REG - Lloyds Banking Group - 2022 Q3 Interim Management Statement
27/10/2022 07:01
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RNS Number : 2534E Lloyds Banking Group PLC 27 October 2022
Lloyds Banking Group plc
Q3 2022 Interim Management Statement
27 October 2022
RESULTS FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2022
"In February we announced an ambitious new strategy. While the operating
environment has changed significantly since then, our customer focus remains
unchanged. We continue to execute against our strategic goals, based on our
objectives of transforming the business, while generating a stronger growth
trajectory and enabling the Group to deliver higher, more sustainable returns.
Our income growth, balance sheet momentum and resilient customer franchise
have enabled the Group to deliver a robust financial performance and strong
capital generation, alongside updated guidance for 2022.
The current environment is concerning for many people and we are committed to
maintaining support for our customers. The Group's resilient business model
and prudent approach to risk position the Group well to face the current
macroeconomic uncertainties while generating enhanced returns for our
shareholders."
Charlie Nunn, Group Chief Executive
Robust financial results with resilient credit performance and continued
business momentum
• Maintaining support for customers and progressing strategic priorities
with significant strategic investment
• Supporting the transition to a low carbon economy; announced new
sector-based 2030 emissions reduction targets and a new net zero ambition for
our supply chain in our Net Zero Activity Update(1)
• Statutory profit after tax of £4.0 billion (nine months to 30 September
2021: £5.5 billion), with higher net income more than offset by impairment
charges as a result of the revised economic outlook (versus a significant
write-back in 2021)
• Robust revenue growth supported by continued recovery in customer
activity and UK Bank Rate changes. Net income of £13.0 billion, up 12 per
cent; higher net interest and other income and continued low operating lease
depreciation
• Underlying net interest income up 15 per cent, significantly driven by a
stronger banking net interest margin of 2.84 per cent year to date (2.98 per
cent in the third quarter)
• Operating costs of £6.4 billion, up 6 per cent compared to the first
nine months of 2021, reflecting stable business-as-usual costs alongside
higher planned strategic investment and new businesses
• Underlying profit before impairment up 29 per cent to £6.5 billion in
the period (with £2.4 billion in the third quarter), as a result of robust
net income growth
• Observed asset quality remains strong and the portfolio is
well-positioned in the context of cost of living pressures. Underlying
impairment of £1.0 billion (of which £0.7 billion was recognised in the
third quarter) reflects a resilient observed credit performance, but impacted
by the weakening economic outlook and associated scenarios in the third
quarter, partially offset by COVID-19 releases
Continued franchise growth and strong capital generation
• Loans and advances to customers at £456.3 billion were up £7.7 billion
in the first nine months and up £0.2 billion in the quarter, with continued
growth in the open mortgage book
• Customer deposits of £484.3 billion were up £8.0 billion in the first
nine months and £6.1 billion in the quarter. Loan to deposit ratio of 94 per
cent continues to provide robust funding and liquidity and potential for
growth
• Capital generation of 191 basis points(2) in the first nine months based
on robust banking performance and including the Insurance dividend paid in
July 2022
• CET1 ratio of 15.0 per cent after ordinary dividend and variable pension
contributions, remaining well ahead of the ongoing target of c.12.5 per cent,
plus a management buffer of c.1 per cent. Commitment to consider excess
capital returns as usual at year-end
Outlook
Given the robust financial performance in the first nine months of 2022 and
incorporating revised macroeconomic forecasts in the third quarter, the Group
is updating its 2022 guidance:
• Banking net interest margin now expected to be greater than 290 basis
points
• Operating costs expected to be c.£8.8 billion
• Asset quality ratio now expected to be c.30 basis points
• Return on tangible equity expected to be c.13 per cent
• Risk-weighted assets at the end of 2022 expected to be c.£210 billion
• Capital generation now expected to be between 225 and 250 basis
points(2)
(1) The Net Zero Activity Update can be found at
www.lloydsbankinggroup.com/investors/esg-information.html.
(2) Excluding regulatory changes on 1 January 2022, ordinary dividend and
variable pension contributions.
INCOME STATEMENT - UNDERLYING BASIS(A) AND KEY BALANCE SHEET METRICS
Nine months ended Nine months ended Change Three months ended Three months ended Change
30 Sep
30 Sep 2022
2022 30 Sep 2021 %
£m 30 Sep 2021 %
£m
£m £m
Underlying net interest income 9,529 8,270 15 3,394 2,852 19
Underlying other income 3,811 3,753 2 1,282 1,336 (4)
Operating lease depreciation (295) (382) 23 (82) (111) 26
Net income 13,045 11,641 12 4,594 4,077 13
Operating costs(1) (6,436) (6,066) (6) (2,187) (2,013) (9)
Remediation (89) (525) 83 (10) (100) 90
Total costs (6,525) (6,591) 1 (2,197) (2,113) (4)
Underlying profit before impairment 6,520 5,050 29 2,397 1,964 22
Underlying impairment (charge) credit(1) (1,045) 853 (668) 119
Underlying profit 5,475 5,903 (7) 1,729 2,083 (17)
Restructuring(1) (69) (34) (22) (24) 8
Volatility and other items (237) 65 (199) (30)
Statutory profit before tax 5,169 5,934 (13) 1,508 2,029 (26)
Tax expense (1,134) (469) (299) (429) 30
Statutory profit after tax 4,035 5,465 (26) 1,209 1,600 (24)
Earnings per share 5.2p 7.1p (1.9)p 1.5p 2.0p (0.5)p
Banking net interest margin(A) 2.84% 2.52% 32bp 2.98% 2.55% 43bp
Average interest-earning banking assets(A) £451.4bn £443.0bn 2 £454.9bn £447.2bn 2
Cost:income ratio(A,1) 50.0% 56.6% (6.6)pp 47.8% 51.8% (4.0)pp
Asset quality ratio(A,1) 0.30% (0.25)% 0.57% (0.10)%
Return on tangible equity(A) 12.9% 17.6% (4.7)pp 11.9% 14.5% (2.6)pp
(1 ) 2021 comparatives have been presented to reflect the new costs
basis, consistent with the current period. See page 23.
