stage 2 Stage 3
£m £m £m £m as % of as % of
total total
Loans and advances to customers
UK mortgages 259,843 46,347 6,529 312,719 14.8 2.1
Credit cards 11,416 3,287 289 14,992 21.9 1.9
Loans and overdrafts 8,357 1,713 247 10,317 16.6 2.4
UK Motor Finance 12,174 2,245 154 14,573 15.4 1.1
Other 13,990 643 157 14,790 4.3 1.1
Retail(1) 305,780 54,235 7,376 367,391 14.8 2.0
Small and Medium Businesses 30,781 5,654 1,760 38,195 14.8 4.6
Corporate and Institutional Banking 49,728 5,839 1,611 57,178 10.2 2.8
Commercial Banking 80,509 11,493 3,371 95,373 12.1 3.5
Equity Investments and Central Items(2) (2,972) - 6 (2,966)
Total gross lending 383,317 65,728 10,753 459,798 14.3 2.3
ECL allowance on drawn balances (700) (1,936) (2,263) (4,899)
Net balance sheet carrying value 382,617 63,792 8,490 454,899
Customer related ECL allowance (drawn and undrawn)
UK mortgages 92 681 817 1,590
Credit cards 173 477 113 763
Loans and overdrafts 185 367 126 678
UK Motor Finance(3) 95 76 81 252
Other 16 18 52 86
Retail(1) 561 1,619 1,189 3,369
Small and Medium Businesses 129 271 149 549
Corporate and Institutional Banking 144 231 925 1,300
Commercial Banking 273 502 1,074 1,849
Equity Investments and Central Items - - 4 4
Total 834 2,121 2,267 5,222
Customer related ECL allowance (drawn and undrawn) as a percentage of loans
and advances to customers(4)
UK mortgages - 1.5 12.5 0.5
Credit cards 1.5 14.5 50.9 5.1
Loans and overdrafts 2.2 21.4 64.6 6.6
UK Motor Finance 0.8 3.4 52.6 1.7
Other 0.1 2.8 33.1 0.6
Retail(1) 0.2 3.0 16.4 0.9
Small and Medium Businesses 0.4 4.8 12.9 1.5
Corporate and Institutional Banking 0.3 4.0 57.5 2.3
Commercial Banking 0.3 4.4 38.9 2.0
Equity Investments and Central Items - 66.7
Total 0.2 3.2 22.6 1.1
(1 ) Retail balances exclude the impact of the HBOS
acquisition-related adjustments.
(2 ) Contains centralised fair value hedge accounting adjustments.
(3 ) UK Motor Finance for Stages 1 and 2 include £92 million relating to
provisions against residual values of vehicles subject to finance leasing
agreements. These provisions are included within the calculation of coverage
ratios.
(4 ) Total and Stage 3 ECL allowances as a percentage of drawn balances
exclude loans in recoveries in Credit cards of £67 million, Loans and
overdrafts of £52 million, Small and Medium Businesses of £607 million and
Corporate and Institutional Banking of £1 million.
CREDIT RISK (continued)
Loans and advances to customers and expected credit loss allowance -
underlying basis(A) (continued)
At 30 September 2022 Stage 1 Stage 2 Stage 3 Total Stage 2 Stage 3
£m £m £m £m as % of as % of
total total
Loans and advances to customers
UK mortgages 259,541 46,153 6,613 312,307 14.8 2.1
Credit cards 12,018 2,526 292 14,836 17.0 2.0
Loans and overdrafts 8,723 1,339 255 10,317 13.0 2.5
UK Motor Finance 12,335 1,949 169 14,453 13.5 1.2
Other 13,294 650 158 14,102 4.6 1.1
Retail(1) 305,911 52,617 7,487 366,015 14.4 2.0
Small and Medium Businesses 31,783 6,266 2,279 40,328 15.5 5.7
Corporate and Institutional Banking 52,001 5,029 1,650 58,680 8.6 2.8
Commercial Banking 83,784 11,295 3,929 99,008 11.4 4.0
Equity Investments and Central Items(2) (4,010) - 6 (4,004)
Total gross lending 385,685 63,912 11,422 461,019 13.9 2.5
ECL allowance on drawn balances (632) (1,847) (2,206) (4,685)
Net balance sheet carrying value 385,053 62,065 9,216 456,334
Customer related ECL allowance (drawn and undrawn)
UK mortgages 48 705 823 1,576
Credit cards 182 382 118 682
Loans and overdrafts 175 273 138 586
UK Motor Finance(3) 107 85 93 285
Other 15 18 48 81
Retail(1) 527 1,463 1,220 3,210
Small and Medium Businesses 104 292 153 549
Corporate and Institutional Banking 133 243 832 1,208
Commercial Banking 237 535 985 1,757
Equity Investments and Central Items - - 4 4
Total 764 1,998 2,209 4,971
Customer related ECL allowance (drawn and undrawn) as a percentage of loans
and advances to customers(4)
UK mortgages - 1.5 12.4 0.5
Credit cards 1.5 15.1 54.4 4.6
Loans and overdrafts 2.0 20.4 72.6 5.7
UK Motor Finance 0.9 4.4 55.0 2.0
Other 0.1 2.8 30.4 0.6
Retail(1) 0.2 2.8 16.6 0.9
Small and Medium Businesses 0.3 4.7 13.0 1.4
Corporate and Institutional Banking 0.3 4.8 50.5 2.1
Commercial Banking 0.3 4.7 34.9 1.8
Equity Investments and Central Items - 66.7
Total 0.2 3.1 21.7 1.1
(1 ) Retail balances exclude the impact of the HBOS acquisition-related
adjustments.
(2 ) Contains centralised fair value hedge accounting adjustments.
(3 ) UK Motor Finance for Stages 1 and 2 include £93 million relating to
provisions against residual values of vehicles subject to finance leasing
agreements. These provisions are included within the calculation of coverage
ratios.
(4 ) Total and Stage 3 ECL allowances as a percentage of drawn balances
exclude loans in recoveries in Credit cards of £75 million, Loans and
overdrafts of £65 million, Small and Medium Businesses of £1,104 million and
Corporate and Institutional Banking of £1 million.
CREDIT RISK (continued)
Loans and advances to customers and expected credit loss allowance -
underlying basis(A) (continued)
At 31 December 2021 Stage 1 Stage 2 Stage 3 Total Stage 2 Stage 3
£m £m £m £m as % of as % of
total total
Loans and advances to customers
UK mortgages 276,021 28,579 4,191 308,791 9.3 1.4
Credit cards(1) 11,905 2,075 292 14,272 14.5 2.0
Loans and overdrafts 8,181 1,105 271 9,557 11.6 2.8
UK Motor Finance 12,247 1,828 201 14,276 12.8 1.4
Other(1) 11,198 593 169 11,960 5.0 1.4
Retail(2) 319,552 34,180 5,124 358,856 9.5 1.4
Small and Medium Businesses(1) 36,134 4,992 1,747 42,873 11.6 4.1
Corporate and Institutional Banking(1) 46,585 2,538 1,816 50,939 5.0 3.6
Commercial Banking 82,719 7,530 3,563 93,812 8.0 3.8
Equity Investments and Central Items(3) 144 - 7 151 - 4.6
Total gross lending 402,415 41,710 8,694 452,819 9.2 1.9
ECL allowance on drawn balances (919) (1,377) (1,981) (4,277)
Net balance sheet carrying value 401,496 40,333 6,713 448,542
Customer related ECL allowance (drawn and undrawn)
UK mortgages 50 653 581 1,284
Credit cards(1) 147 253 131 531
Loans and overdrafts 136 170 139 445
UK Motor Finance(4) 108 74 116 298
Other(1) 15 15 52 82
Retail(2) 456 1,165 1,019 2,640
Small and Medium Businesses(1) 104 176 179 459
Corporate and Institutional Banking(1) 68 122 782 972
Commercial Banking 172 298 961 1,431
Equity Investments and Central Items 400 - 6 406
Total 1,028 1,463 1,986 4,477
Customer related ECL allowance (drawn and undrawn) as a percentage of loans
and advances to customers(5)
UK mortgages - 2.3 13.9 0.4
Credit cards(1) 1.2 12.2 58.2 3.7
Loans and overdrafts 1.7 15.4 67.5 4.7
UK Motor Finance 0.9 4.0 57.7 2.1
Other(1) 0.1 2.5 30.8 0.7
Retail(2) 0.1 3.4 20.4 0.7
Small and Medium Businesses(1) 0.3 3.5 14.5 1.1
Corporate and Institutional Banking(1) 0.1 4.8 43.1 1.9
Commercial Banking 0.2 4.0 31.6 1.5
Equity Investments and Central Items(6) - - 85.7 4.0
Total 0.3 3.5 24.7 1.0
(1 ) Reflects the new organisation structure. See page 82.
(2 ) Retail balances exclude the impact of the HBOS and MBNA
acquisition-related adjustments.
(3 ) Contains centralised fair value hedge accounting adjustments.
(4 ) UK Motor Finance for Stages 1 and 2 include £95 million relating to
provisions against residual values of vehicles subject to finance leasing
agreements. These provisions are included within the calculation of coverage
ratios.
(5 ) Total and Stage 3 ECL allowances as a percentage of drawn balances
exclude loans in recoveries in Credit cards of £67 million, Loans and
overdrafts of £65 million, Small and Medium Businesses of £515 million and
Corporate and Institutional Banking of £3 million.
(6) Equity Investments and Central Items excludes the £400 million ECL
central adjustment.
