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Lloyds Banking Group PLC   -  LLOY   

2018 Results - News Release

Released 07:00 20-Feb-2019

RNS Number : 5398Q
Lloyds Banking Group PLC
20 February 2019
 

 

 

 

 

2018 Results

News Release

 

Lloyds Banking Group plc

 

20 February 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIS OF PRESENTATION

This release covers the results of Lloyds Banking Group plc together with its subsidiaries (the Group) for the year ended 31 December 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 set out on pages 44 to 60. 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 (PPI) 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 year ended 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 year ended 31 December 2018 to the year ended 31 December 2017, and the balance sheet analysis compares the Group balance sheet as at 31 December 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 61.

 

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; the ability to achieve strategic objectives; changing customer behaviour including consumer spending, saving and borrowing habits; changes to borrower or counterparty credit quality; concentration of financial exposure; management and monitoring of conduct risk; instability in the global financial markets, including Eurozone instability, instability as a result of uncertainty surrounding the exit by the UK from the European Union (EU) and as a result of such exit 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; risks relating to climate change; 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 transition from IBORs to alternative reference rates; 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 

Results for the full year

1

Income statement - underlying basis

2

Key balance sheet metrics

2

Quarterly information

3

Balance sheet analysis

4

Group Chief Executive's statement

5

Summary of Group results

8

Underlying basis - segmental analysis

16

 

 

Divisional results

17

Retail

17

Commercial Banking

19

Insurance and Wealth

21

Central items

23

 

 

Other financial information

24

Reconciliation between statutory and underlying basis results

24

Banking net interest margin and average interest-earning assets

25

Volatility arising in insurance businesses

25

Tangible net assets per share

26

Return on tangible equity

26

Share buyback

26

 

 

Risk management

27

Credit risk portfolio

27

Funding and liquidity management

36

Capital management

37

 

 

Statutory information

44

Condensed consolidated financial statements

44

Consolidated income statement

44

Consolidated statement of comprehensive income

45

Consolidated balance sheet

46

Consolidated statement of changes in equity

48

Consolidated cash flow statement

50

Notes to the consolidated financial statements

51

 

 

Summary of alternative performance measures

61

 

 

Contacts

62

 

 

 

 

 

RESULTS FOR THE FULL YEAR

 

'2018 has been a year of strong strategic and financial delivery, as we build on our unique capabilities to transform the Group to succeed in a digital world. We have made significant progress against the priorities we set out at the start of the year when we launched the third stage of our strategic plan, which is supported by investment of more than £3 billion over the plan period. We have also delivered another year of increased statutory profits and returns along with strong capital build and, as a result, have been able to recommend an increased dividend and share buyback to our investors.

 

Over 2018 the UK economy has proven itself to be resilient with record employment and continued GDP growth. Although the near term outlook for the UK economy remains uncertain, our strategy continues to deliver for our customers. I remain confident that with our unique business model and market leading efficiency we can continue to increase investment in customer propositions and grow our leading digital bank, whilst at the same time delivering strong financial performance and market leading returns.

 

Our strategy is framed by our purpose of Helping Britain Prosper, being the bank with the largest retail and commercial presence throughout the country. In 2018 we continued to grow our lending balances to SMEs and Mid Market businesses by £3 billion; we have helped one in five first time buyers by lending £12 billion, we have provided digital skills training to more than 700,000 people, SMEs and charities alongside further investment in apprenticeship schemes and were again the UK's largest corporate tax payer.'

 

António Horta-Osório

Group Chief Executive

 

 

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

·    Strong start to the next phase of our strategy with increased strategic investment

·    Achievements during the year include the launch of Open Banking, Single Customer View, Lloyds Bank Corporate Markets, the wealth management partnership with Schroders and enhanced customer propositions

·    The Group will continue to Help Britain Prosper whilst delivering strong and sustainable returns for shareholders

 

Strong and sustainable financial performance with continued growth in profit and returns

·    Statutory profit after tax of £4.4 billion up 24 per cent with a 6 per cent increase in underlying profit to £8.1 billion

·    Total ordinary dividend of 3.21 pence per share, up 5 per cent on 2017, and a proposed share buyback of up to £1.75 billion representing a total capital return of up to £4.0 billion (2017: £3.2 billion), increase of up to 26 per cent

·    Net income of £17.8 billion, 2 per cent higher, with net interest margin higher at 2.93 per cent

·    Operating costs down on prior year despite increased investment; cost:income ratio further improved to 49.3 per cent with positive jaws of 5 per cent

·    Credit quality remains strong with no deterioration in credit risk; gross asset quality ratio remains stable at 28 basis points, in line with full year 2017 and 2016

·    Return on tangible equity increased to 11.7 per cent and earnings per share of 5.5 pence up 27 per cent

·    Balance sheet strength maintained with capital build of 210 basis points in the year and CET 1 ratio of 13.9 per cent after dividends and share buybacks

·    Tangible net assets per share of 53.0 pence, up 1.3 pence after the payment of dividends in the year

 

Guidance demonstrates confidence in continued strong performance

·    Continue to expect increased statutory return on tangible equity of 14 to 15 per cent in 2019 with strong underlying profit and lower below the line charges driving statutory profit growth

·    Ongoing capital build of 170 to 200 basis points per annum

·    Net interest margin of c.2.90 per cent in 2019 and, as previously guided, resilient through the plan period

·    Operating costs now expected to be less than £8 billion in 2019; a year ahead of original target, cost:income ratio still expected to fall every year and be in the low 40s exiting 2020 including remediation

 

 

·    Net asset quality ratio expected to be less than 30 basis points in 2019 and through the plan period

INCOME STATEMENT − UNDERLYING BASIS

 

 

 

 

 

 

 

 

 

 

 

 

 2018 

 

 2017 

 

Change

 

 

    

£m 

    

£m 

    

%

 

 

 

 

 

 

 

 

Net interest income

 

 

 12,714 

 

 12,320 

 

3

Other income

 

 

 6,010 

 

 6,059 

 

(1)

Vocalink gain on sale

 

 

 - 

 

 146 

 

 

Operating lease depreciation

 

 

 (956) 

 

 (1,053) 

 

9

Net income

 

 

 17,768 

 

 17,472 

 

2

Operating costs

 

 

 (8,165) 

 

 (8,184) 

 

-

Remediation

 

 

 (600) 

 

 (865) 

 

31

Total costs

 

 

 (8,765) 

 

 (9,049) 

 

3

Impairment

 

 

 (937) 

 

 (795) 

 

(18)

Underlying profit

 

 

 8,066 

 

 7,628 

 

6

Restructuring

 

 

 (879) 

 

 (621) 

 

(42)

Volatility and other items

 

 

 (477) 

 

 (82) 

 

 

Payment protection insurance provision

 

 

 (750) 

 

 (1,650) 

 

55

Statutory profit before tax

 

 

 5,960 

 

 5,275 

 

13

Tax expense

 

 

 (1,560) 

 

 (1,728) 

 

10

Statutory profit after tax

 

 

 4,400 

 

 3,547 

 

24

 

 

 

 

 

 

 

 

Earnings per share

 

 

5.5p

 

4.4p

 

27

Dividends per share - ordinary

 

 

3.21p

 

3.05p

 

5

Share buyback

 

 

2.46p

 

1.40p

 

76

Share buyback value

 

 

£1.75bn

 

£1bn

 

75

 

 

 

 

 

 

 

 

Banking net interest margin

 

 

2.93%

 

2.86%

 

7bp

Average interest-earning banking assets

 

 

£436bn

 

£435bn

 

-

Cost:income ratio

 

 

49.3%

 

51.8%

 

(2.5)pp

Cost:income ratio excluding remediation

 

 

46.0%

 

46.8%

 

(0.8)pp

Asset quality ratio

 

 

0.21%

 

0.18%

 

3bp

Underlying return on tangible equity

 

 

15.5%

 

14.0%

 

1.5pp

Return on tangible equity

 

 

11.7%

 

8.9%

 

2.8pp

 

 

 

 

 

KEY BALANCE SHEET METRICS

 

 

 

 

 

 

 

 

 

 

 

 

At 31 Dec

 

At 1 Jan

 

 

 

 

 

2018

 

2018

 

Change

 

 

 

 

 

(adjusted)1

 

%

 

 

 

 

 

 

 

 

Loans and advances to customers2

 

 

£444bn

 

£444bn

 

-

Customer deposits3

 

 

£416bn

 

£416bn

 

-

Loan to deposit ratio

 

 

107%

 

107%

 

-

Capital build4

 

 

210bp

 

244bp

 

(34)bp

Pro forma CET1 ratio5

 

 

13.9%

 

13.9%

 

-

Pro forma transitional MREL ratio5

 

 

32.6%

 

26.0%

 

6.6pp

Pro forma UK leverage ratio5

 

 

5.6%

 

5.4%

 

0.2pp

Risk-weighted assets

 

 

£206bn

 

£211bn

 

(2)

Tangible net assets per share

 

 

53.0p

 

51.7p

 

1.3p

 

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 £40.5 billion (1 January 2018: £16.8 billion).

3

Excludes repos of £1.8 billion (1 January 2018: £2.6 billion).

4

Capital build is reported on a pro forma basis before ordinary dividends and share buyback.

5

The CET1, MREL and leverage ratios at 31 December 2018 and 1 January 2018 are reported on a pro forma basis, reflecting the dividends paid up by the Insurance business in February 2019 and February 2018 respectively in relation to prior year earnings. The CET1 ratio is also reported post dividends and share buyback.

 

QUARTERLY INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter 

 

Quarter 

 

Quarter 

 

Quarter 

 

Quarter 

 

Quarter 

 

Quarter 

 

Quarter 

 

 

ended 

 

ended 

 

ended 

 

ended 

 

ended 

 

ended 

 

ended 

 

ended 

 

 

31 Dec 

 

30 Sept 

 

30 June 

 

31 Mar 

 

31 Dec 

 

30 Sept 

 

30 June 

 

31 Mar 

 

 

2018 

 

2018 

 

2018 

 

2018 

 

2017 

 

2017 

 

2017 

 

2017 

 

  

£m 

 

£m 

  

£m 

  

£m 

  

£m 

  

£m 

  

£m 

 

£m 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 3,170 

 

 3,200 

 

 3,173 

 

 3,171 

 

 3,203 

 

 3,192 

 

 2,997 

 

 2,928 

Other income

 

 1,400 

 

 1,486 

 

 1,713 

 

 1,411 

 

 1,429 

 

 1,428 

 

 1,720 

 

 1,482 

Vocalink gain on sale

 

 - 

 

 - 

 

 - 

 

 - 

 

 - 

 

 - 

 

 146 

 

 - 

Operating lease depreciation

 

 (225) 

 

 (234) 

 

 (245) 

 

 (252) 

 

 (284) 

 

 (274) 

 

 (263) 

 

 (232) 

Net income

 

 4,345 

 

 4,452 

 

 4,641 

 

 4,330 

 

 4,348 

 

 4,346 

 

 4,600 

 

 4,178 

Operating costs

 

 (2,151) 

 

 (1,990) 

 

 (2,016) 

 

 (2,008) 

 

 (2,165) 

 

 (2,001) 

 

 (2,050) 

 

 (1,968) 

Remediation

 

 (234) 

 

 (109) 

 

 (197) 

 

 (60) 

 

 (325) 

 

 - 

 

 (340) 

 

 (200) 

Total costs

 

 (2,385) 

 

 (2,099) 

 

 (2,213) 

 

 (2,068) 

 

 (2,490) 

 

 (2,001) 

 

 (2,390) 

 

 (2,168) 

Impairment

 

 (197) 

 

 (284) 

 

 (198) 

 

 (258) 

 

 (257) 

 

 (270) 

 

 (141) 

 

 (127) 

Underlying profit

 

 1,763 

 

 2,069 

 

 2,230 

 

 2,004 

 

 1,601 

 

 2,075 

 

 2,069 

 

 1,883 

Restructuring

 

 (267) 

 

 (235) 

 

 (239) 

 

 (138) 

 

 (152) 

 

 (148) 

 

 (164) 

 

 (157) 

Volatility and other items

 

 (270) 

 

 (17) 

 

 (16) 

 

 (174) 

 

 (69) 

 

 24 

 

 35 

 

 (72) 

Payment protection insurance provision

 

 (200) 

 

 - 

 

 (460) 

 

 (90) 

 

 (600) 

 

 - 

 

 (700) 

 

 (350) 

Statutory profit before tax

 

 1,026 

 

 1,817 

 

 1,515 

 

 1,602 

 

 780 

 

 1,951 

 

 1,240 

 

 1,304 

Tax expense

 

 (290) 

 

 (420) 

 

 (395) 

 

 (455) 

 

 (342) 

 

 (481) 

 

 (491) 

 

 (414) 

Statutory profit after tax

 

 736 

 

 1,397 

 

 1,120 

 

 1,147 

 

 438 

 

 1,470 

 

 749 

 

 890 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost:income ratio

 

54.9%

 

47.1%

 

47.7%

 

47.8%

 

57.3%

 

46.0%

 

52.0%

 

51.9%

Cost:income ratio excluding remediation

 

49.5%

 

44.7%

 

43.4%

 

46.4%

 

49.8%

 

46.0%

 

44.6%

 

47.1%

Asset quality ratio

 

0.18%

 

0.25%

 

0.18%

 

0.23%

 

0.23%

 

0.24%

 

0.13%

 

0.12%

 

 

 

 

 

 

 

 

 

BALANCE SHEET ANALYSIS

 

 

 

 

 

 

 

 

 

 

At 31 Dec

 

At 1 Jan

 

 

 

 

2018

 

2018

 

 

 

 

 

 

(adjusted)1

 

Change

 

    

£bn

 

£bn

 

%

Loans and advances to customers

 

 

 

 

 

 

Open mortgage book

 

266.6

 

267.0

 

-

Closed mortgage book

 

21.2

 

23.6

 

(10)

Credit cards

 

18.1

 

17.9

 

1

UK Retail unsecured loans

 

7.9

 

7.8

 

1

UK Motor Finance

 

14.6

 

13.5

 

8

Overdrafts

 

1.3

 

1.4

 

(7)

Retail other2

 

8.6

 

8.0

 

8

SME3

 

31.8

 

31.0

 

3

Mid Markets

 

31.7

 

29.4

 

8

Global Corporates and Financial Institutions

 

34.4

 

32.6

 

6

Commercial Banking other

 

4.3

 

7.2

 

(40)

Irish mortgage portfolio

 

 -

 

4.2

 

 

Wealth and other

 

3.9

 

0.6

 

 

Loans and advances to customers4

 

444.4

 

444.2

 

-

 

 

 

 

 

 

 

Customer deposits

 

 

 

 

 

 

Retail current accounts

 

73.7

 

70.3

 

5

Commercial current accounts3

 

34.9

 

30.0

 

16

Retail relationship savings accounts

 

145.9

 

150.4

 

(3)

Retail tactical savings accounts

 

16.8

 

18.9

 

(11)

Commercial deposits3

 

130.1

 

131.7

 

(1)

Wealth and central items

 

14.9

 

14.2

 

5

Total customer deposits5

 

416.3

 

415.5

 

-

 

 

 

 

 

 

 

Total assets

 

797.6

 

811.2

 

(2)

Total liabilities

 

747.4

 

763.2

 

(2)

 

 

 

 

 

 

 

Shareholders' equity

 

43.4

 

42.4

 

2

Other equity instruments

 

6.5

 

5.4

 

20

Non-controlling interests

 

0.3

 

0.2

 

50

Total equity

 

50.2

 

48.0

 

5

 

 

 

 

 

 

 

Ordinary shares in issue, excluding own shares

 

71,149m

 

71,944m

 

(1)

 

 

 

 

 

 

 

Average Retail current accounts

 

£71.6bn

 

£67.5bn

 

6

 

 

 

1

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

2

Retail other primarily includes Europe.

