2013 HALF-YEAR RESULTS NEWS RELEASE - PART 1
2013 Half-Year Results
News Release
Lloyds Banking Group plc
1 August 2013
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BASIS OF PRESENTATION |
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This report covers the results of Lloyds Banking Group plc (the Company) together with its subsidiaries (the Group) for the half-year ended 30 June 2013. |
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Statutory basis Statutory results are set out on pages 104 to 153. However, a number of factors have had a significant effect on the comparability of the Group's financial position and results. As a result, comparison on a statutory basis of the 2013 results with 2012 is of limited benefit. |
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Underlying basis In order to present a more meaningful view of business performance, the results of the Group and divisions are presented on an underlying basis. The key principles adopted in the preparation of the underlying basis of reporting are described below. · In order to reflect the impact of the acquisition of HBOS, the following have been excluded: - the amortisation of purchased intangible assets; and - the unwind of acquisition-related fair value adjustments. · The following items, not related to acquisition accounting, have also been excluded from underlying profit: |
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- the effects of certain asset sales, liability management and volatile items; - volatility arising in insurance businesses; - Simplification costs; - Verde costs; |
- payment protection insurance provision; - insurance gross up; - certain past service pensions credits in respect of the Group's defined benefit pension schemes; and - other regulatory provisions. |
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The financial statements have been restated following the implementation of IAS 19R Employee Benefits and IFRS 10 Consolidated Financial Statements with effect from 1 January 2013. Further details are shown on page 145.
To enable a better understanding of the Group's core business trends and outlook, certain income statement, balance sheet and regulatory capital information is analysed between core and non-core portfolios. The non-core portfolios consist of businesses which deliver below-hurdle returns, which are outside the Group's risk appetite or may be distressed, are subscale or have an unclear value proposition, or have a poor fit with the Group's customer strategy. The EC mandated retail business disposal (Project Verde) is included in core portfolios.
The Group's core and non-core activities are not managed separately and the preparation of this information requires management to make estimates and assumptions that impact the reported income statements, balance sheet, regulatory capital related and risk amounts analysed as core and as non-core. The Group uses a methodology that categorises income and expenses as non-core only where management expect that the income or expense will cease to be earned or incurred when the associated asset or liability is divested or run-off, and allocates operational costs to the core portfolio unless they are directly related to non-core activities. This results in the reported operating costs for the non-core portfolios being less than would be required to manage these portfolios on a stand-alone basis. Due to the inherent uncertainty in making estimates, a different methodology or a different estimate of the allocation might result in a different proportion of the Group's income or expenses being allocated to the core and non-core portfolios, different assets and liabilities being deemed core or non-core and accordingly a different allocation of the regulatory effects.
Unless otherwise stated income statement commentaries throughout this document compare the half-year ended 30 June 2013 to the half-year ended 30 June 2012, and the balance sheet analysis compares the Group balance sheet as at 30 June 2013 to the Group balance sheet as at 31 December 2012. |
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FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with respect to the business, strategy and plans of the Lloyds Banking Group, its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about the Group or the Group's management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to future events and circumstances that will or may occur. The Group's actual future business, strategy, plans and/or results may differ materially from those expressed or implied in these forward looking statements as a result of a variety of factors, including, but not limited to, UK domestic and global economic and business conditions; the ability to derive cost savings and other benefits, including as a result of the Group's Simplification programme; and to access sufficient funding to meet the Group's liquidity needs; changes to the Group's credit ratings; risks concerning borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability and the impact of any sovereign credit rating downgrade or other sovereign financial issues; market-related risks including changes in interest rates and exchange rates; changing demographic and market-related trends; changes in customer preferences; changes to laws, regulation, accounting standards or taxation, including changes to regulatory capital or liquidity requirements; the policies and actions of governmental or regulatory authorities in the UK, the European Union, or other jurisdictions in which the Group operates, including the US; the implementation of Recovery and Resolution Directive and banking reform following the recommendations made by the Independent Commission on Banking; the ability to attract and retain senior management and other employees; requirements or limitations imposed on the Group as a result of HM Treasury's investment in the Group; the ability to satisfactorily dispose of certain assets or otherwise meet the Group's EC state aid obligations; the extent of any future impairment charges or write-downs caused by depressed asset valuations, market disruptions and illiquid markets; the effects of competition and the actions of competitors, including non-bank financial services and lending companies; exposure to regulatory scrutiny, legal proceedings, regulatory investigations or complaints, and other factors. 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 together with examples of forward looking statements. The forward looking statements contained in this announcement are made as at the date of this announcement, and the Group undertakes no obligation to update any of its forward looking statements.
CONTENTS
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Page |
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Key highlights |
1 |
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Results summary |
2 |
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Consolidated income statement |
3 |
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Balance sheet and key ratios |
3 |
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Consolidated income statement - core and non-core |
4 |
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Group Chief Executive's statement |
5 |
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Group Finance Director's review of financial performance |
9 |
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Underlying basis segmental analysis |
17 |
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Underlying basis quarterly information |
22 |
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Divisional performance |
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Retail |
23 |
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Commercial Banking |
27 |
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Wealth, Asset Finance and International |
31 |
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Insurance |
36 |
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Group Operations |
40 |
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Central items |
40 |
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Additional information on a underlying basis |
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Basis of preparation of underlying basis information |
41 |
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St. James's Place |
42 |
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Banking net interest margin |
43 |
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Volatility arising in insurance businesses |
44 |
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Number of employees (full-time equivalent) |
45 |
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Risk management |
46 |
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Risk management approach |
47 |
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The economy |
47 |
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Principal risks and uncertainties |
48 |
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Credit risk portfolio |
54 |
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Exposure to Eurozone countries |
81 |
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Liquidity and funding management |
89 |
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Capital management |
96 |
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Statutory information |
104 |
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Primary statements |
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Consolidated income statement |
105 |
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Consolidated statement of comprehensive income |
106 |
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Consolidated balance sheet |
107 |
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Consolidated statement of changes in equity |
109 |
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Consolidated cash flow statement |
112 |
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Notes |
113 |
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Statement of directors' responsibilities |
154 |
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Independent review report to Lloyds Banking Group plc |
155 |
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Contacts |
156 |
RESULTS FOR THE HALF-YEAR TO 30 JUNE 2013
ACCELERATED PROGRESS IN DELIVERING STRATEGIC PLAN
'In the two years since we set out our strategic plan to become the best bank for customers, we have transformed the Group with increasing momentum, reshaping the business to focus on our core UK franchise, significantly reducing costs and risk, and simplifying and improving our service, products, and processes. As a result, we are now well on track to create a bank with a leading cost position, lower risk, a lower cost of equity, and products and services focused on our customers' needs, to deliver strong, stable and sustainable returns to our shareholders.
We accelerated the pace of delivery on key elements of our strategic plan in the first half of the year. We returned our core loan book to growth a quarter earlier than expected, delivered a significant improvement in our net interest margin, and are targeting additional cost reductions. We have also substantially strengthened our balance sheet and reduced risk through building our capital further and reducing non-core assets more quickly. At the same time, we are continuing to support the UK economic recovery and are making substantial improvements in our service to customers through additional investments in our simple, UK customer-focused retail and commercial banking model.'
António Horta-Osório
Group Chief Executive
KEY HIGHLIGHTS
· Accelerated progress in delivering strategic plan in the first half of 2013.
· Substantial increase in underlying profit of £1,858 million to £2,902 million with income growth of 2 per cent, increased net interest margin of 2.01 per cent and further cost and impairment reductions, down 6 per cent and 43 per cent respectively.
· Statutory profit of £2,134 million (first half of 2012: loss of £456 million).
· Core underlying income up 6 per cent with accelerated core loan book growth in second quarter.
· Upgraded guidance for net interest margin improvement, cost reduction, non-core asset reduction and capital build.
· Now expect full year 2013 net interest margin of close to 2.10 per cent.
· Further reduction in costs, as reported in guidance given in first quarter results.
· Non-core asset reduction of £17 billion, ahead of plan and capital accretive.
· Now targeting non-core assets of less than £70 billion by end 2013, a year earlier than previously expected. Non-retail non-core assets expected to be less than £30 billion at end 2013, and less than £20 billion at end 2014.
· Capital build ahead of expectations with fully loaded core tier 1 ratio of 9.6 per cent; now targeting fully loaded core tier 1 ratio of above 10 per cent by year end, twelve months ahead of plan.
RESULTS SUMMARY
Substantial increase in Group underlying profit and return to statutory profit
· Group underlying profit of £2,902 million (half-year to 30 June 2012: £1,044 million).
· Statutory profit before tax of £2,134 million (half-year to 30 June 2012: £456 million loss).
· Group return on risk-weighted assets increased from 0.61 per cent to 1.95 per cent.
· Total underlying income of £9,464 million, up 2 per cent; decreased 2 per cent excluding St. James's Place effects.
· Group net interest margin increased to 2.01 per cent, ahead of guidance.
· Costs further reduced by 6 per cent to £4,749 million; Simplification run-rate savings increased to £1,160 million.
· 43 per cent reduction in impairment charge to £1,813 million (half-year to 30 June 2012: £3,157 million).
Core returns further improved and increased core underlying profit
· Core underlying profit increased by 26 per cent to £3,696 million (half-year to 30 June 2012: £2,931 million).
· Return on risk-weighted assets increased from 2.44 per cent to 3.16 per cent.
· Core underlying income of £9,071 million, up 6 per cent; increased 1 per cent excluding St. James's Place effects.
· Loans and advances increased by £3.0 billion or 1 per cent in the first half of 2013.
· Net interest margin of 2.39 per cent improved by 7 basis points.
· 4 per cent reduction in core costs to £4,468 million (half-year to 30 June 2012: £4,667 million).
Strong balance sheet; continue to de-risk and strengthen balance sheet and capital position
· Fully loaded core tier 1 ratio significantly improved at 9.6 per cent, after legacy charges of £575 million, driven by underlying capital generation, capital accretive non-core reduction and management actions.
· Core tier 1 capital ratio increased to 13.7 per cent (31 December 2012: 12.0 per cent).
· Tier 1 leverage ratio of 4.2 per cent (31 December 2012: 3.8 per cent).
· Continued capital-accretive non-core asset reduction of £17 billion on a constant currency basis, £16 billion after currency effects. Non-core assets now £83 billion, including non-retail assets of £36 billion.
· Ahead of target in reducing our international presence with 17 countries or overseas branches now exited, or exit announced; now targeting a presence in less than 10 countries by end 2014.
· Core loan to deposit ratio of 100 per cent; Group loan to deposit ratio of 117 per cent; deposit growth of 2 per cent in the half-year.
Supporting customers and the UK economic recovery
· Commercial Banking core loan book returned to growth (4 per cent growth in the half-year).
· Positive SME net lending growth of 5 per cent in the last twelve months, against market contraction of 3 per cent.
· Over £1 billion committed to manufacturing in the last nine months; original £1 billion target achieved three months early.
· Supported over 33,000 first-time buyers in the first half of 2013; committed to helping around 60,000 in 2013.
· TSB returning to the high street in September; IPO preparation progressing.
Enhanced guidance reflects continued strong performance and business momentum
· Expect a Group net interest margin of close to 2.10 per cent for full year 2013.
· Expect to reach our non-core assets target of less than £70 billion by the end of 2013, 12 months ahead of plan, and to cease reporting non-core separately after full year 2013 results.
· Non-retail non-core assets expected to be less than £30 billion at end 2013, and less than £20 billion at end 2014.
· As guided in the first quarter results, now expect total costs to be around £9.6 billion in 2013, £200 million lower than previous guidance, and around £9.15 billion in 2014, assuming Verde IPO in mid 2014.
· Targeting an estimated pro forma fully loaded CRD IV core tier 1 ratio of above 10 per cent by end of 2013, a year ahead of previous guidance.
UNDERLYING BASIS CONSOLIDATED INCOME STATEMENT
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Half-year |
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Half-year 20121 |
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Half-year 20121 |
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£ million |
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£ million |
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£ million |
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Net interest income |
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5,206 |
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5,215 |
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5,120 |
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Other income |
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4,406 |
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4,264 |
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4,152 |
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Insurance claims |
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(148) |
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(233) |
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(132) |
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Total underlying income |
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9,464 |
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9,246 |
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9,140 |
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Total costs |
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(4,749) |
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(5,045) |
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(5,079) |
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Impairment |
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(1,813) |
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(3,157) |
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(2,540) |
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Underlying profit |
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2,902 |
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1,044 |
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1,521 |
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Asset sales and volatile items |
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897 |
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80 |
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2,452 |
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Simplification and Verde costs |
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(786) |
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(513) |
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(733) |
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Legacy items |
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(575) |
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(1,075) |
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(3,150) |
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Other items |
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(304) |
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8 |
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(240) |
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Profit (loss) before tax - statutory |
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2,134 |
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(456) |
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(150) |
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Taxation |
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(556) |
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(206) |
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(575) |
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Profit (loss) for the period |
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1,578 |
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(662) |
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(725) |
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Earnings (loss) per share |
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2.2p |
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(1.0)p |
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(1.1)p |
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Banking net interest margin |
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2.01% |
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1.93% |
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1.93% |
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Average interest-earning assets |
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£517.0bn |
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£553.2bn |
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£533.5bn |
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Impairment charge as a % of average advances |
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0.69% |
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1.10% |
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0.95% |
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Return on risk-weighted assets |
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1.95% |
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0.61% |
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0.94% |
BALANCE SHEET AND KEY RATIOS
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At 30 June 2013 |
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At 31 Dec 2012 |
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Change |
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Loans and advances to customers excluding reverse repos2 |
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£503.9bn |
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£512.1bn |
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(2) |
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Core loans and advances to customers excluding reverse repos2 |
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£428.3bn |
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£425.3bn |
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1 |
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Customer deposits excluding repos3 |
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£430.6bn |
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£422.5bn |
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2 |
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Loan to deposit ratio4 |
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117% |
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121% |
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(4)pp |
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Core loan to deposit ratio4 |
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100% |
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101% |
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(1)pp |
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Non-core assets |
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£82.6bn |
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£98.4bn |
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(16) |
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Total assets |
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£876.8bn |
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£934.2bn |
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(6) |
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Wholesale funding |
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£157.0bn |
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£169.6bn |
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(7) |
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Wholesale funding <1 year maturity |
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£50.7bn |
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£50.6bn |
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- |
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Risk-weighted assets5 |
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£288.7bn |
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£310.3bn |
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(7) |
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Core tier 1 capital ratio5 |
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13.7% |
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12.0% |
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1.7pp |
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Estimated pro forma fully loaded CRD IV core tier 1 ratio5 |
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9.6% |
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8.1% |
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1.5pp |
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Fully loaded leverage ratio (including tier 1 instruments)5 |
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4.2% |
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3.8% |
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0.4pp |
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Net tangible assets per share1 |
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54.6p |
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51.9p |
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2.7p |
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1 |
Restated to reflect the implementation of IAS 19R and IFRS 10. See page 145. |
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2 |
Excludes reverse repos of £1.9 billion (31 December 2012: £5.1 billion). |
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3 |
Excludes repos of £3.0 billion (31 December 2012: £4.4 billion). |
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4 |
Loans and advances to customers excluding reverse repos divided by customer deposits excluding repos. |
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5 |
31 December 2012 comparatives have not been restated to reflect the implementation of IAS 19R and IFRS10. |
UNDERLYING BASIS CONSOLIDATED INCOME STATEMENT - CORE AND NON-CORE
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Core |
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Half-year |
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Half-year 20121 |
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Half-year |
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£ million |
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£ million |
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£ million |
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Net interest income |
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5,031 |
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4,922 |
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4,946 |
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Other income |
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4,188 |
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3,887 |
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3,895 |
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Insurance claims |
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(148) |
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(233) |
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(132) |
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Total underlying income |
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9,071 |
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8,576 |
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8,709 |
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Total costs |
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(4,468) |
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(4,667) |
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(4,587) |
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Impairment |
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(907) |
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(978) |
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(941) |
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Underlying profit |
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3,696 |
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2,931 |
|
3,181 |
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|
|
|
|
|
|
|
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Banking net interest margin |
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2.39% |
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2.32% |
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2.32% |
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Impairment charge as a % of average advances |
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0.42% |
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0.44% |
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0.44% |
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Return on risk-weighted assets |
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3.16% |
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2.44% |
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2.65% |
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Non-core |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net interest income |
|
175 |
|
293 |
|
174 |
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Other income |
|
218 |
|
377 |
|
257 |
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Insurance claims |
|
- |
|
- |
|
- |
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Total underlying income |
|
393 |
|
670 |
|
431 |
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Total costs |
|
(281) |
|
(378) |
|
(492) |
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Impairment |
|
(906) |
|
(2,179) |
|
(1,599) |
|
Underlying loss |
|
(794) |
|
(1,887) |
|
(1,660) |
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
0.41% |
|
0.60% |
|
0.47% |
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Impairment charge as a % of average advances |
|
1.83% |
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3.33% |
|
2.91% |
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Core |
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At 30 June |
|
At 31 Dec |
|
Change |
|
|
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£bn |
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£bn |
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% |
|
|
|
|
|
|
|
|
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Loans and advances to customers excluding reverse repos2 |
|
428.3 |
|
425.3 |
|
1 |
|
Total core assets |
|
794.2 |
|
835.8 |
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(5) |
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Customer deposits excluding repos3 |
|
427.8 |
|
419.1 |
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2 |
|
Core loan to deposit ratio4 |
|
100% |
|
101% |
|
(1)pp |
|
Risk-weighted assets |
|
233.5 |
|
237.4 |
|
(2) |
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Non-core |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Loans and advances to customers |
|
75.6 |
|
86.8 |
|
(13) |
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Loans and advances to banks |
|
0.4 |
|
0.4 |
|
- |
|
Debt securities held as loans and receivables |
|
1.2 |
|
4.7 |
|
(74) |
|
Available-for-sale financial assets |
|
1.6 |
|
2.6 |
|
(38) |
|
Other |
|
3.8 |
|
3.9 |
|
(5) |
|
Total non-core assets |
|
82.6 |
|
98.4 |
|
(16) |
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
55.2 |
|
72.9 |
|
(24) |
|
1 |
Restated to reflect the implementation of IAS 19R and IFRS 10. See page 145. |
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2 |
Excludes reverse repos of £1.9 billion (31 December 2012: £5.1 billion). |
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3 |
Excludes repos of £3.0 billion (31 December 2012: £4.4 billion). |
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4 |
Loans and advances to customers excluding reverse repos divided by customer deposits excluding repos. |
GROUP CHIEF EXECUTIVE'S STATEMENT
Accelerated progress in delivering our strategic plan
In the first half of 2013, we further accelerated the delivery of the strategic plan we set out in June 2011. As a result, although the economic and regulatory environment has been challenging, we have now delivered many of its key elements ahead of our expectations, and have exceeded a number of our original targets and set new targets for further improvement. We have substantially completed the strengthening of our balance sheet, and while further work remains to be done, we have made significant progress in reshaping and simplifying the Group for the benefit of customers and colleagues. At the same time, our investments to improve products and services are providing substantial benefits for our customers.
As a result of the work we have done over the last two years, our performance is not only much improved, but is now more stable and resilient. As a result, the Group is now better able to respond to changes in the economic and regulatory environment, and to absorb, without a material effect on the strength of our balance sheet, the further charges for legacy issues we decided it was appropriate to take in the period.
We are now seeing the benefits of the substantial advantages of being a low risk, highly efficient UK retail and commercial bank. Our strong UK franchise and operating model built around the customer means we are building products and services focused on their needs. We expect our focused, efficient and lower risk model to result in a low cost of equity, and to deliver strong, stable and sustainable returns for our shareholders well in excess of the cost of equity.
Significantly improved financial performance
We delivered a significantly improved financial performance in the first half of 2013. Group underlying profit increased by 178 per cent to £2,902 million when compared to the first half of 2012. Group net interest margin increased by 8 basis points to 2.01 per cent, costs reduced by 6 per cent to £4,749 million and the impairment charge reduced by 43 per cent to £1,813 million. As a result, the Group return on risk-weighted assets improved to 1.95 per cent from 0.61 per cent.
We also further improved profitability and returns in our core business, with core underlying profit increasing by 26 per cent to £3,696 million, and core return on risk-weighted assets increasing by 72 basis points to 3.16 per cent. Importantly, and in line with our focus on supporting the UK economy, the core loan book returned to growth in the first quarter and continued into the second quarter, such that core loans and advances increased by £3.0 billion, or 1 per cent, in the first half. Together with an increase in net interest margin of 7 basis points to 2.39 per cent, this helped drive an increase of 6 per cent in core income, while we reduced costs by a further 4 per cent to £4,468 million, and impairments by 7 per cent to £907 million.
Group statutory profit before tax was £2,134 million, a significant improvement on the loss of £456 million in the first half of 2012, demonstrating the resilience of the Group's performance as it absorbed expected Simplification and Verde build expenses and a further charge for legacy items of £575 million.
Strengthening the Group's balance sheet, consistent with regulatory requirements announced in the first half
Much of the work required to strengthen our balance sheet, through improving our funding, liquidity and capital positions, is now complete. At the same time, we now have greater certainty on the regulatory environment following announcements on the capital framework by the UK's Prudential Regulation Authority (PRA) and by the European Commission on CRD IV capital requirements.
As a result, we remain confident in our capital position, and continue to expect to meet the PRA's additional capital requirements, announced on 20 June, without recourse to further equity issuance or the utilisation of additional contingent capital securities.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
A key element in strengthening the balance sheet has been the improvement we have made in our capital position. The fully loaded core tier 1 ratio now stands at 9.6 per cent, and are targeting it to be above 10 per cent by the end of 2013, a year ahead of expectations.
We have transformed our funding position, with the core loan to deposit ratio now at 100 per cent, from 114 per cent at the time of the strategic review, with our customer deposit base increased by 9 per cent in the last two years. Over this time we have reduced our wholesale funding requirement by over £135 billion, or around half, and have materially improved its maturity profile, with short-term funding now representing less than one-third of total wholesale funding, from over half at the time of the review. At the same time, we have maintained a strong liquidity position.
Together, these improvements have resulted in a much more robust and sustainable balance sheet position, which has been one of the catalysts for the substantial reduction in the Group's funding cost over the period. We expect this reduction will over time allow us to deliver our net interest margin guidance and stronger, and more sustainable, returns to shareholders.
As a consequence of the significant progress made in strengthening the balance sheet we now expect to commence discussions with our regulators in the second half of this year on the timetable and conditions for dividend payments.
Reshaping our business portfolio
The improvement in our capital ratios has been driven by capital generation in our core franchise, management actions, and the active reshaping of our business portfolio, including the very substantial reduction of non-core assets in a capital accretive manner. We have now reduced non-core assets by nearly £80 billion, or around half, to £83 billion since June 2011, while releasing £3.4 billion of capital, with the reduction of £17 billion in the first 6 months of the year releasing £1.6 billion of capital.
At the same time, in line with our UK-focused strategy, we have reduced our international presence, and, 18 months ahead of our original expectations, have now exceeded our original target for 2014 of a reduction to 15 countries or fewer, with exits completed or announced from 17 countries. We now expect to reduce further our international presence to under 10 countries by the end of 2014.
Simplifying the Group to improve efficiency and service
Our Simplification programme is central to the successful delivery of our strategy, both in terms of driving further cost savings and efficiencies across the Group, but also in simultaneously improving the service we deliver to our customers.
We have largely completed our programme to remove management layers from our organisation and increase spans of control, and made strong progress in simplifying the Group. Notable achievements include the transfer of 1.7 million mortgage accounts on to a single mortgage system, the implementation of an integrated online Group wide training and development solution and a 39 per cent reduction in legal entities. In addition we have reduced the number of suppliers by 47 per cent since the start of the programme to less than 9,600 and we are now targeting 8,500 by end 2014.
In 2012, we met our target cost base of £10 billion two years ahead of schedule, and in this half-year have further upgraded our guidance such that we now expect a Group cost base of around £9.6 billion in 2013, and around £9.15 billion in 2014, assuming a half-year of costs from the Verde business in 2014.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
These cost reductions have been achieved while delivering a substantial improvement in customer satisfaction and reduction in complaints, driven by faster, more automated and simpler processes, focused on the customer. We have now achieved our target reduction to 1 customer banking complaint per 1,000 accounts (excluding PPI), more than a year ahead of schedule.
Investing in growing our core franchise and supporting our customers and the UK economy
At the same time, we have been strengthening the Group's capacity to support and service our customers and enable growth by investing a proportion of the savings from the Simplification programme in our core franchise.
In Retail, we have maintained our commitment to our branch network, making no closures on a net basis over the period, while refurbishing over 1,000 branches since the strategic review, and extending opening hours. We have also further developed our leading digital presence, reaching, in the first half of this year, the milestones of over 10 million active online users, and now having 3.7 million mobile users at the end of June.
We have maintained our position as the largest lender to UK households, supporting the UK economy and the housing market through our focus on first-time buyers by our commitment to lend over £6.5 billion to help around 60,000 customers purchase their first home in 2013, while attracting depositors through products such as our Halifax ISA Promise.
We are supportive of the UK government's Help to Buy scheme, which aims to increase the availability of mortgages for buyers with small deposits, and which will be available from January 2014 on both new build and previously owned properties up to £600,000 in value for first-time buyers and existing home owners. We are working closely with the government on its detailed implementation and believe this will help to increase liquidity in the UK housing market while offering support to house prices, and to the wider economy through increased activity in the construction sector.
In CommercialBanking, our client-centric approach has again been recognised by the award for the ninth year in a row of the Business Bank of the Year at the FD's Excellence Awards. Consistent with our strategy to improve Commercial Banking's returns, we continue to invest in product capability, notably in Transaction Banking where in the first half we launched a new mobile card solution for our small business clients, and expanded the range of currencies in which our customers can transact. The further development of our debt capital markets franchise is reflected in maintaining a top four position in Investment Grade Corporate Sterling debt issuance and in becoming a market maker for retail bond investors on the London Stock Exchange.
Our support for our small business clients, and therefore for the UK economic recovery in which they play a key role, has been further underlined by our growth in lending to them, and since the strategic review we have consistently increased our lending in a declining market. In the last twelve months we have increased our SME lending by 5 per cent against a market contraction of 3 per cent. We have also continued to support our corporate clients and have committed over £1 billion to UK manufacturers in the last nine months, delivering our £1 billion target three months ahead of plan. Our utilisation of the UK Government's Funding for Lending scheme has further underlined our support for the UK economic recovery, and we remain committed to passing benefits of this low cost funding on to our customers. We have now committed over £24 billion in gross funds under the scheme.
In Wealth, where we created a single business, we are investing in improving client service. In the first half of 2013, our focus has been on embedding the single Wealth business to generate synergies across the UK and the Channel Islands while delivering faster advice and improved support for customers through our new Private Banking client centre, which will be reinforced in the second half by new Customer Relationship Management technology. In Asset Finance, we are now well positioned for growth, given our strong market positions and the development of new technology and customer-centric propositions.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
In Insurance, we continue to see strong growth in Corporate Pensions, reflecting the strength of our proposition and the strong pipeline generated in the run-up to the implementation of the Retail Distribution Review, and have now launched our enhanced annuities product as a key step to expanding our participation in the growing annuity market. We see significant potential in serving the retirement needs of our retail bank customers and the growing direct market. We are investing in the capability of our direct channel with a focus on meeting the needs of customers who may no longer have access to independent financial advice, following the implementation of the Retail Distribution Review. Similarly, we are committed to helping meet the UK population's protection gap. We are developing our protection proposition for the intermediary channel to complement our market leading Bancassurance protection proposition.
As the UK's largest retail and commercial bank we are well placed to help unlock the potential of the families, businesses and communities we serve and make a significant contribution to the future strength and prosperity of the UK. Being the best bank for customers, alongside a focus on operating sustainably and responsibly, underpins our approach to business.
That is why we have focused on addressing customer legacy issues, such as PPI, quickly and fairly. We were the first bank to break from the legal action over PPI, and we did this because it was the right thing to do for our customers. We are disappointed by the Financial Conduct Authority's (FCA) decision to instigate an Enforcement investigation with regard to issues on PPI, which have been written about in the press. We will work with the FCA to resolve the issues and ensure our customers' complaints are addressed efficiently and fairly.
Only by focusing on customers' needs and addressing those needs can we expect to deliver benefit to our stakeholders. We recognise the need to rebuild trust with our customers and our customer-focused strategy is entirely aligned to this. The recently published Salz report also provides the industry with a set of standards against which the industry's approach will be assessed and we are confident of surpassing all these standards.
Guidance and outlook
Our strong momentum is reflected in the significant upgrades to our guidance which we have announced in this half-year. We now expect to improve our Group net interest margin for the full year 2013 to close to 2.10 per cent, against our previous guidance of an improvement to around 1.98 per cent. As announced in our first quarter 2013 results, we expect Group total costs to reduce to around £9.6 billion in 2013 and to around £9.15 billion in 2014 assuming Verde IPO in mid 2014, representing an improvement of nearly £1 billion against the guidance we gave in the strategic review. We expect a further improvement in asset quality to drive a substantial reduction in the 2013 impairment charge with our non-core assets to reduce to less than £70 billion, almost two years ahead of our original plan. We also expect our non-retail non-core assets to be less than £30 billion by the end of this year and less than £20 billion at the end of 2014.
We also expect to further strengthen the Group's balance sheet and reduce risk, and we are now targeting a fully loaded core tier 1 ratio of above 10 per cent at the end of this year.
We have made substantial progress on the delivery of our strategic plan, and have significantly improved the Group's performance, balance sheet strength and resilience while continuing to deal with legacy issues. While the UK economy remains subdued and we await further clarification on the detail of regulatory implementation, including on capital and ringfencing, we expect to deliver further progress in the remainder of 2013 and beyond.