CREDIT RISK (continued)
Stage 2 loans and advances to customers and expected credit loss allowance -
statutory basis
Up to date 1 to 30 days Over 30 days Total
past due(2) past due
PD movements Other(1)
At 31 December 2022 Gross ECL(3) Gross ECL(3) Gross ECL(3) Gross ECL(3) Gross ECL(3)
lending £m lending £m lending £m lending £m lending £m
£m £m £m £m £m
UK mortgages 29,718 263 9,613 160 1,633 67 819 63 41,783 553
Credit cards 3,023 386 136 46 98 30 30 15 3,287 477
Loans and overdrafts 1,311 249 234 53 125 45 43 20 1,713 367
UK Motor Finance 1,047 28 1,045 23 122 18 31 7 2,245 76
Other 160 5 384 7 54 4 45 2 643 18
Retail 35,259 931 11,412 289 2,032 164 968 107 49,671 1,491
Small and Medium Businesses 4,081 223 1,060 27 339 13 174 8 5,654 271
Corporate and Institutional Banking 5,728 229 27 - 30 1 54 1 5,839 231
Commercial Banking 9,809 452 1,087 27 369 14 228 9 11,493 502
Total 45,068 1,383 12,499 316 2,401 178 1,196 116 61,164 1,993
At 30 September 2022
UK mortgages 31,885 195 6,331 159 1,599 82 760 80 40,575 516
Credit cards 2,275 291 132 47 90 28 29 16 2,526 382
Loans and overdrafts 943 169 232 45 121 39 43 20 1,339 273
UK Motor Finance 854 27 927 23 136 25 32 10 1,949 85
Other 166 4 394 8 54 4 36 2 650 18
Retail 36,123 686 8,016 282 2,000 178 900 128 47,039 1,274
Small and Medium Businesses 4,408 246 1,235 26 399 13 224 7 6,266 292
Corporate and Institutional Banking 4,856 242 39 - 14 - 120 1 5,029 243
Commercial Banking 9,264 488 1,274 26 413 13 344 8 11,295 535
Total 45,387 1,174 9,290 308 2,413 191 1,244 136 58,334 1,809
At 31 December 2021
UK mortgages 14,845 132 4,133 155 1,433 38 1,387 69 21,798 394
Credit cards(4) 1,755 176 210 42 86 20 26 11 2,077 249
Loans and overdrafts 505 82 448 43 113 30 39 15 1,105 170
UK Motor Finance 581 20 1,089 26 124 19 34 9 1,828 74
Other(4) 194 4 306 7 44 2 49 2 593 15
Retail 17,880 414 6,186 273 1,800 109 1,535 106 27,401 902
Small and Medium Businesses(4) 3,570 153 936 14 297 6 189 3 4,992 176
Corporate and Institutional Banking(4) 2,479 119 25 3 6 - 28 - 2,538 122
Commercial Banking 6,049 272 961 17 303 6 217 3 7,530 298
Total 23,929 686 7,147 290 2,103 115 1,752 109 34,931 1,200
(1 ) Includes forbearance, client and product-specific indicators not
reflected within quantitative PD assessments. As of 31 December 2022,
interest-only mortgage customers at risk of not meeting their final term
payment are now directly classified as Stage 2 up to date "Other", driving
movement of gross lending from the category of Stage 2 up to date "PD
movement" into "Other".
(2) Includes assets that have triggered PD movements, or other rules, given
that being 1-29 days in arrears in and of itself is not a Stage 2 trigger.
(3) Expected credit loss allowance on loans and advances to customers (drawn
and undrawn).
(4) Reflects the new organisation structure. See page 82.
CREDIT RISK (continued)
Stage 2 loans and advances to customers and expected credit loss allowance -
underlying basis(A)
Up to date 1 to 30 days Over 30 days Total
past due(2) past due
PD movements Other(1)
At 31 December 2022 Gross ECL(3) Gross ECL(3) Gross ECL(3) Gross ECL(3) Gross ECL(3)
lending £m lending £m lending £m lending £m lending £m
£m £m £m £m £m
UK mortgages 31,908 301 10,800 198 2,379 93 1,260 89 46,347 681
Credit cards 3,023 386 136 46 98 30 30 15 3,287 477
Loans and overdrafts 1,311 249 234 53 125 45 43 20 1,713 367
UK Motor Finance 1,047 28 1,045 23 122 18 31 7 2,245 76
Other 160 5 384 7 54 4 45 2 643 18
Retail 37,449 969 12,599 327 2,778 190 1,409 133 54,235 1,619
Small and Medium Businesses 4,081 223 1,060 27 339 13 174 8 5,654 271
Corporate and Institutional Banking 5,728 229 27 - 30 1 54 1 5,839 231
Commercial Banking 9,809 452 1,087 27 369 14 228 9 11,493 502
Total 47,258 1,421 13,686 354 3,147 204 1,637 142 65,728 2,121
At 30 September 2022
UK mortgages 34,716 257 7,915 213 2,349 118 1,173 117 46,153 705
Credit cards 2,275 291 132 47 90 28 29 16 2,526 382
Loans and overdrafts 943 169 232 45 121 39 43 20 1,339 273
UK Motor Finance 854 27 927 23 136 25 32 10 1,949 85
Other 166 4 394 8 54 4 36 2 650 18
Retail 38,954 748 9,600 336 2,750 214 1,313 165 52,617 1,463
Small and Medium Businesses 4,408 246 1,235 26 399 13 224 7 6,266 292
Corporate and Institutional Banking 4,856 242 39 - 14 - 120 1 5,029 243
Commercial Banking 9,264 488 1,274 26 413 13 344 8 11,295 535
Total 48,218 1,236 10,874 362 3,163 227 1,657 173 63,912 1,998
At 31 December 2021
UK mortgages 17,917 226 6,053 222 2,270 73 2,339 132 28,579 653
Credit cards(4) 1,754 179 209 41 86 21 26 12 2,075 253
Loans and overdrafts 505 82 448 43 113 30 39 15 1,105 170
UK Motor Finance 581 20 1,089 26 124 19 34 9 1,828 74
Other(4) 194 4 306 7 44 2 49 2 593 15
Retail 20,951 511 8,105 339 2,637 145 2,487 170 34,180 1,165
Small and Medium Businesses(4) 3,570 153 936 14 297 6 189 3 4,992 176
Corporate and Institutional Banking(4) 2,479 119 25 3 6 - 28 - 2,538 122
Commercial Banking 6,049 272 961 17 303 6 217 3 7,530 298
Total 27,000 783 9,066 356 2,940 151 2,704 173 41,710 1,463
(1 ) Includes forbearance, client and product-specific indicators not
reflected within quantitative PD assessments. As of 31 December 2022,
interest-only mortgage customers at risk of not meeting their final term
payment are now directly classified as Stage 2 up to date "Other", driving
movement of gross lending from the category of Stage 2 up to date "PD
movement" into "Other".
(2) Includes assets that have triggered PD movements, or other rules, given
that being 1-29 days in arrears in and of itself is not a Stage 2 trigger.
(3) Expected credit loss allowance on loans and advances to customers (drawn
and undrawn).
(4) Reflects the new organisation structure. See page 82.
CREDIT RISK (continued)
ECL sensitivity to economic assumptions
The measurement of ECL reflects an unbiased probability-weighted range of
possible future economic outcomes. The Group achieves this by generating four
economic scenarios to reflect the range of outcomes; the central scenario
reflects the Group's base case assumptions used for medium-term planning
purposes, an upside and a downside scenario are also selected together with a
severe downside scenario. If the base case moves adversely, it generates a
new, more adverse downside and severe downside which are then incorporated
into the ECL. The base case, upside and downside scenarios carry a 30 per cent
weighting; the severe downside is weighted at 10 per cent. These assumptions
can be found in note 5 on page 72 onwards.
The table below shows the Group's ECL for the probability-weighted, upside,
base case, downside and severe downside scenarios, with the severe downside
scenario incorporating adjustments made to CPI inflation and UK Bank Rate
paths. The stage allocation for an asset is based on the overall scenario
probability-weighted PD and hence the staging of assets is constant across all
the scenarios. In each economic scenario the ECL for individual assessments
and post-model adjustments is typically held constant reflecting the basis on
which they are evaluated. For 31 December 2022, however, post-model
adjustments in Commercial Banking have been apportioned across the scenarios
to better reflect the sensitivity of these adjustments to each scenario.
Judgements applied through changes to model inputs are reflected in the
scenario ECL sensitivities. The probability-weighted view shows the extent to
which a higher ECL allowance has been recognised to take account of multiple
economic scenarios relative to the base case; the uplift being £692 million
compared to £223 million at 31 December 2021.
Statutory basis Probability- Upside Base case Downside Severe
weighted £m £m £m downside
£m £m
UK mortgages 1,209 514 790 1,434 3,874
Credit cards 763 596 727 828 1,180
Other Retail 1,016 907 992 1,056 1,290
Commercial Banking 1,869 1,459 1,656 2,027 3,261
Other 46 46 46 47 47
At 31 December 2022 4,903 3,522 4,211 5,392 9,652
UK mortgages 1,163 463 734 1,375 3,914
Credit cards 682 594 649 742 866
Other Retail 952 903 937 984 1,048
Commercial Banking 1,768 1,365 1,580 1,909 3,117
Other 39 39 39 39 39
At 30 September 2022 4,604 3,364 3,939 5,049 8,984
UK mortgages 837 637 723 967 1,386
Credit cards(1) 521 442 500 569 672
Other Retail(1) 825 760 811 863 950
Commercial Banking(1) 1,433 1,295 1,358 1,505 1,859
Other(1) 426 426 427 426 424
At 31 December 2021 4,042 3,560 3,819 4,330 5,291
(1) Reflects the new organisation structure. See page 82.
