REG - Lloyds Banking Group - 2023 Half-Year Results
26/07/2023 07:00
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RNS Number : 1774H Lloyds Banking Group PLC 26 July 2023
Lloyds Banking Group plc
2023 Half-Year Results
26 July 2023
Part 1 of 2
CONTENTS
Results for the half-year 1
Income statement - underlying basis and key balance sheet metrics 3
Quarterly information 4
Balance sheet analysis 5
Group results - (#Section4) statutory basis 6
Group Chief Executive's statement 7
Summary of Group results 9
Segmental analysis - underlying basis 17
Divisional results
Retail 19
Commercial Banking 21
Insurance, Pensions and Investments 23
Equity Investments and Central Items 26
Alternative performance measures 27
Risk management
Principal risks and uncertainties 33
Capital risk 35
Credit risk 41
Funding and liquidity risk 58
Interest rate sensitivity 62
Statutory information
Condensed consolidated half-year financial statements (unaudited) 63
Consolidated income statement 64
Consolidated statement of comprehensive income 65
Consolidated balance sheet 66
Consolidated statement of changes in equity 68
Consolidated cash flow statement 71
Notes to the condensed consolidated half-year financial statements 72
Statement of directors' responsibilities 121
Independent review report to Lloyds Banking Group plc 122
Key dates 123
Basis of presentation 123
Forward looking statements 124
Contacts 125
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 27. Unless otherwise stated, commentary on pages 1 to 2 and on pages 7 to
8 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 124.
RESULTS FOR THE HALF-YEAR
"We know that rising interest rates, cost of living pressures and an uncertain
economic outlook are proving challenging for many people and businesses.
Guided by our purpose of Helping Britain Prosper, we remain fully focused on
proactively supporting our customers and helping them navigate the current
environment.
The Group delivered a robust financial performance in the first half of 2023
with strong net income and capital generation alongside resilient asset
quality.
We continue to make good progress on delivering our strategic initiatives.
Combined with our franchise resilience, this better positions us to support
our customers, both today and in the future."
Charlie Nunn,
Group Chief Executive
Fully focused on proactively supporting customers
• Proactively contacting customers to offer cost of living support,
including more than 200,000 mortgage customers, alongside committing to the
Government's Mortgage Charter
• Contact with more than 550,000 business customers to offer guidance on
building financial resilience
• Supporting customers to develop financial resilience; contacted over 10
million customers about savings options, with 1.9 million new savings accounts
opened in the first half in response to the Group's higher rates and enhanced
offering
Robust financial performance and consistent delivery supporting higher interim
dividend
• Continuing to deliver on strategic ambitions and well positioned to
deliver for all stakeholders
• Statutory profit after tax of £2.9 billion, with net income of £9.2
billion up 11 per cent (stable on the second half of 2022), partly offset by
expected higher operating costs and impairment charge. Strong return on
tangible equity of 16.6 per cent in the first half of 2023 and 13.6 per cent
in the second quarter
• Statutory profit after tax in the second quarter of £1.2 billion,
reflecting broadly stable income compared to the first quarter, offset by
increases in operating lease depreciation, operating costs and impairment
charges
• Underlying net interest income of £7.0 billion, with a net interest
margin of 3.18 per cent. Net interest margin of 3.14 per cent in the second
quarter, down 8 basis points compared to the first, given expected headwinds
from mortgage and deposit pricing. Average interest-earning assets of £453.8
billion, stable compared to the fourth quarter of 2022
• Other income of £2.5 billion, 7 per cent higher, reflecting continued
recovery of customer activity and ongoing investment in the business, building
confidence in growth potential
• Operating lease depreciation of £356 million, up 67 per cent, given
depreciation cost of higher value vehicles, the Tusker acquisition, lower
gains on disposal and recent declines in electric vehicle used car prices
• Operating costs of £4.4 billion, up 6 per cent. The Group has
maintained its cost discipline in the context of higher planned strategic
investment, new business costs and continued inflationary pressure
• Remediation charge of £70 million remains low, largely in relation to
pre-existing programmes
• Impairment charge of £0.7 billion and asset quality ratio of 29 basis
points reflecting broadly stable credit trends. Asset quality remains
resilient and the portfolio is well-positioned in the context of cost of
living pressures
• Loans and advances to customers reduced by £4.2 billion (£1.6 billion
in the second quarter) to £450.7 billion, impacted by the first quarter £2.5
billion legacy mortgage portfolio exit and net reductions in the open mortgage
book
• Customer deposits of £469.8 billion down £5.5 billion (1.2 per cent),
including £6.2 billion in Retail current accounts, partly offset by a
£3.5 billion increase in Retail savings balances
• Customer deposits in the second quarter benefited from broadly stable
Retail balances. Commercial Banking balances were slightly lower including the
expected reversal of short term placements, leading to an overall £3.3
billion reduction
• Loan to deposit ratio of 96 per cent; large, high quality liquid asset
portfolio with all assets hedged for interest rate risk
• Strong capital generation of 111 basis points includes the full £800
million fixed pension contributions for 2023; 75 basis points after CRD IV
model changes and phased unwind of IFRS 9 relief
• Risk-weighted assets increased by £4.4 billion, including £3 billion
anticipated impact of CRD IV model updates
• Tangible net assets per share of 45.7 pence, slightly down on the end of
2022 and down 3.9 pence per share in the second quarter, largely due to the
impact of rising rates on the cash flow hedge reserve
• Interim ordinary dividend of 0.92 pence per share, up 15 per cent on the
prior year and equivalent to £594 million
• CET1 ratio of 14.2 per cent after 44 basis points for ordinary dividend
accrual and 21 basis points for the Tusker acquisition. Remains ahead of
ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent
RESULTS FOR THE HALF-YEAR (continued)
Enhancing guidance for 2023, delivering higher, more sustainable returns
Based on our purpose-driven strategy, robust financial performance and the
Group's revised macroeconomic forecasts, we are enhancing our 2023 guidance
and now expect:
• Banking net interest margin to be greater than 310 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 greater than 14 per cent
• Capital generation to be c.175 basis points(1)
(1) Excluding capital distributions and the impact of the Tusker
acquisition. Inclusive of ordinary dividends received from the
Insurance business.
INCOME STATEMENT - UNDERLYING BASIS(A) AND KEY BALANCE SHEET METRICS
Half-year to 30 Jun Half-year Change Half-year Change
2023
£m to 30 Jun 2022 % to 31 Dec 2022 %
£m £m
Underlying net interest income 7,004 6,135 14 7,037
Underlying other income(1) 2,538 2,367 7 2,299 10
Operating lease depreciation (356) (213) (67) (160)
Net income 9,186 8,289 11 9,176
Operating costs(1) (4,413) (4,171) (6) (4,501) 2
Remediation (70) (79) 11 (176) 60
Total costs (4,483) (4,250) (5) (4,677) 4
Underlying profit before impairment 4,703 4,039 16 4,499 5
Underlying impairment charge (662) (377) (76) (1,133) 42
Underlying profit 4,041 3,662 10 3,366 20
Restructuring (25) (47) 47 (33) 24
Volatility and other items(1) (146) (466) 69 (1,700) 91
Statutory profit before tax 3,870 3,149 23 1,633
Tax expense(1) (1,006) (702) (43) (157)
Statutory profit after tax 2,864 2,447 17 1,476 94
Earnings per share(1) 3.9p 3.1p 0.8p 1.8p 2.1p
Dividends per share - ordinary 0.92p 0.80p 15 1.60p
Banking net interest margin(A) 3.18% 2.77% 41bp 3.10% 8bp
Average interest-earning banking assets(A) £453.8bn £449.6bn 1 £454.3bn
Cost:income ratio(A,1) 48.8% 51.3% (2.5)pp 51.0% (2.2)pp
Asset quality ratio(A) 0.29% 0.17% 12bp 0.48% (19)bp
Return on tangible equity(A,1) 16.6% 11.8% 4.8pp 7.4% 9.2pp
(A) See page 27.
(1) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123.
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)
At 30 Jun At 30 Jun Change At 31 Dec Change
2023
2022
2022
% %
Loans and advances to customers £450.7bn £456.1bn (1) £454.9bn (1)
Customer deposits £469.8bn £478.2bn (2) £475.3bn (1)
Loan to deposit ratio(A) 96% 95% 1pp 96%
CET1 ratio 14.2% 14.7% (0.5)pp 15.1% (0.9)pp
Pro forma CET1 ratio(A,1) 14.2% 14.8% (0.6)pp 14.1% 0.1pp
UK leverage ratio 5.7% 5.3% 0.4pp 5.6% 0.1pp
Risk-weighted assets £215.3bn £209.6bn 3 £210.9bn 2
Wholesale funding £103.5bn £97.7bn 6 £100.3bn 3
Liquidity coverage ratio(2) 142% 142% 144% (2)pp
Net stable funding ratio(3) 130% 130%
Tangible net assets per share(A,4) 45.7p 51.4p (5.7)p 46.5p (0.8)p
(1 ) 30 June 2022 reflects the interim ordinary dividend received from
the Insurance business in July 2022. 31 December 2022 reflects the interim
ordinary dividend received from the Insurance business 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.
(2) The liquidity coverage ratio is calculated as a monthly rolling simple
average over the previous 12 months.
(3) Net stable funding ratio is based on an average of the four previous
quarters.
(4) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123.
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)
QUARTERLY INFORMATION(A)
Quarter ended Quarter Change Quarter Quarter ended Quarter ended Quarter
30 Jun 2023 ended % ended 30 Sep 2022 30 Jun 2022 ended
£m 31 Mar 31 Dec £m £m 31 Mar
2023 2022 2022
£m £m £m
Underlying net interest income 3,469 3,535 (2) 3,643 3,394 3,190 2,945
Underlying other income(1) 1,281 1,257 2 1,128 1,171 1,185 1,182
Operating lease depreciation (216) (140) (54) (78) (82) (119) (94)
Net income 4,534 4,652 (3) 4,693 4,483 4,256 4,033
Operating costs(1) (2,243) (2,170) (3) (2,356) (2,145) (2,112) (2,059)
Remediation (51) (19) (166) (10) (27) (52)
Total costs (2,294) (2,189) (5) (2,522) (2,155) (2,139) (2,111)
Underlying profit before impairment 2,240 2,463 (9) 2,171 2,328 2,117 1,922
Underlying impairment charge (419) (243) (72) (465) (668) (200) (177)
Underlying profit 1,821 2,220 (18) 1,706 1,660 1,917 1,745
Restructuring (13) (12) (8) (11) (22) (23) (24)
Volatility and other items(1) (198) 52 (638) (1,062) (289) (177)
Statutory profit before tax 1,610 2,260 (29) 1,057 576 1,605 1,544
Tax expense(1) (387) (619) 37 (75) (82) (303) (399)
Statutory profit after tax 1,223 1,641 (25) 982 494 1,302 1,145
Banking net interest margin(A) 3.14% 3.22% (8)bp 3.22% 2.98% 2.87% 2.68%
Average interest-earning banking assets(A) £453.4bn £454.2bn £453.8bn £454.9bn £451.2bn £448.0bn
Cost:income ratio(A,1) 50.6% 47.1% 3.5pp 53.7% 48.1% 50.3% 52.3%
Asset quality ratio(A) 0.36% 0.22% 14bp 0.38% 0.57% 0.17% 0.16%
Return on tangible equity(A,1) 13.6% 19.1% (5.5)pp 11.0% 4.2% 13.0% 10.7%
Loans and advances to customers £450.7bn £452.3bn £454.9bn £456.3bn £456.1bn £451.8bn
Customer deposits £469.8bn £473.1bn (1) £475.3bn £484.3bn £478.2bn £481.1bn
Loan to deposit ratio(A) 96% 96% 96% 94% 95% 94%
Risk-weighted assets £215.3bn £210.9bn 2 £210.9bn £210.8bn £209.6bn £210.2bn
Tangible net assets per share(A,1) 45.7p 49.6p (3.9)p 46.5p 44.5p 51.4p 53.7p
(1 ) 2022 comparatives have been restated to reflect the impact of IFRS
17. See page 123.
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BALANCE SHEET ANALYSIS
At 30 Jun At 31 Mar Change At 30 Jun Change At 31 Dec Change
2023
2023
2022
£bn
£bn % 2022(1) %
£bn %
£bn
Loans and advances to customers
Open mortgage book 297.9 298.6 296.6 299.6 (1)
Closed mortgage book 8.5 8.9 (4) 13.1 (35) 11.6 (27)
Credit cards 14.9 14.4 3 14.2 5 14.3 4
UK Retail unsecured loans 9.3 9.0 3 8.5 9 8.7 7
UK Motor Finance 14.9 14.7 1 14.2 5 14.3 4
Overdrafts 1.0 1.0 1.0 1.0
Wealth 0.9 0.9 1.0 (10) 0.9
Retail other(2) 14.5 14.2 2 12.5 16 13.8 5
Small and Medium Businesses 35.5 36.4 (2) 41.1 (14) 37.7 (6)
Corporate and Institutional Banking 56.6 56.7 55.7 2 56.0 1
Central items(3) (3.3) (2.5) (32) (1.8) (83) (3.0) (10)
Loans and advances to customers 450.7 452.3 456.1 (1) 454.9 (1)
Customer deposits
Retail current accounts 107.8 110.5 (2) 113.4 (5) 114.0 (5)
Retail relationship savings accounts 169.4 166.7 2 165.8 2 166.3 2
Retail tactical savings accounts 16.5 16.4 1 16.9 (2) 16.1 2
Wealth 12.2 12.9 (5) 14.9 (18) 14.4 (15)
Commercial Banking deposits 163.6 166.5 (2) 166.7 (2) 163.8
Central items 0.3 0.1 0.5 (40) 0.7 (57)
Total customer deposits 469.8 473.1 (1) 478.2 (2) 475.3 (1)
(1 ) The portfolios shown reflect the new organisation structure;
comparatives have been presented on a consistent basis. See page 123.
(2 ) Primarily Europe.
(3) Central items includes central fair value hedge accounting adjustments.
30 June 2022 included a £200 million ECL central adjustment that was not
allocated to specific portfolios. In the third quarter of 2022 this central
adjustment was released.
( )
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GROUP RESULTS - STATUTORY BASIS
The results below are prepared in accordance with the recognition and
measurement principles of International Financial Reporting Standards (IFRSs).
The underlying results are shown on page 3.
Summary income statement Half-year to 30 Jun Half-year Change Half-year Change
2023 to 30 Jun 2022(1) % to 31 Dec %
£m £m 2022(1)
£m
Net interest income 6,798 6,037 13 6,885 (1)
Other income 8,097 (18,030) (238)
Total income 14,895 (11,993) 6,647
Net finance income in respect of insurance and investment contracts (5,589) 19,941 946
Total income, after net finance income in respect of insurance and investment 9,306 7,948 17 7,593 23
contracts
Operating expenses (4,774) (4,418) (8) (4,819) 1
Impairment (662) (381) (74) (1,141) 42
Profit before tax 3,870 3,149 23 1,633
Tax expense (1,006) (702) (43) (157)
Profit for the period 2,864 2,447 17 1,476 94
Profit attributable to ordinary shareholders 2,572 2,190 17 1,199
Ordinary shares in issue (weighted-average - basic) 66,226m 70,192m (6) 67,524m (2)
Basic earnings per share 3.9p 3.1p 0.8p 1.8p 2.1p
Summary balance sheet At 30 Jun 2023 At 30 Jun Change At 31 Dec Change
£m 2022(1) % 2022(1) %
£m £m
Assets
Cash and balances at central banks 95,522 86,717 10 91,388 5
Financial assets at fair value through profit or loss 191,525 179,606 7 180,769 6
Derivative financial instruments 23,670 29,734 (20) 24,753 (4)
Financial assets at amortised cost 510,908 529,434 (3) 520,322 (2)
Financial assets at fair value through other comprehensive income 22,232 24,329 (9) 23,154 (4)
Other assets 38,947 35,987 8 33,008 18
Total assets 882,804 885,807 873,394 1
Liabilities
Deposits from banks 6,222 7,470 (17) 7,266 (14)
Customer deposits 469,813 478,215 (2) 475,331 (1)
Repurchase agreements at amortised cost 44,622 48,175 (7) 48,596 (8)
Financial liabilities at fair value through profit or loss 23,777 19,735 20 17,755 34
Derivative financial instruments 23,662 26,531 (11) 24,042 (2)
Debt securities in issue 79,264 74,284 7 73,819 7
Liabilities arising from insurance and investment contracts 155,509 147,739 5 149,754 4
Other liabilities 25,596 25,165 2 22,190 15
Subordinated liabilities 9,857 10,773 (9) 10,730 (8)
Total liabilities 838,322 838,087 829,483 1
Total equity 44,482 47,720 (7) 43,911 1
Total equity and liabilities 882,804 885,807 873,394 1
(1) Restated for presentational changes and for the adoption of IFRS 17; see
notes 1 (page 72) and 24 (page 114).
GROUP CHIEF EXECUTIVE'S STATEMENT
We set out our ambitious new strategy last year and are making good progress.
Since that time, the macroeconomic environment has changed significantly. We
are seeing higher and more persistent inflation, driving a significant
increase in interest rates and a slower economic recovery than we had
anticipated. Our strategy remains the right one, but in this context and
guided by our purpose of Helping Britain Prosper, we have increased our focus
on proactively supporting our customers, helping them navigate the current
environment.