António Horta-Osório
Group Chief Executive
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
Overview
In the first half of 2013, the profitability of the Group has improved significantly on both a statutory and underlying basis. This improvement was driven by income growth, greater than expected net interest margin expansion, further cost reductions and a significantly lower impairment charge. We improved returns in our core business and continued to grow the core loan book in the second quarter, having returned it to growth in the first quarter. We further reduced the non-core asset portfolio in a capital-accretive way, and losses from this portfolio have declined significantly. We substantially enhanced the Group's capital position and our liquidity position remains strong.
Significantly improved Group underlying and statutory profitability
Group underlying profit before tax increased by £1,858 million to £2,902 million compared to the first half of 2012. Underlying income grew by 2 per cent to £9,464 million, including a £433 million gain relating to the sales of shares in St. James's Place. Excluding St. James's Place (both the effect of the gain on sale and deconsolidation from the end of the first quarter), total underlying income was in line when compared with the previous two half years. Group net interest margin increased more than expected by 8 basis points to 2.01 per cent, mainly driven by improved deposit pricing. Total costs continue to be tightly controlled and fell by 6 per cent to £4,749 million. The impairment charge improved by 43 per cent to £1,813 million was mainly driven by the reduction in non-core assets and the sustained improvement in Group asset quality.
Group statutory profit before tax increased by £2,590 million to £2,134 million, driven by improved underlying profit, increased gains from asset sales, positive insurance volatility and a lower provision for legacy issues of £575 million compared to a £1,075 million charge in the first half of 2012.
Core underlying profit improved substantially to £3,696 million from £2,931 million in the first half of 2012 with the return on risk-weighted assets improving to 3.16 per cent from 2.44 per cent. Excluding the effects of the sales of shares in St. James's Place the return on risk-weighted assets was 2.74 per cent. Core underlying income increased 6 per cent to £9,071 million, and by 1 per cent excluding the St. James's Place effects. The core net interest margin also increased 7 basis points to 2.39 per cent.
Core loans and advances grew by £3.0 billion to £428.3 billion over the course of the half-year, with the increase in Commercial Banking and Wealth, Asset Finance and International, partially offset by a reduction in the Retail secured book, which we continue to expect to return to growth in the second half of this year. Core costs decreased by 4 per cent driven by further savings from the Simplification programme and the deconsolidation of St. James's Place. The core impairment charge decreased 7 per cent to £907 million with the reduction primarily attributable to lower Retail impairments.
The non-core underlying loss reduced 58 per cent to £794 million year-on-year, largely as result of a 58 per cent reduction in the impairment charge to £906 million.
Strong balance sheet with substantially enhanced capital position
We have now substantially completed our work to transform the balance sheet, strengthening our funding, liquidity and capital position. The Group's funding requirement has reduced by £20 billion since 31 December 2012, largely as a result of the further £15.8 billion reduction in non-core assets (£17.4 billion on a constant exchange basis). At the same time we have continued to grow deposits. This has enabled us to reduce wholesale funding by £12.6 billion and to repay the full amount of the Long Term Refinancing Operation funding from the European Central Bank of €13.5 billion ahead of schedule.
The Group has further strengthened its capital ratios with the estimated fully loaded CRD IV core tier 1 ratio increasing to 9.6 per cent from 8.1 per cent at 31 December 2012 and the core tier 1 ratio improving to 13.7 per cent.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Total underlying income
|
|
Half-year |
|
Half-year |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£ million |
|
£ million |
|
% |
|
£ million |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
5,205 |
|
5,213 |
|
- |
|
5,118 |
|
2 |
|
Other income |
|
3,877 |
|
4,126 |
|
(6) |
|
3,965 |
|
(2) |
|
Insurance claims |
|
(148) |
|
(233) |
|
36 |
|
(132) |
|
(12) |
|
|
|
8,934 |
|
9,106 |
|
(2) |
|
8,951 |
|
- |
|
St. James's Place1 |
|
530 |
|
140 |
|
|
|
189 |
|
|
|
Total underlying income |
|
9,464 |
|
9,246 |
|
2 |
|
9,140 |
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.01% |
|
1.93% |
|
8bp |
|
1.93% |
|
8bp |
|
Average interest-earning banking assets |
|
£517.0bn |
|
£553.2bn |
|
(7) |
|
£533.5bn |
|
(3) |
|
Loan to deposit ratio |
|
117% |
|
126% |
|
(9)pp |
|
121% |
|
(4)pp |
|
1 |
See detail on page 42. |
Group underlying income increased by 2 per cent to £9,464 million reflecting the gain on the sales of shares in St. James's Place. Excluding St. James's Place, underlying income decreased by 2 per cent compared to the first half of 2012, largely driven by the 41 per cent reduction in non-core income.
Group net interest income was stable with the impact of the 7 per cent reduction in average interest-earning assets, which was principally driven by further non-core reductions, substantially offset by the improvement in net interest margin to 2.01 per cent, significantly ahead of expectations and our full year guidance. The improvement in net interest margin was driven by lower deposit pricing, better than expected asset margin performance, an improved funding mix, and the benefits of repositioning our structural hedge, following recent increases in interest rates. These factors more than offset the negative effects of 6 basis points on net interest margin from the repositioning of our government bond portfolio. As a result we now expect our Group net interest margin to be close to 2.10 per cent for the full year.
Excluding St. James's Place, other income was 6 per cent lower principally reflecting the reduced level of income from the non-core business. Insurance claims were significantly lower reflecting the benign weather in 2013 relative to 2012.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Core underlying income
|
|
Half-year |
|
Half-year |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£ million |
|
£ million |
|
% |
|
£ million |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
5,030 |
|
4,920 |
|
2 |
|
4,944 |
|
2 |
|
Other income |
|
3,659 |
|
3,749 |
|
(2) |
|
3,708 |
|
(1) |
|
Insurance claims |
|
(148) |
|
(233) |
|
36 |
|
(132) |
|
(12) |
|
|
|
8,541 |
|
8,436 |
|
1 |
|
8,520 |
|
- |
|
St. James's Place1 |
|
530 |
|
140 |
|
|
|
189 |
|
|
|
Total underlying income |
|
9,071 |
|
8,576 |
|
6 |
|
8,709 |
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.39% |
|
2.32% |
|
7bp |
|
2.32% |
|
7bp |
|
Average interest-earning banking assets |
|
£418.8bn |
|
£426.5bn |
|
(2) |
|
£421.0bn |
|
(1) |
|
Loan to deposit ratio |
|
100% |
|
103% |
|
(3)pp |
|
101% |
|
(1)pp |
|
1 |
See detail on page 42. |
Core net interest income strengthened by 2 per cent compared to the second half of 2012 which was the third sequential half-year improvement. The impact of the 2 per cent reduction in average interest-earning assets over the year was more than offset by the improved net interest margin. Excluding St. James's Place, core other income was in line with the previous two halves.
Core loans and advances continued to grow in the second quarter after returning to growth in the first quarter. The increase in Commercial Banking and Wealth, Asset Finance and International was partially offset by a reduction in the Retail secured book, which we continue to expect to return to growth in the second half of this year.
Total costs
|
|
Half-year |
|
Half-year |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£ million |
|
£ million |
|
% |
|
£ million |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
4,468 |
|
4,667 |
|
4 |
|
4,587 |
|
3 |
|
Non-core |
|
281 |
|
378 |
|
26 |
|
492 |
|
43 |
|
Total costs |
|
4,749 |
|
5,045 |
|
6 |
|
5,079 |
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Simplification savings annual run-rate |
|
1,160 |
|
512 |
|
127 |
|
847 |
|
37 |
Total costs decreased 6 per cent to £4,749 million compared to the same period in 2012. Core total costs reduced by 4 per cent to £4,468 million driven by benefits of the Simplification programme, strong cost management and the benefit from the deconsolidation of St. James's Place. Costs attributable to St. James's Place were £85 million in the first half of 2012 falling to £44 million in the first half of 2013 as the business was deconsolidated at the end of the first quarter. The strong progress on cost reductions was after inflationary pressures and increased investment in the business. Non-core costs fell due to the significant reduction in non-core assets.
At 30 June 2013, we had realised annual run-rate savings of £1,160 million from our initiatives to simplify the Group. This is an increase of £313 million since 31 December 2012 and £648 million since 30 June 2012, with the Simplification programme contributing cost savings of £619 million in the six months to 30 June 2013. We remain confident of achieving our target of £1.9 billion of annual run-rate cost savings by the end of 2014.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Impairment
|
|
Half-year |
|
Half-year |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£ million |
|
£ million |
|
% |
|
£ million |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
907 |
|
978 |
|
7 |
|
941 |
|
4 |
|
Non-core |
|
906 |
|
2,179 |
|
58 |
|
1,599 |
|
43 |
|
Total impairment |
|
1,813 |
|
3,157 |
|
43 |
|
2,540 |
|
29 |
|
Impairment charge as a % of average advances |
|
|
|
|
|
|
|
|
|
|
|
Core |
|
0.42% |
|
0.44% |
|
(2)bp |
|
0.44% |
|
(2)bp |
|
Non-core |
|
1.83% |
|
3.33% |
|
(150)bp |
|
2.91% |
|
(108)bp |
|
Total impairment |
|
0.69% |
|
1.10% |
|
(41)bp |
|
0.95% |
|
(26)bp |
The impairment charge reduced 43 per cent to £1,813 million, with continued strong management of impaired loans and a further reduction in non-core leading to a further significant improvement in the quality of the portfolio. Reductions were seen across both core and non-core portfolios and the non-core impairment charge was less than the core impairment charge for the first time. The impairment charge as a percentage of average advances reduced by 41 basis points to 0.69 per cent, close to our 2014 target for the Group of 50 to 60 basis points.
Core impairment
The 7 per cent reduction in core impairment charge was primarily attributable to lower Retail impairments. This was partly offset by a higher charge in Commercial Banking, which benefitted from releases during the first half of 2012 which were not repeated in 2013. The impairment charge as a percentage of average advances in the core business remains low at 0.42 per cent.
Non-core impairment
The non-core impairment charge decreased 58 per cent to £906 million, driven by substantial reductions in the Commercial Banking and International portfolios. The 43 per cent decrease compared with the second half of 2012 was driven by reductions in Commercial Banking impairments.
Impaired loans
|
|
As at 30 June |
|
As at 30 June |
|
Change |
|
As at 31 Dec 2012 |
|
Change |
|
|
|
|
% |
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans as a % of closing advances |
|
7.7 |
|
9.4 |
|
(1.7)pp |
|
8.6 |
|
(0.9)pp |
|
Provisions as a % of impaired loans1 |
|
51.1 |
|
48.7 |
|
2.4pp |
|
48.2 |
|
2.9pp |
|
1 |
Excludes loans in recoveries. |
Impaired loans as a percentage of closing advances reduced to 7.7 per cent, from 8.6 per cent at 31 December 2012, driven by improvements in Commercial Banking with reductions in both the core and non-core books. Provisions as a percentage of impaired loans increased from 48.2 per cent at 31 December 2012 to 51.1 per cent, with increases across both the core and non-core books.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Statutory profit
Statutory profit before tax was £2,134 million compared to a loss of £456 million in the first half of 2012. Gains on the sale of our government securities portfolio of £780 million and positive volatility arising in the insurance business of £485 million were more than offset by further Simplification and Verde costs of £786 million, further charges relating to legacy business of £500 million for PPI and £75 million for claims relating to policies issued by Clerical Medical Insurance Group Limited in Germany, and other items. Further detail on the reconciliation of underlying to statutory results is included on page 41.
|
|
Half-year |
|
Half-year |
|
Change |
|
Half-year 20121 |
|
Change |
|
|
|
|
£ million |
|
£ million |
|
% |
|
£ million |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying profit |
|
2,902 |
|
1,044 |
|
178 |
|
1,521 |
|
91 |
|
Asset sales and volatile items: |
|
|
|
|
|
|
|
|
|
|
|
Asset sales |
|
775 |
|
585 |
|
|
|
1,962 |
|
|
|
Liability management |
|
(97) |
|
168 |
|
|
|
(397) |
|
|
|
Own debt volatility |
|
(166) |
|
(387) |
|
|
|
117 |
|
|
|
Other volatile items |
|
(136) |
|
(422) |
|
|
|
(56) |
|
|
|
Volatility arising in insurance businesses |
|
485 |
|
(21) |
|
|
|
333 |
|
|
|
Fair value unwind |
|
36 |
|
157 |
|
|
|
493 |
|
|
|
|
|
897 |
|
80 |
|
|
|
2,452 |
|
|
|
Simplification and Verde costs |
|
(786) |
|
(513) |
|
|
|
(733) |
|
|
|
Legacy items: |
|
|
|
|
|
|
|
|
|
|
|
Payment protection insurance provision |
|
(500) |
|
(1,075) |
|
|
|
(2,500) |
|
|
|
Other regulatory provisions |
|
(75) |
|
- |
|
|
|
(650) |
|
|
|
|
|
(575) |
|
(1,075) |
|
|
|
(3,150) |
|
|
|
Other items: |
|
|
|
|
|
|
|
|
|
|
|
Past service pensions (charge) credit |
|
(104) |
|
250 |
|
|
|
- |
|
|
|
Amortisation of purchased intangibles |
|
(200) |
|
(242) |
|
|
|
(240) |
|
|
|
|
|
(304) |
|
8 |
|
|
|
(240) |
|
|
|
Profit (loss) before tax - statutory |
|
2,134 |
|
(456) |
|
|
|
(150) |
|
|
|
Taxation |
|
(556) |
|
(206) |
|
|
|
(575) |
|
|
|
Profit (loss) for the period |
|
1,578 |
|
(662) |
|
|
|
(725) |
|
|
|
Earnings (loss) per share |
|
2.2p |
|
(1.0)p |
|
|
|
(1.1)p |
|
|
|
1 |
Restated to reflect the implementation of IAS 19R and IFRS 10. See page 145. |
Asset sales
Asset sales included gains on the sale of government securities of £780 million, and a net loss of £5 million (after related fair value unwind of £1,345 million), from the reduction of non-core assets. This reduction included the sale of our Spanish retail banking operations and a portfolio of US Retail Mortgage Backed Securities (US RMBS).
Volatility arising in insurance businesses
The Group's statutory result before tax is affected by insurance volatility, caused by movements in financial markets, and policyholder interests volatility, which primarily reflects the gross up of policyholder tax included in the Group tax charge. The statutory result included £485 million of positive insurance and policyholder interests volatility (30 June 2012: negative volatility of £21 million), reflecting the rise in equity markets in the period.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Simplification and Verde costs
The costs of the Simplification programme were £409 million, with a total of £1,270 million spent to date. These costs related to severance, IT and business costs of implementation. A further 2,740 FTE role reductions were announced in the first half of 2013, taking the total to 9,730 since the start of the programme. Simplification of our business operations continues through reduction in management layers and increasing spans of control as well as restructuring business units.
The Group continues to progress the EC mandated business disposal (Verde) through an Initial Public Offering (IPO) which remains subject to regulatory and EC approval. We continue to target an IPO in mid-2014. Detailed plans are in place to rebrand the business as TSB which will be visible on the high street from September this year, at which point the TSB Bank will operate as a separate business within Lloyds Banking Group and the Lloyds Bank brand will be relaunched. Costs relating to Verde were £377 million and from inception to the end of 30 June 2013 totalled £1,159 million.
PPI
The volume of PPI complaints continues to fall in line with expectations, with average monthly complaint volumes down 12 per cent on the first quarter and weekly complaints averaging approximately 12,500 in the second quarter of 2013. Monthly complaint volumes were on average 40 per cent below those in the second half of 2012.
Costs in the second quarter, however, continued to be higher than expected due to the acceleration of the settlement of cases currently held with the Financial Ombudsman Service, VAT ruling, and slightly higher uphold and settlement rates. We have also revised our estimate of future administration costs. We are therefore increasing our provision by £450 million in relation to these items, with around £250 million of this increase relating to redress costs and about £200 million to additional administration costs.
We have also been informed that we have been referred to the Enforcement Team of the Financial Conduct Authority for investigation over our governance of a third party supplier and failings in the PPI complaint handling process. We have made a provision of £50 million with regards to the likely administration costs of this exercise.
These provisions bring the total amount provided for PPI to £7,275 million (of which £1,510 million relates to administration costs). The total amount provided for PPI represents our best estimate of likely costs, and a number of risks and uncertainties remain, in particular pro-active and reactive complaint volumes, uphold rates, average redress costs, and the outcome of the Enforcement Team investigation. The cost of these factors could differ materially from our estimates, which could result in a further provision being required. Sensitivities to these factors are set out on page 132.
As at 30 June 2013, £1,650 million of the total provision remained unutilised, and total costs incurred in the six months to 30 June 2013 were £1,280 million, including approximately £380 million of administration costs.
Other items
The Group recognised a charge of £104 million as a result of changes to early retirement and commutation factors in two of its principal defined benefit schemes. In the first half of 2012, other items included a credit related to a change in policy in respect of discretionary pension increases.
Taxation
The tax charge for the first six months of 2013 was £556 million. This reflects a higher effective tax rate than the UK statutory rate primarily due to a policyholder tax charge, which is partially offset by exempt gains or gains covered by capital losses.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Balance sheet
We further strengthened and de-risked the balance sheet in the first half, by increasing our capital and leverage ratios, maintaining a strong liquidity position, further reducing non-core assets and continuing to reduce wholesale funding and grow customer deposits.
We have achieved a further significant reduction in non-core assets of £17.4 billion or £15.8 billion including currency effects, to £82.6 billion in the first half. The reductions included £4.5 billion in treasury assets and £4.0 billion in UK commercial real estate, £1.4 billion from the sale of our Spanish retail operations, as well as reductions in Ireland, Asset Finance, Acquisition Finance and Shipping.
Funding and liquidity
The continued growth in customer deposits combined with the reduction of non-core assets has enabled a further reduction in wholesale funding and the full repayment of our Long Term Refinancing Operation funding from the European Central Bank, ahead of schedule.
Customer deposits increased 2 per cent, primarily driven by higher deposits in Retail and growth in Transaction Banking in Commercial Banking. As a result, the Group loan to deposit ratio has improved to 117 per cent from 121 per cent at 31 December 2012. The core loan to deposit ratio improved to 100 per cent from 101 per cent at 31 December 2012.
Wholesale funding has reduced by 7 per cent since 31 December 2012 to £157.0 billion while short-term wholesale funding remained stable at £50.7 billion (31 December 2012: £50.6 billion). Wholesale funding with a maturity of less than one year at 30 June 2013 was 32.3 per cent, compared to 29.8 per cent at 31 December 2012 reflecting the lower overall level of wholesale funding.
|
|
|
At 30 June 2013 |
|
At 31 Dec 20121 |
|
Change |
|
|
|
|
|
|
|
|
|
Funded assets |
|
£520.2bn |
|
£538.7bn |
|
(3) |
|
Non-core assets |
|
£82.6bn |
|
£98.4bn |
|
(16) |
|
Customer deposits2 |
|
£430.6bn |
|
£422.5bn |
|
2 |
|
Wholesale funding |
|
£157.0bn |
|
£169.6bn |
|
(7) |
|
Wholesale funding <1 year maturity |
|
£50.7bn |
|
£50.6bn |
|
- |
|
Of which money-market funding <1 year maturity |
|
£31.3bn |
|
£31.0bn |
|
1 |
|
Wholesale funding <1 year maturity as a % of total wholesale funding |
32.3% |
|
29.8% |
|
2.5pp |
|
|
Loan to deposit ratio |
|
117% |
|
121% |
|
(4)pp |
|
Core loan to deposit ratio |
|
100% |
|
101% |
|
(1)pp |
|
Primary liquid assets |
|
£86.5bn |
|
£87.6bn |
|
(1) |
|
Secondary liquidity |
|
£128.0bn |
|
£117.1bn |
|
9 |
|
1 |
Restated for IAS 19R and IFRS 10. |
|
2 |
Excluding repos of £3.0 billion (31 December 2012: £4.4 billion) (all core). |
The Group's liquidity position remains strong, with primary liquid assets of £86.5 billion at 30 June 2013 (31 December 2012: £87.6 billion). Primary liquid assets represent approximately 2.7 times our money-market funding and are approximately 1.7 times our wholesale funding with a maturity of less than one year, providing a substantial buffer in the event of market dislocation. In addition to primary liquid assets, we have significant secondary liquidity holdings of £128.0 billion. Our total liquid assets represent approximately 4.2 times our wholesale funding with a maturity of less than one year.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)
Risk-weighted assets and capital ratios
|
|
|
At 30 June 2013 |
|
At 31 Dec 20121 |
|
Change |
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
£288.7bn |
|
£310.3bn |
|
(7) |
|
Core risk-weighted assets |
|
£233.5bn |
|
£237.4bn |
|
(2) |
|
Non-core risk-weighted assets |
|
£55.2bn |
|
£72.9bn |
|
(24) |
|
Core tier 1 capital ratio |
|
13.7% |
|
12.0% |
|
1.7pp |
|
Tier 1 capital ratio |
|
14.2% |
|
13.8% |
|
0.4pp |
|
Total capital ratio |
|
20.4% |
|
17.3% |
|
3.1pp |
|
|
|
|
|
|
|
|
|
Estimated pro forma fully loaded CRD IV risk-weighted assets |
|
£299.6bn |
|
£321.1bn |
|
(7) |
|
Estimated pro forma fully loaded CRD IV core tier 1 ratio |
|
9.6% |
|
8.1% |
|
1.5pp |
|
Estimated pro forma fully loaded CRD IV leverage ratio |
|
4.2% |
|
3.8% |
|
0.4pp |
|
1 |
31 December 2012 comparatives have not been restated to reflect the implementation of IAS 19R and IFRS10. |
The Group's estimated pro forma fully loaded CRD IV core tier 1 ratio increased to 9.6 per cent principally driven by capital generation in our core business, the decrease in risk-weighted assets from non-core asset reductions and actions such as the St. James's Place share sales, US RMBS disposal and the £1.6 billion dividend paid by the insurance business to the Group. These were partially offset by the effects of changes to pension accounting and other statutory items.
Our estimated ratio reflects the Group's current interpretation of the final CRD IV rules published on 27 June 2013. Given our progress on capital in the first half of the year, we now anticipate our estimated pro forma fully loaded CRD IV core tier 1 ratio to be above 10 per cent by the end of 2013.
The Group's core tier 1 capital ratio increased to 13.7 per cent from 12.0 per cent at the end of December 2012.
The Group's total capital ratio increased to 20.4 per cent, with £27.4 billionof tier 1 and tier 2 securities contributing a net £19.3 billionto the capital base. The transition to CRD IV is expected to reduce the volume of deductions from non-equity capital arising from the Group's insurance operations and therefore to release a material proportion of tier 1 and tier 2 capital, helping the Group meet future total capital requirements.
The Group's estimated fully loaded leverage ratio including grandfathered tier 1 capital increased to 4.2 per cent from 3.8 per cent at the end of 2012 and to 3.5 per cent from 3.1 per cent excluding grandfathered tier 1. Both of these ratios are in excess of the Basel Committee's proposed minimum of 3 per cent.
The Group has a strong capital position and continues to expect to meet the PRA's requirement of £8.6 billion additional capital announced in June without recourse to further equity issuance or the utilisation of additional contingent capital securities.
Conclusion
The Group has continued to deliver strong core returns with growth in core lending, underlying income and net interest margin, and reductions in costs and impairments. The continued progress we have made in reducing risk in the balance sheet and strengthening the Group's capital ratios leaves us well positioned to continue growing our core business as we support the UK economic recovery.