CREDIT RISK (continued)
ECL sensitivity to economic assumptions (continued)
Underlying basis(A) Probability- Upside Base case Downside Severe
weighted £m £m £m downside
£m £m
UK mortgages 1,590 895 1,172 1,815 4,254
Credit cards 763 596 727 828 1,180
Other Retail 1,016 907 992 1,056 1,290
Commercial Banking 1,869 1,459 1,656 2,027 3,261
Other 46 46 46 47 47
At 31 December 2022 5,284 3,903 4,593 5,773 10,032
UK mortgages 1,576 877 1,147 1,788 4,327
Credit cards 682 594 649 742 866
Other Retail 952 903 937 984 1,048
Commercial Banking 1,768 1,365 1,580 1,909 3,117
Other 39 39 39 39 39
At 30 September 2022 5,017 3,778 4,352 5,462 9,397
UK mortgages 1,284 1,084 1,170 1,414 1,833
Credit cards(1) 531 453 511 579 682
Other Retail(1) 825 760 811 863 950
Commercial Banking(1) 1,433 1,295 1,358 1,505 1,859
Other(1) 426 426 427 426 424
At 31 December 2021 4,499 4,018 4,277 4,787 5,748
(1) Reflects the new organisation structure. See page 82.
FUNDING AND LIQUIDITY RISK
The Group has maintained its strong funding and liquidity position with a loan
to deposit ratio of 96 per cent as at 31 December 2022 (94 per cent as at 31
December 2021), largely driven by increased customer lending. Overall total
wholesale funding has increased to £100.3 billion as at 31 December 2022 (31
December 2021: £93.1 billion) as a result of short term funding which has
increased towards more normalised levels and maintains the Group's access to
diverse sources and tenors of funding.
The Group's liquid assets continue to exceed the regulatory minimum and
internal risk appetite, with a liquidity coverage ratio (LCR) of 144 per cent
(based on a monthly rolling average over the previous 12 months) as at 31
December 2022 (31 December 2021: 135 per cent) calculated on a Group
consolidated basis based on the EU Delegated Act. The increase in LCR is
explained primarily by an increase in liquid assets from the Bank of England
Term Funding Scheme with additional incentives for SMEs (TFSME) drawdowns in
2021. Following the implementation of structural reform, liquidity risk is
managed at a legal entity level with the Group consolidated LCR, representing
the composite of the Ring-Fenced Bank and Non-Ring-Fenced Bank entities.
The Net Stable Funding Ratio (NSFR) was implemented on 1 January 2022. The
Group monitors this metric monthly and is significantly in excess of the
regulatory requirement of 100 per cent.
During 2022, the Group accessed wholesale funding across a range of currencies
and markets with term issuance volumes totalling £9.3 billion. The total
outstanding amount of drawings from the TFSME has remained stable at
£30.0 billion at 31 December 2022 (31 December 2021: £30.0 billion), with
maturities in 2025, 2027 and beyond. In 2023, the Group expects to have a term
wholesale issuance requirement of around £15 billion.
The Group's credit ratings continue to reflect the strength of the Group's
business model and balance sheet. Over the course of the year, Fitch and
S&P affirmed the Group's ratings. In July, Moody's downgraded the senior
and subordinated ratings for Lloyds Banking Group plc by one notch based on
their Loss Given Failure methodology. This was a technical and methodological
change that puts the Group in line with peer issuers. The rating agencies
continue to monitor the impact of cost of living increases and rising rates
for the UK banking sector. The Group's strong management, franchise and
financial performance, along with the robust capital and funding position, are
reflected in the Group's strong ratings.
INTEREST RATE SENSITIVITY
The Group manages the risk to its earnings and capital from movements in
interest rates centrally by hedging the net liabilities which are stable or
less sensitive to movements in rates. As at 31 December 2022, the Group's
structural hedge had an approved capacity of £255 billion (up £15 billion on
31 December 2021) including a part of the balances from the deposit growth
since the start of the coronavirus pandemic.
Illustrative cumulative impact of parallel shifts in interest rate curve(1)
The table below shows the banking book net interest income sensitivity to an
instantaneous parallel increase in interest rates. Sensitivities reflect
shifts in the interest rate curve. The marginal reduction in Year 1
sensitivity compared to the year-end and half-year is driven by structural
hedge maturity reinvestment schedule in future periods. The actual impact will
also depend on the prevailing regulatory and competitive environment at the
time. This sensitivity is illustrative and does not reflect new business
margin implications and/or pricing actions today or in future periods, other
than as outlined.
The following assumptions have been applied:
• Instantaneous parallel shift in interest rate curve, including UK Bank
Rate
• Balance sheet remains constant
• Illustrative 50 per cent pass-through on deposits and 100 per cent
pass-through on assets, which could be different in practice
Year 1 Year 2 Year 3
£m
£m
£m
+50bps c.300 c.525 c.750
+25bps c.150 c.250 c.375
-25bps (c.175) (c.250) (c.375)
(1 ) Sensitivity based on modelled impact on banking book net interest
income, including the future impact of structural hedge maturities. Annual
impacts are presented for illustrative purposes only and are based on a number
of assumptions which are subject to change. Year 1 reflects the 12 months from
the 31 December 2022 balance sheet position.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
Note 2021
2022 £m
£m
Interest income 17,645 13,258
Interest expense (3,688) (3,892)
Net interest income 13,957 9,366
Fee and commission income 2,835 2,608
Fee and commission expense (1,332) (1,185)
Net fee and commission income 1,503 1,423
Net trading income (19,987) 17,200
Insurance premium income 9,059 8,283
Other operating income 1,276 1,172
Other income (8,149) 28,078
Total income 5,808 37,444
Insurance claims and changes in insurance and investment contract liabilities 12,401 (21,120)
Total income, net of insurance claims and changes in insurance and investment 18,209 16,324
contract liabilities
Operating expenses (9,759) (10,800)
Impairment (charge) credit (1,522) 1,378
Profit before tax 6,928 6,902
Tax expense 3 (1,373) (1,017)
Profit for the year 5,555 5,885
Profit attributable to ordinary shareholders 5,021 5,355
Profit attributable to other equity holders 438 429
Profit attributable to equity holders 5,459 5,784
Profit attributable to non-controlling interests 96 101
Profit for the year 5,555 5,885
Basic earnings per share 4 7.3p 7.5p
Diluted earnings per share 4 7.2p 7.5p
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
2021
2022 £m
£m
Profit for the year 5,555 5,885
Other comprehensive income
Items that will not subsequently be reclassified to profit or loss:
Post-retirement defined benefit scheme remeasurements:
Remeasurements before tax (3,012) 1,720
Tax 860 (658)
(2,152) 1,062
Movements in revaluation reserve in respect of equity shares held at fair
value through other comprehensive income:
Change in fair value 44 61
Tax 3 (4)
47 57
Gains and losses attributable to own credit risk:
Gains (losses) before tax 519 (86)
Tax (155) 34
364 (52)
Items that may subsequently be reclassified to profit or loss:
Movements in revaluation reserve in respect of debt securities held at fair
value through other comprehensive income:
Change in fair value (133) 133
Income statement transfers in respect of disposals (92) 2
Income statement transfers in respect of impairment 6 (2)
Tax 62 (25)
(157) 108
Movements in cash flow hedging reserve:
Effective portion of changes in fair value taken to other comprehensive income (6,990) (2,279)
Net income statement transfers 43 (621)
Tax 1,928 814
(5,019) (2,086)
Movements in foreign currency translation reserve:
Currency translation differences (tax: £nil) 119 (39)
Transfers to income statement (tax: £nil) (31) -
88 (39)
Total other comprehensive (loss) income for the year, net of tax (6,829) (950)
Total comprehensive (loss) income for the year (1,274) 4,935
Total comprehensive (loss) income attributable to ordinary shareholders (1,808) 4,405
Total comprehensive income attributable to other equity holders 438 429
Total comprehensive (loss) income attributable to equity holders (1,370) 4,834
Total comprehensive income attributable to non-controlling interests 96 101
Total comprehensive (loss) income for the year (1,274) 4,935
CONSOLIDATED BALANCE SHEET
At 31 Dec At 31 Dec
2022 2021
£m £m
Assets
Cash and balances at central banks 91,388 76,420
Items in the course of collection from banks 242 147
Financial assets at fair value through profit or loss 180,609 206,771
Derivative financial instruments 24,753 22,051
Loans and advances to banks 10,632 7,001
Loans and advances to customers 454,899 448,567
Reverse repurchase agreements 44,865 54,753
Debt securities 9,926 6,835
Financial assets at amortised cost 520,322 517,156
Financial assets at fair value through other comprehensive income 23,154 28,137
Reinsurance assets(1) 616 759
Investments in joint ventures and associates 385 352
Goodwill 2,655 2,320
Value of in-force business 5,419 5,514
Other intangible assets 4,786 4,196
Current tax recoverable 612 363
Deferred tax assets 5,228 3,118
Retirement benefit assets 3,823 4,531
Other assets(1) 13,837 14,690
Total assets 877,829 886,525
(1) See note 1 regarding changes to presentation.
