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Lloyds Banking Group PLC  -  LLOY   

2018 Half-Year Results

Released 07:00 01-Aug-2018

RNS Number : 3946W
Lloyds Banking Group PLC
01 August 2018
 

 

 

 

 

2018 Half-Year Results

News Release

 

Lloyds Banking Group plc

 

1 August 2018

 

 

 



 

 

 


BASIS OF PRESENTATION

This release covers the results of Lloyds Banking Group plc together with its subsidiaries (the Group) for the six months ended 30 June 2018.

IFRS 9 and IFRS 15: On 1 January 2018, the Group implemented IFRS 9 "Financial Instruments" and IFRS 15 "Revenue from Contracts with Customers". As permitted by IFRS 9 and IFRS 15, comparative information for previous periods has not been restated.

Statutory basis: Statutory information is out on pages 48 to 93. However, a number of factors have had a significant effect on the comparability of the Group's financial position and results. Accordingly, the results are also presented on an underlying basis.

Underlying basis: The statutory results are adjusted for certain items which are listed below, to allow a comparison of the Group's underlying performance:

−     restructuring, including severance-related costs, the costs of implementing regulatory reform including
ring-fencing, the rationalisation of the non-branch property portfolio, the integration of MBNA and Zurich's UK workplace pensions and savings business;

−     volatility and other items, which includes the effects of certain asset sales, the volatility relating to the Group's own debt and hedging arrangements and that arising in the insurance businesses, insurance gross up, the unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets;

−     payment protection insurance provisions.

Segment information: the segment results and balance sheet information have been restated to reflect incorporation of the Run-off segment into Commercial Banking, Retail and Central items. The underlying profit and statutory results at Group level are unchanged as a result of these restatements.

Remediation: Previously referred to as other conduct, remediation which excludes PPI is now included in underlying profit and the Group's cost:income ratio. The Group's and segmental results for the six months ended 30 June 2017 and 31 December 2017 have been restated to allow comparison.

MBNA: MBNA's results and balance sheet have been consolidated with effect from 1 June 2017.

Unless otherwise stated, income statement commentaries throughout this document compare the six months ended 30 June 2018 to the six months ended 30 June 2017, and the balance sheet analysis compares the Group balance sheet as at 30 June 2018 to the Group balance sheet as at 31 December 2017.

Alternative performance measures: The Group uses a number of alternative performance measures, including underlying profit, in the discussion of its business performance and financial position. Further information on these measures is set out on page 97.

 

FORWARD LOOKING STATEMENTS

This document contains certain forward looking statements with respect to the business, strategy, plans and /or results of the Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about the Group's or its directors' and/or management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future.  Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in interest rates, inflation, exchange rates, stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group's credit ratings; the ability to derive cost savings and other benefits including, but without limitation as a result of any acquisitions, disposals and other strategic transactions; changing customer behaviour including consumer spending, saving and borrowing habits; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, instability as a result of the exit by the UK from the European Union (EU) and the potential for other countries to exit the EU or the Eurozone  and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to the security of IT and operational infrastructure, systems, data and information resulting  from  increased threat of cyber and other attacks; natural, pandemic and other disasters, adverse weather and similar contingencies outside the Group's control; inadequate or failed internal or external processes or systems; acts of war, other acts of hostility, terrorist acts and responses to those acts, geopolitical, pandemic or other such events; changes in laws, regulations, practices and accounting standards or taxation, including as a result of the exit by the UK from the EU, or a further possible referendum on Scottish independence; changes to regulatory capital or liquidity requirements and similar contingencies outside the Group's control; the policies, decisions and actions of governmental or regulatory authorities or courts in the UK, the EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation together with any resulting impact on the future structure of the Group; the ability to attract and retain senior management and other employees and meet its diversity objectives; actions or omissions by the Group's directors, management or employees including industrial action; changes to the Group's post-retirement defined benefit scheme obligations; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; the value and effectiveness of any credit protection purchased by the Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services, lending companies and digital innovators and disruptive technologies; and exposure to regulatory or competition scrutiny, legal, regulatory or competition proceedings, investigations or complaints. Please refer to the latest Annual Report on Form 20-F filed with the US Securities and Exchange Commission for a discussion of certain factors and risks together with examples of forward looking statements. Except as required by any applicable law or regulation, the forward looking statements contained in this document are made as of today's date, and the Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this document to reflect any change in the Group's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The information, statements and opinions contained in this document do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments

CONTENTS

 



 

Page 

Key highlights

Consolidated income statement

Balance sheet and capital

Quarterly information

Summary consolidated balance sheet

Group Chief Executive's statement

Summary of Group results

Underlying basis - segmental analysis

13 

 

 

Divisional results

 

Retail

15 

Commercial Banking

17 

Insurance and Wealth

19 

Central items

21 

 

 

Other financial information

 

Reconciliation between statutory and underlying basis results

22 

Banking net interest margin and average-interest-earning assets

23 

Volatility arising in insurance businesses

23 

Tangible net assets per share

24 

Return on tangible equity

24 

 

 

Risk management

 

Principal risks and uncertainties

25 

Credit risk portfolio

26 

Funding and liquidity management

34 

Capital management

39 

 

 

Statutory information

 

Primary statements

48 

Consolidated income statement

49 

Consolidated statement of comprehensive income

50 

Consolidated balance sheet

51 

Consolidated statement of changes in equity

53 

Consolidated cash flow statement

56 

Notes to the consolidated financial statements

57 

 

 

Summary of alternative performance measures

97 

 

 

Contacts

98 

 

 

 

 


RESULTS FOR THE HALF-YEAR

 

We have delivered another strong financial performance with increased statutory profits, higher returns, and a strong capital build.

 

There has been significant business progress including the successful delivery of Open Banking, the launch of Lloyds Bank Corporate Markets and the planned integration of MBNA and Zurich's UK workplace pensions and savings business.

 

In February we announced an ambitious strategy to transform the Group for continued success in a digital world. We have made a strong start in implementing the strategic initiatives which will further digitise the Group, enhance customer propositions, maximise our capabilities as an integrated financial services provider and transform the way we work.

 

Our differentiated UK business model continues to deliver with our multi brand, multi channel approach, cost leadership, low risk positioning, investment capacity and execution capabilities positioning us well for sustainable success and continuing to deliver our purpose of Helping Britain Prosper.

 

António Horta-Osório

Group Chief Executive

 

 

Significant business progress with strong start to the Group's latest strategic plan

·     Successful delivery including Open Banking, the launch of Lloyds Bank Corporate Markets and the planned integration of MBNA and Zurich's UK workplace pensions and savings business

·     Strong start to GSR 3 with increased strategic investment, together with a reduction in the underlying cost base

·     Continued growth in targeted segments, including SME, consumer finance and financial planning and retirement

 

Delivering a strong and sustainable financial performance

·     Statutory profit after tax of £2.3 billion, up 38 per cent, and return on tangible equity of 12.1 per cent

·     Earnings per share increased 45 per cent to 2.9 pence per share reflecting the improved profitability

·     Underlying profit increased 7 per cent to £4.2 billion reflecting increased income and lower total costs

·     Net income of £9.0 billion, 2 per cent higher reflecting an improved margin of 2.93 per cent, higher average interest earning assets at £436 billion and other income of £3.1 billion following a good second quarter

·     Operating costs flat, despite increased investment and inclusion of the MBNA cost base; cost:income ratio further improved to 47.7 per cent (including remediation) and 44.9 per cent (excluding remediation)

·     Credit quality remains strong with no deterioration in credit risk indicators; gross asset quality ratio stable at 27 basis points, with increase in net asset quality ratio to 20 basis points reflecting expected lower releases and write-backs

·     Strong capital build of 121 basis points, including 25 basis points from the sale of the Irish mortgage portfolio, with pro forma CET1 ratio, pre dividend, of 15.1 per cent

·     Group's Pillar 2A CET1 requirement reduced from 3.0 per cent to 2.7 per cent

·     Increased interim ordinary dividend of 1.07 pence per share, in line with the Board's progressive and sustainable policy

·     Tangible net assets per share increased to 52.1 pence per share

 

Improved guidance for 2018

·     Capital increase now expected to be c.200 basis points, pre dividend

·     Net interest margin for the full year now expected to be in line with the first half of 2018

·     Asset quality ratio now expected to be less than 25 basis points



 

CONSOLIDATED INCOME STATEMENT − UNDERLYING BASIS

 












 



Half-year 


Half-year 




Half-year 





to 30 June 


to 30 June 




to 31 Dec 





2018 


2017 


Change 


2017 


Change 


    

£m 

    

£m 

    

% 

    

£m 


% 












Net interest income


 6,344 


 5,925 


7 


 6,395 


(1) 

Other income


 3,124 


 3,348 


(7) 


 2,857 


9 

Total income


 9,468 


 9,273 


2 


 9,252 


2 

Operating lease depreciation


 (497) 


 (495) 


- 


 (558) 


11 

Net income


 8,971 


 8,778 


2 


 8,694 


3 

Operating costs


 (4,024) 


 (4,018) 


- 


 (4,166) 


3 

Remediation


 (257) 


 (540) 


52 


 (325) 


21 

Total costs


 (4,281) 


 (4,558) 


6 


 (4,491) 


5 

Impairment


 (456) 


 (268) 


(70) 


 (527) 


13 

Underlying profit


 4,234 


 3,952 


7 


 3,676 


15 

Restructuring


 (377) 


 (321) 


(17) 


 (300) 


(26

Volatility and other items


 (190) 


 (37) 




 (45) 



Payment protection insurance provision


 (550) 


 (1,050) 


48 


 (600) 


8 

Statutory profit before tax


 3,117 


 2,544 


23 


 2,731 


14 

Tax expense


 (850) 


 (905) 


6 


 (823) 


(3) 

Statutory profit after tax


 2,267 


 1,639 


38 


 1,908 


19 












Earnings per share


2.9p 


2.0p 


45 


2.4p 


21 












Banking net interest margin


2.93% 


2.82% 


11bp 


2.90% 


3bp 

Average interest-earning banking assets


£436bn 


£431bn 


1 


£439bn 


(1) 

Cost:income ratio including remediation


47.7% 


51.9% 


(4.2)pp 


51.7% 


(4.0)pp 

Asset quality ratio


0.20% 


0.12% 


8bp 


0.24% 


(4)bp 

Underlying return on tangible equity


16.3% 


14.5% 


1.8pp 


13.6% 


2.7pp 

Return on tangible equity


12.1% 


8.2% 


3.9pp 


9.7% 


2.4pp 

 

 

BALANCE SHEET AND CAPITAL

 












 



At 30 June


At 1 Jan




At 31 Dec




  

2018

  

2018


Change


2017


Change





(adjusted)1


%


(reported)


%












Loans and advances to customers2


£442bn


£444bn


-


£456bn


(3)

Customer deposits3


£418bn


£416bn


-


£416bn


-

Loan to deposit ratio


106%


107%


(1.1)pp


110%


(4.1)pp

Pro forma CET1 ratio pre 2018 dividend accrual4


15.1%


13.9%


1.2pp


13.9%


1.2pp

Pro forma CET1 ratio4


14.5%


13.9%


0.6pp


13.9%


0.6pp

Pro forma transitional MREL ratio4


29.7%


26.0%


3.7pp


26.0%


3.7pp

Pro forma UK leverage ratio4


5.3%


5.4%


(0.1)pp


5.4%


(0.1)pp

Risk-weighted assets


£211bn


£211bn


-


£211bn


-

Pro forma risk-weighted assets4


£207bn


£211bn


(2)


£211bn


(2)

Tangible net assets per share


52.1p


51.7p


0.4p


53.3p


(1.2)p

 

1

Adjusted to reflect the impact of applying IFRS 9 from 1 January 2018, with transitional arrangements applied for capital.