George Culmer
Group Finance Director
UNDERLYING BASIS SEGMENTAL ANALYSIS
|
Half-year to 30 June 2013 |
|
Retail |
Commercial |
|
Wealth, |
Insurance |
Group |
|
Group |
|||
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
3,590 |
|
1,196 |
|
431 |
|
(45) |
|
34 |
|
5,206 |
|
Other income |
|
728 |
|
1,426 |
|
951 |
|
1,111 |
|
190 |
|
4,406 |
|
Insurance claims |
|
- |
|
- |
|
- |
|
(148) |
|
- |
|
(148) |
|
Total underlying income |
|
4,318 |
|
2,622 |
|
1,382 |
|
918 |
|
224 |
|
9,464 |
|
Total costs |
|
(2,046) |
|
(1,261) |
|
(1,033) |
|
(354) |
|
(55) |
|
(4,749) |
|
Impairment |
|
(636) |
|
(727) |
|
(450) |
|
- |
|
- |
|
(1,813) |
|
Underlying profit (loss) |
|
1,636 |
|
634 |
|
(101) |
|
564 |
|
169 |
|
2,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.14% |
|
1.89% |
|
2.01% |
|
|
|
|
|
2.01% |
|
Impairment charge as a % of average advances |
|
0.37% |
|
1.03% |
|
2.10% |
|
|
|
|
|
0.69% |
|
Return on risk-weighted assets |
|
3.51% |
|
0.81% |
|
(0.59)% |
|
|
|
|
|
1.95% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key balance sheet items |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and advances to customers excluding reverse repos |
|
340.5 |
|
132.1 |
|
30.3 |
|
|
|
1.0 |
|
503.9 |
|
Customer deposits excluding repos |
|
263.2 |
|
118.4 |
|
48.9 |
|
|
|
0.1 |
|
430.6 |
|
Total customer balances |
|
603.7 |
|
250.5 |
|
79.2 |
|
|
|
1.1 |
|
934.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
91.6 |
|
150.5 |
|
32.2 |
|
|
|
14.4 |
|
288.7 |
UNDERLYING BASIS SEGMENTAL ANALYSIS (continued)
|
Half-year to 30 June 2012 |
|
Retail1 |
Commercial |
|
Wealth, |
Insurance |
Group |
|
Group |
|||
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
3,553 |
|
1,111 |
|
415 |
|
(37) |
|
173 |
|
5,215 |
|
Other income |
|
766 |
|
1,496 |
|
1,006 |
|
1,156 |
|
(160) |
|
4,264 |
|
Insurance claims |
|
- |
|
- |
|
- |
|
(233) |
|
- |
|
(233) |
|
Total underlying income |
|
4,319 |
|
2,607 |
|
1,421 |
|
886 |
|
13 |
|
9,246 |
|
Total costs |
|
(2,089) |
|
(1,282) |
|
(1,136) |
|
(384) |
|
(154) |
|
(5,045) |
|
Impairment |
|
(758) |
|
(1,408) |
|
(991) |
|
- |
|
- |
|
(3,157) |
|
Underlying profit (loss) |
|
1,472 |
|
(83) |
|
(706) |
|
502 |
|
(141) |
|
1,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.05% |
|
1.58% |
|
1.62% |
|
|
|
|
|
1.93% |
|
Impairment charge as a % of average advances |
|
0.43% |
|
1.61% |
|
3.99% |
|
|
|
|
|
1.10% |
|
Return on risk-weighted assets |
|
2.92% |
|
(0.09)% |
|
(3.38)% |
|
|
|
|
|
0.61% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key balance sheet items |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and advances to customers excluding reverse repos |
|
347.0 |
|
145.1 |
|
36.3 |
|
|
|
0.2 |
|
528.6 |
|
Customer deposits excluding repos |
|
254.7 |
|
115.1 |
|
49.3 |
|
|
|
- |
|
419.1 |
|
Total customer balances |
|
601.7 |
|
260.2 |
|
85.6 |
|
|
|
0.2 |
|
947.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
100.2 |
|
179.5 |
|
40.1 |
|
|
|
12.7 |
|
332.5 |
|
1 |
Restated. |
|
Half-year to 31 December 2012 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
3,642 |
|
1,095 |
|
384 |
|
(41) |
|
40 |
|
5,120 |
|
Other income |
|
696 |
|
1,436 |
|
1,037 |
|
1,138 |
|
(155) |
|
4,152 |
|
Insurance claims |
|
- |
|
- |
|
- |
|
(132) |
|
- |
|
(132) |
|
Total underlying income |
|
4,338 |
|
2,531 |
|
1,421 |
|
965 |
|
(115) |
|
9,140 |
|
Total costs |
|
(2,110) |
|
(1,234) |
|
(1,155) |
|
(360) |
|
(220) |
|
(5,079) |
|
Impairment |
|
(512) |
|
(1,538) |
|
(489) |
|
- |
|
(1) |
|
(2,540) |
|
Underlying profit (loss) |
|
1,716 |
|
(241) |
|
(223) |
|
605 |
|
(336) |
|
1,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.11% |
|
1.59% |
|
1.69% |
|
|
|
|
|
1.93% |
|
Impairment charge as a % of average advances |
|
0.29% |
|
2.06% |
|
2.16% |
|
|
|
|
|
0.95% |
|
Return on risk-weighted assets |
|
3.50% |
|
(0.28)% |
|
(1.16)% |
|
|
|
|
|
0.94% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key balance sheet items |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and advances to customers excluding reverse repos |
|
343.3 |
|
134.7 |
|
33.4 |
|
|
|
0.7 |
|
512.1 |
|
Customer deposits excluding repos |
|
260.8 |
|
109.7 |
|
51.9 |
|
|
|
0.1 |
|
422.5 |
|
Total customer balances |
|
604.1 |
|
244.4 |
|
85.3 |
|
|
|
0.8 |
|
934.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
95.5 |
|
165.2 |
|
36.2 |
|
|
|
13.4 |
|
310.3 |
CORE BUSINESS
|
Half-year to 30 June 2013 |
|
Retail |
Commercial |
|
Wealth, |
Insurance |
Group |
|
Group |
|||
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
3,581 |
|
1,173 |
|
246 |
|
(49) |
|
80 |
|
5,031 |
|
Other income |
|
722 |
|
1,262 |
|
918 |
|
1,096 |
|
190 |
|
4,188 |
|
Insurance claims |
|
- |
|
- |
|
- |
|
(148) |
|
- |
|
(148) |
|
Total underlying income |
|
4,303 |
|
2,435 |
|
1,164 |
|
899 |
|
270 |
|
9,071 |
|
Total costs |
|
(2,044) |
|
(1,179) |
|
(853) |
|
(337) |
|
(55) |
|
(4,468) |
|
Impairment |
|
(590) |
|
(302) |
|
(15) |
|
- |
|
- |
|
(907) |
|
Underlying profit |
|
1,669 |
|
954 |
|
296 |
|
562 |
|
215 |
|
3,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.31% |
|
2.48% |
|
7.78% |
|
|
|
|
|
2.39% |
|
Impairment charge as a % of average advances |
|
0.37% |
|
0.57% |
|
0.50% |
|
|
|
|
|
0.42% |
|
Return on risk-weighted assets |
|
3.95% |
|
1.51% |
|
6.24% |
|
|
|
|
|
3.16% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key balance sheet items |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
Loans and advances to customers excluding reverse repos |
|
315.4 |
|
106.3 |
|
5.6 |
|
|
|
1.0 |
|
428.3 |
|
Customer deposits excluding repos |
|
263.2 |
|
115.8 |
|
48.7 |
|
|
|
0.1 |
|
427.8 |
|
Total customer balances |
|
578.6 |
|
222.1 |
|
54.3 |
|
|
|
1.1 |
|
856.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
83.0 |
|
126.4 |
|
9.7 |
|
|
|
14.4 |
|
233.5 |
Core business (continued)
|
Half-year to 30 June 2012 |
|
Retail1 |
Commercial |
|
Wealth, |
Insurance |
Group |
|
Group |
|||
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
3,522 |
|
1,114 |
|
154 |
|
(41) |
|
173 |
|
4,922 |
|
Other income |
|
757 |
|
1,206 |
|
958 |
|
1,126 |
|
(160) |
|
3,887 |
|
Insurance claims |
|
- |
|
- |
|
- |
|
(233) |
|
- |
|
(233) |
|
Total underlying income |
|
4,279 |
|
2,320 |
|
1,112 |
|
852 |
|
13 |
|
8,576 |
|
Total costs |
|
(2,086) |
|
(1,162) |
|
(900) |
|
(365) |
|
(154) |
|
(4,667) |
|
Impairment |
|
(735) |
|
(232) |
|
(11) |
|
- |
|
- |
|
(978) |
|
Underlying profit (loss) |
|
1,458 |
|
926 |
|
201 |
|
487 |
|
(141) |
|
2,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.21% |
|
2.21% |
|
5.69% |
|
|
|
|
|
2.32% |
|
Impairment charge as a % of average advances |
|
0.45% |
|
0.40% |
|
0.36% |
|
|
|
|
|
0.44% |
|
Return on risk-weighted assets |
|
3.22% |
|
1.45% |
|
4.46% |
|
|
|
|
|
2.44% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key balance sheet items At 30 June 2012 |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
Loans and advances to customers excluding reverse repos |
|
320.1 |
|
103.5 |
|
4.7 |
|
|
|
0.2 |
|
428.5 |
|
Customer deposits excluding repos |
|
254.7 |
|
112.6 |
|
48.6 |
|
|
|
- |
|
415.9 |
|
Total customer balances |
|
574.8 |
|
216.1 |
|
53.3 |
|
|
|
0.2 |
|
844.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
90.4 |
|
127.4 |
|
8.6 |
|
|
|
12.7 |
|
239.1 |
|
1 |
Restated. |
|
Half-year to 31 December 2012 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
3,641 |
|
1,128 |
|
158 |
|
(46) |
|
65 |
|
4,946 |
|
Other income |
|
689 |
|
1,236 |
|
1,006 |
|
1,119 |
|
(155) |
|
3,895 |
|
Insurance claims |
|
- |
|
- |
|
- |
|
(132) |
|
- |
|
(132) |
|
Total underlying income |
|
4,330 |
|
2,364 |
|
1,164 |
|
941 |
|
(90) |
|
8,709 |
|
Total costs |
|
(2,107) |
|
(1,070) |
|
(895) |
|
(345) |
|
(170) |
|
(4,587) |
|
Impairment |
|
(457) |
|
(472) |
|
(11) |
|
- |
|
(1) |
|
(941) |
|
Underlying profit (loss) |
|
1,766 |
|
822 |
|
258 |
|
596 |
|
(261) |
|
3,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.29% |
|
2.22% |
|
6.09% |
|
|
|
|
|
2.32% |
|
Impairment charge as a % of average advances |
|
0.28% |
|
0.93% |
|
0.55% |
|
|
|
|
|
0.44% |
|
Return on risk-weighted assets |
|
3.98% |
|
1.27% |
|
5.76% |
|
|
|
|
|
2.65% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key balance sheet items At 31 December 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and advances to customers excluding reverse repos |
|
317.3 |
|
102.0 |
|
5.3 |
|
|
|
0.7 |
|
425.3 |
|
Customer deposits excluding repos |
|
260.8 |
|
107.2 |
|
51.0 |
|
|
|
0.1 |
|
419.1 |
|
Total customer balances |
|
578.1 |
|
209.2 |
|
56.3 |
|
|
|
0.8 |
|
844.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
86.6 |
|
127.8 |
|
9.6 |
|
|
|
13.4 |
|
237.4 |
NON-CORE BUSINESS
|
Half-year to 30 June 2013 |
|
Retail |
Commercial |
|
Wealth, |
Insurance |
Group |
|
Group |
|||
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
9 |
|
23 |
|
185 |
|
4 |
|
(46) |
|
175 |
|
Other income |
|
6 |
|
164 |
|
33 |
|
15 |
|
- |
|
218 |
|
Total underlying income |
|
15 |
|
187 |
|
218 |
|
19 |
|
(46) |
|
393 |
|
Total costs |
|
(2) |
|
(82) |
|
(180) |
|
(17) |
|
- |
|
(281) |
|
Impairment |
|
(46) |
|
(425) |
|
(435) |
|
- |
|
- |
|
(906) |
|
Underlying (loss) profit |
|
(33) |
|
(320) |
|
(397) |
|
2 |
|
(46) |
|
(794) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
0.09% |
|
0.29% |
|
1.05% |
|
|
|
|
|
0.41% |
|
Impairment charge as a % of average advances |
|
0.36% |
|
2.35% |
|
2.37% |
|
|
|
|
|
1.83% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key balance sheet items at 30 June 2013 |
|
|
|
|
|
|
|
|
|
|
||
|
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
Total non-core assets |
|
25.1 |
|
31.4 |
|
25.5 |
|
0.6 |
|
- |
|
82.6 |
|
Risk-weighted assets |
|
8.6 |
|
24.1 |
|
22.5 |
|
|
|
|
|
55.2 |
|
Half-year to 30 June 2012 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
31 |
|
(3) |
|
261 |
|
4 |
|
- |
|
293 |
|
Other income |
|
9 |
|
290 |
|
48 |
|
30 |
|
- |
|
377 |
|
Total underlying income |
|
40 |
|
287 |
|
309 |
|
34 |
|
- |
|
670 |
|
Total costs |
|
(3) |
|
(120) |
|
(236) |
|
(19) |
|
- |
|
(378) |
|
Impairment |
|
(23) |
|
(1,176) |
|
(980) |
|
- |
|
- |
|
(2,179) |
|
Underlying profit (loss) |
|
14 |
|
(1,009) |
|
(907) |
|
15 |
|
- |
|
(1,887) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
0.22% |
|
0.44% |
|
1.15% |
|
|
|
|
|
0.60% |
|
Impairment charge as a % of average advances |
|
0.17% |
|
3.76% |
|
4.42% |
|
|
|
|
|
3.33% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key balance sheet items at 30 June 2012 |
|
|
|
|
|
|
|
|
|
|
||
|
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
Total non-core assets |
|
26.9 |
|
57.1 |
|
32.9 |
|
0.6 |
|
- |
|
117.5 |
|
Risk-weighted assets |
|
9.8 |
|
52.1 |
|
31.5 |
|
|
|
|
|
93.4 |
|
Half-year to 31 December 2012 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
1 |
|
(33) |
|
226 |
|
5 |
|
(25) |
|
174 |
|
Other income |
|
7 |
|
200 |
|
31 |
|
19 |
|
- |
|
257 |
|
Total underlying income |
|
8 |
|
167 |
|
257 |
|
24 |
|
(25) |
|
431 |
|
Total costs |
|
(3) |
|
(164) |
|
(260) |
|
(15) |
|
(50) |
|
(492) |
|
Impairment |
|
(55) |
|
(1,066) |
|
(478) |
|
- |
|
- |
|
(1,599) |
|
Underlying (loss) profit |
|
(50) |
|
(1,063) |
|
(481) |
|
9 |
|
(75) |
|
(1,660) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
0.02% |
|
0.25% |
|
1.12% |
|
|
|
|
|
0.47% |
|
Impairment charge as a % of average advances |
|
0.41% |
|
4.64% |
|
2.34% |
|
|
|
|
|
2.91% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key balance sheet items at 31 Dec 2012 |
|
|
|
|
|
|
|
|
|
|
||
|
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
Total non-core assets |
|
26.0 |
|
43.0 |
|
28.9 |
|
0.5 |
|
- |
|
98.4 |
|
Risk-weighted assets |
|
8.9 |
|
37.4 |
|
26.6 |
|
|
|
|
|
72.9 |
|
1 |
Restated. |
UNDERLYING BASIS QUARTERLY INFORMATION
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
2,653 |
|
2,553 |
|
2,545 |
|
2,575 |
|
2,582 |
|
2,633 |
|
Other income |
|
1,984 |
|
2,422 |
|
2,040 |
|
2,112 |
|
2,061 |
|
2,203 |
|
Insurance claims |
|
(62) |
|
(86) |
|
(30) |
|
(102) |
|
(125) |
|
(108) |
|
Total underlying income |
|
4,575 |
|
4,889 |
|
4,555 |
|
4,585 |
|
4,518 |
|
4,728 |
|
Total costs |
|
(2,341) |
|
(2,408) |
|
(2,587) |
|
(2,492) |
|
(2,471) |
|
(2,574) |
|
Impairment |
|
(811) |
|
(1,002) |
|
(1,278) |
|
(1,262) |
|
(1,500) |
|
(1,657) |
|
Underlying profit |
|
1,423 |
|
1,479 |
|
690 |
|
831 |
|
547 |
|
497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.06% |
|
1.96% |
|
1.94% |
|
1.93% |
|
1.91% |
|
1.95% |
|
Impairment charge as a % of average advances |
|
0.57% |
|
0.80% |
|
0.96% |
|
0.93% |
|
1.05% |
|
1.14% |
|
Return on risk-weighted assets |
|
1.93% |
|
1.96% |
|
0.87% |
|
1.01% |
|
0.65% |
|
0.57% |
|
Core |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
2,579 |
|
2,452 |
|
2,487 |
|
2,459 |
|
2,472 |
|
2,450 |
|
Other income |
|
1,923 |
|
2,265 |
|
1,932 |
|
1,963 |
|
1,888 |
|
1,999 |
|
Insurance claims |
|
(62) |
|
(86) |
|
(30) |
|
(102) |
|
(125) |
|
(108) |
|
Total underlying income |
|
4,440 |
|
4,631 |
|
4,389 |
|
4,320 |
|
4,235 |
|
4,341 |
|
Total costs |
|
(2,199) |
|
(2,269) |
|
(2,341) |
|
(2,246) |
|
(2,314) |
|
(2,353) |
|
Impairment |
|
(416) |
|
(491) |
|
(568) |
|
(373) |
|
(566) |
|
(412) |
|
Underlying profit |
|
1,825 |
|
1,871 |
|
1,480 |
|
1,701 |
|
1,355 |
|
1,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.43% |
|
2.34% |
|
2.33% |
|
2.32% |
|
2.32% |
|
2.32% |
|
Impairment charge as a % of average advances |
|
0.34% |
|
0.51% |
|
0.50% |
|
0.36% |
|
0.52% |
|
0.36% |
|
Return on risk-weighted assets |
|
3.11% |
|
3.20% |
|
2.47% |
|
2.83% |
|
2.26% |
|
2.61% |
|
Non-core |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
74 |
|
101 |
|
58 |
|
116 |
|
110 |
|
183 |
|
Other income |
|
61 |
|
157 |
|
108 |
|
149 |
|
173 |
|
204 |
|
Insurance claims |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Total underlying income |
|
135 |
|
258 |
|
166 |
|
265 |
|
283 |
|
387 |
|
Total costs |
|
(142) |
|
(139) |
|
(246) |
|
(246) |
|
(157) |
|
(221) |
|
Impairment |
|
(395) |
|
(511) |
|
(710) |
|
(889) |
|
(934) |
|
(1,245) |
|
Underlying loss |
|
(402) |
|
(392) |
|
(790) |
|
(870) |
|
(808) |
|
(1,079) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
0.37% |
|
0.44% |
|
0.37% |
|
0.49% |
|
0.50% |
|
0.70% |
|
Impairment charge as a % of average advances |
|
1.62% |
|
2.03% |
|
2.80% |
|
3.08% |
|
2.88% |
|
3.71% |
DIVISIONAL PERFORMANCE
RETAIL
Key highlights
· In the first half of 2013, Retail made significant progress in delivering our customer-led strategy, with continued investment in products and across all channels, including digital, which now has over 10 million active users.
· Underlying profit increased 11 per cent to £1,636 million, driven by a reduction in the impairment charge of 16 per cent with revenues stabilising with strong margin management, more than offsetting continued customer deleveraging. Return on risk-weighted assets increased to 3.51 per cent from 2.92 per cent at 30 June 2012.
· Loans and advances to customers decreased by 1 per cent compared to 31 December 2012. Customer de-leveraging slowed in the first half of the year with core lending expected to grow in the second half of the year. Customer deposits grew 1 per cent (3 per cent compared to 30 June 2012) with balances in our relationship brands up 6 per cent in the last 12 months.
· Customer complaints (excluding PPI) reduced 30 per cent to 1 per 1,000 accounts and customer service scores continued to increase across all brands.
· As the largest UK retail bank, we remain committed to meeting the needs of our customers and supporting the UK economy helping one in four first-time buyers and being strong supporters of government initiatives such as NewBuy and Help to Buy.
· Retail remains committed to supporting communities across the UK, participating in Group initiatives such as National School Sport week and raising funds for the Group's charity of the year with Lloyds TSB colleagues raising almost £100,000 for the Alzheimer's Society's Live Well campaign during Dementia Awareness Week alone.
|
|
Half-year |
|
Half-year 20121 |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
3,590 |
|
3,553 |
|
1 |
|
3,642 |
|
(1) |
|
Other income |
|
728 |
|
766 |
|
(5) |
|
696 |
|
5 |
|
Total underlying income |
|
4,318 |
|
4,319 |
|
|
|
4,338 |
|
|
|
Total costs |
|
(2,046) |
|
(2,089) |
|
2 |
|
(2,110) |
|
3 |
|
Impairment |
|
(636) |
|
(758) |
|
16 |
|
(512) |
|
(24) |
|
Underlying profit |
|
1,636 |
|
1,472 |
|
11 |
|
1,716 |
|
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.14% |
|
2.05% |
|
9bp |
|
2.11% |
|
3bp |
|
Impairment charge as a % of average advances |
|
0.37% |
|
0.43% |
|
(6)bp |
|
0.29% |
|
8bp |
|
Return on risk-weighted assets |
|
3.51% |
|
2.92% |
|
59bp |
|
3.50% |
|
1bp |
|
1 |
Restated. |
|
|
|
At |
|
At |
|
Change |
|
Key balance sheet items |
|
£bn |
|
£bn |
|
% |
|
|
|
|
|
|
|
|
|
Loans and advances to customers excluding reverse repos |
|
340.5 |
|
343.3 |
|
(1) |
|
Customer deposits excluding repos |
|
263.2 |
|
260.8 |
|
1 |
|
Total customer balances |
|
603.7 |
|
604.1 |
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
91.6 |
|
95.5 |
|
(4) |
RETAIL (continued)
|
Core |
Half-year |
|
Half-year 20121 |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
3,581 |
|
3,522 |
|
2 |
|
3,641 |
|
(2) |
|
Other income |
|
722 |
|
757 |
|
(5) |
|
689 |
|
5 |
|
Total underlying income |
|
4,303 |
|
4,279 |
|
1 |
|
4,330 |
|
(1) |
|
Total costs |
|
(2,044) |
|
(2,086) |
|
2 |
|
(2,107) |
|
3 |
|
Impairment |
|
(590) |
|
(735) |
|
20 |
|
(457) |
|
(29) |
|
Underlying profit |
|
1,669 |
|
1,458 |
|
14 |
|
1,766 |
|
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.31% |
|
2.21% |
|
10bp |
|
2.29% |
|
2bp |
|
Impairment charge as a % of average advances |
|
0.37% |
|
0.45% |
|
(8)bp |
|
0.28% |
|
9bp |
|
Return on risk-weighted assets |
|
3.95% |
|
3.22% |
|
73bp |
|
3.98% |
|
(3)bp |
|
1 |
Restated. |
|
|
|
At |
|
At 31 Dec |
|
Change |
|
Key balance sheet items |
|
£bn |
|
£bn |
|
% |
|
|
|
|
|
|
|
|
|
Loans and advances to customers excluding reverse repos |
|
315.4 |
|
317.3 |
|
(1) |
|
Customer deposits excluding repos |
|
263.2 |
|
260.8 |
|
1 |
|
Total customer balances |
|
578.6 |
|
578.1 |
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
83.0 |
|
86.6 |
|
(4) |
|
Non-core |
Half-year |
|
Half-year 2012 |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
9 |
|
31 |
|
(71) |
|
1 |
|
|
|
Other income |
|
6 |
|
9 |
|
(33) |
|
7 |
|
(14) |
|
Total underlying income |
|
15 |
|
40 |
|
(63) |
|
8 |
|
88 |
|
Total costs |
|
(2) |
|
(3) |
|
33 |
|
(3) |
|
33 |
|
Impairment |
|
(46) |
|
(23) |
|
|
|
(55) |
|
16 |
|
Underlying (loss) profit |
|
(33) |
|
14 |
|
|
|
(50) |
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
0.09% |
|
0.22% |
|
(13)bp |
|
0.02% |
|
7bp |
|
Impairment charge as a % of average advances |
|
0.36% |
|
0.17% |
|
19bp |
|
0.41% |
|
(5)bp |
|
|
|
At 30 June |
|
At 31 Dec |
|
Change |
|
Key balance sheet items |
|
£bn |
|
£bn |
|
% |
|
|
|
|
|
|
|
|
|
Total non-core assets |
|
25.1 |
|
26.0 |
|
(3) |
|
Risk-weighted assets |
|
8.6 |
|
8.9 |
|
(3) |
RETAIL (continued)
Progress against strategic initiatives
Our goal is to be the best bank for customers in the UK. Customer service scores were 11 per cent higher in the first half of 2013 compared to prior year, with record levels being reached across all channels. This improvement is being supported by increased focus on products and services that meet customer needs, and more effective delivery processes. As a result, Retail again made excellent progress in reducing customer complaints which are 30 per cent lower in the period, excluding PPI. By continuing to invest in our customers and growth, Retail is now strongly positioned as economic conditions start to improve. Later this year, we will be re-launching the iconic Lloyds Bank brand to deliver an improved customer experience and choice to our customers and introducing TSB as a new brand on the high street, creating fresh competition in the market place.
Retail is investing in the different channels used by customers to interact with the Group. We are upgrading our branch networks with over 1,000 new refurbishments completed since the strategic review. Our customers will also benefit from extended opening hours at Lloyds TSB and Bank of Scotland branches, the availability of 'welcoming' colleagues to receive customers into our branches and the installation of WiFi and tablets in a number of Lloyds TSB and Halifax branches to enhance and simplify the customer experience. We are also investing in skills training for our people to allow them to deliver effectively for our customers; our goal is for 50,000 colleagues to achieve the Chartered Banker's Foundation Standard for Professional Bankers.
At the same time, we are continuing to transform our digital proposition to ensure that we are delivering in line with our customers' growing appetite for digital banking and providing a joined-up customer experience across our channels. Our Money Manager and International Payments services provide improved access and control for online users, whilst Mobile Banking allows our 3.7 million mobile users to interact wherever and whenever they choose. Our active online user base has now surpassed the 10 million milestone, with internet users now initiating over 95 million log-ons every month; investing in systems capability has ensured service availability for customers throughout the first half.
As the largest UK retail bank we recognise the importance of our role in supporting our customers, and helping them to prosper. We have maintained our position as the largest lender to UK households, helping over 33,000 or one in four first-time buyers whilst supporting government initiatives aimed at new-to-market customers such as NewBuy and Help to Buy. We remain on track to deliver our commitment to lend £6.5 billion to help around 60,000 first-time buyers in 2013. We are also meeting the needs of our savers in the low interest rate environment, taking significant deposit inflows into our relationship brands in the first half, including strong current account and net switching inflows. At the same time, we have helped over 280,000 customers to manage their finances, improve their properties and buy their cars through unsecured loans. Our Halifax challenger brand has been recognised as Personal Finance Provider of the Year, Best Current Account Provider and Best Fixed Rate Account Provider by MoneyFacts in its recent awards, whilst also being named as Best Lender for Service and Best Overall Intermediary Lender alongside Birmingham Midshires as Best Buy-to-Let lender in categories of the 2013 Key Account awards.
We are also progressing our plans to simplify the bank, with further automation ensuring fewer manual interventions, leading to cost efficiencies and reduced customer complaints. We have launched a number of customer propositions, such as Lloyds TSB's 'Banking Made Easy', improvements to ISA tax year end processes that have reduced the time to transfer funds between banks for customers and automating our fixed term deposit product setup and maturity process. New Digital and Telephone Banking customers are now benefitting from instant activation of accounts opened and we have now routed 24 million calls through our market leading Interactive Voice Recognition upgrade, 'Say Anything', since October 2012.
In addition to our commitment to help our customers to succeed financially, Retail is continuing to support the UK economy and local communities through involvement in Group programmes and the initiatives of Retail colleagues, who have volunteered their time to assist a variety of community-based projects, such as 'Day to Make a Difference'. Halifax's partnership with 'The Big Lunch', an annual event held across the UK, helped to bring over 3 million people together to celebrate where they live and to get to know their neighbours. Other community activities include our Local Heroes programme in support of young athletes, whilst inspiring almost 3 million children to take part in National School Sport Week, both aimed at securing a lasting legacy for London 2012. Lloyds TSB colleagues also raised nearly £100,000 for The Alzheimer's Society's Live Well campaign during Dementia Awareness Week.
RETAIL (continued)
Financial performance
Underlying profit increased £164 million, or 11 per cent, to £1,636 million. Total underlying income was stable (with decreasing assets, offset by margin improvements), combined with reductions in costs and impairment.
Banking margin increased by 9 basis points versus the same period last year, and by 3 basis points relative to the second half. Lower savings rates have benefitted the liability margin, particularly relative to the second half of 2012, but low market interest rates continued to adversely impact the margin on compressed balances. Asset margins have been robust, albeit with recent competition in the market resulting in narrower new business margins.
Other operating income decreased as we continue to see lower income from bancassurance and protection following the Retail Distribution Review in 2012 and subdued customer demand for these products. This was partially offset by the impact of revised commission arrangements in relation to the home insurance book.
Total costs fell 2 per cent, primarily as a result of the Simplification programme and ongoing cost management activity.
Impairment reduced 16 per cent to £636 million. The unsecured impairment charge reduced to £449 million from £585 million in the first half of 2012 driven largely by debt sale activity. The secured impairment charge increased to £187 million from £173 million with impairment provisions maintained at £1,614 million, thus increasing provision coverage to 26.0 per cent.
Balance sheet
We continued to improve the strength and quality of the Retail balance sheet through a focus on lower risk lending to franchise customers and deepening of relationship deposit balances. This helped to build strong underlying business momentum, allowing Retail to make a significant contribution to the overall improvement in Group capital, liquidity and margin ratios.
Loans and advances to customers decreased by 1 per cent (2 per cent compared to 30 June 2012) with customer deleveraging slowing in the first half of 2013. Secured balances reduced by £1.9 billion, to £319.4 billion of which £0.8 billion was a reduction in our non-core lending portfolio in line with the Group's strategy. Gross new mortgage lending was £14.5 billion in the first half of 2013 compared to £12.3 billion in the first half of 2012, an increase of £2.2 billion.
Customer deposits increased 1 per cent to £263.2 billion (3 per cent compared to 30 June 2012). Savings balances increased to £219.3 billion broadly in line with market growth with relationship balances (Lloyds TSB, Halifax and Bank of Scotland) increasing 6 per cent over the last 12 months. Personal Current Account balances increased £1.8 billion in the first six months of 2013 to £43.9 billion driven by the effect of our strong product offerings, particularly in the Lloyds TSB brand.
Risk-weighted assets decreased to £91.6 billion, a reduction of £3.9 billion or 4 per cent. This was driven by a reduction in lending balances for both secured and unsecured portfolios and improvements in credit quality of retail assets. Credit quality strengthened due to ongoing effective portfolio management and positive macroeconomic factors.
COMMERCIAL BANKING
Key highlights
· Commercial Banking is committed to being the best bank for clients, with a core product offering of Lending, Transaction Banking, Financial Markets and Capital Markets servicing the needs of Small and Medium-sized Enterprises (SME), Mid Markets, Global Corporates and Financial Institutions.
· Commercial Banking returned to profitability with an underlying profit of £634 million, compared to an £83 million loss in the first half of 2012, driven by a 48 per cent reduction in impairment charges and a 2 per cent reduction in costs.
· The impairment charge as a percentage of average advances improved by 58 basis points reflecting lower charges in the non-core portfolio. Core impairment charge as a percentage of average advances of 0.57 per cent reflects the relatively stable economic environment seen in the first half of 2013, with the year on year increase of 17 basis points due to releases in 2012 not being repeated in 2013.
· Core underlying income grew by 5 per cent, driving an increase in underlying profit of 3 per cent to £954 million. This was attributable to net interest margin expansion and increased other income from Capital Markets and LDC as we execute our UK-focused strategy. This was offset by an increase in impairments due to a number of releases in 2012 not being repeated in the first half of 2013 and ongoing investment in product capabilities driving a marginal increase in costs.
· Core lending increased by 4 per cent to £106.3 billion, driven by growth in SME, Mid Markets and Global Corporates. In the last 12 months, SME net lending grew by 5 per cent and lending committed to UK manufacturing companies exceeded £1 billion. Core customer deposits increased by 8 per cent to £115.8 billion, with increases seen across all client segments.
· Core return on risk-weighted assets increased by 6 basis points year on year, and 24 basis points from the second half of 2012, to 1.51 per cent. This reflects our continuing focus on optimisation of risk-weighted assets and our strategic priority of focusing our customer offering on capital efficient products.
|
|
Half-year |
|
Half-year 20121 |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
1,196 |
|
1,111 |
|
8 |
|
1,095 |
|
9 |
|
Other income |
|
1,426 |
|
1,496 |
|
(5) |
|
1,436 |
|
(1) |
|
Total underlying income |
|
2,622 |
|
2,607 |
|
1 |
|
2,531 |
|
4 |
|
Total costs |
|
(1,261) |
|
(1,282) |
|
2 |
|
(1,234) |
|
(2) |
|
Impairment |
|
(727) |
|
(1,408) |
|
48 |
|
(1,538) |
|
53 |
|
Underlying profit (loss) |
|
634 |
|
(83) |
|
|
|
(241) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
1.89% |
|
1.58% |
|
31bp |
|
1.59% |
|
30bp |
|
Impairment charge as a % of average advances |
|
1.03% |
|
1.61% |
|
(58)bp |
|
2.06% |
|
(103)bp |
|
Return on risk-weighted assets |
|
0.81% |
|
(0.09)% |
|
90bp |
|
(0.28)% |
|
109bp |
|
|
|
At 2013 |
|
At 2012 |
|
Change |
|
Key balance sheet items |
|
£bn |
|
£bn |
|
% |
|
|
|
|
|
|
|
|
|
Loans and advances to customers excluding reverse repos |
|
132.1 |
|
134.7 |
|
(2) |
|
Debt securities and available-for-sale financial assets |
|
4.5 |
|
9.5 |
|
(53) |
|
|
|
136.6 |
|
144.2 |
|
(5) |
|
|
|
|
|
|
|
|
|
Customer deposits excluding repos |
|
118.4 |
|
109.7 |
|
8 |
|
Risk-weighted assets |
|
150.5 |
|
165.2 |
|
(9) |
|
1 |
Restated. |
COMMERCIAL BANKING (continued)
|
Core |
Half-year |
|
Half-year 20121 |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
1,173 |
|
1,114 |
|
5 |
|
1,128 |
|
4 |
|
Other income |
|
1,262 |
|
1,206 |
|
5 |
|
1,236 |
|
2 |
|
Total underlying income |
|
2,435 |
|
2,320 |
|
5 |
|
2,364 |
|
3 |
|
Total costs |
|
(1,179) |
|
(1,162) |
|
(1) |
|
(1,070) |
|
(10) |
|
Impairment |
|
(302) |
|
(232) |
|
(30) |
|
(472) |
|
36 |
|
Underlying profit |
|
954 |
|
926 |
|
3 |
|
822 |
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.48% |
|
2.21% |
|
27bp |
|
2.22% |
|
26bp |
|
Impairment charge as a % of average advances |
|
0.57% |
|
0.40% |
|
17bp |
|
0.93% |
|
(36)bp |
|
Return on risk-weighted assets |
|
1.51% |
|
1.45% |
|
6bp |
|
1.27% |
|
24bp |
|
|
|
At 30 June |
|
At 31 Dec |
|
Change |
|
Key balance sheet items |
|
£bn |
|
£bn |
|
% |
|
|
|
|
|
|
|
|
|
SME2 |
|
27.7 |
|
26.6 |
|
4 |
|
Mid Markets, Global Corporates, Financial Institutions and Other |
|
78.6 |
|
75.4 |
|
4 |
|
Loans and advances to customers excluding reverse repos |
|
106.3 |
|
102.0 |
|
4 |
|
Debt securities and available-for-sale financial assets |
|
1.8 |
|
2.3 |
|
(22) |
|
|
|
108.1 |
|
104.3 |
|
4 |
|
|
|
|
|
|
|
|
|
Customer deposits excluding repos |
|
115.8 |
|
107.2 |
|
8 |
|
Risk-weighted assets |
|
126.4 |
|
127.8 |
|
(1) |
|
Non-core |
Half-year |
|
Half-year 20121 |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
23 |
|
(3) |
|
|
|
(33) |
|
|
|
Other income |
|
164 |
|
290 |
|
(43) |
|
200 |
|
(18) |
|
Total underlying income |
|
187 |
|
287 |
|
(35) |
|
167 |
|
12 |
|
Total costs |
|
(82) |
|
(120) |
|
32 |
|
(164) |
|
50 |
|
Impairment |
|
(425) |
|
(1,176) |
|
64 |
|
(1,066) |
|
60 |
|
Underlying loss |
|
(320) |
|
(1,009) |
|
68 |
|
(1,063) |
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
0.29% |
|
0.44% |
|
(15)bp |
|
0.25% |
|
4bp |
|
Impairment charge as a % of average advances |
|
2.35% |
|
3.76% |
|
(141)bp |
|
4.64% |
|
(229)bp |
|
|
|
At |
|
At 31 Dec |
|
Change |
|
Key balance sheet items |
|
£bn |
|
£bn |
|
% |
|
|
|
|
|
|
|
|
|
Loans and advances to customers excluding reverse repos |
|
25.8 |
|
32.7 |
|
(21) |
|
Debt securities and available-for-sale financial assets |
|
2.7 |
|
7.2 |
|
(63) |
|
|
|
28.5 |
|
39.9 |
|
(29) |
|
|
|
|
|
|
|
|
|
Non-core assets |
|
31.4 |
|
43.0 |
|
(27) |
|
Risk-weighted assets |
|
24.1 |
|
37.4 |
|
(36) |
|
1 |
Restated. |
|
2 |
SME comprises clients with turnover of up to £25 million in line with lending data supplied by the Bank of England. |
COMMERCIAL BANKING (continued)
Progress against strategic initiatives
Our strategy places clients at the centre of our business. In the first half of 2013, the benefits of our relentless execution have started to flow though our four client segments: Small and Medium-sized Enterprises (SME), Mid Markets, Global Corporates and Financial Institutions.