The Group is performing well and has delivered a robust financial performance
in the first half of the year with continued income growth. This performance,
alongside continued business momentum, has enabled our enhanced customer
support and positions the Group well for the future. It has also enabled the
Board to announce an interim ordinary dividend of 0.92 pence per share, up 15
per cent on the first half of 2022.
We have made good progress on our strategic ambitions and we are on track to
deliver our targets, with the aim of growing our business and deepening
relationships with our customers, meeting more of their financial needs. We
believe our purpose-driven strategy will deliver higher, more sustainable
returns, whilst better positioning the Group to support customers now and in
the future.
Supporting our customers
We know that many people and businesses are experiencing significant
challenges given inflationary pressures and higher interest rates. Our
purpose-driven business model and strong financial foundations enable us to
provide enhanced support to our customers.
We are continuing to proactively contact our customers to offer support due to
the rising cost of living, including over 200,000 mortgage customers most
affected by rising interest rates. We have also offered c.260,000 customers a
£500 interest free overdraft buffer since the start of 2023. We have
committed to the Government's Mortgage Charter and product transfers are now
available six months in advance for residential mortgage customers(1). To
enable our customers to build their financial resilience and develop a savings
habit, we continue to launch competitive rated fixed products and have
expanded our offering to include tiered rates and limited withdrawal accounts
with attractive rates, as well as raising rates on instant access savings
accounts. We have contacted over 10 million customers about their savings
options and have seen 1.9 million new savings accounts opened in the first
half of 2023.
Whilst our business customers continue to demonstrate resilience, we continue
to proactively contact more than 550,000 customers with guidance on how to
build financial resilience. We have launched a hub in partnership with Mental
Health UK to support small business leaders and owners.
Robust financial performance
In the first six months, we delivered a robust financial performance with
business trends developing in line with our expectations.
Statutory profit after tax of £2.9 billion was up 17 per cent on the first
half of 2022, albeit the second quarter was down 25 per cent on the first
quarter. Net income increased 11 per cent to £9.2 billion in the first half,
supported by a strengthened banking net interest margin, broadly stable
average interest-earning assets compared to year end and the continued
recovery in other income. The banking net interest margin reduced 8 basis
points in the second quarter compared to the first quarter, as a result of
expected headwinds from mortgage and deposit pricing. Operating costs of £4.4
billion increased by 6 per cent with cost discipline maintained in the context
of higher planned strategic investment, costs associated with new businesses
and expected inflationary effects. Asset quality remains resilient and the
impairment charge of £0.7 billion reflects our broadly stable credit
metrics.
Loans and advances to customers decreased by £4.2 billion in the half to
£450.7 billion. This was largely the result of the £2.5 billion exit of
legacy retail mortgage loans in the first quarter and modest net reductions in
the open mortgage book. Customer deposits were down 1.2 per cent in the first
half of the year at £469.8 billion. Retail balances were broadly stable in
the second quarter as current account balances have reduced but savings
balances have grown.
Underpinned by this robust financial performance, the Group generated 111
basis points of CET1 capital in the first half of 2023, enabling the Board to
announce an interim ordinary dividend of 0.92 pence per share, an increase of
15 per cent on prior year and in line with our progressive and sustainable
ordinary dividend policy.
As usual, the Board will continue to give due consideration at each year end
to the return of any surplus capital. In February this year, the Board decided
to return surplus capital through a share buyback programme of up to £2.0
billion. As at 30 June 2023, the programme had completed £1.5 billion of the
buyback, with c.3.3 billion ordinary shares purchased.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
Focusing on serving all stakeholders, making progress on our strategic
priorities
We have a purpose-driven strategy. Core to this is our focus on contributing
to an inclusive society and supporting the transition to a low carbon economy,
while creating new opportunities for our future growth. Our initiatives in
building a more inclusive society include lending £5.6 billion to first time
buyers and supporting c.£1 billion of funding to the social housing sector in
the first half of the year. We have launched our new partnership with the
homelessness charity Crisis and together we believe we can help end
homelessness. Importantly, we remain on track to reach our gender and ethnic
diversity ambitions by 2025 and have announced a new ambition to double the
representation of colleagues with a disability in senior roles by 2025.
To help support the transition to a low carbon economy we have funded c.£20
billion of green and sustainable financing(2) since January 2022 and made more
than £20 billion of discretionary investments in climate-aware strategies(3)
through Scottish Widows since January 2021. In the first half of the year, we
launched a new sustainability hub and training modules for mortgage brokers to
promote sustainability in housing and agreed to partner with the Green Finance
Institute to develop a blueprint for property-linked retrofit finance.
We are now in the second year of our five-year strategic transformation.
Having laid the foundations in 2022, we are now building momentum across our
strategic initiatives, as well as realising business and financial benefits.
In the first half of 2023, we accelerated our deployment, investing a further
£0.6 billion to reach c.£1.4 billion to date. We are now at the halfway
stage for the 2024 targeted outcomes that we outlined last year and are on
track to deliver against these, whilst surpassing our targets on some. For
example, we now have 20.6 million digitally active customers, up c.13 per cent
since the end of 2021 and are already ahead of our 2024 ambition. We have
reduced our office footprint by c.20 per cent over the same period as we
progress towards a reduction of more than 30 per cent by the end of 2024. Our
progress is split across all of our strategic priority areas, alongside the
strategic enablers of people, technology and data. It provides us with
confidence that we are on track to deliver c.£0.7 billion of additional
revenues from strategic initiatives and c.£1.2 billion of
gross cost savings by the end of 2024. We continue to believe our strategy is
the right one to position the Group for success over both the medium and
long-term. We are encouraged by the progress we have made.
Enhancing guidance for 2023, delivering higher, more sustainable returns
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. As we continue to make progress against
our strategic ambitions we remain confident that successful delivery will
create a more sustainable business and deliver increased shareholder returns
in the medium to longer-term. Based on our purpose-driven strategy, robust
financial performance and the Group's revised macroeconomic forecasts, we are
enhancing our 2023 guidance and now expect:
• Banking net interest margin to be greater than 310 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 greater than 14 per cent
• Capital generation to be c.175 basis points(4)
(1 ) Product transfers available for residential customers in arrears
(Halifax, Lloyds Bank and the majority of Bank of Scotland customers).
Advanced product transfers available to Halifax and Lloyds Bank customers.
(2) Since 1 January 2022, c.£6bn green mortgage lending (at 31 March 2023),
c.£4 billion financing for electric vehicles and plug-in hybrid electric
vehicles, c.£11 billion sustainable finance for corporate and institutional
clients (at 30 June 2023).
(3 ) Since 1 January 2022, c.£20 billion discretionary investment in
climate aware strategies through Scottish Widows.
(4) Excluding capital distributions and the impact of the Tusker
acquisition. Inclusive of ordinary dividends received from the
Insurance business.
( )
SUMMARY OF GROUP RESULTS(A)
Robust financial performance and consistent delivery supporting higher interim
dividend
Statutory results
The Group's statutory profit before tax for the first half of 2023 was £3,870
million, 23 per cent higher than the same period in 2022, benefiting from
higher net income, partly offset by operating expense and impairment charge
increases. Statutory profit after tax was £2,864 million (half-year to 30
June 2022: £2,447 million). In the second quarter of the year, statutory
profit before tax was £1,610 million and statutory profit after tax was
£1,223 million, lower than the first 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 net finance income in respect of insurance and
investment contracts from one period to the next. In the first half of 2023,
due to market conditions, the Group recognised net gains on policyholder
investments within total income, which were materially offset by the
corresponding decrease in net finance income in respect of insurance and
investment contracts.
Total income, after net finance income in respect of insurance and investment
contracts for the first half of 2023 was £9,306 million, an increase of 17
per cent on the same period in 2022, primarily reflecting higher net interest
income in the period. Net interest income of £6,798 million was up 13 per
cent on the prior year, driven by stronger margins and higher average
interest-earning banking assets, supported by growth in the open mortgage
book, Retail unsecured and European retail business.
Other income amounted to a gain of £8,097 million in the half-year to 30
June 2023, compared to a loss of £18,030 million in the same period in 2022.
Net finance income in respect of insurance and investment contracts was a loss
of £5,589 million in the first half of 2023 compared to a gain of £19,941
million in the first half of 2022, reflecting improved global equity markets.
The Group maintained its focus on cost management, whilst increasing strategic
investment as planned. Total operating expenses of £4,774 million were 8 per
cent higher than in the prior year. This reflects higher planned strategic
investment, new business costs and inflationary effects. In the first half of
2023 the Group recognised remediation costs of £70 million largely in
relation to pre-existing programmes (half-year to 30 June 2022:
£79 million). The higher operating lease depreciation charge reflected the
depreciation cost of higher value vehicles, the Tusker acquisition, lower
gains on disposal and recent declines in battery electric used car prices.
Impairment was a net charge of £662 million (half-year to 30 June 2022:
£381 million). This reflects a charge of £657 million, pre-updated
multiple economic scenarios (MES), in the period (half-year to 30 June 2022:
£282 million) and a small net £5 million MES charge (half-year to 30 June
2022: £95 million charge).
The Group recognised a tax expense of £1,006 million in the period, compared
to £702 million in the first half of 2022.
Loans and advances to customers fell by £4.2 billion in the first half of
2023 (£1.6 billion in the second quarter) to £450.7 billion, largely as a
result of the exit of £2.5 billion of legacy Retail mortgage loans (including
£2.1 billion in the closed mortgage book) during the first quarter. Excluding
this, loans and advances to customers were down 0.4 per cent. £2.5 billion
growth in other Retail lending, principally unsecured, was offset by a net
reduction of £1.3 billion in the open mortgage book and net repayments in
Small and Medium Businesses including government-backed lending.
Customer deposits at £469.8 billion have decreased by £5.5 billion (1.2
per cent) since the end of 2022. This included decreases in Retail current
account balances of £6.2 billion as a result of tax payments, higher spend
and a more competitive market, including the Group's own savings offers where
balances increased by £3.5 billion, partly from transfers from the Group's
current account customer base. Commercial Banking deposits were stable during
the first half of 2023. Customer deposits in the second quarter reduced £3.3
billion including the expected reversal of short term placements in Commercial
Banking, while Retail balances were broadly stable. In the first half of 2023,
due to market conditions, an increase was seen in policyholder investments,
primarily within financial assets at fair value through profit or loss. This
was materially offset by a corresponding increase in the related insurance and
investment contract liabilities.
Total equity of £44,482 million at 30 June 2023 increased from £43,911
million at 31 December 2022. The movement reflected attributable profit for
the period and issuance of other equity instruments in the first quarter,
partially offset by market movements impacting the cash flow hedge reserve and
pensions, the dividend paid in May 2023 and the impact of the share buyback
programme. As at 30 June 2023, the programme had completed £1.5 billion of
the buyback, with c.3.3 billion ordinary shares purchased.
SUMMARY OF GROUP RESULTS (continued)
Underlying results
The Group's underlying profit for the first half of 2023 was £4,041 million,
compared to £3,662 million in the prior year. Growth in net income was partly
offset by higher operating costs and impairment charges. Underlying profit in
the second quarter reduced 18 per cent compared to the first, reflecting
broadly stable income offset by increases in operating lease depreciation,
operating costs and underlying impairment charges.
Net income(A)
Net income of £9,186 million was up 11 per cent on the prior year, with
higher net interest income and other income partially offset by an increased
charge for operating lease depreciation.
Half-year to 30 Jun 2023 Half-year Change Half-year Change
£m
to 30 Jun % to 31 Dec 2022 %
2022 £m
£m
Underlying net interest income 7,004 6,135 14 7,037
Underlying other income(1) 2,538 2,367 7 2,299 10
Operating lease depreciation (356) (213) (67) (160)
Net income(A) 9,186 8,289 11 9,176
Banking net interest margin(A) 3.18% 2.77% 41bp 3.10% 8bp
Average interest-earning banking assets(A) £453.8bn £449.6bn 1 £454.3bn
(1) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123.
Net interest income in the first half of £7,004 million was up 14 per cent,
driven by a stronger banking net interest margin of 3.18 per cent (half-year
to 30 June 2022: 2.77 per cent, half-year to 31 December 2022: 3.10 per cent)
and higher average interest-earning banking assets. The net interest margin
benefitted from UK Bank Rate increases and higher structural hedge earnings
from the rising rate environment, partly offset by asset margin compression,
particularly in the mortgage book and unsecured lending. Average
interest-earning banking assets were up 1 per cent compared to the first half
of 2022 at £453.8 billion, supported by growth in the open mortgage book,
Retail unsecured and the European retail business. Net interest income in the
first half of 2023 included a non-banking interest income charge of £155
million (half-year to 30 June 2022: £52 million), an increase on the prior
year as a result of higher funding costs and growth in the Group's non-banking
businesses. Net interest income in the second quarter of £3,469 million was 2
per cent lower than the first quarter, reflecting a lower net interest margin
of 3.14 per cent (three months to 31 March 2023: 3.22 per cent) and stable
average interest earning assets. The Group now expects the banking net
interest margin for 2023 to be greater than 310 basis points. Average
interest-earning assets over 2023 are expected to be down slightly compared to
the fourth quarter of 2022.
The Group manages the risk to 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 June 2023, the Group's structural
hedge had an approved capacity of £255 billion (31 December 2022: £255
billion). The nominal balance of the structural hedge was £255 billion
(31 December 2022: £255 billion) with a weighted-average duration of
approximately three-and-a-half years (31 December 2022: approximately
three-and-a-half years). The Group continues to review the stability and mix
of underlying deposits and their eligibility for the structural hedge and
expects a modest reduction in nominal balance in the second half given deposit
mix changes. The Group generated £1.6 billion of total gross income from
structural hedge balances in the first half of 2023, representing material
growth over the prior year (half-year to 30 June 2022: £1.2 billion). The
Group continues to expect hedge earnings in 2023 to be c.£0.8 billion higher
than in 2022.
SUMMARY OF GROUP RESULTS (continued)
Underlying other income in the first half of £2,538 million was 7 per cent
higher compared to £2,367 million in the prior year, with growth across
Retail, Commercial Banking and Insurance, Pensions and Investments. Underlying
other income was 2 per cent higher in the second quarter versus the first,
reflecting progress in the underlying business. Retail other income was up 18
per cent on the prior year, including increased current account and credit
card activity, improved Lex performance and the impact of the acquisition of
Tusker. Retail other income was 13 per cent higher in the second quarter
versus the first, benefiting from higher customer spending, the Tusker
acquisition and Lex performance. Commercial Banking other income was up 17
per cent versus the prior year, reflecting improved trading and strong bond
financing performance, down modestly in the second quarter given less
favourable market conditions.
Insurance, Pensions and Investments other income was 16 per cent higher than
the prior year, driven by balance sheet growth from both new business and the
impact of adding a drawdown feature in 2022 to existing long-standing and
workplace pension business. This resulted in higher contractual service margin
and risk adjustment releases to income. Insurance, Pensions and Investments
other income was 9 per cent higher in the second quarter versus the first,
principally as a result of improved general insurance net income, with lower
claims. The Group delivered good organic growth in Insurance, Pensions and
Investments and Wealth (reported within Retail) assets under administration
(AuA), with combined £4 billion net new money in open book AuA over the
period. In total, open book AuA currently stand at
c.£168 billion.
Other income from the Group's equity investments businesses, including Lloyds
Development Capital, was lower than the prior year, reflecting more subdued
market conditions in the first half of 2023.
Operating lease depreciation of £356 million increased by 67 per cent
compared to the prior year, reflecting the depreciation cost of higher value
vehicles, the Tusker acquisition, lower gains on disposal and recent declines
in battery electric used car prices. Overall, operating lease depreciation is
increasing towards more normalised levels as expected.
Total costs(A)
Half-year to 30 Jun Half-year Change Half-year Change
2023 to 30 Jun % to 31 Dec %
£m 2022 2022
£m £m
Operating costs(A,1) 4,413 4,171 (6) 4,501 2
Remediation 70 79 11 176 60
Total costs(A,1) 4,483 4,250 (5) 4,677 4
Cost:income ratio(A,1) 48.8% 51.3% (2.5)pp 51.0% (2.2)pp
(1) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123.
Total costs of £4,483 million were 5 per cent higher than in the prior year,
and 5 per cent higher in the second quarter than the first. The Group has
maintained its cost discipline. Operating costs were up 6 per cent to
£4,413 million, given the higher planned strategic investment (expected to
peak in 2023), new business costs and inflationary effects, partially
mitigated by continued cost efficiency. The Group's cost:income ratio for the
first half of 2023 was 48.8 per cent, compared to 51.3 per cent in the prior
year. Consistent with guidance, operating costs are expected to be c.£9.1
billion in 2023 (2022: £8.7 billion).
The Group recognised remediation costs of £70 million in the first half of
2023, largely in relation to pre-existing programmes (half-year to 30 June
2022: £79 million), with £51 million in the second quarter. There have been
no further charges relating to HBOS Reading and the provision held continues
to reflect the Group's best estimate of its full liability, albeit
uncertainties remain. Following the FCA's Motor Market review, the Group
continues to receive complaints and is engaging with the Financial Ombudsman
Service in respect of historical motor commission arrangements. Discussions
are continuing, with the remediation and financial impact, if any, remaining
uncertain.