2

Excludes reverse repos of £26.7 billion (31 December 2017: £16.8 billion).

3

Excludes repos of £4.0 billion (31 December 2017: £2.6 billion).

4

The CET1, leverage and transitional MREL ratios at 30 June 2018 and 31 December 2017 are reported on a pro forma basis, reflecting dividends declared by Insurance but paid in the subsequent reporting period. In addition the pro forma ratios and pro forma risk-weighted assets at 30 June 2018 reflect the sale of the Irish mortgage portfolio. The CET1 ratio at 31 December 2017 is reported post share buy back.



 

 

QUARTERLY INFORMATION

 
















Quarter 


Quarter 


Quarter 


Quarter 


Quarter 


Quarter 



ended 


ended 


ended 


ended 


ended 


ended 



30 June 


31 Mar 


31 Dec 


30 Sept 


30 June 


31 March 



2018 


2018 


2017 


2017 


2017 


2017 


  

£m 

  

£m 

  

£m 

  

£m 

  

£m 


£m 














Net interest income


 3,173


 3,171


 3,203


 3,192


 2,997


 2,928

Vocalink gain on sale


 -


 -


 -


 -


 146


 -

Other income


 1,713


 1,411


 1,429


 1,428


 1,720


 1,482

Total income


 4,886


 4,582


 4,632


 4,620


 4,863


 4,410

Operating lease depreciation


 (245)


 (252)


 (284)


 (274)


 (263)


 (232)

Net income


 4,641


 4,330


 4,348


 4,346


 4,600


 4,178

Operating costs


 (2,016)


 (2,008)


 (2,165)


 (2,001)


 (2,050)


 (1,968)

Remediation


 (197)


 (60)


 (325)


 -


 (340)


 (200)

Total costs


 (2,213)


 (2,068)


 (2,490)


 (2,001)


 (2,390)


 (2,168)

Impairment


 (198)


 (258)


 (257)


 (270)


 (141)


 (127)

Underlying profit


 2,230


 2,004


 1,601


 2,075


 2,069


 1,883

Restructuring


 (239)


 (138)


 (152)


 (148)


 (164)


 (157)

Volatility and other items


 (16)


 (174)


 (69)


 24


 35


 (72)

Payment protection insurance provision


 (460)


 (90)


 (600)


 -


 (700)


 (350)

Statutory profit before tax


 1,515


 1,602


 780


 1,951


 1,240


 1,304

Tax expense


 (395)


 (455)


 (342)


 (481)


 (491)


 (414)

Statutory profit after tax


 1,120


 1,147


 438


 1,470


 749


 890














Cost:income ratio including remediation


47.7%


47.8%


57.3%


46.0%


52.0%


51.9%

Cost:income ratio excluding remediation


43.4%


46.4%


49.8%


46.0%


44.6%


47.1%

Asset quality ratio


0.18%


0.23%


0.23%


0.24%


0.13%


0.12%

 

 

 

 

 

 

 



 

SUMMARY CONSOLIDATED BALANCE SHEET

 










At 30 June


At 1 Jan


At 31 Dec



2018


20181


2017


    

£m

    

£m

    

£m








Assets







Cash and balances at central banks


 67,948


 58,521


 58,521

Financial assets at fair value through profit or loss


 172,361


 176,008


 162,878

Derivative financial instruments


 26,955


 25,474


 25,834

Loans and advances to banks


 6,674


 4,246


 6,611

Loans and advances to customers


 469,025


 461,016


 472,498

Debt securities


 4,281


 3,314


 3,643

Financial assets at amortised cost


 479,980


 468,576


 482,752

Financial assets at fair value through other comprehensive income


 31,300


 42,917



Available-for-sale financial assets






 42,098

Other assets


 51,235


 39,686


 40,026

Total assets


 829,779


 811,182


 812,109








Liabilities







Deposits from banks


 30,934


 29,804


 29,804

Customer deposits


 421,609


 418,124


 418,124

Financial liabilities at fair value through profit or loss


 45,777


 50,935


 50,877

Derivative financial instruments


 25,561


 26,124


 26,124

Debt securities in issue


 90,293


 72,402


 72,450

Liabilities arising from insurance and investment contracts


 118,703


 118,860


 118,860

Subordinated liabilities


 17,637


 17,922


 17,922

Other liabilities


 30,722


 29,059


 28,805

Total liabilities


 781,236


 763,230


 762,966








Shareholders' equity


 42,940


 42,360


 43,551

Other equity instruments


 5,355


 5,355


 5,355

Non-controlling interests


 248


 237


 237

Total equity


 48,543


 47,952


 49,143

Total equity and liabilities


 829,779


 811,182


 812,109

 



1

Adjusted to reflect the implementation of IFRS 9 and IFRS 15.

 [



GROUP CHIEF EXECUTIVE'S STATEMENT

 

We have delivered a strong and sustainable financial performance in the first half of 2018 with increased statutory profit, higher returns and a strong capital build. We have made significant progress in the last six months and are already delivering against the ambitious targets we set out in our new transformational strategy in February. As a simple, low risk, customer focused financial services provider we are well placed to succeed in a digital world and help Britain prosper.

 

Operating environment

The UK faces a period of political and economic uncertainty in the run-up to the UK's departure from the European Union, however the UK economy remains resilient and, excluding the impact of adverse weather, continues to demonstrate robust growth. The economy is benefiting from the highest employment rate in half a century and household indebtedness remains significantly below pre-crisis levels, with strong growth in the world economy also positive for UK exports.

 

Financial Performance

In the first six months we have again delivered a strong and sustainable financial performance. Underlying profit increased 7 per cent to £4.2 billion, driven by higher income and lower total costs, with statutory profit after tax increasing 38 per cent to £2.3 billion. Earnings per share increased 45 per cent to 2.9 pence per share reflecting the improved profitability while statutory return on tangible equity continued to increase and is now 12.1 per cent. Asset quality remains strong and we have seen no deterioration in the portfolio. The strong performance has also enabled capital build of 121 basis points, with the Group's CET1 ratio increasing to 15.1 per cent, on a pro forma basis.

 

The Board has recommended an interim ordinary dividend of 1.07 pence per share, in line with the Group's progressive and sustainable ordinary dividend policy. Good progress has also been made on the share buy back that was announced with full year results, which commenced in March and is now nearing completion. To date, we have bought back approximately 1.2 billion shares, with around 75 per cent of the £1 billion buy back already fulfilled.

 

We have continued to de-risk the balance sheet. In July the Prudential Regulation Authority (PRA) reduced the Group's Pillar 2A CET1 requirement to 2.7 per cent from 3.0 per cent. The Board's view of the level of CET1 capital required remains at c.13 per cent, plus a management buffer of around 1 per cent.

 

Business and strategic progress

In the first six months we have made significant business progress, successfully delivering Open Banking, launching Lloyds Bank Corporate Markets and continuing the planned integration of the MBNA credit card book and Zurich's UK workplace pension and savings business. These provide a strong platform for the next phase of our development.

 

In February we announced an ambitious strategy to transform the Group for success in a digital world. We have made a strong start in implementing the strategic initiatives which will further digitise the Group, enhance customer propositions, maximise our capabilities as an integrated financial services provider and transform the way we work.

 

The Group's cost discipline continues to be a competitive advantage and enables greater investment capacity and increased returns. Our market leading cost efficiency and reducing cost base are being achieved together with more than £3 billion of strategic investment over the next 3 years, a 40 per cent increase on the previous plan, which enables the transformation required to exceed customer expectations and succeed in a digital world. This transformation will generate further cost reductions, which will enable us to reduce our operating costs to less than £8 billion in 2020. It will also enable us to further enhance the customer experience and continue to both improve our financial performance and to help Britain prosper.

 



 

We operate the UK's largest branch network and the largest digital bank in the UK and continue to grow the digital bank with active users increasing to almost 14 million, including around 10 million mobile banking users. In the first half we re-platformed our mobile app enabling enhanced functionality and reducing future delivery times. We have also continued to reshape our branch network which includes our recently opened flagship branches that demonstrate improved productivity and customer satisfaction. We have also added to our fleet of mobile branches, which now cover 190 locations, and supports our commitment to maintaining the largest branch network in the UK.

 

Our increased technology spend, which now represents about 15 per cent of the Group's cost base, is allowing us to create efficiencies and make banking easier for customers. By enhancing machine learning and leveraging robotics, we have released c.115,000 hours of colleague capacity. We have also rolled out a single customer view platform across all three banking brands, creating a progressive single home for banking and insurance needs, with targeted customer numbers of more than 3 million by the end of the year.

 

As part of our Helping Britain Prosper Plan we have continued to boost support to key sectors of the economy. In the first half of the year, we launched a £2 billion Clean Growth Financing Initiative, providing discounted funding to help British businesses reduce environmental impacts and benefit from the transition to a low carbon economy. We have lent £6 billion to first time buyers and also continued to grow lending to targeted segments, including SME and consumer finance, whilst growing financial planning and retirement assets under administration by 14 per cent, or over £9 billion.

 

Guidance

As a result of the strong performance in the last six months, we have upgraded our financial guidance for 2018. We now expect net interest margin to be in line with the first half of the year, the asset quality ratio to be less than 25 basis points and for capital build to be c.200 basis points, at the top end of our guided range. All other longer term guidance remains unchanged.

 

Outlook

Our differentiated, customer focused business model continues to deliver with our multi brand, multi channel approach, cost leadership, low risk positioning, investment capacity and execution capabilities positioning us well for sustainable success in a digital world. As a result we believe that this strategy will allow us to continue to help Britain prosper whilst continuing to deliver strong and sustainable returns for shareholders.

 

António Horta-Osório

Group Chief Executive



 

SUMMARY OF GROUP RESULTS

 

Strong financial performance with continued improvements in statutory and underlying profit and returns

The Group's statutory profit before tax of £3,117 million was 23 per cent higher than in the first half of 2017, whilst profit after tax of £2,267 million was 38 per cent higher, both driven by increased underlying profit and a lower PPI charge. Statutory return on tangible equity improved by 3.9 percentage points to 12.1 per cent.

 

Underlying profit was £4,234 million, 7 per cent higher than in the first half of 2017 with higher net income and lower total costs partly offset by the expected higher impairment charge. The underlying return on tangible equity increased to 16.3 per cent.

 

The balance sheet remains strong with the Group's CET1 capital ratio increasing by 121 basis points, on a pro forma basis, to 15.1 per cent pre dividend and to 14.5 per cent post dividend (31 December 2017: 13.9 per cent pro forma post dividend and share buy back). The capital build includes the impact of the interim Insurance dividend paid in July 2018 and the sale of the Irish mortgage portfolio (25 basis points) which will complete later in the third quarter.

 

Net income














Half-year


Half-year




Half-year



 



to 30 June


to 30 June




to 31 Dec



 



2018


2017


Change


2017


Change

 



£m


£m


%


£m


%

 












 

Net interest income


 6,344


 5,925


7


 6,395


(1)

 

Vocalink gain on sale


 -


 146




 -



 

Other income


 3,124


 3,202


(2)


 2,857


9

 

Total income


 9,468


 9,273


2


 9,252


2

 

Operating lease depreciation1


 (497)


 (495)


-


 (558)


11

 

Net income


 8,971


 8,778


2


 8,694


3

 












 

Banking net interest margin


2.93%


2.82%


11bp


2.90%


3bp

 

Average interest-earning banking assets


£436.4bn


£430.9bn


1


£438.8bn


(1)

 

 

1

Net of profits on disposal of operating lease assets of £29 million (half year to 30 June 2017: £17 million; half-year to 31 December 2017: £15 million).

 

Further detail on net interest income is included on page 23.

