Q1 2017 - Lloyds Banking Group

Q1 2017 Interim Management Statement

LLOYDS BANKING GROUP PLC

Q1 2017 INTERIM MANAGEMENT STATEMENT

HIGHLIGHTS FOR THE THREE MONTHS ENDED 31 MARCH 2017 Strong underlying performance with significant improvement in statutory profit and returns 

Increase in underlying profit to £2.1 billion with an underlying return on tangible equity of 15.1 per cent



Positive operating jaws while credit quality remains strong with asset quality ratio of 12 basis points



Statutory profit before tax increased to £1.3 billion; statutory return on tangible equity of 8.8 per cent



Strong balance sheet maintained with CET1 ratio of 14.5 per cent (pre dividend accrual)



Tangible net assets per share increased to 56.5 pence driven by strong underlying profit

Our differentiated UK focused business model continues to deliver 

Simple, efficient and low risk business model providing competitive advantage



Strong capital generation of 0.7 percentage points



UK government shareholding now below 2 per cent

On track to deliver the Group financial targets for 2017 with longer term guidance maintained 

Net interest margin for the year now expected to be close to 2.80 per cent (pre MBNA)



Expect open book mortgage balances to stabilise and then grow to close the year in line with 31 December 2016



Asset quality ratio for the year now expected to be inside existing 25 basis points guidance (pre MBNA)



Expect 2017 capital generation to be at the top end of the 170-200 basis points ongoing guidance range



Continue to target a cost:income ratio of around 45 per cent exiting 2019 with reductions every year



Expect to generate a statutory return on tangible equity of between 13.5 and 15.0 per cent in 2019

GROUP CHIEF EXECUTIVE’S STATEMENT In the first three months of this year we have delivered strong financial performance with increased underlying profit, a significant improvement in statutory profit and returns, and strong capital generation. These results continue to demonstrate the strength of our customer focused, simple and low risk business model and our ability to respond to a challenging operating environment. The UK economy continues to benefit from low unemployment and reduced levels of indebtedness, and asset quality remains strong and is stable across the portfolio. We remain committed to supporting the people, businesses and communities in the UK through our Helping Britain Prosper Plan and putting customers first. As announced earlier this month, we are determined that the victims of HBOS Reading are fairly, swiftly and appropriately compensated and we have set aside a provision of £100 million in our first quarter results. We continue to make good progress against our strategic priorities of creating the best customer experience; becoming simpler and more efficient; and delivering sustainable growth; and we remain on track to deliver the Group financial targets for 2017, whilst maintaining our longer term guidance. António Horta-Osório Group Chief Executive

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CONSOLIDATED INCOME STATEMENT − UNDERLYING BASIS

Net interest income Other income Total income Operating lease depreciation Net income Operating costs Impairment Underlying profit

Three months ended 31 Mar 2017 £ million 2,928 1,482 4,410 (232) 4,178 (1,968) (127) 2,083

Three months ended 31 Mar 2016 £ million 2,906 1,477 4,383 (193) 4,190 (1,987) (149) 2,054

(229) (350) (200) 1,304 (414) 890

(1,285) – (115) 654 (123) 531

1.1p 2.80% £431bn 47.1% 0.12% 3.93% 15.1% 8.8% 8.2%

Volatility and other items Payment protection insurance provision Other conduct provisions Statutory profit before tax Taxation Profit for the period Earnings per share Banking net interest margin Average interest-earning banking assets Cost:income ratio Asset quality ratio Return on risk-weighted assets Underlying return on tangible equity Statutory return on tangible equity Statutory return on required equity

Change % 1 – 1 (20) – 1 15 1

Three months ended 31 Dec 2016 £ million 2,805 1,545 4,350 (226) 4,124 (2,134) (196) 1,794