CONSOLIDATED BALANCE SHEET (continued)
At 31 Dec At 31 Dec
2022 2021
£m £m
Liabilities
Deposits from banks 7,266 7,647
Customer deposits 475,331 476,344
Repurchase agreements at amortised cost 48,596 31,125
Items in the course of transmission to banks 372 316
Financial liabilities at fair value through profit or loss 17,755 23,123
Derivative financial instruments 24,042 18,060
Notes in circulation 1,280 1,321
Debt securities in issue 73,819 71,552
Liabilities arising from insurance contracts and participating investment 106,893 123,423
contracts
Liabilities arising from non-participating investment contracts 42,975 45,040
Other liabilities 19,090 19,947
Retirement benefit obligations 126 230
Current tax liabilities 8 6
Deferred tax liabilities 216 39
Other provisions 1,809 2,092
Subordinated liabilities 10,730 13,108
Total liabilities 830,308 833,373
Equity
Share capital 6,729 7,102
Share premium account 18,504 18,479
Other reserves 6,602 11,189
Retained profits 10,145 10,241
Ordinary shareholders' equity 41,980 47,011
Other equity instruments 5,297 5,906
Total equity excluding non-controlling interests 47,277 52,917
Non-controlling interests 244 235
Total equity 47,521 53,152
Total equity and liabilities 877,829 886,525
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to ordinary shareholders
Share Other Retained Total Other Non- Total
capital and reserves profits £m equity controlling £m
premium £m £m instruments interests
£m £m £m
At 1 January 2022 25,581 11,189 10,241 47,011 5,906 235 53,152
Comprehensive income
Profit for the year - - 5,021 5,021 438 96 5,555
Other comprehensive income
Post-retirement defined benefit scheme remeasurements, net of tax - - (2,152) (2,152) - - (2,152)
Movements in revaluation reserve in respect of financial assets held at fair
value through other comprehensive income, net of tax:
Debt securities - (157) - (157) - - (157)
Equity shares - 47 - 47 - - 47
Gains and losses attributable to own credit risk, net of tax - - 364 364 - - 364
Movements in cash flow hedging reserve, net of tax - (5,019) - (5,019) - - (5,019)
Movements in foreign currency translation reserve, net of tax - 88 - 88 - - 88
Total other comprehensive loss - (5,041) (1,788) (6,829) - - (6,829)
Total comprehensive (loss) income(1) - (5,041) 3,233 (1,808) 438 96 (1,274)
Transactions with owners
Dividends - - (1,475) (1,475) - (92) (1,567)
Distributions on other equity instruments - - - - (438) - (438)
Issue of ordinary shares 105 - - 105 - - 105
Share buyback (453) 453 (2,013) (2,013) - - (2,013)
Redemption of preference shares - - - - - - -
Issue of other equity instruments - - (5) (5) 750 - 745
Repurchases and redemptions of other equity instruments - - (36) (36) (1,359) - (1,395)
Movement in treasury shares - - (20) (20) - - (20)
Value of employee services:
Share option schemes - - 41 41 - - 41
Other employee award schemes - - 183 183 - - 183
Changes in non-controlling interests - - (3) (3) - 5 2
Total transactions with owners (348) 453 (3,328) (3,223) (1,047) (87) (4,357)
Realised gains and losses on equity shares held at fair value through other - 1 (1) - - - -
comprehensive income
At 31 December 2022 25,233 6,602 10,145 41,980 5,297 244 47,521
(1) Total comprehensive income attributable to owners of the parent was a
deficit of £1,370 million.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to ordinary shareholders
Share Other Retained Total Other Non- Total
capital and reserves profits £m equity controlling £m
premium £m £m instruments interests
£m £m £m
At 1 January 2021 24,947 13,747 4,584 43,278 5,906 229 49,413
Comprehensive income
Profit for the year - - 5,355 5,355 429 101 5,885
Other comprehensive income
Post-retirement defined benefit scheme remeasurements, net of tax - - 1,062 1,062 - - 1,062
Movements in revaluation reserve in respect of financial assets held at fair
value through other comprehensive income, net of tax:
Debt securities - 108 - 108 - - 108
Equity shares - 57 - 57 - - 57
Gains and losses attributable to own credit risk, net of tax - - (52) (52) - - (52)
Movements in cash flow hedging reserve, net of tax - (2,086) - (2,086) - - (2,086)
Movements in foreign currency translation reserve, net of tax - (39) - (39) - - (39)
Total other comprehensive (loss) income - (1,960) 1,010 (950) - - (950)
Total comprehensive (loss) income(1) - (1,960) 6,365 4,405 429 101 4,935
Transactions with owners
Dividends - - (877) (877) - (93) (970)
Distributions on other equity instruments - - - - (429) - (429)
Issue of ordinary shares 37 - - 37 - - 37
Share buyback - - - - - - -
Redemption of preference shares 597 (597) - - - - -
Issue of other equity instruments - - - - - - -
Repurchases and redemptions of other equity instruments - - - - - - -
Movement in treasury shares - - (13) (13) - - (13)
Value of employee services:
Share option schemes - - 51 51 - - 51
Other employee award schemes - - 131 131 - - 131
Changes in non-controlling interests - - (1) (1) - (2) (3)
Total transactions with owners 634 (597) (709) (672) (429) (95) (1,196)
Realised gains and losses on equity shares held at fair value through other - (1) 1 - - - -
comprehensive income
At 31 December 2021 25,581 11,189 10,241 47,011 5,906 235 53,152
(1) Total comprehensive income attributable to owners of the parent was a
surplus of £4,834 million.
CONSOLIDATED CASH FLOW STATEMENT
2022 2021
£m £m
Profit before tax 6,928 6,902
Adjustments for:
Change in operating assets 17,037 (10,365)
Change in operating liabilities 15,593 4,954
Non-cash and other items (16,804) 6,063
Tax paid (net) (743) (796)
Net cash provided by operating activities 22,011 6,758
Cash flows from investing activities
Purchase of financial assets (7,984) (8,984)
Proceeds from sale and maturity of financial assets 11,172 8,287
Purchase of fixed assets (3,855) (3,228)
Proceeds from sale of fixed assets 1,550 1,437
Repayment of capital by joint ventures and associates 36 -
Acquisition of businesses, net of cash acquired (409) (57)
Net cash provided by (used in) investing activities 510 (2,545)
Cash flows from financing activities
Dividends paid to ordinary shareholders (1,475) (877)
Distributions on other equity instruments (438) (429)
Dividends paid to non-controlling interests (92) (93)
Interest paid on subordinated liabilities (603) (1,303)
Proceeds from issue of subordinated liabilities 838 499
Proceeds from issue of other equity instruments 745 -
Proceeds from issue of ordinary shares 31 25
Share buyback (2,013) -
Repayment of subordinated liabilities (2,216) (1,056)
Repurchases and redemptions of other equity instruments (1,395) -
Change in stake of non-controlling interests 5 -
Net cash used in financing activities (6,613) (3,234)
Effects of exchange rate changes on cash and cash equivalents 727 70
Change in cash and cash equivalents 16,635 1,049
Cash and cash equivalents at beginning of year 79,194 78,145
Cash and cash equivalents at end of year 95,829 79,194
Cash and cash equivalents comprise cash and non-mandatory balances with
central banks and amounts due from banks with a maturity of less than three
months. Included within cash and cash equivalents at 31 December 2022 is
£37 million (31 December 2021: £76 million) of restricted cash and cash
equivalents held within the Group's long-term insurance and investments
operations, which is not immediately available for use in the business.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting policies and presentation
These condensed consolidated financial statements as at and for the year to 31
December 2022 have been prepared in accordance with the Listing Rules of the
Financial Conduct Authority (FCA) relating to Preliminary Announcements and
comprise the results of Lloyds Banking Group plc (the Company) together with
its subsidiaries (the Group). They do not include all of the information
required for full annual financial statements. Copies of the 2022 Annual
Report and Accounts will be available on the Group's website and upon request
from Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London
EC2V 7HN.
Except for the matter referred to below, the Group's accounting policies are
consistent with those applied by the Group in its 2021 Annual Report and
Accounts and there have been no changes in the Group's methods of computation.
The Group's accounting policies are set out in full in the 2022 Annual Report
and Accounts.
In April 2022, the IFRS Interpretations Committee was asked to consider
whether an entity includes a demand deposit as a component of cash and cash
equivalents in the statement of cash flows when the demand deposit is subject
to contractual restrictions on use agreed with a third party. It concluded
that such amounts should be included within cash and cash equivalents.
Accordingly, the Group includes mandatory reserve deposits with central banks
that are held in demand accounts within cash and cash equivalents disclosed in
the cash flow statement. This change has increased the Group's cash and cash
equivalents at 1 January 2020 by £1,696 million (to £59,507 million) and
decreased the adjustment for the change in operating assets in 2020 by £982
million (to a reduction of £17,668 million) resulting in an increase in the
Group's cash and cash equivalents at 31 December 2020 of £2,678 million (to
£78,145 million); and decreased the adjustment for the change in operating
assets in 2021 by £137 million (to a reduction of £10,365 million) and, as
a result, the Group's cash and cash equivalents at 31 December 2021 increased
by £2,815 million (to £79,194 million). The change had no impact on profit
after tax, total equity or the Group's earnings per share.
The following change has been made to the presentation of the Group's assets
on the face of the balance sheet:
• Reinsurance assets are shown separately from other assets
There has been no change in the basis of accounting for any of the underlying
transactions. Comparatives have been presented on a consistent basis.
The directors consider that it is appropriate to continue to adopt the going
concern basis in preparing the financial statements. In reaching this
assessment, the directors have considered the impact of climate change upon
the Group's performance and projected funding and capital position. The
directors have also taken into account the results from stress testing
scenarios.
2. Critical accounting judgements and key sources of estimation
uncertainty
The critical accounting judgements and key sources of estimation uncertainty
made by management in applying the Group's accounting policies are set out in
full in the Group's 2022 Annual Report and Accounts. Those affecting the
Group's recognition and measurement of allowance for expected credit losses
are set out in note 5.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Tax expense
The UK corporation tax rate for the year was 19.0 per cent (2021: 19.0 per
cent). An explanation of the relationship between tax expense and accounting
profit is set out below.
2022 2021
£m £m
Profit before tax 6,928 6,902
UK corporation tax thereon (1,316) (1,311)
Impact of surcharge on banking profits (339) (439)
Non-deductible costs: conduct charges (5) (185)
Non-deductible costs: bank levy (28) (22)
Other non-deductible costs (72) (83)
Non-taxable income 134 40
Tax relief on coupons on other equity instruments 83 81
Tax-exempt gains on disposals 67 140
Tax losses where no deferred tax recognised 11 (1)
Remeasurement of deferred tax due to rate changes (53) 954
Differences in overseas tax rates (63) (19)
Policyholder tax (65) (63)
Policyholder deferred tax asset in respect of life assurance expenses 33 (69)
Adjustments in respect of prior years 243 (40)
Tax effect of share of results of joint ventures (3) -
Tax expense (1,373) (1,017)
4. Earnings per share
2022 2021
£m £m
Profit attributable to ordinary shareholders - basic and diluted 5,021 5,355
2022 2021
million million
Weighted-average number of ordinary shares in issue - basic 68,847 70,937
Adjustment for share options and awards 835 848
Weighted-average number of ordinary shares in issue - diluted 69,682 71,785
Basic earnings per share 7.3p 7.5p
Diluted earnings per share 7.2p 7.5p
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Allowance for expected credit losses
The critical accounting judgements and key sources of estimation uncertainty
made by management in applying the Group's accounting policies are set out in
full in the Group's 2022 Annual Report and Accounts. Those affecting the
Group's recognition and measurement of allowances for expected credit losses
are set out below.