 

Net income at £8,971 million was 2 per cent higher than in the first half of 2017 with growth in net interest income partly offset by lower other operating income.

 

Net interest income at £6,344 million increased by 7 per cent reflecting an improved net interest margin and increased average interest-earning banking assets which were 1 per cent higher at £436 billion. The net interest margin increased by 11 basis points to 2.93 per cent with lower deposit and wholesale funding costs more than offsetting continued pressure on asset margins. The margin also benefitted from changing product mix and growth in consumer finance, including the acquisition of MBNA.

 

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 2018 the Group was fully hedged with a nominal balance of £171 billion (31 December 2017: £165 billion) and an average duration of around 4.1 years (31 December 2017: c.3 years). The Group generated £1.3 billion of income from the structural hedge balances in the period (half-year to 30 June 2017: £1.2 billion) with a fixed earnings rate of approximately 0.9 per cent over LIBOR.

 

Given the strong performance, the Group now expects net interest margin for 2018 to be in line with the first half of 2018 and for the margin to remain resilient over the plan period.



 

Other income at £3,124 million reflected a good second quarter and excluding the £146 million gain on the sale of Vocalink recognised in the first half of 2017, was slightly down year on year.

 

The good performance in the second quarter of £1.7 billion was primarily driven by Insurance with higher new business volumes and increased contributions in workplace pensions, increased income from bulk annuities, and lower weather related insurance claims. Commercial Banking was also up in the quarter driven by increased markets activity whilst Retail income was stable. Other income in the half includes a gain of £191 million on the sale of £11 billion of gilts and other liquid assets, compared with a £146 million gain from the £5 billion sale of such assets in the first half of 2017.

 

The Group now expects 2018 other income to be broadly in line with 2017 excluding Vocalink.

 

Total costs














Half-year


Half-year




Half-year





to 30 June


to 30 June




to 31 Dec





2018


2017


Change


2017


Change



£m


£m


%


£m


%












Operating costs


 4,024


 4,018


-


 4,166


3

Remediation


 257


 540


52


 325


21

Total costs


 4,281


 4,558


6


 4,491


5












Cost:income ratio including remediation


47.7%


51.9%


(4.2)pp


51.7%


(4.0)pp

Cost:income ratio excluding remediation


44.9%


45.8%


(0.9)pp


47.9%


(3.0)pp

 

Operating costs at £4,024 million were flat compared to the first half of 2017, despite increased investment and inclusion of the MBNA cost base.

 

The Group continues to focus on reducing its underlying cost base, and before investment and the inclusion of MBNA operating costs reduced by 7 per cent, largely driven by increased efficiency from digitalisation, process improvement and better procurement. This cost discipline creates capacity for increased investment with investment expensed and depreciation up 14 per cent in the period.

 

Remediation charges were 52 per cent lower at £257 million and included additional charges of £197 million in the second quarter. The additional provision covers a number of small items and largely relates to incremental costs of existing programmes.

 

The Group's market leading cost:income ratio continues to provide competitive advantage and improved further to 47.7 per cent with positive jaws of 8 per cent. The Group's cost:income ratio excluding remediation also improved to 44.9 per cent.

 

The Group continues to target a cost:income ratio (including remediation) in the low 40's exiting 2020, with reductions every year, and for operating costs to be lower than £8 billion in 2020.



 

Impairment














Half-year


Half-year




Half-year



 



to 30 June


to 30 June




to 31 Dec



 



2018


2017


Change


2017


Change

 



£m


£m


%


£m


%

 












 

Impairment charge


456


268


(70)


527


13

 

Asset quality ratio


0.20%


0.12%


8bp


0.24%


(4)bp

 

Gross asset quality ratio


0.27%


0.23%


4bp


0.33%


(6)bp

 

 



At 30 June


At 1 Jan





2018


2018


Change



%


%










Stage 3 loans and advances to customers as a % of total


 1.8


 1.9


(0.1)pp

Stage 3 ECL1 allowance as a % of Stage 3 drawn balances


 25.2


 24.0


1.2pp

 



1

Expected credit loss.

 

Asset quality across the portfolio remains strong and stable with no deterioration in credit risk indicators. The Group's loan portfolios continue to be well positioned, reflecting our continued prudent through the cycle approach to credit risk, and benefiting from continued low interest rates and a resilient UK economy.

 

The gross asset quality ratio at 27 basis points remains in line with full year 2017 and 2016, despite the inclusion of MBNA. On a net basis the asset quality ratio increased to 20 basis points reflecting expected lower releases and write-backs. The impairment charge increased to £456 million in the first half of 2018, again reflecting lower releases and write-backs.

 

Stage 3 loans at £8.7 billion as a proportion of total loans and advances to customers have reduced to 1.8 per cent (1 January 2018: 1.9 per cent), while at the same time coverage of Stage 3 drawn balances has increased to 25.2 per cent (1 January 2018: 24.0 per cent).

 

Overall credit performance in the UK mortgage book remains stable. The average loan to value reduced again to 43.5 per cent (31 December 2017: 43.6 per cent) while the proportion of lending with an LTV of greater than 90 per cent remained low at 2.5 per cent (31 December 2017: 2.5 per cent). No deterioration is being seen in the portfolio with new to arrears as a proportion of total lending continuing to fall.

 

The unsecured portfolios also continue to perform strongly with new to arrears rates remaining stable and the MBNA portfolio performing in line with the Group's expectations. The UK motor finance book continues to perform well given resilient car prices and is benefiting from our conservative approach to residual values and prudent provisioning, including a £200 million residual value and specific event provision.

 

The Commercial Banking portfolio continues to benefit from effective risk management, a resilient economic environment and continued low interest rates with the increased impairment charge driven by lower releases and write-backs.

 

The Group now expects the asset quality ratio to be less than 25 basis points in 2018 and continues to expect less than 30 basis points through the plan period. The Group continues to expect asset quality to remain strong but with further reductions in releases and write-backs.

 



 

Statutory profit














Half-year 


Half-year 




Half-year 





to 30 June 


to 30 June 




to 31 Dec 





2018 


2017 


Change


2017 


Change


   

£m 


£m 


%


£m 


%












Underlying profit


 4,234 


 3,952 


7


 3,676 


15

Restructuring


 (377) 


 (321) 


(17)


 (300) 


(26)

Volatility and other items











Market volatility and asset sales


 34 


 136 




 143 


(76)

Amortisation of purchased intangibles


 (53) 


 (38) 


(39)


 (53) 


-

Fair value unwind and other


 (171) 


 (135) 


(27)


 (135) 


(27)



 (190) 


 (37) 




 (45) 



Payment protection insurance provision


 (550) 


 (1,050) 


48


 (600) 


8

Statutory profit before tax


 3,117 


 2,544 


23


 2,731 


14

Tax expense


 (850) 


 (905) 


6


 (823) 


(3)

Statutory profit after tax


 2,267 


 1,639 


38


 1,908 


19

 

Further information on the reconciliation of underlying to statutory results is included on page 22.

 

Statutory profit before tax of £3,117 million (2017: £2,544 million) increased 23 per cent, driven by the increased underlying profit and lower PPI charge. Statutory profit after tax increased by 38 per cent to £2,267 million (2017: £1,639 million).

 

Restructuring costs of £377 million included £155 million for severance costs relating to the Group's strategic investment plans as well as the costs of the integration of MBNA and Zurich's UK workplace pensions and savings business, implementing regulatory reform and ring-fencing and the rationalisation of the non-branch property portfolio.

 

Market volatility and asset sales of £34 million included positive banking and insurance volatility, partly offset by the £105 million loss on sale of the Irish mortgage portfolio and an adjustment to past service pension liability.

 

The PPI charge of £550 million included an additional £460 million in the second quarter and now covers claims volumes of approximately 13,000 per week until the deadline in August 2019, compared to the 11,000 run rate previously assumed. The outstanding balance sheet provision at 30 June 2018 was £2 billion.

 

Tax expense

The tax expense was £850 million (2017: £905 million) representing an effective tax rate of 27 per cent (2017: 36 per cent). The high effective tax rate in the first half of 2017 of 36 per cent largely reflected the restrictions on deductibility of conduct provisions, which included remediation.

 

The Group continues to expect the effective tax rate to reduce to around 25 per cent in 2020.

 

Return on tangible equity

The return on tangible equity was 12.1 per cent up from 8.2 per cent in the first half of 2017, reflecting the increase in statutory profit after tax. The underlying return on tangible equity increased to 16.3 per cent (half-year to 30 June 2017: 14.5 per cent) primarily reflecting increased underlying profit.



 

Balance sheet














At 30 June


At 1 Jan




At 31 Dec




  

2018

  

2018


Change


2017


Change





(adjusted)1


%


(reported)


%












Loans and advances to customers2


£442bn


£444bn


-


£456bn


(3)

Customer deposits3


£418bn


£416bn


-


£416bn


-

Loan to deposit ratio


106%


107%


(1.1)pp


110%


(4.1)pp












Wholesale funding


£122bn


£101bn


21


£101bn


21

Wholesale funding <1 year maturity


£38bn


£29bn


32


£29bn


32

Of which money-market funding <1 year maturity4


£25bn


£15bn


70


£15bn


70

Liquidity coverage ratio - eligible assets


£129bn






£121bn


7

Liquidity coverage ratio5


129%






127%


2.0pp

 



1

Adjusted to reflect the impact of applying IFRS 9 from 1 January 2018, with transitional arrangements applied for capital.

2

Excludes reverse repos of £26.7 billion (31 December 2017: £16.8 billion).

3

Excludes repos of £4.0 billion (31 December 2017: £2.6 billion).

4

Excludes balances relating to margins of £4.0 billion (31 December 2017: £2.1 billion) and settlement accounts of £1.7 billion (31 December 2017: £1.5 billion).

5

Liquidity coverage ratio at 30 June 2018 has been prepared on a Group consolidated basis.

 

Group loans and advances to customers fell slightly to £442 billion with growth in targeted segments more than offset by the £4 billion sale of the Irish residential mortgage portfolio. Over the last six months, SME and Motor Finance have continued to grow whilst the open mortgage book of £267 billion is in line with the start of the year. The Group continues to expect the year end position for open mortgages to be slightly higher than the end of 2017.

 

Loans and advances to customers were adjusted on adoption of IFRS 9, resulting in an £11.5 billion reduction to £444 billion on 1 January 2018. This was primarily due to the reclassification of certain assets transferred from the banking business to the insurance business in recent years which have been designated at fair value, in common with other assets within the Insurance business, as well as assets which have failed the solely payments of principal and interest test.

 

The loan to deposit ratio was down slightly at 106 per cent. Wholesale funding increased by 21 per cent to £122 billion compared with £101 billion at 31 December 2017 reflecting increased term issuance following the end of the Bank of England's Term Funding Scheme and an increase to our liquidity position during the period of the ring-fencing transfers through additional short term money market funding.

 

The Group's liquidity surplus exceeds the regulatory minimum and internal risk appetite with a Liquidity Coverage Ratio of 129 per cent based on the EU Delegated Act at 30 June 2018 (31 December 2017: 127 per cent).

 



 

Capital














At 30 June


At 1 Jan




At 31 Dec



 



2018

  

2018


Change


2017


Change

 





(adjusted)1


%


(reported)


%

 












 

Pro forma CET1 ratio pre 2018 dividend accrual2


15.1%


13.9%


1.2pp


13.9%


1.2pp

 

Pro forma CET1 ratio2


14.5%


13.9%


0.6pp


13.9%


0.6pp

 

Transitional total capital ratio


21.6%


21.2%


0.4pp


21.2%


0.4pp

 

Pro forma transitional MREL ratio2


29.7%


26.0%


3.7pp


26.0%


3.7pp

 

Pro forma UK leverage ratio2


5.3%


5.4%


(0.1)pp


5.4%


(0.1)pp

 

Risk-weighted assets


£211bn


£211bn


-


£211bn


-

 

Pro forma risk-weighted assets2


£207bn


£211bn


(2)


£211bn


(2)

 












 

Shareholders' equity


£43bn


£42bn


2


£44bn


(1)

 

Tangible net assets per share


52.1p


51.7p


0.4p


53.3p


(1.2)p

 

 

1

Adjusted to reflect the impact of applying IFRS 9 from 1 January 2018, with transitional arrangements applied for capital.