At 30 Sep At 30 Jun Change At 31 Dec Change
2022
2022
2021
% %
Loans and advances to customers £456.3bn £456.1bn £448.6bn 2
Customer deposits £484.3bn £478.2bn 1 £476.3bn 2
Loan to deposit ratio(A) 94% 95% (1pp) 94%
CET1 ratio 15.0% 14.7% 0.3pp 17.3% (2.3)pp
Pro forma CET1 ratio(A,1) 15.0% 14.8% 0.2pp 16.3% (1.3)pp
Total capital ratio 19.4% 19.3% 0.1pp 23.6% (4.2)pp
MREL ratio 32.8% 32.4% 0.4pp 37.2% (4.4)pp
UK leverage ratio 5.3% 5.3% 5.8% (0.5)pp
Risk-weighted assets £210.8bn £209.6bn 1 £196.0bn 8
Wholesale funding £98.9bn £97.7bn 1 £93.1bn 6
Liquidity coverage ratio(2) 146% 142% 4.0pp 135% 11.0pp
Tangible net assets per share(A) 49.0p 54.8p (5.8)p 57.5p (8.5)p
(A) See page 25.
(1 ) The pro forma CET1 ratio comparative for 30 June 2022 reflects the
interim dividend received from Insurance in July 2022. The 31 December 2021
comparative reflects the dividend received from Insurance in February 2022 and
the full impact of the share buyback, but prior to the impact of regulatory
changes that came into effect on 1 January 2022.
(2 ) The liquidity coverage ratio is calculated as a simple average of
month-end observations over the previous 12 months.
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QUARTERLY INFORMATION(A)
Quarter ended Quarter ended Quarter Quarter Quarter Quarter Quarter
30 Sep 2022
30 Jun 2022
£m
£m ended ended ended ended ended
31 Mar 31 Dec 30 Sep 30 Jun 31 Mar
2022 2021 2021 2021 2021
£m £m £m £m £m
Underlying net interest income 3,394 3,190 2,945 2,893 2,852 2,741 2,677
Underlying other income 1,282 1,268 1,261 1,307 1,336 1,282 1,135
Operating lease depreciation (82) (119) (94) (78) (111) (123) (148)
Net income 4,594 4,339 4,112 4,122 4,077 3,900 3,664
Operating costs(1) (2,187) (2,151) (2,098) (2,246) (2,013) (2,008) (2,045)
Remediation (10) (27) (52) (775) (100) (360) (65)
Total costs (2,197) (2,178) (2,150) (3,021) (2,113) (2,368) (2,110)
Underlying profit before impairment 2,397 2,161 1,962 1,101 1,964 1,532 1,554
Underlying impairment (charge) credit(1) (668) (200) (177) 532 119 374 360
Underlying profit 1,729 1,961 1,785 1,633 2,083 1,906 1,914
Restructuring(1) (22) (23) (24) (418) (24) 6 (16)
Volatility and other items (199) 100 (138) (247) (30) 95 -
Statutory profit before tax 1,508 2,038 1,623 968 2,029 2,007 1,898
Tax (expense) credit (299) (416) (419) (548) (429) 461 (501)
Statutory profit after tax 1,209 1,622 1,204 420 1,600 2,468 1,397
Banking net interest margin(A) 2.98% 2.87% 2.68% 2.57% 2.55% 2.51% 2.49%
Average interest-earning banking assets(A) £454.9bn £451.2bn £448.0bn £449.4bn £447.2bn £442.2bn £439.4bn
Cost:income ratio(A,1) 47.8% 50.2% 52.3% 73.3% 51.8% 60.7% 57.6%
Asset quality ratio(A,1) 0.57% 0.17% 0.16% (0.46)% (0.10)% (0.33)% (0.33)%
Return on tangible equity(A) 11.9% 15.6% 10.8% 2.9% 14.5% 24.4% 13.9%
Loans and advances to customers £456.3bn £456.1bn £451.8bn £448.6bn £450.5bn £447.7bn £443.5bn
Customer deposits £484.3bn £478.2bn £481.1bn £476.3bn £479.1bn £474.4bn £462.4bn
Loan to deposit ratio(A) 94% 95% 94% 94% 94% 94% 96%
Risk-weighted assets £210.8bn £209.6bn £210.2bn £196.0bn £200.7bn £200.9bn £198.9bn
Tangible net assets per share(A) 49.0p 54.8p 56.5p 57.5p 56.6p 55.6p 52.4p
(1 ) 2021 comparatives have been presented to reflect the new costs
basis, consistent with the current period. See page 23.
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BALANCE SHEET ANALYSIS
At 30 Sep At 30 Jun Change At 30 Sep Change At 31 Dec Change
2022
2022
2021
2021
£bn
£bn %
£bn %
£bn %
Loans and advances to customers
Open mortgage book 298.4 296.6 1 292.6 2 293.3 2
Closed mortgage book 12.3 13.1 (6) 14.8 (17) 14.2 (13)
Credit cards(2) 14.3 14.2 1 13.5 6 13.8 4
UK Retail unsecured loans 8.8 8.5 4 8.1 9 8.1 9
UK Motor Finance 14.2 14.2 14.1 1 14.0 1
Overdrafts 1.0 1.0 1.0 1.0
Retail other(1) 13.0 12.5 4 10.8 20 10.9 19
Wealth(2) 1.0 1.0 1.0 1.0
Small and Medium Businesses(2) 39.8 41.1 (3) 43.8 (9) 42.5 (6)
Corporate and Institutional Banking(2) 57.6 55.7 3 51.0 13 50.0 15
Central items(2,3) (4.1) (1.8) (0.2) (0.2)
Loans and advances to customers 456.3 456.1 450.5 1 448.6 2
Customer deposits
Retail current accounts 115.7 113.4 2 109.6 6 111.5 4
Retail relationship savings accounts 165.7 165.8 162.6 2 164.5 1
Retail tactical savings accounts 16.2 16.9 (4) 16.8 (4) 16.8 (4)
Wealth(2) 14.9 14.9 15.1 (1) 15.6 (4)
Commercial Banking deposits 170.2 166.7 2 174.5 (2) 167.5 2
Central items(2) 1.6 0.5 0.5 0.4
Total customer deposits 484.3 478.2 1 479.1 1 476.3 2
Total assets 892.9 890.4 882.0 1 886.6 1
Total liabilities 846.5 840.3 1 829.4 2 833.4 2
Ordinary shareholders' equity 40.0 44.4 (10) 46.5 (14) 47.1 (15)
Other equity instruments 6.2 5.5 13 5.9 5 5.9 5
Non-controlling interests 0.2 0.2 0.2 0.2
Total equity 46.4 50.1 (7) 52.6 (12) 53.2 (13)
Ordinary shares in issue, excluding own shares 67,464m 68,702m (2) 70,979m (5) 70,996m (5)
(1 ) Primarily Europe.