SUMMARY OF GROUP RESULTS (continued)
Underlying impairment(A)
Half-year to 30 Jun 2023 Half-year Change Half-year Change
£m
to 30 Jun % to 31 Dec 2022 %
2022(1) £m
£m
Charges pre-updated MES(2)
Retail 551 285 (93) 488 (13)
Commercial Banking 108 (7) 129 16
Other (2) 4 16
657 282 633 (4)
Updated economic outlook
Retail 41 171 76 429 90
Commercial Banking (36) 124 271
Other - (200) (200)
5 95 95 500 99
Underlying impairment charge(A) 662 377 (76) 1,133 42
Asset quality ratio(A) 0.29% 0.17% 12bp 0.48% (19)bp
Total expected credit loss allowance (at end of period) 5,419 4,514 (20) 5,284 (3)
(1) Impairment charges for Retail, Commercial Banking and Other reflect the
new organisation structure; comparatives have been presented on a consistent
basis. See page 123.
(2) Impairment charges excluding the impact from updated economic outlook
taken each quarter.
(
)
Asset quality remains resilient with only modest deterioration to date from a
low base, with credit performance similar, or favourable, to pre-pandemic
experience. Underlying impairment was a net charge of £662 million (half-year
to 30 June 2022: £377 million, half-year to 31 December 2022: £1,133
million), resulting in an asset quality ratio of 29 basis points. This
included a small net £5 million multiple economic scenarios (MES) charge,
with £84 million in the second quarter (half-year to 30 June 2022:
£95 million charge), reflecting a stronger near-term GDP outlook relative to
the view at year end, offset by increased losses assumed from a higher UK Bank
Rate outlook. The pre-updated MES charge was £657 million in the period
(half-year to 30 June 2022: £282 million, half-year to 31 December 2022:
£633 million), equivalent to an asset quality ratio of 29 basis points. The
increase compared to the first half of 2022 reflects increased flows to
default primarily in legacy variable rate UK mortgage portfolios and higher
charges on existing Stage 3 clients in Commercial Banking, the impact of
higher discount rates on future recoveries, as well as the expected credit
loss (ECL) allowance build from Stage 1 loans rolling forward into a more
adverse economic outlook.
The ECL allowance of £5.4 billion (31 December 2022: £5.3 billion) continues
to reflect a probability-weighted view of 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. The base case outlook improved
modestly in the first quarter of 2023, but then deteriorated in the second
quarter to a similar overall position to the end of 2022. The updated base
case no longer anticipates a mild GDP recession, however it anticipates a
slower recovery and a UK Bank Rate peak of 5.5 per cent which, alongside
inflation, remains higher for longer than previously assumed. Unemployment and
asset price forecasts are not materially changed from those used at the year
end, with unemployment still assumed to rise to 5.3 per cent and HPI to
observe a peak to trough decline of 12 per cent. The probability-weighted ECL
is impacted by higher UK Bank Rates increasing flows to default assumptions,
partly offset by improvements in GDP and HPI levels in the downside scenarios.
The Group continues to include an adjusted severe downside scenario to
incorporate higher CPI inflation and UK Bank Rate profiles.
Management judgement adjustments have reduced in the first half of 2023. With
all COVID-19 related judgements released by the end of 2022, the remaining
judgements include c.£250 million at 30 June 2023 held in respect of the
current high inflationary and interest rate pressures not deemed to be fully
captured by models, with other judgements covering broader limitations in the
Group's impairment models or data inputs largely netting off at a Group level.
Observed portfolio performance has seen slightly increased levels of new to
arrears rates in UK mortgages. New to arrears remain broadly stable across
unsecured portfolios, with only credit cards marginally above pre-pandemic
levels. UK mortgages flow to default rates have seen an increase to above
pre-pandemic levels, primarily due to legacy variable rate assets, with credit
performance among more recent vintages remaining resilient. Unsecured flow to
default rates remain broadly flat. The Commercial Banking portfolio's credit
quality remains resilient with only a small number of credit metrics
indicating very modest deterioration.
SUMMARY OF GROUP RESULTS (continued)
Stage 2 loans and advances to customers are flat at the half year at £65.7
billion including a reduction of £0.9 billion in respect of the exit of £2.5
billion of legacy Retail mortgage loans, against an offsetting increase
largely as a result of the higher bank base rate outlook relative to year end.
92 per cent of Group Stage 2 loans are up to date (31 December 2022: 93 per
cent). Stage 3 assets were £10.7 billion as at 30 June 2023 (31 December
2022: £10.8 billion) with £0.4 billion removed as a result of the legacy
Retail mortgage loans exit. Excluding this, Stage 3 assets grew by
£0.3 billion reflecting an increase in UK mortgages and low levels of
write-offs in the period.
On the basis of the Group's revised macroeconomic forecast, the Group
continues to expect the asset quality ratio to be c.30 basis points in 2023.
Restructuring, volatility and other items
Half-year to 30 Jun Half-year Change Half-year Change
2023
£m to 30 Jun % to 31 Dec %
2022 2022
£m £m
Underlying profit(A,1) 4,041 3,662 10 3,366 20
Restructuring (25) (47) 47 (33) 24
Volatility and other items
Market volatility and asset sales(1) (63) (359) 82 (1,619) 96
Amortisation of purchased intangibles (35) (35) (35)
Fair value unwind (48) (72) 33 (46) (4)
(146) (466) 69 (1,700) 91
Statutory profit before tax 3,870 3,149 23 1,633
Tax expense(1) (1,006) (702) (43) (157)
Statutory profit after tax 2,864 2,447 17 1,476 94
Earnings per share(1) 3.9p 3.1p 0.8p 1.8p 2.1p
Return on tangible equity(A,1) 16.6% 11.8% 4.8pp 7.4% 9.2pp
Tangible net assets per share(A,1) 45.7p 51.4p (5.7)p 46.5p (0.8)p
(1) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123.
Restructuring costs remain low at £25 million (half-year to 30 June 2022:
£47 million) and include costs relating to the integration of Embark and
other integrations. Volatility and other items were a net loss of £146
million for the first half of 2023 (half-year to 30 June 2022: net loss of
£466 million), comprising negative market volatility and asset sales of
£63 million, £35 million for the amortisation of purchased intangibles
(half-year to 30 June 2022: £35 million) and £48 million relating to fair
value unwind (half-year to 30 June 2022: £72 million). Market volatility and
asset sales included negative impacts from insurance volatility partly offset
by positive banking volatility. Volatility and other items in 2022,
predominantly in the second half, included an exceptional charge from contract
modifications in Insurance under IFRS 17 following the addition of a drawdown
feature to existing long-standing and workplace pensions as a significant
customer enhancement.
The return on tangible equity for the first half of 2023 was 16.6 per cent
(half-year to 30 June 2022: 11.8 per cent), reflecting the Group's robust
financial performance, lower market volatility losses in the period, as well
as a reduction in average tangible equity. The Group expects the return on
tangible equity to be greater than 14 per cent, benefiting from stronger
income and lower tangible net assets in 2023 than expected. Earnings per share
were 3.9 pence (half-year to 30 June 2022: 3.1 pence).
Tangible net assets per share as at 30 June 2023 were 45.7 pence, marginally
lower than 46.5 pence at 31 December 2022. The reduction resulted from
dividend payments as well as market movements negatively impacting the cash
flow hedge reserve in the context of rising rates, offset by attributable
profit and a reduction in the number of shares as a result of the ongoing
ordinary share buyback. Tangible net assets per share reduced by 3.9 pence in
the second quarter, due to rate induced market movements impacting cash flow
hedge reserve and pensions, combined with the dividend payment and reduction
in the number of shares.
SUMMARY OF GROUP RESULTS (continued)
The Group recognised a tax expense of £1,006 million in the period (half-year
to 30 June 2022: £702 million). 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 came into effect on 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 84.
Balance sheet
At 30 Jun At 30 Jun Change At 31 Dec Change
2023
2022
2022
% %
Loans and advances to customers £450.7bn £456.1bn (1) £454.9bn (1)
Customer deposits £469.8bn £478.2bn (2) £475.3bn (1)
Loan to deposit ratio(A) 96% 95% 1pp 96%
Wholesale funding £103.5bn £97.7bn 6 £100.3bn 3
Wholesale funding <1 year maturity £40.8bn £37.9bn 8 £37.5bn 9
Of which money-market funding <1 year maturity(1) £32.4bn £21.5bn 51 £24.8bn 31
Liquidity coverage ratio - eligible assets(2) £138.2bn £145.9bn (5) £144.7bn (4)
Liquidity coverage ratio(3) 142% 142% 144% (2pp)
Net stable funding ratio(4) 130% 130%
(1) Excludes balances relating to margins of £2.1 billion (31 December
2022: £2.6 billion).
(2) Eligible assets are calculated as a monthly rolling simple average of
month end observations over the previous 12 months post any liquidity
haircuts.
(3) The liquidity coverage ratio is calculated as a monthly rolling simple
average over the previous 12 months.
(4) Net stable funding ratio is based on an average of the four previous
quarters.
(
)
Loans and advances to customers fell by £4.2 billion in the first half of
2023 (£1.6 billion in the second quarter) to £450.7 billion, largely as a
result of the exit of £2.5 billion of legacy Retail mortgage loans (including
£2.1 billion in the closed mortgage book) during the first quarter. Excluding
this, loans and advances to customers were down 0.4 per cent. £2.5 billion
growth in other Retail lending, principally unsecured, was offset by a net
reduction of £1.3 billion in the open mortgage book and net repayments in
Small and Medium Businesses including government-backed lending.
Customer deposits at £469.8 billion have decreased by £5.5 billion (1.2
per cent) since the end of 2022. This included decreases in Retail current
account balances of £6.2 billion as a result of tax payments, higher spend
and a more competitive market, including the Group's own savings offers where
balances increased by £3.5 billion, partly from transfers from the Group's
current account customer base. Commercial Banking deposits were stable during
the first half of 2023. Customer deposits in the second quarter reduced £3.3
billion including the expected reversal of short term placements in Commercial
Banking, while Retail balances were broadly stable.
The Group has a large, high quality liquid asset portfolio held mainly in cash
and government bonds, with all assets hedged for interest rate risk. The
Group's liquid assets continue to significantly exceed regulatory requirements
and internal risk appetite, with a strong and stable liquidity coverage ratio
of 142 per cent (31 December 2022: 144 per cent) and a strong net stable
funding ratio of 130 per cent (31 December 2022: 130 per cent) as at 30 June
2023. The loan to deposit ratio of 96 per cent, stable on 2022, continues to
reflect robust funding and liquidity and the potential for growth.
The Group continued to access wholesale funding across a range of currencies
and markets. Issuance volumes in the first half of 2023 totalled
£9.4 billion (half-year to 30 June 2022: £3.5 billion), of which £5.1
billion at 30 June 2023 was issued by Lloyds Banking Group plc across senior
unsecured, T2 and AT1 (30 June 2022: £3.2 billion). Total wholesale funding
increased to £103.5 billion at 30 June 2023 (31 December 2022: £100.3
billion) as a result of short term funding which remains within Group risk
appetite. The Group maintains its 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 30 June 2023 (31 December 2022: £30.0 billion), with
maturities in 2025, 2027 and beyond.
SUMMARY OF GROUP RESULTS (continued)
Capital
At 30 Jun At 30 Jun Change At 31 Dec Change
2023
2022
2022
% %
CET1 ratio 14.2% 14.7% (0.5)pp 15.1% (0.9)pp
Pro forma CET1 ratio(A,1) 14.2% 14.8% (0.6)pp 14.1% 0.1pp
UK leverage ratio 5.7% 5.3% 0.4pp 5.6% 0.1pp
Risk-weighted assets £215.3bn £209.6bn 3 £210.9bn 2
(1) 30 June 2022 reflects the interim ordinary dividend received from the
Insurance business in July 2022. 31 December 2022 reflects the interim
ordinary dividend received from the Insurance business 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.
Pro forma CET1 ratio as at 31 December 2022(1) 14.1%
Banking build (including impairment charge) (bps) 135
Risk-weighted assets (bps) (11)
Fixed pension deficit contributions (bps) (30)
Other movements (bps) 17
Capital generation (bps) 111
CRD IV and transitional headwinds (bps)(2) (36)
Capital generation (post CRD IV and transitional headwinds) (bps) 75
Tusker acquisition (bps)(3) (21)
Ordinary dividend accrual (bps) (44)
CET1 ratio as at 30 June 2023 14.2%
(1) 31 December 2022 reflects the interim ordinary dividend received from
the Insurance business 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.
(2 ) Phased unwind of IFRS 9 relief and an adjustment for the anticipated
impact of CRD IV models.
(3) Subject to the finalisation of the fair value of the individual assets
and liabilities acquired including the associated identifiable intangible
assets and goodwill.
The Group's CET1 capital ratio at 30 June 2023 was 14.2 per cent (31 December
2022: 14.1 per cent pro forma). Capital generation during the first half of
the year was 111 basis points (59 basis points in the second quarter),
primarily reflecting strong banking build, partially offset by risk-weighted
asset increases (before CRD IV model changes) and the accelerated full year
payment (£800 million) of fixed pension deficit contributions made to the
Group's three main defined benefit pension schemes. The impact of CRD IV and
transitional headwinds of 36 basis points reflects an adjustment for the
anticipated impact of CRD IV models, which are not yet finalised. It also
reflects the end of IFRS 9 static transitional relief and the reduction in the
transitional factor applied to IFRS 9 dynamic relief. Capital generation
after the impact of these headwinds was 75 basis points. In addition, the
Group has accrued a foreseeable ordinary dividend equating to 44 basis points,
inclusive of the announced interim ordinary dividend of 0.92 pence per share.
The acquisition of Tusker has utilised 21 basis points of capital.
The Group continues to expect 2023 capital generation to be c.175 basis
points.
Risk-weighted assets have increased by £4 billion during the first half of
the year to £215 billion at 30 June 2023 (31 December 2022: £211 billion).
This largely reflects an adjustment for the anticipated impact of CRD IV
models taken in the second quarter. Excluding this, lending growth, a small
uplift from model calibration and other increases were partly offset by
capital efficient securitisation and other optimisation activity, in addition
to a reduction in threshold risk-weighted assets. The CRD IV model updates
reflect an updated impact assessment following a further iteration of model
development. The models remain subject to further development and final
approval by the PRA. On that basis final impacts remain uncertain and further
increases could be required. The Group's risk-weighted assets guidance remains
unchanged at between £220 billion and £225 billion at the end of 2024.
The current sum of the Group's regulatory CET1 capital requirement and capital
buffers remains at around 11 per cent. This is expected to increase to around
12 per cent in July 2023 due to the increase in the UK countercyclical capital
buffer (CCyB) rate to 2 per cent (from 1 per cent), which will increase the
Group's CCyB rate to around 1.8 per cent (from 0.9 per cent) in total. 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 triennial valuation as at 31 December 2022 for the Group's three main
defined benefit pension schemes is in progress. The Group expects to have
substantially agreed the 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 made a fixed contribution of £0.8
billion in the first half of 2023, consistent with 2022 and 2021. The Group
has also discussed with the Trustee the likelihood that further variable
contributions will not be necessary in 2023 and beyond, dependent upon the
outcome of the valuation. The Group expects that future contributions will
become increasingly contingent in nature, such that they are only paid into
the schemes if required. This will be updated in future periods as discussions
with the Trustee progress.
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 has announced an interim ordinary dividend of 0.92 pence per share,
an increase of 15 per cent, in line with the Board's commitment to capital
returns. The Board intends to pay down to its capital target within the course
of the current plan, by the end of 2024.
In February this year, the Board approved an ordinary share buyback programme
of up to £2 billion to return surplus capital in respect of 2022. This
commenced in February 2023 and at 30 June 2023, the programme had completed
£1.5 billion of the buyback, with c.3.3 billion ordinary shares purchased.
SEGMENTAL ANALYSIS - UNDERLYING BASIS(A)
Half-year to 30 June 2023 Retail Commercial Insurance, Equity Group
£m Banking Pensions and Investments £m
£m Investments and Central
£m Items
£m
Underlying net interest income 5,064 1,934 (70) 76 7,004
Underlying other income 1,006 856 619 57 2,538
Operating lease depreciation (351) (5) - - (356)
Net income 5,719 2,785 549 133 9,186
Operating costs (2,607) (1,253) (451) (102) (4,413)
Remediation (15) (43) (8) (4) (70)
Total costs (2,622) (1,296) (459) (106) (4,483)
Underlying profit before impairment 3,097 1,489 90 27 4,703
Underlying impairment (charge) credit (592) (72) 1 1 (662)
Underlying profit 2,505 1,417 91 28 4,041
Banking net interest margin(A) 2.89% 4.70% 3.18%
Average interest-earning banking assets(A) £364.1bn £87.8bn - £1.9bn £453.8bn
Asset quality ratio(A) 0.33% 0.16% 0.29%
Loans and advances to customers(1) £361.9bn £92.1bn - (£3.3bn) £450.7bn
Customer deposits £305.9bn £163.6bn - £0.3bn £469.8bn
Risk-weighted assets £114.8bn £75.5bn £0.2bn £24.8bn £215.3bn
Half-year to 30 June 2022 Retail(2) Commercial Insurance, Equity Investments and Central Group
£m Banking(2) Pensions and Items £m
£m Investments(2,3) £m
£m
Underlying net interest income 4,628 1,520 (43) 30 6,135
Underlying other income 854 731 533 249 2,367
Operating lease depreciation (202) (11) - - (213)
Net income 5,280 2,240 490 279 8,289
Operating costs (2,477) (1,189) (431) (74) (4,171)
Remediation (28) (30) (21) - (79)
Total costs (2,505) (1,219) (452) (74) (4,250)
Underlying profit before impairment 2,775 1,021 38 205 4,039
Underlying impairment (charge) credit (455) (117) (3) 198 (377)
Underlying profit 2,320 904 35 403 3,662
Banking net interest margin(A) 2.65% 3.47% 2.77%
Average interest-earning banking assets(A) £359.5bn £90.1bn - - £449.6bn
Asset quality ratio(A) 0.26% 0.24% 0.17%
Loans and advances to customers(1) £361.1bn £96.8bn - (£1.8bn) £456.1bn
Customer deposits £311.0bn £166.7bn - £0.5bn £478.2bn
Risk-weighted assets £110.8bn £74.6bn £0.1bn £24.1bn £209.6bn
(1) Equity Investments and Central Items includes central fair value hedge
accounting adjustments. 30 June 2022 included a £200 million ECL central
adjustment that was not allocated to specific portfolios. In the third quarter
of 2022 this central adjustment was released.