2

The CET1, leverage and transitional Minimum Requirement for Own Funds and Eligible Liabilities (MREL) ratios at 30 June 2018 and 31 December 2017 are reported on a pro forma basis, reflecting dividends declared by Insurance but paid in the subsequent reporting period. In addition the pro forma ratios and pro forma risk-weighted assets at 30 June 2018 reflect the sale of the Irish mortgage portfolio. The CET1 ratio at 31 December 2017 is reported post share buy back.

 

The Group's CET1 ratio has strengthened to 15.1 per cent on a pro forma basis, pre dividend, an increase of 121 basis points in the first half of the year. The increase includes 111 basis points generated from underlying banking profits, 8 basis points relating to the interim dividend received from the Insurance business, 25 basis points in relation to the sale of the Irish mortgage portfolio, and 5 basis points from market and other movements. These impacts were partially offset by 28 basis points for PPI charges. Post dividend accrual, the Group's pro forma CET1 ratio was 14.5 per cent (14.1 per cent excluding the impact of the interim Insurance dividend and the sale of the Irish mortgage portfolio)

 

The Group remains highly capital generative and given the strong first half, the Group now expects the CET1 build to be c.200 basis points pre dividend in 2018. The Group continues to expect to deliver 170 to 200 basis points every year, pre dividend, on an ongoing basis.

 

In July 2018, the Prudential Regulation Authority (PRA) reduced the Group's Pillar 2A CET1 requirement to 2.6 per cent from 3.0 per cent. It will increase to 2.7 per cent from 1 January 2019 following entry into force of the UK's ring-fencing regime. The Board's view of the level of CET1 capital required remains at c.13 per cent, plus a management buffer of around 1 per cent.

 

Total capital ratio remains strong at 21.6 per cent and the Group remains well positioned to meet its MREL from 2020 with a pro forma transitional MREL ratio at 30 June 2018 of 29.7 per cent (31 December 2017: 26.0 per cent pro forma). The leverage ratio on a pro forma basis was in line with the start of the year at 5.3 per cent (31 December 2017: 5.4 per cent).

 

Tangible net assets per share increased 3.3 pence to 55.0 pence, pre dividends and share buy-back. This reflects a 3.5 pence increase for statutory profit, before a reduction of 0.8 pence for the PPI charge, and a 0.6 pence benefit from reserve movements. After reflecting the payment of the dividend and the impact of the share buy-back, equivalent to 2.9 pence, tangible net assets increased to 52.1 pence (1 January 2018: 51.7 pence).

 

Dividend

The Board has recommended an interim ordinary dividend of 1.07 pence per share, in line with our policy to maintain a progressive and sustainable ordinary dividend.

 

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 buy back programme of up to £1 billion. This commenced in March 2018 and at the time of issuing results is c.75 per cent complete having purchased c.1.2 billion shares.

UNDERLYING BASIS - SEGMENTAL ANALYSIS

 












Half-year to 30 June 2018











 





Commercial 


Insurance 


Central 



 



Retail 


Banking 


and Wealth 


items 


Group 

 


  

£m 

  

£m 

  

£m 

  

£m 

  

£m 

 












 

Net interest income


 4,514 


 1,497 


 60 


 273 


 6,344 

 

Other income


 1,089 


 840 


 979 


 216 


 3,124 

 

Total income


 5,603 


 2,337 


 1,039 


 489 


 9,468 

 

Operating lease depreciation


 (477) 


 (20) 


 - 


 - 


 (497) 

 

Net income


 5,126 


 2,317 


 1,039 


 489 


 8,971 

 

Operating costs


 (2,410) 


 (1,061) 


 (534) 


 (19) 


 (4,024) 

 

Remediation


 (91) 


 (75) 


 (25) 


 (66) 


 (257) 

 

Total costs


 (2,501) 


 (1,136) 


 (559) 


 (85) 


 (4,281) 

 

Impairment


 (461) 


 (15) 


 - 


 20 


 (456) 

 

Underlying profit


 2,164 


 1,166 


 480 


 424 


 4,234 

 












 

Banking net interest margin


2.69%


3.32%






2.93%

 

Average interest-earning banking assets


£342.0bn


£90.3bn


£0.8bn


£3.3bn


£436.4bn

 

Asset quality ratio


0.27%


0.02%






0.20%

 

Return on risk-weighted assets


4.74%


2.71%






4.05%

 

Loans and advances to customers1


£340.8bn


£97.3bn


£0.8bn


£3.4bn


£442.3bn

 

Customer deposits2


£254.6bn


£148.5bn


£13.6bn


£0.9bn


£417.6bn

 

Risk-weighted assets


£93.2bn


£86.2bn


£1.3bn


£30.0bn


£210.7bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year to 30 June 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial 

 

Insurance 

 

Central 

 

 

 

 

Retail

 

Banking

 

and Wealth 

 

Items

 

Group 

 

  

£m 

  

£m 

  

£m 

  

£m 

  

£m 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 4,182 

 

 1,488 

 

 72 

 

 183 

 

 5,925 

Vocalink gain on sale

 

 - 

 

 - 

 

 - 

 

 146 

 

 146 

Other income excluding Vocalink

 

 1,148 

 

 994 

 

 939 

 

 121 

 

 3,202 

Total income

 

 5,330 

 

 2,482 

 

 1,011 

 

 450 

 

 9,273 

Operating lease depreciation

 

 (449) 

 

 (45) 

 

 - 

 

 (1) 

 

 (495) 

Net income

 

 4,881 

 

 2,437 

 

 1,011 

 

 449 

 

 8,778 

Operating costs

 

 (2,349) 

 

 (1,085) 

 

 (556) 

 

 (28) 

 

 (4,018) 

Remediation

 

 (370) 

 

 (125) 

 

 (26) 

 

 (19) 

 

 (540) 

Total costs

 

 (2,719) 

 

 (1,210) 

 

 (582) 

 

 (47) 

 

 (4,558) 

Impairment

 

 (260) 

 

 1 

 

 - 

 

 (9) 

 

 (268) 

Underlying profit4

 

 1,902 

 

 1,228 

 

 429 

 

 393 

 

 3,952 

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.55%

 

3.29%

 

 

 

 

 

2.82%

Average interest-earning banking assets

 

£334.3bn

 

£91.4bn

 

£0.8bn

 

£4.4bn

 

£430.9bn

Asset quality ratio

 

0.16%

 

 

 

 

 

 

0.12%

Return on risk-weighted assets4

 

4.33%

 

2.66%

 

 

 

 

 

3.70%

Loans and advances to customers1

 

£340.2bn

 

£100.8bn

 

£0.8bn

 

£11.4bn

 

£453.2bn

Customer deposits2

 

£254.4bn

 

£148.4bn

 

£13.6bn

 

£0.2bn

 

£416.6bn

Risk-weighted assets

 

£93.4bn

 

£90.5bn

 

£1.7bn

 

£32.2bn

 

£217.8bn

                                         

 

 

 

1

Excludes reverse repos of £26.7 billion (30 June 2017: £11.4 billion).

2

Excludes repos of £4.0 billion (30 June 2017: £1.0 billion).

3

Restated to include run-off.

4

Prior periods restated to include remediation.

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year to 31 December 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial 

 

Insurance 

 

Central 

 

 

 

 

Retail1 

 

Banking1 

 

and Wealth 

 

items1 

 

Group 

 

  

£m 

  

£m 

  

£m 

  

£m 

  

£m 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 4,524 

 

 1,542 

 

 61 

 

 268 

 

 6,395 

Other income

 

 1,073 

 

 804 

 

 907 

 

 73 

 

 2,857 

Total income

 

 5,597 

 

 2,346 

 

 968 

 

 341 

 

 9,252 

Operating lease depreciation

 

 (498) 

 

 (60) 

 

 - 

 

 - 

 

 (558) 

Net income

 

 5,099 

 

 2,286 

 

 968 

 

 341 

 

 8,694 

Operating costs

 

 (2,517) 

 

 (1,145) 

 

 (484) 

 

 (20) 

 

 (4,166) 

Remediation

 

 (263) 

 

 (48) 

 

 (14) 

 

 - 

 

 (325) 

Total costs

 

 (2,780) 

 

 (1,193) 

 

 (498) 

 

 (20) 

 

 (4,491) 

Impairment

 

 (451) 

 

 (90) 

 

 - 

 

 14 

 

 (527) 

Underlying profit2

 

 1,868 

 

 1,003 

 

 470 

 

 335 

 

 3,676 

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.65%

 

3.27%

 

 

 

 

 

2.90%

Average interest-earning banking assets

 

£342.7bn

 

£90.7bn

 

£0.8bn

 

£4.6bn

 

£438.8bn

Asset quality ratio

 

0.26%

 

0.20%

 

 

 

 

 

0.24%

Return on risk-weighted assets2

 

3.98%

 

2.23%

 

 

 

 

 

3.39%

Loans and advances to customers3

 

£340.7bn

 

£102.8bn

 

£0.8bn

 

£11.4bn

 

£455.7bn

Customer deposits4

 

£253.1bn

 

£148.3bn

 

£13.8bn

 

£0.3bn

 

£415.5bn

Risk-weighted assets

 

£91.4bn

 

£88.1bn

 

£1.3bn

 

£30.1bn

 

£210.9bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 January 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers3

 

£340.1bn

 

£99.3bn

 

£0.8bn

 

£4.0bn

 

£444.2bn

                                 

 

1

Restated to include run-off.

2

Prior periods restated to include remediation.

3

Excludes reverse repos of £16.8 billion.

4

Excludes repos of £2.6 billion.

 

 

 

 

 

DIVISIONAL RESULTS

 

RETAIL

Retail offers a broad range of financial service products, including current accounts, savings, mortgages, credit cards, motor finance and unsecured loans to personal and business banking customers. Its aim is to be the best bank for customers in the UK, by building deep and enduring relationships that deliver value to customers, and by providing them with greater choice and flexibility. Retail operates a multi-brand and multi-channel strategy and continues to simplify the business and provide more transparent products, helping to improve service levels and reduce conduct risks, whilst working within a prudent risk appetite.