(2 ) The portfolios shown reflect the new organisation structure;
comparatives have been presented on a consistent basis. See page 25.
(3 ) Includes central fair value hedge accounting adjustments. 30 June
2022 included a £200 million ECL central adjustment that was not allocated to
specific portfolios (30 September 2021 and 31 December 2021: £400 million).
In the third quarter of 2022 this central adjustment was released.
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GROUP RESULTS - STATUTORY BASIS
Summary income statement Nine months ended Nine months ended Change
30 Sep 30 Sep %
2022 2021
£m £m
Net interest income 11,061 7,073 56
Other income (17,984) 20,012
Total income(1) (6,923) 27,085
Insurance claims(1) 20,181 (14,803)
Total income, net of insurance claims 13,258 12,282 8
Operating expenses (7,033) (7,194) 2
Impairment (charge) credit (1,056) 846
Profit before tax 5,169 5,934 (13)
Tax expense (1,134) (469)
Profit for the period 4,035 5,465 (26)
Profit attributable to ordinary shareholders 3,632 5,064 (28)
Profit attributable to other equity holders 327 321 2
Profit attributable to non-controlling interests 76 80 (5)
Profit for the period 4,035 5,465 (26)
Ordinary shares in issue (weighted-average - basic) 69,478m 70,919m (2)
Basic earnings per share 5.2p 7.1p (1.9)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
attributable to equity shareholders. These can, depending on market movements,
lead to significant variances on a statutory basis in total income and
insurance claims from one period to the next.
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Summary balance sheet At 30 Sep 2022 At 31 Dec Change
£m 2021 %
£m
Assets
Cash and balances at central banks 84,841 76,420 11
Financial assets at fair value through profit or loss 174,235 206,771 (16)
Derivative financial instruments 34,919 22,051 58
Financial assets at amortised cost 536,843 517,156 4
Financial assets at fair value through other comprehensive income 21,303 28,137 (24)
Other assets 40,781 35,990 13
Total assets 892,922 886,525 1
Liabilities
Deposits from banks 9,032 7,647 18
Customer deposits 484,303 476,344 2
Repurchase agreements at amortised cost(1) 46,378 31,125 49
Financial liabilities at fair value through profit or loss 21,012 23,123 (9)
Derivative financial instruments 33,983 18,060 88
Debt securities in issue 72,448 71,552 1
Liabilities arising from insurance and investment contracts 142,977 168,463 (15)
Other liabilities 26,174 23,951 9
Subordinated liabilities 10,242 13,108 (22)
Total liabilities 846,549 833,373 2
Total equity 46,373 53,152 (13)
Total equity and liabilities 892,922 886,525 1
(1 ) Repurchase agreements at amortised cost, previously included within
other liabilities, are now shown separately; comparatives have been presented
on a consistent basis.
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REVIEW OF PERFORMANCE
Robust financial performance with continued business momentum
Statutory results
The Group's statutory profit before tax for the first nine months of 2022 was
£5,169 million, 13 per cent lower than the same period in 2021. Results
benefitted from higher income, more than offset by the impact of an impairment
charge (compared to a credit in the prior year), including updates to the
economic outlook in the third quarter. Statutory profit after tax was
£4,035 million (nine months to 30 September 2021: £5,465 million, which
included the benefit of a deferred tax remeasurement). In the third quarter of
the year, statutory profit before tax was £1,508 million and statutory profit
after tax was £1,209 million, a decrease on the second quarter of 26 per cent
and 25 per cent respectively, again as a result of higher income more than
offset by the impairment charge in light of the deterioration in the
macroeconomic outlook as at 30 September 2022.
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 attributable to equity
shareholders but can, depending on market movements, lead to significant
variances on a statutory basis between total income and insurance claims from
one period to the next. In the nine months to 30 September 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 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 for the first nine months was
£13,258 million, an increase of 8 per cent on the first nine months of 2021,
reflecting continued recovery in customer activity and UK Bank Rate changes.
The Group has maintained its focus on cost management, whilst increasing
strategic investment as planned.
Loans and advances to customers are up 2 per cent on 31 December 2021 at
£456.3 billion, including continued growth of £5.1 billion in the open
mortgage book (£1.8 billion in the third quarter), alongside higher retail
unsecured loan and credit card balances. Commercial Banking balances increased
by £4.9 billion (including £0.6 billion in the third quarter) due to
attractive growth opportunities as well as foreign exchange movements in the
Corporate and Institutional Banking portfolio. Customer deposits have
increased by £8.0 billion since the end of 2021, to £484.3 billion. This
included Retail current account growth of £4.2 billion and Retail
relationship savings growth of £1.2 billion, along with Commercial Banking
deposit growth of £2.7 billion. In the nine months to 30 September 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 period 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. This programme
completed on 11 October 2022, with c.4.5 billion ordinary shares repurchased.
REVIEW OF PERFORMANCE (continued)
Underlying results(A)
The Group's underlying profit for the first nine months of the year was
£5,475 million, compared to £5,903 million for the same period in 2021.