Generation of multiple economic scenarios
The estimate of expected credit losses is required to be based on an unbiased
expectation of future economic scenarios. The approach used to generate the
range of future economic scenarios depends on the methodology and judgements
adopted. The Group's approach is to start from a defined base case scenario,
used for planning purposes, and to generate alternative economic scenarios
around this base case. The base case scenario is a conditional forecast
underpinned by a number of conditioning assumptions that reflect the Group's
best view of key future developments. If circumstances appear likely to
materially deviate from the conditioning assumptions, then the base case
scenario is updated.
The base case scenario is central to a range of future economic scenarios
generated by simulation of an economic model, for which the same conditioning
assumptions apply as in the base case scenario. These scenarios are ranked by
using estimated relationships with industry-wide historical loss data. With
the base case already pre-defined, three other scenarios are identified as
averages of constituent scenarios located around the 15th, 75th and 95th
percentiles of the distribution. The full distribution is therefore summarised
by a practical number of scenarios to run through ECL models representing an
upside, the base case, and a downside scenario weighted at 30 per cent each,
together with a severe downside scenario weighted at 10 per cent. The scenario
weights represent the distribution of economic scenarios and not subjective
views on likelihood. The inclusion of a severe downside scenario with a
smaller weighting ensures that the non-linearity of losses in the tail of the
distribution is adequately captured. Macroeconomic projections may employ
reversionary techniques to adjust the paths of economic drivers towards
long-run equilibria after a reasonable forecast horizon. The Group does not
use such techniques to force the MES scenarios to revert to the base case
planning view. Utilising such techniques would be expected to be immaterial
for expected credit losses since loss sensitivity is highest over the initial
five years of the projections. Most assets are expected to have matured, or
reached the end of their behavioural life before the five-year horizon.
A forum under the chairmanship of the Chief Economist meets at least quarterly
to review and, if appropriate, recommend changes to the method by which
economic scenarios are generated, for approval by the Chief Financial Officer
and Chief Risk Officer. In June 2022, the Group judged it appropriate to
include an adjusted severe downside scenario to incorporate a high CPI
inflation and UK Bank Rate profiles and to adopt this adjusted severe downside
scenario to calculate the Group's ECL. This is because the historic
macroeconomic and loan loss data upon which the scenario model is calibrated
imply an association of downside economic outcomes with easier monetary
policy, and therefore low interest rates. The adjustment is considered to
better reflect the risks around the Group's base case view in an economic
environment where supply shocks are the principal concern. The Group has
continued to include a non-modelled severe downside scenario for Group ECL
calculations for 31 December 2022 reporting.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Allowance for expected credit losses (continued)
Base case and MES economic assumptions
The Group's base case economic scenario has been revised in light of the
ongoing war in Ukraine, reversals in UK fiscal policy, and a continuing global
shift towards a more restrictive monetary policy stance against a backdrop of
elevated inflation pressures. The Group's updated base case scenario has three
conditioning assumptions: first, the war in Ukraine remains 'local', i.e.
without overtly involving neighbouring countries, NATO or China; second, the
UK labour market participation rate remains below pre-pandemic levels,
impeding the economy's supply capacity; and third, the Bank of England
accommodates above-target inflation in the medium term, recognising the
economic costs that might arise from a rapid return to the two per cent
target.
Based on these assumptions and incorporating the economic data published in
the fourth quarter, the Group's base case scenario is for a contraction in
economic activity and a rise in the unemployment rate alongside declines in
residential and commercial property prices, following increases in UK Bank
Rate in response to persistent inflationary pressures. Risks around this base
case economic view lie in both directions and are largely captured by the
generation of alternative economic scenarios.
The Group has accommodated the latest available information at the reporting
date in defining its base case scenario and generating alternative economic
scenarios. The scenarios include forecasts for key variables in the fourth
quarter of 2022, for which actuals may have since emerged prior to
publication.
Scenarios by year
The key UK economic assumptions made by the Group are shown in the following
tables across a number of measures explained below.
Annual assumptions
Gross domestic product (GDP) and Consumer Price Index (CPI) inflation are
presented as an annual change, house price growth and commercial real estate
price growth are presented as the growth in the respective indices over each
year. Unemployment rate and UK Bank Rate are averages over the year.
Five-year average
The five-year average reflects the average annual growth rate, or level, over
the five-year period. It includes movements within the current reporting year,
such that the position as of 31 December 2022 covers the five years 2022 to
2026. The inclusion of the reporting year within the five-year period reflects
the need to predict variables which remain unpublished at the reporting date
and recognises that credit models utilise both level and annual changes. The
use of calendar years maintains a comparability between the annual assumptions
presented.
Five-year start to peak and trough
The peak or trough for any metric may occur intra year and therefore not be
identifiable from the annual assumptions, therefore they are also disclosed.
For GDP, house price growth and commercial real estate price growth, the peak,
or trough, reflects the highest, or lowest cumulative quarterly position
reached relative to the start of the five-year period, which as of 31 December
2022 is 1 January 2022. Given these metrics may exhibit increases followed by
greater falls, the start to trough movements quoted may be smaller than the
equivalent 'peak to trough' movement (and vice versa for start to peak).
Unemployment, UK Bank Rate and CPI Inflation reflect the highest, or lowest,
quarterly level reached in the five-year period.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Allowance for expected credit losses (continued)
At 31 December 2022 2022 2023 2024 2025 2026 2022 Start to Start to
% % % % % to 2026 average peak(1) trough(1)
% % %
Upside
Gross domestic product 4.1 0.1 1.1 1.7 2.1 1.8 6.5 0.4
Unemployment rate 3.5 2.8 3.0 3.3 3.4 3.2 3.8 2.8
House price growth 2.4 (2.8) 6.5 9.0 8.0 4.5 24.8 (1.1)
Commercial real estate price growth (9.4) 8.5 3.5 2.6 2.3 1.3 7.2 (9.4)
UK Bank Rate 1.94 4.95 4.98 4.63 4.58 4.22 5.39 0.75
CPI inflation 9.0 8.3 4.2 3.3 3.0 5.5 10.7 2.9
Base case
Gross domestic product 4.0 (1.2) 0.5 1.6 2.1 1.4 4.3 (1.1)
Unemployment rate 3.7 4.5 5.1 5.3 5.1 4.8 5.3 3.6
House price growth 2.0 (6.9) (1.2) 2.9 4.4 0.2 6.4 (6.3)
Commercial real estate price growth (11.8) (3.3) 0.9 2.8 3.1 (1.8) 7.2 (14.8)
UK Bank Rate 1.94 4.00 3.38 3.00 3.00 3.06 4.00 0.75
CPI inflation 9.0 8.3 3.7 2.3 1.7 5.0 10.7 1.6
Downside
Gross domestic product 3.9 (3.0) (0.5) 1.4 2.1 0.8 1.2 (3.6)
Unemployment rate 3.8 6.3 7.5 7.6 7.2 6.5 7.7 3.6
House price growth 1.6 (11.1) (9.8) (5.6) (1.5) (5.4) 6.4 (24.3)
Commercial real estate price growth (13.9) (15.0) (3.7) 0.4 1.4 (6.4) 7.2 (29.6)
UK Bank Rate 1.94 2.93 1.39 0.98 1.04 1.65 3.62 0.75
CPI inflation 9.0 8.2 3.3 1.3 0.3 4.4 10.7 0.2
Severe downside
Gross domestic product 3.7 (5.2) (1.0) 1.3 2.1 0.1 0.7 (6.4)
Unemployment rate 4.1 9.0 10.7 10.4 9.7 8.8 10.7 3.6
House price growth 1.1 (14.8) (18.0) (11.5) (4.2) (9.8) 6.4 (40.1)
Commercial real estate price growth (17.3) (28.8) (9.9) (1.3) 3.2 (11.6) 7.2 (47.8)
UK Bank Rate - modelled 1.94 1.41 0.20 0.13 0.14 0.76 3.50 0.12
UK Bank Rate - adjusted(2) 2.44 7.00 4.88 3.31 3.25 4.18 7.00 0.75
CPI inflation - modelled 9.0 8.2 2.6 (0.1) (1.6) 3.6 10.7 (1.7)
CPI inflation - adjusted(2) 9.7 14.3 9.0 4.1 1.6 7.7 14.8 1.5
Probability-weighted
Gross domestic product 4.0 (1.8) 0.2 1.5 2.1 1.2 3.4 (1.8)
Unemployment rate 3.7 5.0 5.8 5.9 5.7 5.2 5.9 3.6
House price growth 1.9 (7.7) (3.2) 0.7 2.9 (1.2) 6.4 (9.5)
Commercial real estate price growth (12.3) (5.8) (0.8) 1.6 2.3 (3.1) 7.2 (18.6)
UK Bank Rate - modelled 1.94 3.70 2.94 2.59 2.60 2.76 3.89 0.75
UK Bank Rate - adjusted(2) 1.99 4.26 3.41 2.91 2.91 3.10 4.31 0.75
CPI inflation - modelled 9.0 8.3 3.6 2.1 1.4 4.9 10.7 1.3
CPI inflation - adjusted(2) 9.1 8.9 4.3 2.5 1.7 5.3 11.0 1.6
(1) Since the level of property prices peaked during 2022, peak to trough
declines for house price growth and commercial real estate price growth are
larger than the start to trough declines over the period shown.