3

Includes Retail Business Banking and other reclassifications.

4

Excludes reverse repos of £40.5 billion (1 January 2018: £16.8 billion).

5

Excludes repos of £1.8 billion (1 January 2018: £2.6 billion).

 

[

 

 

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT

 

In 2018 the Group has again delivered significant benefits for our customers and a strong financial performance, with increased profits and returns. As a result of this performance, we have been able to recommend an increased dividend and share buyback. Our differentiated, customer focused, UK business model continues to position us well for sustainable success and continuing to deliver our purpose of Helping Britain Prosper.

 

I am clearly proud of our customer focus and financial performance. To deliver this sustainable success in the long-term we need to ensure we remain focused on enhancing customer experience. With this in mind, in February 2018 we announced our ambitious strategy to transform the Group for success in a digital world, with a significant increase in strategic investment. We have already made a great start in implementing the strategic initiatives which will further digitise the Group, enhance customer experience, maximise our capabilities as an integrated financial services provider and transform the way we work. In addition, towards the end of the year we also announced a strategic partnership with Schroders to create a market leading wealth proposition. Continued delivery against our strategic priorities positions us well for future success and our confidence is reflected in our guidance.

 

Given our UK focus, our performance is inextricably linked to the health of the UK economy. Over 2018, economic performance has remained resilient with record employment and continued GDP growth and, whilst the near-term outlook remains unclear, particularly given the ongoing EU withdrawal negotiations, our strategy will continue to deliver for our customers. Our strategy is framed by our purpose of Helping Britain Prosper, being the bank with the largest retail and commercial presence throughout the country. Our unique business model and market leading efficiency will ensure we can continue to invest in customer propositions and grow our leading digital bank whilst delivering strong financial performance and market leading returns.

 

Financial performance

Statutory profit after tax of £4.4 billion was 24 per cent higher than 2017 and earnings per share at 5.5 pence per share was 27 per cent higher. This was driven by improved underlying profit including lower remediation charges and we continue to narrow the gap between underlying and statutory profit, a trend we expect to continue as statutory profits increase further. As a result of this performance the Group has delivered a further increase to our return on tangible equity, which is now a market leading 11.7 per cent. Underlying profit of £8.1 billion increased 6 per cent, reflecting growth in income and lower costs, partly offset by the expected increase in the impairment charge. Our relentless focus on cost efficiency led to a reduction in operating costs despite increased strategic investment, and our cost:income ratio improved further to 49.3 per cent. Asset quality remains strong with the Group's gross asset quality ratio remaining flat at 28 basis points, while the net asset quality ratio increased to 21 basis points, from 18 basis points, driven by expected lower releases and write-backs.

 

The Group's loans and advances were stable at £444 billion with growth in targeted segments including SME, Mid Markets and consumer lending offset by the sale of the £4 billion Irish mortgage portfolio in the first half of 2018. The Group's capital position remains strong with a pro forma CET1 ratio of 13.9 per cent after allowing for ordinary dividends and the share buyback.

 

Given the Group's capital build of 210 basis points in the year, the Board has recommended a final ordinary dividend of 2.14 pence per share, bringing the total ordinary dividend for the year to 3.21 pence per share. This represents an increase of 5 per cent on 2017 and is in line with our progressive and sustainable ordinary dividend policy. In addition, the Board has announced its intention to implement a share buyback programme of up to £1.75 billion, equivalent to 2.46 pence per share, up 76 per cent from last year.

 

 

 

Strategic progress

In February 2018, we launched the third stage of our strategic plan with an increased strategic investment of more than £3 billion over the three year plan period, building on our unique competitive advantages, to transform the Group to succeed in a digital world. Over the first year of the plan we have delivered significant progress against our strategic priorities.

 

Leading customer experience

We continue to believe that a multi-brand, multi-channel strategy is the best approach to meet customers' evolving needs. We are the UK's largest digital bank, with 15.7 million digitally active customers, and in 2018 have launched API-enabled Open Banking aggregation functionality as well as enhanced security and anti-fraud features. Although we continue to see increased use of digital channels, which now accounts for 74 per cent of our sales, we remain committed to maintaining the UK's largest branch network, with one out of five branches in the country, whilst tailoring it to meet customers' complex needs more effectively. In the year we opened our flagship Halifax branch, increased our mobile branch fleet to 44 and extended our remote advice coverage to 270 branches. We are also delivering increasingly targeted customer propositions, having recently launched our new Lend a Hand mortgage. The success of our multi-channel, multi-brand approach is reflected in our net promoter score which increased to 62 in the year and is up c.50 per cent from 2011.

 

Digitising the Group

We have increased investment in technology which now represents 16 per cent of operating costs, with over two-thirds relating to enhancing existing capabilities and creating new ones. This has driven operational efficiencies and improved the experience of customers and colleagues. We are adopting new technologies, introducing machine learning and creating approximately 780,000 hours of additional colleague capacity through the use of robotics for simple repetitive tasks. We have also made targeted investments in public and private cloud solutions, which will deliver more efficient and scalable infrastructure going forward, whilst collaborating with fintechs to accelerate the digital transformation of the business, as part of our broader innovation strategy.

 

Maximising the Group's capabilities

In 2018 we launched Single Customer View; a unique capability already enabling over 3 million customers to view in one place the pension and insurance products they hold with the Group alongside their banking products. We have expanded our workplace pensions and savings offering to over 2 million customers and have seen net inflows of £13 billion into our financial planning and retirement propositions. We have also strengthened our client relationship model and improved online functionality for Commercial Banking clients. Our Schroders partnership announced in October is a key part of our strategy to accelerate growth in Wealth by leveraging our multi-channel customer reach and Schroders' investment expertise, with the aim of becoming a top three UK financial planning business within five years.

 

Transforming ways of working

We recognise that our colleagues are critical to the success of our transformation and are therefore making our biggest ever investment in our people. In 2018 we have increased training hours by over 50 per cent, including more than 1 million hours dedicated to developing skills of the future. We have also introduced more modern collaborative working environments, simplified people processes by replacing several HR systems with a single platform and developed a new performance management system 'Your Best', which launched in January 2019. We are also transforming the way in which change is delivered with 15 per cent of teams now using Agile methodologies.

 

Helping Britain Prosper Plan

The Group's success is intertwined with the UK's prosperity and we acknowledge we have a responsibility to help address the economic, social and environmental challenges the country faces. We do this through our Helping Britain Prosper Plan, which was simplified and updated in 2018 to support our three year strategy and focus on metrics that have the most impact on people, businesses and communities.

 

During 2018 we lent over £12 billion to first time buyers and increased lending to SME and Mid Market businesses by £3 billion to Help Britain Prosper and have committed to lending up to £18 billion in 2019 to businesses as part of our continued support for the UK economy. We have also provided digital skills training for more than 700,000 individuals, SMEs and charities, and supported over 3,000 charities through our independent charitable Foundations.

 

In 2018, the Group became the first FTSE 100 company to set a public target to increase representation of Black, Asian and Minority Ethnic (BAME) colleagues, committing to 8 per cent of senior management and to 10 per cent of the total workforce by 2020. At the end of the year 6.4 per cent of senior management and 9.5 per cent of all colleagues were from BAME backgrounds.

 

In recognition of the importance the Group places on helping the UK transition to a low carbon economy, in 2019 we have included a specific sustainability metric in our Plan. This signals our commitment and is supported by a detailed sustainability strategy.

 

Outlook

Over 2018 the UK economy has proven itself to be resilient with record employment and continued GDP growth. Whilst the near term outlook for the UK economy remains unclear, we continue to believe that our simple, low risk business model will deliver strong financial performance and market leading returns with a resilient net interest margin, lower operating costs enabling increased investment, strong asset quality and lower remediation costs. Our guidance demonstrates our confidence in the business model and the future prospects of the Group:

·    We are already delivering a market leading return on tangible equity and expect further improvement in 2019 to 14 to 15 per cent

·    Capital build is expected to remain strong at 170 to 200 basis points per year with the Board's view of our CET1 capital requirement remaining at around 13 per cent plus a management buffer of around 1 per cent. As a result we continue to expect to deliver progressive and sustainable ordinary dividends whilst maintaining the flexibility to return surplus capital to shareholders 

·    Our net interest margin is expected to be c.2.90 per cent in 2019 and, as previously guided, remain resilient through the plan period

·    Our market leading efficiency continues to be a competitive advantage and we now expect operating costs to be less than £8 billion in 2019, a year ahead of the original target. We also continue to expect a cost:income ratio, including remediation costs, in the low 40s as we exit 2020, with improvements in this ratio every year

·    Credit quality remains strong and, given our low risk business model and the significant portfolio improvements in recent years, we expect an asset quality ratio of less than 30 basis points in 2019 and the rest of the plan period

 

Summary

Framed by our purpose to Help Britain Prosper, the Group has again delivered a strong customer experience and financial performance in 2018 whilst making significant progress in building new capabilities to transform the Group to succeed in a digital world. While the year ahead will bring its own challenges, given the ongoing economic and political uncertainty, I continue to believe that our simple, low risk business model is the right one. Our current strategic plan for 2018 to 2020, with continued strong investment, will further improve customer propositions and grow our leading digital bank as part of our multi-channel strategy, while continuing to provide leading and sustainable returns to our shareholders.

 

 

 

 

 

SUMMARY OF GROUP RESULTS

 

Strong and sustainable financial performance with continued growth in profits and returns

The Group's statutory profit after tax of £4,400 million was 24 per cent higher than in 2017, driven by increased underlying profit, a reduction in the payment protection insurance charge and a lower effective tax rate. Statutory return on tangible equity increased by 2.8 percentage points to 11.7 per cent.

 

Underlying profit was £8,066 million, 6 per cent higher than 2017, with higher net income and lower total costs partly offset by the expected increase in the impairment charge. The underlying return on tangible equity increased to 15.5 per cent (2017: 14.0 per cent).

 

Given the strong capital build of 210 basis points this year, the Board has recommended a final ordinary dividend of 2.14 pence per share, making a total ordinary dividend of 3.21 pence per share, an increase of 5 per cent on 2017 and in line with our progressive and sustainable ordinary dividend policy. In addition, the Board intends to implement a share buyback of up to £1.75 billion, equivalent to 2.46 pence per share. The Group's pro forma CET1 ratio was 13.9 per cent post dividend and allowing for the proposed share buyback (31 December 2017: 13.9 per cent).

 

Net income

 

 

 

 

 

 

 

 

 

2018

 

2017

 

Change

 

 

£m

 

£m

 

%

 

 

 

 

 

 

 

Net interest income

 

 12,714

 

 12,320

 

3

Other income

 

 6,010

 

 6,059

 

(1)

Vocalink gain on sale

 

 -

 

 146

 

 

Operating lease depreciation1

 

 (956)

 

 (1,053)

 

9

Net income

 

 17,768

 

 17,472

 

2

 

 

 

 

 

 

 

Banking net interest margin

 

2.93%

 

2.86%

 

7bp

Average interest-earning banking assets

 

£436.0bn

 

£434.9bn

 

-

 

1

Net of profits on disposal of operating lease assets of £60 million (2017: £32 million).

 

Net income of £17,768 million was 2 per cent higher than in 2017, with an increase in net interest income partly offset by slightly lower other income, while operating lease depreciation reduced by 9 per cent.

 

Net interest income of £12,714 million increased by 3 per cent compared to 2017, reflecting an improved net interest margin and slightly higher average interest-earning banking assets of £436 billion. The net interest margin increased to 2.93 per cent with lower deposit costs and an increased contribution from the structural hedge, again more than offsetting continued pressure on asset margins. In line with previous guidance, the Group expects a net interest margin of c.2.90 per cent in 2019 and for the margin to be resilient through the plan period.

 

The Group manages the risk to its earnings and capital from movements in interest rates centrally by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 31 December 2018 the Group's hedge had a nominal balance of £180 billion (31 December 2017: £165 billion) and an average duration of around four years (31 December 2017: around three years). The Group generated £2.7 billion of income from the structural hedge balances in the year (2017: £2.5 billion). The benefit from the hedge in the year was £1.4 billion over LIBOR (2017: £1.9 billion) with a fixed earnings rate of approximately 0.7 per cent over LIBOR (2017: 1.1 per cent).

 

Other income of £6,010 million was slightly lower excluding the £146 million gain on sale of Vocalink in 2017. Strong growth in new business within Insurance and Wealth, largely driven by increased workplace pensions income, was offset by slightly lower clients market activity in Commercial Banking while Retail remained stable, due in part to the launch of a simpler overdraft fee structure, which has now been fully implemented. Other income includes a gain of £270 million on the sale of £18 billion of gilts and other liquid assets, compared with a £274 million gain on sale of such assets in 2017.

 

Operating lease depreciation reduced by 9 per cent to £956 million reflecting improved used car prices and the non- recurrence of accelerated depreciation charges within Commercial Banking in 2017.
 

Total costs

 

 

 

 

 

 

 

 

 

2018

 

2017

 

Change

 

 

£m

 

£m

 

%

 

 

 

 

 

 

 

Operating costs

 

 8,165

 

 8,184

 

-

Remediation

 

 600

 

 865

 

31

Total costs

 

 8,765

 

 9,049

 

3

 

 

 

 

 

 

 

Cost:income ratio

 

49.3%

 

51.8%

 

(2.5)pp

Cost:income ratio excluding remediation

 

46.0%

 

46.8%

 

(0.8)pp

 

Total costs of £8,765 million were 3 per cent lower than in 2017, driven by the reduction in operating costs and remediation charges.

 

Operating costs of £8,165 million were slightly lower than 2017, with business as usual costs down 4 per cent offset by expected higher investment expensed and depreciation which together increased by 10 per cent. During 2018 the Group capitalised £1.5 billion of investment spend, equivalent to c.60 per cent of above the line investment, in line with 2017. Capitalised investment spend of £1.0 billion, or 67 per cent, related to intangible assets, a similar proportion to 2017.

 

The Group's market leading cost:income ratio continues to provide competitive advantage and improved by 2.5 percentage points to 49.3 per cent (or 0.8 percentage points to 46.0 per cent, excluding remediation) with positive jaws of 5 per cent.