Growth in net income was more than offset by an increased impairment charge,
largely given the impact of the updated economic outlook and associated
scenarios in the third quarter versus the underlying impairment credit for the
same period in 2021. Underlying profit before impairment for the period was up
29 per cent to £6,520 million, driven by robust net income growth and lower
remediation costs. In the third quarter, underlying profit before impairment
was £2,397 million, up 11 per cent on the second quarter.
Net income of £13,045 million was up 12 per cent on the first nine months of
2021, with higher net interest income and other income as well as a continued
low charge for operating lease depreciation.
Net interest income of £9,529 million was up 15 per cent, largely driven by a
stronger banking net interest margin of 2.84 per cent (nine months to 30
September 2021: 2.52 per cent). The net interest margin benefitted from the UK
Bank Rate increases, structural hedge earnings from the rising rate
environment, continued funding and capital optimisation and robust balance
growth, partly offset by mortgage margin reductions. In the third quarter, the
net interest margin rose to 2.98 per cent. Average interest-earning banking
assets were up 2 per cent compared to the first nine months of 2021 at
£451.4 billion, driven by continued growth in the open mortgage book. The
Group now expects the banking net interest margin for 2022 to be greater than
290 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 30 September 2022, the Group's
structural hedge had an approved capacity of £250 billion (up £10 billion on
31 December 2021 and stable compared to 30 June 2022), including some of the
balances from the deposit growth since the start of the coronavirus pandemic.
The Group continues to review recent periods' deposit growth and its
eligibility for the structural hedge. The nominal balance of the structural
hedge was £250 billion at 30 September 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 £1.9 billion of total gross income from structural hedge balances
in the first nine months of 2022, representing material growth over the same
period in 2021 (nine months to 30 September 2021: £1.6 billion).
Other income of £3,811 million was 2 per cent higher compared to £3,753
million for the first nine months of 2021, reflecting solid performance across
Retail, Commercial Banking, Insurance, Pensions and Investments (previously
Insurance and Wealth) and the Group's equity investments businesses. This
included £1,282 million in the third quarter, slightly up on the second
quarter.
Within Retail, other income was up 11 per cent on prior year, including
improved current account and credit card performance. Commercial Banking was
up 3 per cent versus the prior year due to higher financial markets activity
and strong performance in transaction banking, partly offset by lower levels
of corporate financing. Insurance, Pensions and Investments other income was 6
per cent higher than the prior year. This largely reflected the impact of
increased workplace pension sales 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
driven by market challenges, and particularly storm and subsidence claims.
Assumption changes were £119 million including £47 million in the third
quarter (nine months to 30 September 2021: £33 million). Other income
associated with the Group's equity investments businesses, including Lloyds
Development Capital, was lower after high contributions and releases in 2021.
Operating lease depreciation decreased to £295 million (nine months to 30
September 2021: £382 million), reflecting 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.
Operating lease depreciation further reduced to £82 million in the third
quarter, compared to £119 million in the second quarter.
The Group delivered good organic growth in Insurance, Pensions and Investments
and Wealth (within Retail) assets under administration (AuA), with over £6
billion net new money in open book AuA over the period. In total, open book
AuA stand at £154 billion.
REVIEW OF PERFORMANCE (continued)
Cost discipline remains a core focus for the Group. The Group's cost:income
ratio was 50.0 per cent compared to 56.6 per cent in the first nine months of
2021. Total costs of £6,525 million were 1 per cent lower than in the first
nine months of 2021 (with £2,197 million in the third quarter). Within this,
lower remediation costs (down 83 per cent) were partially offset by increased
operating costs of £6,436 million (up 6 per cent), reflecting higher planned
strategic investment and new businesses. Business-as-usual costs were stable.
Operating costs as previously guided are still expected to be c.£8.8 billion
for full-year 2022 (2021: £8.3 billion).
In the first nine months of 2022 the Group recognised remediation costs of
£89 million (£10 million in the third quarter), principally relating to
pre-existing programmes and significantly lower compared to the first nine
months of 2021 (£525 million). There have been no further charges relating
to HBOS Reading since the year-end and the provision held continues to reflect
the Group's best estimate of its full liability, albeit significant
uncertainties remain.
Impairment was a net charge of £1,045 million (including £668 million in
the third quarter), compared to a net credit of £853 million for the first
nine months of 2021. This reflected an observed performance charge of £532
million in the year to date (nine months to 30 September 2021: £245 million,
net of £261 million of write-backs), equivalent to an asset quality ratio of
15 basis points and a £513 million charge (nine months to 30 September
2021: a credit of £1,098 million) from updates to the assessment of the
economic outlook and associated scenarios. The updated outlook includes
elevated risks from a higher inflation and interest rate environment, offset
by a £200 million release of the COVID-19 central adjustment, driving
£418 million of the £668 million charge in the third quarter. The asset
quality ratio year to date is now 30 basis points.
The Group's loan portfolio continues to be well-positioned, reflecting a
prudent through-the-cycle approach to lending with high levels of security,
also reflected in strong recovery performance. Observed credit performance
remains stable, with very modest evidence of deterioration and the flow of
assets into arrears, defaults and write-offs at low levels and below
pre-pandemic levels. These help sustain a low observed performance charge of
£250 million in the third quarter, higher than earlier quarters in the year,
largely due to fewer write-backs from asset sales and model-related releases.
Stage 3 loans and advances have been stable across the third quarter (see
below). Credit card minimum payers and overdraft and revolving credit facility
(RCF) utilisation rates have remained low and in line with recent trends.
The Group's expected credit loss (ECL) allowance has increased in the first
nine months of the year to £5.0 billion (31 December 2021: £4.5 billion).
This reflects the balance of risks shifting from COVID-19 to increased
inflationary pressures and rising interest rates within the Group's base case
and wider economic scenarios. The deterioration in the economic outlook is now
reflected in variables which credit models better capture. As a result, the
Group's reliance on judgemental overlays for modelling risks in relation to
inflationary pressures has reduced from £0.3 billion at the half-year to
£0.1 billion in the third quarter, with these risks now captured more fully
in models.