(2) The adjustment to UK Bank Rate and CPI inflation in the severe downside
is considered to better reflect the risks around the Group's base case view in
an economic environment where supply shocks are the principal concern.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Allowance for expected credit losses (continued)
At 31 December 2021 2021 2022 2023 2024 2025 2021 Start to Start to
% % % % % to 2025 average peak trough
% % %
Upside
Gross domestic product 7.1 4.0 1.4 1.3 1.4 3.0 12.6 (1.3)
Unemployment rate 4.4 3.3 3.4 3.5 3.7 3.7 4.9 3.2
House price growth 10.1 2.6 4.9 4.7 3.6 5.1 28.5 1.2
Commercial real estate price growth 12.4 5.8 0.7 1.0 (0.6) 3.7 20.9 0.8
UK Bank Rate 0.14 1.44 1.74 1.82 2.03 1.43 2.04 0.10
CPI inflation(1) 2.6 5.9 3.3 2.6 3.3 3.5 6.5 0.6
Base case
Gross domestic product 7.1 3.7 1.5 1.3 1.3 2.9 12.3 (1.3)
Unemployment rate 4.5 4.3 4.4 4.4 4.5 4.4 4.9 4.3
House price growth 9.8 0.0 0.0 0.5 0.7 2.1 11.0 1.2
Commercial real estate price growth 10.2 (2.2) (1.9) 0.1 0.6 1.2 10.2 0.8
UK Bank Rate 0.14 0.81 1.00 1.06 1.25 0.85 1.25 0.10
CPI inflation(1) 2.6 5.9 3.0 1.6 2.0 3.0 6.5 0.6
Downside
Gross domestic product 7.1 3.4 1.3 1.1 1.2 2.8 11.4 (1.3)
Unemployment rate 4.7 5.6 5.9 5.8 5.7 5.6 6.0 4.3
House price growth 9.2 (4.9) (7.8) (6.6) (4.7) (3.1) 9.2 (14.8)
Commercial real estate price growth 8.6 (10.1) (7.0) (3.4) (0.3) (2.6) 8.6 (12.8)
UK Bank Rate 0.14 0.45 0.52 0.55 0.69 0.47 0.71 0.10
CPI inflation(1) 2.6 5.8 2.8 1.3 1.6 2.8 6.4 0.6
Severe downside
Gross domestic product 6.8 0.9 0.4 1.0 1.4 2.1 7.6 (1.3)
Unemployment rate 4.9 7.7 8.5 8.1 7.6 7.3 8.5 4.3
House price growth 9.1 (7.3) (13.9) (12.5) (8.4) (6.9) 9.1 (30.2)
Commercial real estate price growth 5.8 (19.6) (12.1) (5.3) (0.5) (6.8) 6.9 (30.0)
UK Bank Rate 0.14 0.04 0.06 0.08 0.09 0.08 0.25 0.02
CPI inflation(1) 2.6 5.8 2.3 0.5 0.9 2.4 6.5 0.4
Probability-weighted
Gross domestic product 7.0 3.4 1.3 1.2 1.3 2.8 11.6 (1.3)
Unemployment rate 4.6 4.7 5.0 5.0 4.9 4.8 5.0 4.3
House price growth 9.6 (1.4) (2.3) (1.7) (1.0) 0.6 9.6 1.2
Commercial real estate price growth 9.9 (3.9) (3.7) (1.2) (0.1) 0.1 9.9 (0.3)
UK Bank Rate 0.14 0.82 0.99 1.04 1.20 0.83 1.20 0.10
CPI inflation(1) 2.6 5.9 2.9 1.7 2.2 3.1 6.5 0.6
(1) For 31 December 2021 scenarios, CPI numbers were translations of
modelled Retail Price Index excluding mortgage interest payments (RPIX)
estimates.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Allowance for expected credit losses (continued)
Base case scenario by quarter
Key quarterly assumptions made by the Group in the base case scenario are
shown below. Gross domestic product is presented quarter-on-quarter. House
price growth, commercial real estate price growth and CPI inflation are
presented year-on-year, i.e. from the equivalent quarter in the previous year.
Unemployment rate and UK Bank Rate are presented as at the end of each
quarter.
At 31 December 2022 First Second Third Fourth First Second Third Fourth
quarter quarter quarter quarter quarter quarter quarter quarter
2022 2022 2022 2022 2023 2023 2023 2023
% % % % % % % %
Gross domestic product 0.6 0.1 (0.3) (0.4) (0.4) (0.4) (0.2) (0.1)
Unemployment rate 3.7 3.8 3.6 3.7 4.0 4.4 4.7 4.9
House price growth 11.1 12.5 9.8 2.0 (3.0) (8.4) (9.8) (6.9)
Commercial real estate price growth 18.0 18.0 8.4 (11.8) (16.9) (19.8) (15.9) (3.3)
UK Bank Rate 0.75 1.25 2.25 3.50 4.00 4.00 4.00 4.00
CPI inflation 6.2 9.2 10.0 10.7 10.0 8.9 8.0 6.1
At 31 December 2021 First Second Third Fourth First Second Third Fourth
quarter quarter quarter quarter quarter quarter quarter quarter
2021 2021 2021 2021 2022 2022 2022 2022
% % % % % % % %
Gross domestic product (1.3) 5.4 1.1 0.4 0.1 1.5 0.5 0.3
Unemployment rate 4.9 4.7 4.3 4.3 4.4 4.3 4.3 4.3
House price growth 6.5 8.7 7.4 9.8 8.4 6.1 3.2 0.0
Commercial real estate price growth (2.9) 3.4 7.5 10.2 8.4 5.2 0.9 (2.2)
UK Bank Rate 0.10 0.10 0.10 0.25 0.50 0.75 1.00 1.00
CPI inflation 0.6 2.1 2.8 4.9 5.3 6.5 6.3 5.3
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Allowance for expected credit losses (continued)
ECL sensitivity to economic assumptions
The impact of changes in the UK unemployment rate and House Price Index (HPI)
have been assessed. Although such changes would not be observed in isolation,
as economic indicators tend to be correlated in a coherent scenario, this
gives insight into the sensitivity of the Group's ECL to gradual changes in
these two critical economic factors. The assessment has been made against the
base case with the reported staging unchanged and is assessed through the
direct impact on modelled ECL only, including management judgements applied
through changes to model inputs. The change in univariate ECL sensitivity in
the period is a result of the change in definition of default and associated
model changes, and the deterioration in the base case on which the assessment
has been performed.
The table below shows the impact on the Group's ECL resulting from a 1
percentage point (pp) increase or decrease in the UK unemployment rate. The
increase or decrease is presented based on the adjustment phased evenly over
the first ten quarters of the base case scenario. An immediate increase or
decrease would drive a more material ECL impact as it would be fully reflected
in both 12-month and lifetime PDs.
At 31 December 2022 At 31 December 2021(1)
1pp increase in 1pp decrease in 1pp increase in 1pp decrease in
unemployment unemployment unemployment unemployment
£m £m £m £m
UK mortgages 26 (21) 23 (18)
Credit cards 41 (41) 20 (20)
Other Retail 25 (25) 12 (12)
Commercial Banking 100 (91) 52 (45)
ECL impact 192 (178) 107 (95)
(1) Reflects the new organisation structure. See page 82.
The table below shows the impact on the Group's ECL in respect of UK mortgages
of an increase or decrease in loss given default for a 10 percentage point
(pp) increase or decrease in the UK House Price Index (HPI). The increase or
decrease is presented based on the adjustment phased evenly over the first ten
quarters of the base case scenario.
At 31 December 2022 At 31 December 2021
10pp increase 10pp decrease 10pp increase 10pp decrease
in HPI in HPI in HPI in HPI
ECL impact, £m (225) 370 (112) 162
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Allowance for expected credit losses (continued)
Application of judgement in adjustments to modelled ECL
Impairment models fall within the Group's model risk framework with model
monitoring, periodic validation and back testing performed on model components
(i.e. probability of default, exposure at default and loss given default).
Limitations in the Group's impairment models or data inputs may be identified
through the ongoing assessment and validation of the output of the models. In
these circumstances, management make appropriate adjustments to the Group's
allowance for impairment losses to ensure that the overall provision
adequately reflects all material risks. These adjustments are determined by
considering the particular attributes of exposures which have not been
adequately captured by the impairment models and range from changes to model
inputs and parameters, at account level, through to more qualitative
post-model adjustments. Post-model adjustments are not typically calculated
under each distinct economic scenario used to generate ECL, but on final
modelled ECL. All adjustments are reviewed quarterly and are subject to
internal review and challenge, including by the Audit Committee, to ensure
that amounts are appropriately calculated and that there are specific release
criteria identified.
The coronavirus pandemic and the various support measures resulted in an
economic environment which differed significantly from the historical economic
conditions upon which the impairment models had been built. As a result there
was a greater need for management judgements to be applied alongside the use
of models at 31 December 2021. During 2022 the direct impact of the pandemic
on both economic and credit performance has reduced, resulting in the release
of all material judgements required specifically to capture COVID-19 risks.
Conversely, the intensifying inflationary pressures alongside rising interest
rates within the Group's outlook have created further risks not deemed to be
fully captured by ECL models. This has required judgements to be added to
capture affordability risks from inflationary and rising interest rate
pressures. At 31 December 2022 management judgement resulted in additional ECL
allowances totalling £330 million (2021: £1,284 million).
The table below analyses total ECL allowance by portfolio, separately
identifying the amounts that have been modelled, those that have been
individually assessed and those arising through the application of management
judgement.