Commercial Banking has reshaped the SME and Mid Corporate Client Charters, helping to position Commercial Banking as the Best Bank for Clients. Clients are responding well to the charters with over 7,500 SME clients switching to the bank in the first half of 2013. In Mid Markets we are over half way through our programme of increasing the number of relationship managers, adding to our locally empowered teams across the UK. In Global Corporates we are increasingly focused on our UK and UK-linked clients improving relationship returns.
We continue to strengthen the balance sheet by improving the quality and quantum of deposits with a clear and continued focus on gathering transactional balances from our core client franchise and a controlled reduction of the non-core portfolio. Our ongoing focus on risk-weighted asset optimisation has resulted in a reduction in core risk-weighted assets of 1 per cent against an increase in core net lending of 4 per cent since December 2012.
We have continued to reduce our exposure to non-core assets, achieving a further substantial reduction of £11.6 billion in the first half of 2013, a decrease of 27 per cent compared to the end of 2012. Non-core risk-weighted assets decreased 36 per cent, against an asset reduction of 27 per cent, providing clear evidence of further reduction of risk in the portfolio.
We continue to invest in product capability to enhance our capital efficient product range. In Transaction Banking we have launched a new mobile card payment solution for our small businesses clients, working with Monitise to help our customers conduct their business on the move. We have also added the Chinese Renminbi to the list of currencies available in international payments, currency accounts, foreign exchange and trade-related services, particularly relevant for our Mid Markets and Global Corporate clients.
We have played a leading role in the development of the UK retail bond market and in May 2013 became a market maker on the London Stock Exchange for retail bond investors, providing the market with continuous pricing in bonds and gilts.
We continued to support the UK economy through financing UK SMEs and developing discounted funding propositions for our clients through the UK Government's Funding for Lending Scheme (FLS). In SME we achieved net growth in lending of 5 per cent over the last 12 months in a market which contracted by 3 per cent in the same period and we also achieved core lending growth across the broader Commercial client base ahead of plan.
We have helped 65,000 businesses start up in the first half of the year and are progressing to our commitment of helping 100,000 start ups. We have exceeded our £1 billion of new lending committed to manufacturing companies ahead of the September 2013 target date we committed to last year. We have 400 volunteer enterprise mentors actively working with community and business organisations throughout the UK and we have launched several innovative propositions for SMEs including our Assisted Asset Acquisition scheme to give clients creating employment access to grants alongside loans and hire purchase from us.
In the first half of 2013 we supported our Global Corporate clients in raising £8.1 billion of financing through the debt capital markets, enabling them to finance and grow their businesses. We have made good progress in creating solutions for our clients, maintaining a top four position in Investment Grade Corporate Sterling debt issuance over the same period.
Commercial Banking was awarded for the ninth year in a row the Business Bank of the Year at the FD's Excellence Awards (in association with the Institute of Chartered Accountants in England and Wales, supported by the CBI).
COMMERCIAL BANKING (continued)
Financial performance
Underlying profit increased by £717 million due to a 48 per cent reduction in impairments. Core underlying income grew by 5 per cent, with client income continuing to represent 90 per cent of total underlying income. Core return on risk-weighted assets increased by 6 basis points to 1.51 per cent.
Net interest income grew by £85 million with core increasing by £59 million driven by increased deposits. Non-core net interest income increased by £26 million due to reduced wholesale funding costs more than offsetting lower asset volumes as a result of our non-core asset reduction strategy.
Net interest margin increased by 31 basis points driven by improved lending and deposit margins. Core net interest margin increased by 27 basis points reflecting the reduction of duration in legacy long-dated lending portfolios, particularly in Mid Markets, and improved earnings on deposits. The ongoing commitment to FLS continues to benefit customers with a 1 per cent reduction in the interest rate offered to eligible customers. Non-core net interest margin decreased by 15 basis points to 0.29 per cent, as legacy wholesale funding costs continue to impact the remaining portfolio.
Other income decreased by £70 million, due to increases in core being more than offset by decreases in non-core. Core other income increased by £56 million due to improved performance in Debt Capital Markets and higher valuations in LDC. Core other income continues to represent over 50 per cent of core total underlying income. Non-core other income decreased £126 million due to the non-core asset reduction strategy.
Commercial Banking costs decreased by £21 million due to savings attributable to the Simplification programme, the continued focus on cost management and the non-core asset reduction strategy. The benefits of these cost saving initiatives have enabled further investment in the Transaction Banking and Financial Markets platforms.
Impairments decreased by £681 million, due to a 64 per cent reduction in non-core. Core impairments increased 30 per cent, due to releases in 2012 which were not repeated in 2013.
Balance sheet
Core lending increased by £4.3 billion as we continue to support our customers' financing requirements, achieving positive lending growth across SME, Mid Markets and Global Corporate during the first six months of 2013. The ongoing commitment to FLS, including reduction of interest rates as offered to eligible customers, helped increase customer demand across the client franchise. Overall, loans and advances to customers decreased by £2.6 billion as the growth in core lending was more than offset by non-core asset reductions of £6.9 billion.
Customer deposits grew in the first half of 2013, increasing £8.7 billion year-on-year, with growth seen in Mid Markets and SME despite further reductions in market interest rates.
Non-core assets decreased by £11.6 billion, mainly due to reductions in loans and advances to customers and treasury assets.
Risk-weighted assets decreased by £14.7 billion to £150.5 billion, primarily reflecting balance sheet disposals (non-core risk-weighted assets represented £13.3 billion of the total reduction). Core risk-weighted assets reduced by £1.4 billion, despite a 4 per cent increase in core net lending mainly reflecting our strategic focus on capital efficient products, regulatory treatments and market risk reductions.
WEALTH, ASSET FINANCE AND INTERNATIONAL
Key highlights
· We again delivered strong profitable growth in our Wealth and Asset Finance businesses whilst continuing to simplify our operating model and invest in building future capability across the core business.
· Losses reduced by 86 per cent to £101 million driven primarily by lower impairments, mainly in Ireland, and strong profitable growth in the core business.
· Profits in the core business increased by 47 per cent to £296 million (66 per cent excluding St. James's Place in which we now hold a 21 per cent stake) driven largely by strong net interest income performance in the Asset Finance business and further cost reductions across all businesses. Core return on risk-weighted assets increased from 4.46 per cent to 6.24 per cent driven by strong and improving volumes and margins across the core business.
· We achieved cost savings of 9 per cent (6 per cent excluding St. James's Place) through continued progress in Wealth and Asset Finance in relation to Simplification initiatives and the further reductions in our non-core International footprint.
· We are ahead of target in reducing our international presence with 17 countries or overseas branches now exited, or exit announced; we are now targeting a presence in less than 10 countries by the end of 2014.
· Core loans and advances to customers increased by 6 per cent (net of a £0.7 billion reduction as a result of the announced exit from our International Private Banking businesses) driven mainly by Asset Finance as a result of continued growth in UK motor finance business. In addition, we have delivered a further 12 per cent reduction in non-core assets since December 2012 of which £0.7 billion was in our Irish portfolio.
|
|
Half-year |
|
Half-year 20121 |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
431 |
|
415 |
|
4 |
|
384 |
|
12 |
|
Other income |
|
951 |
|
1,006 |
|
(5) |
|
1,037 |
|
(8) |
|
Total underlying income |
|
1,382 |
|
1,421 |
|
(3) |
|
1,421 |
|
(3) |
|
Total costs |
|
(1,033) |
|
(1,136) |
|
9 |
|
(1,155) |
|
11 |
|
Impairment |
|
(450) |
|
(991) |
|
55 |
|
(489) |
|
8 |
|
Underlying loss |
|
(101) |
|
(706) |
|
86 |
|
(223) |
|
55 |
|
Underlying loss excluding St. James's Place2 |
|
(154) |
|
(761) |
|
80 |
|
(329) |
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.01% |
|
1.62% |
|
39bp |
|
1.69% |
|
32bp |
|
Impairment charge as a % of average advances |
|
2.10% |
|
3.99% |
|
(189)bp |
|
2.16% |
|
(6)bp |
|
Return on risk-weighted assets |
|
(0.59)% |
|
(3.38)% |
|
279bp |
|
(1.16)% |
|
57bp |
|
1 |
Restated. |
|
2 |
The gain relating to the sale of shares in St. James's Place is included in Central items. |
|
|
|
At |
|
At |
|
Change |
|
Key balance sheet and other items |
|
£bn |
|
£bn |
|
% |
|
|
|
|
|
|
|
|
|
Loans and advances to customers excluding reverse repos |
|
30.3 |
|
33.4 |
|
(9) |
|
Customer deposits excluding repos |
|
48.9 |
|
51.9 |
|
(6) |
|
Total customer balances |
|
79.2 |
|
85.3 |
|
(7) |
|
|
|
|
|
|
|
|
|
Operating lease assets |
|
2.8 |
|
2.8 |
|
- |
|
Funds under management |
|
156.8 |
|
189.1 |
|
(17) |
|
Risk-weighted assets |
|
32.2 |
|
36.2 |
|
(11) |
WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)
|
Core |
Half-year |
|
Half-year 20121 |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
246 |
|
154 |
|
60 |
|
158 |
|
56 |
|
Other income |
|
918 |
|
958 |
|
(4) |
|
1,006 |
|
(9) |
|
Total underlying income |
|
1,164 |
|
1,112 |
|
5 |
|
1,164 |
|
- |
|
Total costs |
|
(853) |
|
(900) |
|
5 |
|
(895) |
|
5 |
|
Impairment |
|
(15) |
|
(11) |
|
(36) |
|
(11) |
|
(36) |
|
Underlying profit |
|
296 |
|
201 |
|
47 |
|
258 |
|
15 |
|
Underlying profit excluding St. James's Place |
|
243 |
|
146 |
|
66 |
|
152 |
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
7.78% |
|
5.69% |
|
209bp |
|
6.09% |
|
169bp |
|
Impairment charge as a % of average advances |
|
0.50% |
|
0.36% |
|
14bp |
|
0.55% |
|
(5)bp |
|
Return on risk-weighted assets |
|
6.24% |
|
4.46% |
|
178bp |
|
5.76% |
|
48bp |
|
|
|
At |
|
At |
|
Change |
|
Key balance sheet and other items |
|
£bn |
|
£bn |
|
% |
|
|
|
|
|
|
|
|
|
Loans and advances to customers excluding reverse repos |
|
5.6 |
|
5.3 |
|
6 |
|
Customer deposits excluding repos |
|
48.7 |
|
51.0 |
|
(5) |
|
Total customer balances |
|
54.3 |
|
56.3 |
|
(4) |
|
|
|
|
|
|
|
|
|
Operating lease assets |
|
2.7 |
|
2.7 |
|
- |
|
Risk-weighted assets |
|
9.7 |
|
9.6 |
|
1 |
|
Non-core |
Half-year |
|
Half-year 20121 |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
185 |
|
261 |
|
(29) |
|
226 |
|
(18) |
|
Other income |
|
33 |
|
48 |
|
(31) |
|
31 |
|
6 |
|
Total underlying income |
|
218 |
|
309 |
|
(29) |
|
257 |
|
(15) |
|
Total costs |
|
(180) |
|
(236) |
|
24 |
|
(260) |
|
31 |
|
Impairment |
|
(435) |
|
(980) |
|
56 |
|
(478) |
|
9 |
|
Underlying loss |
|
(397) |
|
(907) |
|
56 |
|
(481) |
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
1.05% |
|
1.15% |
|
(10)bp |
|
1.12% |
|
(7)bp |
|
Impairment charge as a % of average advances |
|
2.37% |
|
4.42% |
|
(205)bp |
|
2.34% |
|
3bp |
|
|
|
At |
|
At |
|
Change |
|
Key balance sheet and other items |
|
£bn |
|
£bn |
|
% |
|
|
|
|
|
|
|
|
|
Total non-core assets |
|
25.5 |
|
28.9 |
|
(12) |
|
Risk-weighted assets |
|
22.5 |
|
26.6 |
|
(15) |
|
1 |
Restated. |
WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)
Progress against strategic initiatives
The significant progress we have made in strengthening the balance sheet positions us for focused, profitable growth in our core business.
We continue to focus on simplifying operations and processes, de-layering management structures and increasing the efficiency of distribution channels and the back office. This drove underlying cost reductions of 7 per cent (excluding St. James's Place) in our Wealth business and 10 per cent in Asset Finance (excluding operating lease depreciation).
We continue to reshape the business and invest for growth in our core businesses. The division has made further good progress towards reducing its international footprint with the Group now having exited or announced the exit from 17 countries.
We continue to invest in our core businesses to grow market share and to leverage our market leading capability in Asset Finance and the strong returns in these businesses, at the same time as improving efficiency.
In Wealth, the investment is geared towards developing compelling propositions for customers within the UK and Channel Islands and also those with UK connections in anglophile territories. In the first half of 2013 we embedded the single Wealth business created in 2012 in order to generate synergies across the UK and Channel Islands and we announced the disposal of our Geneva based International Private Banking business.
We remain confident that by delivering our strategy to be a simple, customer-focused business we can increase the trust of both customers and stakeholders. In Wealth we have improved client service and accessibility through the faster access to advice and support that customers are now receiving via a new Private Banking Client Centre. We have introduced a pilot of a new point of sale system, will introduce new Customer Relationship Management technology in the second half of the year, and we are developing more bespoke ways to interact with our customers, particularly through digital channels.
We are focused on ways to leverage the strength of our core banking franchise which holds a number of significant customers who meet the criteria for our Wealth proposition. As market deposit rate levels continue to fall we will focus on supporting our customers with advice.
The Asset Finance proposition has now been refined and we are well positioned for growth. The business is investing in infrastructure and new growth initiatives which further strengthen the core businesses. This reflects changes in market outlook, our strong market position in both Blackhorse Motor Finance and Lex Autolease and evolving customer needs and technology trends. This is already delivering results - in the first half of 2013 Lex Autolease UK has returned to fleet growth, after many years of shrinkage, with a year on year increase in new vehicle deliveries, and the Blackhorse Retail Motor Finance business has seen new business volumes grow 30 per cent, while in Australia the business achieved new business growth of 22 per cent.
WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)
Financial performance
Underlying loss reduced by 86 per cent to £101 million, primarily due to a £541 million reduction in impairments, strong banking net interest margins and lower costs, partially offset by a fall in income as a result of the balance sheet reduction together with the impact from the sale of approximately 37 per cent of St. James's Place.
Core underlying profit increased by 47 per cent to £296 million (excluding St. James's Place core underlying profit increased by 66 per cent to £243 million), largely driven by strong performance within our Wealth and Asset Finance deposit businesses and UK motor and contract hire businesses together with improved efficiency across all businesses. Underlying non-core loss reduced by 56 per cent to £397 million driven by a continued reduction in impairments in Ireland.
Net interest income increased by 4 per cent. Core net interest income grew by 60 per cent predominantly due to strong net interest margins in the Wealth and Asset Finance deposit businesses. Non-core net interest income reduced by 29 per cent driven by continuing reductions in the asset base within the non-core business. Strong margins in the core deposit business drove a net interest margin increase to 2.01 per cent from 1.62 per cent.
Other income reduced by 5 per cent to £951 million driven by the sales of part of our stake in St. James's Place. Excluding St. James's Place, core other income was in line with the same period last year.
Total costs decreased by 9 per cent to £1,033 million. In Wealth, costs were down 14 per cent (7 per cent excluding St. James's Place) and in Asset Finance costs were down 3 per cent (10 per cent excluding operating lease depreciation of £337 million, compared to £336 million in the same period last year) reflecting our continuing focus on the efficiency of our operating models.
The impairment charge reduced by 55 per cent to £450 million, largely as a result of lower charges in the Irish business where the charge amounted to £385 million compared to £897 million for the same period last year.
Overall, in the first half, Asset Finance delivered underlying profit growth of 59 per cent, underpinned by 6 per cent growth in income and 10 per cent reduction in costs (net of operating lease depreciation). In the first half Wealth (excluding St. James's Place) delivered underlying profit growth of 39 per cent, underpinned by level income and 7 per cent lower costs.
Balance sheet
Core lending increased by £0.3 billion to £5.6 billion after taking account of a £0.7 billion reduction as a result of the announced disposal of our International Private Banking businesses. The increase was mainly within Asset Finance as a result of continued growth in UK motor finance business. Overall, net loans and advances to customers decreased by £3.1 billion to £30.3 billion as we continue to de-risk the balance sheet. This reflects net repayments and asset sales of £3.4 billion, additional impairment provisions of £0.4 billion, mainly within the Irish business, offset by foreign exchange movements of £0.7 billion.
Customer deposit balances reduced by £3.0 billion since December 2012 to £48.9 billion. However, this includes a £2.2 billion reduction as a result of the announced disposal of our International Private Banking and Spanish Retail businesses. Excluding the impact of these disposals, underlying customer deposits reduced by £0.8 billion arising mainly within the European online deposit business as a result of pricing changes in keeping with our manage for value strategy.
Risk-weighted assets fell by 11 per cent from £36.2 billion to £32.2 billion, compared to a 9 per cent fall in loans and advances reflecting continued focus in the period on non-core asset run-off and balance sheet de-risking.
Funds under management decreased by 17 per cent to £156.8 billion but increased 1.6 per cent excluding St. James's Place. The underlying increase is primarily driven by improved investment markets which have driven an increase of £5.9 billion, however, partially offset by reductions arising from the disposals in the period of our businesses in Luxembourg and Spain together with net outflows of £5.3 billion mainly as a result of attrition within the Scottish Widows Investment Partnership insurance funds and the payment of a dividend from the insurance division of £1.6 billion.
WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)
Wealth
|
|
Half-year |
|
Half-year 20121 |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
173 |
|
172 |
|
1 |
|
156 |
|
11 |
|
Other income |
|
409 |
|
448 |
|
(9) |
|
492 |
|
(17) |
|
Total underlying income |
|
582 |
|
620 |
|
(6) |
|
648 |
|
(10) |
|
Total costs |
|
(410) |
|
(477) |
|
14 |
|
(466) |
|
12 |
|
Impairment |
|
(8) |
|
(8) |
|
- |
|
(15) |
|
47 |
|
Underlying profit |
|
164 |
|
135 |
|
21 |
|
167 |
|
(2) |
|
Underlying profit excluding St. James's Place |
|
111 |
|
80 |
|
39 |
|
61 |
|
82 |
Asset Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
252 |
|
205 |
|
23 |
|
209 |
|
21 |
|
Other income |
|
541 |
|
542 |
|
- |
|
545 |
|
(1) |
|
Total underlying income |
|
793 |
|
747 |
|
6 |
|
754 |
|
5 |
|
Total costs |
|
(512) |
|
(530) |
|
3 |
|
(513) |
|
- |
|
Impairment |
|
(35) |
|
(62) |
|
44 |
|
(74) |
|
53 |
|
Underlying profit |
|
246 |
|
155 |
|
59 |
|
167 |
|
47 |
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
6 |
|
38 |
|
(84) |
|
19 |
|
(68) |
|
Other income |
|
1 |
|
16 |
|
(94) |
|
- |
|
|
|
Total underlying income |
|
7 |
|
54 |
|
(87) |
|
19 |
|
(63) |
|
Total costs |
|
(111) |
|
(129) |
|
14 |
|
(176) |
|
37 |
|
Impairment |
|
(407) |
|
(921) |
|
56 |
|
(400) |
|
2 |
|
Underlying loss |
|
(511) |
|
(996) |
|
49 |
|
(557) |
|
8 |
|
1 |
Restated. |
|
|
|
Wealth |
|
Asset Finance |
|
International |
||||||
|
Key balance sheet items |
|
At 30 June 2013 |
|
At 2012 |
|
At 2013 |
|
At 2012 |
|
At 2013 |
|
At 2012 |
|
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and advances to customers excluding reverse repos |
|
3.3 |
|
4.2 |
|
9.2 |
|
9.3 |
|
17.8 |
|
19.9 |
|
Customer deposits excluding repos |
28.6 |
|
30.8 |
|
20.1 |
|
20.2 |
|
0.2 |
|
0.9 |
|
|
Total customer balances |
|
31.9 |
|
35.0 |
|
29.3 |
|
29.5 |
|
18.0 |
|
20.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds under management |
|
156.8 |
|
188.6 |
|
- |
|
- |
|
- |
|
0.5 |
|
Risk-weighted assets |
|
5.3 |
|
5.6 |
|
10.7 |
|
10.9 |
|
16.2 |
|
19.7 |
INSURANCE
Key highlights
· We have delivered a strong performance in the first half of 2013 and have leveraged the financial strength of the insurance business to make a significant contribution to the optimisation of the Group's capital structure.
· Total underlying profit increased by 12 per cent and core underlying profit by 15 per cent, primarily reflecting a 6 per cent improvement in core underlying income as well as an 8 per cent decrease in core costs which includes synergies delivered under our new insurance structure.
· The 6 per cent increase in core underlying income primarily reflects an increase in Life, Pensions and Investments (LP&I) income and a stable performance in General Insurance.
· LP&I income has increased by £26 million despite lower bancassurance investment sales following the withdrawal in the second half of 2012 of investment advice for customers with savings below £100,000.
· 29 per cent growth in sales of corporate pensions reflects the strength of our proposition and the conversion of the strong pipeline generated in the run up to implementation of the Retail Distribution Review (RDR).
· We launched our enhanced annuities product in June which is a key step in expanding our participation in the growing annuity market.
· The strong underlying profitability and capitalisation of the Insurance business has enabled Scottish Widows to remit a further £1.6 billion to the Group whilst maintaining a significant capital base in Insurance, reflected in an estimated Pillar 1 capital surplus of £3.0 billion (Scottish Widows plc) and an estimated IGD capital surplus of £2.7 billion for the insurance group.
|
|
Half-year |
|
Half-year 2012 |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
(45) |
|
(37) |
|
(22) |
|
(41) |
|
(10) |
|
Other income |
|
1,111 |
|
1,156 |
|
(4) |
|
1,138 |
|
(2) |
|
Insurance claims |
|
(148) |
|
(233) |
|
36 |
|
(132) |
|
(12) |
|
Total underlying income |
|
918 |
|
886 |
|
4 |
|
965 |
|
(5) |
|
Total costs |
|
(354) |
|
(384) |
|
8 |
|
(360) |
|
2 |
|
Underlying profit |
|
564 |
|
502 |
|
12 |
|
605 |
|
(7) |
|
|
|
|
|
|
|
|
|
|
|
|
EEV new business margin |
|
3.3% |
|
3.6% |
|
(30)bp |
|
3.8% |
|
(50)bp |
Life, Pensions and Investments sales (PVNBP) |
|
5,552 |
|
5,627 |
|
(1) |
|
4,737 |
|
17 |
General Insurance combined ratio |
|
69% |
|
80% |
|
(11)pp |
|
72% |
|
(3)pp |
|
Core |
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
(49) |
|
(41) |
|
(20) |
|
(46) |
|
(7) |
|
Other income |
|
1,096 |
|
1,126 |
|
(3) |
|
1,119 |
|
(2) |
|
Insurance claims |
|
(148) |
|
(233) |
|
36 |
|
(132) |
|
(12) |
|
Total underlying income |
|
899 |
|
852 |
|
6 |
|
941 |
|
(4) |
|
Total costs |
|
(337) |
|
(365) |
|
8 |
|
(345) |
|
2 |
|
Underlying profit |
|
562 |
|
487 |
|
15 |
|
596 |
|
(6) |
|
Non-core |
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
4 |
|
4 |
|
- |
|
5 |
|
(20) |
|
Other income |
|
15 |
|
30 |
|
(50) |
|
19 |
|
(21) |
|
Insurance claims |
|
- |
|
- |
|
|
|
- |
|
|
|
Total underlying income |
|
19 |
|
34 |
|
(44) |
|
24 |
|
(21) |
|
Total costs |
|
(17) |
|
(19) |
|
11 |
|
(15) |
|
(13) |
|
Underlying profit |
|
2 |
|
15 |
|
(87) |
|
9 |
|
(78) |
INSURANCE(continued)
Progress against strategic initiatives
The insurance division has continued to make a significant contribution to the Group's objective of being the best bank for customers, enhancing our market leading pensions and protection products which help customers to protect themselves today and prepare for a secure financial future. We believe that our multi-brand, multi-channel model will allow us the flexibility to meet the changing financial needs of our customers. We have delivered underlying profits in excess of £1 billion for the last four years, which has enabled the payment of a total of £4.6 billion of dividends to the Group since 2009. This has contributed to optimisation of the Group's capital structure and strengthening of its capital ratios.
We are focused on strengthening our position in the growing retirement savings market. In corporate pensions we have benefitted from the conversion of the strong pipeline generated in the run up to RDR contributing to 29 per cent growth. We see opportunities in increasing contributions and members within existing schemes and are also working closely with our corporate customers to support them through auto-enrolment which is expected to drive further growth over the next three to five years. Our award-winning personal pensions product, the Retirement Account, has performed well reflecting the transparent charging and flexibility that it offers customers.
The launch of our enhanced annuities proposition in June was an important step to competing more effectively in an increasingly open market. We see enormous potential to serve the retirement needs of our retail bank customers, many of whom may no longer be able to get independent financial advice at retirement. We are addressing this by leveraging Group expertise and investing in the capability of our Direct channel, with a clear focus on meeting customer needs including looking to increase the range of products we can offer through this growing channel.
We are committed to helping meet the UK population's £2.4 trillion protection gap. Only 42 per cent of the working population has life insurance, falling to 15 per cent for critical illness and just 7 per cent for income protection. We are already the market leader in Bancassurance protection and will build upon our strong advisor force in the retail network. We are investing in developing our proposition for the intermediary channel where we plan to launch in 2014.
We continue to see the home insurance market as serving a key need for our customers and as an attractive market. Our ability to accurately and competitively price home insurance has been enhanced by the insight we can draw on across the Group's customer base. When combined with our investment in flood mapping and strong claims management capability we believe that we are well placed to serve our customers in this market. Our commercial insurance proposition is being strengthened with the introduction of additional underwriters to widen the risk protection that we can offer our SME customer base.
Following the transfer of our operations to the Group Operations functions we expect to see further customer service and cost benefits through adoption of best practice from across the Group. The simplification of our business model and processes has contributed approximately 75 per cent of the overall improvement in our costs this year. We anticipate this simplified business model continuing to support our position as a cost leader in the industry.
Our 2013 market leading Protection, Pension and Savings reports highlighted the inadequacy of the provision made for protection and for a secure financial future by the UK population. Scottish Widows has continued to lead the debate on these issues as part of our commitment to better understanding our customers' needs and helping Britain prosper. The benefit of this insight is reflected in the strength of our customer propositions which have won several industry awards including; 'Best Group Pension Provider' in the Corporate Adviser awards and 'Best Personal Pensions Provider' in the Professional Adviser awards, both for the second year running as well as 'Group Pension Provider of the Year' and 'Personal Pension Provider of the Year' at the Financial Adviser Life awards. Scottish Widows was awarded a 5-star rating in the 'Life and Pensions' category at the recent FT Adviser Online Service Awards.
INSURANCE (continued)
Financial Performance
|
|
Half-year 2013 |
|
Half-year 2012 |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing business income |
|
407 |
|
382 |
|
7 |
|
378 |
|
8 |
|
New business income: |
|
|
|
|
|
|
|
|
|
|
|
Intermediary and direct |
|
207 |
|
177 |
|
17 |
|
180 |
|
15 |
|
Bancassurance |
|
51 |
|
80 |
|
(36) |
|
82 |
|
(38) |
|
|
|
258 |
|
257 |
|
3 |
|
262 |
|
(2) |
|
LP&I income1 |
|
665 |
|
639 |
|
4 |
|
640 |
|
4 |
|
General Insurance income |
|
401 |
|
480 |
|
(16) |
|
457 |
|
12 |
|
Total income |
|
1,066 |
|
1,119 |
|
(5) |
|
1,097 |
|
(3) |
|
Insurance claims2 |
|
(148) |
|
(233) |
|
36 |
|
(132) |
|
(12) |
|
Total underlying income |
|
918 |
|
886 |
|
4 |
|
965 |
|
(5) |
|
1 |
LP&I income includes both the UK and European businesses. |
|
2 |
All related to General Insurance. |
LP&I existing business income increased by £25 million to £407 million. This includes increased returns as a result of purchasing over £1.5 billion of attractive, higher yielding long dated assets to match long duration Insurance liabilities in the last quarter of 2012 and in 2013 and a net benefit from assumption changes and experience variances. The assumption changes include a benefit of £141 million attributable to changing the risk free rate for non-annuity business to be based on swap curves rather than the 15 year Government bond rate, the impact of which was mostly offset by other changes to methodology and assumptions.