 

Remediation charges were 31 per cent lower at £600 million and included additional charges of £234 million in the fourth quarter relating to a number of small items across existing programmes. The Group expects remediation charges to reduce significantly in 2019.

 

The Group continues to target a cost:income ratio including remediation in the low 40s exiting 2020, with reductions every year, and now expects operating costs to be less than £8 billion in 2019, a year ahead of the original target.

 

 

 

Impairment

 

 

 

 

 

 

 

 

 

 

2018

 

2017

 

Change

 

 

£m

 

£m

 

%

 

 

 

 

 

 

 

Impairment charge

 

937

 

795

 

(18)

Asset quality ratio

 

0.21%

 

0.18%

 

3bp

Gross asset quality ratio

 

0.28%

 

0.28%

 

-

 

 

 

 

 

 

 

 

 

At 31 Dec

 

At 1 Jan

 

 

 

 

20181

 

20181

 

Change

 

 

%

 

%

 

%

 

 

 

 

 

 

 

Stage 2 gross loans and advances to customers as a % of total

 

7.8

 

11.3

 

(3.5)pp

Stage 2 ECL2 allowances as a % of Stage 2 drawn balances

 

4.1

 

3.5

 

0.6pp

 

 

 

 

 

 

 

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

 

1.9

 

1.9

 

-

Stage 3 ECL2 allowances as a % of Stage 3 drawn balances

 

24.3

 

24.0

 

0.3pp

 

 

 

 

 

 

 

Total ECL2 allowances as a % of drawn balances

 

0.9

 

1.0

 

(0.1)pp

 

 

 

1

Underlying basis (including purchased and originated credit impaired assets in Stage 2 and 3).

2

Expected credit losses.

 

Credit quality remains strong with no deterioration in credit risk. The Group's loan portfolios continue to be well positioned, reflecting the Group's 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 remains stable at 28 basis points, in line with full year 2017 and 2016. On a net basis the asset quality ratio increased to 21 basis points and the impairment charge increased by 18 per cent to £937 million, both reflecting expected lower releases and write-backs.

 

Overall credit performance in the UK mortgage book remains strong with average mortgage loan to value ratios broadly stable at 44.1 per cent and new to arrears as a proportion of the total book remaining low. New business average loan to value was 62.5 per cent and around 88 per cent of the portfolio continues to have loan to value ratios of less than 80 per cent. The consumer finance portfolios continue to perform well with credit card business new to arrears as a proportion of the total book remaining low whilst the UK motor finance book continues to benefit from the Group's conservative approach to residual values and resilient used car prices. In Commercial Banking, the book continues to benefit from effective risk management, including reduced single name and key sector exposures. Together with a resilient economic environment, this has resulted in impairment charges remaining at a low level.

 

There have been no significant changes to the Group's economic assumptions included in its IFRS 9 models. IFRS 9 is procyclical and introduces additional volatility but through the cycle expectations remain unchanged. The Group's expected credit loss (ECL) allowance reflects a probability weighted view of future economic scenarios including a 30 per cent weighting of downside and a 10 per cent weighting of severe downside. The weighted impact of these negative scenarios is already included within the Group's ECL allowance which includes £0.6 billion in respect of the severe downside scenario.

 

Stage 2 loans and advances to customers as a percentage of total lending reduced by 3.5 percentage points to 7.8 per cent reflecting the sale of the Irish portfolio, model refinements and portfolio improvements whilst Stage 3 loans and advances were stable at 1.9 per cent. At the same time coverage of Stage 2 assets has increased to 4.1 per cent of drawn balances and Stage 3 assets to 24.3 per cent. At the end of 2018, the Group held a total ECL allowance of £4.4 billion, equivalent to over four years of net underlying cash write-offs (and five years for the mortgage portfolio).

 

The Group expects an asset quality ratio of less than 30 basis points in 2019 and through the plan period reflecting continued strong asset quality and further reductions in releases and write-backs.
 

Statutory profit

 

 

 

 

 

 

 

 

 

 

 2018 

 

 2017 

 

Change

 

   

£m 

 

£m 

 

%

 

 

 

 

 

 

 

Underlying profit

 

 8,066 

 

 7,628 

 

6

Restructuring

 

 (879) 

 

 (621) 

 

(42)

Volatility and other items

 

 

 

 

 

 

Market volatility and asset sales

 

 (50) 

 

 279 

 

 

Amortisation of purchased intangibles

 

 (108) 

 

 (91) 

 

(19)

Fair value unwind and other

 

 (319) 

 

 (270) 

 

(18)

 

 

 (477) 

 

 (82) 

 

 

Payment protection insurance provision

 

 (750) 

 

 (1,650) 

 

55

Statutory profit before tax

 

 5,960 

 

 5,275 

 

13

Tax expense

 

 (1,560) 

 

 (1,728) 

 

10

Statutory profit after tax

 

 4,400 

 

 3,547 

 

24

 

 

 

 

 

 

 

Earnings per share

 

5.5p 

 

4.4p 

 

27

 

Further information on the reconciliation of underlying to statutory results is included on page 24.

 

The Group's statutory profit after tax of £4,400 million was 24 per cent higher than in 2017, driven by increased underlying profit, a reduction in the payment protection insurance charge and a lower effective tax rate. Earnings per share was 5.5p, 27 per cent higher than 2017 driven by increased statutory profit and lower share count.

 

Restructuring costs were £879 million, with £267 million incurred in the fourth quarter, and included severance costs relating to the Group's strategic investment plans as well as the expected costs of the integration of MBNA and Zurich's UK workplace pensions and savings business, ring-fencing and the rationalisation of the non-branch property portfolio. The fourth quarter charge included £57 million of severance costs, making £247 million for the year. Restructuring costs are expected to reduce significantly in 2019 with ring-fencing and the integration of MBNA now substantially complete.

 

Market volatility and asset sales of £50 million included negative insurance volatility of £103 million, with £236 million of negative insurance volatility in the fourth quarter reflecting weaker equity markets and wider credit spreads, compared to positive insurance volatility of £286 million in 2017. Market volatility also included a £105 million loss on sale of the Irish mortgage portfolio and an adjustment to past service pension liabilities, both of which were recognised in the first half of 2018.

 

The increase in amortisation of purchased intangibles to £108 million (2017: £91 million) and fair value unwind and other items to £319 million (2017: £270 million) were both largely driven by the inclusion of MBNA.

 

The payment protection insurance charge of £750 million included an additional £200 million charged in the fourth quarter. The additional charge was largely driven by an increase in average redress per case, additional operational costs to deal with potential complaint volatility and continued improvements in data interrogation and the Group's ability to identify valid claims, partly offset by lower reactive complaints which have been 12,000 per week in the second half of 2018, compared with the Group's assumption of 13,000 per week. The outstanding balance sheet provision at 31 December 2018 was £1.3 billion and continues to assume around 13,000 complaints per week until the timebar in August 2019.

 

 

 

Taxation

 

The tax expense was £1,560 million (2017: £1,728 million) representing an effective tax rate of 26 per cent (2017: 33 per cent). The lower effective tax rate was driven by the reduction in non-deductible conduct provisions, including 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 11.7 per cent up from 8.9 per cent in 2017, reflecting the increase in statutory profit after tax, and slightly lower average tangible equity. The underlying return on tangible equity increased to 15.5 per cent (2017: 14.0 per cent) reflecting increased underlying profit.

 

The Group continues to expect a return on tangible equity of 14 to 15 per cent in 2019.

 

 

Balance sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 Dec

 

At 1 Jan

 

 

 

At 31 Dec

 

 

 

  

2018

  

2018

 

Change

 

2017

 

Change

 

 

 

 

(adjusted)1

 

%

 

(reported)

 

%

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers2

 

£444bn

 

£444bn

 

-

 

£456bn

 

(2)

Customer deposits3

 

£416bn

 

£416bn

 

-

 

£416bn

 

-

Loan to deposit ratio

 

107%

 

107%

 

-

 

110%

 

(3)pp

 

 

 

 

 

 

 

 

 

 

 

Wholesale funding

 

£123bn

 

£101bn

 

22

 

£101bn

 

22

Wholesale funding <1 year maturity

 

£33bn

 

£29bn

 

16

 

£29bn

 

16

Of which money-market funding <1 year maturity4

 

£21bn

 

£15bn

 

44

 

£15bn

 

44

Liquidity coverage ratio - eligible assets

 

£129bn

 

 

 

 

 

£121bn

 

7

Liquidity coverage ratio

 

130%

 

 

 

 

 

127%

 

3pp

 

 

 

1

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

2

Excludes reverse repos of £40.5 billion (1 January 2018: £16.8 billion; 31 December 2017: £16.8 billion).

3

Excludes repos of £1.8 billion (1 January 2018: £2.6 billion; 31 December 2017: £2.6 billion).

4

Excludes balances relating to margins of £3.8 billion (1 January 2018: £2.1 billion; 31 December 2017: £2.1 billion) and settlement accounts of £1.2 billion (1 January 2018: £1.5 billion; 31 December 2017: £1.5 billion).

 

Loans and advances to customers were stable at £444 billion with growth in targeted segments offset by the £4 billion sale of the Irish mortgage portfolio and a reduction of £2 billion in the closed mortgage book. The growth in targeted segments included £3 billion from start-ups, SME and Mid Markets and £1 billion from UK Motor Finance whilst the open mortgage book remained broadly flat at £267 billion.

 

The Group continues to optimise funding and target current account balance growth, with Retail current accounts up 5 per cent to £74 billion (31 December 2017: £70 billion) and Commercial current account balances at £35 billion (31 December 2017: £30 billion).

 

The loan to deposit ratio was stable at 107 per cent. Wholesale funding increased by 22 per cent to £123 billion, compared to £101 billion at 31 December 2017, as the Group refinanced Bank of England Funding for Lending Scheme maturities and increased liquidity buffers.

 

The Group's liquidity surplus continues to exceed the regulatory minimum and internal risk appetite with a liquidity coverage ratio (LCR) of 130 per cent (31 December 2017: 127 per cent) and LCR eligible assets of £129 billion (31 December 2017: £121 billion).

 

 

 

 

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 Dec

 

At 1 Jan

 

 

 

At 31 Dec

 

 

 

 

2018

  

2018

 

Change

 

2017

 

Change

 

 

 

 

(adjusted)1

 

%

 

(reported)

 

%

 

 

 

 

 

 

 

 

 

 

 

Capital build2

 

210bp

 

244bp

 

(34)bp

 

245bp

 

(35)bp

Pro forma CET1 ratio3

 

13.9%

 

13.9%

 

-

 

13.9%

 

-

Pro forma transitional total capital ratio3

 

23.1%

 

21.5%

 

1.6pp

 

21.5%

 

1.6pp

Pro forma transitional MREL ratio3

 

32.6%

 

26.0%

 

6.6pp

 

26.0%

 

6.6pp

Pro forma UK leverage ratio3

 

5.6%

 

5.4%

 

0.2pp

 

5.4%

 

0.2pp

Risk-weighted assets

 

£206bn

 

£211bn

 

(2)

 

£211bn

 

(2)

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

£43bn

 

£42bn

 

2

 

£44bn

 

-

Tangible net assets per share

 

53.0p

 

51.7p

 

1.3p

 

53.3p

 

(0.3)p

 

 

 

1

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

2

Capital build is reported on a pro forma basis before ordinary dividends and share buyback.

3

The CET1, total, leverage and MREL ratios at 31 December 2018, 1 January 2018 and 31 December 2017 are reported on a pro forma basis, reflecting the dividends paid up by the Insurance business in February 2019 and February 2018 respectively in relation to prior year earnings. The CET1 ratio is also reported post dividends and share buyback.

 

The Group's balance sheet remains strong with capital build of 210 basis points, pre 2018 dividends, and a pro forma CET1 ratio of 13.9 per cent post proposed buyback and Insurance dividend.

 

The capital build included 195 basis points from underlying performance, 25 basis points from earnings related dividends received from the Insurance business and 25 basis points in relation to the sale of the Irish mortgage portfolio. Other movements, resulting in a net increase of 3 basis points, included the impact of structural changes arising from transfers between Insurance and the ring-fenced bank, risk-weighted asset reductions, market movements and expected pension deficit contributions. This was partly offset by 38 basis points for PPI charges.

 

The Group continues to expect ongoing capital build of 170 to 200 basis points per year, after allowing for the impact of estimated RWA inflation and increased pension contributions.

 

In July 2018, the Prudential Regulation Authority (PRA) reduced the Group's Pillar 2A CET1 requirement from 3.0 per cent to 2.6 per cent, increasing to 2.7 per cent with effect from 1 January 2019 to reflect commencement of the UK's ring-fencing regime. In addition the countercyclical capital buffer rate on UK credit exposures increased to 1.0 per cent in November 2018 resulting in a countercyclical capital buffer for the Group of 0.9 per cent.

 

The Board's view of the level of CET1 capital required for the Group remains around 13 per cent, plus a management buffer of around 1 per cent.

 

The transitional total capital ratio increased to 23.1 per cent on a pro forma basis (31 December 2017: 21.5 per cent) and the Group remains well positioned to meet its MREL requirement from 2020 with a pro forma transitional MREL ratio of 32.6 per cent (31 December 2017: 26.0 per cent). The leverage ratio on a pro forma basis increased to 5.6 per cent (31 December 2017: 5.4 per cent).

 

Tangible net assets per share of 53.0 pence (1 January 2018: 51.7 pence) was up 1.3 pence with an increase of 4.4 pence before dividends of 3.1 pence paid in 2018, driven by increased statutory profit after tax partly offset by the effects of the share buyback and other reserve movements.

 

 

 

Dividend and share buyback

 

The Group has a progressive and sustainable ordinary dividend policy whilst maintaining the flexibility to return surplus capital through buybacks or special dividends. The Board's view of the current level of capital required to grow the business, meet regulatory requirements and cover uncertainties remains around 13 per cent plus a management buffer of around 1 per cent.

 

Given the strong business performance in 2018 the Board has recommended a final ordinary dividend of 2.14 pence per share. This is in addition to the interim ordinary dividend of 1.07 pence per share that was announced in the 2018 half year results. The total ordinary dividend per share for 2018 of 3.21 pence per share has increased by 5 per cent from 3.05 pence per share in 2017.

 

The Group is planning on the basis of an orderly EU withdrawal and, given the resilience of the UK economy, intends to implement a share buyback of up to £1.75 billion (2017: £1 billion) which will commence in March 2019 and is expected to be completed by 31 December 2019. The Board's current preference is to return surplus capital by way of a buyback programme given the amount of surplus capital, the normalisation of ordinary dividends, and the flexibility that a buyback programme offers.

 

Given the total ordinary dividend of 3.21 pence per share and the intended share buyback, equivalent to up to 2.46 pence per ordinary share, the total capital return for 2018 will be up to 5.67 pence per share, an increase of 27 per cent on the prior year, equivalent to £4.0 billion.