 

Progress against strategic priorities

Delivering a leading customer experience

·     Opened the new Halifax flagship branch, offering the latest in banking technology, and introduced eight new mobile branches taking the total to 36, helping reach more remote and rural communities across 190 locations

·     Maintained position as the UK's largest digital bank with 13.8 million digital customers and 9.8 million mobile users

·     Delivery of an enhanced Lex Autolease driver portal, enabling a more streamlined customer experience through a self-serve platform

·     Shortened the branch mortgage application process by two days, due to a number of initiatives, including faster document processing and the roll out of automated valuations

 

Digitising the Group

·     The first major UK bank to successfully deliver Open Banking, enhanced by re-platforming our mobile app, enabling improved functionality and delivery of future capabilities

·     Launched new dynamic personal loan tool, providing customers with online eligibility checker and personalised price functionality

 

Maximising the Group's capabilities

·     Extended the successful Jaguar Land Rover partnership until the end of 2020

·     Invested significantly in additional mortgage advisors, increasing customer facing capacity by over 10 per cent and the number of branches equipped to offer remote appointments doubling to 100

 

Transforming ways of working

·     Colleagues completed over 200,000 hours of learning, further developing the skills and capabilities required for the future

 

Financial performance

·     Underlying profit increased 14 per cent to £2,164 million

·     MBNA has performed ahead of expectations, and integration is expected to complete ahead of schedule in the first quarter of 2019

·     Net interest income increased 8 per cent reflecting a 14 basis points improvement in net interest margin. The benefits of MBNA and lower funding costs, more than offsetting ongoing mortgage pricing pressure

·     Other income was 5 per cent lower following changes to overdraft charging which took effect in November, more than offsetting fleet growth in Lex Autolease, which also drives growth in operating lease depreciation

·     Operating costs increased 3 per cent to £2,410 million. Excluding MBNA, costs were down 1 per cent as efficiency savings more than offset increased investment and inflationary pressure

·     Remediation reduced to £91 million driven by lower provision charges across existing programmes

·     Impairment charges increased 77 per cent to £461 million and the asset quality ratio increased 11 basis points to 27 basis points, both reflecting lower debt sales and recoveries and the inclusion of MBNA

·     Loans and advances increased to £340.8 billion with the transfer of Business Banking balances from Commercial Banking and growth in Black Horse, being partly offset by reductions in the closed mortgage book. Open mortgage book balances were flat in the first half

·     Customer deposits remained broadly flat, excluding the transfer of Business Banking relationship balances

 

 

·     Risk-weighted assets increased to £93.2 billion, reflecting balance growth and changing mix, along with model refinements

Performance summary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year 

 

Half-year 

 

 

 

Half-year 

 

 

 

 

to 30 June 

 

to 30 June 

 

 

 

to 31 Dec 

 

 

 

 

2018 

 

2017

 

Change

 

2017

 

Change

 

    

£m 

    

£m 

    

%

    

£m 

 

%

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 4,514 

 

 4,182 

 

8

 

 4,524 

 

-

Other income

 

 1,089 

 

 1,148 

 

(5)

 

 1,073 

 

1

Total income

 

 5,603 

 

 5,330 

 

5

 

 5,597 

 

-

Operating lease depreciation

 

 (477) 

 

 (449) 

 

(6)

 

 (498) 

 

4

Net income

 

 5,126 

 

 4,881 

 

5

 

 5,099 

 

1

Operating costs

 

 (2,410) 

 

 (2,349) 

 

(3)

 

 (2,517) 

 

4

Remediation

 

 (91) 

 

 (370) 

 

75

 

 (263) 

 

65

Total costs

 

 (2,501) 

 

 (2,719) 

 

8

 

 (2,780) 

 

10

Impairment

 

 (461) 

 

 (260) 

 

(77)

 

 (451) 

 

(2)

Underlying profit2

 

 2,164 

 

 1,902 

 

14

 

 1,868 

 

16

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.69%

 

2.55%

 

14bp

 

2.65%

 

4bp

Average interest-earning banking assets

 

£342.0bn

 

£334.3bn

 

2

 

£342.7bn

 

-

Asset quality ratio

 

0.27%

 

0.16%

 

11bp

 

0.26%

 

1bp

Return on risk-weighted assets2

 

4.74%

 

4.33%

 

41bp

 

3.98%

 

76bp

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June

 

At 1 Jan

 

 

 

At 31 Dec

 

 

 

 

 

2018

  

2018

 

 

 

2017

 

 

 

 

 

 

 

(adjusted)1,3

 

Change

 

(reported)1

 

Change

 

 

 

£bn

 

£bn

 

%

 

£bn

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Open mortgage book

 

267.1

 

267.0

 

-

 

267.1

 

-

 

Closed mortgage book

 

22.2

 

23.6

 

(6)

 

23.6

 

(6)

 

Credit cards

 

18.5

 

17.9

 

3

 

18.1

 

2

 

Loans

 

7.8

 

7.8

 

-

 

7.9

 

(1)

 

UK Motor Finance

 

13.9

 

13.5

 

3

 

13.6

 

2

 

Europe4

 

7.2

 

7.1

 

1

 

7.1

 

1

 

Business Banking5

 

1.9

 

0.9

 

 

 

0.9

 

 

 

Other1

 

2.2

 

2.3

 

(4)

 

2.4

 

(8)

 

Loans and advances to customers

 

340.8

 

340.1

 

-

 

340.7

 

-

 

Operating lease assets

 

4.7

 

4.7

 

-

 

4.7

 

-

 

Total customer assets

 

345.5

 

344.8

 

-

 

345.4

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Relationship balances

 

241.8

 

240.0

 

1

 

240.0

 

1

 

Tactical balances

 

12.8

 

13.1

 

(2)

 

13.1

 

(2)

 

Customer deposits1,5

 

254.6

 

253.1

 

1

 

253.1

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets

 

93.2

 

91.4

 

2

 

91.4

 

2

 

                                           

 

1

Prior periods restated to include run-off.

2

Prior periods restated to include remediation.

3

Adjusted to reflect the impact of applying IFRS 9 from 1 January 2018.

4

Includes the Netherlands mortgage lending business.

5

SME portfolio within Commercial Banking re-segmented moving £1.0 billion of loans and advances to customers and £2.0 billion of customer deposits to Retail Business Banking. Prior period not restated.

 

 

COMMERCIAL BANKING

Commercial Banking has a client-led, low risk, capital efficient strategy, helping UK-based clients and international clients with a link to the UK. Through its four client facing segments - SME, Mid Markets, Global Corporates and Financial Institutions - it provides clients with a range of products and services such as lending, transactional banking, working capital management, risk management and debt capital markets services.

 

Progress against strategic priorities

Commercial Banking is committed to supporting the financing needs of key client segments, continuing to invest in capabilities and digital propositions in order to deliver a leading customer experience supported by increasingly productive relationship managers. In the first half of 2018 we successfully launched Lloyds Bank Corporate Markets (LBCM), the Group's non ring-fenced bank.

 

Delivering a leading customer experience

·     Awarded Business Bank of the Year at the FDs' Excellence Awards for the 14th consecutive year; with an overall satisfaction rating of nine out of ten

 

Digitising the Group

·     Launched the digital eligibility and pricing tool, enabling SME clients to understand instantly how likely they are to be approved for a loan or overdraft of up to £25,000 before they apply

·     Piloted Invoice Finance Online, a new mobile enabled portal giving clients access to faster payments, flexible processing and functionality to create their own reports

 

Maximising the Group's capabilities

·     On target to achieve £2 billion growth in net lending to start-ups, SMEs and Mid Market clients in 2018, supported by initiatives such as the £100 million lending fund for SMEs linked to the construction of EDF Energy's Hinkley Point C power station, which will provide low-carbon electricity for around 6 million homes

·     Launched a £500 million fund for housing associations, supporting the Government pledge to deliver 300,000 houses each year by the middle of the next decade. Committed £750 million in 2018 for social housing projects, contributing to the Group's commitment to enable more people in Britain to get a home

 

Transforming ways of working

·     Created the Customer Contact Portal, a digital tool to capture customer information in one place, enabling colleagues to provide proactive support, improve engagement and better serve customer needs across the Group

·     Further re-segmented the SME portfolio, moving 30,000 clients with a turnover of £3 million or less to Business Banking in Retail. Through investment in new technology, the Group has responded to changing client preferences, and can now effectively manage day-to-day banking needs of smaller clients through the 'direct' relationship manager capability

 

Financial performance

·     Net interest income of £1,497 million has remained stable supported by improved net interest margin following continued optimisation of the lending portfolio as well as increased high quality transactional deposits

·     Other income showing good momentum, 4 per cent higher than previous six months, at £840 million. The first half of 2017 included a number of significant refinancing and hedging transactions

·     Improved return on risk-weighted assets of 2.71 per cent, up 5 basis points driven by a reduction in risk-weighted assets following further optimisation

·     Operating lease depreciation reduced following accelerated charges in prior year

·     Operating costs 2 per cent lower reflecting efficiency initiatives offsetting higher investment

·     Asset quality ratio of 2 basis points reflecting strong credit quality across the portfolio, with the slight increase in the first half of 2018 primarily driven by lower releases and write-backs. The second half of 2017 included a single large corporate impairment

·     Continued lending growth in SME of 2 per cent, including loans and advances now transferred to Business Banking

 

 

·     Increased customer deposits at £148.5 billion, reflecting continued success in attracting high quality transactional deposit balances

Performance summary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year 

 

Half-year 

 

 

 

Half-year 

 

 

 

 

to 30 June 

 

to 30 June 

 

 

 

to 31 Dec 

 

 

 

 

2018 

 

2017

 

Change

 

2017

 

Change

 

    

£m 

    

£m 

    

%

    

£m 

 

%

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 1,497 

 

 1,488 

 

1

 

 1,542 

 

(3)

Other income

 

 840 

 

 994 

 

(15)

 

 804 

 

4

Total income

 

 2,337 

 

 2,482 

 

(6)

 

 2,346 

 

-

Operating lease depreciation

 

 (20) 

 

 (45) 

 

56

 

 (60) 

 

67

Net income

 

 2,317 

 

 2,437 

 

(5)

 

 2,286 

 

1

Operating costs

 

 (1,061) 

 

 (1,085) 

 

2

 

 (1,145) 

 

7

Remediation

 

 (75) 

 

 (125) 

 

40

 

 (48) 

 

(56)

Total costs

 

 (1,136) 

 

 (1,210) 

 

6

 

 (1,193) 

 

5

Impairment

 

 (15) 

 

 1 

 

 

 

 (90) 

 

83

Underlying profit2

 

 1,166 

 

 1,228 

 

(5)

 

 1,003 

 

16

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

3.32%

 

3.29%

 

3bp

 

3.27%

 

5bp

Average interest-earning banking assets

 

£90.3bn

 

£91.4bn

 

(1)

 

£90.7bn

 

-

Asset quality ratio

 

0.02%

 

-

 

2bp

 

0.20%

 

(18)bp

Return on risk-weighted assets2

 

2.71%

 

2.66%

 

5bp

 

2.23%

 

48bp

                                         

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June

 

At 1 Jan

 

 

 

At 31 Dec

 

 

 

 

 

2018

  

2018

 

 

 

2017

 

 

 

 

 

 

 

(adjusted)1,3

 

Change

 

(reported)1

 

Change

 

 

 

£bn

 

£bn

 

%

 

£bn

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

SME4

 

29.6

 

30.1

 

(2)

 

30.7

 

(4)

 

Mid-Markets

 

30.1

 

29.4

 

2

 

34.2

 

(12)

 

Other5

 

37.6

 

39.8

 

(6)

 

44.6

 

(16)

 

Loans sold to Insurance business6

 

 

 

 

 

 

 

(6.7)

 

 

 

Loans and advances to customers

 

97.3

 

99.3

 

(2)

 

102.8

 

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

SME including Retail Business Banking

 

31.5

 

31.0

 

2

 

31.6

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer deposits1,4

 

148.5

 

148.3

 

1

 

148.3

 

1

 

Risk-weighted assets

 

86.2

 

88.1

 

(2)

 

88.1

 

(2)

 

                                           

 

1

Prior periods restated to include run-off.

2

Prior periods restated to include remediation.

3

Adjusted to reflect the impact of applying IFRS 9 from 1 January 2018.

4

SME portfolio re-segmented moving £1.0 billion of loans and advances to customers and £2.0 billion of customer deposits to Retail Business Banking. Prior periods not restated.

5

Mainly lending to Global Corporates and Financial Institutions clients. As part of the Lloyds Bank Corporate Markets launch c.£2 billion of loans and advances to customers moved to Group Corporate Treasury.