(2) The portfolios shown reflect the new organisation structure;
comparatives have been presented on a consistent basis. See page 123.
(3) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123.
( )
SEGMENTAL ANALYSIS - UNDERLYING BASIS(A) (continued)
Half-year to 31 December 2022 Retail Commercial Insurance, Equity Investments and Central Group
£m Banking Pensions and Items £m
£m Investments(1) £m
£m
Underlying net interest income 5,146 1,927 (58) 22 7,037
Underlying other income 877 834 427 161 2,299
Operating lease depreciation (166) 6 - - (160)
Net income 5,857 2,767 369 183 9,176
Operating costs (2,698) (1,307) (448) (48) (4,501)
Remediation (64) (103) (9) - (176)
Total costs (2,762) (1,410) (457) (48) (4,677)
Underlying profit before impairment 3,095 1,357 (88) 135 4,499
Underlying impairment (charge) credit (918) (400) (9) 194 (1,133)
Underlying profit 2,177 957 (97) 329 3,366
Banking net interest margin(A) 2.87% 4.37% 3.10%
Average interest-earning banking assets(A) £364.3bn £90.0bn - - £454.3bn
Asset quality ratio(A) 0.50% 0.79% 0.48%
Loans and advances to customers(2) £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
(1) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123.
(2) Equity Investments and Central Items includes central fair value hedge
accounting adjustments.
(
)
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
strategic investment, alongside increased use of data, Retail will deepen
existing consumer relationships and broaden its intermediary offering, to
improve customer experience, operational efficiency and increasingly tailored
propositions.
Strategic progress
• UK's largest digital bank with 20.6 million digitally active users, 17.7
million via the mobile app. Now also offers car leasing directly to customers
via the mobile app. Invested in identity verification specialist Yoti to
support the development of a new, digital identity proposition to help combat
the growing risks of identity fraud
• Proactively contacted customers to offer support due to the rising cost
of living, including mortgage customers on standard variable rates who may
benefit from a product transfer(1). Product transfers may now be booked up to
6 months in advance(2), offering customers earlier certainty on their future
payments
• 7.3 million customers have registered for 'Your Credit Score', the
Group's credit checking tool, up 1.8 million this year; in addition, 1.2
million visits to the Home Ecosystem hub, which now provides customers with
cost of living support
• Supported mass affluent customers by introducing tiered savings pricing,
greater flexibility in mortgage lending criteria and a discount on certain
packaged bank accounts. Developed 'Your Money', a digital hub enabling mass
affluent customers to view their complete financial life with the Group,
providing a platform for personalised propositions
• Launched a new pre-eligibility tool in partnership with Zoopla,
providing home buyers with earlier certainty on their potential mortgage
borrowing; automated eligibility checks incorporated earlier in the MBNA Loans
customer journey resulting in 97 per cent of applicants now being pre-approved
• Limited withdrawal savings products allow customers to retain some
flexibility in how they access their savings, whilst offering higher rates in
comparison to instant access products. Continue to launch competitive rated
fixed products
• On track to meet 2024 sustainability targets, including £5.6 billion of
green mortgage lending(3) and £3.6 billion financing and leasing for battery
electric and plug-in hybrid vehicles(3). Launched sustainability hub and
training modules for mortgage brokers to promote housing market sustainability
Financial performance
• Underlying net interest income 9 per cent higher, driven by the impact
of the rising rate environment and higher unsecured lending balances, partly
offset by mortgage and unsecured lending margin compression
• Underlying other income up 18 per cent, driven by increased current
account and credit card activity, improved Lex performance and the impact of
the acquisition of Tusker
• Operating lease depreciation charge up 74 per cent due to the
depreciation cost of higher value vehicles, the Tusker acquisition, lower
gains on disposal and recent declines in battery electric used car prices
• Operating costs 5 per cent higher, reflecting higher planned strategic
investment costs, costs associated with Tusker and inflationary effects,
partly offset by the continued benefit from efficiency initiatives
• Underlying impairment charge £592 million. Slight increase in observed
UK mortgage new to arrears and flows to default levels, primarily from legacy
variable rate balances, whilst unsecured performance remained broadly stable.
Updated economic scenarios drive a £41 million charge largely due to a higher
UK Bank Rate outlook
• Customer lending decreased 1 per cent; largely as a result of the £2.5
billion legacy UK mortgage loan exit (£2.1 billion within the closed book).
Excluding this, lending was stable with growth in credit cards, loans and
motor offset by a £1.3 billion net reduction in the open mortgage book
• Customer deposits decreased 2 per cent, reflecting tax payments in the
first quarter, higher spend and a more competitive market, including the
Group's own savings offers where balances increased by £3.5 billion
• Risk-weighted assets up 3 per cent in the period, due to higher
unsecured lending balances and an adjustment for the anticipated impact of CRD
IV models, partly offset by continued optimisation activity and a divisional
operational risk allocation methodology change (Group figure unaffected)
(1) Product transfers available for residential customers in arrears
(Halifax, Lloyds Bank and the majority of Bank of Scotland customers).
(2 ) Advanced product transfers available to Halifax and Lloyds Bank
customers.
(3) Since 1 January 2022, new residential mortgage lending on property with
an Energy Performance Certificate rating of B or higher at 31 March 2023; and
new lending advances for Black Horse and operating leases for Lex Autolease at
30 June 2023.
DIVISIONAL RESULTS (continued)
Retail (continued)
Retail performance summary
Half-year to 30 Jun 2023 Half-year Change Half-year to 31 Dec 2022 Change
£m to 30 Jun 2022(1) % £m %
£m
Underlying net interest income 5,064 4,628 9 5,146 (2)
Underlying other income 1,006 854 18 877 15
Operating lease depreciation (351) (202) (74) (166)
Net income 5,719 5,280 8 5,857 (2)
Operating costs (2,607) (2,477) (5) (2,698) 3
Remediation (15) (28) 46 (64) 77
Total costs (2,622) (2,505) (5) (2,762) 5
Underlying profit before impairment 3,097 2,775 12 3,095
Underlying impairment charge (592) (455) (30) (918) 36
Underlying profit 2,505 2,320 8 2,177 15
Banking net interest margin(A) 2.89% 2.65% 24bp 2.87% 2bp
Average interest-earning banking assets(A) £364.1bn £359.5bn 1 £364.3bn
Asset quality ratio(A) 0.33% 0.26% 7bp 0.50% (17)bp
At 30 Jun 2023 At 30 Jun 2022(1) Change At 31 Dec 2022 Change
£bn
£bn
£bn % %
Open mortgage book 297.9 296.6 299.6 (1)
Closed mortgage book 8.5 13.1 (35) 11.6 (27)
Credit cards 14.9 14.2 5 14.3 4
UK unsecured loans 9.3 8.5 9 8.7 7
UK Motor Finance 14.9 14.2 5 14.3 4
Overdrafts 1.0 1.0 1.0
Wealth 0.9 1.0 (10) 0.9
Other(2) 14.5 12.5 16 13.8 5
Loans and advances to customers 361.9 361.1 364.2 (1)
Operating lease assets 5.9 4.3 37 4.8 23
Total customer assets 367.8 365.4 1 369.0
Current accounts 107.8 113.4 (5) 114.0 (5)
Relationship savings 169.4 165.8 2 166.3 2
Tactical savings 16.5 16.9 (2) 16.1 2
Wealth 12.2 14.9 (18) 14.4 (15)
Customer deposits 305.9 311.0 (2) 310.8 (2)
Risk-weighted assets 114.8 110.8 4 111.7 3
(1 ) The portfolios shown reflect the new organisation structure;
comparatives have been presented on a consistent basis. See page 123.
(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 in their transition to net zero.
Strategic progress
• Launched new mobile first onboarding journey for sole traders,
transforming the customer experience and increasing levels of automation with
account opening times for customers improving by up to 15 times
• Continue to enhance digital servicing capabilities, including moving
more than 100,000 accounts to paperless statements, driving an annual
reduction of 1 million letters
• On track to achieve full year target of 20 per cent growth in new
merchant services clients, supported by a new point-of-sale card payments
solution to micro businesses enabling clients to transact more quickly
• Strong performance in Markets, including ending the half in the top
three for sterling issuance(1); continue to invest in foreign exchange
proposition including capabilities on FXall and Bloomberg platforms, deepening
foreign exchange percentage share of wallet
• Award winning(2) trade finance business announced new partnership with
Enigio AB to expand and promote the use of digital documentation via
blockchain technology
• Offering clients data-driven insights including via a digital self-serve
portal for Lloyds Bank Market Intelligence; a catalyst in driving clients'
strategic growth through the Group's data and technology
• Enhancing cash management embedded payments proposition, including the
launch of Lloyds Bank 'PayMe'
• Strong progress towards achieving Corporate and Institutional commitment
of £15 billion green and sustainable financing by the end of 2024, delivering
c.£11 billion(3) up to 30 June 2023
• Continued multi-year programme to support Black entrepreneurs; launching
a regionally-focused programme in Birmingham and partnering with Channel 4
television to launch national 'Black in Business' initiative
• Launched a resilience hub in partnership with Mental Health UK,
supporting small business leaders and owners across the UK through provision
of resources and therapeutic coaching sessions
Financial performance
• Underlying net interest income increased 27 per cent to £1,934 million,
driven by a stronger banking net interest margin reflecting the higher rate
environment and strong portfolio management
• Underlying other income of £856 million, up 17 per cent on the prior
year, reflecting improved trading and strong bond financing performance
• Operating costs 5 per cent higher, due to higher planned strategic
investment costs and inflationary effects, partly offset by the continued
benefit from efficiency initiatives. Remediation charges low at £43 million
• Underlying impairment charge of £72 million driven by Stage 3 charges,
primarily on existing clients in default. Portfolio's credit quality remains
resilient with very modest signs of deterioration
• Customer lending 2 per cent lower at £92.1 billion due to attractive
growth opportunities in Corporate and Institutional Banking offset by net
repayments within Small and Medium Businesses including government-backed
lending and foreign exchange movements
• Customer deposits stable at £163.6 billion, reflecting targeted growth
in high quality balances in Corporate and Institutional Banking offset by a
reduction in Small and Medium Businesses due to cost of living pressures.
Customer deposits reduced in the second quarter, including stable Small and
Medium Businesses balances and the expected reversal of short term placements
in Corporate and Institutional Banking
• Risk-weighted assets increased 2 per cent to £75.5 billion, driven by a
divisional operational risk allocation methodology change (Group figure
unaffected) and balance sheet growth, partly offset by continued optimisation
activity
(1) Refinitiv Eikon - All International Bonds in GBP, excluding Sovereign,
Supranational and Agency.
(2) Best Trade Finance Bank in the UK at the 2023 Global Trade Review
Leaders in Trade awards.
(3 ) Includes the clean growth finance initiative, Commercial Real Estate
green lending, renewable energy financing, sustainability linked loans and
green and social bond facilitation.
DIVISIONAL RESULTS (continued)
Commercial Banking (continued)
Commercial Banking performance summary(A)
Half-year to 30 Jun 2023 Half-year Change Half-year Change
£m to 30 Jun 2022(1) % to 31 Dec 2022 %
£m £m
Underlying net interest income 1,934 1,520 27 1,927
Underlying other income 856 731 17 834 3
Operating lease depreciation (5) (11) 55 6
Net income 2,785 2,240 24 2,767 1
Operating costs (1,253) (1,189) (5) (1,307) 4
Remediation (43) (30) (43) (103) 58
Total costs (1,296) (1,219) (6) (1,410) 8
Underlying profit before impairment 1,489 1,021 46 1,357 10
Underlying impairment charge (72) (117) 38 (400) 82
Underlying profit 1,417 904 57 957 48
Banking net interest margin(A) 4.70% 3.47% 123bp 4.37% 33bp
Average interest-earning banking assets(A) £87.8bn £90.1bn (3) £90.0bn (2)
Asset quality ratio(A) 0.16% 0.24% (8)bp 0.79% (63)bp
At 30 Jun 2023 At 30 Jun 2022(1) Change At 31 Dec 2022 Change
£bn
£bn % £bn %
Small and Medium Businesses 35.5 41.1 (14) 37.7 (6)
Corporate and Institutional Banking 56.6 55.7 2 56.0 1
Loans and advances to customers 92.1 96.8 (5) 93.7 (2)
Customer deposits 163.6 166.7 (2) 163.8
Risk-weighted assets 75.5 74.6 1 74.3 2
(1 ) The portfolios shown reflect the new organisation structure;
comparatives have been presented on a consistent basis. See page 123.
(
)
DIVISIONAL RESULTS (continued)
Insurance, Pensions and Investments
Insurance, Pensions and Investments supports over 10 million customers with
Assets under Administration (AuA) of £203 billion (excluding Wealth) and
annualised annuity payments of over £1.1 billion. The Group continues to
invest significantly in the development of the business. This includes the
investment propositions to support the Group's mass affluent strategy,
innovating intermediary propositions through the Embark and Cavendish Online
acquisitions and accelerating the transition to a low carbon economy.
Strategic progress
• Net AuA flows of £3.7 billion reflect good growth across unit linked
and investment propositions contributing to an increased stock of future
profit. Open book AuA of £154 billion (5 per cent growth)
• Launched simple non-advised Ready Made Investments through Embark in
February 2023, helping around 5,000 customers start their investment journey,
almost half of those younger than 35, supporting strategic AuA growth and mass
affluent objectives. Stockbroking income more than doubled compared to the
prior year
• Announced the imminent launch of the Scottish Widows Retail Intermediary
Investment Platform, broadening reach and enhancing proposition across the
Intermediary market with leading platform technology and adviser support model
• Workplace pensions business saw a 19 per cent annual increase in regular
contributions to pensions administered, with £3 billion net AuA flows in the
period
• Grew general insurance market share following launch of MBNA product
with new policies up over 40 per cent and overall share of flows up 3 per
cent(1). Digitisation improvements continue to transform customer experience
• c.£20 billion invested in climate-aware investment strategies(2)
through Scottish Widows, meeting the target of between £20 billion and £25
billion invested by 2025, with £3 billion invested in the period in line with
the Climate Action Plan
• Continued progress in our protection offering, integrating Cavendish
Online and protecting over 10,000 families through the Group's direct channels
this year
• Doubled the number of open market customers securing an annuity during
the first half of 2023 (compared to the second half of 2022), supported by
investing in operational capacity and improving process efficiencies in the
context of an improving market
Financial performance
• Underlying other income increased by £86 million, driven by balance
sheet growth from both new business and the impact of adding a drawdown
feature in 2022 to existing longstanding and workplace pension business,
resulting in higher contractual service margin and risk adjustment releases to
income
• Underlying other income was 9 per cent higher in the second quarter
versus the first, as a result of improved general insurance net income, with
lower claims and benign weather
• Operating costs 5 per cent higher reflecting higher planned strategic
investment costs and inflationary effects
• Grew contractual service margin (deferred profits) by £85 million in
the half (before release to income), including £56 million from new business
which reflects strong value generation in our workplace pensions and annuities
businesses. Balance of deferred profits c.£4 billion at 30 June 2023
• Life and pensions sales (PVNBP) increased by 1 per cent despite higher
discounting applied in the current year, driven by strong performance in
workplace pensions and individual annuities
• Estimated Insurance Solvency II ratio of 155 per cent, after dividend of
£100 million in respect of 2022 paid to Lloyds Banking Group plc in February
2023
• 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 billion cash
and cash like assets
(1) Annual increase for five months to 31 May 2023.
(2) Includes a range of funds with a bias towards investing in companies
that are adapting their businesses to be less carbon-intensive or are
developing climate solutions.
DIVISIONAL RESULTS (continued)
Insurance, Pensions and Investments (continued)
Insurance, Pensions and Investments performance summary(A)
Half-year to 30 Jun 2023 Half-year Change Half-year Change
£m to 30 Jun 2022(1,2) % to 31 Dec 2022(1) %
£m £m
Underlying net interest income (70) (43) (63) (58) (21)
Underlying other income 619 533 16 427 45
Net income 549 490 12 369 49
Operating costs (451) (431) (5) (448) (1)
Remediation (8) (21) 62 (9) 11
Total costs (459) (452) (2) (457)
Underlying profit before impairment 90 38 (88)
Underlying impairment credit (charge) 1 (3) (9)
Underlying profit 91 35 (97)
Life and pensions sales (PVNBP)(3) 8,956 8,855 1 10,136 (12)
New business value(A,4)
Of which deferred to CSM and Risk Adjustment 98 65 51 67 46
Of which charged to income statement (9) (17) (47) (16) (44)
89 48 85 51 75
Assets under administration (net flows)(5) £3.7bn £4.2bn (12) £4.2bn (12)
General insurance underwritten new gross written premiums 42 26 62 29 45
General insurance underwritten total gross written premiums 258 240 8 246 5
General insurance combined ratio(6) 99% 99% 129% (30)pp
At 30 Jun 2023 At 30 Jun 2022 Change At 31 Dec 2022 At Change
£bn
£bn % £bn %
Insurance Solvency II ratio (pre-dividend)(7) 155% 172% (17)pp 163% (8)pp
Total customer assets under administration 203.1 196.1 4 197.3 3
(1) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123.