 

Ring-fencing

 

The Group successfully launched its new non ring-fenced bank, Lloyds Bank Corporate Markets plc in 2018, transferring in non ring-fenced business from the rest of the Group, thereby meeting its legal requirements under ring-fencing legislation. As a predominantly UK retail and commercial bank, the effect on the Group has been relatively limited, with minimal impact on the majority of the Group's retail and commercial customers. As the vast majority of the Group's business has continued to be held by Lloyds Bank plc and its subsidiaries there has not been a material impact on the financial strength of Lloyds Bank plc.

 

 

 

UNDERLYING BASIS - SEGMENTAL ANALYSIS

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial 

 

Insurance 

 

Central 

 

 

 

 

Retail 

 

Banking 

 

and Wealth 

 

items 

 

Group 

 

  

£m 

  

£m 

  

£m 

  

£m 

  

£m 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 9,066 

 

 3,004 

 

 123 

 

 521 

 

 12,714 

Other income

 

 2,171 

 

 1,653 

 

 1,865 

 

 321 

 

 6,010 

Operating lease depreciation

 

 (921) 

 

 (35) 

 

 - 

 

 - 

 

 (956) 

Net income

 

 10,316 

 

 4,622 

 

 1,988 

 

 842 

 

 17,768 

Operating costs

 

 (4,915) 

 

 (2,167) 

 

 (1,021) 

 

 (62) 

 

 (8,165) 

Remediation

 

 (267) 

 

 (203) 

 

 (39) 

 

 (91) 

 

 (600) 

Total costs

 

 (5,182) 

 

 (2,370) 

 

 (1,060) 

 

 (153) 

 

 (8,765) 

Impairment

 

 (862) 

 

 (92) 

 

 (1) 

 

 18 

 

 (937) 

Underlying profit

 

 4,272 

 

 2,160 

 

 927 

 

 707 

 

 8,066 

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.68%

 

3.27%

 

 

 

 

 

2.93%

Average interest-earning banking assets

 

£342.3bn

 

£91.2bn

 

£0.8bn

 

£1.7bn

 

£436.0bn

Asset quality ratio

 

0.25%

 

0.09%

 

 

 

 

 

0.21%

Return on risk-weighted assets

 

4.59%

 

2.50%

 

 

 

 

 

3.86%

Loans and advances to customers1

 

£340.1bn

 

£100.4bn

 

£0.9bn

 

£3.0bn

 

£444.4bn

Customer deposits2

 

£252.8bn

 

£148.6bn

 

£14.1bn

 

£0.8bn

 

£416.3bn

Risk-weighted assets

 

£94.3bn

 

£86.0bn

 

£1.2bn

 

£24.9bn

 

£206.4bn

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial 

 

Insurance 

 

Central 

 

 

 

 

Retail3 

 

Banking

 

and Wealth 

 

items

 

Group 

 

  

£m 

  

£m 

  

£m 

  

£m 

  

£m 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 8,706 

 

 3,030 

 

 133 

 

 451 

 

 12,320 

Other income

 

 2,221 

 

 1,798 

 

 1,846 

 

 194 

 

 6,059 

Vocalink gain on sale

 

 - 

 

 - 

 

 - 

 

 146 

 

 146 

Operating lease depreciation

 

 (947) 

 

 (105) 

 

 - 

 

 (1) 

 

 (1,053) 

Net income

 

 9,980 

 

 4,723 

 

 1,979 

 

 790 

 

 17,472 

Operating costs

 

 (4,866) 

 

 (2,230) 

 

 (1,040) 

 

 (48) 

 

 (8,184) 

Remediation

 

 (633) 

 

 (173) 

 

 (40) 

 

 (19) 

 

 (865) 

Total costs

 

 (5,499) 

 

 (2,403) 

 

 (1,080) 

 

 (67) 

 

 (9,049) 

Impairment

 

 (711) 

 

 (89) 

 

 - 

 

 5 

 

 (795) 

Underlying profit4

 

 3,770 

 

 2,231 

 

 899 

 

 728 

 

 7,628 

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.60%

 

3.28%

 

 

 

 

 

2.86%

Average interest-earning banking assets

 

£338.5bn

 

£91.1bn

 

£0.8bn

 

£4.5bn

 

£434.9bn

Asset quality ratio

 

0.21%

 

0.10%

 

 

 

 

 

0.18%

Return on risk-weighted assets4

 

4.18%

 

2.44%

 

 

 

 

 

3.55%

Loans and advances to customers1

 

£340.7bn

 

£102.8bn

 

£0.8bn

 

£11.4bn

 

£455.7bn

Customer deposits2

 

£253.1bn

 

£148.3bn

 

£13.8bn

 

£0.3bn

 

£415.5bn

Risk-weighted assets

 

£91.4bn

 

£88.1bn

 

£1.3bn

 

£30.1bn

 

£210.9bn

                                   

 

 

 

1

Excludes reverse repos of £40.5 billion (31 December 2017: £16.8 billion).

2

Excludes repos of £1.8 billion (31 December 2017: £2.6 billion).

3

Restated to include run-off.

4

Prior period restated to include remediation.

 

 

DIVISIONAL RESULTS

RETAIL

 

Retail offers a broad range of financial service products to personal and business banking customers, including current accounts, savings, mortgages, credit cards, unsecured loans, motor finance and leasing solutions. Its aim is to be the best bank for customers in the UK, by building deep and enduring relationships that deliver value, and by providing them with choice and flexibility, with propositions increasingly personalised to their needs. Retail operates a multi-brand and multi-channel strategy and continues to simplify its 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

Leading customer experience

·    Launched API-enabled Open Banking aggregation capability, providing customers with more control and the ability to view in one place the current accounts they hold with us alongside those held outside the Group

·    Maintained position as UK's largest digital bank with 15.7 million digitally active customers

·    Maintained the UK's largest branch network, while tailoring it to meet customers' complex needs more effectively. Opened a new flagship Halifax branch and 41 micro branches, while also introducing 16 new mobile branches, with the enlarged fleet helping serve customers in more remote and rural communities across more than 210 locations

·    Expanded Remote Advice video service, with approximately 38,000 customers having already discussed their mortgage needs with remote advisers in one of the 270 branches that offer this service or from their own homes

·    Increased personalisation, with the recent launch of Lend a Hand mortgage expanding support to first time buyers

·    Reduced complaints (excluding PPI) by 10 per cent in 2018

 

Digitising the Group

·    Rolled out Voice ID technology to make banking quicker and easier for customers, whilst providing added protection. Since launch, over 770,000 registered customers have used this functionality, completing 4 million verifications

·    Continued to improve mobile banking experience, giving customers greater control and choice:

-       First UK bank to use location based payment tracking, enabling customers to identify fraudulent transactions

-       Launched card controls increasing customer security with functionality to cancel or temporarily freeze card use

-       Introduced cheque image clearing, providing customers with the ability to pay in cheques remotely 

 

Maximising the Group's capabilities

·    Helping Britain Prosper with over £12 billion of gross mortgage lending to first time buyers and over 120,000 start-up businesses supported

·    Halifax was the first UK bank to reach 1 million switchers since the Current Account Switching Service began in 2013

 

Transforming ways of working

·    Delivered around 25,000 training hours to Group Customer Services colleagues, enabling them to better support vulnerable customers

 

Financial performance

·    Underlying profit at £4,272 million increased 13 per cent

·    Net interest income increased 4 per cent reflecting an 8 basis point improvement in net interest margin with the benefits of a full year of MBNA and lower funding costs more than offsetting ongoing mortgage pricing pressure

·    Other income was 2 per cent lower following implementation of a simpler overdraft fee structure

·    Operating lease depreciation reduced 3 per cent reflecting improved used car market prices

·    Operating costs of £4,915 million increased 1 per cent, as increased investment in the business was partly offset by efficiency savings. Remediation reduced to £267 million, driven by lower provision charges

·    Impairment increased 21 per cent reflecting full year inclusion of MBNA and non-repeat of UK mortgages write-backs

·    Loans and advances include the increase in Business Banking balances and growth in Black Horse offset by reductions in the closed mortgage book. Open mortgage book balances were broadly flat at £267 billion reflecting continued focus on the trade-off between volume and margin in a highly competitive market

·    Customer deposits included average current account growth of 6 per cent and continued reduction in tactical savings

 

 

·    Risk-weighted assets increased to £94 billion reflecting changing asset mix, along with model refinements

Performance summary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 

 

20171 

 

Change

 

    

 

 

 

 

£m 

    

£m 

    

%

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

 9,066 

 

 8,706 

 

4

Other income

 

 

 

 

 

 2,171 

 

 2,221 

 

(2)

Operating lease depreciation

 

 

 

 

 

 (921) 

 

 (947) 

 

3

Net income

 

 

 

 

 

 10,316 

 

 9,980 

 

3

Operating costs

 

 

 

 

 

 (4,915) 

 

 (4,866) 

 

(1)

Remediation

 

 

 

 

 

 (267) 

 

 (633) 

 

58

Total costs

 

 

 

 

 

 (5,182) 

 

 (5,499) 

 

6

Impairment

 

 

 

 

 

 (862) 

 

 (711) 

 

(21)

Underlying profit2

 

 

 

 

 

 4,272

 

 3,770 

 

13

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

 

 

 

 

2.68%

 

2.60%

 

8bp

Average interest-earning banking assets

 

 

 

 

 

£342.3bn

 

£338.5bn

 

1

Asset quality ratio

 

 

 

 

 

0.25%

 

0.21%

 

4bp

Return on risk-weighted assets2

 

 

 

 

 

4.59%

 

4.18%

 

41bp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 Dec

 

At 1 Jan

 

 

 

At 31 Dec

 

 

 

 

2018

  

2018

 

 

 

2017

 

 

 

 

 

 

(adjusted)1,3

 

Change

 

(reported)1

 

Change

 

 

£bn

 

£bn

 

%

 

£bn

 

%

 

 

 

 

 

 

 

 

 

 

 

Open mortgage book

 

266.6

 

267.0

 

-

 

267.1

 

-

Closed mortgage book

 

21.2

 

23.6

 

(10)

 

23.6

 

(10)

Credit cards

 

18.1

 

17.9

 

1

 

18.1

 

-

UK unsecured loans

 

7.9

 

7.8

 

1

 

7.9

 

-

UK Motor Finance

 

14.6

 

13.5

 

8

 

13.6

 

7

Business Banking

 

1.8

 

0.9

 

 

 

0.9

 

 

Overdrafts

 

1.3

 

1.4

 

(7)

 

1.5

 

(13)

Other4

 

8.6

 

8.0

 

8

 

8.0

 

8

Loans and advances to customers

 

340.1

 

340.1

 

-

 

340.7

 

-

Operating lease assets

 

4.7

 

4.7

 

-

 

4.7

 

-

Total customer assets

 

344.8

 

344.8

 

-

 

345.4

 

-

 

 

 

 

 

 

 

 

 

 

 

Relationship balances5

 

235.3

 

233.2

 

1

 

233.2

 

1

Tactical balances5

 

17.5

 

19.9

 

(12)

 

19.9

 

(12)

Customer deposits6

 

252.8

 

253.1

 

-

 

253.1

 

-

 

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets

 

94.3

 

91.4

 

3

 

91.4

 

3

 

 

 

 

 

 

 

 

 

 

 

Average Retail current accounts

 

71.6

 

67.5

 

6

 

67.5

 

6

 

1

Prior period restated to include run-off.

2

Prior period restated to include remediation.

3

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

4

Includes Europe and run-off, previously reported separately.

5

Prior period restated to show European deposits as tactical balances.

6

SME portfolio re-segmented in the first half of 2018 moving £1.0 billion of loans and advances to customers and £2.0 billion of customer deposits to Business Banking. Comparatives not restated.

 

 

COMMERCIAL BANKING

 

Commercial Banking has a client-led, low risk, capital efficient strategy, and is committed to supporting UK-based clients and international clients with a link to the UK. Through its segmented client coverage model, it provides clients with a range of products and services such as lending, transaction banking, working capital management, risk management and debt capital markets services. Continued investment in capabilities and digital propositions enables the delivery of a leading customer experience, supported by increasingly productive relationship managers, with more time spent on value-adding activity.

 

Progress against strategic priorities

Leading customer experience

·    Successful launch of Lloyds Bank Corporate Markets, the Group's non ring-fenced bank, enabling us to continue meeting our clients' broad range of needs while helping to create a safer, more secure financial services industry

·    Further simplified the client coverage model to better reflect the changing needs of our clients. Coverage model now based on  three segments - SME and Mid Corporates, Large Corporates and Financial Institutions

·    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 a 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

·    Expanded the online servicing functionality available to SME customers, including the ability for sole traders to digitally add or remove a party onto their business account in less than 24 hours

 

Maximising the Group's capabilities

·    Increased net lending to start-ups, SMEs and Mid Market clients by £3 billion, having provided over £18 billion of gross new lending to businesses in the year and committed to the same level in 2019

·    Exceeded the commitment to provide £750 million of funding to support social housing projects in the UK

·    Provided £1.5 billion of funding to the UK manufacturing sector, supporting increased production capacity, investment in plant and machinery and research and development, allowing clients to remain innovative and competitive

·    Exceeded sustainability targets through support for renewable energy projects capable of powering over 2.6 million homes and the financing of energy efficiency improvements across 1.4 million square feet of real estate

 

Transforming ways of working

·    Restructured our Commercial Banking operations teams to align processing activity with the changing ways that customers consume our services

·    Over 94,000 colleague training hours completed, helping us to develop the skills and capabilities of the future

 

Financial performance

·    Return on risk-weighted assets of 2.50 per cent, up 6 basis points with lower risk-weighted assets driven by continued balance sheet optimisation more than offsetting a reduction in underlying profit

·    Net interest income was slightly lower at £3,004 million, with the net interest margin slightly lower at 3.27 per cent, and marginally higher average interest earning assets

·    Other income of £1,653 million was 8 per cent lower reflecting challenging market conditions leading to lower levels of client markets activity. 2017 included a number of significant one-off refinancing and hedging transactions

·    Operating lease depreciation significantly lower given accelerated depreciation of legacy assets in 2017

·    Operating costs 3 per cent lower, with efficiency savings more than offsetting increased investment

·    Improved asset quality ratio of 9 basis points reflecting good credit quality across the portfolio

·    Continued lending growth in SME of 3 per cent including loans and advances now transferred to Business Banking as part of the client re-segmentation

 

 

·    Increased customer deposits of £149 billion, reflecting continued success in attracting high quality transactional deposits with improved current account mix

Performance summary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 

 

20171 

 

Change

 

    

 

 

 

 

£m 

    

£m 

    

%

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

 3,004 

 

 3,030 

 

(1)

Other income

 

 

 

 

 

 1,653 

 

 1,798 

 

(8)

Operating lease depreciation

 

 

 

 

 

 (35) 

 

 (105) 

 

67

Net income

 

 

 

 

 

 4,622 

 

 4,723 

 

(2)

Operating costs

 

 

 

 

 

 (2,167) 

 

 (2,230) 

 

3

Remediation

 

 

 

 

 

 (203) 

 

 (173) 

 

(17)

Total costs

 

 

 

 

 

 (2,370) 

 

 (2,403) 

 

1

Impairment

 

 

 

 

 

 (92) 

 

 (89) 

 

(3)

Underlying profit2

 

 

 

 

 

 2,160 

 

 2,231 

 

(3)

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

 

 

 

 

3.27%

 

3.28%

 

(1)bp

Average interest-earning banking assets

 

 

 

 

 

£91.2bn

 

£91.1bn

 

-

Asset quality ratio

 

 

 

 

 

0.09%

 

0.10%

 

(1)bp

Return on risk-weighted assets2

 

 

 

 

 

2.50%

 

2.44%

 

6bp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 Dec

 

At 1 Jan

 

 

 

At 31 Dec

 

 

 

 

2018

  

2018

 

 

 

2017

 

 

 

 

 

 

(adjusted)1,3

 

Change

 

(reported)1

 

Change

 

 

£bn

 

£bn

 

%

 

£bn

 

%

 

 

 

 

 

 

 

 

 

 

 

SME4

 

30.0

 

30.1

 

-

 

30.7

 

(2)

Mid Markets

 

31.7

 

29.4

 

8

 

34.2

 

(7)

Global Corporates and Financial Institutions

 

34.4

 

32.6

 

6

 

36.9

 

(7)

Other5

 

4.3

 

7.2

 

(40)

 

7.7

 

(44)

Loans sold to Insurance business6

 

 

 

 

 

 

 

(6.7)

 

 

Loans and advances to customers

 

100.4

 

99.3

 

1

 

102.8

 

(2)

 

 

 

 

 

 

 

 

 

 

 

SME including Retail Business Banking

 

31.8

 

31.0

 

3

 

31.6

 

1

 

 

 

 

 

 

 

 

 

 

 

Customer deposits1,4

 

148.6

 

148.3

 

-

 

148.3

 

-

Risk-weighted assets

 

86.0

 

88.1

 

(2)

 

88.1

 

(2)

 

1

Prior period restated to include run-off.