Intermediary and direct new business income has increased by £30 million to £207 million due to a strong corporate pensions performance driven by the conversion of the pipeline generated in the run up to RDR. The reduction in Bancassurance income to £51 million includes the impact of changes to the basis of taxation for new life protection business in January 2013. The reduction in the EEV new business margin to 3.3 per cent mainly reflects the impact of this taxation change.
General insurance income reduced by £79 million to £401 million due to run-off of the legacy books and the impact of revising intra group commission arrangements on the home book. The significant reduction in general insurance claims to £148 million primarily reflects the benign weather in 2013 relative to 2012, which was the second wettest year on record. The improvement in the combined ratio to 69 per cent has been primarily driven by the reduction in weather related claims.
INSURANCE (continued)
Present Value of New Business Premiums (PVNBP)
An analysis of the present value of new life business premiums for business written by the Insurance division, split between the UK and European Life, Pensions and Investments Businesses is given below:
|
|
|
Half-year to 30 June 2013 |
|
Half-year to 30 June 2012 |
|
|
||||||||
|
|
|
UK |
|
Europe |
|
Total |
|
UK |
|
Europe |
|
Total |
|
Change |
|
Analysis by product |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate pensions |
|
3,686 |
|
- |
|
3,686 |
|
2,857 |
|
- |
|
2,857 |
|
29 |
|
Individual pensions |
|
711 |
|
27 |
|
738 |
|
877 |
|
34 |
|
911 |
|
(19) |
|
Retirement income |
|
374 |
|
- |
|
374 |
|
369 |
|
- |
|
369 |
|
1 |
|
Protection |
|
211 |
|
21 |
|
232 |
|
302 |
|
16 |
|
318 |
|
(27) |
|
Investments (inc OEICs) |
|
448 |
|
74 |
|
522 |
|
1,105 |
|
67 |
|
1,172 |
|
(55) |
|
Total |
|
5,430 |
|
122 |
|
5,552 |
|
5,510 |
|
117 |
|
5,627 |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis by channel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediary |
|
4,342 |
|
122 |
|
4,464 |
|
3,773 |
|
117 |
|
3,890 |
|
15 |
|
Bancassurance |
|
651 |
|
- |
|
651 |
|
1,389 |
|
- |
|
1,389 |
|
(53) |
|
Direct |
|
437 |
|
- |
|
437 |
|
348 |
|
- |
|
348 |
|
26 |
|
Total |
|
5,430 |
|
122 |
|
5,552 |
|
5,510 |
|
117 |
|
5,627 |
|
(1) |
Total sales (PVNBP) have decreased by 1 per cent to £5,552 million primarily reflecting lower investments, protection and individual pensions volumes partially offset by strong sales of corporate pensions in LP&I UK.
There has been strong growth in the Intermediary channel, particularly in corporate pensions where sales were 29 per cent higher than 2012. This reflects the underlying strength of our proposition, the quality of service provided to customers and the conversion of the strong pipeline generated in the run up to the implementation of RDR.
Sales of investment products and protection through the bancassurance channel have reduced due to the withdrawal in the second half of 2012 from investment advice for customers with savings below £100,000 within the Retail business. The resultant impacts to sales advisor populations have also led to a reduction in protection sales in the first half of 2013.
The direct channel continues to perform well and is being developed for future growth. The 26 per cent growth in this channel was supported by a strong performance of our flagship Retirement Account.
.
GROUP OPERATIONS
|
|
Half-year |
|
Half-year 20121 |
|
Change |
|
Half-year |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underlying income |
|
5 |
|
17 |
|
(71) |
|
13 |
|
(62) |
|
Direct costs: |
|
|
|
|
|
|
|
|
|
|
|
Information technology |
|
(572) |
|
(600) |
|
5 |
|
(571) |
|
- |
|
Operations |
|
(421) |
|
(444) |
|
5 |
|
(378) |
|
(11) |
|
Property |
|
(438) |
|
(461) |
|
5 |
|
(431) |
|
(2) |
|
Support functions |
|
(46) |
|
(45) |
|
(2) |
|
(48) |
|
4 |
|
|
|
(1,477) |
|
(1,550) |
|
5 |
|
(1,428) |
|
(3) |
|
Result before recharges to divisions |
|
(1,472) |
|
(1,533) |
|
4 |
|
(1,415) |
|
(4) |
|
Total net recharges to divisions |
|
1,443 |
|
1,467 |
|
(2) |
|
1,430 |
|
1 |
|
Underlying (loss) profit |
|
(29) |
|
(66) |
|
56 |
|
15 |
|
|
|
1 |
2012 comparative figures have been amended to reflect the effect of the continuing consolidation of operations across the Group. To ensure a fair comparison of the 2013 performance, 2012 direct costs have been restated with an equivalent offsetting increase in recharges to divisions. |
Direct costs fell by £73 million or 5 per cent to £1,477 million driven by Simplification savings and the continued focus on cost management, which more than offset inflationary rises and incremental costs from supporting Group investment projects. Group Operations continues to play a major part in leading the delivery of the Simplification programme as well as through initiatives to improve sourcing, re-engineer end-to-end process, and consolidate and rationalise property and IT.
We continue to simplify our end-to-end processes in order to improve the service we provide to our customers whilst also reducing costs. Examples include the introduction of an electronic Cash ISA transfer solution allowing quicker movement of funds between banks; and the provision of a fully automated process for term deposit maturities which has reduced set up time from up to twenty minutes to three minutes.
We continue to streamline our internal operations and have reduced the number of suppliers by a further 1,000 so far this year, bringing the total down from over 18,000 at the start of Simplification to less than 9,600, well ahead of our original target of 10,000 by the end of 2014. We have also integrated Insurance operations into Group Operations in 2013, leveraging the size and scale of the Group Operations business to deliver improvements in customer and colleague experience as well as lowering costs.
Group Property costs decreased by 5 per cent as we continued to consolidate the Group's property portfolio.
CENTRAL ITEMS
|
|
Half-year |
|
Half-year |
|
Change |
|
Half-year 2012 |
|
Change |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underlying income (expense) |
|
219 |
|
(4) |
|
|
|
(128) |
|
|
|
Total costs |
|
(21) |
|
(71) |
|
70 |
|
(222) |
|
91 |
|
Impairment |
|
- |
|
- |
|
|
|
(1) |
|
|
|
Underlying profit (loss) |
|
198 |
|
(75) |
|
|
|
(351) |
|
|
Central items include income and expenditure not recharged to the divisions, including the costs of certain central and head office functions. Total underlying income in the first half of 2013 includes the gain on the sales of shares in St. James's Place of £433 million.
The costs in the half year to 31 December 2012 include the Bank Levy.
ADDITIONAL INFORMATION ON AN UNDERLYING BASIS
1. Basis of preparation of underlying basis information
The tables below set out a reconciliation from the published statutory results to the underlying basis results, the principles of which are set out on the inside front cover:
|
|
|
|
|
Removal of: |
|
|
|||||||||
|
Half-year to |
|
Lloyds |
Acquisition |
Volatility |
Insurance |
Legal and |
Fair value |
Underlying |
|||||||
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
3,270 |
|
(12) |
|
(7) |
|
1,700 |
|
- |
|
255 |
|
5,206 |
|
|
Other income |
|
18,802 |
|
(558) |
|
(478) |
|
(13,360) |
|
- |
|
- |
|
4,406 |
|
|
Insurance claims |
|
(11,687) |
|
- |
|
- |
|
11,539 |
|
- |
|
- |
|
(148) |
|
|
Total underlying income |
10,385 |
|
(570) |
|
(485) |
|
(121) |
|
- |
|
255 |
|
9,464 |
||
|
Operating expenses3 |
|
(6,568) |
|
1,090 |
|
- |
|
121 |
|
575 |
|
33 |
|
(4,749) |
|
|
Impairment |
|
(1,683) |
|
194 |
|
- |
|
- |
|
- |
|
(324) |
|
(1,813) |
|
|
Profit (loss) |
|
2,134 |
|
714 |
|
(485) |
|
- |
|
575 |
|
(36) |
|
2,902 |
|
|
|
|
|
|
Removal of: |
|
|
|||||||||
|
Half-year to |
|
Lloyds |
Acquisition |
Volatility |
Insurance |
Legal and |
Fair value |
Underlying |
|||||||
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
4,264 |
|
(80) |
|
(2) |
|
721 |
|
- |
|
312 |
|
5,215 |
|
|
Other income |
|
11,992 |
|
136 |
|
23 |
|
(7,862) |
|
- |
|
(25) |
|
4,264 |
|
|
Insurance claims |
|
(7,288) |
|
- |
|
- |
|
7,055 |
|
- |
|
- |
|
(233) |
|
|
Total underlying income |
|
8,968 |
|
56 |
|
21 |
|
(86) |
|
- |
|
287 |
|
9,246 |
|
|
Operating expenses3 |
|
(6,696) |
|
505 |
|
- |
|
86 |
|
1,075 |
|
(15) |
|
(5,045) |
|
|
Impairment |
|
(2,728) |
|
- |
|
- |
|
- |
|
- |
|
(429) |
|
(3,157) |
|
|
Profit (loss) |
|
(456) |
|
561 |
|
21 |
|
- |
|
1,075 |
|
(157) |
|
1,044 |
|
|
|
|
|
|
Removal of: |
|
|
|||||||||
|
Half-year to |
|
Lloyds |
Acquisition |
Volatility |
Insurance |
Legal and |
Fair value |
Underlying |
|||||||
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
3,454 |
|
(119) |
|
(6) |
|
1,866 |
|
- |
|
(75) |
|
5,120 |
|
|
Other income |
|
19,203 |
|
(1,827) |
|
(327) |
|
(12,929) |
|
50 |
|
(18) |
|
4,152 |
|
|
Insurance claims |
|
(11,108) |
|
- |
|
- |
|
10,976 |
|
- |
|
- |
|
(132) |
|
|
Total underlying income |
|
11,549 |
|
(1,946) |
|
(333) |
|
(87) |
|
50 |
|
(93) |
|
9,140 |
|
|
Operating expenses3 |
|
(9,278) |
|
973 |
|
- |
|
87 |
|
3,100 |
|
39 |
|
(5,079) |
|
|
Impairment |
|
(2,421) |
|
320 |
|
- |
|
- |
|
- |
|
(439) |
|
(2,540) |
|
|
Profit (loss) |
|
(150) |
|
(653) |
|
(333) |
|
- |
|
3,150 |
|
(493) |
|
1,521 |
|
|
1 |
Comprises the effects of asset sales (gain of £775 million), volatile items (loss of £302 million), liability management (loss of £97 million), Simplification costs related to severance, IT and business costs of implementation (£409 million), EC mandated retail business disposal costs (£377 million), the past service pensions charge (£104 million) and the amortisation of purchased intangibles (£200 million). |
|
2 |
Comprises the payment protection insurance provision of £500 million (half-year to 30 June 2012: £1,075 million; half-year to 31 December 2012: £2,500 million) and other regulatory provisions of £75 million (half-year to 30 June 2012: £ nil; half-year to 31 December 2012: £650 million). |
|
3 |
On an underlying basis, this is described as total costs. |
|
4 |
Restated to reflect the implementation of IAS 19 and IFRS 10. See page 145. |
|
5 |
Comprises the effects of asset sales (gain of £585 million), volatile items (loss of £809 million), liability management (gain of £168 million), Simplification costs (£274 million), EC mandated retail business disposal costs (£239 million), the past service pensions credit (£250 million) and the amortisation of purchased intangibles (£242 million). |
|
6 |
Comprises the effects of asset sales (gain of £1,962 million), volatile items (gain of £61 million), liability management (loss of £397 million), Simplification costs (£402 million), EC mandated retail business disposal costs (£331 million) and the amortisation of purchased intangibles (£240 million). |
2. St. James's Place plc
The Group no longer consolidates the results of St. James's Place following the sale of shares in March. From 1 April 2013 St. James's Place has been accounted for as an associate. The table below shows the impact on the Group Results for each half year.
|
|
Half-year |
|
Half-year |
|
Half-year 2012 |
|||||
|
|
|
£m |
|
£m |
|
£m |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
1 |
|
2 |
|
2 |
||||
|
Other operating income: |
|
|
|
|
|
|
||||
|
Gain on sales of shares |
|
433 |
|
- |
|
- |
||||
|
Other income |
|
96 |
|
138 |
|
187 |
||||
|
|
|
529 |
|
138 |
|
187 |
||||
|
Underlying income |
|
530 |
|
140 |
|
189 |
||||
|
Costs |
|
(44) |
|
(85) |
|
(83) |
||||
|
Underlying profit |
|
486 |
|
55 |
|
106 |
||||
3. Banking net interest margin
|
|
|
Half-year |
|
Half-year 2012 |
|
Half-year 2012 |
|
|
|
|
|
|
|
|
|
Banking net interest income |
|
£5,153m |
|
£5,300m |
|
£5,180m |
|
|
|
|
|
|
|
|
|
Average interest-earning banking assets |
|
£517.0bn |
|
£553.2bn |
|
£533.5bn |
|
Core average interest-earning banking assets |
|
£418.8bn |
|
£426.5bn |
|
£421.0bn |
|
Non-core average interest-earning banking assets |
|
£98.2bn |
|
£126.7bn |
|
£112.5bn |
|
Average interest-bearing banking liabilities |
|
£408.2bn |
|
£383.3bn |
|
£399.2bn |
|
|
|
|
|
|
|
|
|
Banking net interest margin |
|
2.01% |
|
1.93% |
|
1.93% |
|
Core banking net interest margin |
|
2.39% |
|
2.32% |
|
2.32% |
|
Non-core banking net interest margin |
|
0.41% |
|
0.60% |
|
0.47% |
|
Banking asset margin |
|
0.96% |
|
1.10% |
|
1.05% |
|
Banking liability margin |
|
1.33% |
|
1.19% |
|
1.17% |
Banking net interest income is analysed for asset and liability margins based on interest earned and paid on average assets and average liabilities respectively, adjusted for Funds Transfer Pricing, which prices intra-group funding and liquidity. Centrally held wholesale funding costs and related items are included in the Group banking asset margin.
Average interest-earning banking assets, which are calculated gross of related impairment allowances, and average interest-bearing banking liabilities relate solely to customer and product balances in the banking businesses on which interest is earned or paid. Funding and capital balances including debt securities in issue, subordinated debt, repos and shareholders' equity are excluded from the calculation of average interest-bearing banking liabilities. However, the cost of funding these balances allocated to the banking businesses is included in banking net interest income.
A reconciliation of banking net interest income to Group net interest income showing the items that are excluded in determining banking net interest income follows:
|
|
|
Half-year |
|
Half-year 2012 |
|
Half-year 2012 |
|
|
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
Banking net interest income - underlying basis |
|
5,153 |
|
5,300 |
|
5,180 |
|
Insurance division |
|
(45) |
|
(37) |
|
(41) |
|
Other net interest income (including trading activity) |
|
98 |
|
(48) |
|
(19) |
|
Group net interest income - underlying basis |
|
5,206 |
|
5,215 |
|
5,120 |
|
Fair value unwind |
|
(255) |
|
(312) |
|
75 |
|
Banking volatility and liability management gains |
|
12 |
|
80 |
|
119 |
|
Insurance gross up |
|
(1,700) |
|
(721) |
|
(1,866) |
|
Volatility arising in insurance businesses |
|
7 |
|
2 |
|
6 |
|
Group net interest income - statutory |
|
3,270 |
|
4,264 |
|
3,454 |
4. Volatility arising in insurance businesses
The Group's statutory result before tax is affected by insurance volatility, caused by movements in financial markets, and policyholder interests volatility, which primarily reflects the gross up of policyholder tax included in the Group tax charge.
In the first half of 2013 the Group's statutory result before tax included positive insurance and policyholder interests volatility totalling £485 million compared to negative volatility of £21 million in the first half of 2012.
Volatility comprises the following:
|
|
|
Half-year 2013 |
|
Half-year 2012 |
|
|
|
£ million |
|
£ million |
|
|
|
|
|
|
|
Insurance volatility |
|
58 |
|
(3) |
|
Policyholder interests volatility1 |
|
407 |
|
(15) |
|
Total volatility |
|
465 |
|
(18) |
|
Insurance hedging arrangements |
|
20 |
|
(3) |
|
Total |
|
485 |
|
(21) |
|
1 |
Includes volatility relating to the Group's interest in St. James's Place. |
Insurance volatility
The Group's insurance business has policyholder liabilities that are supported by substantial holdings of investments, including equities, property and fixed interest investments, all of which are subject to variations in their value. The value of the liabilities does not move exactly in line with changes in the value of the investments, yet IFRS requires that the changes in both the value of the liabilities and investments be reflected within the income statement. As these investments are substantial and 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 expected gross investment returns used to determine the normalised profit of the business, which are based on prevailing market rates and published research into historical investment return differentials, are set out below:
|
United Kingdom |
|
2013 |
|
2012 |
|
|
|
% |
|
% |
|
|
|
|
|
|
|
Investments backing annuity liabilities |
|
3.76 |
|
3.89 |
|
Equities and property |
|
5.58 |
|
5.48 |
|
UK Government bonds |
|
2.58 |
|
2.48 |
|
Corporate bonds |
|
3.18 |
|
3.08 |
|
Other debt securities |
|
3.58 |
|
n/a |
A review of investment strategy in the Group's Insurance business has resulted in investment being made in a wider range of assets. Expected investment returns in 2013 include appropriate returns for these assets. The 2013 rates also reflect the move to swap rates as the basis for calculations.
The impact on the results due to the actual return on these investments differing from the expected return (based upon economic assumptions made at the beginning of the year, adjusted for significant changes in asset mix) is included within insurance volatility. Changes in market variables also affect the realistic valuation of the guarantees and options embedded within the with profits funds, the value of the in-force business and the value of shareholders' funds.
The positive insurance volatility during the period ended 30 June 2013 in the Insurance division was £58 million, primarily reflecting the favourable performance of equity investments in the period relative to the expected return. This has been partially offset by an increase in the long-term level of market implied inflation and lower cash returns compared to long-term expectations.
4. Volatility arising in insurance businesses (continued)
Policyholder interests volatility
The application of accounting standards results in the introduction of other sources of significant volatility into the pre-tax profits of the life, pensions and investments business. In order to provide a clearer representation of the performance of the business, and consistent with the way in which it is managed, adjustments are made to remove this volatility from underlying profits. The effect of these adjustments is separately disclosed as policyholder interests volatility.
The most significant of these additional sources of volatility is policyholder tax. Accounting standards require that tax on policyholder investment returns should be included in the Group's tax charge rather than being offset against the related income. The result is, therefore, to either increase or decrease profit before tax with a related change in the tax charge. Timing and measurement differences exist between provisions for tax and charges made to policyholders. Consistent with the normalised approach taken in respect of insurance volatility, differences in the expected levels of the policyholder tax provision and policyholder charges are adjusted through policyholder interests volatility.
In the first half of 2013, the statutory results before tax included a credit to other income which relates to policyholder interests volatility totalling £407 million (first half of 2012: £15 million charge) relating to the rise in equity markets in the period.
Insurance hedging arrangements
To protect against further deterioration in equity market conditions, and the consequent negative impact on the value of in-force business on the Group balance sheet, the Group purchased put option contracts in 2012, financed by selling some upside potential from equity market movements. These expired in 2013 and the charge booked in 2013 on these contracts was £9 million. New protection was acquired in 2013 to replace the expired contracts. On a mark-to-market valuation basis a profit of £29 million was recognised in relation to the new contracts in 2013.
5. Number of employees (full-time equivalent)
|
|
|
At 2013 |
|
At 2012 |
|
|
|
|
|
|
|
Retail |
|
41,514 |
|
41,460 |
|
Commercial Banking |
|
7,910 |
|
8,051 |
|
Wealth, Asset Finance and International |
|
8,379 |
|
9,131 |
|
Insurance |
|
2,257 |
|
2,293 |
|
Group Operations |
|
22,609 |
|
23,666 |
|
Central items |
|
12,778 |
|
12,490 |
|
|
|
95,447 |
|
97,091 |
|
Agency staff (full-time equivalent) |
|
(3,012) |
|
(4,303) |
|
Total number of employees (full-time equivalent) |
|
92,435 |
|
92,788 |
RISK MANAGEMENT
|
|
Page |
|
Risk management approach |
47 |
|
|
|
|
The economy |
47 |
|
|
|
|
Principal risks and uncertainties |
48 |
|
Credit risk |
48 |
|
Conduct risk |
48 |
|
Market risk |
49 |
|
Operational risk |
50 |
|
People risk |
51 |
|
Liquidity and funding |
51 |
|
Insurance risk |
52 |
|
State funding and state aid |
53 |
|
|
|
|
Credit risk portfolio |
54 |
|
Exposures to Eurozone countries |
81 |
|
Liquidity and funding management |
89 |
|
Capital management |
96 |
The income statement numbers in this section are presented on an underlying basis.
RISK MANAGEMENT APPROACH
There have been no material changes to the Group's approach to risk management as described in the risk management report within the Lloyds Banking Group annual report and accounts for the year ended 31 December 2012.
THE ECONOMY
The global economy has been more stable during the first half of 2013 than through 2011-12. The US economy has continued its recovery despite fiscal tightening, boosted by a recovery in the housing market. The Eurozone economy remains in mild recession, but it is no longer deepening and policies on fiscal tightening are easing up slightly for those economies that have been struggling the most. A gradual slowdown in emerging market growth has helped to lower commodity prices and thus inflationary pressures in advanced economies.
Similarly, current estimates suggest that the UK economy has returned to growth, albeit at a moderate rate. After a period of stagnation since late 2011, GDP is estimated to have risen by 0.3 per cent in the first quarter of 2013, and 0.6 per cent in the second quarter. Employment has held on to the surprisingly strong gains that occurred through 2012, keeping the unemployment rate broadly stable at 7.8-7.9 per cent so far in 2013. House prices have picked up, showing successive small monthly rises since late 2012 and are now 4.1 per cent higher than a year earlier at the end of June. Commercial real estate (CRE) prices remain weaker, however, drifting down during the first quarter of 2013 and 2.6 per cent lower than a year earlier at end June. Company failures continue to improve, declining to 3,619 (seasonally adjusted) in the first three months of 2013, the lowest since the second quarter of 2008.
The Irish economy continues to struggle against the headwinds of ongoing Eurozone recession, tight financial conditions and fiscal tightening. GDP was broadly flat in 2012, rising by 0.2 per cent, and shrank by 0.6 per cent in the first quarter of 2013. However there are a number of signs of stabilisation in the economy. Employment grew by 1.1 per cent in the first quarter relative to a year ago, the unemployment rate is 1.4 percentage points below its 2011 peak and surveys of activity suggest Ireland continues to outperform its Eurozone peers. House prices are also stabilising, up 1.2 per cent from a year ago in June, having fallen 4.5 per cent in 2012. Commercial real estate prices continue to fall however, down 5.8 per cent in the year to 31 March 2013.
Future economic developments in the UK and Ireland depend crucially on the extent to which gradually improving domestic conditions can offset headwinds from the Eurozone. The consensus view is that the Eurozone will emerge very slowly from recession towards the end of 2013, but there are substantial risks to that view. Domestically, the UK and Ireland still face drags on recovery from government austerity policies and the still-high indebtedness of consumers.
The current consensus view for 2013 UK GDP growth is 1.0 per cent, an improvement from the 0.2 per cent recorded in 2012 but still very weak. The UK Bank Rate is likely to stay at current low levels through the remainder of this year and next. House prices are expected to continue to rise gradually through this year and CRE prices are expected to rise slightly during the second half, ending the year flat on a year earlier. Unemployment is expected to remain broadly flat. The current consensus view for 2013 Irish GDP growth is for another year of sub 1 per cent growth in 2013, and the unemployment rate there is expected to remain broadly stable through the rest of the year. Irish house prices are expected to finish 2013 broadly flat.
The probability attached to this weak recovery scenario has risen so far this year as evidence of emerging recovery has built and the risk of a near-term destabilising shock from the Eurozone crisis has gradually abated. However, whilst the Eurozone continues to inch only slowly towards a definitive solution to the crisis, there continues to be a risk that deterioration in the Eurozone economic outlook could result in a return to stagnation in the UK and Ireland, or could cause a significant recession either scenario accompanied by higher unemployment and higher corporate failures. A significant recession would likely lead to a second leg of falling UK and Irish property prices, and rising commercial tenant defaults. In turn, these developments would have a negative impact on the Group's income, funding costs and impairment charges.
PRINCIPAL RISKS AND UNCERTAINTIES
At present the most significant risks faced by the Group are detailed below. These risks could impact on the success of delivering against the Group's long-term strategic objectives.
Credit risk
Principal risks
Adverse changes in the credit quality or behaviour of the Group's borrowers and counterparties would be expected to reduce the value of the Group's assets and increase the Group's write-downs and allowances for impairment losses. Credit risk can be affected by a range of macroeconomic, environment and other factors, including, inter alia, increased unemployment, reduced asset values (including residential and commercial real estate), lower consumer spending, increased consumer indebtedness, increased personal or corporate insolvency levels, reduced corporate profits, increased interest rates and/or higher tenant defaults. The Group has exposure to commercial customers in both the UK and internationally, including Europe and Ireland, particularly related to commercial real estate lending, where the Group has a high level of lending secured on secondary and tertiary assets. The Group's portfolios may be impacted by some or all of these factors and the possibility of further economic downside risk remains.
Mitigating actions
The Group takes many mitigating actions with respect to this principal risk. The Group manages its credit risk in a variety of ways such as:
- Through prudent and through the cycle credit risk appetite and policies;
- Clearly defined levels of authority (including, independently sanctioned and controlled credit limits for commercial customers and counterparties, sound credit scoring models and credit policies for retail customers);
- Robust credit processes and controls, including those governing forbearance; and
- Well-established Group and Divisional committees that ensure distressed and impaired loans are identified, considered, controlled and appropriately escalated and appropriately impaired (taking account of the Group's latest view of current and expected market conditions, as well as refinancing risk).
Reviews are undertaken at least quarterly and incorporate internal and external audit review and challenge.
Conduct risk
Principal risks
As a provider of a wide range of financial services products across different brands and distribution channels to an extremely broad and varied customer base and as a participant in market activities, the Group faces significant conduct risks, such as: products or services not meeting the needs of its customers; sales processes which could result in selling products to customers which do not meet their needs; failure to deal with a customer's complaint effectively where the Group has got it wrong and not met customer expectations; and behaviours which do not meet market standards. Given the high level of scrutiny regarding financial institutions' treatment of customers and business conduct from regulatory bodies, the media and politicians, there is a risk that certain aspects of the Group's current or historic business may be determined by the Financial Conduct Authority (FCA) and other regulatory bodies or the courts as not being conducted in accordance with applicable laws or regulations, or fair and reasonable treatment in their opinion. The Group may also be liable for damages to third parties harmed by the conduct of its business.
Mitigating actions
The Group takes a range of mitigating actions with respect to this principal risk with clear and visible leadership from the top. These actions are being developed within the Group's Conduct Strategy initiative, including:
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
- To support the Group's strategy to be the best bank for customers: the Group is enhancing its approach to business strategy and planning, with the customer at the heart; it is continuing its journey to industry-leading complaints performance; its simplification programme is making customer interactions easy and straightforward
- To support the transparency and simplification of the Group's products: the Group is enhancing its conduct risk appetite statements, with detailed supporting MI and customer analytics to track continuous improvement, and a robust product governance framework; it is developing its framework for rectifying and undertaking root-cause analysis of conduct issues where they arise; it is improving how it keeps a record of the delivery of fair outcomes for customers
- To support how colleagues deliver the right outcomes for customers: the Group is enhancing recruitment and training and how it manages performance with clearer customer accountabilities; it is reviewing and developing how rewards and incentives drive customer-centric behaviours; it is strengthening sales processes and frameworks to deliver consistently fair outcomes for customers
- This is supported by policies and standards in key areas, including product governance, customer treatment, sales, responsible lending, customers in financial difficulties, claims and complaint handling. The Group develops colleagues' awareness of these and other expected standards of conduct through these and other policies and standards and codes of responsibility.
- The Group actively engages with regulatory bodies and other stakeholders in developing its understanding of current customer treatment concerns to ensure that the implementation of the Group's Conduct Strategy meets evolving stakeholder expectations.
Market risk
Principal risks
The Group has a number of market risks, the principal ones being:
- Interest rate risk: This risk to the Group's banking income arises from competitive pressures on product terms in existing loans and deposits, which sometimes restrict the Group in its ability to change interest rates applying to customers in response to changes in interbank and central bank rates. A further related risk arises from the level of interest rates and the margin of interbank rates over central bank rates. In addition, the defined benefit pension scheme liabilities are exposed to movements in long-term interest rates;
- Equity risk: This risk arises from movements in equity market prices. The main equity market risks arise in the Insurance business through the performance of future income (value of in-force) and defined benefit pension schemes; and
- Credit spread risk: This risk arises when the market perception of the creditworthiness of a particular counterparty changes. The main credit spread exposure arises in the Insurance business, defined benefit pension schemes and banking businesses.
Mitigating actions
Market risk is managed within a Board approved framework using a range of metrics to monitor the Group's profile against its stated appetite and potential market conditions.
High level market risk exposure is reported regularly to appropriate committees for monitoring and oversight by senior management.