Management judgements in respect of COVID-19 are now £0.1 billion, having
reduced by £0.2 billion in the third quarter and compared to £0.8 billion at
31 December 2021. Of the £0.7 billion reduction since 31 December 2021, £0.2
billion is now captured as expected within ECL portfolio models where
previously distorted data or trends have now normalised. The remaining
£0.5 billion release drives a net ECL reduction and credit to the impairment
charge, with the bulk relating to the £0.4 billion central adjustment (£0.2
billion released in each of the second and third quarters) and £0.1 billion
relating to ECL held against certain Commercial sectors in relation to the
specific risk posed by the virus and potential social restrictions (released
to profit in the first half).
Stage 2 loans and advances increased to £64 billion (31 December 2021:
£42 billion), with 92 per cent up to date. Of the £22 billion increase,
£15 billion occurred in the third quarter as a result of the updated economic
outlook, largely in UK mortgages and Commercial Banking. 99 per cent of the
increase in the third quarter related to up to date loans. The increases in
Stage 2 assets during the first half of the year, and in Stage 3 loans in the
year to date, are not reflective of observed deterioration, but driven by
changes in credit risk measurement and modelling associated with CRD IV
regulatory requirements(1) since the end of 2021. Stage 3 loans of £11
billion as at 30 September 2022 were stable compared to the second quarter.
On the basis of the Group's updated base case and the significant change in
economic context and associated scenarios since half-year, the Group now
expects the 2022 asset quality ratio to be c.30 basis points.
(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.
REVIEW OF PERFORMANCE (continued)
Restructuring costs of £69 million were higher than in the first nine months
of 2021 (£34 million) and included costs associated with the integration of
Embark. 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 £237 million in the first nine
months of 2022, comprising £95 million of negative market volatility and
£142 million relating to amortisation of purchased intangibles and fair value
unwind. Market volatility included negative insurance volatility of
£144 million due to rising interest rates and wider bond spreads which was
partly offset by positive banking volatility of £74 million. This compares to
gains in the first nine months of 2021 including £132 million of positive
insurance volatility. In the third quarter, market volatility included £102
million of negative insurance volatility and £35 million of negative banking
volatility, again principally from rising interest rates.
The return on tangible equity for the first nine months of 2022 was 12.9 per
cent reflecting the Group's robust financial performance (nine months to 30
September 2021: 17.6 per cent, benefitting from a net impairment credit and
remeasurement of deferred tax assets). The Group continues to expect the
return on tangible equity for 2022 to be c.13 per cent.
Capital
The Group's CET1 capital ratio reduced from 16.3 per cent on a pro forma basis
at 31 December 2021 to 15.0 per cent at 30 September 2022. This included a
reduction of 230 basis points on 1 January 2022 for regulatory changes (as
previously reported), subsequently offset by strong capital generation of 191
basis points during the first nine months of this year. Capital generation
reflected banking profitability of 169 basis points, including a net
impairment offset of 31 basis points, plus 16 basis points for the interim
dividend received from the Insurance business in July 2022 (£300 million).
The capital generation further benefitted from a reduction in underlying
risk-weighted assets, post 1 January 2022 regulatory changes, equivalent to
14 basis points and other movements of 23 basis points. This was offset in
part by 31 basis points related to the full 2022 fixed pension deficit
contributions for the Group's defined benefit pension schemes. Capital
generation during the third quarter of 52 basis points was driven by banking
profitability of 52 basis points (including a net impairment offset of 18
basis points) and other movements of 6 basis points. This was offset by a
reduction of 6 basis points from an increase in risk-weighted assets.
The net impairment offset of 31 basis points for the year to date reflects the
impairment charge of 41 basis points, offset by IFRS 9 dynamic relief of 10
basis points resulting from the increase in Stage 1 and Stage 2 expected
credit losses in the third quarter. In relation to capital usage, the impact
of the interim ordinary dividend and the foreseeable ordinary dividend accrual
at 30 September 2022 equated to 60 basis points.
During the first nine months of the year a total of £1.8 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 £0.8 billion (equivalent to 31 basis points)
were paid in full in the first quarter. The variable contributions of
£1.0 billion reflected £0.5 billion paid in the first quarter and £0.5
billion in the third quarter (equivalent to 37 basis points in total). This
substantially covers the payment of the agreed variable pension contributions
(c.95 per cent) relating to 30 per cent of in-year distributions, in
accordance with the current agreement with the Trustees, with a small residual
to be paid in the fourth quarter. The impact of recent volatility has had no
material impact on the funding position of the pension schemes.
The Group now expects capital generation in 2022 of between 225 and 250 basis
points. The Group maintains its commitment to consider the return of excess
capital as usual at year-end.
REVIEW OF PERFORMANCE (continued)
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) 169
Insurance dividend (bps) 16
Underlying risk-weighted assets (bps) 14
Fixed pension deficit contributions (bps) (31)
Other movements (bps) 23
Capital generation (bps) 191
Ordinary dividend (bps) (60)
Variable pension contributions (bps) (37)
Net movement in CET1 ratio excluding regulatory change (bps) 94
CET1 ratio as at 30 September 2022 15.0%
(1 ) 31 December 2021 ratio reflects the dividend received from Insurance
in February 2022 and the full impact of the share buyback.
Risk-weighted assets 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. Risk-weighted assets subsequently reduced by
£1 billion during the first nine months of the year to £211 billion at 30
September 2022, largely reflecting optimisation activity and Retail model
reductions linked to the resilient underlying credit performance, partly
offset by the growth in balance sheet lending and impact of foreign exchange.
The £1 billion increase in risk-weighted assets during the third quarter was
largely driven by the growth in lending and foreign exchange impacts,
partially offset by further optimisation and Retail model reductions. The new
CRD IV models remain subject to finalisation and approval by the PRA and
therefore the final risk-weighted asset impact remains subject to this.
The Group continues to expect risk-weighted assets at the end of 2022 to be
around £210 billion.