2

Prior period restated to include remediation.

3

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

4

SME portfolio re-segmented in the first half of 2018 moving £1.0 billion of loans and advances to customers and £2.0 billion of customer deposits to Business Banking in Retail. Comparatives not restated.

5

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 the 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 around 10 million customers with assets under administration of £141 billion and annualised annuity payments in retirement of over £1 billion. The Group continues to invest significantly in the development of the business, with the aims of capturing considerable opportunities in pensions and financial planning, offering customers a single home for their banking and insurance needs, and driving growth across intermediary and relationship channels through a strong distribution model.

 

Progress against strategic initiatives

Leading customer experience

·    Successfully completed first stage of Zurich transfer and on track to conclude transfers in the second half of 2019

·    Commenced roll out of a new suite of annual benefit statements to over 50 per cent of longstanding customers, making it simpler for them to understand their products, as well as the options available to them

·    Simplifying systems and processes through our long-term partnership with Diligenta. Good progress towards initial systems migration in first half of 2019, enabling customers to better manage their policies with Scottish Widows

·    Scottish Widows won 5 star service awards at the Financial Adviser Service Awards for the third consecutive year

 

Digitising the Group

·    Successful pilot allowing customers to register and manage home insurance claims online now being followed up with introduction of new technology, enabling customers to upload digital media to accelerate settlement

 

Maximising the Group's capabilities

·    Launched Single Customer View; a unique capability, already enabling over 3 million customers to view in one place the pension and insurance products they hold with the Group alongside their banking products.

·    Announced strategic partnership with Schroders to create a market leading wealth management proposition. Target for the partnership, Schroders Personal Wealth, to become a top 3 UK financial planning business within five years

·    Good progress towards the target of growing open book assets under administration by £50 billion by the end of 2020, with strong customer net inflows of £13 billion achieved in the year, partly offset by £5.5 billion of negative market movements, mainly in the fourth quarter

·    Strong progress towards one million new pension customers by end 2020, with over 630,000 new customers in 2018

·    Ongoing collaboration with Commercial Banking to provide long duration loans primarily to finance housing, infrastructure and education while backing the growing annuity portfolio, with £1.1 billion new loans written in 2018

 

Transforming ways of working

·    Involved customers and colleagues in developing and launching a new simple to understand protection product

 

Financial performance

·    Strong growth in life and pensions sales, up 45 per cent, driven by increases in new members in existing workplace schemes, increased auto enrolment workplace contributions and bulk annuities

·    New underwritten household premiums increased 27 per cent, reflecting progress of Direct and Corporate Partnership propositions; total underwritten premiums decreased 6 per cent driven by a competitive renewal market

·    Significant growth in life and pensions new business income, up 87 per cent to £526 million partly offset by £26 million decrease in total general insurance income net of claims, including around £60 million impact from higher weather related claims. Lower experience and other items primarily due to non recurrence of £170 million income from the addition of death benefits in 2017

·    Underlying profit increased by 3 per cent to £927 million. Net income increased by £9 million to £1,988 million whilst operating costs decreased by £19 million, with cost savings more than offsetting higher investment in the business

 

Insurance capital

·    Estimated pre final dividend Solvency II ratio of 165 per cent (31 December 2017 pre final dividend position: 160 per cent). The rise in the ratio primarily reflects the impact of earnings and capital initiatives, offset by dividends of £1.2 billion and the repayment of £490 million notional of subordinated debt

 

 

·     Excess capital of £1.3 billion has been generated in 2018 from which £1.2 billion of dividends have been paid in the year, with a further dividend of £350 million paid to the Group in February 2019

Performance summary

 

 

 

 

 

 

 

 

 

 

2018 

 

2017 

 

Change

 

    

£m 

    

£m 

    

%

 

 

 

 

 

 

 

Net interest income

 

 123 

 

 133 

 

(8)

Other income

 

 1,865 

 

 1,846 

 

1

Net income

 

 1,988 

 

 1,979 

 

-

Operating costs

 

 (1,021) 

 

 (1,040) 

 

2

Remediation

 

 (39) 

 

 (40) 

 

3

Total costs

 

 (1,060) 

 

 (1,080) 

 

2

Impairment

 

 (1) 

 

 - 

 

 

Underlying profit1

 

 927 

 

 899 

 

3

 

 

 

 

 

 

 

Life and pensions sales (PVNBP)2

 

 14,384 

 

 9,951 

 

45

General insurance underwritten new GWP3

 

 107 

 

84 

 

27

General insurance underwritten total GWP3

 

 690 

 

733 

 

(6)

General insurance combined ratio

 

89%

 

87%

 

2pp

                         

 

 

 

 

 

 

 

 

 

 

 

At 31 Dec

 

At 31 Dec

 

 

 

 

2018

  

2017

 

 

 

 

 

 

(reported)4

 

Change

 

 

£bn

 

£bn

 

%

 

 

 

 

 

 

 

Insurance Solvency II ratio5

 

165%

 

160%

 

5pp

UK Wealth Loans and advances to customers

 

0.9

 

0.8

 

13

UK Wealth Customer deposits

 

14.1

 

13.8

 

2

UK Wealth Risk-weighted assets

 

1.2

 

1.3

 

(8)

Total customer assets under administration

 

141.3

 

145.4

 

(3)

                         

 

Income by product group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

2017

 

  

New

  

Existing

  

 

  

New

  

Existing

  

 

 

 

business

 

business

 

Total

 

business

 

business

 

Total

 

  

£m

  

£m

  

£m

  

£m

  

£m

  

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

Workplace, planning and retirement

 

333

 

153

 

486

 

131

 

125

 

256

Individual and bulk annuities

 

160

 

84

 

244

 

125

 

88

 

213

Protection

 

20

 

22

 

42

 

13

 

20

 

33

Longstanding LP&I

 

13

 

414

 

427

 

12

 

440

 

452

 

 

526

 

673

 

1,199

 

281

 

673

 

954

Life and pensions experience and other items

 

 

 

 

 

143

 

 

 

 

 

358

General insurance

 

 

 

 

 

272

 

 

 

 

 

298

 

 

 

 

 

 

1,614

 

 

 

 

 

1,610

UK Wealth

 

 

 

 

 

374

 

 

 

 

 

369

Net income

 

 

 

 

 

1,988

 

 

 

 

 

1,979

 

 

 

1

Prior period restated to include remediation.

2

Present value of new business premiums. Further information on page 61.

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 31 December 2018 was 156 per cent (31 December 2017: 154 per cent).

 

 

CENTRAL ITEMS

 

Performance summary

 

 

 

 

 

 

 

 

 

 

2018 

 

20171 

 

Change

 

 

£m 

    

£m 

    

%

 

 

 

 

 

 

 

Net income

 

 842 

 

 790 

 

7

Operating costs

 

 (62) 

 

 (48) 

 

(29)

Remediation

 

 (91) 

 

 (19) 

 

 

Total costs

 

 (153) 

 

 (67) 

 

 

Impairment

 

 18 

 

 5 

 

 

Underlying profit2

 

 707 

 

 728 

 

(3)

                         

 

 

 

1

Prior period restated to include run-off.

2

Prior period 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

2018

  

£m

  

£m

  

£m

  

£m

  

£m

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

13,396

 

152

 

(834)

 

 -

 

 12,714

Other income, net of insurance claims

 

5,230

 

107

 

673

 

 -

 

 6,010

Operating lease depreciation

 

 

 

(956)

 

 -

 

 -

 

 (956)

Net income

 

18,626

 

(697)

 

(161)

 

 -

 

 17,768

Operating expenses5

 

(11,729)

 

2,053

 

161

 

 750

 

 (8,765)

Impairment

 

(937)

 

 -

 

 -

 

 -

 

 (937)

Profit before tax

 

5,960

 

1,356

 

 -

 

 750

 

 8,066

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

10,912

 

228

 

1,180

 

 -

 

12,320

Other income, net of insurance claims

 

7,747

 

(186)

 

(1,356)

 

 -

 

6,205

Operating lease depreciation

 

 

 

(1,053)

 

 -

 

 -

 

(1,053)

Net income

 

18,659

 

(1,011)

 

(176)

 

 -

 

17,472

Operating expenses5

 

(12,696)

 

1,821

 

176

 

 1,650

 

(9,049)

Impairment

 

(688)

 

(107)

 

 -

 

-

 

(795)

Profit before tax

 

5,275

 

703

 

 -

 

 1,650

 

7,628

 

 

 

1

In the year ended 31 December 2018 this comprised the effects of asset sales (losses of £145 million); volatility and other items (gains of £95 million); the amortisation of purchased intangibles (£108 million); restructuring (£879 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 £319 million).

 

2

In the year ended 31 December 2017 this comprised the effects of asset sales (gains of £30 million); volatility and other items (gains of £249 million); the amortisation of purchased intangibles (£91 million); restructuring (£621 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 the fair value unwind and other items (losses of £270 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 period 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

 

 

 

 

 

 

 

 

2018

 

2017

 

 

 

 

 

Group net interest income - statutory basis (£m)

 

13,396

 

10,912

Insurance gross up (£m)

 

(834)

 

1,180

Volatility and other items (£m)

 

152

 

228

Group net interest income - underlying basis (£m)

 

12,714

 

12,320

Non-banking net interest expense (£m)

 

54

 

111

Banking net interest income - underlying basis (£m)

 

12,768

 

12,431

 

 

 

 

 

Net loans and advances to customers (£bn)1

 

 444.4

 

 455.7

Impairment provision and fair value adjustments (£bn)

 

 4.0

 

 3.2

Non-banking items:

 

 

 

 

Fee based loans and advances (£bn)

 

 (7.2)

 

 (8.1)

Assets held by Insurance (£bn)

 

 -

 

 (6.9)

Other non-banking (£bn)

 

 (4.7)

 

 (4.0)

Gross banking loans and advances (£bn)

 

 436.5

 

 439.9

Averaging (£bn)

 

 (0.5)

 

 (5.0)

Average interest-earning banking assets (£bn)

 

 436.0

 

 434.9

 

 

 

 

 

Banking net interest margin (%)

 

 2.93

 

 2.86

 

 

 

 

 

 

 

 

1

Excludes reverse repos of £40.5 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:

 

 

 

 

 

 

 

 

2018 

 

2017

 

 

    

£m 

    

£m

 

 

 

 

 

 

 

Insurance volatility

 

 (506) 

 

 196

 

Policyholder interests volatility

 

 46 

 

 190

 

Total volatility

 

 (460) 

 

 386

 

Insurance hedging arrangements

 

357 

 

 (100)

 

Total

 

 (103) 

 

 286

 

                 

 

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.

 

The Group actively manages its exposures to interest rate, foreign currency exchange rate, inflation and market movements within the banking book through a comprehensive hedging strategy. This helps to mitigate earnings volatility and reduces the impact of market movements on the capital position.

 

The volatility movements in the period were largely driven by insurance volatility arising from equity market movements and credit spreads. The capital impact of equity market movements is hedged within Insurance and this also reduces the IFRS earnings exposure.

 

 

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 31 Dec

 

At 1 Jan

 

 

2018

 

2018

 

 

 

 

(adjusted)1

 

    

£m

 

£m

 

 

 

 

 

Shareholders' equity

 

43,434

 

42,360

Goodwill

 

(2,310)

 

(2,310)

Intangible assets

 

(3,347)

 

(2,835)

Purchased value of in-force business

 

(271)

 

(306)

Other, including deferred tax effects

 

228

 

254

Tangible net assets

 

37,734

 

37,163

 

 

 

 

 

Ordinary shares in issue, excluding own shares

 

71,149m

 

71,944m

Tangible net assets per share

 

53.0p

 

51.7p

 

1

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

 

5.         Return on tangible equity

 

 

 

 

 

 

 

 

2018

 

2017

 

    

 

 

 

Average shareholders' equity (£bn)

 

 43.0

 

 43.4

Average intangible assets (£bn)

 

 (5.4)

 

 (4.6)

Average tangible equity (£bn)

 

 37.6

 

 38.8

 

 

 

 

 

Underlying profit after tax (£m)1

 

5,951

 

5,612

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

 

296

 

219

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

 

(425)

 

(403)

Adjusted underlying profit after tax (£m)

 

5,822

 

5,428

 

 

 

 

 

Underlying return on tangible equity (%)1

 

15.5

 

14.0

 

 

 

 

 

Group statutory profit after tax (£m)

 

4,400

 

3,547

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

 

296

 

219

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

 

111

 

101

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

 

(425)

 

(403)

Adjusted statutory profit after tax (£m)

 

4,382

 

3,464

 

 

 

 

 

Statutory return on tangible equity (%)

 

11.7

 

8.9

 

1

Prior period restated to include remediation.

 

6.         Share buyback

 

During 2018, the Group completed a £1 billion share buyback programme with an average price paid of 63.4 pence per share. Through a reduction in the weighted average number of ordinary shares in issue, share buybacks have the effect of increasing earnings per share and, depending on the average price paid per share, can either increase or decrease the tangible net assets per share. The 2018 share buyback had the effect of increasing the earnings per share by 0.1 pence and decreasing the tangible net assets per share by 0.2 pence.