A variety of risk measures are used such as:
- Sensitivity based measures (e.g. sensitivity to 100 basis points move in interest rates);
- Percentile based measures (e.g. Value at Risk (VAR). The average 95 per cent 1-day trading VAR was £4.5 million for the half-year to 30 June 2013 (£7.0 million for the year to 31 December 2012)); and
- Scenario/stress based measures (e.g. single factor stresses, macroeconomic scenarios).
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
In addition, profit and loss triggers are used in the Trading Books in order to ensure that mitigating action is discussed if profit and loss becomes volatile.
- Interest rate risk: Exposure arising from the different repricing characteristics of the Group's non-trading assets and liabilities, and from the mismatch between interest rate sensitive assets and interest rate sensitive liabilities, is managed centrally. Matching assets and liabilities are offset against each other and interest rate swaps are also used to manage the residual exposure to within the non-traded market risk appetite. Exposure arising from the margin of interbank rates over central bank rates is monitored and managed within the non-traded market risk appetite through appropriate hedging activity. The defined benefit pension schemes have a swap hedging programme in place which will reduce the exposure to interest rate risk over time.
- Equity and credit spread risk: The Group continues to liaise with defined benefit pension scheme Trustees with regard to appropriately de-risking the pension scheme portfolio. Risk exposures within Insurance are reviewed regularly and appropriate hedging opportunities are considered.
Operational risk
Principal risks
The principal operational risks in the Group are:
- IT systems and resilience: The risk of customer impact and/or loss to the Group resulting from failure to develop, deliver or maintain effective IT solutions.
- Information security: The risk of information leakage, loss or theft.
- External fraud: The risk of loss to the Group and/or its customers resulting from an act of deception or omission.
- Customer process: The risk of new issues, process weaknesses and control deficiencies within the Group's customer facing processes.
Mitigating actions
The Group operates a robust control environment with regular review and investment. Contingency plans are maintained for a range of potential scenarios with a regime of regular disaster recovery exercises, both Group specific and industry wide. Significant investment has been, and continues to be made in IT infrastructure and systems to ensure their resilience, security and to enhance the business and customer services they support.
The Group adopts a risk based approach to mitigate the external fraud risk it faces, reflecting the current and emerging external fraud risks within the market. This approach drives an annual programme of enhancements to the Group's technology, process and people related controls; with emphasis on preventative controls, supported by real time detective controls wherever feasible. Through Group-wide policies and operational control frameworks the Group has developed a robust fraud operating model with centralised accountability. Over the past six months the Group has revised and enhanced its incident management capability to increase its speed of response to customer impacting incidents.
Material operational risks are reported regularly to appropriate committees, attracting senior management visibility, and are managed via a range of strategies - avoidance, mitigation, transfer (including insurance), and acceptance.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
People risk
Principal risks
The Group's management of material people risks is critical to its capacity to deliver against its strategic objectives and to be the best bank for customers. Over the coming six months the Group's ability to manage people risks successfully is likely to be affected by the following factors:
- The ongoing pace of change may disrupt the Group's ability to lead and manage its people effectively in some areas;
- The developing and increasingly rigorous and intrusive regulatory environment may challenge the Group's people strategy, remuneration practices and retention; and
- Negative political and media attention on the banking sector culture, sales practices and ethical conduct may impact colleague engagement, investor sentiment and the Group's cost base.
Mitigating actions
The Group takes many mitigating actions with respect to people risk. Key examples include:
- Strengthening the risk and customer focused culture amongst colleagues by developing and delivering a number of initiatives that reinforce behaviours to generate the best possible long-term outcomes for customers and colleagues;
- Continuing to ensure strong management of the impact of organisational change and consolidation on colleagues;
- Embedding the Group's Codes of Personal and Business Responsibility across the Group;
- Reviewing and developing incentives continually to ensure they promote colleagues behaviours that meet customer needs and regulatory expectations;
- Focusing on leadership and colleague engagement, through delivery of strategies to attract, retain and develop high calibre people together with implementation of rigorous succession planning;
- Maintaining focus on people risk management across the Group; and
- Ensuring compliance with legal and regulatory requirements related to Approved Persons and the Remuneration Code, and embedding compliant and appropriate colleague behaviours in line with Group policies, values and its people risk priorities.
Liquidity and funding
Principal risks
The Group is dependent on confidence in the short and long-term wholesale funding markets. Should the Group, due to exceptional circumstances, be unable to continue to source sustainable funding, its ability to fund its financial obligations could be impacted. The key dependencies on successfully funding the Group's balance sheet include:
- Continued functioning of the money and capital markets;
- The continuation of the Group's strategy of right-sizing the balance sheet and development of the retail deposit base which has led to a significant reduction in the wholesale funding requirement;
- Limited further deterioration in the UK's and the Group's credit rating; and
- No significant or sudden withdrawal of customer deposits.
Mitigating actions
Liquidity and funding risk appetite for the banking businesses is set by the Board and this statement of the Group's overall appetite for liquidity risk is reviewed and approved annually by the Board.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
- The Group's liquidity and funding position is underpinned by its significant customer deposit base, and has been supported by stable funding from the wholesale markets with a reduced dependence on short-term wholesale funding.
- At 30 June 2013, the Group had £214.5 billion of liquid unencumbered assets in its liquidity portfolio which are available to meet cash and collateral outflows.
- Daily monitoring and control processes are in place to address regulatory liquidity requirements. The Group monitors a range of market and internal early warning indicators on a daily basis for early signs of liquidity risk in the market or specific to the Group.
- The Group carries out stress testing of its liquidity position against a range of scenarios, including those prescribed by the Prudential Regulation Authority (PRA), on an ongoing basis. The Group's liquidity risk appetite is also calibrated against a number of stressed liquidity metrics.
- The Group has a contingency funding plan embedded within the Group Liquidity Policy which has been designed to identify emerging liquidity concerns at an early stage, so that mitigating actions can be taken to avoid a more serious crisis developing.
Insurance risk
Principal risks
The major sources of insurance risk are within the Insurance business and the Group's defined benefit pension schemes. Insurance risk is inherent in the Insurance business and can be affected by customer behaviour. Insurance risks accepted relate primarily to mortality, longevity, morbidity, persistency, expenses, property and unemployment. The primary insurance risk of the Group's defined benefit pension schemes is related to longevity.
Insurance risk has the potential to significantly impact the earnings and capital position of the Insurance business of the Group. For the Group's defined benefit pension schemes, insurance risk could significantly increase the cost of pension provision and impact the balance sheet of the Group.
Mitigating actions
The Group takes many mitigating actions with respect to this principal risk, key examples include:
- Actuarial assumptions are reviewed in line with experience and in-depth reviews are conducted regularly. Longevity assumptions for the Group's defined benefit pension schemes are reviewed annually together with other IFRS assumptions. Expert judgement is required; and
- Insurance risk is controlled by robust processes including underwriting, pricing-to-risk, claims management, reinsurance and other risk mitigation techniques.
Insurance risk is reported regularly to appropriate committees and boards.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
State funding and state aid
Principal risks
HM Treasury currently holds 38.7 per cent of the Group's ordinary share capital. United Kingdom Financial Investments Limited (UKFI), as manager of HM Treasury's shareholding, continues to operate in line with the framework document between UKFI and HM Treasury, managing the investment in the Group on a commercial basis without interference in day-to-day management decisions. There is a risk that a change in Government priorities could result in the framework agreement currently in place being replaced leading to interference in the operations of the Group.
In addition, the Group is subject to European Union (EU) State Aid obligations in line with the Restructuring Plan agreed with HM Treasury and the EU College of Commissioners in November 2009. This has placed a number of requirements on the Group including an asset reduction target from a defined pool of assets by the end of 2014 (Project Atlantic), and the disposal of certain portions of its Retail business by the end of November 2013 (Project Verde). There is a risk that if the Group does not deliver its divestment commitments by then, a Divestiture Trustee would be appointed to dispose of the divestment, which could be sold at a negative price.
Mitigating actions
The Group has received no indications that the Government intends to change the existing operating arrangements with regard to the role of UKFI and engagement with the Group.
The Group continues to make good progress in respect to its State Aid commitments. In line with strengthening of the balance sheet, the Group has made excellent progress against its asset reduction commitment and reached the reduction total required in December 2012, two years ahead of the mandated completion date. The European Commission confirmed in May 2013 to HM Treasury that the Group had satisfied and therefore was formally released from this commitment.
As announced on 24 April 2013, following the withdrawal of the Co-Operative Group from the sale process the Group now intends to divest Verde through an IPO, subject to regulatory and EU Commission approval, having maintained this option throughout the process to ensure best value for shareholders and certainty for customers and colleagues. The Group has already made good progress in the creation of Verde as a stand-alone bank with a strong management team already in place and good progress made in delivering segregated IT systems on the proven Lloyds Banking Group platform. Detailed plans are in place to rebrand the business as TSB which will be visible on the High Street from September this year, at which point the TSB Bank (Verde) will operate as a separate business within Lloyds Banking Group. As a result of the Co-op's withdrawal, the Group will not meet the November 2013 deadline and is currently in discussions regarding a revised timeline for disposal via an IPO, with the EU Commission and HM Treasury. To date, the Group has received no indication that the EU Commission intends to appoint a Divestiture Trustee post November 2013.
The Group continues to work closely with the PRA, FCA, EU Commission, HM Treasury and the Monitoring Trustee appointed by the EU Commission to ensure the successful implementation of the Restructuring Plan and mitigate customer impact.
CREDIT RISK PORTFOLIO
Group
Overview
· The Group's impairment charge decreased by 43 per cent to £1,813 million in the half year to 30 June 2013, continuing the improvement seen in 2012.
· Impaired loans as a percentage of closing advances reduced to 7.7 per cent at 30 June 2013, from 8.6 per cent at 31 December 2012, driven by improvements in Commercial Banking and reflecting reductions in both the core and non-core books.
· The Group continues to proactively manage down sovereign as well as banking and trading book exposure to selected Eurozone countries.
· The Group's divestment strategy remains focused on reducing non-core assets and on the disposal of higher risk positions.
Impairment charge by division
|
|
|
Half-year |
|
Half-year 2012 |
|
Change |
|
Half-year |
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
636 |
|
758 |
|
16 |
|
512 |
|
Commercial Banking |
|
727 |
|
1,408 |
|
48 |
|
1,538 |
|
Wealth, Asset Finance and International |
|
450 |
|
991 |
|
55 |
|
489 |
|
Central items |
|
- |
|
- |
|
|
|
1 |
|
Total impairment charge |
|
1,813 |
|
3,157 |
|
43 |
|
2,540 |
|
|
|
|
|
|
|
|
|
|
|
Core |
|
|
|
|
|
|
|
|
|
Retail |
|
590 |
|
735 |
|
20 |
|
457 |
|
Commercial Banking |
|
302 |
|
232 |
|
(30) |
|
472 |
|
Wealth, Asset Finance and International |
|
15 |
|
11 |
|
(36) |
|
11 |
|
Central items |
|
- |
|
- |
|
|
|
1 |
|
Core impairment charge |
|
907 |
|
978 |
|
7 |
|
941 |
|
|
|
|
|
|
|
|
|
|
|
Non-core |
|
|
|
|
|
|
|
|
|
Retail |
|
46 |
|
23 |
|
|
|
55 |
|
Commercial Banking |
|
425 |
|
1,176 |
|
64 |
|
1,066 |
|
Wealth, Asset Finance and International |
|
435 |
|
980 |
|
56 |
|
478 |
|
Non-core impairment charge |
|
906 |
|
2,179 |
|
58 |
|
1,599 |
|
|
|
|
|
|
|
|
|
|
|
Impairment charge as a % of average advances |
|
0.69% |
|
1.10% |
|
(41)bp |
|
0.95% |
|
Core impairment charge as a % of average advances |
0.42% |
|
0.44% |
|
(2)bp |
|
0.44% |
|
|
Non-core impairment charge as a % of average advances |
|
1.83% |
|
3.33% |
|
(150)bp |
|
2.91% |
Total impairment charge comprises:
|
|
|
Half-year |
|
Half-year 2012 |
|
Change |
|
Half-year |
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
|
|
|
|
|
|
|
|
|
Loans and advances to customers |
|
1,810 |
|
3,082 |
|
41 |
|
2,572 |
|
Debt securities classified as loans and receivables |
|
1 |
|
28 |
|
96 |
|
(13) |
|
Available-for-sale financial assets |
|
2 |
|
28 |
|
93 |
|
9 |
|
Other credit risk provisions |
|
- |
|
19 |
|
|
|
(28) |
Total impairment charge |
|
1,813 |
|
3,157 |
|
43 |
|
2,540 |
CREDIT RISK PORTFOLIO (continued)
Impaired loans and provisions
Group
|
At 30 June 2013 |
Loans and |
|
Impaired |
|
Impaired |
Impairment |
Impairment |
|||
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
343,513 |
|
7,993 |
|
2.3 |
|
2,256 |
|
32.3 |
|
Commercial Banking |
|
140,472 |
|
19,102 |
|
13.6 |
|
8,377 |
|
43.9 |
|
Wealth, Asset Finance and International |
|
39,833 |
|
13,285 |
|
33.4 |
|
9,504 |
|
71.5 |
|
Reverse repos and other items |
|
2,833 |
|
- |
|
|
|
- |
|
|
|
Total gross lending |
|
526,651 |
|
40,380 |
|
7.7 |
|
20,137 |
|
51.1 |
|
Impairment provisions |
|
(20,137) |
|
|
|
|
|
|
|
|
|
Fair value adjustments3 |
|
(730) |
|
|
|
|
|
|
|
|
|
Total Group |
|
505,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
317,933 |
|
6,450 |
|
2.0 |
|
1,882 |
|
34.1 |
|
Commercial Banking |
|
109,128 |
|
5,498 |
|
5.0 |
|
2,845 |
|
51.7 |
|
Wealth, Asset Finance and International |
|
5,733 |
|
320 |
|
5.6 |
|
100 |
|
31.3 |
|
Reverse repos and other items |
|
2,833 |
|
- |
|
|
|
- |
|
|
|
Total core gross lending |
|
435,627 |
|
12,268 |
|
2.8 |
|
4,827 |
|
42.6 |
|
Impairment provisions |
|
(4,827) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(618) |
|
|
|
|
|
|
|
|
|
Total core |
|
430,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core |
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
25,580 |
|
1,543 |
|
6.0 |
|
374 |
|
25.5 |
|
Commercial Banking |
|
31,344 |
|
13,604 |
|
43.4 |
|
5,532 |
|
40.7 |
|
Wealth, Asset Finance and International |
|
34,100 |
|
12,965 |
|
38.0 |
|
9,404 |
|
72.5 |
|
Reverse repos and other items |
|
- |
|
- |
|
|
|
- |
|
|
|
Total non-core gross lending |
|
91,024 |
|
28,112 |
|
30.9 |
|
15,310 |
|
54.6 |
|
Impairment provisions |
|
(15,310) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(112) |
|
|
|
|
|
|
|
|
|
Total non-core |
|
75,602 |
|
|
|
|
|
|
|
|
|
1 |
Impairment provisions include collective unimpaired provisions. |
|
2 |
Impairment provisions as a percentage of impaired loans are calculated excluding Retail unsecured loans in recoveries (£1,005 million; core: £929 million; non-core: £76 million). |
|
3 |
The fair value adjustments relating to loans and advances were those required to reflect the HBOS assets in the Group's consolidated financial records at their fair value and took into account both the expected future impairment losses and market liquidity at the date of acquisition. The unwind relating to future impairment losses requires significant management judgement to determine its timing which includes an assessment of whether the losses incurred in the current period were expected at the date of the acquisition and assessing whether the remaining losses expected at the date of the acquisition will still be incurred. The element relating to market liquidity unwinds to the income statement over the estimated expected lives of the related assets (until 2014 for wholesale loans and 2018 for retail loans) although if an asset is written-off or suffers previously unexpected impairment then this element of the fair value will no longer be considered a timing difference (liquidity) but permanent (impairment). The fair value unwind in respect of impairment losses incurred was £324 million for the period ended 30 June 2013. The fair value unwind in respect of loans and advances is expected to continue to decrease in future years as fixed-rate periods on mortgages expire, loans are repaid or written-off, and will reduce to zero over time. |
CREDIT RISK PORTFOLIO (continued)
Impaired loans and provisions (continued)
|
At 31 December 2012 |
Loans and |
|
Impaired |
|
Impaired |
Impairment |
Impairment |
|
|||
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
, |
|
|
|
|
|
|
|
|
|
|
Retail |
|
346,560 |
|
8,320 |
|
2.4 |
|
2,335 |
|
32.5 |
|
|
Commercial Banking |
|
144,770 |
|
23,965 |
|
16.6 |
|
9,984 |
|
41.7 |
|
|
Wealth, Asset Finance and International |
|
42,927 |
|
14,008 |
|
32.6 |
|
9,453 |
|
67.5 |
|
|
Reverse repos and other items |
|
5,814 |
|
- |
|
|
|
- |
|
|
|
|
Total gross lending |
|
540,071 |
|
46,293 |
|
8.6 |
|
21,772 |
|
48.2 |
|
|
Impairment provisions |
|
(21,772) |
|
|
|
|
|
|
|
|
|
|
Fair value adjustments3 |
|
(1,074) |
|
|
|
|
|
|
|
|
|
|
Total Group |
|
517,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
320,058 |
|
6,693 |
|
2.1 |
|
1,957 |
|
34.7 |
|
|
Commercial Banking |
|
104,867 |
|
5,907 |
|
5.6 |
|
2,866 |
|
48.5 |
|
|
Wealth, Asset Finance and International |
|
5,415 |
|
351 |
|
6.5 |
|
85 |
|
24.2 |
|
|
Reverse repos and other items |
|
5,814 |
|
- |
|
|
|
- |
|
|
|
|
Total core gross lending |
|
436,154 |
|
12,951 |
|
3.0 |
|
4,908 |
|
41.2 |
|
|
Impairment provisions |
|
(4,908) |
|
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(778) |
|
|
|
|
|
|
|
|
|
|
Total core |
|
430,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core |
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
26,502 |
|
1,627 |
|
6.1 |
|
378 |
|
24.5 |
|
|
Commercial Banking |
|
39,903 |
|
18,058 |
|
45.3 |
|
7,118 |
|
39.4 |
|
|
Wealth, Asset Finance and International |
|
37,512 |
|
13,657 |
|
36.4 |
|
9,368 |
|
68.6 |
|
|
Reverse repos and other items |
|
- |
|
- |
|
|
|
- |
|
|
|
|
Total non-core gross lending |
|
103,917 |
|
33,342 |
|
32.1 |
|
16,864 |
|
50.7 |
|
|
Impairment provisions |
|
(16,864) |
|
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(296) |
|
|
|
|
|
|
|
|
|
|
Total non-core |
|
86,757 |
|
|
|
|
|
|
|
|
|
|
1 |
Impairment provisions Include collective unimpaired provisions. |
|
2 |
Impairment provisions as a percentage of impaired loans are calculated excluding Retail unsecured loans in recoveries (£1,129 million; core: £1,047 million; non-core: £82 million). |
|
3 |
The fair value adjustments relating to loans and advances were those required to reflect the HBOS assets in the Group's consolidated financial records at their fair value and took into account both the expected future impairment losses and market liquidity at the date of acquisition. The unwind relating to future impairment losses requires significant management judgement to determine its timing which includes an assessment of whether the losses incurred in the current period were expected at the date of the acquisition and assessing whether the remaining losses expected at the date of the acquisition will still be incurred. The element relating to market liquidity unwinds to the income statement over the estimated expected lives of the related assets (until 2014 for wholesale loans and 2018 for retail loans) although if an asset is written-off or suffers previously unexpected impairment then this element of the fair value will no longer be considered a timing difference (liquidity) but permanent (impairment). The fair value unwind in respect of impairment losses incurred was £868 million for the period ended 31 December 2012. The fair value unwind in respect of loans and advances is expected to continue to decrease in future years as fixed-rate periods on mortgages expire, loans are repaid or written-off, and will reduce to zero over time. |
CREDIT RISK PORTFOLIO (continued)
Forbearance
The Group operates a number of schemes to assist borrowers who are experiencing financial stress. The material elements of these schemes through which the Group has granted a concession, whether temporarily or permanently, are set out below.
Retail customers
The Group classifies the treatments offered to retail customers who have experienced financial difficulty into the following categories:
- Reduced contractual monthly payment: a temporary account change to assist customers through periods of financial difficulty where arrears do not accrue at the original contractual payments, for example capital payment breaks and payment assistance breaks. Any arrears existing at the commencement of the arrangement are retained;
- Financial distress assistance: an arrangement for customers in financial distress where arrears accrue at the contractual payment, for example short-term arrangements to pay and term extensions; and
- Repair: an account change used to repair a customer's position when they have emerged from financial difficulty, for example capitalisation of arrears.
Forbearance classification
The Group classifies a retail account as forborne at the time a customer in financial difficulty is granted a concession. Where a change results in a reduced contractual monthly payment or is a short-term arrangement to pay, it is included within the forborne analysis below if the customer is currently benefitting from the forbearance treatment. Where the treatment involves a permanent change to the contractual basis of the customer's account, such as a capitalisation of arrears or term extension, the Group only classifies the balance as forborne for a period of 12 months, after which no distinction is made between these accounts and others where no change has been made.
The tables below set out the Group's forborne loans and advances to customers at 30 June 2013.
Mortgages
At 30 June 2013, UK and Irish retail secured loans and advances subject to forbearance were 1.6 per cent (31 December 2012: 1.8 per cent) of total UK and Irish retail secured loans and advances. Further analysis of the forborne loan balances is set out below:
|
|
|
Total loans and advances which are forborne |
|
Total forborne loans and advances which are impaired |
|
Impairment provisions as % of loans and advances which are forborne |
||||||
|
|
|
At 2013 |
|
At 2012 |
|
At 2013 |
|
At 2012 |
|
At 2013 |
|
At 2012 |
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
% |
|
% |
|
UK |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduced contractual monthly payment |
|
1,625 |
|
2,706 |
|
229 |
|
359 |
|
3.7 |
|
3.6 |
|
Financial distress |
|
1,262 |
|
1,066 |
|
201 |
|
174 |
|
3.6 |
|
3.1 |
|
Repair |
|
1,824 |
|
1,644 |
|
34 |
|
35 |
|
3.6 |
|
4.7 |
|
Total - UK |
|
4,711 |
|
5,416 |
|
464 |
|
568 |
|
3.6 |
|
3.9 |
|
Ireland |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduced contractual monthly payment |
|
9 |
|
11 |
|
6 |
|
6 |
|
38.1 |
|
30.8 |
|
Financial distress |
|
274 |
|
274 |
|
238 |
|
229 |
|
51.0 |
|
43.4 |
|
Repair |
|
308 |
|
286 |
|
44 |
|
28 |
|
28.6 |
|
30.9 |
|
Total - Ireland |
|
591 |
|
571 |
|
288 |
|
263 |
|
39.2 |
|
36.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total - UK and Ireland |
|
5,302 |
|
5,987 |
|
752 |
|
831 |
|
7.6 |
|
7.0 |
CREDIT RISK PORTFOLIO (continued)
Impairment assessment of retail mortgages subject to forbearance
The Group regards a forborne loan as impaired if it is six or more months in arrears (or certain cases where the borrower is bankrupt), in line with the Group's definition of an impaired asset for UK secured loans. Both impaired and unimpaired loans which are forborne are grouped with other assets with similar risk characteristics and assessed collectively for impairment as described below.
The Group's approach is to ensure that provisioning models, supported by management judgement, appropriately reflect the underlying loss risk of exposures. The Group uses sophisticated behavioural scoring to assess customers' credit risk. The underlying behavioural scorecards consider many different characteristics of customer behaviour, both static and dynamic, from internal sources and also from credit bureaux data, including characteristics that may identify when a customer has been in arrears on products held with other firms. Hence, these models take a range of potential indicators of customer financial distress into account.
The performance of such models is monitored and challenged on an ongoing basis, in line with the Group's model governance policies. The models are also regularly recalibrated to reflect up to date customer behaviour and market conditions. Specifically, regular detailed analysis of modelled provision outputs is undertaken to demonstrate that the risk of forbearance or other similar activities is recognised, that the outcome period adequately captures the risk and that the underlying risk is appropriately reflected. Where this is not the case, additional provisions are applied to capture the risk.
Personal loans, overdrafts and credit cards
At 30 June 2013, UK retail unsecured loans and advances subject to forbearance were 1.9 per cent (31 December 2012: 2.1 per cent) of total UK retail unsecured loans and advances. Further analysis of the forborne loan balances is set out below:
|
|
|
Total loans and advances which are forborne |
|
Total forborne loans and advances which are impaired |
|
Impairment provisions as % of loans and advances which are forborne |
||||||
|
|
|
At 2013 |
|
At 2012 |
|
At 2013 |
|
At 2012 |
|
At 2013 |
|
At 2012 |
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
% |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduced contractual monthly payment |
|
223 |
|
257 |
|
210 |
|
239 |
|
46.8 |
|
50.1 |
|
Financial distress |
|
70 |
|
90 |
|
65 |
|
84 |
|
52.4 |
|
57.9 |
|
Repair |
|
126 |
|
125 |
|
27 |
|
33 |
|
3.2 |
|
4.2 |
|
Total |
|
419 |
|
472 |
|
302 |
|
356 |
|
34.6 |
|
39.4 |
Collective impairment assessment of UK retail personal loans, overdrafts and credit cards subject to forbearance
Credit risk provisioning for the UK retail unsecured portfolio is undertaken on a purely collective basis. The approach used is based on segmented cash flow models, divided into two primary streams for loans judged to be impaired and those that are not. The Group regards all accounts subject to repayment plans and collections refinance loans as impaired.
For exposures that are judged to be impaired, provisions are determined through modelling the expected cure rates, write-off propensity and cash flows with segments explicitly relating to repayment plans and refinance loans treatments. Payments of less than the monthly contractual amount are reflected in reduced cash flow forecasts when calculating the impairment allowance for these accounts.
The outputs of the models are monitored and challenged on an ongoing basis. The models are run monthly meaning that current market conditions and customer processes are reflected in the output. Where the risks identified are not captured in the underlying models, appropriate additional provisions are made.
CREDIT RISK PORTFOLIO (continued)
Other retail
Asset Finance operates a number of retail portfolios including Black Horse Motor Finance as well as a number of portfolios closed to new business and currently in run-off. The reduction in the level of forborne loans in the first half of 2013 was driven by the continuing run-off and sale of non-core portfolios. The table below includes both the open and closed retail portfolios in the Asset Finance business:
|
|
|
Total loans and advances which are forborne |
|
Total forborne loans and advances which are impaired |
|
Impairment provisions as % of loans and advances which are forborne |
||||||
|
|
|
At 2013 |
|
At 2012 |
|
At 2013 |
|
At 2012 |
|
At 2013 |
|
At 2012 |
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
% |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduced contractual monthly payment |
|
253 |
|
328 |
|
230 |
|
301 |
|
58.0 |
|
58.0 |
|
Financial distress |
|
96 |
|
112 |
|
83 |
|
102 |
|
24.1 |
|
24.8 |
|
Repair |
|
4 |
|
7 |
|
- |
|
2 |
|
0.6 |
|
1.6 |
|
Total |
|
353 |
|
447 |
|
313 |
|
405 |
|
48.1 |
|
48.8 |
Commercial customers
The Group treats forbearance for commercial customers as the granting of a concession to a borrower who is in financial difficulty or where their risk profile is such that the Group would not otherwise consider the concession. The Group's policy is that this applies to both temporary (for example, distressed covenant waivers) and permanent (for example, loan extensions and covenant amendments) forbearance concessions.
The main types of concessions to commercial customers in financial distress are set out below:
- Amendments: This includes temporary and permanent waivers, amendment or resetting of contractual covenants (including LTV and interest cover), amendments to an interest rate to a level considered outside of market or the Group's risk appetite, or other amendments such as changes to collateral, or other debt servicing arrangements;
- Extensions: This includes extension and/or alteration of repayment terms to a level outside of market or the Group's risk appetite due to the customer's inability to make existing contractual repayment terms;
- Forgiveness: This includes debt for equity swaps or partial debt forgiveness. This type of forbearance will always give rise to impairment; and
- Multiple type of forbearance (essentially a mixture of the above three).
CREDIT RISK PORTFOLIO (continued)
Where a concession is granted to an obligor that is not in financial difficulty or the risk profile is considered within current risk appetite, the concession would not be considered to be an act of forbearance.
A number of options are available to the Group where a customer is facing financial difficulty, and each case is treated depending on its own specific circumstances. The Group's strategy and offer of forbearance is largely dependent on the individual situation and early identification, control and monitoring are key in order to support the customer and protect the Group. Concessions are often provided to help the customer with their day to day liquidity and working capital. An example of this relates to helping to maintain the business through a temporary difficult period.
Forbearance classification
The Group automatically treats all impaired assets in Commercial Banking as having been granted some form of forbearance. Impaired obligors are always treated as forborne.
An obligor that is unimpaired and where forbearance has been granted will remain treated and recorded as forborne until it evidences acceptable performance over a period of time. This period will depend on a number of factors such as whether the obligor is trading in line with the revised plan, it is operating within the new terms and conditions (including observation to revised covenants and contractual payments), its financial performance is stable or improving, and there are no undue concerns over its future performance. As a minimum, this period is expected to be at least six months following a forbearance event. Once an obligor evidences acceptable performance over a period of time, the Group would expect that it could be returned to the mainstream good classification and they would no longer be considered forborne. It is important to note that such a decision can be made only by the independent Risk division. The exception to this six month minimum period is where a permanent structural cure is made (for example, in a real estate transaction, this could be an injection of collateral security or partial repayment of debt to restore an LTV back to within risk appetite). In this case, the obligor may be removed from the forbearance category once the permanent cure has been made.