Judgements due to:
At 31 December 2022 Modelled Individually COVID-19(1) Inflationary risk Other Total
ECL assessed £m £m £m ECL
£m £m £m
UK mortgages 946 - - 49 214 1,209
Credit cards 698 - - 93 (28) 763
Other Retail 903 - 1 53 59 1,016
Commercial Banking 972 1,008 - - (111) 1,869
Other 46 - - - - 46
Total 3,565 1,008 1 195 134 4,903
At 31 December 2021(2)
UK mortgages 292 - 67 52 426 837
Credit cards 436 - 94 - (9) 521
Other Retail 757 - 18 - 50 825
Commercial Banking 342 905 200 - (14) 1,433
Other 26 - 400 - - 426
Total 1,853 905 779 52 453 4,042
(1) Judgements introduced to address the impact that COVID-19 and resulting
interventions have had on the Group's economic outlook and observed loss
experience, which have required additional model limitations to be addressed.
In 2021, there was a £400 million other COVID-19 judgement to recognise the
risk that the conditioning assumptions assumed in the base case economic
scenario were invalidated by future events.
(2) Reflects the new organisation structure. See page 82.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Provisions for liabilities and charges
Regulatory and legal provisions
In the course of its business, the Group is engaged in discussions with the
PRA, FCA and other UK and overseas regulators and other governmental
authorities on a range of matters. The Group also receives complaints in
connection with its past conduct and claims brought by or on behalf of current
and former employees, customers, investors and other third parties and is
subject to legal proceedings and other actions. Where significant, provisions
are held against the costs expected to be incurred in relation to these
matters and matters arising from related internal reviews. During the year
ended 31 December 2022 the Group charged a further £255 million in respect of
legal actions and other regulatory matters and the unutilised balance at 31
December 2022 was £803 million (31 December 2021: £1,156 million). The most
significant items are as follows.
HBOS Reading - review
The Group continues to apply the recommendations from Sir Ross Cranston's
review, issued in December 2019, including a reassessment of direct and
consequential losses by an independent panel (the Foskett Panel), an extension
of debt relief and a wider definition of de facto directors. The Foskett
Panel's full scope and methodology was published on 7 July 2020. The Foskett
Panel's stated objective is to consider cases via a non-legalistic and fair
process and to make their decisions in a generous, fair and common sense
manner, assessing claims against an expanded definition of the fraud and on a
lower evidential basis.
Following the emergence of the first outcomes of the Foskett Panel through
2021, the Group charged a further £790 million in the year ended
31 December 2021. This included operational costs in relation to Dame Linda
Dobbs's review, which is considering whether the issues relating to HBOS
Reading were investigated and appropriately reported by the Group during the
period from January 2009 to January 2017, and other programme costs. A
significant proportion of the charge related to the estimated future awards
from the Foskett Panel. The Foskett Panel had shared outcomes on a limited
subset of the total population which covers a wide range of businesses and
different claim characteristics. The estimated awards provision recognised at
31 December 2021 was therefore materially dependent on the assumption that the
limited number of awards to date were representative of the full population of
cases.
In June 2022, the Foskett Panel announced an alternative option, in the form
of a fixed sum award which could be accepted as an alternative to
participation in the full re-review process, to support earlier resolution of
claims for those deemed by the Foskett Panel to be victims of the fraud.
Around half the population have now had outcomes via this new process.
Extrapolating the Group's experience to date resulted in an increase to the
provision of £50 million in the year (all in the fourth quarter).
Notwithstanding the settled claims and the increase in coverage which builds
confidence in the full estimated cost, uncertainties remain and the final
outcome could be different from the current provision once the re-review is
concluded by the Foskett Panel. There is no confirmed timeline for the
completion of the Foskett Panel re-review process nor the review by Dame Linda
Dobbs. The Group is committed to implementing Sir Ross's recommendations in
full.
Payment protection insurance
The Group has incurred costs for PPI over a number of years totalling £21,960
million. The Group continues to challenge PPI litigation cases, with mainly
legal fees and operational costs associated with litigation activity
recognised within regulatory and legal provisions, including a charge in the
fourth quarter. PPI litigation remains inherently uncertain, with a number of
key court judgments due to be delivered in 2023.
Customer claims in relation to insurance branch business in Germany
The Group continues to receive claims from customers in Germany relating to
policies issued by Clerical Medical Investment Group Limited (subsequently
renamed Scottish Widows Limited), with smaller numbers of claims received from
customers in Austria and Italy. The total provision made to 31 December 2022,
was £709 million (31 December 2021: £695 million) with £11 million
utilisation of the provision during the year, leaving an unutilised provision
at 31 December 2022 of £88 million. The ultimate financial effect, which
could be significantly different from the current provision, will be known
only once all relevant claims have been resolved.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Contingent liabilities and commitments
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the Group is not a
party in the ongoing or threatened litigation which involves the card schemes
Visa and Mastercard (as described below). However, the Group is a
member/licensee of Visa and Mastercard and other card schemes. The litigation
in question is as follows:
• Litigation brought by or on behalf of retailers against both Visa and
Mastercard in the English Courts, in which retailers are seeking damages on
grounds that Visa and Mastercard's MIFs breached competition law (this
includes a judgment of the Supreme Court in June 2020 upholding the Court of
Appeal's finding in 2018 that certain historic interchange arrangements of
Mastercard and Visa infringed competition law)
• Litigation brought on behalf of UK consumers in the English Courts
against Mastercard
Any impact on the Group of the litigation against Visa and Mastercard remains
uncertain at this time, such that it is not practicable for the Group to
provide an estimate of any potential financial effect. Insofar as Visa is
required to pay damages to retailers for interchange fees set prior to June
2016, contractual arrangements to allocate liability have been agreed between
various UK banks (including the Group) and Visa Inc, as part of Visa Inc's
acquisition of Visa Europe in 2016. These arrangements cap the maximum amount
of liability to which the Group may be subject and this cap is set at the cash
consideration received by the Group for the sale of its stake in Visa Europe
to Visa Inc in 2016. In 2016, the Group received Visa preference shares as
part of the consideration for the sale of its shares in Visa Europe. A release
assessment is carried out by Visa on certain anniversaries of the sale (in
line with the Visa Europe sale documentation) and as a result, some Visa
preference shares may be converted into Visa Inc Class A common stock. Any
such release and any subsequent sale of Visa common stock does not impact the
contingent liability.
LIBOR and other trading rates
Certain Group companies, together with other panel banks, have been named as
defendants in ongoing private lawsuits, including purported class action
suits, in the US in connection with their roles as panel banks contributing to
the setting of US Dollar, Japanese Yen and Sterling London Interbank Offered
Rate and the Australian BBSW reference rate.
Certain Group companies are also named as defendants in (i) UK-based claims;
and (ii) two Dutch class actions, raising LIBOR manipulation allegations. A
number of claims against the Group in the UK relating to the alleged mis-sale
of interest rate hedging products also include allegations of LIBOR
manipulation.
It is currently not possible to predict the scope and ultimate outcome on the
Group of any private lawsuits or any related challenges to the interpretation
or validity of any of the Group's contractual arrangements, including their
timing and scale. As such, it is not practicable to provide an estimate of any
potential financial effect.
Tax authorities
The Group has an open matter in relation to a claim for group relief of losses
incurred in its former Irish banking subsidiary, which ceased trading on 31
December 2010. In 2013, HMRC informed the Group that its interpretation of the
UK rules means that the group relief is not available. In 2020, HMRC concluded
their enquiry into the matter and issued a closure notice. The Group's
interpretation of the UK rules has not changed and hence it has appealed to
the First Tier Tax Tribunal, with a hearing expected in 2023. If the final
determination of the matter by the judicial process is that HMRC's position is
correct, management estimate that this would result in an increase in current
tax liabilities of approximately £875 million (including interest) and a
reduction in the Group's deferred tax asset of approximately £295 million.
The Group, having taken appropriate advice, does not consider that this is a
case where additional tax will ultimately fall due.
There are a number of other open matters on which the Group is in discussions
with HMRC (including the tax treatment of certain costs arising from the
divestment of TSB Banking Group plc), none of which is expected to have a
material impact on the financial position of the Group.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Contingent liabilities and commitments
Motor commission review
Following the FCA's Motor Market review, the Group has received a number of
complaints, some of which are with the Financial Ombudsman Service, in respect
of commission arrangements. It is currently not possible to predict the
ultimate outcome of the complaints, including the financial impact or the
scope or nature of remediation requirements, if any, or any related challenges
to the interpretation or validity of any of the Group's historical motor
commission arrangements.
Other legal actions and regulatory matters
In addition, in the course of its business the Group is subject to other
complaints and threatened or actual legal proceedings (including class or
group action claims) brought by or on behalf of current or former employees,
customers, investors or other third parties, as well as legal and regulatory
reviews, challenges, investigations and enforcement actions, which could
relate to a number of issues, including financial, environmental or other
regulatory matters, both in the UK and overseas. Where material, such matters
are periodically reassessed, with the assistance of external professional
advisers where appropriate, to determine the likelihood of the Group incurring
a liability. In those instances where it is concluded that it is more likely
than not that a payment will be made, a provision is established based on
management's best estimate of the amount required at the relevant balance
sheet date. In some cases it will not be possible to form a view, for example
because the facts are unclear or because further time is needed to assess
properly the merits of the case, and no provisions are held in relation to
such matters. In these circumstances, specific disclosure in relation to a
contingent liability will be made where material. However, the Group does not
currently expect the final outcome of any such case to have a material adverse
effect on its financial position, operations or cash flows. Where there is a
contingent liability related to an existing provision the relevant disclosures
are included within note 6.
8. Dividends on ordinary shares and share buyback
The Board has recommended a final ordinary dividend, which is subject to
approval by the shareholders at the Annual General Meeting on 18 May 2023, of
1.60 pence per ordinary share (2021: 1.33 pence per ordinary share) totalling
£1,062 million (2021: £930 million, following cancellations of shares
under the Group's buyback programme up to the record date). These condensed
consolidated financial statements do not reflect the recommended dividend.