 

 

 

RISK MANAGEMENT

 

CREDIT RISK PORTFOLIO

 

Overview

·    Credit quality remains strong with no deterioration in credit risk. Flow to arrears remains stable at low levels. The Group's loan portfolios continue to be well positioned, reflecting the Group's 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 remains stable at 28 basis points, in line with 2017 and 2016

·    The net asset quality ratio increased to 21 basis points (2017: 18 basis points) and the impairment charge increased to £937 million in 2018 (2017: £795 million), driven by expected lower releases and write-backs, the inclusion of MBNA for a full year and a low impairment charge in UK mortgages compared to one-off write-backs in 2017

·    The closed mortgage book continued to run off, reducing by a further £2.4 billion during 2018

·    Stage 2 loans as a proportion of total loans and advances to customers have reduced to 7.8 per cent (1 January 2018: 11.3 per cent), with Stage 2 loans and advances down by £14.3 billion to £38.3 billion, driven by the sale of the Irish mortgage portfolio, model refinements to the Stage 2 transfer approach for UK mortgages and portfolio improvements. Coverage of Stage 2 drawn balances increased to 4.1 per cent (1 January 2018: 3.5 per cent)

·    Stage 3 loans as a proportion of total loans and advances to customers have remained stable at 1.9 per cent, with Stage 3 loans and advances up £0.2 billion to £9.2 billion. Coverage of Stage 3 drawn balances increased to 24.3 per cent (1 January 2018: 24.0 per cent)

 

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

·    Credit portfolios are well positioned against an uncertain economic outlook and potential market volatility, including that related to the UK's exit from the EU

·    The Group continues to grow lending to targeted segments while maintaining a prudent risk appetite

·    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 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial

 

 

 

 

 

 

 

 

 

 

 

 

assets at

 

 

 

 

 

 

 

 

 

 

 

 

fair value

 

 

 

 

 

 

 

 

Loans and

 

 

 

through

 

 

 

 

 

 

 

 

advances

 

Loans and

 

other

 

 

 

 

 

 

 

 

to banks

 

advances

 

compreh-

 

 

 

 

 

 

 

 

and other

 

to

 

ensive

 

Undrawn

 

2018

 

 

 

 

assets

 

customers

 

income

 

balances

 

Total

 

20171

 

  

£m

  

£m

  

£m

  

£m

  

£m

  

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail2

 

 -

 

 889

 

 -

 

 (27)

 

 862

 

 711

Commercial Banking2

 

 1

 

 150

 

 (14)

 

 (45)

 

 92

 

 89

Insurance and Wealth

 

 -

 

 1

 

 -

 

 -

 

 1

 

 -

Central Items2

 

1

 

 (18)

 

 -

 

(1)

 

 (18)

 

 (5)

Total impairment charge 

 

 2

 

 1,022

 

 (14)

 

 (73)

 

 937

 

 795

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset quality ratio

 

 

 

 

 

 

 

 

 

0.21%

 

0.18%

Gross asset quality ratio

 

 

 

 

 

 

 

 

 

0.28%

 

0.28%

                                                   

 

 

 

1

Prior period comparatives are on an IAS 39 basis.

2

2017 restated to include run-off.

 

 

Basis of presentation

 

The analyses which follow have been presented on two bases; the 'statutory basis' which is consistent with the presentation in the Group's accounts and the 'underlying basis' which is used for internal management purposes. Reconciliations between the two bases have been provided.

 

In the following statutory basis tables, purchased or originated credit impaired (POCI) assets relate to a fixed pool of mortgages that were purchased as part of the HBOS acquisition at a deep discount to face value reflecting credit losses incurred from the point of origination to the date of acquisition totalling £1,002 million at 31 December 2018. The residual ECL allowance and resulting low coverage ratio on POCI assets reflects further deterioration in the creditworthiness from the date of acquisition. Over time, the POCI assets will run off as the loans redeem, pay down or losses are crystallised.

 

The Group uses the underlying basis to monitor the creditworthiness of the lending portfolio and related ECL allowances because it provides a better indication of the credit performance of the POCI assets. The underlying basis assumes that the lending assets acquired as part of a business combination was originated by the Group and is classified as either Stage 1, 2 or 3 according to the change in credit risk over the period since origination. Underlying ECL allowances have been calculated accordingly.

 

 

 

Group loans and advances to customers - statutory basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased

 

 

 

 

 

 

 

 

 

 

 

 

 

or

 

 

 

 

 

 

 

 

 

 

 

 

 

originated

 

Stage 2

 

Stage 3

 

 

 

 

 

 

 

 

 

credit-

 

as % of

 

as % of

 

Total

 

Stage 1

 

Stage 2

 

Stage 3

 

impaired

 

total

 

total

 

£m

 

£m

 

£m

 

£m

 

£m

 

%

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 20181

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 341,682

 

 305,160

 

 18,741

 

 2,390

 

 15,391

 

5.5

 

 0.7

Commercial Banking

 101,890

 

 92,002

 

 6,592

 

 3,296

 

 -

 

6.5

 

 3.2

Insurance and Wealth

 865

 

 804

 

 6

 

 55

 

 -

 

0.7

 

 6.4

Central items

 43,571

 

 43,565

 

6

 

 -

 

 -

 

-

 

 -

Total gross lending

 488,008

 

 441,531

 

 25,345

 

 5,741

 

 15,391

 

5.2

 

 1.2

ECL allowance on

drawn balances

 (3,150)

 

 (525)

 

 (994)

 

 (1,553)

 

 (78)

 

 

 

 

Net balance sheet

carrying value

 484,858

 

 441,006

 

 24,351

 

 4,188

 

 15,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ECL allowance

(drawn and undrawn)

as a percentage

of gross lending (%)2

0.7

 

0.1

 

4.2

 

28.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January 20181,3

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 341,661

 

 296,264

 

 25,319

 

 2,105

 

 17,973

 

7.4

 

 0.6

Commercial Banking

 100,820

 

 90,341

 

 7,765

 

 2,714

 

 -

 

7.7

 

 2.7

Insurance and Wealth

 819

 

 724

 

 67

 

 28

 

 -

 

8.2

 

 3.4

Central items

 20,939

 

 16,552

 

 4,094

 

 293

 

 -

 

19.6

 

 1.4

Total gross lending

 464,239

 

 403,881

 

 37,245

 

 5,140

 

 17,973

 

8.0

 

 1.1

ECL allowance on

drawn balances

 (3,223)

 

 (597)

 

 (1,148)

 

 (1,446)

 

 (32)

 

 

 

 

Net balance sheet

carrying value

 461,016

 

 403,284

 

 36,097

 

 3,694

 

 17,941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ECL allowance

(drawn and undrawn)

as a percentage

of gross lending (%)2

0.8

 

0.2

 

3.4

 

29.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                   

 

1

Gross lending and expected credit loss allowances on drawn balances are stated on an IFRS 9 basis; the balances include the impact of the HBOS and MBNA acquisition related adjustments.

2

Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for Retail (31 December 2018: £250 million; 1 January 2018: £291 million).

3

Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of run-off across Retail and Commercial Banking.

 

 

Group loans and advances to customers - underlying basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stage 2

 

Stage 3

 

 

 

 

 

 

 

 

 

as % of

 

as % of

 

Total

 

Stage 1

 

Stage 2

 

Stage 3

 

total

 

total

 

£m

 

£m

 

£m

 

£m

 

%

 

%

At 31 December 20181

 

 

 

 

 

 

 

 

 

 

 

Retail

 342,559

 

 305,048

 

 31,647

 

 5,864

 

9.2

 

 1.7

Commercial Banking

 101,890

 

 92,002

 

 6,592

 

 3,296

 

6.5

 

 3.2

Insurance and Wealth

 865

 

 804

 

 6

 

 55

 

0.7

 

 6.4

Central items

 43,571

 

 43,565

 

 6

 

 -

 

-

 

 -

Total gross lending

 488,885

 

 441,419

 

 38,251

 

 9,215

 

7.8

 

 1.9

ECL allowance on drawn balances

 (4,236)

 

 (556)

 

 (1,506)

 

 (2,174)

 

 

 

 

Net balance sheet carrying value

 484,649

 

 440,863

 

 36,745

 

 7,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ECL allowance (drawn and undrawn)

as a percentage of gross lending (%)2

0.9

 

0.2

 

4.1

 

24.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January 20181,3

 

 

 

 

 

 

 

 

 

 

 

Retail

 342,632

 

 295,994

 

 40,618

 

 6,020

 

11.9

 

 1.8

Commercial Banking

 100,820

 

 90,341

 

 7,765

 

 2,714

 

7.7

 

 2.7

Insurance and Wealth

 819

 

 724

 

 67

 

 28

 

8.2

 

 3.4

Central items

 20,939

 

 16,552

 

 4,094

 

 293

 

19.6

 

 1.4

Total gross lending

 465,210

 

 403,611

 

 52,544

 

 9,055

 

11.3

 

 1.9

ECL allowance on drawn balances

 (4,464)

 

 (626)

 

 (1,731)

 

 (2,107)

 

 

 

 

Net balance sheet carrying value

 460,746

 

 402,985

 

 50,813

 

 6,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ECL allowance (drawn and undrawn)

as a percentage of gross lending (%)2

1.0

 

0.2

 

3.5

 

24.0

 

 

 

 

                                       

 

1

Gross lending and expected credit loss allowances on drawn balances are stated on an IFRS 9 basis; the balances exclude the impact of the HBOS and MBNA acquisition related adjustments.

2

Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for Retail (31 December 2018: £250 million; 1 January 2018: £291 million).

3

Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of run-off across Retail and Commercial Banking.

 

 

 

Group total expected credit loss allowance (statutory basis)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 Dec

 

At 1 Jan

 

At 31 Dec

 

 

 

 

 

2018

 

2018

 

2017

 

 

 

 

 

 

 

(adjusted)1

 

 

 

 

 

 

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

Customer related balances:

 

 

 

 

 

 

 

 

 

Drawn

 

 

 

 

3,150

 

3,223

 

2,201

Undrawn

 

 

 

 

193

 

273

 

30

 

 

 

 

 

3,343

 

3,496

 

2,231

Other assets

 

 

 

 

19

 

37

 

26

Total expected credit loss allowance

 

 

 

 

3,362

 

3,533

 

2,257

 

 

 

1

Adjusted to reflect the implementation of IFRS 9.

 

Group total expected credit loss allowance (underlying basis)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 Dec

 

At1 Jan

 

At

 

 

 

 

 

2018

 

2018

 

31 Dec 2017

 

 

 

 

 

 

 

(adjusted)1

 

 

 

 

 

 

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

Customer related balances:

 

 

 

 

 

 

 

 

 

Drawn

 

 

 

 

4,236

 

4,464

 

3,442

Undrawn

 

 

 

 

193

 

273

 

30

 

 

 

 

 

4,429

 

4,737

 

3,472

Other assets

 

 

 

 

19

 

37

 

26

Total expected credit loss allowance

 

 

 

 

4,448

 

4,774

 

3,498

 

 

 

1

Adjusted to reflect the implementation of IFRS 9.

 

 

 

Reconciliation between statutory and underlying basis of Group gross loans and advances to customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased 

 

 

 

 

 

 

 

 

 

or origin-

 

 

 

 

 

 

 

 

 

nated 

 

 

 

 

 

 

 

 

 

credit-

 

Total 

 

Stage 1 

 

Stage 2 

 

Stage 3 

 

impaired 

 

£m 

 

£m 

 

£m 

 

£m 

 

£m 

At 31 December 20181

 

 

 

 

 

 

 

 

 

Underlying basis

488,885 

 

441,419 

 

38,251 

 

9,215 

 

 - 

Purchased or originated credit-impaired assets

 - 

 

 - 

 

 (12,917) 

 

 (3,476) 

 

16,393 

Pre-acquisition ECL allowance

 (877)

 

112 

 

 11 

 

 2 

 

 (1,002)

 

 (877)

 

112 

 

 (12,906) 

 

 (3,474) 

 

15,391 

Statutory basis

488,008 

 

441,531 

 

25,345 

 

5,741

 

15,391 

 

 

 

 

 

 

 

 

 

 

At 1 January 20181

 

 

 

 

 

 

 

 

 

Underlying basis

465,210 

 

403,611 

 

52,544 

 

9,055 

 

- 

Purchased or originated credit-impaired assets

- 

 

- 

 

(15,290) 

 

(3,802) 

 

19,092 

Pre-acquisition ECL allowance

(971) 

 

270 

 

(9)

 

(113)

 

(1,119)

 

(971)

 

270 

 

(15,299) 

 

(3,915) 

 

17,973 

Statutory basis

464,239 

 

403,881 

 

37,245 

 

5,140 

 

17,973 

 

 

 

 

 

 

 

 

 

 

                                     

 

 

 

1

Gross lending and ECL allowances are stated on an IFRS 9 basis.

 

Reconciliation between statutory and underlying basis of Group expected credit loss allowances on drawn balances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased 

 

 

 

 

 

 

 

 

 

or origin-

 

 

 

 

 

 

 

 

 

nated 

 

 

 

 

 

 

 

 

 

credit-

 

Total 

 

Stage 1 

 

Stage 2 

 

Stage 3 

 

impaired 

 

£m 

 

£m 

 

£m 

 

£m 

 

£m 

At 31 December 20181

 

 

 

 

 

 

 

 

 

Underlying basis

4,236 

 

 556 

 

 1,506 

 

2,174 

 

 - 

Purchased or originated credit-impaired assets

 - 

 

 - 

 

 (481) 

 

 (599) 

 

 1,080 

Pre-acquisition ECL allowance

 (1,086) 

 

 (31) 

 

 (31) 

 

 (22) 

 

 (1,002) 

 

 (1,086) 

 

 (31) 

 

 (512) 

 

 (621) 

 

 78 

Statutory basis

 3,150 

 

 525 

 

994 

 

 1,553 

 

 78 

 

 

 

 

 

 

 

 

 

 

At 1 January 20181

 

 

 

 

 

 

 

 

 

Underlying basis

4,464 

 

626 

 

1,731 

 

2,107 

 

-

Purchased or originated credit-impaired assets

- 

 

- 

 

(553)

 

(598)

 

1,151 

Pre-acquisition ECL allowance

(1,241)

 

(29)

 

(30)

 

(63)

 

(1,119)

 

(1,241)

 

(29)

 

(583)

 

(661)

 

32 

Statutory basis

3,223 

 

597 

 

1,148 

 

1,446 

 

32 

                                       

 

 

 

1

ECL allowances are stated on an IFRS 9 basis.