(2) The portfolios shown reflect the new organisation structure;
comparatives have been presented on a consistent basis. See page 123.
(3) Present value of new business premiums.
(4) New business value represents the value added to the CSM and risk
adjustment at the initial recognition of new contracts, net of acquisition
expenses and any loss component on onerous contracts (which is recognised
directly in the income statement) but does not include existing business
increments.
(5) The movement in asset inflows and outflows driven by business activity
(excluding market movements).
(6) General insurance combined ratio for the half-year to 30 June 2023
includes £18 million relating to event weather claims (storm, subsidence and
freeze). Excluding these items and reserve releases the ratio was 98 per cent.
(7) Equivalent estimated regulatory view of ratio (including With Profits
funds and post dividend where applicable) was 150 per cent (31 December 2022:
152 per cent, post February 2023 dividend).
DIVISIONAL RESULTS (continued)
Insurance, Pensions and Investments (continued)
Movement in the contractual service margin (CSM) and risk adjustment
Half-year to 30 June 2023 Half-year to 30 June 2022 Change
CSM Risk adjustment Total(1) CSM Risk adjustment Total(1) Total
£m £m £m £m £m £m £m
At start of period 3,999 1,109 5,108 1,927 1,492 3,419 1,689
New business written in year
of which: workplace 20 16 36 5 23 28 8
of which: individual and bulk annuities 43 24 67 17 23 40 27
of which: protection (7) 2 (5) (5) 2 (3) (2)
56 42 98 17 48 65 33
Release to income statement (152) (38) (190) (93) (49) (142) (48)
Other(2) 29 17 46 654 (238) 416 (370)
At end of period 3,932 1,130 5,062 2,505 1,253 3,758 1,304
(1) Total deferred profit is represented by contractual service margin (CSM)
and risk adjustment, both held on the balance sheet. CSM is released as
insurance contract services are provided; risk adjustment is released as
uncertainty within the calculation of the liabilities diminishes.
(2) For half-year to 30 June 2022, Other included £254 million relating to
increases in the CSM arising on the contracts that were modified and
recognised as new contracts during the period. A further £1,077 million
increase to CSM was recognised in the half-year to 31 December 2022. This is
not included in new business value.
Volatility arising in the insurance business
Volatility included in the Group's statutory results before tax comprises the
following:
Half-year to 30 Jun 2023 Half-year Half-year
£m to 30 Jun 2022 to 31 Dec 2022
£m(1) £m(1)
Insurance volatility 24 (488) (334)
Policyholder interests volatility 29 (177) (28)
Total volatility 53 (665) (362)
Insurance hedging arrangements (235) 436 (85)
Total (182) (229) (447)
(1) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123.
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 on business
accounted for under the Variable Fee Approach (largely unit-linked pensions
business) is deferred to the CSM, other than where the risk mitigation option
is applied.
Insurance volatility movements during the first half of 2023 were largely
driven by increases in interest rates, partially offset on a pre-hedge basis
by increases to equity market levels and inflation. Application of the risk
mitigation option and equity hedging arrangements drive an overall market
volatility loss.
The Group manages its Insurance business exposures to equity, interest rate,
foreign currency exchange rate, inflation and market movements within the
Insurance division. It does so by balancing the importance of managing the
impacts on both capital and earnings volatility.
DIVISIONAL RESULTS (continued)
Equity Investments and Central Items
Half-year to 30 Jun 2023 Half-year Change Half-year Change
£m to 30 Jun 2022(1) % to 31 Dec 2022(1) %
£m £m
Net income 133 279 (52) 183 (27)
Total costs (106) (74) (43) (48)
Underlying profit before impairment 27 205 (87) 135 (80)
Underlying impairment credit 1 198 99 194 99
Underlying profit 28 403 (93) 329 (91)
(1) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123.
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.
Net income decreased compared to the first half of 2022, due to lower income
from the Group's equity investments businesses from subdued market conditions
and higher funding costs, lower gains from gilt sales and the net impact of
intra-group transfer pricing as rates increased. The Group's equity investment
businesses contributed £182 million compared to £221 million in the first
half of 2022 and £198 million in the second half of 2022. LDC continues to
deliver strong investment performance and to build its investment portfolio
with attractive returns and opportunities. Total costs of £106 million in
the first half of 2023 were 43 per cent higher than the first half of 2022, in
part due to the costs of new businesses in equity investments.
Underlying impairment was a £1 million release compared to a £198 million
release in the first half of 2022, relating to the release of part of the ECL
central adjustment held at the end of 2021 (30 June 2022: £200 million), with
the remaining £200 million released in the second half of 2022. 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' (as defined by IFRS 8 Operating segments) 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
• Losses from insurance and participating investment contract
modifications relating to the enhancement to the Group's longstanding and
workplace pension business through the addition of a drawdown feature
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 43. 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 2022 pro forma CET1 ratios include
the impact of the share buyback programme in respect of 2022, announced in
February 2023
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(4)
items(1,2,3) £m
£m
Half-year to 30 June 2023
Net interest income 6,798 213 (7) 7,004 Underlying net interest income
Other income, net of net finance income in respect of insurance and investment 2,508 (109) 139 2,538 Underlying other income
contracts
(356) - (356) Operating lease depreciation
Total income, net of net finance income in respect of insurance and investment 9,306 (252) 132 9,186 Net income
contracts
Operating expenses(5) (4,774) 423 (132) (4,483) Total costs(5)
Impairment charge (662) - - (662) Underlying impairment charge
Profit before tax 3,870 171 - 4,041 Underlying profit
Half-year to 30 June 2022(6)
Net interest income 6,037 74 24 6,135 Underlying net interest income
Other income, net of net finance income in respect of insurance and investment 1,911 351 105 2,367 Underlying other income
contracts
(213) - (213) Operating lease depreciation
Total income, net of net finance income in respect of insurance and investment 7,948 212 129 8,289 Net income
contracts
Operating expenses(5) (4,418) 297 (129) (4,250) Total costs(5)
Impairment credit (381) 4 - (377) Underlying impairment credit
Profit before tax 3,149 513 - 3,662 Underlying profit
Half-year to 31 December 2022(6)
Net interest income 6,885 152 - 7,037 Underlying net interest income
Other income, net of net finance income in respect of insurance and investment 708 1,495 96 2,299 Underlying other income
contracts
(160) - (160) Operating lease depreciation
Total income, net of net finance income in respect of insurance and investment 7,593 1,487 96 9,176 Net income
contracts
Operating expenses(5) (4,819) 238 (96) (4,677) Total costs(5)
Impairment credit (1,141) 8 - (1,133) Underlying impairment credit
Profit before tax 1,633 1,733 - 3,366 Underlying profit
(1) In the half-year ended 30 June 2023 this comprised the effects of market
volatility and asset sales (loss of £63 million); the amortisation of
purchased intangibles (loss of £35 million); restructuring costs (loss of
£25 million); and fair value unwind (loss of £48 million).
(2) In the half-year ended 30 June 2022 this comprised the effects of market
volatility and asset sales (loss of £359 million); the amortisation of
purchased intangibles (loss of £35 million); restructuring costs (loss of
£47 million); and fair value unwind (loss of £72 million).
(3) In the half-year ended 31 December 2022, this comprised the effects of
market volatility and asset sales (loss of £1,619 million) the amortisation
of purchased intangibles (loss of £35 million); restructuring costs (loss of
£33 million); and fair value unwind (loss of £46 million).
(4) 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.
(5) Statutory operating expenses includes operating lease depreciation. On
an underlying basis operating lease depreciation is included in net income.
(6) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123.
ALTERNATIVE PERFORMANCE MEASURES (continued)
Half-year to 30 Jun 2023 Half-year Half-year
to 30 Jun 2022(1) to 31 Dec
2022(1)
Asset quality ratio(A)
Underlying impairment (charge) credit (£m) (662) (377) (1,133)
Remove non-customer underlying impairment (£m) (5) 3 24
Underlying customer related impairment (charge) credit (£m) (667) (374) (1,109)
Loans and advances to customers (£bn) 450.7 456.1 454.9
Add back expected credit loss allowance (drawn) (£bn) 4.7 3.8 4.5
Add back acquisition related fair value adjustments (£bn) 0.3 0.4 0.4
Underlying gross loans and advances to customers (£bn) 455.7 460.3 459.8
Averaging (£bn) 0.4 (5.8) (0.6)
Average underlying gross loans and advances to customers (£bn) 456.1 454.5 459.2
Asset quality ratio(A) 0.29% 0.17% 0.48%
Banking net interest margin(A)
Underlying net interest income (£m) 7,004 6,135 7,037
Remove non-banking underlying net interest expense (£m) 155 52 59
Banking underlying net interest income (£m) 7,159 6,187 7,096
Underlying gross loans and advances to customers (£bn) 455.7 460.3 459.8
Adjustment for non-banking and other items:
Fee-based loans and advances (£bn) (8.7) (6.5) (8.4)
Other (£bn) 7.0 1.7 5.0
Interest-earning banking assets (£bn) 454.0 455.5 456.4
Averaging (£bn) (0.2) (5.9) (2.1)
Average interest-earning banking assets (£bn)(A) 453.8 449.6 454.3
Banking net interest margin(A) 3.18% 2.77% 3.10%
Cost:income ratio(A)
Total costs (£m) 4,483 4,250 4,677
Net income (£m) 9,186 8,289 9,176
Cost:income ratio(A) 48.8% 51.3% 51.0%
Operating costs(A)
Operating expenses (£m) 4,774 4,418 4,819
Adjustment for:
Remediation (£m) (70) (79) (176)
Restructuring (£m) (25) (47) (33)
Operating lease depreciation (£m) (356) (213) (160)
Amortisation of purchased intangibles (£m) (35) (35) (35)
Insurance gross up (£m)(1) 132 129 96
Other statutory items (£m) (7) (2) (10)
Operating costs (£m)(A,1) 4,413 4,171 4,501
(1) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123 and note 24 to the financial statements.
ALTERNATIVE PERFORMANCE MEASURES (continued)
Half-year to 30 Jun 2023 Half-year Half-year
to 30 Jun 2022(1) to 31 Dec
2022(1)
Return on tangible equity(A)
Profit attributable to ordinary shareholders (£m) 2,572 2,190 1,199
Average shareholders' equity (£bn) 38.8 43.8 39.1
Remove average intangible assets (£bn) (7.6) (6.5) (7.0)
Average tangible equity (£bn) 31.2 37.3 32.1
Return on tangible equity(A) 16.6% 11.8% 7.4%
Underlying profit before impairment(A)
Statutory profit before tax 3,870 3,149 1,633
Remove impairment charge (credit) 662 381 1,141
Remove volatility and other items including restructuring 171 509 1,725
Underlying profit before impairment(A) 4,703 4,039 4,499
(1) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123 and note 24 to the financial statements.
Half-year to 30 Jun 2023 Half-year Half-year
to 30 Jun 2022(1) to 31 Dec
2022(1)
New business value(A)
Closing balance:
Contractual service margin (CSM): insurance and participating investment 4,166 2,638 4,210
contracts
Risk adjustment: insurance and participating investment contracts 1,208 1,372 1,187
CSM: reinsurance contracts held (234) (133) (211)
Risk adjustment: reinsurance contracts held (78) (119) (78)
5,062 3,758 5,108
Opening balance:
CSM: insurance and participating investment contracts 4,210 2,014 2,638
Risk adjustment: insurance and participating investment contracts 1,187 1,670 1,372
CSM: reinsurance contracts held (211) (87) (133)
Risk adjustment: reinsurance contracts held (78) (178) (119)
5,108 3,419 3,758
Increase / (decrease) in CSM and risk adjustment in the period (46) 339 1,350
Adjustment for:
Remove increase in CSM from contracts modified and recognised as new contracts - (254) (1,077)
in the period
Remove release of CSM and risk adjustment to income statement in the period 190 154 194
from insurance and participating investment contracts
Remove release of CSM and risk adjustment to income statement in the period (12) (12) (17)
from reinsurance contracts held
Remove other movements in CSM and risk adjustment (34) (162) (383)
New business value added to CSM and risk adjustment 98 65 67
Add back: New business value charged to the income statement from loss on (9) (17) (16)
initial recognition of insurance and participating investment contracts, net
of loss component offset on reinsurance contracts held
New business value(A) 89 48 51
ALTERNATIVE PERFORMANCE MEASURES (continued)
At 30 Jun 2023 At 30 Jun 2022 At 31 Dec 2022
Loan to deposit ratio(A)
Loans and advances to customers (£bn) 450.7 456.1 454.9
Customer deposits (£bn) 469.8 478.2 475.3
Loan to deposit ratio(A) 96% 95% 96%
Pro forma CET1 ratio(A)
CET1 ratio 14.2% 14.7% 15.1%
Insurance dividend and share buyback accrual(1) - 0.1% (1.0)%
Pro forma CET1 ratio(A) 14.2% 14.8% 14.1%
Tangible net assets per share(A)
Ordinary shareholders' equity (£m)(2) 37,291 42,016 38,370
Goodwill and other intangible assets (8,203) (7,214) (7,615)
Deferred tax effects and other adjustments (£m)(2) 413 481 393
Tangible net assets (£m) 29,501 35,283 31,148
Ordinary shares in issue, excluding own shares 64,571m 68,702m 66,944m
Tangible net assets per share(A) 45.7p 51.4p 46.5p
(1) Dividend paid up by the Insurance business in the subsequent quarter
period and the impact of the announced ordinary share buyback programmes.
(2) 2022 comparatives have been restated to reflect the impact of IFRS 17.
See page 123 and note 24 to the financial statements.
RISK MANAGEMENT
PRINCIPAL RISKS AND UNCERTAINTIES
The most important risks faced by the Group are detailed below. The external
risks faced by the Group may impact the success of delivering against the
Group's long-term strategic objectives. They include, but are not limited to
macroeconomic uncertainty; high interest rates and high inflation which are
contributing to the cost of living increases and associated implications for
UK consumers and businesses.
Heightened monitoring is in place across the Group's portfolios to identify
signs of affordability stress. The Group has experienced only modest
deterioration in credit performance across its portfolio to date, most notably
in UK mortgages where new to arrears and flows to default have increased on
legacy variable rate loans. The Group continues to work with its customers to
proactively support them through cost of living pressures, the impact from
rising interest rates and any deterioration in broader economic conditions.
The Group remains committed to the effective implementation and embedding of
Consumer Duty into its purpose, strategy and culture in order to deliver good
outcomes for our customers throughout their journeys. This activity seeks to
align and enhance the Group's approach to supporting all customers, including
those who may be vulnerable and customers in financial difficulty.
CRD IV model changes reflecting the revised regulatory standards introduced in
2022 remain subject to approval by the PRA with the resultant risk-weighted
asset and expected loss outcome dependent upon this. An adjustment to
risk-weighted assets has been taken in the second quarter, to reflect the
anticipated impact of CRD IV models, following a further iteration of model
development. On that basis final impacts remain uncertain and further
increases could be required.
There have been minor changes to the definition of these risks compared to
those disclosed in the Group's 2022 Annual Report and Accounts, such as
clarifying third party and outsourced arrangements. The Group continues to
conduct a detailed review of its Enterprise Risk Management Framework, which
may result in a reclassification of the principal risks.
The Group's principal risks and uncertainties are reviewed and reported
regularly to the Board in alignment with the Group's Enterprise Risk
Management Framework.
Capital risk - The risk that an insufficient quantity or quality of capital is
held to meet regulatory requirements or to support business strategy, an
inefficient level of capital is held or that capital is inefficiently deployed
across the Group.
Change and execution risk - The risk that, in delivering its change agenda,
the Group fails to ensure compliance with laws and regulation, maintain
available and effective customer and colleague services, and/or operate within
the Group's risk appetite.
Climate risk - The risk that the Group experiences losses and/or reputational
damage, either from the impacts of climate change and the transition to net
zero, or as a result of the Group's responses to tackling climate change.
Conduct risk - The risk of customer detriment across the customer lifecycle
including: failures in product management, distribution and servicing
activities; from other risks materialising, or other activities which could
undermine the integrity of the market or distort competition, leading to
unfair customer outcomes, regulatory censure, reputational damage or financial
loss. Customer harm or detriment is defined as consumer loss, distress or
inconvenience to customers due to breaches of regulatory or internal
requirements or our wider duty to act fairly and reasonably.
Credit risk - The risk that parties with whom the Group has contracted fail to
meet their financial obligations (both on and off-balance sheet).
Data risk - The risk of the Group failing to effectively govern, manage and
protect its data throughout its lifecycle, including data processed by third
parties, or failure to drive value from data; leading to unethical decision
making, poor customer outcomes, loss of value to the Group and mistrust.