6

At 31 December 2017 the customer segment balances included lower risk loans that were originated by Commercial Banking and subsequently sold to the Insurance business to back annuitant liabilities. These loans were reported in Central items but included in table to aid comparison with prior periods. Since the implementation of IFRS 9 these loans are no longer classified as loans and advances to customers.

 

 

 

 

 

INSURANCE AND WEALTH

Insurance and Wealth offers insurance, investment and wealth management products and services. It supports c.10 million customers with total customer assets under administration of £151 billion and annualised annuity payments to customers in retirement of c.£1 billion. Its strategic aim is to be the best insurer and wealth management business in the UK and it is committed to providing trusted, value for money products and services to meet the needs of its customers.

 

Progress against strategic initiatives

The Group continues to direct significant investment towards developing Insurance and Wealth, seeking to capture the workplace pensions opportunity, offering customers a single home for their banking and insurance needs and driving growth across intermediary and relationship channels through a strong distribution model.

 

Delivering a leading customer experience

·     Scottish Widows won 'Pension Firm of the Year' at the FD's Excellence Awards for the second consecutive year

·     Successfully completed the first stage of transfer of the acquired Zurich UK workplace pensions and savings business, helping to create a market leading UK retirement savings business

·     New drawdown functionality launched within Retirement Account, providing a flexible way for customers to manage and control withdrawals in retirement

·     Joined Underwrite Me quote comparison site, allowing intermediaries to obtain fully underwritten prices for personal life insurance and critical illness products from multiple providers using just one application process

·     Successfully transferred activity and colleagues to Diligenta and Jardine Lloyd Thomson supporting plans to simplify processes and improve experience for customers

 

Digitising the Group

·     Launched pilot of single customer view across insurance and banking products, allowing Retail customers to view their insurance products online; targeting c.3 million users by year end

·     Successful home insurance claims pilot, allowing customers to register and progress claims online

 

Maximising the Group's capabilities

·     Strong progress towards the Helping Britain Prosper target of growing open book assets under administration (AUA) by £50 billion by end 2020. Growth of over £9 billion to date; already ahead of the full year target of £8 billion

·     Completed four bulk annuity transactions, generating £1.1 billion of new business premiums, including the Group's largest external deal to date with the Littlewoods Pension Scheme, leveraging an existing relationship within Commercial Banking

·     Helping Britain prosper by providing long duration loans to finance social housing, infrastructure and commercial real estate projects while backing the growing annuity portfolio, with over £230 million new loans written in 2018

 

Financial performance

·     Total life and pensions sales increased by 50 per cent, driven by increases in new members in existing workplace schemes, the impact of contracted increases in auto enrolment workplace contributions and bulk annuities

·     New underwritten household premiums increased by 26 per cent, reflecting progress of the direct proposition. Total underwritten premiums decreased by 8 per cent driven by the highly competitive marketplace

·     Life and pensions new business income was up 75 per cent. This was partly offset by a £54 million decrease in general insurance income, which included around £40 million impact from higher weather related home insurance claims and lower benefits from experience and other items. As a result, total income increased 3 per cent to £1,039 million

·     Operating costs decreased 4 per cent, with cost savings more than offsetting higher investment costs

·     With higher income and lower costs, underlying profit increased by 12 per cent to £480 million

 

Insurance capital

·     Estimated pre interim dividend Solvency II ratio of 153 per cent (31 December 2017 pre final dividend position: 160 per cent). The fall in the ratio primarily reflects the £600 million dividend paid in February 2018 (in respect of 2017 earnings) and the acquisition of Zurich's UK workplace pensions and savings business, offset by positive market movements and earnings over the first half of the year

 

 

·     Excess capital of £181 million has been generated in 2018 from which a dividend of £150 million was paid to Group in July 2018

Performance summary

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year 

 

Half-year 

 

 

 

Half-year 

 

 

 

 

to 30 June 

 

to 30 June 

 

 

 

to 31 Dec 

 

 

 

 

2018 

 

2017 

 

Change

 

2017 

 

Change

 

    

£m 

    

£m 

    

%

    

£m 

 

%

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 60 

 

 72 

 

(17)

 

 61 

 

(2)

Other income

 

 979 

 

 939 

 

4

 

 907 

 

8

Total income

 

 1,039 

 

 1,011 

 

3

 

 968 

 

7

Operating costs

 

 (534) 

 

 (556) 

 

4

 

 (484) 

 

(10)

Remediation

 

 (25) 

 

 (26) 

 

4

 

 (14) 

 

(79)

Total costs

 

 (559) 

 

 (582) 

 

4

 

 (498) 

 

(12)

Impairment

 

 - 

 

 - 

 

 

 

 - 

 

 

Underlying profit1

 

 480 

 

 429 

 

12

 

 470 

 

2

 

 

 

 

 

 

 

 

 

 

 

Life and pensions sales (PVNBP)2

 

 7,483 

 

 4,984 

 

50

 

 4,967 

 

51

General insurance underwritten new GWP3

 

 48 

 

38 

 

26

 

46 

 

4

General insurance underwritten total GWP3

 

 342 

 

370 

 

(8)

 

363 

 

(6)

General insurance combined ratio

 

103%

 

88%

 

15pp

 

87% 

 

16pp

                                         

 

 

 

 

 

 

 

 

 

 

 

At 30 June

 

At 31 Dec

 

 

 

 

2018

  

2017

 

 

 

 

 

 

(reported)4

 

Change

 

 

£bn

 

£bn

 

%

 

 

 

 

 

 

 

Insurance Solvency II ratio5

 

153%

 

160%

 

(7)pp

Wealth loans and advances to customers

 

0.8

 

0.8

 

-

Wealth customer deposits

 

13.6

 

13.8

 

(1)

Wealth risk-weighted assets

 

1.3

 

1.3

 

-

Total customer assets under administration

 

151.0

 

145.4

 

4

                         

 

 

Income by product group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year to 30 June 2018

 

Half-year to 30 June 2017

 

Half-year

 

 

  

New

  

Existing

  

 

  

New

  

Existing

  

 

 

to 31 Dec

 

 

business

 

business

 

Total

 

business

 

business

 

Total

 

2017

 

  

£m

  

£m

  

£m

  

£m

  

£m

  

£m

  

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Workplace, planning & retirement

 

165

 

75

 

240

 

61

 

61

 

122

 

134

Individual & bulk annuities

 

88

 

45

 

133

 

75

 

45

 

120

 

93

Protection

 

8

 

11

 

19

 

10

 

10

 

20

 

13

Longstanding LP&I

 

7

 

208

 

215

 

7

 

220

 

227

 

225

 

 

268

 

339

 

607

 

153

 

336

 

489

 

465

Life and pensions experience and other items

 

 

 

 

 

140

 

 

 

 

 

176

 

182

General insurance

 

 

 

 

 

103

 

 

 

 

 

157

 

141

 

 

 

 

 

 

850

 

 

 

 

 

822

 

788

Wealth

 

 

 

 

 

189

 

 

 

 

 

189

 

180

Total income

 

 

 

 

 

1,039

 

 

 

 

 

1,011

 

968

                                                         

 

 

 

1

Prior periods restated to include remediation.

2

Present value of new business premiums.

3

Gross written premiums.

4

No material impact from application of IFRS 9 - adjusted assets are unchanged from those reported at 31 December 2017.

5

Equivalent regulatory view of ratio (including With Profits funds) at 30 June 2017 was 148 per cent (31 December 2017: 154 per cent).

CENTRAL ITEMS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year 

 

Half-year 

 

 

 

Half-year 

 

 

 

 

to 30 June 

 

to 30 June 

 

 

 

to 31 Dec 

 

 

 

 

2018 

 

20171 

 

Change

 

20171 

 

Change

 

 

£m 

    

£m 

    

%

    

£m 

 

%

 

 

 

 

 

 

 

 

 

 

 

Total income

 

 489 

 

 449 

 

9

 

 341 

 

43

Operating costs

 

 (19) 

 

 (28) 

 

32

 

 (20) 

 

5

Remediation

 

 (66) 

 

 (19) 

 

 

 

 - 

 

 

Total costs

 

 (85) 

 

 (47) 

 

(81)

 

 (20) 

 

 

Impairment

 

 20 

 

 (9) 

 

 

 

 14 

 

43

Underlying profit2

 

 424 

 

 393 

 

8

 

 335 

 

27

                                         

 

 

 

1

Prior periods restated to include run-off.

2

Prior periods restated to include remediation.

 

Central items includes income and expenditure not attributed to divisions, including the costs of certain central and head office functions and the Group's private equity business, Lloyds Development Capital.

 

 

 

 

 

 

 

OTHER FINANCIAL INFORMATION

 

1.         Reconciliation between statutory and underlying basis results

 

The tables below set out the reconciliation from the statutory results to the underlying basis results, the principles of which are set out on the inside front cover.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Removal of:

 

 

 

 

 

Volatility

 

 

 

 

 

 

 

 

Statutory

 

and other

 

Insurance

 

 

 

Underlying

 

 

basis

 

items1,2

 

gross up3

 

PPI

 

basis4

Half-year to 30 June 2018

  

£m

  

£m

  

£m

  

£m

  

£m

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

6,007

 

93

 

244

 

 -

 

 6,344

Other income, net of insurance claims

 

3,564

 

(119)

 

(321)

 

 -

 

 3,124

Total income

 

9,571

 

(26)

 

(77)

 

 -

 

 9,468

Operating lease depreciation

 

 

 

(497)

 

 -

 

 -

 

 (497)

Net income

 

9,571

 

(523)

 

(77)

 

 -

 

 8,971

Operating expenses5

 

(5,998)

 

1,090

 

77

 

 550

 

 (4,281)

Impairment

 

(456)

 

 -

 

 -

 

 -

 

 (456)

Profit before tax

 

3,117

 

567

 

 -

 

 550

 

 4,234

 

 

 

 

 

 

 

 

 

 

 

Half-year to 30 June 20173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

5,202

 

115

 

608

 

 -

 

5,925

Other income, net of insurance claims

 

4,097

 

(89)

 

(660)

 

 -

 

3,348

Total income

 

9,299

 

26

 

(52)

 

 -

 

9,273

Operating lease depreciation

 

 

 

(495)

 

 -

 

 -

 

(495)

Net income

 

9,299

 

(469)

 

(52)

 

 -

 

8,778

Operating expenses5

 

(6,552)

 

892

 

52

 

 1,050

 

(4,558)

Impairment

 

(203)

 

(65)

 

 -

 

 -

 

(268)

Profit before tax

 

2,544

 

358

 

 -

 

 1,050

 

3,952

 

 

 

 

 

 

 

 

 

 

 

Half-year to 31 December 20171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

5,710

 

113

 

572

 

 -

 

6,395

Other income, net of insurance claims

 

3,650

 

(97)

 

(696)

 

 -

 

2,857

Total income

 

9,360

 

16

 

(124)

 

 -

 

9,252

Operating lease depreciation

 

 

 

(558)

 

 -

 

 -

 

(558)

Net income

 

9,360

 

(542)

 

(124)

 

 -

 

8,694

Operating expenses5

 

(6,144)

 

929

 

124

 

 600

 

(4,491)

Impairment

 

(485)

 

(42)

 

 -

 

 -

 

(527)

Profit before tax

 

2,731

 

345

 

 -

 

 600

 

3,676

                               

 



1

Half-year to 30 June 2018 comprises the effects of asset sales (losses of £120 million); volatility and other items (gains of £154 million); the amortisation of purchased intangibles (£53 million); restructuring (£377 million, comprising severance related costs, the rationalisation of the non-branch property portfolio, the work on implementing the ring-fencing requirements and the integration of MBNA and Zurich's UK workplace pensions and savings business); and the fair value unwind and other items (losses of £171 million).