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased or

 

 

 

 

 

 

 

 

 

originated

 

Total

 

Stage 1

 

Stage 2

 

Stage 3

 

credit-impaired

 

as % of

 

as % of

 

as % of

 

as % of

 

as % of

 

drawn

 

drawn

 

drawn

 

drawn

 

drawn

 

balances

 

balances

 

balances

 

balances1

 

balances

 

£m

%

 

£m

%

 

£m

%

 

£m

%

 

£m

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 20182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 1,768

0.5

 

 493

0.2

 

 713

3.8

 

 484

22.6

 

 78

0.5

Commercial Banking

 1,513

1.5

 

 111

0.1

 

 338

5.1

 

 1,064

32.3

 

 -

-

Insurance and Wealth

 18

2.1

 

 6

0.7

 

 1

16.7

 

 11

20.0

 

 -

-

Central items

 44

0.1

 

 38

0.1

 

 6

100.0

 

 -

-

 

 -

-

Total

 3,343

0.7

 

  648

0.1

 

 1,058

4.2

 

 1,559

28.4

 

 78

0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January 20182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 1,685

0.5

 

 538

0.2

 

 716

2.8

 

 399

22.0

 

 32

0.2

Commercial Banking

 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

27.6

 

 -

-

Total

 3,496

0.8

 

 743

0.2

 

  1,275

3.4

 

  1,446

29.8

 

 32

0.2

                                                         

 

1

Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for Retail (31 December 2018: £250 million; 1 January 2018: £291 million).

2

Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances include the impact of the HBOS and MBNA related acquisition adjustments.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Stage 1

 

Stage 2

 

Stage 3

 

as % of

 

as % of

 

as % of

 

as % of

 

drawn

 

drawn

 

drawn

 

drawn

 

balances

 

balances

 

balances

 

balances1

 

£m

%

 

£m

%

 

£m

%

 

£m

%

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 20182

 

 

 

 

 

 

 

 

 

 

 

Retail

 2,854

0.8

 

 524

0.2

 

 1,225

3.9

 

 1,105

19.7

Commercial Banking

 1,513

1.5

 

 111

0.1

 

 338

5.1

 

 1,064

32.3

Insurance and Wealth

 18

2.1

 

 6

0.7

 

 1

16.7

 

 11

20.0

Central items

 44

0.1

 

 38

0.1

 

 6

 100.0

 

 -

 -  

Total

 4,429

0.9

 

 679

0.2

 

 1,570

4.1

 

 2,180

24.3

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January 20182

 

 

 

 

 

 

 

 

 

 

 

Retail

 2,926

0.9

 

 567

0.2

 

 1,299

3.2

 

 1,060

18.5

Commercial Banking

 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

27.6

Total

 4,737

1.0

 

 772

0.2

 

 1,858

3.5

 

 2,107

24.0

                                                 

 

1

Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for Retail (31 December 2018: £250 million; 1 January 2018: £291 million).

2

Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances exclude the impact of the HBOS and MBNA related acquisition adjustments.

 

 

 

Group Stage 2 loans and advances to customers - statutory basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Up to date

 

1-30 days past due

 

Over 30 days past due

 

 

 

Expected

 

As % of

 

 

 

Expected

 

As % of

 

 

 

Expected

 

As % of

 

Gross

 

credit

 

gross

 

Gross

 

credit

 

gross

 

Gross

 

credit

 

gross

 

lending

 

loss

 

lending

 

lending

 

loss

 

lending

 

lending

 

loss

 

lending

 

£m

 

£m

 

%

 

£m

 

£m

 

%

 

£m

 

£m

 

%

At 31 December 20181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

14,505

 

498

 

3.4

 

2,441

 

113

 

4.6

 

1,795

 

102

 

5.7

Commercial Banking

6,020

 

287

 

4.8

 

455

 

42

 

9.2

 

117

 

9

 

7.7

Insurance and Wealth

4

 

-

 

-

 

-

 

-

 

-

 

2

 

1

 

50.0

Central items

6

 

6

 

100.0

 

-

 

-

 

-

 

-

 

-

 

-

Total

20,535

 

791

 

3.9

 

2,896

 

155

 

5.4

 

1,914

 

112

 

5.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January 20181,2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

21,773

 

535

 

2.5

 

2,005

 

90

 

4.5

 

1,541

 

91

 

5.9

Commercial Banking

7,420

 

401

 

5.4

 

250

 

31

 

12.4

 

95

 

-

 

-

Insurance and Wealth

61

 

2

 

3.3

 

1

 

-

 

-

 

5

 

-

 

-

Central items

4,014

 

111

 

2.8

 

62

 

10

 

16.1

 

18

 

4

 

22.2

Total

33,268

 

1,049

 

3.2

 

2,318

 

131

 

5.7

 

1,659

 

95

 

5.7

 

1

Gross lending and expected credit loss allowances on drawn balances are stated on an IFRS 9 basis; the balances include the impact of the HBOS and MBNA acquisition related adjustments.

2

Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of run-off across Retail and Commercial Banking.

 

Group Stage 2 loans and advances to customers - underlying basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Up to date

 

1-30 days past due

 

Over 30 days past due

 

 

 

Expected

 

As % of

 

 

 

Expected

 

As % of

 

 

 

Expected

 

As % of

 

Gross

 

credit

 

gross

 

Gross

 

credit

 

gross

 

Gross

 

credit

 

gross

 

lending

 

loss

 

lending

 

lending

 

loss

 

lending

 

lending

 

loss

 

lending

 

£m

 

£m

 

%

 

£m

 

£m

 

%

 

£m

 

£m

 

%

At 31 December 20181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

23,025

 

769

 

3.3

 

4,472

 

182

 

4.1

 

4,150

 

274

 

6.6

Commercial Banking

6,020

 

287

 

4.8

 

455

 

42

 

9.2

 

117

 

9

 

7.7

Insurance and Wealth

4

 

-

 

-

 

-

 

-

 

-

 

2

 

1

 

50.0

Central items

6

 

6

 

100.0

 

-

 

-

 

-

 

-

 

-

 

-

Total

29,055

 

1,062

 

3.7

 

4,927

 

224

 

4.5

 

4,269

 

284

 

6.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January 20181,2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

32,113

 

831

 

2.6

 

4,269

 

174

 

4.1

 

4,236

 

294

 

6.9

Commercial Banking

 7,420

 

 401

 

 5.4

 

 250

 

 31

 

 12.4

 

 95

 

 -

 

 -

Insurance and Wealth

 61

 

 2

 

 3.3

 

 1

 

 -

 

 -

 

 5

 

 -

 

 -

Central items

 4,014

 

 111

 

 2.8

 

 62

 

 10

 

 16.1

 

 18

 

 4

 

 22.2

Total

43,608

 

1,345

 

3.1

 

4,582

 

215

 

4.7

 

4,354

 

298

 

6.9

 

1

Gross lending and expected credit loss allowances on drawn balances are stated on an IFRS 9 basis; the balances exclude the impact of the HBOS and MBNA acquisition related adjustments.

2

Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of run-off across Retail and Commercial Banking.

 

 

 

 

Additional information

 

The measurement of expected credit losses reflects an unbiased probability-weighted view of possible future economic outcomes. The Group achieves this by selecting four economic scenarios to reflect the range of outcomes; the central scenario reflects the Group's base case assumptions used for medium term planning purposes, an upside and a downside scenario are also selected together with a severe downside scenario. The base case, upside and downside scenarios carry a 30 per cent weighting; the severe downside is weighted at 10 per cent. The table below shows the composition of the probability-weighted ECL allowance showing the effect of each forward-looking economic scenario. In this analysis, the stage allocation is constant across all scenarios.

 

The table below shows the underlying ECL calculated under each scenario.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Probability

 

 

 

 

 

 

 

Severe

 

 

weighted

 

Upside

 

Base case

 

Downside

 

Downside

 

 

£m

 

£m

 

£m

 

£m

 

£m

Underlying basis

 

 

 

 

 

 

 

 

 

UK mortgages

 

1,462

 

 

376

 

471

 

298

Other Retail

 

1,392

 

 

413

 

418

 

164

Commercial

 

1,513

 

 

442

 

468

 

179

Other

 

81

 

23

 

25

 

25

 

8

At 31 December 2018

 

4,448

 

1,161

 

1,256

 

1,382

 

649

 

 

 

 

 

 

 

 

 

 

 

 

 

Probability

 

 

 

 

 

 

 

Severe

 

 

weighted

 

Upside

 

Base case

 

Downside

 

Downside

 

 

£m

 

£m

 

£m

 

£m

 

£m

Statutory basis

 

 

 

 

 

 

 

 

 

 

UK mortgages

 

460

 

16

 

76

 

170

 

198

Other Retail

 

1,308

 

371

 

388

 

393

 

156

Commercial

 

1,513

 

424

 

442

 

468

 

179

Other

 

81

 

23

 

25

 

25

 

8

At 31 December 2018

 

3,362

 

834

 

931

 

1,056

 

541

 

The table below shows the Group's underlying ECL for the upside and downside scenarios using a 100 per cent weighting, which means that both stage allocation and the ECL are based on the single scenario only. All non-modelled provisions, including management judgement remain unchanged.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Upside

 

Downside

 

 

 

 

 

 

 

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

 

ECL allowance

 

 

 

 

 

 

 

3,861

 

4,659

                                         

 

 

 

FUNDING AND LIQUIDITY MANAGEMENT

 

The Group has maintained its strong funding and liquidity position with a stable loan to deposit ratio of 107 per cent.

 

During the year, the Group took advantage of favourable funding markets to raise £21.4 billion of new term wholesale funding in order to refinance maturities in the year including the Bank of England's Funding for Lending Scheme (FLS) and increased liquidity buffers. As a result wholesale funding increased from £101.1 billion to £123.3 billion.

 

During 2018, the Group repaid £12 billion of its FLS drawings, which has reduced the amount outstanding to £13.1 billion at 31 December 2018. The balance of Term Funding Scheme drawings remains at £19.9 billion as at 31 December 2018.

 

The Group's liquidity position remains strong and in excess of the regulatory minimum and internal risk appetite, with a Liquidity Coverage Ratio (LCR) of 130 per cent as at 31 December 2018 based on the EU Delegated Act. Total LCR eligible liquid assets as at 31 December 2018 were £129.4 billion, up £8.5 billion in the year.

 

The Group's strong ratings continue to reflect its robust balance sheet, improved profitability and bail-in capital position. During 2018, S&P upgraded Lloyds Bank plc's long-term rating by one notch to 'A+' and S&P, Moody's and Fitch assigned definitive ratings to Lloyds Bank Corporate Markets of A/A1/A respectively.

 

 

 

CAPITAL MANAGEMENT

 

Analysis of capital position

The Group's CET1 capital ratio increased by 2.10 per cent on a pro forma basis before ordinary dividends and the share buyback, primarily as a result of:

·    Strong underlying capital build, net of remediation costs, of 1.95 per cent, largely driven by underlying profits

·    Dividends paid by the Insurance business in July 2018 and in February 2019, in relation to 2018 earnings generating an increase of 0.25 per cent

·    The completion of the sale of the Irish mortgage portfolio in the second half of the year which resulted in a 0.25 per cent increase

·    Other movements, resulting in a net increase of 0.03 per cent, included the impact of structural changes arising from transfers between Insurance and the ring-fenced bank, risk-weighted asset reductions, market movements and additional pension contributions 

·    Offset by a reduction of 0.38 per cent relating to PPI charges

 

The implementation of IFRS 9 on 1 January 2018 resulted in an initial reduction in CET1 capital of 0.30 per cent which, following the application of transitional relief, reduced to 0.01 per cent. No additional relief has been recognised at 31 December 2018 as Stage 1 and Stage 2 expected credit losses (ECLs), net of regulatory expected losses, have not increased beyond the position at 1 January 2018.

 

Overall the Group's CET1 ratio has strengthened to 16.0 per cent on a pro forma basis before ordinary dividends and the share buyback. After ordinary dividends the Group's CET1 ratio reduces to 14.8 per cent on a pro forma basis. In addition the Board intends to implement a share buyback programme of up to £1.75 billion, equivalent to 2.46 pence per share. The buyback will impact the Group's capital position in 2019 and is expected to reduce CET1 capital by c.0.9 per cent. Allowing for this at 31 December 2018 the pro forma CET1 ratio would be 13.9 per cent after ordinary dividends (31 December 2017: 13.9 per cent pro forma, after ordinary dividends and the share buyback).

 

Excluding the Insurance dividend paid in February 2019 the Group's CET1 ratio has strengthened to 15.8 per cent before ordinary dividends and the share buyback.

 

The accrual for foreseeable dividends reflects the recommended final ordinary dividend of 2.14 pence per share.

 

The transitional total capital ratio, after ordinary dividends, increased by 1.7 per cent to 22.9 per cent, largely reflecting the issuance of new AT1 and dated subordinated debt instruments, foreign exchange movements on subordinated debt instruments, the reduction in the significant investments deduction from tier 2 capital, the increase in CET1 capital and the reduction in risk-weighted assets, partially offset by the amortisation of dated tier 2 instruments and the annual reduction in the transitional limit applied to grandfathered AT1 capital instruments.

 

The UK leverage ratio, after ordinary dividends, increased from 5.4 per cent on a pro forma basis to 5.6 per cent on a pro forma basis, largely reflecting the increase in the fully loaded tier 1 capital position following the issuance of a new AT1 capital instrument, partially offset by a marginal increase in the exposure measure.

 

 

.
 

Target capital ratio

The Board's view of the current level of CET1 capital required remains at around 13 per cent plus a management buffer of around 1 per cent to provide capacity for growth, meet regulatory requirements and cover uncertainties. The required level of CET1 capital takes into account the following:

·    The minimum Pillar 1 CET1 capital requirement of 4.5 per cent of risk-weighted assets

·    The Group's Pillar 2A CET1 capital requirement of 2.6 per cent of risk-weighted assets, increasing to 2.7 per cent from 1 January 2019 following commencement of the UK's ring-fencing regime

·    The capital conservation buffer (CCB) requirement of 1.875 per cent of risk-weighted assets, increasing to 2.5 per cent of risk-weighted assets from 1 January 2019

·    The Group's current countercyclical capital buffer (CCYB) requirement of 0.9 per cent of risk-weighted assets

·    The introduction of the systemic risk buffer (SRB) during 2019 for the ring-fenced bank (RFB) sub-group, which will require the Group to hold an equivalent monetary amount of capital

·    The Group's PRA buffer, which the PRA set after taking account of the results of the PRA stress tests and other information, as well as outputs from the Group's internal stress tests. The PRA requires the PRA buffer itself to remain confidential between the Group and the PRA.

 

Capital resources

An analysis of the Group's capital position as at 31 December 2018 is presented in the following section on both a CRD IV transitional arrangements basis and a CRD IV fully loaded basis. In addition the Group's capital position reflects the application of the transitional arrangements for IFRS 9.