Funding and liquidity risk - Funding risk is defined as the risk that the
Group does not have sufficiently stable and diverse sources of funding or the
funding structure is inefficient. Liquidity risk is defined as the risk that
the Group has insufficient financial resources to meet its commitments as they
fall due, or can only secure them at excessive cost.
Insurance underwriting risk - The risk of adverse developments in the timing,
frequency and severity of claims for insured/underwritten events, in customer
behaviour, and in expense costs, leading to reductions in earnings and/or
value.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Market risk - The risk that the Group's capital or earnings profile is
affected by adverse market rates or prices, in particular interest rates,
credit spreads and equity prices.
Model risk - The risk of financial loss, regulatory censure, reputational
damage or customer detriment, as a result of deficiencies in the development,
application or ongoing operation of models and rating systems.
Operational risk - The risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events.
Operational resilience risk - The risk that the Group fails to design
resilience into business operations including those that are outsourced,
underlying infrastructure and controls (people, property, process, technology)
so that it is able to withstand external or internal events which could impact
the continuation of operations, and fails to respond in a way which meets
customers and stakeholder expectations and needs when the continuity of
operations is compromised.
People risk - The risk that the Group fails to provide an appropriate
colleague and customer-centric culture, supported by robust reward and
wellbeing policies and processes; effective leadership to manage colleague
resources; effective talent and succession management; and robust control to
ensure all colleague-related requirements are met.
Regulatory and legal risk - The risk of financial penalties, regulatory
censure, criminal or civil enforcement action or customer detriment as a
result of failure to identify, assess, correctly interpret, comply with, or
manage regulatory and/or legal requirements.
Strategic risk - The risk which results from:
• Incorrect assumptions about internal or external operating environments
• Failure to understand the potential impact of strategic responses and
business plans on existing risk types
• Failure to respond or the inappropriate strategic response to material
changes in the external or internal operating environments
CAPITAL RISK
CET1 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, increasing to 1.8 per cent
(based upon the concentration of Group exposures to the UK market at 30 June
2023) following the increase in the UK CCyB rate to 2 per cent in July 2023
• The capital conservation buffer (CCB) requirement of 2.5 per cent of
risk-weighted assets
• The Ring-Fenced Bank (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 revised
methodology, where the buffer rate is determined using the leverage exposure
measure of the RFB sub-group, will apply from the next review point in
December 2023, with any changes applying from 1 January 2025
• The Group's PRA Buffer, set 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
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 30 June 2023,
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.
Leverage minimum requirements
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, increasing to 0.6 per cent (based upon
the concentration of Group exposures to the UK market at 30 June 2023)
following the increase in the UK CCyB rate to 2 per cent in July 2023
• 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.
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 in 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 were published by the Bank of England on 12 July
2023. The Bank of England calculated the Group's transitional CET1 ratio,
after the application of management actions, as 11.6 per cent and its leverage
ratio as 4.5 per cent, significantly exceeding the hurdle rates of 6.6 per
cent and 3.5 per cent, respectively. The Group also continues to internally
assess vulnerabilities to adverse economic conditions.
CAPITAL RISK (continued)
Capital and MREL resources
An analysis of the Group's capital position and MREL resources as at 30 June
2023 is presented in the following table. This reflects the application of the
transitional arrangements for IFRS 9.
At 30 Jun At 31 Dec 2022
2023 £m
£m
Common equity tier 1
Shareholders' equity per balance sheet(1) 37,291 38,370
Adjustment to retained earnings for foreseeable dividends (891) (1,062)
Deconsolidation adjustments(1) 6,968 6,668
Cash flow hedging reserve 6,120 5,476
Other adjustments (189) (80)
49,299 49,372
less: deductions from common equity tier 1
Goodwill and other intangible assets (5,577) (4,982)
Prudent valuation adjustment (419) (434)
Removal of defined benefit pension surplus (3,435) (2,803)
Significant investments(1) (4,925) (4,843)
Deferred tax assets (4,339) (4,445)
Common equity tier 1 capital 30,604 31,865
Additional tier 1
Other equity instruments 6,913 5,271
Preference shares and preferred securities(2) 466 470
Regulatory adjustments (466) (470)
6,913 5,271
less: deductions from tier 1
Significant investments(1) (1,100) (1,100)
Total tier 1 capital 36,417 36,036
Tier 2
Other subordinated liabilities(2) 9,391 10,260
Deconsolidation of instruments issued by insurance entities(1) (516) (1,430)
Regulatory adjustments (1,870) (2,323)
7,005 6,507
less: deductions from tier 2
Significant investments(1) (969) (963)
Total capital resources 42,453 41,580
Ineligible AT1 and tier 2 instruments(3) (151) (181)
Amortised portion of eligible tier 2 instruments issued by Lloyds Banking 1,560 1,346
Group plc
Other eligible liabilities issued by Lloyds Banking Group plc(4) 22,843 24,085
Total MREL resources 66,705 66,830
Risk-weighted assets 215,290 210,859
Common equity tier 1 capital ratio 14.2% 15.1%
Tier 1 capital ratio 16.9% 17.1%
Total capital ratio 19.7% 19.7%
MREL ratio 31.0% 31.7%
(1) 2022 comparatives have been restated to reflect the impact of IFRS 17.
The CET1 deconsolidation adjustments applied to shareholders' equity increased
by £3.6 billion to reflect the full offset of the impact of IFRS 17 on the
Group's opening shareholders' equity position per the Group's consolidated
balance sheet. 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) Instruments with less than or equal to one year to maturity or
instruments not issued out of the holding company.
(4) Includes senior unsecured debt.
CAPITAL RISK (continued)
Movements in CET1 capital resources
The key movements are set out in the table below.
Common
equity
tier 1
£m
At 31 December 2022 31,865
Banking business profits(1) 2,929
Movement in foreseeable dividend accrual(2) 168
Final 2022 dividend paid out on ordinary shares during the period (1,059)
Share buyback reflected through retained profits (2,020)
Dividends received from the Insurance business(3) 100
IFRS 9 transitional adjustment to retained earnings (204)
Pension deficit contributions (586)
Goodwill and other intangible assets (595)
Significant investments (81)
Movement in treasury shares and employee share schemes 195
Distributions on other equity instruments (255)
Other movements 147
At 30 June 2023 30,604
(1) Under the regulatory framework, profits made by Insurance are removed
from CET1 capital. However, when dividends are paid to the Group by Insurance
these are recognised through CET1 capital.
(2) Reflects the reversal of the brought forward accrual for the 2022 final
ordinary dividend, net of the accrual for foreseeable 2023 ordinary dividends.
(3) Received in February 2023.
The Group's CET1 capital ratio reduced from 15.1 per cent at 31 December 2022
to 14.2 per cent at 30 June 2023 reflecting the reduction in CET1 capital
resources and the increase in risk-weighted assets.
The reduction in CET1 capital resources reflected banking business profits for
the period and the receipt of the dividend paid up by the Insurance business
in February 2023, which were more than offset by:
• The recognition of the full capital impact of the ordinary share buyback
programme announced as part of the Group's 2022 year end results, which
commenced in February 2023
• The accrual for foreseeable ordinary dividends in respect of the first
half of 2023, inclusive of the announced interim ordinary dividend of 0.92
pence per share
• Accelerated fixed pension deficit contributions paid during the period
into the Group's three main defined benefit pension schemes
• An increase in goodwill and other intangible assets, which included the
acquisition of Tusker in February 2023
The impact of the ordinary share buyback programme and the Insurance dividend
received in February 2023 were included in the Group's pro forma CET1 ratio of
14.1 per cent at 31 December 2022.
Movements in total capital and MREL
The Group's total capital ratio remained flat at 19.7 per cent (31 December
2022: 19.7 per cent) primarily reflecting the issuance of new AT1 and Tier 2
capital instruments and an increase in eligible provisions recognised through
Tier 2 capital, offset by the reduction in CET1 capital, the impact of
sterling appreciation and regulatory amortisation on Tier 2 capital
instruments and the increase in risk-weighted assets. The MREL ratio reduced
to 31.0 per cent (31 December 2022: 31.7 per cent) with the increase in total
capital resources more than offset by the reduction in other eligible
liabilities and the increase in risk-weighted assets. The reduction in other
eligible liabilities reflected the derecognition of a called instrument and
instruments with less than one year to maturity and the impact of sterling
appreciation, partially offset by the issuance of new instruments.
CAPITAL RISK (continued)
Risk-weighted assets
At 30 Jun At 31 Dec 2022
2023 £m
£m
Foundation Internal Ratings Based (IRB) Approach 45,486 46,500
Retail IRB Approach 83,794 81,091
Other IRB Approach(1) 19,854 19,764
IRB Approach 149,134 147,355
Standardised (STA) Approach(1) 24,009 23,119
Credit risk 173,143 170,474
Securitisation(1) 7,850 6,397
Counterparty credit risk 5,734 5,911
Credit valuation adjustment risk 431 621
Operational risk 24,277 24,241
Market risk 3,855 3,215
Risk-weighted assets 215,290 210,859
Of which threshold risk-weighted assets(2) 11,249 11,883
(1) Threshold risk-weighted assets are included within Other IRB Approach
and Standardised (STA) Approach.
(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 £4 billion during the first half of
the year to £215 billion at 30 June 2023 (31 December 2022: £211 billion).
This largely reflects an adjustment for the anticipated impact of CRD IV
models taken in the second quarter. Excluding this, lending growth, a small
uplift from model calibration and other increases were partly offset by
capital efficient securitisation and other optimisation activity, in addition
to a reduction in threshold risk-weighted assets.
The CRD IV model updates reflect an updated impact assessment following a
further iteration of model development. The models remain subject to further
development and final approval by the PRA. On that basis final impacts remain
uncertain and further increases could be required.
CAPITAL RISK (continued)
Leverage ratio
The table below summarises the component parts of the Group's leverage ratio.
At 30 Jun At 31 Dec 2022
2023 £m
£m
Total tier 1 capital 36,417 36,036
Exposure measure
Statutory balance sheet assets
Derivative financial instruments 23,670 24,753
Securities financing transactions 52,097 56,646
Loans and advances and other assets(1) 807,037 791,995
Total assets 882,804 873,394
Qualifying central bank claims (95,346) (91,125)
Deconsolidation adjustments(2)
Derivative financial instruments 979 712
Loans and advances and other assets(1) (168,226) (164,096)
Total deconsolidation adjustments (167,247) (163,384)
Derivatives adjustments (6,577) (7,414)
Securities financing transactions adjustments 2,556 2,645
Off-balance sheet items 42,203 42,463
Amounts already deducted from tier 1 capital (13,372) (12,033)
Other regulatory adjustments(3) (6,819) (5,731)
Total exposure measure 638,202 638,815
UK leverage ratio 5.7% 5.6%
Leverage exposure measure (including central bank claims) 733,548 729,940
Leverage ratio (including central bank claims) 5.0% 4.9%
Total MREL resources 66,705 66,830
MREL Leverage Ratio 10.5% 10.5%
(1) 2022 comparatives have been restated to reflect the impact of IFRS 17.
(2) 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.
(3) Includes adjustments to exclude lending under the UK Government's Bounce
Back Loan Scheme (BBLS).
Analysis of leverage movements
The Group's UK leverage ratio increased to 5.7 per cent (31 December 2022: 5.6
per cent) predominantly reflecting the increase in the total tier 1 capital
position. Reductions in the leverage exposure measure largely attributable to
securities financing transactions were broadly offset by other balance sheet
movements.
Pillar 3 disclosures
The Group will publish a condensed set of half-year Pillar 3 disclosures in
the second half of August. A copy of the disclosures will be available to view
at: www.lloydsbankinggroup.com/investors/financial-downloads.
CREDIT RISK
Overview
The Group's portfolios are well-positioned for the current macroeconomic
environment. 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 resilient, despite the continued economic
uncertainty with only modest evidence of deterioration to date. New to arrears
have slightly increased in UK mortgages but remain broadly stable across
unsecured portfolios, with only credit cards marginally above pre-pandemic
levels. Looking forward, there are risks from a higher inflation and interest
rate environment as modelled in the Group's expected credit loss (ECL)
allowance including the impact of the multiple economic scenarios (MES). The
Group continues to monitor the impacts of 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 the first half of 2023 was £662 million,
compared to a charge of £377 million in the first half of 2022. The
pre-updated MES charge of £657 million (half-year to 30 June 2022: £282
million) reflects the expected credit loss (ECL) allowance build from Stage 1
loans rolling forward into a more adverse economic outlook, as well as modest
increases in UK mortgages new to arrears rates and additional charges on
existing Commercial Banking clients in Stage 3. The impact of economic outlook
revisions was £5 million (half-year to 30 June 2022: £95 million, including
the partial release of £200 million of the Group's central adjustment in
relation to COVID-19).
The Group's underlying ECL allowance on loans and advances to customers
increased in the period to £5,361 million (31 December 2022: £5,222
million), largely due to underlying increases in UK mortgages and additional
charges on existing Commercial Banking clients in Stage 3.
Group Stage 2 loans and advances to customers are stable at £65,730 million
(31 December 2022: £65,728 million), and as a percentage of total lending at
14.4 per cent (31 December 2022: 14.3 per cent). Updates to the macroeconomic
outlook drive offsetting movements, with Stage 2 increases in UK mortgages
driven by higher UK Bank Rate projections offset by Commercial Banking
reductions reflecting the modestly improved GDP outlook. Of the total Group
Stage 2 loans and advances to customers, 92.1 per cent are up to date
(31 December 2022 92.7 per cent). Stage 2 coverage remain stable at 3.2 per
cent (31 December 2022: 3.2 per cent).
Stage 3 loans and advances to customers are stable at £10,712 million (31
December 2022: £10,753 million), and as a percentage of total lending
increased slightly to 2.4 per cent (31 December 2022: 2.3 per cent). Stage 3
coverage increased by 1.1 percentage points to 23.7 per cent (31 December
2022: 22.6 per cent) largely driven by additional charges on existing
Commercial Banking clients in Stage 3.
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 the impacts from
higher interest rates and from 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, embracing the standards
outlined in the Mortgage Charter and including where customers are leveraging
Pay As You Grow options under the UK Government Coronavirus scheme
CREDIT RISK (continued)
Impairment charge (credit) by division − statutory basis
Half-year to 30 Jun 2023 Half-year Change Half-year Change
£m
to 30 Jun 2022(1) % to 31 Dec %
£m 2022
£m
UK mortgages 191 (64) 359 47
Credit cards 197 272 28 299 34
Loans and overdrafts 160 241 34 258 38
UK Motor Finance 43 7 (9)
Other 1 - 10 90
Retail 592 456 (30) 917 35
Small and Medium Businesses 25 30 17 158 84
Corporate and Institutional Banking 47 87 46 242 81
Commercial Banking 72 117 38 400 82
Insurance, Pensions and Investments (1) 6 18
Equity Investments and Central Items (1) (198) (99) (194) (99)
Total impairment charge 662 381 (74) 1,141 42
(1) Impairment charges for Retail, Commercial Banking and Other reflect the
new organisation structure; comparatives have been presented on a consistent
basis. See page 123.
Impairment charge (credit) by division − underlying basis(A)
Half-year to 30 Jun 2023 Half-year Change Half-year Change
£m
to 30 Jun 2022(1) % to 31 Dec %
£m 2022
£m
UK mortgages 191 (64) 359 47
Credit cards 197 272 28 299 34
Loans and overdrafts 160 241 34 258 38
UK Motor Finance 43 7 (9)
Other 1 - 10 90
Retail 592 456 (30) 917 35
Small and Medium Businesses 25 30 17 158 84
Corporate and Institutional Banking 47 87 46 242 81
Commercial Banking 72 117 38 400 82
Insurance, Pensions and Investments (1) 2 10
Equity Investments and Central Items (1) (198) (99) (194) (99)
Total impairment charge(A) 662 377 (76) 1,133 42
Asset quality ratio(A) 0.29% 0.17% 12bp 0.48% (19)bp
(1) Impairment charges for Retail, Commercial Banking and Other reflect the
new organisation structure; comparatives have been presented on a consistent
basis. See page 123.
(
)
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 30 Jun 2023 At 31 Dec At 30 Jun 2023 At 31 Dec
£m
2022
£m
2022
£m
£m
Customer related balances
Drawn 4,737 4,518 5,039 4,899
Undrawn 322 323 322 323
5,059 4,841 5,361 5,222
Loans and advances to banks 12 15 12 15
Debt securities 11 9 11 9
Other assets 35 38 35 38
Total expected credit loss allowance 5,117 4,903 5,419 5,284
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 30 June 2023
Underlying basis(A) 379,317 65,730 10,712 - 455,759 780 1,894 2,365 - 5,039
POCI assets (1,800) (4,028) (2,823) 8,651 - (2) (113) (462) 577 -
Acquisition fair - - - (302) (302) - - - (302) (302)
value adjustment
(1,800) (4,028) (2,823) 8,349 (302) (2) (113) (462) 275 (302)
Statutory basis 377,517 61,702 7,889 8,349 455,457 778 1,781 1,903 275 4,737
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
CREDIT RISK (continued)
Movements in total expected credit loss allowance - statutory basis
Opening ECL at 31 Dec 2022 Write-offs Income Net ECL Closing ECL at 30 Jun 2023
£m and other(1) statement increase £m
£m charge (credit) (decrease)
£m £m
UK mortgages(2) 1,209 (69) 191 122 1,331
Credit cards 763 (191) 197 6 769
Loans and overdrafts 678 (147) 160 13 691
UK Motor Finance 252 (44) 43 (1) 251
Other 86 1 1 2 88
Retail 2,988 (450) 592 142 3,130
Small and Medium Businesses 549 (41) 25 (16) 533
Corporate and Institutional Banking 1,320 43 47 90 1,410
Commercial Banking 1,869 2 72 74 1,943
Insurance, Pensions and Investments 40 (1) (1) (2) 38
Equity Investments and Central Items 6 1 (1) - 6
Total(3) 4,903 (448) 662 214 5,117
(1) Contains adjustments in respect of purchased or originated
credit-impaired financial assets.