 

2

Half-year to 30 June 2017 comprises the effects of asset sales (gains of £6 million); volatile items (gains of £145 million); liability management (losses of £15 million); the amortisation of purchased intangibles (£38 million); restructuring (£321 million, comprising severance related costs relating, the rationalisation of the non-branch property portfolio, the work on implementing the ring-fencing requirements and the integration of MBNA); and the fair value unwind and other items (losses of £135 million).

 

3

The Group's insurance businesses' income statements include income and expenditure which are attributable to the policyholders of the Group's long-term assurance funds. These items have no impact in total upon the profit attributable to equity shareholders and, in order to provide a clearer representation of the underlying trends within the business, these items are shown net within the underlying results.

 

4

Prior periods restated to include remediation.

 

5

The statutory basis figure is the aggregate of operating costs and operating lease depreciation.

 

2.         Banking net interest margin and average interest-earning assets

 










Half-year


Half-year


Half-year



to 30 June


to 30 June


to 31 Dec



2018


2017


2017



£m

   

£m


£m








Group net interest income - statutory basis


6,007


5,202


5,710

Insurance gross up


244


608


572

Volatility and other items


93


115


113

Group net interest income - underlying basis


6,344


5,925


6,395

Non-banking net interest expense


 3


96


15

Banking net interest income - underlying basis


6,347


6,021


6,410








Average interest-earning banking assets


£436.4bn


£430.9bn


£438.8bn








Banking net interest margin


2.93%


2.82%


2.90%










Half-year


Half-year


Half-year



to 30 June


to 30 June


to 31 Dec



2018


2017


2017



£m

   

£m


£m








Net loans and advances to customers1


 442.3


 453.2


 455.7

Impairment provision and fair value adjustments


 4.0


 3.3


 3.2

Non-banking items:







Fee based loans and advances


 (5.3)


 (7.4)


 (8.1)

Sale of assets to Insurance


 -


 (6.8)


 (6.9)

Other non-banking


 (2.2)


 (4.2)


 (4.0)

Gross banking loans and advances


 438.8


 438.1


 439.9

Averaging


 (2.4)


 (7.2)


 (1.1)

Average interest-earning banking assets


 436.4


 430.9


 438.8

 



1

Excludes reverse repos of £26.7 billion (31 December 2017: £16.8 billion).

 

 

3.         Volatility arising in insurance businesses

 

Volatility included in the Group's statutory results before tax comprises the following:

 










Half-year 


Half-year 


Half-year 

 



to 30 June 


to 30 June 


to 31 Dec 

 



2018 


2017 


2017 

 


    

£m 

    

£m 


£m 

 








 

Insurance volatility


 (23) 


 74 


 122 

 

Policyholder interests volatility


 122 


 110 


 80 

 

Total volatility


 99 


 184 


 202 

 

Insurance hedging arrangements


 (60) 


 (19) 


 (81) 

 

Total


 39 


 165 


 121 

 

 

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 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 in addition to results based on the actual return. The impact of the actual return on these investments differing from the expected return is included within insurance volatility.

4.         Tangible net assets per share

 

The table below sets out a reconciliation of the Group's shareholders' equity to its tangible net assets.

 










At 30 June


At 1 Jan


At 31 Dec



2018


20181


2017


    

£m


£m

    

£m








Shareholders' equity


42,940


42,360


43,551

Goodwill


(2,310)


(2,310)


(2,310)

Intangible assets


(3,061)


(2,835)


(2,835)

Purchased value of in-force business


(291)


(306)


(306)

Other, including deferred tax effects


240


254


254

Tangible net assets


37,518


37,163


38,354








Ordinary shares in issue, excluding own shares


71,944m


71,944m


71,944m

Tangible net assets per share


52.1p


51.7p


53.3p

 

1

Adjusted to reflect the implementation of IFRS 9  and IFRS 15.

 

5.         Return on tangible equity










Half-year


Half-year


Half-year



to 30 June


to 30 June


to 31 Dec



2018


2017


2017


    






Average shareholders' equity (£bn)


 43.2


 43.3


 43.1

Average intangible assets (£bn)


 (5.3)


 (4.2)


 (5.0)

Average tangible equity (£bn)


 37.9


 39.1


 38.1








Underlying profit after tax1 (£m)


3,124


2,906


2,706

Add back amortisation of intangible assets (post tax) (£m)


138


108


111

Less profit attributable to non-controlling interests and other equity holders (£m)


(192)


(199)


(204)

Adjusted underlying profit after tax (£m)


3,070


2,815


2,613








Underlying return on tangible equity1


16.3%


14.5%


13.6%








Group statutory profit after tax (£m)


2,267


1,639


1,908

Add back amortisation of intangible assets (post tax) (£m)


138


108


111

Add back amortisation of purchased intangible assets (post tax) (£m)


59


45


56

Less profit attributable to non-controlling interests and other equity holders (£m)


(192)


(199)


(204)

Adjusted statutory profit after tax (£m)


2,272


1,593


1,871








Statutory return on tangible equity


12.1%


8.2%


9.7%

 

1

Prior periods restated to include remediation.

 

 



 

 

RISK MANAGEMENT

PRINCIPAL RISKS AND UNCERTAINTIES

 

The significant risks faced by the Group which could impact the success of delivering against the Group's long-term strategic objectives and through which global macro-economic conditions, ongoing political uncertainty, regulatory developments and market liquidity dynamics could manifest, are detailed below. Except where noted, there has been no significant change to the description of these risks or key mitigating actions disclosed in the Group's 2017 Annual Report and Accounts, with any quantitative disclosures updated herein.

 

The Group continues to consider and assess the potential implications of the UK leaving the European Union and manage related developments to assess, and if possible mitigate any impact to its customers, colleagues and products as well as legal, regulatory, tax, financial and capital implications.

 

Credit risk - The risk that parties with whom the Group has contracted fail to meet their financial obligations (both on and off balance sheet). Adverse changes in the economic, geopolitical and market environment could impact profitability due to an increase in impairment losses, write-downs and/or decrease in asset valuations.

 

Regulatory and legal risk - The risks of changing legislation, regulation, policies, voluntary codes of practice and their interpretation in the markets in which the Group operates may have a significant impact on the Group's operations, business prospects, structure, costs, capital requirements and/or ability to enforce contractual obligations.

 

Conduct risk - Conduct risk can arise from a number of areas including selling products to customers which do not meet their needs; failing to deal with customers' complaints effectively; not meeting customers' expectations; failing to promote effective competition in the interest of customers; and exhibiting behaviours which could impact on the integrity of the market or undermine wider regulatory standards.

 

Operational risk - The Group faces significant operational risks which may disrupt services to customers, cause reputational damage, and result in financial loss. These include the availability, resilience and security of the Group's core IT systems, unlawful or inappropriate use of customer data, theft of sensitive data, fraud and financial crime threats, and the potential for failings in the Group's customer processes.

 

People risk - Key people risks include the risk that the Group fails to maintain organisational skills, capability, resilience and capacity levels in response to organisational, political and external market change and evolving business needs.

 

Insurance underwriting risk - Key insurance underwriting risks within the Insurance business are longevity, persistency and property insurance. Longevity risk is expected to increase as the Group's presence in the bulk annuity market increases.

 

Capital risk - The risk that the Group has a sub-optimal quantity or quality of capital or that capital is inefficiently deployed across the Group.

 

Funding and liquidity risk - The risk that the Group has insufficient financial resources to meet its commitments as they fall due.

 

Governance risk - Against a background of increased regulatory focus on governance and risk management, the most significant challenges arise from meeting the requirements to ring-fence core UK financial services and activities from January 2019 and further requirements under the Senior Manager and Certification Regime (SMCR).

 

Market risk - The risk that the Group's capital or earnings profile is affected by adverse market rates, in particular interest rates and credit spreads in the banking business, equity and credit spreads in the Insurance business, and credit spreads in the Group's defined benefit pension schemes.

 

Model risk - The risk of financial loss, regulatory censure, reputational damage or customer detriment, as a result of deficiencies in the development, application and ongoing operation of financial models and rating systems.

 

 

 



 

 CREDIT RISK PORTFOLIO

 

Overview

·     Asset quality remains strong with portfolios continuing to benefit from the Group's proactive approach to risk management, continued low interest rates and a resilient UK economic environment

·     The net impairment charge increased to £456 million in the first half of 2018, driven by expected lower releases and write-backs and the inclusion of MBNA

·     The asset quality ratio was 20 basis points (full year 2017: 18 basis points) with the gross asset quality ratio (before write-backs and releases) of 27 basis points remaining in line with full year 2017 (28 basis points)

·     Stage 3 loans as a proportion of total loans and advances to customers have reduced to 1.8 per cent (1 January 2018: 1.9 per cent), with Stage 3 loans and advances reduced by £387 million to £8,668 million. Coverage of Stage 3 drawn balances has increased to 25.2 per cent (1 January 2018: 24.0 per cent)

·     Stage 2 loans and advances have reduced by £6,365 million, driven by the sale of the Irish mortgage portfolio and reductions in Retail

 

Low risk culture and prudent risk appetite

·     The Group continues to take a prudent approach to credit risk, with robust credit quality and affordability controls at origination and a prudent through the cycle credit risk appetite. The Group's portfolios are well positioned against an uncertain economic outlook and potential market volatility

·     The Group continues to grow lending to key segments while maintaining prudent credit criteria

·     The Group's effective risk management ensures early identification and management of customers and counterparties who may be showing signs of distress

·     Sector concentrations within the lending portfolios are closely monitored and controlled, with mitigating actions taken where appropriate. Sector and product caps limit exposure to certain higher risk and vulnerable sectors and asset classes

 

 



 

Impairment charge by division














Half-year  


Half-year 




Half-year 





to 30 June  


to 30 June 




to 31 Dec 





2018  


20171,2 


Change 


20171,2 


Change 



£m  

   

£m 

   

   

£m 

   

Retail:











Secured


 20 


 34 


41


 (49) 



Unsecured3


 386 


 173 




 419 


8

UK Motor Finance


 49 


 45 


(9)


 66 


26

Other4


 6 


 8 


25


 15 


60



 461 


 260 


(77)


 451 


(2)

Commercial Banking:











SME


 14 


 1 




 6 



Other


 1 


 (2) 




 84 


99



 15 


 (1) 




 90 


83

Insurance and Wealth


 - 


 - 




 - 



Central items


 (20) 


 9 




 (14) 


43

Total impairment charge


 456 


 268 


(70)


 527 


13












Asset quality ratio


0.20%


0.12%


8bp


0.24%


(4)bp

Gross asset quality ratio


0.27%


0.23%


4bp


0.33%


(6)bp

 

1

Prior period comparatives are on an IAS39 basis.

2

Includes run-off, previously reported as a separate segment.

3

Unsecured includes Credit cards, Loans and Overdrafts.

4

Retail other includes Business Banking, Europe and Retail run-off

 

Group's total expected credit loss allowance (underlying basis)










At 30 June


At 1 Jan


At 31 Dec



2018


2018


20171



£m

   

£m

   

£m








Customer related balances:







Drawn


 4,236


 4,464


 3,442

Undrawn


 248


 273


 30



 4,484


 4,737


 3,472

Other assets


 30


 37


 26

Total expected credit loss allowance2


 4,514


 4,774


 3,498

 

1

31 December 2017 comparatives are on an IAS39 basis.

2

Presented on an underlying basis, which excludes the impact of acquisition related adjustments.

 

Group loans and advances to customers

The following pages contain analysis of the Group's loans and advances to customers by sub-portfolio.

 

Loans and advances to customers are categorised into the following stages:

Stage 1 assets comprise newly originated assets (unless purchased or originated credit impaired), as well as those which have not experienced a significant increase in credit risk. These assets carry an expected credit loss allowance equivalent to the expected credit losses that result from those default events that are possible within 12 months of the reporting date (12 month expected credit losses).