In October the PRA reduced the Group's Pillar 2A CET1 capital requirement to
around 1.5 per cent of risk-weighted assets (previously around 2 per cent of
risk-weighted assets), with the Group's regulatory minimum CET1 capital
requirement now around 10.5 per cent. The planned increases in the UK
countercyclical capital buffer rate to 1 per cent in December 2022 and to 2
per cent from July 2023 will lead to an increase in the Group's
countercyclical capital buffer (CCyB), initially to around 0.9 per cent and
then to 1.8 per cent, which will be partially offset by the removal of the
0.25 per cent CCyB related element of the PRA buffer. 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.
Tangible net assets per share were 49.0 pence, down from 57.5 pence at
31 December 2021, with the favourable impact from profits more than offset by
cash flow hedging reserve movements as a result of increased interest rates
(9.5 pence), pensions remeasurements (2.2 pence) and the impacts from payment
of ordinary dividends (2.2 pence).
FURTHER IMPAIRMENT DETAIL
The analyses which follow have been presented on an underlying basis. See page
23.
Underlying impairment(A)
Nine months ended Nine months ended Change Three months ended Three months ended Change
30 Sep
30 Sep 2022
2022 30 Sep %
£m 30 Sep 2021(1) %
£m
2021(1) £m
£m
Charges (credits) pre-updated MES(2)
Retail(3) 520 601 13 235 163 (44)
Commercial Banking(3) 1 (354) 8 (21)
Other(3) 11 (2) 7 -
532 245 250 142
Updated economic outlook
Retail(3) 541 (678) 370 (141)
Commercial Banking(3) 372 (420) 248 (120)
Other(3) (400) - (200) -
513 (1,098) 418 (261)
Underlying impairment charge (credit)(A) 1,045 (853) 668 (119)
Asset quality ratio(A) 0.30% (0.25)% 0.57% (0.10)%
(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 absent the impact from updated economic outlook,
thus reflecting observed movements in credit quality. 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.
(3 ) Impairment charges for Retail, Commercial Banking and Other reflect
the new organisation structure; comparatives have been presented on a
consistent basis. See page 25.
Total expected credit loss allowance
Underlying basis(A)
At 30 Sep 2022 At 30 Jun 2022 At 31 Dec
£m
£m
2021
£m
Customer related balances
Drawn 4,685 4,247 4,277
Undrawn 286 236 200
4,971 4,483 4,477
Loans and advances to banks 7 4 1
Debt securities 6 4 3
Other assets 33 23 18
Total ECL allowance 5,017 4,514 4,499
FURTHER IMPAIRMENT DETAIL (continued)
Loans and advances to customers and expected credit loss allowance -
underlying basis(A)
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.
FURTHER IMPAIRMENT DETAIL (continued)
Loans and advances to customers and expected credit loss allowance -
underlying basis(A) (continued)
At 30 June 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 268,568 35,555 6,764 310,887 11.4 2.2
Credit cards(1) 12,186 2,289 280 14,755 15.5 1.9
Loans and overdrafts 8,666 1,144 256 10,066 11.4 2.5
UK Motor Finance 12,476 1,832 179 14,487 12.6 1.2
Other(1) 12,711 626 150 13,487 4.6 1.1
Retail(2) 314,607 41,446 7,629 363,682 11.4 2.1
Small and Medium Businesses(1) 34,310 5,053 2,147 41,510 12.2 5.2
Corporate and Institutional Banking(1) 52,129 2,910 1,653 56,692 5.1 2.9
Commercial Banking 86,439 7,963 3,800 98,202 8.1 3.9
Equity Investments and Central Items(3) (1,549) 1 6 (1,542)
Total gross lending 399,497 49,410 11,435 460,342 10.7 2.5
ECL allowance on drawn balances (776) (1,389) (2,082) (4,247)
Net balance sheet carrying value 398,721 48,021 9,353 456,095
Customer related ECL allowance (drawn and undrawn)
UK mortgages 45 470 716 1,231
Credit cards(1) 172 346 111 629
Loans and overdrafts 164 243 135 542
UK Motor Finance(4) 105 80 105 290
Other(1) 14 16 48 78
Retail(2) 500 1,155 1,115 2,770
Small and Medium Businesses(1) 106 177 153 436
Corporate and Institutional Banking(1) 93 166 814 1,073
Commercial Banking 199 343 967 1,509
Equity Investments and Central Items 200 - 4 204
Total 899 1,498 2,086 4,483
Customer related ECL allowance (drawn and undrawn) as a percentage of loans
and advances to customers(5)
UK mortgages - 1.3 10.6 0.4
Credit cards(1) 1.4 15.1 53.6 4.3
Loans and overdrafts 1.9 21.2 70.7 5.4
UK Motor Finance 0.8 4.4 58.7 2.0
Other(1) 0.1 2.6 32.0 0.6
Retail(2) 0.2 2.8 14.9 0.8
Small and Medium Businesses(1) 0.3 3.5 12.5 1.1
Corporate and Institutional Banking(1) 0.2 5.7 49.3 1.9
Commercial Banking 0.2 4.3 33.6 1.6
Equity Investments and Central Items(6) - 66.7
Total 0.2 3.0 20.1 1.0
(1) Reflects the new organisation structure. See page 25.
(2 ) Retail balances exclude the impact of the HBOS acquisition-related
adjustments.
(3 ) Contains centralised fair value hedge accounting adjustments.
(4 ) UK Motor Finance for Stages 1 and 2 include £94 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 £73 million, Loans and
overdrafts of £65 million, Small and Medium Businesses of £921 million and
Corporate and Institutional Banking of £1 million.
(6) Equity Investments and Central Items excludes the £200 million ECL
central adjustment.
FURTHER IMPAIRMENT DETAIL (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 25.
(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.