Impairment assessment of commercial loans subject to forbearance
The Group recognises that forbearance alone is not necessarily an indicator of impaired status but is a trigger point for the review of the customer's credit profile. The Group grants forbearance only when it believes that there is a realistic prospect of the customer's performance and liquidity improving. If there is any concern over future cash flows and the Group incurring a loss, then forborne loans will be classified as impaired if they meet the Group's standard definition of impairment. Recovery can sometimes be through improvement in market or economic conditions, or the customer may benefit from access to alternative sources of liquidity such as an equity injection. These can be especially relevant in real estate or other asset backed transactions where a fire sale of assets in a weak market is unattractive.
The granting of forbearance does not necessarily mean that it is expected that future cash flows will fall, or that the asset is impaired. Depending on circumstances and when operated within robust parameters and controls, the Group believes forbearance can help support the customer in the short to medium term. Therefore the Group expects to have unimpaired forborne assets within its portfolios, although as noted below, these are specifically controlled and managed. Unimpaired forborne assets are included in calculating the overall collective unimpaired provision, and which uses the historic observed default rate of the portfolio as a whole as part of its calculation.
It is Group policy that where a commercial customer is considered forborne it must be managed either within the Group's good book watchlist classifications or within a Business Support Unit. The majority of the forborne assets in Commercial Banking are managed in a Business Support Unit. Forborne assets are not permitted to exist outside these two areas of increased control and management. The Group's robust credit risk classification process ensures that any such obligors are managed in the appropriate specialist area, and if appropriate, an impairment provision is taken.
All customers in Business Support, and those on the good book watchlist, including those on which forbearance has been granted, are subject to greater monitoring. Any event that has an adverse or potentially adverse impact on the ability of the customer to repay in full is likely to lead the asset being impaired and, if required, an impairment allowance recognised.
CREDIT RISK PORTFOLIO (continued)
The tables below set out the Group's forborne loans and advances to commercial customers at 30 June 2013.
|
|
|
Total loans and advances which are forborne |
|
Impairment provisions as % of loans and advances which are forborne |
||||
|
|
|
At 2013 |
|
At 2012 |
|
At 2013 |
|
At 2012 |
|
|
|
£m |
|
£m |
|
% |
|
% |
|
|
|
|
|
|
|
|
|
|
|
Impaired |
|
19,102 |
|
23,965 |
|
43.9 |
|
41.7 |
|
Unimpaired |
|
8,914 |
|
9,027 |
|
- |
|
- |
|
Total |
|
28,016 |
|
32,992 |
|
29.9 |
|
30.3 |
All impaired assets are considered forborne. At 30 June 2013, £8,914 million of unimpaired assets were considered forborne as a result of proactive management of cases to help customers in financial difficulties. Of this figure, £6,203 million was classified as non-core, with the remaining £2,711 million classified as core.
The table below sets out the Group's largest unimpaired forborne loans and advances to commercial customers (exposures over £10 million) as at 30 June 2013 by type of forbearance, together with a breakdown on which exposures are classified as Direct Real Estate:
|
At 30 June 2013 |
|
Direct Real Estate |
|
Other industry sector |
|
Total |
|
|
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
Type of unimpaired forbearance |
|
|
|
|
|
|
|
Exposures > £10 million (on UK booked exposures) |
|
|
|
|
|
|
|
Amendments |
|
1,295 |
|
975 |
|
2,270 |
|
Extensions |
|
897 |
|
600 |
|
1,497 |
|
Multiple |
|
130 |
|
310 |
|
440 |
|
|
|
2,322 |
|
1,885 |
|
4,207 |
|
Exposures < £10 million and other non-UK booked exposures |
|
|
|
|
|
4,707 |
|
Total |
|
|
|
|
|
8,914 |
Whilst the material portfolios have been reviewed for forbearance, some portfolios within Commercial Banking have not been reviewed on the basis that the level is relatively immaterial or because the concept of forbearance is not relevant, for example if the portfolio is of very strong quality and/or the impairment history is negligible.
CREDIT RISK PORTFOLIO (continued)
Ireland commercial real estate and corporate (part of the Wealth, Asset Finance and International division)
All loans and advances in Ireland commercial real estate and corporate (whether impaired or unimpaired) are treated as forborne and all assets are classified as non-core.
|
|
|
Total loans and advances which are forborne |
|
Impairment provisions as % of loans and advances which are forborne |
||||
|
|
|
At 2013 |
|
At 2012 |
|
At 2013 |
|
At 2012 |
|
|
|
£m |
|
£m |
|
% |
|
% |
|
|
|
|
|
|
|
|
|
|
|
Impaired |
|
10,541 |
|
10,967 |
|
73.0 |
|
68.0 |
|
Unimpaired |
|
1,656 |
|
1,908 |
|
- |
|
- |
|
Total |
|
12,197 |
|
12,875 |
|
63.1 |
|
58.0 |
CREDIT RISK PORTFOLIO (continued)
Retail
Overview
· The Retail impairment charge was £636 million in the first half of 2013, a decrease of 16 per cent against the first half of 2012. The decrease was primarily driven by debt sale activity in the unsecured portfolio.
· The Retail impairment charge, as an annualised percentage of average loans and advances to customers, decreased to 0.37 per cent in the first half of 2013 from 0.43 per cent in the first half of 2012.
· The overall value of assets entering arrears in the first half of 2013 has been broadly stable.
· Non-core represents 7 per cent of total Retail assets at 30 June 2013 and is primarily specialist mortgages, which is closed to new business and has been in run-off since 2009.
Impairment charge
|
|
|
Half-year |
|
Half-year 2012 |
|
Change |
|
Half-year |
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
187 |
|
173 |
|
(8) |
|
204 |
|
Unsecured |
|
449 |
|
585 |
|
23 |
|
308 |
|
Total impairment charge |
|
636 |
|
758 |
|
16 |
|
512 |
|
|
|
|
|
|
|
|
|
|
|
Core: |
|
|
|
|
|
|
|
|
|
Secured |
|
149 |
|
149 |
|
- |
|
155 |
|
Unsecured |
|
441 |
|
586 |
|
25 |
|
302 |
|
|
|
590 |
|
735 |
|
20 |
|
457 |
|
Non-core: |
|
|
|
|
|
|
|
|
|
Secured |
|
38 |
|
24 |
|
(58) |
|
49 |
|
Unsecured |
|
8 |
|
(1) |
|
|
|
6 |
|
|
|
46 |
|
23 |
|
|
|
55 |
|
Total impairment charge |
|
636 |
|
758 |
|
16 |
|
512 |
|
|
|
|
|
|
|
|
|
|
|
Impairment charge as a % of average advances |
0.37% |
|
0.43% |
|
(6)bp |
|
0.29% |
|
|
Core impairment charge as a % of average advances |
0.37% |
|
0.45% |
|
(8)bp |
|
0.28% |
|
|
Non-core impairment charge as a % of average advances |
|
0.36% |
|
0.17% |
|
19bp |
|
0.41% |
Impaired loans and provisions
Retail impaired loans decreased by £327 million to £7,993 million compared with 31 December 2012 and, as a percentage of closing loans and advances to customers, decreased to 2.3 per cent from 2.4 per cent at 31 December 2012. Impairment provisions as a percentage of impaired loans (excluding unsecured loans in recoveries) decreased to 32.3 per cent from 32.5 per cent at 31 December 2012 driven by the reduction in unsecured impaired loans.
CREDIT RISK PORTFOLIO (continued)
Retail
|
At 30 June 2013 |
Loans and |
|
Impaired |
|
Impaired loans as |
|
Impairment |
|
Impairment |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
321,717 |
|
6,217 |
|
1.9 |
|
1,614 |
|
26.0 |
|
Unsecured: |
|
|
|
|
|
|
|
|
|
|
|
Collections |
|
|
|
771 |
|
|
|
642 |
|
83.3 |
|
Recoveries2 |
|
|
|
1,005 |
|
|
|
- |
|
|
|
|
|
21,796 |
|
1,776 |
|
8.1 |
|
642 |
|
|
|
Total gross lending |
|
343,513 |
|
7,993 |
|
2.3 |
|
2,256 |
|
32.3 |
|
Impairment provisions |
|
(2,256) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(718) |
|
|
|
|
|
|
|
|
|
Total |
|
340,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
296,589 |
|
4,764 |
|
1.6 |
|
1,251 |
|
26.3 |
|
Unsecured: |
|
|
|
|
|
|
|
|
|
|
|
Collections |
|
|
|
757 |
|
|
|
631 |
|
83.4 |
|
Recoveries2 |
|
|
|
929 |
|
|
|
- |
|
|
|
|
|
21,344 |
|
1,686 |
|
7.9 |
|
631 |
|
|
|
Total core gross lending |
|
317,933 |
|
6,450 |
|
2.0 |
|
1,882 |
|
34.1 |
|
Impairment provisions |
|
(1,882) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(618) |
|
|
|
|
|
|
|
|
|
Total core |
|
315,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core |
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
25,128 |
|
1,453 |
|
5.8 |
|
363 |
|
25.0 |
|
Unsecured: |
|
|
|
|
|
|
|
|
|
|
|
Collections |
|
|
|
14 |
|
|
|
11 |
|
78.6 |
|
Recoveries2 |
|
|
|
76 |
|
|
|
- |
|
|
|
|
|
452 |
|
90 |
|
19.9 |
|
11 |
|
|
|
Total non-core gross lending |
|
25,580 |
|
1,543 |
|
6.0 |
|
374 |
|
25.5 |
|
Impairment provisions |
|
(374) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(100) |
|
|
|
|
|
|
|
|
|
Total non-core |
|
25,106 |
|
|
|
|
|
|
|
|
|
1 |
Impairment provisions include collective unimpaired provisions. |
|
2 |
Recoveries assets are written down to the present value of future expected cash flows on these assets. |
|
3 |
Impairment provisions as a percentage of impaired loans are calculated excluding unsecured loans in recoveries. |
CREDIT RISK PORTFOLIO (continued)
|
At 31 December 2012 |
Loans and |
|
Impaired |
|
Impaired |
|
Impairment |
|
Impairment |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
323,862 |
|
6,321 |
|
2.0 |
|
1,616 |
|
25.6 |
|
Unsecured: |
|
|
|
|
|
|
|
|
|
|
|
Collections |
|
|
|
870 |
|
|
|
719 |
|
82.6 |
|
Recoveries2 |
|
|
|
1,129 |
|
|
|
- |
|
|
|
|
|
22,698 |
|
1,999 |
|
8.8 |
|
719 |
|
|
|
Total gross lending |
|
346,560 |
|
8,320 |
|
2.4 |
|
2,335 |
|
32.5 |
|
Impairment provisions |
|
(2,335) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(915) |
|
|
|
|
|
|
|
|
|
Total |
|
343,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
297,902 |
|
4,793 |
|
1.6 |
|
1,251 |
|
26.1 |
|
Unsecured: |
|
|
|
|
|
|
|
|
|
|
|
Collections |
|
|
|
853 |
|
|
|
706 |
|
82.8 |
|
Recoveries2 |
|
|
|
1,047 |
|
|
|
- |
|
|
|
|
|
22,156 |
|
1,900 |
|
8.6 |
|
706 |
|
|
|
Total core gross lending |
|
320,058 |
|
6,693 |
|
2.1 |
|
1,957 |
|
34.7 |
|
Impairment provisions |
|
(1,957) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(778) |
|
|
|
|
|
|
|
|
|
Total core |
|
317,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core |
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
25,960 |
|
1,528 |
|
5.9 |
|
365 |
|
23.9 |
|
Unsecured: |
|
|
|
|
|
|
|
|
|
|
|
Collections |
|
|
|
17 |
|
|
|
13 |
|
76.5 |
|
Recoveries2 |
|
|
|
82 |
|
|
|
- |
|
|
|
|
|
542 |
|
99 |
|
18.3 |
|
13 |
|
|
|
Total non-core gross lending |
|
26,502 |
|
1,627 |
|
6.1 |
|
378 |
|
24.5 |
|
Impairment provisions |
|
(378) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(137) |
|
|
|
|
|
|
|
|
|
Total non-core |
|
25,987 |
|
|
|
|
|
|
|
|
|
1 |
Impairment provisions include collective unimpaired provisions. |
|
2 |
Recoveries assets are written down to the present value of future expected cash flows on these assets. |
|
3 |
Impairment provisions as a percentage of impaired loans are calculated excluding unsecured loans in recoveries. |
CREDIT RISK PORTFOLIO (continued)
The Retail division's loans and advances to customers are analysed in the following table:
|
|
|
At 30 June 2013 |
|
At 31 Dec 2012 |
|
|
|
£m |
|
£m |
|
|
|
|
|
|
|
Secured: |
|
|
|
|
|
Mainstream |
|
246,332 |
|
248,735 |
|
Buy to let |
|
50,632 |
|
49,568 |
|
Specialist |
|
24,753 |
|
25,559 |
|
|
|
321,717 |
|
323,862 |
|
Unsecured: |
|
|
|
|
|
Credit cards |
|
9,270 |
|
9,465 |
|
Personal loans |
|
10,042 |
|
10,523 |
|
Overdrafts |
|
2,484 |
|
2,710 |
|
|
|
21,796 |
|
22,698 |
|
Total gross lending |
|
343,513 |
|
346,560 |
Secured
The impairment charge increased by £14 million, to £187 million compared with the first half of 2012, and decreased by £17 million compared with the second half of 2012. The annualised impairment charge, as a percentage of average loans and advances to customers, has remained broadly stable at 0.12 per cent compared to the first half of 2012. Impairment provisions have been maintained at £1,614 million at 30 June 2013 compared to £1,616 million at 31 December 2012. As a result of this, impairment provisions as a percentage of impaired loans increased to 26.0 per cent from 25.6 per cent at 31 December 2012.
The impairment provisions held against secured assets reflect the Group's view of appropriate allowance for incurred losses. The Group holds appropriate impairment provisions for customers who are experiencing financial difficulty, either on a forbearance arrangement or who may be able to maintain their repayments only whilst interest rates remain low.
The value of mortgages greater than three months in arrears (excluding repossessions) decreased by £75 million to £9,562 million at 30 June 2013 compared to £9,637 million at 31 December 2012.
The number of customers entering into arrears was broadly stable in the first half of 2013.
Mortgages greater than three months in arrears (excluding repossessions)
|
|
|
Number of cases |
|
Total mortgage accounts % |
|
Value of debt1 |
|
Total mortgage balances % |
||||||||
|
|
At 2013 |
|
At 2012 |
At 2013 |
|
At 2012 |
At 2013 |
|
At 2012 |
At 2013 |
|
At 2012 |
||||
|
|
|
Cases |
|
Cases |
|
% |
|
% |
|
£m |
|
£m |
|
% |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainstream |
|
56,585 |
|
55,905 |
|
2.2 |
|
2.2 |
|
6,365 |
|
6,287 |
|
2.6 |
|
2.5 |
|
Buy to let |
|
6,820 |
|
7,306 |
|
1.5 |
|
1.6 |
|
947 |
|
1,033 |
|
1.9 |
|
2.1 |
|
Specialist |
|
12,929 |
|
13,262 |
|
7.6 |
|
7.6 |
|
2,250 |
|
2,317 |
|
9.1 |
|
9.1 |
|
Total |
|
76,334 |
|
76,473 |
|
2.4 |
|
2.4 |
|
9,562 |
|
9,637 |
|
3.0 |
|
3.0 |
|
1 |
Value of debt represents total book value of mortgages in arrears. |
The stock of repossessions increased to 2,681 cases at 30 June 2013 compared to 2,438 cases at 31 December 2012.
CREDIT RISK PORTFOLIO (continued)
Secured loan to value analysis
The average indexed loan to value (LTV) on the mortgage portfolio at 30 June 2013 decreased to 54.0 per cent compared with 56.4 per cent at 31 December 2012. The average LTV for new mortgages and further advances written in the first half of 2013 was 63.6 per cent compared with 62.6 per cent for 2012.
The percentage of closing loans and advances with an indexed LTV in excess of 100 per cent decreased to 7.2 per cent at 30 June 2013, compared with 11.7 per cent at 31 December 2012. The tables below show LTVs across the principal mortgage portfolios.
Actual and average LTVs across the Retail mortgage portfolios
|
At 30 June 2013 |
|
Mainstream |
|
Buy to let |
|
Specialist1 |
|
Total |
|
|
|
% |
|
% |
|
% |
|
% |
|
|
|
|
|
|
|
|
|
|
|
Less than 60% |
|
34.8 |
|
16.9 |
|
17.5 |
|
30.6 |
|
60% to 70% |
|
15.7 |
|
18.0 |
|
13.0 |
|
15.8 |
|
70% to 80% |
|
19.3 |
|
26.8 |
|
19.5 |
|
20.6 |
|
80% to 90% |
|
15.6 |
|
14.9 |
|
19.9 |
|
15.8 |
|
90% to 100% |
|
8.3 |
|
14.6 |
|
16.4 |
|
10.0 |
|
Greater than 100% |
|
6.3 |
|
8.8 |
|
13.7 |
|
7.2 |
|
Total |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
Average loan to value:2 |
|
|
|
|
|
|
|
|
|
Stock of residential mortgages |
|
50.6 |
|
69.6 |
|
68.9 |
|
54.0 |
|
New residential lending |
|
63.4 |
|
64.8 |
|
n/a |
|
63.6 |
|
Impaired mortgages |
|
70.5 |
|
96.2 |
|
85.2 |
|
76.0 |
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2012 |
|
Mainstream |
|
Buy to let |
|
Specialist1 |
|
Total |
|
|
|
% |
|
% |
|
% |
|
% |
|
|
|
|
|
|
|
|
|
|
|
Less than 60% |
|
31.9 |
|
12.8 |
|
14.7 |
|
27.6 |
|
60% to 70% |
|
12.8 |
|
12.9 |
|
9.7 |
|
12.6 |
|
70% to 80% |
|
18.3 |
|
26.2 |
|
17.2 |
|
19.4 |
|
80% to 90% |
|
16.6 |
|
16.5 |
|
19.1 |
|
16.8 |
|
90% to 100% |
|
10.5 |
|
15.4 |
|
18.5 |
|
11.9 |
|
Greater than 100% |
|
9.9 |
|
16.2 |
|
20.8 |
|
11.7 |
|
Total |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
Average loan to value:2 |
|
|
|
|
|
|
|
|
|
Stock of residential mortgages |
|
52.7 |
|
73.6 |
|
72.6 |
|
56.4 |
|
New residential lending |
|
62.3 |
|
64.5 |
|
n/a |
|
62.6 |
|
Impaired mortgages |
|
72.2 |
|
99.3 |
|
88.1 |
|
78.3 |
|
1 |
Specialist lending is closed to new business and is in run-off. |
|
2 |
Average loan to value is calculated as total loans and advances as a percentage of the total collateral of these loans and advances. |
CREDIT RISK PORTFOLIO (continued)
Unsecured
In the first half of 2013 the impairment charge on unsecured loans and advances to customers reduced by £136 million compared with the first half of 2012 and increased by £141 million to £449 million compared with the second half of 2012. The movements were driven by debt sale and recoveries stock management activities; the underlying trend is broadly stable. The annualised impairment charge as a percentage of average loans and advances to customers decreased to 4.01 per cent in the first half of 2013 from 4.80 per cent in the first half of 2012.
Impaired loans decreased by £223 million since 31 December 2012 to £1,776 million at 30 June 2013 which represented 8.1 per cent of closing loans and advances to customers, compared with 8.8 per cent at 31 December 2012. The reduction in impaired loans is a result of the Group's sustainable risk appetite and ongoing effective portfolio management. Retail's exposure to revolving credit products has been actively managed to ensure that it is appropriate to customers' changing financial circumstances.
Impairment provisions decreased by £77 million, compared with 31 December 2012. This reduction was driven by fewer assets entering arrears and recoveries assets being written down to the present value of future expected cash flows. Impairment provisions as a percentage of impaired loans in collections increased to 83.3 per cent at 30 June 2013 from 82.6 per cent at 31 December 2012.
CREDIT RISK PORTFOLIO (continued)
Commercial Banking
Overview
· The Commercial Banking impairment charge was £727 million in the first half of 2013, substantially lower than the £1,408 million in the first half of 2012. The decrease was primarily driven by lower charges in the non-core portfolio. This was partially offset by a higher core charge which was primarily attributable to a level of releases during the first half of 2012 which were not repeated in the first half of 2013. The impairment charge was also lower compared to £1,538 million in the second half of 2012.
· The overall quality of the Commercial Banking portfolio remains good. The Group's prudent through the cycle approach to risk appetite, and the continuing low interest rate environment are helping maintain defaults at a relatively low level, despite subdued economic conditions.
· The impairment charge as a percentage of average loans and advances decreased to 1.03 per cent from 1.61 per cent in the first half of 2012, and materially improved from 2.06 per cent for the half year to 31 December 2012. Core impairment charge as an annualised percentage of average loans and advances to customers increased to 0.57 per cent compared to 0.40 per cent in the first half of 2012, but decreased from 0.93 per cent in the second half of 2012.
· Non-core portfolio continues to reduce, as a result of the Group's proactive asset disposal programme. As a percentage of total loans and advances to customers, non-core now represents 22.3 per cent compared to 27.6 per cent at 31 December 2012.
Impairment charge
|
|
|
Half-year |
|
Half-year 2012 |
|
Change |
|
Half-year |
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
Core |
|
302 |
|
232 |
|
(30) |
|
472 |
|
Non-core |
|
425 |
|
1,176 |
|
64 |
|
1,066 |
|
Total impairment charge |
|
727 |
|
1,408 |
|
48 |
|
1,538 |
|
|
|
|
|
|
|
|
|
|
|
Core impairment charge as a % of average advances |
0.57% |
|
0.40% |
|
17bp |
|
0.93% |
|
|
Non-core impairment charge as a % of average advances |
|
2.35% |
|
3.76% |
|
(141)bp |
|
4.64% |
|
Impairment charge as a % of average advances |
|
1.03% |
|
1.61% |
|
(58)bp |
|
2.06% |
Impaired loans and provisions
Commercial Banking impaired loans reduced substantially by 20.3 per cent to £19,102 million compared with 31 December 2012. As a percentage of closing loans and advances to customers, impaired loans reduced to 13.6 per cent from 16.6 per cent at 31 December 2012, despite a reducing portfolio. Impairment provisions as a percentage of impaired loans improved to 43.9 per cent from 41.7 per cent at 31 December 2012 driven by increased provisions made on a number of existing impaired connections and the disposal of impaired loans with lower coverage.
Core impaired loans reduced to £5,498 million from £5,907 million at 31 December 2012. Core impairment provisions as a percentage of impaired loans increased to 51.7 per cent compared to 48.5 per cent at 31 December 2012, reflecting higher levels of provisions on a few longstanding impaired cases in Mid Markets.
Non-core impaired loans reduced materially by 24.7 per cent to £13,604 million compared to £18,058 million at 31 December 2012, reflecting the Group's continued proactive deleveraging. Nearly three quarters of the reduction came from the non-core Corporate Real Estate portfolio. Non-core impairment provisions as a percentage of impaired loans increased to 40.7 per cent compared to 39.4 per cent, driven by additional provisions taken on a number of existing impaired connections and disposals of impaired loans with lower coverage. Non-core impairment provisions as a percentage of non-core impaired assets remain lower than core, mainly a factor of asset mix, given that the non-core assets which are impaired are heavily weighted towards real estate and real estate related assets with higher collateral levels.
CREDIT RISK PORTFOLIO (continued)
Commercial Banking
|
At 30 June 2013 |
Loans and |
|
Impaired |
|
Impaired |
|
Impairment provisions1 |
|
Impairment |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Banking |
|
140,472 |
|
19,102 |
|
13.6 |
|
8,377 |
|
43.9 |
|
Reverse repos |
|
1,917 |
|
|
|
|
|
|
|
|
|
Impairment provisions |
|
(8,377) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
- |
|
|
|
|
|
|
|
|
|
Total |
|
134,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Banking |
|
109,128 |
|
5,498 |
|
5.0 |
|
2,845 |
|
51.7 |
|
Reverse repos |
|
1,917 |
|
|
|
|
|
|
|
|
|
Impairment provisions |
|
(2,845) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
- |
|
|
|
|
|
|
|
|
|
Total core |
|
108,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core |
|
|
|
|
|
|
|
|
|
|
|
Corporate Real Estate and other Corporate2 |
|
16,524 |
|
11,181 |
|
67.7 |
|
4,185 |
|
37.4 |
|
Specialist Finance3 |
|
12,870 |
|
2,043 |
|
15.9 |
|
1,081 |
|
52.9 |
|
Other |
|
1,950 |
|
380 |
|
19.5 |
|
266 |
|
70.0 |
|
Total Commercial Banking |
|
31,344 |
|
13,604 |
|
43.4 |
|
5,532 |
|
40.7 |
|
Reverse repos |
|
- |
|
|
|
|
|
|
|
|
|
Impairment provisions |
|
(5,532) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
- |
|
|
|
|
|
|
|
|
|
Total non-core |
|
25,812 |
|
|
|
|
|
|
|
|
|
1 |
Includes collective unimpaired provisions of £826 million; core: £571 million; non-core: £255 million. |
|
2 |
Includes the Corporate Real Estate BSU portfolio which is now managed with other Corporate (including non-core good book Corporate Real Estate) assets which were previously disclosed in Other. |
|
3 |
Includes the Specialised Lending portfolio which is now managed with other Specialist Finance assets which were previously disclosed in Other. |
CREDIT RISK PORTFOLIO (continued)
|
At 31 December 2012 |
Loans and |
|
Impaired |
|
Impaired |
|
Impairment provisions1 |
|
Impairment |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Banking |
|
144,770 |
|
23,965 |
|
16.6 |
|
9,984 |
|
41.7 |
|
Reverse repos |
|
5,087 |
|
|
|
|
|
|
|
|
|
Impairment provisions |
|
(9,984) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(131) |
|
|
|
|
|
|
|
|
|
Total |
|
139,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Banking |
|
104,867 |
|
5,907 |
|
5.6 |
|
2,866 |
|
48.5 |
|
Reverse repos |
|
5,087 |
|
|
|
|
|
|
|
|
|
Impairment provisions |
|
(2,866) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
- |
|
|
|
|
|
|
|
|
|
Total core |
|
107,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core |
|
|
|
|
|
|
|
|
|
|
|
Corporate Real Estate and other Corporate2 |
|
21,777 |
|
14,447 |
|
66.3 |
|
5,411 |
|
37.5 |
|
Specialist Finance3 |
|
15,488 |
|
2,935 |
|
19.0 |
|
1,235 |
|
42.1 |
|
Other |
|
2,638 |
|
676 |
|
25.6 |
|
472 |
|
69.8 |
|
Total Commercial Banking |
|
39,903 |
|
18,058 |
|
45.3 |
|
7,118 |
|
39.4 |
|
Reverse repos |
|
- |
|
|
|
|
|
|
|
|
|
Impairment provisions |
|
(7,118) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(131) |
|
|
|
|
|
|
|
|
|
Total non-core |
|
32,654 |
|
|
|
|
|
|
|
|
|
1 |
Includes collective unimpaired provisions of £894 million; core: £545 million; non-core: £349 million. |
|
2 |
Includes the Corporate Real Estate BSU portfolio which is now managed with other Corporate (including non-core good book Corporate Real Estate) assets which were previously disclosed in Other. |
|
3 |
Includes the Specialised Lending portfolio which is now managed with other Specialist Finance assets which were previously disclosed in Other. |
Core
SME
The SME portfolio continues to grow within prudent credit risk appetite parameters and net lending increased 5 per cent year-on-year reflecting the Group's continuing commitment to support the UK economy and the Funding for Lending Scheme, with portfolio credit quality either remaining stable or improving across all key metrics. There have been no material changes to credit risk appetite.
The impairment charge has reduced to £89 million in the first half of 2013 compared to £116 million in the first half of 2012. Stable credit quality and a reducing impairment charge reflect the Group's consistent and prudent through the cycle credit risk appetite, and is also a function of benefitting from a low interest rate environment which has helped to maintain defaults at a lower level. Notwithstanding this, the Group always looks to ensure that new business originated can sustain an increase in policy rates over the medium-term back to more normal levels.
This is all part of the Group's commitment to support clients through the cycle and its prudent credit risk appetite remains key. The Group's control and monitoring activities play an important role in identifying customers showing early signs of financial stress and bringing them into the Group's support model so prompt and supporting actions can be taken.
CREDIT RISK PORTFOLIO (continued)
Other Commercial Banking
The £80.7 billion of gross loans and advances to customers in the Commercial Banking core portfolio are segmented across a number of different coverage segments delivered via various products from Lending and Transaction Banking to Financial Markets and Capital Markets. These include:
Mid Markets- the vast majority of the business remains UK-focused with consequent dependency on the performance of the domestic economy. Fragile consumer sentiment, public sector austerity measures and low investment activity and appetite, particularly outside London and the South East, have continued to contribute towards soft trading conditions and constrained demand for credit. The impact of reduced demand remains evident in consumer discretionary spending sectors such as retail and leisure and investment-driven sectors such as construction, although the Group's portfolio in these sectors has proven resilient during the first half of 2013. The Residential Care portfolio has remained susceptible to sector-wide pressures, which continued during the first half of 2013.
The Mid Markets real estate business is focused predominantly upon unquoted private real estate portfolios. Credit quality continues to improve and the number of new non-performing customers continues to moderate. The core portfolio is modestly expanding and new business propositions are being written under robust policy parameters and in line with agreed risk appetite. The challenging backdrop of the UK economy is maintaining pressure on the domestic real estate market with capital and rental values remaining subdued particularly outside of the London and South East region.
Global Corporates - the core portfolio related to trading companies continues to be predominantly Investment Grade focused; the overall portfolio asset quality remains good; and corporate balance sheets generally remain conservatively structured following a period of de-leveraging through the downturn. 2013 continues to see a limited number of mergers and acquisitions, with conservative structuring approaches being adopted and subsequent focus on rapid de-leveraging. Whilst the Group continues to see weakness in sectors such as Media, Retail, Leisure, Manufacturing and Construction across the UK and Continental Europe, there are now some signs of a slow improvement, albeit this remains fragile.