(2 ) Includes £60 million, within write-offs and other relating to the
£2.5 billion legacy portfolio exit in the first quarter of 2023.
(3) Total ECL includes £58 million relating to other non customer-related
assets (31 December 2022: £62 million).
(
)
Movements in total expected credit loss allowance - underlying basis(A)
Opening ECL at 31 Dec 2022 Write-offs Income Net ECL Closing ECL at 30 Jun 2023
£m and other statement increase £m
£m charge (credit) (decrease)
£m £m
UK mortgages(1) 1,590 (148) 191 43 1,633
Credit cards 763 (191) 197 6 769
Loans and overdrafts 678 (147) 160 13 691
UK Motor Finance 252 (44) 43 (1) 251
Other 86 1 1 2 88
Retail 3,369 (529) 592 63 3,432
Small and Medium Businesses 549 (41) 25 (16) 533
Corporate and Institutional Banking 1,320 43 47 90 1,410
Commercial Banking 1,869 2 72 74 1,943
Insurance, Pensions and Investments 40 (1) (1) (2) 38
Equity Investments and Central Items 6 1 (1) - 6
Total(2) 5,284 (527) 662 135 5,419
(1 ) Includes £126 million, within write-offs and other relating to the
£2.5 billion legacy portfolio exit in the first quarter of 2023.
(2) Total ECL includes £58 million relating to other non customer-related
assets (31 December 2022: £62 million).
(
)
CREDIT RISK (continued)
Loans and advances to customers and expected credit loss allowance - statutory
basis
At 30 June 2023 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 251,013 44,643 3,766 8,349 307,771 14.5 1.2
Credit cards 12,210 3,066 302 - 15,578 19.7 1.9
Loans and overdrafts 9,075 1,535 242 - 10,852 14.1 2.2
UK Motor Finance 12,836 2,226 122 - 15,184 14.7 0.8
Other 14,797 567 131 - 15,495 3.7 0.8
Retail 299,931 52,037 4,563 8,349 364,880 14.3 1.3
Small and Medium Businesses 29,350 5,060 1,576 - 35,986 14.1 4.4
Corporate and Institutional Banking 51,527 4,605 1,744 - 57,876 8.0 3.0
Commercial Banking 80,877 9,665 3,320 - 93,862 10.3 3.5
Equity Investments and Central Items(1) (3,291) - 6 - (3,285)
Total gross lending 377,517 61,702 7,889 8,349 455,457 13.5 1.7
ECL allowance on drawn balances (778) (1,781) (1,903) (275) (4,737)
Net balance sheet carrying value 376,739 59,921 5,986 8,074 450,720
Customer related ECL allowance (drawn and undrawn)
UK mortgages 117 573 366 275 1,331
Credit cards 187 459 123 - 769
Loans and overdrafts 205 358 128 - 691
UK Motor Finance(2) 120 71 60 - 251
Other 19 18 51 - 88
Retail 648 1,479 728 275 3,130
Small and Medium Businesses 119 255 159 - 533
Corporate and Institutional Banking 146 231 1,015 - 1,392
Commercial Banking 265 486 1,174 - 1,925
Equity Investments and Central Items - - 4 - 4
Total 913 1,965 1,906 275 5,059
Customer related ECL allowance (drawn and undrawn) as a percentage of loans
and advances to customers(3)
UK mortgages - 1.3 9.7 3.3 0.4
Credit cards 1.5 15.0 52.3 - 5.0
Loans and overdrafts 2.3 23.3 66.0 - 6.4
UK Motor Finance 0.9 3.2 49.2 - 1.7
Other 0.1 3.2 38.9 - 0.6
Retail 0.2 2.8 16.4 3.3 0.9
Small and Medium Businesses 0.4 5.0 16.5 - 1.5
Corporate and Institutional Banking 0.3 5.0 58.2 - 2.4
Commercial Banking 0.3 5.0 43.3 - 2.1
Equity Investments and Central Items - 66.7 -
Total 0.2 3.2 26.6 3.3 1.1
(1) Contains centralised fair value hedge accounting adjustments.
(2) UK Motor Finance for Stages 1 and 2 include £116 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 £48 million and Small and Medium Businesses of £610 million.
CREDIT RISK (continued)
Loans and advances to customers and expected credit loss allowance - statutory
basis (continued)
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 (underlying
basis)(A)
At 30 June 2023 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 252,814 48,670 6,589 308,073 15.8 2.1
Credit cards 12,210 3,066 302 15,578 19.7 1.9
Loans and overdrafts 9,075 1,535 242 10,852 14.1 2.2
UK Motor Finance 12,836 2,226 122 15,184 14.7 0.8
Other 14,797 567 131 15,495 3.7 0.8
Retail(1) 301,732 56,064 7,386 365,182 15.4 2.0
Small and Medium Businesses 29,350 5,060 1,576 35,986 14.1 4.4
Corporate and Institutional Banking 51,526 4,606 1,744 57,876 8.0 3.0
Commercial Banking 80,876 9,666 3,320 93,862 10.3 3.5
Equity Investments and Central Items(2) (3,291) - 6 (3,285)
Total gross lending 379,317 65,730 10,712 455,759 14.4 2.4
ECL allowance on drawn balances (780) (1,894) (2,365) (5,039)
Net balance sheet carrying value 378,537 63,836 8,347 450,720
Customer related ECL allowance (drawn and undrawn)
UK mortgages 119 686 828 1,633
Credit cards 187 459 123 769
Loans and overdrafts 205 358 128 691
UK Motor Finance(3) 120 71 60 251
Other 19 18 51 88
Retail(1) 650 1,592 1,190 3,432
Small and Medium Businesses 119 255 159 533
Corporate and Institutional Banking 146 231 1,015 1,392
Commercial Banking 265 486 1,174 1,925
Equity Investments and Central Items - - 4 4
Total 915 2,078 2,368 5,361
Customer related ECL allowance (drawn and undrawn) as a percentage of loans
and advances to customers(4)
UK mortgages - 1.4 12.6 0.5
Credit cards 1.5 15.0 52.3 5.0
Loans and overdrafts 2.3 23.3 66.0 6.4
UK Motor Finance 0.9 3.2 49.2 1.7
Other 0.1 3.2 38.9 0.6
Retail(1) 0.2 2.8 16.4 0.9
Small and Medium Businesses 0.4 5.0 16.5 1.5
Corporate and Institutional Banking 0.3 5.0 58.2 2.4
Commercial Banking 0.3 5.0 43.3 2.1
Equity Investments and Central Items - 66.7
Total 0.2 3.2 23.7 1.2
(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 £116 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 £48 million and Small and Medium Businesses of £610 million.
CREDIT RISK (continued)
Loans and advances to customers and expected credit loss allowance (underlying
basis)(A) (continued)
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)
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 30 June 2023 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
At
UK mortgages 32,585 251 9,234 163 1,771 80 1,053 79 44,643 573
Credit cards 2,799 362 141 49 92 30 34 18 3,066 459
Loans and overdrafts 1,135 238 229 55 127 44 44 21 1,535 358
UK Motor Finance 798 22 1,257 24 140 17 31 8 2,226 71
Other 127 5 345 7 57 4 38 2 567 18
Retail 37,444 878 11,206 298 2,187 175 1,200 128 52,037 1,479
Small and Medium Businesses 3,835 221 702 18 334 12 189 4 5,060 255
Corporate and Institutional Banking 4,436 227 33 3 6 1 130 - 4,605 231
Commercial Banking 8,271 448 735 21 340 13 319 4 9,665 486
Total 45,715 1,326 11,941 319 2,527 188 1,519 132 61,702 1,965
At 31 December 2022
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
(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 to 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).
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 30 June 2023 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
At
UK mortgages 34,505 278 10,207 191 2,413 103 1,545 114 48,670 686
Credit cards 2,799 362 141 49 92 30 34 18 3,066 459
Loans and overdrafts 1,135 238 229 55 127 44 44 21 1,535 358
UK Motor Finance 798 22 1,257 24 140 17 31 8 2,226 71
Other 127 5 345 7 57 4 38 2 567 18
Retail 39,364 905 12,179 326 2,829 198 1,692 163 56,064 1,592
Small and Medium Businesses 3,835 221 702 18 334 12 189 4 5,060 255
Corporate and Institutional Banking 4,436 227 34 3 6 1 130 - 4,606 231
Commercial Banking 8,271 448 736 21 340 13 319 4 9,666 486
Total 47,635 1,353 12,915 347 3,169 211 2,011 167 65,730 2,078
At
At 31 December 2022
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
(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 to 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).
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 16 on page 98 onwards.
The tables 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. 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 at 30 June 2023 and December 2022.
Statutory basis Probability- Upside Base case Downside Severe
weighted £m £m £m downside
£m £m
UK mortgages 1,331 544 878 1,502 4,535
Credit cards 769 606 731 842 1,155
Other Retail 1,030 921 1,005 1,075 1,294
Commercial Banking 1,943 1,573 1,767 2,124 3,041
Other 44 44 44 45 45
At 30 June 2023 5,117 3,688 4,425 5,588 10,070
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
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 1,633 846 1,180 1,804 4,837
Credit cards 769 606 731 842 1,155
Other Retail 1,029 921 1,004 1,074 1,294
Commercial Banking 1,943 1,573 1,767 2,124 3,041
Other 45 45 45 45 45
At 30 June 2023 5,419 3,991 4,727 5,889 10,372
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
Retail
• The Retail portfolio has remained resilient and well-positioned, despite
pressure on consumer disposable incomes from a higher cost of living,
inflationary pressures and rising interest rates. Robust risk management
remains in place, with strong affordability and indebtedness controls for both
new and existing lending and a prudent risk appetite approach. The Retail
lending book is concentrated towards lower risk segments which should be
better able to withstand the cost of living challenge and rising interest
rates
• Modest evidence of increases in new to arrears and flow to default have
been observed in UK mortgages, but new to arrears largely remain stable across
unsecured portfolios, where only credit cards new to arrears are slightly
above 2019 levels
• The Group is closely monitoring the impacts of the rising cost of living
and higher interest rates on consumers to ensure it remains vigilant for any
signs of deterioration. Lending strategies are under continuous review and
have been proactively managed and calibrated to the latest macroeconomic
outlook, with actions taken to enhance living cost assumptions in
affordability assessments with more targeted action for those customers deemed
to be most at risk
• The Retail underlying impairment charge in the first half of 2023 was
£592 million, compared to £455 million in the first half of 2022, reflecting
the expected credit loss (ECL) allowance build from Stage 1 loans rolling
forward into a more adverse economic outlook, as well as modest increases in
UK mortgages new to arrears rates. Revisions to the macroeconomic outlook have
led to a £41 million ECL increase for the first half of 2023, which compares
favourably to the £171 million charge over the first half of 2022, which
reflected the deteriorating global outlook, higher inflation and cost of
living concerns as a consequence of the Ukraine war
• ECL judgements to capture the increased risk of inflation and cost of
living impacts for Retail customers have been updated. This includes
judgements to account for segments of the portfolio considered to be least
resilient to disposable income shocks
• Stage 2 loans and advances to customers now comprise 15.4 per cent of
the Retail portfolio (31 December 2022: 14.8 per cent), of which 91.9 per cent
are up to date performing loans (31 December 2022: 92.3 per cent). Stage 2 ECL
coverage has decreased to 2.8 per cent (31 December 2022: 3.0 per cent)
given the UK mortgages portfolio now comprises a higher proportion of Retail
Stage 2 balances as a result of updates to the macroeconomic outlook. Stage 2
ECL coverage remains broadly stable by portfolio
• Stage 3 loans and advances to customers are stable at 2.0 per cent.
Stage 3 ECL coverage is flat at 16.4 per cent (31 December 2022: 16.4 per
cent)
CREDIT RISK (continued)
Portfolios
UK mortgages
• The UK mortgages portfolio is well-positioned with a strong
loan-to-value (LTV) profile. The Group has actively improved the quality of
the portfolio over recent years using robust affordability and credit
controls, whilst the balances of higher risk portfolios originated prior to
2008 have continued to reduce
• New to arrears remain below pre-pandemic experience, but modest
increases have been observed this year largely driven by mortgages which
originated in the period 2006 to 2008, where there is a high concentration of
variable rate customers. The Group is proactively monitoring existing mortgage
customers as they reach the end of fixed rate deals with customers' immediate
behaviour remaining stable
• Despite continued macroeconomic uncertainty and inflationary pressures,
credit quality for new mortgage lending remains strong and within the Group's
risk appetite
• Total loans and advances to customers reduced to £308.1 billion (31
December 2022: £312.7 billion), with an increase in average LTV to 42.3 per
cent (31 December 2022: 41.6 per cent). The proportion of balances with an LTV
greater than 90 per cent increased to 1.7 per cent (31 December 2022: 1.4 per
cent). New lending at 90 per cent LTV or above is supported through the
Mortgage Guarantee Scheme or other risk mitigation and is tightly controlled
through enhanced lending criteria. The average LTV of new business decreased
to 60.2 per cent (31 December 2022: 61.7 per cent)
• There was an impairment charge of £191 million for the first half of
2023 reflecting ECL build from Stage 1 loans rolling forward into a more
adverse economic outlook, in addition to a modest deterioration in observed
credit performance. This compares to a net release of £64 million for the
first half of 2022, which reflected benign credit performance and increasing
house prices observed over this period. Total ECL coverage remains flat at 0.5
per cent (31 December 2022: 0.5 per cent)
• Stage 2 loans and advances to customers increased slightly to 15.8 per
cent of the portfolio (31 December 2022: 14.8 per cent) due to updates to the
macroeconomic outlook, most notably higher UK Bank Rate projections. Stage 2
ECL coverage is stable at 1.4 per cent (31 December 2022: 1.5 per cent)
• Stage 3 ECL coverage is also stable at 12.6 per cent (31 December 2022:
12.5 per cent)
Credit cards
• Credit card balances increased to £15.6 billion (31 December 2022:
£15.0 billion) due to increased levels of customer spend offset by repayments
• The credit card portfolio is a prime book which has performed well in
recent years. New to arrears rates are slightly above pre-pandemic levels,
with the absolute value of new to arrears cases being lower due to the
contraction in total balances since 2019
• The impairment charge was £197 million for the first half of 2023
compared to a charge of £272 million for the first half of 2022, with overall
ECL coverage stable at 5.0 per cent (31 December 2022: 5.1 per cent)
• Coverage by stage remains broadly stable. Stage 2 ECL coverage increased
slightly to 15.0 per cent (31 December 2022: 14.5 per cent), along with Stage
3 ECL coverage at 52.3 per cent (31 December 2022: 50.9 per cent)
Loans and overdrafts
• Loans and advances to customers for unsecured loans and overdrafts
increased to £10.9 billion (31 December 2022: £10.3 billion) largely driven
by increasing customer demand, with growth concentrated in low risk segments
• The impairment charge was £160 million for the first half of 2023,
compared to £241 million for the first half of 2022 and overall ECL coverage
broadly stable at 6.4 per cent (31 December 2022: 6.6 per cent)
• Stage 2 ECL coverage increased slightly to 23.3 per cent (31 December
2022: 21.4 per cent) and Stage 3 ECL coverage increased to 66.0 per cent (31
December 2022: 64.6 per cent)
CREDIT RISK (continued)
UK Motor Finance
• The UK Motor Finance portfolio increased to £15.2 billion (31 December
2022: £14.6 billion) with new car supply constraints continuing to ease
• There was an impairment charge of £43 million for the first half of
2023 compared to £7 million for the first half of 2022, reflecting recent
used car price declines from recent high levels. Overall ECL coverage has
remained stable at 1.7 per cent (31 December 2022: 1.7 per cent)
• Updates to residual value (RV) and voluntary termination (VT) risk held
against personal contract purchase (PCP) and hire purchase (HP) lending are
included within the impairment charge. Updates to account for used car prices,
including valuations for battery electric vehicles (BEVs), have increased RV
and VT ECL to £116 million (31 December 2022: £92 million)
• Stage 2 ECL coverage reduced slightly to 3.2 per cent (31 December 2022:
3.4 per cent) and Stage 3 ECL coverage reduced to 49.2 per cent (31 December
2022: 52.6 per cent)
Retail UK mortgages loans and advances to customers(1) - statutory basis
At 30 Jun At 31 Dec 2022
2023 £m
£m
Mainstream 253,107 253,283
Buy-to-let 48,807 51,529
Specialist 5,857 7,526
Total 307,771 312,338
(1) Balances include the impact of HBOS related acquisition adjustments.