(
)
FURTHER IMPAIRMENT DETAIL (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 30 September 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 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
Equity Investments and Central Items - - - - - - - - - -
Total 48,218 1,236 10,874 362 3,163 227 1,657 173 63,912 1,998
At 30 June 2022
UK mortgages 24,356 193 7,836 161 2,290 60 1,073 56 35,555 470
Credit cards(4) 2,042 257 131 45 87 28 29 16 2,289 346
Loans and overdrafts 735 140 235 42 134 43 40 18 1,144 243
UK Motor Finance 675 24 977 21 143 25 37 10 1,832 80
Other(4) 169 3 354 7 54 3 49 3 626 16
Retail 27,977 617 9,533 276 2,708 159 1,228 103 41,446 1,155
Small and Medium Businesses(4) 3,146 139 1,257 22 413 10 237 6 5,053 177
Corporate and Institutional Banking(4) 2,672 160 123 3 26 3 89 - 2,910 166
Commercial Banking 5,818 299 1,380 25 439 13 326 6 7,963 343
Equity Investments and Central Items - - 1 - - - - - 1 -
Total 33,795 916 10,914 301 3,147 172 1,554 109 49,410 1,498
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
Equity Investments and Central Items - - - - - - - - - -
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.
(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 25.
FURTHER IMPAIRMENT DETAIL (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 on pages 19 and 18.
The table below shows the Group's ECL for the probability-weighted, upside,
base case, downside and severe downside scenarios, 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 constant reflecting the basis on which they are
evaluated.
Underlying basis(A) Probability- Upside Base case Downside Severe
weighted £m £m £m downside
£m £m
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 1,231 856 1,004 1,374 2,607
Credit cards(1) 629 546 597 686 804
Other Retail(1) 910 863 895 941 1,004
Commercial Banking(1) 1,515 1,316 1,413 1,587 2,200
Other(1) 229 229 229 229 229
At 30 June 2022 4,514 3,810 4,138 4,817 6,844
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 25.
FURTHER IMPAIRMENT DETAIL (continued)
Base case and MES economic assumptions
The Group's base case economic scenario reflects the outlook as of 30
September 2022 and was revised in light of developments in energy pricing,
changes in UK fiscal policy prior to the balance sheet date and a continuing
shift towards a more restrictive monetary policy stance by central banks. The
Group's updated base case scenario was based upon three conditioning
assumptions: first, the war in Ukraine remains 'local', without overtly
involving neighbouring countries, NATO or China; second, the fiscal loosening
implied by the UK Government's 'Growth Plan' of 23 September 2022 would be
offset principally by Government spending cuts; and third, central bank
reaction functions, including of the Bank of England, are focused on
controlling inflation, motivating a more rapid tightening of UK monetary
policy. The Group continues to assume that no further UK COVID-19 national
lockdowns are mandated. Based on these assumptions and incorporating the
macroeconomic information published in the third quarter, the Group's base
case scenario comprises an economic downturn with a rise in the unemployment
rate, declining residential and commercial property prices, and continuing
increases in the UK Bank Rate against a backdrop of elevated inflationary
pressures. Risks to the base case economic view exist in both directions and
are partly captured by the generation of alternative economic scenarios. Each
of the scenarios includes forecasts for key variables as of the third quarter
of 2022, for which data or revisions to history may have since emerged prior
to publication.
At 30 September 2022, the Group has included an adjusted severe downside
scenario to incorporate high CPI inflation and UK Bank Rate profiles and has
adopted this adjusted severe downside scenario in calculating its ECL
allowance. 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 lower inflation rates, easier monetary policy, and
therefore low interest rates. This adjustment is considered to better reflect
the risks around the Group's base case view in a macroeconomic environment in
which supply shocks are the principal concern.
UK economic assumptions - 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 30 September 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 0.8 (0.1) (0.1) (0.3) (0.4) (0.3) (0.2) (0.1)
Unemployment rate 3.7 3.8 3.7 3.8 4.3 4.7 5.1 5.4
House price growth 11.1 12.5 10.4 5.0 (0.2) (5.8) (8.2) (7.9)
Commercial real estate price growth 18.0 18.0 12.3 2.8 (5.6) (11.8) (13.7) (14.4)
UK Bank Rate 0.75 1.25 2.25 4.00 4.00 4.00 4.00 4.00
CPI inflation 6.2 9.2 10.2 10.7 9.8 6.5 5.2 3.2
FURTHER IMPAIRMENT DETAIL (continued)
UK economic assumptions - scenarios by year
Key annual assumptions made by the Group are shown below. Gross domestic
product 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 within the period.
Unemployment rate and UK Bank Rate are averages for the period.
At 30 September 2022 2022 2023 2024 2025 2026 2022
% % % % % to 2026 average
%
Upside
Gross domestic product 3.6 0.4 1.0 1.5 2.1 1.7
Unemployment rate 3.3 2.8 3.2 3.5 3.8 3.3
House price growth 6.1 (2.7) 7.2 8.5 6.1 5.0
Commercial real estate price growth 8.7 (3.6) 0.1 1.0 1.9 1.6
UK Bank Rate 2.16 5.28 5.17 4.30 4.12 4.20
CPI inflation 9.0 6.1 2.9 3.2 2.6 4.8
Base case
Gross domestic product 3.4 (1.0) 0.4 1.4 2.0 1.2
Unemployment rate 3.7 4.9 5.4 5.5 5.5 5.0
House price growth 5.0 (7.9) (0.5) 2.5 2.3 0.2
Commercial real estate price growth 2.8 (14.4) (2.7) 0.4 1.9 (2.6)
UK Bank Rate 2.06 4.00 3.38 2.56 2.50 2.90
CPI inflation 9.1 6.2 2.5 2.2 1.3 4.2
Downside
Gross domestic product 3.2 (2.3) (0.2) 1.2 1.9 0.8
Unemployment rate 4.1 6.6 7.5 7.3 7.2 6.5
House price growth 3.9 (12.9) (8.9) (5.4) (3.3) (5.5)
Commercial real estate price growth (1.4) (23.0) (6.5) (2.5) (0.2) (7.1)
UK Bank Rate 2.00 2.93 1.76 1.04 1.07 1.76
CPI inflation 9.0 6.0 1.9 1.1 0.0 3.6
Severe downside
Gross domestic product 2.4 (4.5) (0.3) 1.0 1.8 0.0
Unemployment rate 4.9 9.8 10.5 10.0 9.5 8.9
House price growth 2.4 (17.9) (16.6) (10.3) (6.0) (10.0)
Commercial real estate price growth (9.2) (35.7) (13.6) (6.4) (0.7) (14.1)
UK Bank Rate - modelled 1.78 0.91 0.36 0.21 0.23 0.70
UK Bank Rate - adjusted 2.44 7.00 4.88 3.00 2.75 4.01
CPI inflation - modelled 9.1 5.9 1.0 (0.4) (1.9) 2.7
CPI inflation - adjusted 9.9 14.3 9.0 4.1 1.3 7.7
Probability-weighted
Gross domestic product 3.3 (1.3) 0.3 1.4 2.0 1.1
Unemployment rate 3.8 5.3 5.9 5.9 5.9 5.4
House price growth 4.7 (8.8) (2.3) 0.6 0.9 (1.1)
Commercial real estate price growth 2.1 (15.8) (4.1) (1.0) 1.0 (3.8)
UK Bank Rate - modelled 2.04 3.75 3.13 2.39 2.33 2.73
UK Bank Rate - adjusted 2.11 4.36 3.58 2.67 2.58 3.06
CPI inflation - modelled 9.1 6.1 2.3 1.9 1.0 4.1
CPI inflation - adjusted 9.1 6.9 3.1 2.4 1.3 4.6
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 30 September 2022, the Group's