Shareholders who have already joined the dividend reinvestment plan will
automatically receive shares instead of the cash dividend. Key dates for the
payment of the recommended dividend are outlined on page 82.
Share buyback
The Board has announced its intention to implement an ordinary share buyback
of up to £2.0 billion. This represents the return to shareholders of capital
surplus to that required to provide capacity to grow the business, meet
current and future regulatory requirements and cover uncertainties. The share
buyback programme will commence as soon as is practicable and is expected to
be completed, subject to continued authority from the PRA, by 31 December
2023.
9. Acquisition of Tusker
On 21 February 2023, Lloyds Bank Asset Finance Limited, a wholly-owned
subsidiary of the Group, acquired 100 per cent of the ordinary share capital
of Hamsard 3352 Limited ("Tusker"), which together with its subsidiaries
operates a vehicle management and leasing business. The acquisition will
enable the Group to expand its salary sacrifice proposition within motor
finance. Cash consideration was approximately £300 million(1). As a result
of the limited time available between the acquisition and the approval of
these financial statements, the Group is still in the process of finalising
the fair value of the individual assets and liabilities acquired including the
associated identifiable intangible assets and goodwill.
(1) Subject to customary adjustments.
10. Other information
The financial information contained in this document does not constitute
statutory accounts within the meaning of section 434 of the Companies Act 2006
(the Act). The statutory accounts for the year ended 31 December 2022 will be
published on the Group's website and will be delivered to the Registrar of
Companies in accordance with section 441 of the Act. The statutory accounts
for the year ended 31 December 2021 have been filed with the Registrar of
Companies. The report of the auditor on those accounts was unqualified, did
not draw attention to any matters by way of emphasis and did not include a
statement under sections 498(2) or 498(3) of the Act.
KEY DATES
Shares quoted ex-dividend for 2022 final dividend 13 April 2023
Record date for 2022 final dividend 14 April 2023
Final date for joining or leaving the final 2022 dividend reinvestment plan 2 May 2023
Q1 2023 Interim Management Statement 3 May 2023
Annual General Meeting 18 May 2023
Final 2022 dividend paid 23 May 2023
2023 Half-year results 26 July 2023
Q3 2023 Interim Management Statement 25 October 2023
BASIS OF PRESENTATION
This news release covers the results of Lloyds Banking Group plc together with
its subsidiaries (the Group) for the year ended 31 December 2022. Unless
otherwise stated, income statement commentaries throughout this document
compare the year ended 31 December 2022 to the year ended 31 December 2021,
and the balance sheet analysis compares the Group balance sheet as at 31
December 2022 to the Group balance sheet as at 31 December 2021. The Group
uses a number of alternative performance measures, including underlying
profit, in the discussion of its business performance and financial position.
These measures are labelled with a superscript 'A' throughout this document.
Further information on these measures is set out on page 34. Unless otherwise
stated, commentary on commentary on pages 1 and 2 and on pages 10 to 12 is
given on an underlying basis. The 2022 Annual Report and Accounts and Pillar 3
Report can be found at
www.lloydsbankinggroup.com/investors/financial-downloads
(file:///C%3A/Users/ldirie/Downloads/www.lloydsbankinggroup.com/investors/financial-downloads)
.
Operating cost comparatives have been presented to reflect the new costs
basis, consistent with the current period. See page 34.
Segmental information: During 2022, the Group revised its liquidity transfer
pricing methodology. Comparative segmental net interest income has been
presented on a consistent basis. On 1 July 2022 the Group adopted a new
organisation structure, aligned to our strategic objectives and our existing
three customer-facing divisions. Disclosure will continue to be based on these
three divisions, reflecting the basis on which management runs the Group. To
reflect the new organisation structure, the Group migrated certain business
units between these divisions, with Business Banking and Commercial Cards
moving from Retail to Commercial Banking and Wealth moving from Insurance,
Pensions and Investments (previously Insurance and Wealth) to Retail.
Comparatives have been represented accordingly. Total Group figures are
unaffected by these changes.
FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements within the meaning
of Section 21E of the US Securities Exchange Act of 1934, as amended, and
section 27A of the US Securities Act of 1933, as amended, with respect to the
business, strategy, plans and/or results of Lloyds Banking Group plc together
with its subsidiaries (the Group) and its current goals and expectations.
Statements that are not historical or current facts, including statements
about the Group's or its directors' and/or management's beliefs and
expectations, are forward looking statements. Words such as, without
limitation, 'believes', 'achieves', 'anticipates', 'estimates', 'expects',
'targets', 'should', 'intends', 'aims', 'projects', 'plans', 'potential',
'will', 'would', 'could', 'considered', 'likely', 'may', 'seek', 'estimate',
'probability', 'goal', 'objective', 'deliver', 'endeavour', 'prospects',
'optimistic' and similar expressions or variations on these expressions are
intended to identify forward looking statements. These statements concern or
may affect future matters, including but not limited to: projections or
expectations of the Group's future financial position, including profit
attributable to shareholders, provisions, economic profit, dividends, capital
structure, portfolios, net interest margin, capital ratios, liquidity,
risk-weighted assets (RWAs), expenditures or any other financial items or
ratios; litigation, regulatory and governmental investigations; the Group's
future financial performance; the level and extent of future impairments and
write-downs; the Group's ESG targets and/or commitments; statements of plans,
objectives or goals of the Group or its management and other statements that
are not historical fact; expectations about the impact of COVID-19; and
statements of assumptions underlying such statements. By their nature, forward
looking statements involve risk and uncertainty because they relate to events
and depend upon circumstances that will or may occur in the future. Factors
that could cause actual business, strategy, plans and/or results (including
but not limited to the payment of dividends) to differ materially from forward
looking statements include, but are not limited to: general economic and
business conditions in the UK and internationally; political instability
including as a result of any UK general election and any further possible
referendum on Scottish independence; acts of hostility or terrorism and
responses to those acts, or other such events; geopolitical unpredictability;
the war between Russia and Ukraine; the tensions between China and Taiwan;
market related risks, trends and developments; exposure to counterparty risk;
instability in the global financial markets, including within the Eurozone,
and as a result of the exit by the UK from the European Union (EU) and the
effects of the EU-UK Trade and Cooperation Agreement; the ability to access
sufficient sources of capital, liquidity and funding when required; changes to
the Group's credit ratings; fluctuations in interest rates, inflation,
exchange rates, stock markets and currencies; volatility in credit markets;
volatility in the price of the Group's securities; tightening of monetary
policy in jurisdictions in which the Group operates; natural pandemic
(including but not limited to the COVID-19 pandemic) and other disasters;
risks concerning borrower and counterparty credit quality; risks affecting
insurance business and defined benefit pension schemes; risks related to the
uncertainty surrounding the integrity and continued existence of reference
rates; changes in laws, regulations, practices and accounting standards or
taxation; changes to regulatory capital or liquidity requirements and similar
contingencies; the policies and actions of governmental or regulatory
authorities or courts together with any resulting impact on the future
structure of the Group; risks associated with the Group's compliance with a
wide range of laws and regulations; assessment related to resolution planning
requirements; risks related to regulatory actions which may be taken in the
event of a bank or Group failure; exposure to legal, regulatory or competition
proceedings, investigations or complaints; failure to comply with anti-money
laundering, counter terrorist financing, anti-bribery and sanctions
regulations; failure to prevent or detect any illegal or improper activities;
operational risks; conduct risk; technological changes and risks to the
security of IT and operational infrastructure, systems, data and information
resulting from increased threat of cyber and other attacks; technological
failure; inadequate or failed internal or external processes or systems; risks
relating to ESG matters, such as climate change (and achieving climate change
ambitions), including the Group's ability along with the government and other
stakeholders to measure, manage and mitigate the impacts of climate change
effectively, and human rights issues; the impact of competitive conditions;
failure to attract, retain and develop high calibre talent; the ability to
achieve strategic objectives; the ability to derive cost savings and other
benefits including, but without limitation, as a result of any acquisitions,
disposals and other strategic transactions; inability to capture accurately
the expected value from acquisitions; assumptions and estimates that form the
basis of the Group's financial statements; and potential changes in dividend
policy. A number of these influences and factors are beyond the Group's
control. Please refer to the latest Annual Report on Form 20-F filed by Lloyds
Banking Group plc with the US Securities and Exchange Commission (the SEC),
which is available on the SEC's website at www.sec.gov, for a discussion of
certain factors and risks. Lloyds Banking Group plc may also make or disclose
written and/or oral forward-looking statements in other written materials and
in oral statements made by the directors, officers or employees of Lloyds
Banking Group plc to third parties, including financial analysts. Except as
required by any applicable law or regulation, the forward-looking statements
contained in this document are made as of today's date, and the Group
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward looking statements contained in this
document whether as a result of new information, future events or otherwise.
The information, statements and opinions contained in this document do not
constitute a public offer under any applicable law or an offer to sell any
securities or financial instruments or any advice or recommendation with
respect to such securities or financial instruments.
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Douglas Radcliffe
Group Investor Relations Director
020 7356 1571
douglas.radcliffe@lloydsbanking.com
Edward Sands
Director of Investor Relations
020 7356 1585
edward.sands@lloydsbanking.com
Nora Thoden
Director of Investor Relations - ESG
020 7356 2334
nora.thoden@lloydsbanking.com
CORPORATE AFFAIRS
Grant Ringshaw
External Relations Director
020 7356 2362
grant.ringshaw@lloydsbanking.com
Matt Smith
Head of Media Relations
020 7356 3522
matt.smith@lloydsbanking.com
Copies of this News Release may be obtained from:
Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V
7HN
The statement can also be found on the Group's website -
www.lloydsbankinggroup.com
Registered office: Lloyds Banking Group plc, The Mound, Edinburgh, EH1 1YZ
Registered in Scotland No. SC095000
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