 

Stage 2 assets are those which have experienced a significant increase in credit risk since origination. These assets carry an expected credit loss allowance equivalent to the expected credit losses arising over the lifetime of the asset (lifetime expected credit losses).

 

Stage 3 assets have either defaulted or are otherwise considered to be credit impaired. These assets carry a lifetime expected credit loss.



 

Group loans and advances to customers

 














Total 


Stage 1 


Stage 2 


Stage 3 


Stage 3

At 30 June 2018


£m 

  

£m 

  

£m 

  

£m 


as % total












Retail:











Secured


 290,764 


 252,271 


 33,415 


 5,078 


 1.7

Unsecured1


 28,121 


 24,562 


 2,826 


 733 


 2.6

UK Motor Finance


 14,201 


 12,534 


 1,548 


 119 


 0.8

Other2,3


 10,160 


 9,192 


 809 


 159 


 1.6



 343,246 


 298,559 


 38,598 


 6,089 


 1.8

Commercial Banking:











SME


 29,929 


 26,037 


 3,121 


 771 


 2.6

Other


 68,821 


 62,629 


 4,443 


 1,749 


 2.5



 98,750 


 88,666 


 7,564 


 2,520 


 2.6

Insurance and Wealth


 829 


 759 


 11 


 59 


 7.1

Central items


 30,196 


 30,190 


 6 


 - 



Total gross lending


 473,021 


 418,174 


 46,179 


 8,668 


 1.8

Expected credit loss allowance on drawn balances


 (4,236) 


 (574) 


 (1,575) 


 (2,087) 





 468,785 


 417,600 


 44,604 


 6,581 



Fair value adjustments4


 240 









Net balance sheet carrying value


 469,025 









 

 














Total 


Stage 1 


Stage 2 


Stage 3 


Stage 3

 

At 1 January 20185


£m 

  

£m 

  

£m 

   

£m 


as % total

 












 

Retail:











 

Secured


 292,140 


 251,707 


 35,399 


 5,034 


 1.7

 

Unsecured1


 27,738 


 23,927 


 3,061 


 750 


 2.7

 

UK Motor Finance


 13,738 


 12,176 


 1,456 


 106 


 0.8

 

Other2


 9,016 


 8,184 


 702 


 130 


 1.4

 



 342,632 


 295,994 


 40,618 


 6,020 


 1.8

 

Commercial Banking:











 

SME


 30,510 


 26,397 


 3,262 


 851 


 2.8

 

Other


 70,310 


 63,944 


 4,503 


 1,863 


 2.6

 



 100,820 


 90,341 


 7,765 


 2,714 


 2.7

 

Insurance and Wealth


 819 


 724 


 67 


 28 


 3.4

 

Central items


 20,939 


 16,552 


 4,094 


 293 


 1.4

 

Total gross lending


 465,210 


 403,611 


 52,544 


 9,055 


 1.9

 

Expected credit loss allowance on drawn balances


 (4,464) 


 (626) 


 (1,731) 


 (2,107) 



 



 460,746 


 402,985 


 50,813 


 6,948 



 

Fair value adjustments4


 270 









 

Net balance sheet carrying value


 461,016 









 

 



1

Unsecured includes Credit cards, Loans and Overdrafts.

2

Retail other includes Business Banking, Europe and Retail run-off.

3

Includes reclassification of Business Banking loans and advances from SME within Commercial Banking. 1 January 2018 not restated.

4

The Group made adjustments to reflect the MBNA loans and advances at fair value on acquisition. The remaining fair value adjustment, which is expected to unwind through net interest income, was £240 million at 30 June 2018 (£270 million at 1 January 2018).

5

Certain balances have been reallocated between segments. These include the incorporation of International Wealth in Commercial Banking and run-off across Retail and Commercial Banking.

 



 

Stage 2 loans and advances to customers

 
















1-30 


Over 







Days 


30 days 



Total 


Up to date 


past due 


past due 

At 30 June 2018


£m 


£m 

   

£m 


£m 










Retail:









Secured


 33,415 


 25,673 


 3,748 


 3,994 

Unsecured1


 2,826 


 2,471 


 248 


 107 

UK Motor Finance


 1,548 


 1,366 


 143 


 39 

Other2


 809 


 635 


 100 


 74 



 38,598 


 30,145 


 4,239 


 4,214 

Commercial Banking:









SME


 3,121 


 2,749 


 316 


 56 

Other


 4,443 


 4,429 


 - 


 14 



 7,564 


 7,178 


 316 


 70 

Insurance and Wealth


 11 


 6 


 3 


 2 

Central items


 6 


 - 


 - 


 6 

Total


 46,179 


 37,329 


 4,558 


 4,292 

 

 
















1-30 


Over 







days 


30 days 



Total 


Up to date 


past due 


past due 

At 1 January 20183


£m 


£m 

   

£m 


£m 










Retail:









Secured4


 35,399 


 27,596 


 3,769 


 4,034 

Unsecured1


 3,061 


 2,686 


 254 


 121 

UK Motor Finance


 1,456 


 1,279 


 137 


 40 

Other2


 702 


 552 


 109 


 41 



 40,618 


 32,113 


 4,269 


 4,236 

Commercial Banking:









SME


 3,262 


 2,969 


 227 


 66 

Other


 4,503 


 4,451 


 23 


 29 



 7,765 


 7,420 


 250 


 95 

Insurance and Wealth


 67 


 61 


 1 


 5 

Central items


 4,094 


 4,014 


 62 


 18 

Total


 52,544 


 43,608 


 4,582 


 4,354 

 





1

Unsecured includes Credit cards, Loans and Overdrafts.

2

Retail other includes Business Banking, Europe and Retail run-off.

3

Certain balances have been reallocated between segments. These include the incorporation of International Wealth in Commercial Banking and run-off across Retail and Commercial Banking.

4

Secured days past due segmentation restated to align with IFRS 9 classifications.

 



 

Group expected credit loss allowances (drawn and undrawn) as a percentage of loans and advances to customers

 




















Total


Stage 1


Stage 2


Stage 3





as % of




as % of




as % of




as % of





drawn




drawn




drawn




drawn





balances




balances




balances




balances

At 30 June 2018


£m 

   

%

   

£m 

   

%


£m 

   

%


£m 

   

%


















Retail:

















Secured


 1,478


 0.5


 33


 0.0


 744


 2.2


 701


 13.8

Unsecured1,2


 1,036


 3.7


 352


 1.4


 401


 14.2


 283


 58.2

UK Motor Finance3


 266


 1.9


 112


 0.9


 74


 4.8


 80


 67.2

Other1,4


 122


 1.2


 47


 0.5


 27


 3.3


 48


 33.8



 2,902


 0.8


 544


 0.2


 1,246


 3.2


 1,112


 19.1

Commercial Banking:

















SME


 332


 1.1


 46


 0.2


 200


 6.4


 86


 11.2

Other


 1,194


 1.7


 87


 0.1


 196


 4.4


 911


 52.1



 1,526


 1.5


 133


 0.2


 396


 5.2


 997


 39.6

Insurance and Wealth


 17


 2.1


 6


 0.8


 1


 9.1


 10


 16.9

Central items


 39


 0.1


 33


 0.1


 6


 100.0


 -



Total


 4,484


0.9


 716


 0.2


 1,649


 3.6


 2,119


 25.2

 

 




















Total


Stage 1


Stage 2


Stage 3





as % of




as % of




as % of




as % of





drawn




drawn




drawn




drawn





balances




balances




balances




balances1

At 1 January 2018


£m


%


£m


%


£m 


%


£m


%


















Retail:

















Secured


 1,504


 0.5


 31


 0.0


 789


 2.2


 684


 13.6

Unsecured1,2


 1,055


 3.8


 379


 1.6


 412


 13.5


 264


 55.8

UK Motor Finance3


 258


 1.9


 113


 0.9


 73


 5.0


 72


 67.9

Other1,4


 109


 1.2


 44


 0.5


 25


 3.6


 40


 34.5



 2,926


 0.9


 567


 0.2


 1,299


 3.2


 1,060


 18.5

Commercial Banking:

















SME


 375


 1.2


 51


 0.2


 206


 6.3


 118


 13.9

Other


 1,146


 1.6


 81


 0.1


 226


 5.0


 839


 45.0



 1,521


 1.5


 132


 0.1


 432


 5.6


 957


 35.3

Insurance and Wealth


 17


 2.1


 6


 0.8


 2


 3.0


 9


 32.1

Central items


 273


 1.3


 67


 0.4


 125


 3.1


 81


 27.7

Total


 4,737


 1.0


 772


 0.2


 1,858


 3.5


 2,107


 24.0

 



1

Stage 3 expected credit loss allowance as a percentage of Stage 3 drawn balances are calculated excluding loans in recoveries for Unsecured (30 June 2018: £247 million; 1 January 2018: £277 million), and Business Banking within Other (30 June 2018: £17 million; 1 January 2018: £14 million).

2

Unsecured includes Credit cards, Loans and Overdrafts.

3

UK Motor Finance for Stages 1 and 2 include £87 million (1 January 2018: £87 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

Retail other includes Business Banking, Europe and Retail run-off.

 



 

Retail

·     The credit quality of the Retail portfolios remains strong and continues to benefit from robust credit risk management, including affordability and indebtedness controls at origination, and a prudent approach to risk appetite. The economic environment remains supportive with historically high levels of employment, positive real wage growth and household indebtedness remaining significantly below pre-crisis levels:

−      New business quality remains strong;

−      The flow of loans entering arrears remains at low levels;

−      Stage 2 balances have reduced to 11.2 per cent of the portfolio and Stage 3 balances are flat at 1.8 per cent.

·     Loans and advances remained flat during the period at £343 billion at 30 June 2018

·     The impairment charge of £461 million for the first half compares to £260 million for the same period in 2017. The increase is largely attributable to the consolidation of MBNA, a lower level of debt sales and less recoveries cash collected as a result of previous sales

·     Expected credit loss (ECL) allowance as a percentage of drawn balances has increased to 19.1 per cent from 18.5 per cent for Stage 3. Coverage is flat for Stages 1 and 2

 

Portfolios

·     Secured credit quality improved with a fall in cases more than three months in arrears and a reduction in Stage 2 balances. The average indexed loan to value (LTV) remained stable at 43.5 per cent (31 December 2017: 43.6 per cent) and the proportion of lending with an LTV of greater than 90 per cent remained low at 2.5 per cent (31 December 2017: 2.5 per cent). The average LTV of new business improved to 62.3 per cent from 63.0 per cent at 31 December 2017.  The closed Specialist mortgage portfolio continued to run off, reducing by a further £906 million (5.8 per cent) to £14,762 million in the period.  The impairment charge of £20 million for the first half compares to £34 million for the same period in 2017, reflecting a reduction in arrears balances

·     The Unsecured portfolio consists of Credit cards, Loans and Overdrafts. The impairment charge increased by £213 million to £386 million in the half-year to 30 June 2018 from £173 million, mainly due to the consolidation of MBNA and a lower level of debt sales in the period, and less recoveries cash collected as a result of previous sales

·     The UK Motor Finance portfolio continued to grow, with balances increasing £463 million (3.4 per cent) over the period.  Stage 2 and Stage 3 balances grew slightly in the period, £92 million and £13 million respectively, reflecting growth and some maturation of the portfolio.  The impairment charge in the period was £49 million compared to £45 million at 30 June 2017. The portfolio continues to benefit from a conservative approach to residual values at origination and through the loan lifecycle, with prudent residual value provisions accounting for £76 million of Stage 1 ECL allowance at 30 June 2018

 

Retail secured loans and advances to customers










At 30 June


At 1 Jan


At 31 Dec