 

The following table summarises the consolidated capital position of the Group.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transitional

 

Fully loaded

 

  

At 31 Dec

  

At 31 Dec

  

At 31 Dec

  

At 31 Dec

 

 

2018

 

2017

 

2018

 

2017

 

 

£m

 

£m

 

£m

 

£m

Common equity tier 1

 

 

 

 

 

 

 

 

Shareholders' equity per balance sheet

 

 43,434

 

 43,551

 

 43,434

 

 43,551

Adjustment to retained earnings for foreseeable dividends

 

 (1,523)

 

 (1,475)

 

 (1,523)

 

 (1,475)

Deconsolidation adjustments1

 

 2,273

 

 1,301

 

 2,273

 

 1,301

Adjustment for own credit

 

 (280)

 

 109

 

 (280)

 

 109

Cash flow hedging reserve

 

 (1,051)

 

 (1,405)

 

 (1,051)

 

 (1,405)

Other adjustments

 

 (19)

 

 (177)

 

 (19)

 

 (177)

 

 

 42,834

 

 41,904

 

 42,834

 

 41,904

less: deductions from common equity tier 1

 

 

 

 

 

 

 

 

Goodwill and other intangible assets

 

 (3,667)

 

 (2,966)

 

 (3,667)

 

 (2,966)

Prudent valuation adjustment

 

 (529)

 

 (556)

 

 (529)

 

 (556)

Excess of expected losses over impairment provisions and value adjustments

 

 (27)

 

 (498)

 

 (27)

 

 (498)

Removal of defined benefit pension surplus

 

 (994)

 

 (541)

 

 (994)

 

 (541)

Securitisation deductions

 

 (191)

 

 (191)

 

 (191)

 

 (191)

Significant investments1

 

 (4,222)

 

 (4,250)

 

 (4,222)

 

 (4,250)

Deferred tax assets

 

 (3,037)

 

 (3,255)

 

 (3,037)

 

 (3,255)

Common equity tier 1 capital

 

 30,167

 

 29,647

 

 30,167

 

 29,647

Additional tier 1

 

 

 

 

 

 

 

 

Other equity instruments

 

 6,466

 

 5,330

 

 6,466

 

 5,330

Preference shares and preferred securities2

 

 4,008

 

 4,503

 

 -

 

 -

Transitional limit and other adjustments

 

 (1,804)

 

 (1,748)

 

 -

 

 -

 

 

 8,670

 

 8,085

 

 6,466

 

 5,330

less: deductions from tier 1

 

 

 

 

 

 

 

 

Significant investments1

 

 (1,298)

 

 (1,403)

 

 -

 

 -

Total tier 1 capital

 

 37,539

 

 36,329

 

 36,633

 

 34,977

Tier 2

 

 

 

 

 

 

 

 

Other subordinated liabilities2

 

 13,648

 

 13,419

 

 13,648

 

 13,419

Deconsolidation of instruments issued by insurance entities1

 

 (1,767)

 

 (1,786)

 

 (1,767)

 

 (1,786)

Adjustments for transitional limit and non-eligible instruments

 

 1,504

 

 1,617

 

 (1,266)

 

 (1,252)

Amortisation and other adjustments

 

 (2,717)

 

 (3,524)

 

 (2,717)

 

 (3,565)

Eligible provisions

 

 -

 

 120

 

 -

 

 120

 

 

 10,668

 

 9,846

 

 7,898

 

 6,936

less: deductions from tier 2

 

 

 

 

 

 

 

 

Significant investments1

 

 (973)

 

 (1,516)

 

 (2,271)

 

 (2,919)

Total capital resources

 

 47,234

 

 44,659

 

 42,260

 

 38,994

 

 

 

 

 

 

 

 

 

Risk-weighted assets

 

 206,366

 

 210,919

 

 206,366

 

 210,919

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio3

 

14.6%

 

14.1%

 

14.6%

 

14.1%

Tier 1 capital ratio

 

18.2%

 

17.2%

 

17.8%

 

16.6%

Total capital ratio

 

22.9%

 

21.2%

 

20.5%

 

18.5%

 

 

 

1

For regulatory capital purposes, the Group's Insurance business is deconsolidated and replaced by the amount of the Group's investment in the business. A part of this amount is deducted from capital (shown as 'significant investments' in the table above) and the remaining amount is risk-weighted, forming part of threshold risk-weighted assets.

2

Preference shares, preferred securities and other subordinated liabilities are categorised as subordinated liabilities in the balance sheet.

3

The Group's common equity tier 1 ratio is 14.8 per cent reflecting the dividend paid by the Insurance business in February 2019 in relation to its 2018 earnings. The post share buyback common equity tier 1 ratio is 13.9 per cent on a pro forma basis (31 December 2017: 13.9 per cent).

Minimum requirement for own funds and eligible liabilities (MREL)

 

Applying the Bank of England's MREL policy to minimum capital requirements from 1 January 2019, the Group's indicative MREL requirement, excluding regulatory capital buffers, is as follows:

·    From 2020, 2 times Pillar 1 plus Pillar 2A, equivalent to 20.7 per cent of risk-weighted assets

·    From 2022, 2 times Pillar 1 plus 2 times Pillar 2A, equivalent to 25.4 per cent of risk-weighted assets

 

The Bank of England will review the calibration of MREL in 2020 before setting final end-state requirements to be met from 2022. This review will take into consideration any changes to the capital framework, including the finalisation of Basel III.

During 2018, the Group issued £8.8 billion (sterling equivalent) of senior unsecured securities from Lloyds Banking Group plc which, while not included in total capital, are eligible to meet MREL. Combined with previous issuances made over the last two years the Group remains comfortably positioned to meet MREL requirements from 2020 and, as at 31 December 2018, had a transitional MREL ratio of 32.4 per cent of risk-weighted assets.

 

An analysis of the Group's current transitional MREL position is provided in the table below.

 

 

 

 

 

 

 

Transitional

 

 

At 31 Dec

 

At 31 Dec

 

 

2018

 

2017

 

  

£m

  

£m

 

 

 

 

 

Total capital resources (transitional basis)

 

 47,234

 

 44,659

Ineligible AT1 and tier 2 instruments1

 

 (613)

 

 (1,350)

Senior unsecured securities issued by Lloyds Banking Group plc

 

 20,213

 

 10,815

Total MREL2

 

 66,834

 

 54,124

 

 

 

 

 

Risk-weighted assets

 

 206,366

 

 210,919

 

 

 

 

 

MREL ratio3

 

32.4%

 

25.7%

 

 

 

1

Instruments with less than one year to maturity or governed under non-EEA law without a contractual bail-in clause.

2

Until 2022, externally issued regulatory capital in operating entities can count towards the Group's MREL to the extent that such capital would count towards the Group's consolidated capital resources.

3

The MREL ratio is 32.6 per cent on a pro forma basis reflecting the dividend paid by the Insurance business in February 2019 in relation to its 2018 earnings (31 December 2017: 26.0 per cent pro forma).

 

Risk-weighted assets

 

 

 

 

 

 

 

 

At 31 Dec

 

At 31 Dec

 

 

2018

 

2017

 

  

£m

  

£m

Foundation Internal Ratings Based (IRB) Approach

 

 60,555

 

 60,207

Retail IRB Approach

 

 59,522

 

 61,588

Other IRB Approach

 

 15,666

 

 17,191

IRB Approach

 

 135,743

 

 138,986

Standardised (STA) Approach

 

 25,757

 

 25,503

Credit risk

 

 161,500

 

 164,489

Counterparty credit risk

 

 5,718

 

 6,055

Contributions to the default funds of central counterparties

 

 830

 

 428

Credit valuation adjustment risk

 

 702

 

 1,402

Operational risk

 

 25,505

 

 25,326

Market risk

 

 2,085

 

 3,051

Underlying risk-weighted assets

 

 196,340

 

 200,751

Threshold risk-weighted assets1

 

 10,026

 

 10,168

Total risk-weighted assets

 

 206,366

 

 210,919

 

 

 

1

Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital. Significant investments primarily arise from investment in the Group's Insurance business.

Stress testing

 

The Group undertakes a wide ranging programme of stress testing providing a comprehensive view of the potential impacts arising from the risks to which the Group and its key legal entities are exposed. One of the most important uses of stress testing is to assess the resilience of the operational and strategic plans of the Group and its legal entities to adverse economic conditions and other key vulnerabilities. As part of this programme the Group conducts macroeconomic stress tests of the operating plans.

 

In 2018 the Group participated in both the concurrent UK stress test run by the Bank of England (BoE) and the European Banking Authority's (EBA) bi-annual EU-wide stress test. The EBA stress test did not contain a pass/fail threshold and as announced in November, the Group demonstrated its ability to meet applicable capital requirements under stressed conditions. In the case of the BoE stress test, despite the severity of the scenario, the Group exceeded the capital and leverage hurdles after the application of management actions, and as a consequence was not required to take any capital actions.

 

Leverage ratio

 

The Group is currently subject to the following minimum requirements under the UK Leverage Ratio Framework:

·    A minimum leverage ratio requirement of 3.25 per cent of the total leverage exposure measure

·    A countercyclical leverage buffer (CCLB) of 0.3 per cent of the total leverage exposure measure

 

An additional leverage ratio buffer (ALRB) will apply from 2019 to the Group's ring-fenced bank (RFB) sub-group, to be determined by multiplying the RFB leverage exposure measure by 35 per cent of the systemic risk buffer. An equivalent amount of capital, referred to as the Leverage Ratio Group Add-on, will be required to be held at Group level to cover the RFB's additional leverage ratio buffer.

 

At least 75 per cent of the 3.25 per cent minimum leverage ratio requirement and all regulatory buffers must be met with CET1 capital.

 

 

The table below summarises the component parts of the Group's leverage ratio.

 

 

 

 

 

 

 

Fully loaded

 

 

At 31 Dec

 

At 31 Dec

 

 

2018

 

2017

 

  

£m

  

£m

Total tier 1 capital for leverage ratio

 

 

 

 

Common equity tier 1 capital

 

 30,167

 

 29,647

Additional tier 1 capital

 

 6,466

 

 5,330

Total tier 1 capital

 

 36,633

 

 34,977

 

 

 

 

 

Exposure measure

 

 

 

 

Statutory balance sheet assets

 

 

 

 

Derivative financial instruments

 

 23,595

 

 25,834

Securities financing transactions

 

 69,301

 

 49,193

Loans and advances and other assets

 

 704,702

 

 737,082

Total assets

 

 797,598

 

 812,109

 

 

 

 

 

Qualifying central bank claims

 

 (50,105)

 

 (53,842)

 

 

 

 

 

Deconsolidation adjustments1

 

 

 

 

Derivative financial instruments

 

 (1,376)

 

 (2,043)

Securities financing transactions

 

 (487)

 

 (85)

Loans and advances and other assets

 

 (130,048)

 

 (140,387)

Total deconsolidation adjustments

 

 (131,911)

 

 (142,515)

 

 

 

 

 

Derivatives adjustments

 

 

 

 

Adjustments for regulatory netting

 

 (8,828)

 

 (13,031)

Adjustments for cash collateral

 

 (10,536)

 

 (7,380)

Net written credit protection

 

 539

 

 881

Regulatory potential future exposure

 

 18,250

 

 12,335

Total derivatives adjustments

 

 (575)

 

 (7,195)

 

 

 

 

 

Securities financing transactions adjustments

 

 40

 

 (2,022)

Off-balance sheet items

 

 56,393

 

 58,357

Regulatory deductions and other adjustments

 

 (8,163)

 

 (7,658)

 

 

 

 

 

Total exposure measure2

 

 663,277

 

 657,234

Average exposure measure3

 

 669,896

 

 

 

 

 

 

 

UK Leverage ratio2,5

 

5.5%

 

5.3%

Average UK leverage ratio3

 

5.5%

 

 

 

 

 

 

 

CRD IV exposure measure4

 

 713,382

 

 711,076

CRD IV leverage ratio4

 

5.1%

 

4.9%

 

1

Deconsolidation adjustments relate to the deconsolidation of certain Group entities that fall outside the scope of the Group's regulatory capital consolidation, being primarily the Group's Insurance business.

2

Calculated in accordance with the UK Leverage Ratio Framework which requires qualifying central bank claims to be excluded from the leverage exposure measure. 

3

The average UK leverage ratio is based on the average of the month end tier 1 capital position and average exposure measure over the quarter (1 October 2018 to 31 December 2018). The average of 5.5 per cent compares to 5.3 per cent at the start and 5.5 per cent at the end of the quarter.

4

Calculated in accordance with CRD IV rules which include central bank claims within the leverage exposure measure.

5

The UK leverage ratio is 5.6 per cent on a pro forma basis reflecting the dividend paid by the Insurance business in February 2019 in relation to its 2018 earnings (31 December 2017: 5.4 per cent pro forma).

 

 

 

Application of IFRS 9 on a full impact basis for capital and leverage

 

 

 

 

 

 

 

 

 

 

IFRS 9 full impact

 

 

 

 

At 31 Dec

 

At 1 Jan

 

At 31 Dec

 

 

2018

 

2018

 

2017

 

 

 

 

 

 

 

Common equity tier 1 (£m)

 

 29,592

 

 29,060

 

 29,647

Transitional tier 1 (£m)

 

 36,964

 

 35,742

 

 36,329

Transitional total capital (£m)

 

 47,195

 

 44,636

 

 44,659

Total risk-weighted assets (£m)

 

 206,614

 

 211,200

 

 210,919

Common equity tier 1 ratio (%)

 

14.3%

 

13.8%

 

14.1%

Transitional tier 1 ratio (%)

 

17.9%

 

16.9%

 

17.2%

Transitional total capital ratio (%)

 

22.8%

 

21.1%

 

21.2%

UK leverage ratio exposure measure (£m)

 

 663,182

 

 656,886

 

 657,234

UK leverage ratio (%)

 

5.4%

 

5.2%

 

5.3%

 

Further details on the Group's adoption of the transitional arrangements for IFRS 9 can be found in the Group publication entitled 'IFRS 9 "Financial Instruments" Transition', published in March 2018 and located on the Group's website at http://www.lloydsbankinggroup.com/investors/financial-performance/.

 

 

 

 

 

 

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CONSOLIDATED INCOME STATEMENT

 

 

 

 

 

 

 

 

 

 

 

 

2018 

    

2017 

 

 

Note

 

£m 

 

£m 

 

 

 

 

 

 

 

Interest and similar income

 

 

 

 16,349 

 

 16,006 

Interest and similar expense

 

 

 

 (2,953) 

 

 (5,094) 

Net interest income

 

 

 

 13,396 

 

 10,912 

Fee and commission income

 

 

 

 2,848 

 

 2,965 

Fee and commission expense

 

 

 

 (1,386) 

 

 (1,382) 

Net fee and commission income

 

 

 

 1,462 

 

 1,583 

Net trading income

 

 

 

 (3,876) 

 

 11,817 

Insurance premium income

 

 

 

 9,189 

 

 7,930 

Other operating income

 

 

 

 1,920 

 

 1,995 

Other income

 

 

 

 8,695 

 

 23,325 

Total income

 

 

 

 22,091 

 

 34,237 

Insurance claims

 

 

 

 (3,465) 

 

 (15,578) 

Total income, net of insurance claims

 

 

 

 18,626 

 

 18,659 

Regulatory provisions

 

 

 

 (1,350) 

 

 (2,515) 

Other operating expenses

 

 

 

 (10,379) 

 

 (10,181) 

Total operating expenses