Mortgages greater than three months in arrears, excluding repossessions -
underlying basis(A)
Number of cases Total mortgage accounts Value of loans(1) Total mortgage balances
At 30 Jun 2023 At 31 Dec 2022 At 30 Jun 2023 At 31 Dec 2022 At 30 Jun 2023 At 31 Dec 2022 At 30 Jun 2023 At 31 Dec 2022
Cases
Cases
%
%
£m
£m
%
%
Mainstream 20,547 19,719 1.2 1.1 2,562 2,213 1.0 0.9
Buy-to-let 3,837 3,478 1.0 0.8 512 473 1.0 0.9
Specialist 4,191 4,323 8.6 7.0 698 722 11.6 9.3
Total 28,575 27,520 1.3 1.2 3,772 3,408 1.2 1.1
(1) Value of loans represents total gross book value of mortgages more than
three months in arrears; the balances exclude the impact of HBOS acquisition
adjustments.
(
)
CREDIT RISK (continued)
Period end and average LTVs across the Retail mortgage portfolios - underlying
basis(A)
At 30 June 2023 Mainstream Buy-to-let Specialist Total
% % % %
Less than 60 per cent 58.8 70.2 86.1 61.2
60 per cent to 70 per cent 18.4 20.9 8.1 18.6
70 per cent to 80 per cent 13.5 8.7 2.3 12.5
80 per cent to 90 per cent 7.2 0.1 1.1 6.0
90 per cent to 100 per cent 2.0 0.0 1.1 1.6
Greater than 100 per cent 0.1 0.1 1.3 0.1
Total 100.0 100.0 100.0 100.0
Average loan to value(1):
Stock of residential mortgages 41.6 47.1 34.7 42.3
New residential lending 60.9 53.0 n/a 60.2
At 31 December 2022
Less than 60 per cent 60.3 71.6 86.0 62.8
60 per cent to 70 per cent 19.1 20.3 7.9 19.0
70 per cent to 80 per cent 13.2 7.7 2.5 12.1
80 per cent to 90 per cent 5.7 0.2 1.2 4.7
90 per cent to 100 per cent 1.6 0.1 1.0 1.3
Greater than 100 per cent 0.1 0.1 1.4 0.1
Total 100.0 100.0 100.0 100.0
Average loan to value(1):
Stock of residential mortgages 40.9 46.8 35.0 41.6
New residential lending 62.3 58.1 n/a 61.7
(1) Average loan to value is calculated as total loans and advances as a
percentage of the total indexed collateral of these loans and advances; the
balances exclude the impact of HBOS acquisition adjustments.
CREDIT RISK (continued)
Commercial Banking
• The Commercial portfolio credit quality remains resilient with a focused
approach to credit underwriting and monitoring standards and proactive
management of exposures to higher risk and vulnerable sectors
• While a small number of the Group's credit metrics indicate very modest
deterioration, these are not considered to be material. Individual risk driver
assessments at industry sector level allow increased focus on sectors more
vulnerable to changes in consumer spending patterns as well as broader
macroeconomic trends
• The Group has reduced overall exposure to cyclical sectors since 2019
and continues to closely monitor credit quality, sector and single name
concentrations. Sector and credit risk appetite continue to be proactively
managed to ensure that clients are supported and the Group is protected
• The Group continues to provide early support to its more vulnerable
customers through focused risk management via its Watchlist and Business
Support framework. Overall exposures on our Watchlist and in Business Support
have increased slightly in the first half of 2023, reflecting the economic
environment, while the Group continues to monitor the risk of direct and
indirect (consumer led) impact from higher interest rates in the UK. The Group
will continue to balance prudent risk management with ensuring support for
financially viable clients
• The Group is cognisant of a number of client risks and headwinds
associated with rising inflationary and interest rate pressures especially in,
but not limited to, sectors reliant upon consumer discretionary spend. These
include reduced asset valuation and refinancing risk, a reduction in market
liquidity impacting credit supply and pressure on both household discretionary
spending and business margins
• The Group continues to carefully monitor the level of arrears on lending
under the UK Government support schemes, including the Bounce Back Loan Scheme
and the Coronavirus Business Interruption Loan Scheme, where UK Government
guarantees are in place for 100 per cent and 80 per cent respectively. The
Group will continue to review customer trends and take early risk mitigating
actions as appropriate, including actions to review and manage refinancing
risk
Impairment
• There was a net impairment charge of £72 million in the first half of
2023, compared to £117 million in the first half of 2022. The charge was
driven by an observed performance charge of £108 million largely due to
additional charges on existing Stage 3 clients, partly offset by a £36
million release from economic outlook revisions
• ECL allowances increased by £76 million to £1,925 million at 30 June
2023 (31 December 2022: £1,849 million). The ECL provision at 30 June 2023
captures the impact of inflationary pressures, rising UK Bank rates and supply
chain constraints and assumes additional losses will emerge as a result of
these
• Stage 2 loans and advances to customers decreased by £1,827 million to
£9,666 million (31 December 2022: £11,493 million), of which 93.2 per cent
are current and up to date. Stage 2 loans as a proportion of total loans and
advances to customers reduced to 10.3 per cent (31 December 2022: 12.1 per
cent). Stage 2 ECL coverage was higher at 5.0 per cent (31 December 2022: 4.4
per cent) with the increase in coverage a result of better quality assets
moving back to Stage 1 due to the modestly improved GDP outlook
• Stage 3 loans and advances to customers reduced to £3,320 million (31
December 2022: £3,371 million) and as a proportion of total loans and
advances to customers, remained stable at 3.5 per cent (31 December 2022: 3.5
per cent). Stage 3 ECL coverage increased to 43.3 per cent (31 December 2022:
38.9 per cent), predominantly driven by additional charges on existing Stage 3
clients
CREDIT RISK (continued)
Commercial Banking UK Direct Real Estate
• Commercial Banking UK Direct Real Estate committed drawn lending stood
at £11.2 billion at 31 May 2023 (net of £3.9 billion exposures subject to
protection through Significant Risk Transfer (SRT) securitisations), £0.2
billion increase in comparison to 31 December 2022. In addition, there are
undrawn lending facilities of £3.4 billion to predominantly investment grade
rated corporate customers
• The Group classifies Direct Real Estate as exposure which is directly
supported by cash flows from property activities (as opposed to trading
activities, such as hotels, care homes and housebuilders). Exposures of £5.8
billion to social housing providers are also excluded
• Despite some headwinds, including the inflationary environment and the
impact of rising interest rates, the portfolio is well-positioned and
proactively managed with conservative LTVs, good levels of interest cover and
appropriate risk mitigants in place
• Lending continues to be heavily weighted towards investment real estate
(c.95 per cent) rather than development. Of these investment exposures, c.91
per cent have an LTV of less than 70 per cent, with an average LTV of 44 per
cent. The average interest cover ratio was 4.0 times, with 80 per cent having
interest cover of above 2 times. In SME, LTV at origination has been typically
limited to c.55 per cent, given prudent repayment cover criteria (including
notional base rate stress)
• The portfolio is well diversified with no speculative development
lending (defined as property not pre-sold or pre-let at a level to fully repay
the debt or generate sufficient income to meet the minimum interest cover
requirements). Approximately 47 per cent of exposures relate to commercial
real estate, including c.15 per cent secured by office assets, c.12 per cent
by retail assets and c.11 per cent by industrial assets. Approximately 41 per
cent of the portfolio relates to residential investment
• Recognising this is a cyclical sector, total (gross and net) and asset
type quantum caps are in place to control origination and exposure, including
several asset type categories. Focus remains on the UK market and new business
has been written in line with a prudent risk appetite criteria including
conservative LTVs, strong quality of income and proven management teams.
Development lending criteria also includes maximum loan to gross development
value and maximum loan to cost, with funding typically only released against
completed work, as confirmed by the Group's monitoring quantity surveyor
• Overall performance has remained resilient. Although the Group saw some
increase in cases on its closer monitoring in the CRE Watchlist category,
these are predominantly precautionary
• Use of SRT securitisations also acts as a risk mitigant in this
portfolio, with run off of these carefully managed and sequenced
• Rent collection has largely recovered and stabilised following the
coronavirus pandemic, although challenges remain in some sectors
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 30 June 2023 (96 per cent as at 31
December 2022). Overall total wholesale funding has increased to £103.5
billion as at 30 June 2023 (31 December 2022: £100.3 billion) as a result of
short term funding which has continued to increase towards more normalised
levels. The Group maintains its 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)(1) of 142 per
cent as at 30 June 2023 (31 December 2022: 144 per cent) calculated on a Group
consolidated basis based on the PRA rulebook. The decrease in LCR is explained
primarily by a reduction in customer deposits. All assets within the liquid
asset portfolio are hedged for interest rate risk. 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.
LCR eligible assets(1) have reduced to £138.2 billion, from £144.7 billion
at 31 December 2022, driven by a reduction in customer deposits. In addition
to the Group's reported LCR eligible assets, the Group maintains borrowing
capacity at central banks which averaged £71 billion in the 12 months to 30
June 2023. The net stable funding ratio remains strong at 130 per cent as at
30 June 2023 (31 December 2022: 130 per cent).
During the first half of 2023, the Group accessed wholesale funding across a
range of currencies and markets with term issuance volumes totalling £9.4
billion, compared to full year guidance of around £15 billion of wholesale
issuance needs. Including pre-funding (issued in 2022), 2023 volumes are
£10.4 billion in the year to date. The total outstanding amount of drawings
from the TFSME has remained stable at £30.0 billion at 30 June 2023 (31
December 2022: £30.0 billion), with maturities in 2025, 2027 and beyond.
The Group's credit ratings continue to reflect the strength of its business
model and balance sheet. 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 and franchise, along with its robust financial
performance, capital and funding position, are reflected in the Group's strong
ratings.
(1) Based on a monthly rolling simple average over the previous 12 months.
FUNDING AND LIQUIDITY RISK (continued)
Group funding requirements and sources
At 30 Jun 2023 At 31 Dec 2022 Change
£bn
£bn
%
Group funding position
Cash and balances at central banks 95.5 91.4 4
Loans and advances to banks(1) 11.3 10.6 7
Loans and advances to customers 450.7 454.9 (1)
Reverse repurchase agreements - non-trading 36.0 44.9 (20)
Debt securities at amortised cost 12.8 9.9 29
Financial assets at fair value through other comprehensive income 22.2 23.2 (4)
Other assets(2) 254.3 238.5 7
Total Group assets 882.8 873.4 1
Less other liabilities(2) (220.4) (205.3) 7
Funding requirements 662.4 668.1 (1)
Customer deposits 469.8 475.3 (1)
Wholesale funding(3) 103.5 100.3 3
Repurchase agreements - non-trading 14.6 18.6 (22)
Term Funding Scheme with additional incentives for SMEs (TFSME) 30.0 30.0
Total equity(2) 44.5 43.9 1
Funding sources 662.4 668.1 (1)
(1) Excludes £0.1 billion (31 December 2022: £0.1 billion) of loans and
advances to banks within the Insurance business.
(2) Other assets and other liabilities primarily include balances in the
Group's Insurance business (for which comparative balances have been restated
for the impacts of IFRS 17) and the fair value of derivative assets and
liabilities.
(3 ) The Group's definition of wholesale funding aligns with that used by
other international market participants; including bank deposits, debt
securities in issue and subordinated liabilities. Excludes balances relating
to margins of £2.1 billion (31 December 2022: £2.6 billion).
The Group continues to have a well diversified deposit base, with around 65
per cent of deposits coming from Retail customers.
A very significant proportion of the Group's customer deposits are insured,
with over 80 per cent of Retail customer balances and 58 per cent of total
deposits protected by the insurance schemes such as the Financial Services
Compensation Scheme (FSCS).
FUNDING AND LIQUIDITY RISK (continued)
Reconciliation of Group funding to the balance sheet
At 30 June 2023 Included Cash collateral received Fair value Balance
in funding £bn and other sheet
analysis accounting £bn
£bn methods
£bn
Deposits from banks 4.0 2.2 - 6.2
Debt securities in issue 87.4 - (8.1) 79.3
Subordinated liabilities 12.1 - (2.2) 9.9
Total wholesale funding 103.5 2.2
Customer deposits 469.8 - - 469.8
Total 573.3 2.2
At 31 December 2022
Deposits from banks 5.1 2.7 (0.5) 7.3
Debt securities in issue 82.3 - (8.5) 73.8
Subordinated liabilities 12.9 - (2.2) 10.7
Total wholesale funding 100.3 2.7
Customer deposits 475.3 - - 475.3
Total 575.6 2.7
Analysis of total wholesale funding by residual maturity
Up to 1 1 to 3 3 to 6 6 to 9 9 to 12 1 to 2 2 to 5 Over Total at 30 Jun 2023 Total at 31 Dec 2022
£bn
£bn
month months months months months years years five years
£bn £bn £bn £bn £bn £bn £bn £bn
Deposits from banks 2.0 0.5 1.2 0.3 - - - - 4.0 5.1
Debt securities in issue:
Certificates of deposit 1.6 3.0 2.0 1.2 1.0 0.1 - - 8.9 7.2
Commercial paper 2.6 7.0 7.2 1.1 1.7 - - - 19.6 12.7
Medium-term notes - 1.5 1.1 1.0 2.0 12.7 14.5 9.9 42.7 45.3
Covered bonds - - - 1.1 1.1 2.7 5.6 2.2 12.7 14.1
Securitisation - - - - - 0.2 2.9 0.4 3.5 3.0
4.2 11.5 10.3 4.4 5.8 15.7 23.0 12.5 87.4 82.3
Subordinated liabilities - 0.6 - - - 1.8 3.5 6.2 12.1 12.9
Total wholesale funding(1) 6.2 12.6 11.5 4.7 5.8 17.5 26.5 18.7 103.5 100.3
(1) Excludes balances relating to margins of £2.1 billion (31 December
2022: £2.6 billion).
FUNDING AND LIQUIDITY RISK (continued)
Analysis of term issuance in half-year to 30 June 2023
Sterling US Dollar Euro Other Total
£bn £bn £bn currencies £bn
£bn
Securitisation(1) 1.1 - - - 1.1
Covered bonds 1.2 - 0.9 - 2.1
Senior unsecured notes - 1.1 1.6 0.9 3.6
Subordinated liabilities 0.8 - - - 0.8
Additional tier 1 0.8 1.0 - - 1.8
Total issuance 3.9 2.1 2.5 0.9 9.4
(1) Includes significant risk transfer securitisations.
Liquidity portfolio
At 30 June 2023, the banking business had £138.2 billion of highly liquid
unencumbered LCR eligible assets, based on a monthly rolling average over the
previous 12 months post any liquidity haircuts (31 December 2022: £144.7
billion). This comprises of £133.4 billion LCR level 1 eligible assets (31
December 2022: £140.4 billion) and £4.8 billion LCR level 2 eligible assets
(31 December 2022: £4.3 billion). These assets are available to meet cash and
collateral outflows and regulatory requirements. The Insurance business
manages a separate liquidity portfolio to mitigate insurance liquidity risk.
The banking business also has a significant amount of non-LCR eligible liquid
assets which are eligible for use in a range of central bank or similar
facilities. Future use of such facilities will be based on prudent liquidity
management and economic considerations, having regard for external market
conditions.
LCR eligible assets
Average
2023(1) 2022(2) Change
%
£bn £bn
Level 1
Cash and central bank reserves 84.6 84.7
High quality government/MDB/agency bonds(3) 46.5 53.6 (13)
High quality covered bonds 2.3 2.1 10
Total 133.4 140.4 (5)
Level 2(4) 4.8 4.3 12
Total LCR eligible assets 138.2 144.7 (4)
(1) Based on 12 months rolling simple average to 30 June 2023. Eligible
assets are calculated as a simple average of month-end observations over the
previous 12 months post any liquidity haircuts.
(2) Based on 12 months rolling simple average to 31 December 2022. Eligible
assets are calculated as a simple average of month-end observations over the
previous 12 months post any liquidity haircuts.
(3) Designated multilateral development bank (MDB).
(4) Includes Level 2A and Level 2B.
At 30 Jun 2023 At 30 Jun 2022 At 31 Dec 2022
Liquidity coverage ratio(1) 142% 142% 144%
Net stable funding ratio(2) 130% 130%
(1) The liquidity coverage ratio and its components are calculated as simple
averages of month-end observations over the previous 12 months.
(2) Net stable funding ratio is based on an average of the four previous
quarters.
FUNDING AND LIQUIDITY RISK (continued)
Encumbered assets
The Board and Group Asset and Liability Committee (GALCO) monitor and manage
total balance sheet encumbrance, including via a defined risk appetite. At 30
June 2023, the Group had £34.8 billion (31 December 2022: £35.5 billion) of
externally encumbered on-balance sheet assets with counterparties other than
central banks. The Group also had £711.4 billion (31 December 2022: £705.9
billion) of unencumbered on-balance sheet assets, and £136.6 billion
(31 December 2022: £132.0 billion) of pre-positioned and encumbered assets
held with central banks. The increase in the latter was primarily driven by
additional assets pre-positioned in the second quarter of 2023. Primarily, the
Group encumbers mortgages, unsecured lending, credit card receivables and car
loans through the issuance programmes and tradable securities through
securities financing activity. The Group mainly pre-positions mortgage assets
at central banks.
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 June 2023, the Group's
structural hedge had an approved capacity of £255 billion (stable on 31
December 2022) and a nominal balance of £255 billion.
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 previous half-year is driven by
reduced current account and variable rate savings deposit balances. 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.250 c.450 c.650
+25bps c.125 c.225 c.325
-25bps (c.150) (c.225) (c.325)
(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 June 2023 balance sheet position.
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