Change % 4 (4) 1 (3) 1 8 35 16

68

(346) – (475) 973 (535) 438

103

0.6p

83

0.4p

175

2.74% £438bn 47.4% 0.14% 3.70% 15.0% 5.7% 4.4%

6bp (2) (0.3)pp (2)bp 23bp 0.1pp 3.1pp 3.8pp

2.68% £434bn 51.7% 0.17% 3.26% 12.8% 4.7% 3.5%

12bp (1) (4.6)pp (5)bp 67bp 2.3pp 4.1pp 4.7pp

At 31 Mar 2017 £445bn £415bn 107% £817bn 14.5% 14.3% 21.9% 5.0% £214bn 56.5p

At 31 Dec 2016 £450bn £413bn 109% £818bn 13.8% 13.8% 21.4% 5.0% £216bn 54.8p

Change % (1) – (2)pp – 0.7pp 0.5pp 0.5pp – (1) 1.7p

99

34

BALANCE SHEET AND KEY RATIOS

1

Loans and advances to customers Customer deposits2 Loan to deposit ratio Total assets 3 Common equity tier 1 ratio pre 2017 dividend accrual 3 Common equity tier 1 ratio Transitional total capital ratio 3 Leverage ratio Risk-weighted assets Tangible net assets per share 1

Excludes reverse repos of £11.2 billion (31 December 2016: £8.3 billion).

2

Excludes repos of £0.4 billion (31 December 2016: £2.5 billion).

3

The common equity tier 1 and leverage ratios at 31 December 2016 were reported on a pro forma basis, including the dividend paid by the Insurance business in February 2017 relating to 2016 earnings.

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REVIEW OF FINANCIAL PERFORMANCE Strong underlying performance with significant improvement in statutory profit and returns The Group’s underlying profit in the quarter was £2,083 million, 1 per cent higher than the first quarter of 2016, with higher total income, a further reduction in operating costs and lower impairment charges. The underlying return on tangible equity remains strong at 15.1 per cent (2016: 15.0 per cent). Statutory profit before tax increased to £1,304 million, given the strong underlying profit and significant reduction in below the line items. Statutory profit after tax was £890 million and the return on tangible equity improved to 8.8 per cent (2016: 5.7 per cent). The Group’s CET1 ratio improved to 14.3 per cent (31 December 2016: 13.8 per cent). The Group generated 0.7 percentage points of CET1 capital in the quarter pre dividend accrual. Tangible net assets per share increased to 56.5 pence (31 December 2016: 54.8 pence). Total income Three months ended 31 Mar 2017 £ million Net interest income Other income Total income Operating lease depreciation¹ Net income Banking net interest margin Average interest-earning banking assets 1

Three months ended 31 Mar 2016 £ million

2,928 1,482 4,410 (232) 4,178 2.80% £430.9bn

2,906 1,477 4,383 (193) 4,190 2.74% £438.2bn

Change % 1 – 1 (20) – 6bp (2)

Three months ended 31 Dec 2016 £ million

Change %

2,805 1,545 4,350 (226) 4,124 2.68% £434.0bn

4 (4) 1 (3) 1 12bp (1)

Net of gains on disposal of leased assets.

Total income increased slightly to £4,410 million with small increases in both net interest income and other income. Net interest income was 1 per cent higher at £2,928 million reflecting the 6 basis point improvement in net interest margin partly offset by a 2 per cent reduction in average interest-earning banking assets. The improvement in net interest margin was driven by further reductions in wholesale funding and deposit costs, which more than offset the continued pressure from asset pricing. The increase in both net interest income and net interest margin from the fourth quarter 2016 was predominantly driven by lower deposit costs following pricing actions taken in December. Non-banking net interest expense reduced to £47 million compared with £84 million in the first quarter of 2016, due to lower costs from past liability management exercises and other items. The Group now expects the net interest margin for the year to be close to 2.80 per cent, excluding MBNA. Other income of £1,482 million was slightly up on the first quarter of 2016 (£1,477 million). This increase was largely driven by Consumer Finance following further contract hire fleet leasing growth in the Lex Autolease business, with slightly weaker Retail and Commercial Banking income whilst Insurance income was stable year-on-year and included the benefit of further bulk annuity transactions.