structural hedge had an approved capacity of £250 billion (up £10 billion on
31 December 2021 and stable compared to 30 June 2022).
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 has been driven by
structural hedge maturity reinvestment. 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
+100bps c.625 c.1,025 c.1,450
+50bps c.300 c.525 c.725
+25bps c.150 c.250 c.350
(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 30 September 2022 balance sheet position.
ALTERNATIVE PERFORMANCE MEASURES
In addition to the statutory basis of presentation, the results are also
presented on an underlying basis. 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 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 an underlying basis. 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.
The Group calculates a number of metrics that are used throughout the banking
and insurance industries on an underlying basis. A description of these
measures and their calculation, which remain unchanged since the year-end, is
set out on pages 27 to 31 of the Group's 2022 Half-Year Results News Release.
ALTERNATIVE PERFORMANCE MEASURES (continued)
Nine months ended Nine months ended
30 Sep 30 Sep
2022 2021
Banking net interest margin(A)
Underlying net interest income (£m) 9,529 8,270
Remove non-banking underlying net interest expense (£m) 69 86
Banking underlying net interest income (£m) 9,598 8,356
Statutory net loans and advances to customers (£bn) 456.3 450.5
Add back expected credit loss allowance (drawn) (£bn) 4.3 4.4
Acquisition related fair value adjustments (£bn) 0.4 0.4
Underlying gross loans and advances to customers (£bn) 461.0 455.3
Adjustment for non-banking and other items:
Fee-based loans and advances (£bn) (8.1) (5.4)
Other non-banking and other items (£bn) 4.4 0.9
Interest-earning banking assets (£bn) 457.3 450.8
Averaging (£bn) (5.9) (7.8)
Average interest-earning banking assets (£bn)(A) 451.4 443.0
Banking net interest margin(A) 2.84% 2.52%
( )
(
)
( )
Nine months ended Nine months ended
30 Sep 30 Sep
2022 2021
Return on tangible equity(A)
Profit attributable to ordinary shareholders (£m) 3,632 5,064
Average shareholders' equity (£bn) 44.4 44.7
Remove average intangible assets (£bn) (6.6) (6.3)
Average tangible equity (£bn) 37.8 38.4
Return on tangible equity(A) 12.9% 17.6%
BASIS OF PRESENTATION
This news release covers the results of Lloyds Banking Group plc together with
its subsidiaries (the Group) for the nine months to 30 September 2022. Unless
otherwise stated, income statement commentaries throughout this document
compare the nine months to 30 September 2022 to the nine months to 30
September 2021, and the balance sheet analysis compares the Group balance
sheet as at 30 September 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 23. Unless
otherwise stated, commentary on page 1 is given on an underlying basis. The Q3
2022 Interim Pillar 3 Report can be found at
www.lloydsbankinggroup.com/investors/financial-downloads
(http://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 23.
Segmental information: 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
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; market related risks, trends and developments; risks
concerning borrower and counterparty credit quality; fluctuations in interest
rates, inflation, exchange rates, stock markets and currencies; volatility in
credit markets; volatility in the price of the Group's securities; changes in
consumer behaviour; any impact of the transition from IBORs to alternative
reference rates; the ability to access sufficient sources of capital,
liquidity and funding when required; changes to the Group's credit ratings;
the ability to derive cost savings 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; potential changes in dividend policy; the ability to achieve
strategic objectives; insurance risks; management and monitoring of conduct
risk; exposure to counterparty risk; credit rating risk; tightening of
monetary policy in jurisdictions in which the Group operates; instability in
the global financial markets, including within the Eurozone, and as a result
of ongoing uncertainty following the exit by the UK from the European Union
(EU) and the effects of the EU-UK Trade and Cooperation Agreement; political
instability including as a result of any UK general election and any further
possible referendum on Scottish independence; 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; natural pandemic (including but not limited to the
COVID-19 pandemic) and other disasters; inadequate or failed internal or
external processes or systems; 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; risks
relating to sustainability and 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; changes in laws, regulations, practices and accounting standards
or taxation; changes to regulatory capital or liquidity requirements and
similar contingencies; assessment related to resolution planning requirements;
the policies and actions of governmental or regulatory authorities or courts
together with any resulting impact on the future structure of the Group;
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; projected employee numbers and key person
risk; increased labour costs; assumptions and estimates that form the basis of
the Group's financial statements; the impact of competitive conditions; and
exposure to legal, regulatory or competition proceedings, investigations or
complaints. 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
(https://eur02.safelinks.protection.outlook.com/?url=http%3A%2F%2Fwww.sec.gov%2F&data=04%7C01%7CSam.Lacy%40lloydsbanking.com%7Ce77873d12ba54f27da8b08da0e868f52%7C3ded2960214a46ff8cf4611f125e2398%7C0%7C0%7C637838268325760725%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000&sdata=WLI0LhzItRxgokBInCDsWMnLdZHz%2Fz0jGPOCPf9Z%2BBY%3D&reserved=0)
, 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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