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Operating costs

Operating costs Cost:income ratio Operating jaws Simplification savings annual run-rate



1,968 47.1% 1% 1,051

1,987 47.4%

Change %


Change %

1 (0.3)pp

2,134 51.7%

8 (4.6)pp

495

947

Operating costs were 1 per cent lower than in the first quarter of 2016 at £1,968 million reflecting tight cost control and further benefits from the Simplification programme. The Group remains on track to deliver the £1.4 billion of targeted Simplification run-rate savings by the end of 2017 and has delivered £1.1 billion of annual run-rate savings to date. The cost:income ratio improved to 47.1 per cent with positive jaws of 1 per cent. The Group continues to expect the cost:income ratio for 2017 to be lower than 2016 (48.7 per cent). Impairment

Total impairment charge Asset quality ratio Gross asset quality ratio Impaired loans as a % of closing advances Provisions as a % of impaired loans



127 0.12% 0.23% 1.8% 43.2%

149 0.14% 0.22% 2.0% 44.7%

Change %


Change %

15 (2)bp 1bp (0.2)pp (1.5)pp

196 0.17% 0.31% 1.8% 43.4%

35 (5)bp (8)bp − (0.2)pp

Credit quality remains strong and is stable across the portfolio. The impairment charge was £127 million, compared with £149 million in the first quarter of 2016 and the asset quality ratio was 12 basis points (2016: 14 basis points) reflecting our prudent approach to risk and the benefit from debt sales made in the quarter. The gross asset quality ratio was 23 basis points (2016: 22 basis points). The Group now expects the asset quality ratio for the year to be inside our existing guidance of 25 basis points, excluding MBNA. Impaired loans as a percentage of closing advances were 1.8 per cent, in line with the end of December, with provisions as a percentage of impaired loans remaining broadly stable at 43 per cent.

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Statutory profit

Underlying profit Volatility and other items Enhanced Capital Notes Market volatility and asset sales Amortisation of purchased intangibles Restructuring costs Fair value unwind Payment protection insurance provision Other conduct provisions Statutory profit before tax Taxation Profit for the period



2,083

2,054

– 12 (23) (157) (61) (229) (350) (200) 1,304 (414) 890

(790) (203) (84) (161) (47) (1,285) – (115) 654 (123) 531

Change %


Change %

1

1,794

16

99 68

– 46 (85) (232) (75) (346) – (475) 973 (535) 438

34 103

Statutory profit before tax increased to £1,304 million (2016: £654 million). The charge of £790 million for Enhanced Capital Notes in the first quarter of 2016 represented the write-off of the embedded derivative and the premium paid on the redemption of the remaining notes. Market volatility and asset sales of £12 million included positive insurance volatility of £3 million compared to negative £163 million in the first quarter of 2016. Restructuring costs were £157 million (2016: £161 million) and comprised severance costs relating to the Simplification programme, the announced rationalisation of the non-branch property portfolio and the work on implementing the ring-fencing requirements. As previously announced to the market, the results include an additional £350 million PPI provision following the release of the revised policy statement by the FCA on 2 March 2017. The additional provision has been taken to reflect the estimated impact of the policy statement including the revised arrangements for Plevin cases, which includes a requirement to proactively contact customers who have previously had their complaints defended, and which is likely to increase estimated volumes and redress. The policy statement also confirmed a two month extension to the time bar to the end of August 2019. Other conduct provisions of £200 million include the £100 million estimated compensation costs for economic losses, distress and inconvenience caused to the victims of the HBOS Reading fraud and £100 million for Retail conduct matters. Taxation The tax charge was £414 million, representing an effective tax rate of 32 per cent. The high effective tax rate reflects the banking surcharge and restrictions on the deductibility of conduct provisions. Return on tangible equity The return on tangible equity improved to 8.8 per cent (2016: 5.7 per cent), reflecting the significant increase in statutory profit after tax in the period. The Group continues to expect to generate a statutory return on tangible equity of between 13.5 and 15.0 per cent in 2019.

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Balance sheet At 31 Mar 2017

At 31 Dec 2016

Loans and advances to customers 2 Customer deposits Loan to deposit ratio

£445bn £415bn 107%

£450bn £413bn 109%

(1) – (2)pp

Wholesale funding Wholesale funding