The Global Corporates real estate customer franchise is focused on the larger borrower end of the UK property market with a bias to the quoted public listed companies and funds sector. Portfolio credit quality remains very acceptable being underpinned by seasoned management teams with proven asset management skills generating predictable cash flows from their income producing portfolios. Access to capital to exploit market opportunities remains available and the customer bias towards London and 'prime' assets has enhanced performance despite the overall challenging UK market conditions. Developing signs of greater distribution appetite in the market including increased participation from insurers is likely to increase the diversity of customer funding options.
Financial Institutions - Commercial Banking maintains relationships with many major financial institutions throughout the world. These relationships are either client focused or held to support the Group's funding, liquidity and general hedging requirements. Trading exposures continue to be predominantly short-term and/or collateralised with inter bank activity mainly undertaken with strong investment grade counterparties. The Eurozone remains challenging and continues to demand very close portfolio scrutiny and oversight. Detailed contingency plans are in place and continuously refined, whilst modest exposures to financial institutions domiciled in peripheral Eurozone countries continue to be managed within tight risk parameters.
CREDIT RISK PORTFOLIO (continued)
Financial Markets provides access to the external wholesale market to facilitate the Group's balance sheet management activities providing pricing and risk management solutions to both internal and external clients. Within Commercial Banking the portfolio comprises £3.9 billion of loans and advances to customers (excluding reverse repos), £5.7 billion of loans and advances to banks and £1.2 billion of available-for-sale debt securities.
The majority of funding and risk management activity is transacted with investment grade counterparties including Sovereign central banks and much of it is on a collateralised basis, suc
h as repos facing a Central Counterparty (CCP). Derivative transactions with Financial Institution counterparties are typically collateralised under a credit support annex in conjunction with the ISDA Master Agreement. The Group continues to consolidate its counterparty risk via CCP's as part of an ongoing move to reduce bilateral counterparty risk by clearing standardised derivative contracts.
Non-core
The non-core portfolio includes Corporate Real Estate and Specialist Finance (Acquisition Finance, Asset Based Finance and Treasury Assets).
Corporate Real Estate and other Corporate
Loans and advances to customers include the non-core Corporate Real Estate Business Support Unit (BSU) portfolio. Following successful asset reduction progress, this portfolio is now managed together with European Assets and other Corporate assets previously disclosed as Other non-core.
The impairment charge in this portfolio has fallen to £317 million in the first half of 2013 (30 June 2012: £662 million). The fall in the impairment charge reflects lower gross charges on a reduced portfolio, favourable market movements on impaired derivatives and the continuing proactive management.
The portfolio has reduced significantly ahead of expectations primarily due to the momentum on asset disposals which totalled £3.6 billion (net book value) in the half year. The non-core Corporate Real Estate BSU element of the portfolio reduced from £15.7 billion to £11.9 billion during the first half of 2013.
Over two thirds of the portfolio consists of non-core direct real estate loans. The remainder relates to loans to other real estate related sectors, supported by trading activities (such as housebuilders, hotels and care homes) which are managed by specialist teams. The principal aim is to minimise losses for the Group and to support the Group's clients through difficult periods. This activity can involve the restructuring of loans, seeking deleverage through asset sales and other sale initiatives. A consensual route with its clients is always the Group's preferred option. The portfolio remains regionally focused with real estate asset quality that is largely secondary and tertiary in nature. These assets have been the subject of frequent review, and have been impaired to appropriate levels. In assessing the Group's impairment provisions, allowance is taken for the Group's greater proportion of secondary real estate assets. Consequently a steeper fall in real estate prices, compared to the general market index expectations, is used to calculate impairment provisions.
CREDIT RISK PORTFOLIO (continued)
Specialist Finance
Loans and advances to customers include non-core Acquisition Finance (leverage lending) portfolio which falls into non-core since it is outside the Group's risk appetite, and the non-core Asset Based Finance portfolios (Ship Finance, Aircraft Finance, Infrastructure and Rail Capital). Total gross loans and advances reduced by £2.6 billion in the half year to 30 June 2013 mainly due to disposals of £2.2 billion (net book value).
Impairment charges in the non-core Acquisition Finance portfolio have continued to decline significantly, reflecting further reductions in the size of the portfolio.
The Ship Finance portfolio continues to exhibit stress due to falls in asset values across the key sectors (tankers, dry bulk and containers) and as a consequence impairment charges are running at similar levels to those experienced through 2012. The Group has continued its strategy of disposing these assets and several initiatives are planned to take place through the remainder of 2013.
In addition to loans and advances to customers, the non-core Specialist Finance portfolio also includes a significantly reduced Treasury Assets portfolio. This legacy investment portfolio mainly encompasses a portfolio of Asset-Backed Securities (ABS) and financial institution Covered Bond positions. The ABS portfolio was significantly reduced in the first six months of 2013 with disposals of £4.9 billion (net book value).
Other
The remaining non-core portfolios comprise balances in non-core Australian Corporate (£1.7 billion) and North America (£0.3 billion). The Australian Corporate business has continued to reshape and de-risk over the first half of 2013, decreasing impaired assets on its balance sheet in 2013. Residual exposure is predominantly investment grade focused.
CREDIT RISK PORTFOLIO (continued)
Secured loan to value analysis for UK Direct Real Estate lending in Commercial Banking
The Group classifies Direct Real Estate as exposure which is directly supported by cash flows from property activities, as opposed to trading activities (such as hotels, care homes and housebuilders). The Group manages its exposures to Direct Real Estate in a number of different business units.
Core UK Direct Real Estate
Approximately three quarters of loans and advances relate to commercial real estate with the remainder mostly residential real estate. A large element of the residential exposure is to professional landlords in the Group's SME business, where performance has been good. Approximately two thirds of the core commercial real estate portfolio was originated under heritage Lloyds TSB credit risk criteria. The Group's risk appetite requires it to look first at the underlying cash flows as part of credit assessment, alongside key requirements for good quality counterparties and a well spread tenant profile. The Group considers the value in security taken as a secondary repayment source, although its origination parameters for loan to values (based on heritage Lloyds TSB risk appetite) are considered through the cycle.
Non-core UK Direct Real Estate
The Group considers this portfolio to be appropriately provided for after taking into account the value of the collateral held. In the case of impaired UK direct real estate exposures (over £5 million) there is a net property collateral shortfall of approximately £0.2 billion. This figure excludes benefits of credit mitigants such as cross collateralisation and cross guarantees. The Group makes use of a variety of methodologies to assess the value of property collateral, where external valuations are not available. These include use of market indexes, models and subject matter expert judgement. Loan to value ratios (indexed or actual if within last 12 months) for the Group's largest transactions (over £5 million) are detailed in the table below.
LTVs - UK Direct Real Estate
|
At 30 June 2013 |
|
Core |
|
Non-core |
||||
|
|
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
Exposures > £5 million: |
|
|
|
|
|
|
|
|
|
Less than 60% |
|
4,209 |
|
41 |
|
686 |
|
8 |
|
61% to 70% |
|
1,344 |
|
13 |
|
310 |
|
4 |
|
71% to 80% |
|
2,116 |
|
21 |
|
470 |
|
6 |
|
81% to 100% |
|
1,142 |
|
11 |
|
1,702 |
|
20 |
|
101% to 125% |
|
149 |
|
1 |
|
1,140 |
|
14 |
|
More than 125% |
|
524 |
|
5 |
|
3,530 |
|
43 |
|
Unsecured |
|
809 |
|
8 |
|
455 |
|
5 |
|
|
|
10,293 |
|
100 |
|
8,293 |
|
100 |
|
Exposures < £5 million |
|
10,039 |
|
|
|
1,084 |
|
|
|
Total |
|
20,332 |
|
|
|
9,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2012 |
|
|
|
|
|
|
|
|
|
Exposures > £5 million: |
|
|
|
|
|
|
|
|
|
Less than 60% |
|
3,309 |
|
37 |
|
630 |
|
6 |
|
61% to 70% |
|
1,920 |
|
21 |
|
279 |
|
3 |
|
71% to 80% |
|
1,657 |
|
18 |
|
576 |
|
6 |
|
81% to 100% |
|
995 |
|
11 |
|
2,046 |
|
21 |
|
101% to 125% |
|
156 |
|
2 |
|
1,618 |
|
17 |
|
More than 125% |
|
185 |
|
2 |
|
4,200 |
|
43 |
|
Unsecured |
|
762 |
|
9 |
|
346 |
|
4 |
|
|
|
8,984 |
|
100 |
|
9,695 |
|
100 |
|
Exposures < £5 million |
|
9,667 |
|
|
|
2,398 |
|
|
|
Total |
|
18,651 |
|
|
|
12,093 |
|
|
CREDIT RISK PORTFOLIO (continued)
Wealth, Asset Finance and International
Overview
· The total Wealth, Asset Finance and International impairment charge was £450 million in the first half of 2013, a decrease of 55 per cent, against the first half of 2012. The decrease was primarily driven by the Irish portfolios.
· Across the aggregate Irish commercial real estate and corporate portfolios, 86.4 per cent (31 December 2012: 85.2 per cent) is now impaired with a coverage ratio of 73.0 per cent (31 December 2012: 68.0 per cent), primarily reflecting continued deterioration in the Irish commercial property market. Net exposure across the Irish commercial real estate and corporate portfolios has reduced to £4.5 billion (31 December 2012: £5.4 billion).
· In the Irish retail mortgage portfolio, impairment provisions as a percentage of impaired loans increased to 71.4 per cent (31 December 2012: 71.2 per cent).
Impairment charge
|
|
|
Half-year |
|
Half-year 2012 |
|
Change 2012 |
|
Half-year |
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
Wealth |
|
8 |
|
8 |
|
|
|
15 |
|
International: |
|
|
|
|
|
|
|
|
|
Ireland retail |
|
21 |
|
65 |
|
68 |
|
43 |
|
Ireland commercial real estate |
|
183 |
|
485 |
|
62 |
|
254 |
|
Ireland corporate |
|
181 |
|
347 |
|
48 |
|
51 |
|
Spain retail |
|
17 |
|
12 |
|
(42) |
|
39 |
|
Netherlands retail |
|
7 |
|
6 |
|
(17) |
|
17 |
|
Asia retail |
|
(3) |
|
6 |
|
|
|
29 |
|
Latin America and Middle East |
|
1 |
|
- |
|
|
|
(33) |
|
|
|
407 |
|
921 |
|
56 |
|
400 |
|
Asset Finance: |
|
|
|
|
|
|
|
|
|
United Kingdom |
|
31 |
|
54 |
|
43 |
|
67 |
|
Australia |
|
4 |
|
8 |
|
50 |
|
7 |
|
|
|
35 |
|
62 |
|
44 |
|
74 |
|
Total impairment charge |
|
450 |
|
991 |
|
55 |
|
489 |
|
|
|
|
|
|
|
|
|
|
|
Core |
|
|
|
|
|
|
|
|
|
Wealth |
|
8 |
|
8 |
|
|
|
15 |
|
International |
|
- |
|
1 |
|
|
|
(1) |
|
Asset Finance |
|
7 |
|
2 |
|
|
|
(3) |
|
Core impairment charge |
|
15 |
|
11 |
|
(36) |
|
11 |
|
|
|
|
|
|
|
|
|
|
|
Non-core |
|
|
|
|
|
|
|
|
|
Wealth |
|
- |
|
- |
|
|
|
- |
|
International |
|
407 |
|
920 |
|
56 |
|
401 |
|
Asset Finance |
|
28 |
|
60 |
|
53 |
|
77 |
|
Non-core impairment charge |
|
435 |
|
980 |
|
56 |
|
478 |
|
|
|
|
|
|
|
|
|
|
|
Impairment charge as a % of average advances |
|
2.10% |
|
3.99% |
|
(189)bp |
|
2.16% |
|
Core impairment charge as a % of average advances |
0.50% |
|
0.36% |
|
14bp |
|
0.55% |
|
|
Non-core impairment charge as a % of average advances |
|
2.37% |
|
4.42% |
|
(205)bp |
|
2.34% |
CREDIT RISK PORTFOLIO (continued)
Impaired loans and provisions
Total impaired loans decreased by £723 million to £13,285 million compared with £14,008 million at 31 December 2012 and as a percentage of closing loans and advances to customers increased to 33.4 per cent from 32.6 per cent at 31 December 2012. This is primarily driven by reductions in Ireland commercial real estate and corporate.
Impairment provisions as a percentage of impaired loans increased to 71.5 per cent from 67.5 per cent at 31 December 2012. The increase was driven by the International portfolios.
Wealth, Asset Finance and International
|
At 30 June 2013 |
Loans and |
|
Impaired loans |
|
Impaired as a % of closing advances |
|
Impairment provisions1 |
|
Impairment provisions as a % of impaired loans |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth |
|
3,381 |
|
258 |
|
7.6 |
|
75 |
|
29.1 |
|
International: |
|
|
|
|
|
|
|
|
|
|
|
Ireland retail |
|
6,870 |
|
1,608 |
|
23.4 |
|
1,158 |
|
72.0 |
|
Ireland commercial real estate |
7,197 |
|
6,574 |
|
91.3 |
|
4,936 |
|
75.1 |
|
|
Ireland corporate |
|
5,000 |
|
3,967 |
|
79.3 |
|
2,757 |
|
69.5 |
|
Spain retail |
|
- |
|
- |
|
|
|
- |
|
|
|
Netherlands retail |
|
5,823 |
|
82 |
|
1.4 |
|
44 |
|
53.7 |
|
Asia retail |
|
1,868 |
|
102 |
|
5.5 |
|
41 |
|
40.2 |
|
Latin America and Middle East |
|
25 |
|
19 |
|
76.0 |
|
24 |
|
|
|
|
|
26,783 |
|
12,352 |
|
46.1 |
|
8,960 |
|
72.5 |
|
Asset Finance: |
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
5,679 |
|
639 |
|
11.3 |
|
429 |
|
67.1 |
|
Australia |
|
3,990 |
|
36 |
|
0.9 |
|
40 |
|
|
|
|
|
9,669 |
|
675 |
|
7.0 |
|
469 |
|
69.5 |
|
Total gross lending |
|
39,833 |
|
13,285 |
|
33.4 |
|
9,504 |
|
71.5 |
|
Impairment provisions |
|
(9,504) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(12) |
|
|
|
|
|
|
|
|
|
Total |
|
30,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
|
|
|
|
|
|
|
|
|
|
Wealth |
|
3,381 |
|
258 |
|
7.6 |
|
75 |
|
29.1 |
|
International |
|
- |
|
- |
|
|
|
- |
|
|
|
Asset Finance |
|
2,352 |
|
62 |
|
2.6 |
|
25 |
|
40.3 |
|
Total core gross lending |
|
5,733 |
|
320 |
|
5.6 |
|
100 |
|
31.3 |
|
Impairment provisions |
|
(100) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
- |
|
|
|
|
|
|
|
|
|
Total core |
|
5,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core |
|
|
|
|
|
|
|
|
|
|
|
Wealth |
|
- |
|
- |
|
|
|
- |
|
|
|
International |
|
26,783 |
|
12,352 |
|
46.1 |
|
8,960 |
|
72.5 |
|
Asset Finance |
|
7,317 |
|
613 |
|
8.4 |
|
444 |
|
72.4 |
|
Total non-core gross lending |
|
34,100 |
|
12,965 |
|
38.0 |
|
9,404 |
|
72.5 |
|
Impairment provisions |
|
(9,404) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(12) |
|
|
|
|
|
|
|
|
|
Total non-core |
|
24,684 |
|
|
|
|
|
|
|
|
|
1 |
Impairment provisions include collective unimpaired provisions. |
CREDIT RISK PORTFOLIO (continued)
|
At 31 December 2012 |
Loans and |
|
Impaired loans |
|
Impaired as a % of closing advances |
|
Impairment provisions1 |
|
Impairment provisions as a % of impaired loans |
|
|
|
|
£m |
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth |
|
4,325 |
|
284 |
|
6.6 |
|
73 |
|
25.7 |
|
International: |
|
|
|
|
|
|
|
|
|
|
|
Ireland retail |
|
6,656 |
|
1,534 |
|
23.0 |
|
1,111 |
|
72.4 |
|
Ireland commercial real estate |
|
7,408 |
|
6,720 |
|
90.7 |
|
4,695 |
|
69.9 |
|
Ireland corporate |
|
5,467 |
|
4,247 |
|
77.7 |
|
2,768 |
|
65.2 |
|
Spain retail |
|
1,458 |
|
104 |
|
7.1 |
|
94 |
|
90.4 |
|
Netherlands retail |
|
5,689 |
|
79 |
|
1.4 |
|
41 |
|
51.9 |
|
Asia retail |
|
1,978 |
|
80 |
|
4.0 |
|
46 |
|
57.5 |
|
Latin America and Middle East |
|
46 |
|
36 |
|
78.3 |
|
31 |
|
86.1 |
|
|
|
28,702 |
|
12,800 |
|
44.6 |
|
8,786 |
|
68.6 |
|
Asset Finance: |
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
5,848 |
|
885 |
|
15.1 |
|
541 |
|
61.1 |
|
Australia |
|
4,052 |
|
39 |
|
1.0 |
|
53 |
|
|
|
|
|
9,900 |
|
924 |
|
9.3 |
|
594 |
|
64.3 |
|
Total gross lending |
|
42,927 |
|
14,008 |
|
32.6 |
|
9,453 |
|
67.5 |
|
Impairment provisions |
|
(9,453) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(28) |
|
|
|
|
|
|
|
|
|
Total |
|
33,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
|
|
|
|
|
|
|
|
|
|
Wealth |
|
4,325 |
|
284 |
|
6.6 |
|
73 |
|
25.7 |
|
International |
|
- |
|
- |
|
|
|
- |
|
|
|
Asset Finance |
|
1,090 |
|
67 |
|
6.1 |
|
12 |
|
17.9 |
|
Total core gross lending |
|
5,415 |
|
351 |
|
6.5 |
|
85 |
|
24.2 |
|
Impairment provisions |
|
(85) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
- |
|
|
|
|
|
|
|
|
|
Total core |
|
5,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core |
|
|
|
|
|
|
|
|
|
|
|
Wealth |
|
- |
|
- |
|
|
|
- |
|
|
|
International |
|
28,702 |
|
12,800 |
|
44.6 |
|
8,786 |
|
68.6 |
|
Asset Finance |
|
8,810 |
|
857 |
|
9.7 |
|
582 |
|
67.9 |
|
Total non-core gross lending |
|
37,512 |
|
13,657 |
|
36.4 |
|
9,368 |
|
68.6 |
|
Impairment provisions |
|
(9,368) |
|
|
|
|
|
|
|
|
|
Fair value adjustments |
|
(28) |
|
|
|
|
|
|
|
|
|
Total non-core |
|
28,116 |
|
|
|
|
|
|
|
|
|
1 |
Impairment provisions include collective unimpaired provisions. |
CREDIT RISK PORTFOLIO (continued)
Wealth
Total impaired loans decreased by £26 million to £258 million compared with £284 million at 31 December 2012. Impairment provisions as a percentage of impaired loans increased to 29.1 per cent from 25.7 per cent at 31 December 2012 as impairment provisions remained broadly stable at £75 million. The impairment charge for the first half of 2013 was unchanged from the first half of 2012 at £8 million.
International
Ireland
The Group continues to reduce its exposure to Ireland. Gross loans and advances reduced by £464 million during the first half of 2013 mainly due to disposals, write-offs and net repayments, partially offset by foreign exchange movements. Excluding foreign exchange movements, gross loans and advances reduced by £1,456 million.
Total impaired loans decreased by £352 million, or 2.8 per cent to £12,149 million compared with £12,501 million at 31 December 2012. The reduction is driven primarily by commercial real estate and corporate loans. Impaired loans as a percentage of closing loans and advances are broadly stable at 63.7 per cent. Continuing weakness in the Irish real estate markets resulted in a further increase in Ireland commercial real estate and corporate coverage in the first half of 2013 to 73.0 per cent.
Impairment charges decreased by £512 million to £385 million compared to the first half of 2012. The impairment charge as an annualised percentage of average loans and advances to customers decreased to 3.97 per cent compared to 7.53 per cent in the first half of 2012.
Ireland retail loans and advances to customers increased to £6,870 million from £6,656 million at 31 December 2012 due to movements in foreign exchange rates. On a local currency basis, loans and advances to customers reduced as the portfolio is closed to new business. Impaired loans as a percentage of loans and advances increased to 23.4 per cent from 23.0 per cent at 31 December 2012 as the portfolio is closed to new business. In the Irish retail mortgage portfolio impairment provisions as a percentage of impaired loans increased to 71.4 per cent (from 71.2 per cent at 31 December 2012.). Residential property prices have remained broadly stable.
The most significant contribution to impaired loans in Ireland is the Commercial Real Estate portfolio. Within the Commercial Real Estate portfolio, 91.3 per cent of the portfolio is now impaired (compared to 90.7 per cent at 31 December 2012). The impairment coverage ratio has increased in the year to 75.1 per cent (69.9 per cent 31 December 2012) reflecting the continued deterioration in commercial real estate prices in Ireland.
CREDIT RISK PORTFOLIO (continued)
Secured loan to value analysis for Commercial Real Estate lending in Ireland
Loan to value ratios (indexed or actual if within last 18 months) for the Group's largest transactions (over €5 million) are detailed in the table below. The Group considers this portfolio to be appropriately provided for after taking into account the provisions held for each transaction and the value of the collateral held. In the case of impaired Ireland commercial real estate exposures (over €5 million) there is a net property collateral shortfall of approximately £0.3 billion. This figure excludes benefits of credit mitigants such as cross collateralisation and cross guarantees. As a result of the market environment, market-based information on valuations is limited. The Group therefore makes use of a variety of methodologies to assess the value of property collateral. These include use of market indexes, models and subject matter expert judgement.
Loans and advances (gross)
|
|
|
At 30 June 2013 |
|
At 31 December 2012 |
||||
|
|
|
£m |
|
% |
|
£m |
|
% |
|
|
|
|
|
|
|
|
|
|
|
Exposures > €5 million: |
|
|
|
|
|
|
|
|
|
Less than 60% |
|
80 |
|
1 |
|
119 |
|
2 |
|
61% to 70% |
|
6 |
|
- |
|
20 |
|
- |
|
71% to 80% |
|
20 |
|
- |
|
27 |
|
- |
|
81% to 100% |
|
109 |
|
2 |
|
165 |
|
3 |
|
101% to 125% |
|
100 |
|
2 |
|
182 |
|
3 |
|
More than 125% |
|
4,421 |
|
74 |
|
4,927 |
|
81 |
|
Unsecured |
|
1,269 |
|
21 |
|
674 |
|
11 |
|
|
|
6,005 |
|
100 |
|
6,114 |
|
100 |
|
Exposures < €5 million |
|
1,192 |
|
|
|
1,294 |
|
|
|
Total |
|
7,197 |
|
|
|
7,408 |
|
|
Other International
Total impaired loans decreased by £96 million to £203 million compared with £299 million at 31 December 2012 driven by Latin America and Middle East and the sale of the Spain retail portfolio. In the Netherlands impaired loans remained stable at 1.4 per cent of closing loans and advances. Impairment provisions as a percentage of impaired loans increased to 53.7 per cent from 51.9 per cent at 31 December 2012 against a backdrop of falling residential property prices.
Asset Finance
United Kingdom - The impairment charge in the first half of 2013 reduced by 43 per cent to £31 million (of which £24 million related to non-core assets) compared with £54 million in the first half of 2012, driven by continued strong credit management and further improved credit quality. The retail portfolio saw more customers meeting their payment arrangements resulting in a lower proportion of people falling into arrears. The retail impairments also benefited from debt sale activity during the course of the half year. The number of defaults in all areas of the commercial and corporate lending book was low relative to the last 3 years, reflecting effective previous and ongoing credit risk management actions.
Australia - Impaired loans decreased by £3 million to £36 million compared with £39 million at 31 December 2012 and as a percentage of closing loans and advances decreased to 0.9 per cent from 1.0 per cent at 31 December 2012. The impairment charge in the first half of 2013 reduced by 50 per cent to £4 million. The Asset Finance business continues to benefit from strong credit management and improving credit quality supported by a resilient Australian economy.
EXPOSURES TO EUROZONE COUNTRIES
The following section summarises the Group's direct exposure to Eurozone countries at 30 June 2013. The exposures comprise on-balance sheet exposures based on their balance sheet carrying values and off-balance sheet exposures, and are based on the country of domicile of the counterparty unless otherwise indicated.
The Group manages its exposures to individual countries through authorised country limits which take into account economic, financial, political and social factors. In addition, the Group manages its direct risks to the selected countries by establishing and monitoring risk limits for individual banks, financial institutions, corporates and individuals.
Identified indirect exposure information is also taken into account when setting limits and determining credit risk appetite for individual counterparties. This forms part of the Group's credit analysis undertaken at least annually for counterparty and sector reviews, with interim updates performed as necessary. Interim updates would usually be triggered by specific credit events such as rating downgrades, sovereign events or other developments such as spread widening. Examples of indirect risk which have been identified are: European Banking groups with lending and other exposures to certain Eurozone Countries; corporate customers with operations or significant trade in certain European jurisdictions; major travel operators known to operate in certain Eurozone Countries; and international banks with custodian operations based in certain European locations.
The Group Financial Stability Forum (GFSF) monitors developments within the Eurozone, carries out stress testing through detailed scenario analysis and completes appropriate due diligence on the Group's exposures.
The GFSF has carried out a number of scenario analyses and rehearsals to test the Group's resilience in the event of further instability in certain Eurozone countries. The Group has developed and refined pre-determined action plans that would be executed in such scenarios. The plans set out governance requirements and responsibilities for the key actions which would be carried out and cover risk areas such as payments, liquidity and capital, communications, suppliers and systems, legal, credit, delivery channels and products, employees and the impact on customers.
The Group has included certain amounts on a net basis to better reflect the overall risk to which the Group is exposed. The gross IFRS reported values for the exposures to Ireland, Spain, Portugal, Italy and Greece are detailed in the following tables. Derivative balances are included within exposures to financial institutions or corporates, as appropriate, at fair value adjusted for master netting agreements at obligor level and net of cash collateral in line with legal agreements. Exposures in respect of reverse repurchase agreements are included on a gross IFRS basis and are disclosed based on the counterparty rather than the collateral (repos and stock lending are excluded); reverse repurchase exposures are not, therefore, reduced as a result of collateral held. Exposures to central clearing counterparties are shown net.
For multi-country asset backed securities exposures, the Group has reported exposures based on the largest country exposure. The country of exposure for asset backed securities is based on the location of the underlying assets which are predominantly residential mortgages not in the domicile of the issuer.
EXPOSURES TO EUROZONE COUNTRIES (continued)
Exposures to Ireland, Spain, Portugal, Italy and Greece
The Group continues to have minimal exposure, in aggregate, which could be considered to be direct recourse to the sovereign risk of the selected countries.
|
|
Sovereign |
|
|
Asset |
Corporate |
Personal |
Insurance |
|
Total |
|||||||||
|
Direct |
Cash at |
Financial |
||||||||||||||||
|
Banks |
|
Other |
||||||||||||||||
|
At 30 June 2013 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ireland |
|
- |
|
- |
|
115 |
|
1,200 |
|
184 |
|
5,236 |
|
5,704 |
|
103 |
|
12,542 |
|
Spain |
|
7 |
|
7 |
|
505 |
|
- |
|
34 |
|
2,203 |
|
52 |
|
20 |
|
2,828 |
|
Portugal |
|
- |
|
- |
|
32 |
|
- |
|
204 |
|
218 |
|
10 |
|
- |
|
464 |
|
Italy |
|
2 |
|
- |
|
55 |
|
18 |
|
11 |
|
128 |
|
- |
|
31 |
|
245 |
|
Greece |
|
- |
|
- |
|
- |
|
- |
|
- |
|
161 |
|
- |
|
- |
|
161 |
|
|
|
9 |
|
7 |
|
707 |
|
1,218 |
|
433 |
|
7,946 |
|
5,766 |
|
154 |
|
16,240 |
|
At 31 December 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ireland |
|
- |
|
- |
|
115 |
|
644 |
|
305 |
|
5,972 |
|
5,559 |
|
111 |
|
12,706 |
|
Spain |
|
5 |
|
14 |
|
1,170 |
|
7 |
|
132 |
|
2,110 |
|
1,472 |
|
25 |
|
4,935 |
|
Portugal |
|
- |
|
- |
|
118 |
|
- |
|
224 |
|
187 |
|
10 |
|
- |
|
539 |
|
Italy |
|
5 |
|
- |
|
44 |
|
- |
|
10 |
|
150 |
|
- |
|
37 |
|
246 |
|
Greece |
|
- |
|
- |
|
- |
|
- |
|
- |
|
277 |
|
- |
|
- |
|
277 |
|
|
|
10 |
|
14 |
|
1,447 |
|
651 |
|
671 |
|
8,696 |
|
7,041 |
|
173 |
|
18,703 |
Derivatives with sovereigns and sovereign referenced credit default swaps are insignificant. Exposures to other financial institutions relate primarily to balances held within insurance companies and funds. No impairments are held against these exposures.
At 30 June 2013, the Group's total gross derivative asset exposure to counterparties registered in the above countries was £711 million (31 December 2012: £754 million), offset by derivative liabilities of £267 million (31 December 2012: £278 million) and cash collateral held of £189 million (31 December 2012: £152 million). Within the following detailed tables, derivative assets are included within the carrying value column, and derivative liabilities and cash collateral are included within the netting column.
Assets held by the Insurance business are shareholder assets and are held outside the with-profits and unit-linked funds. Approximately £87 million (31 December 2012: £106 million) of these exposures relate to direct investments where the issuer is resident in Ireland, Spain, Portugal, Italy or Greece and the credit rating is consistent with the tight credit criteria defined under the appropriate investment mandate. The remaining exposures relate to interests in two funds domiciled in Ireland and administered by Scottish Widows Investment Partnership (the Global Liquidity Fund and the Short-Term Fund) where in line with the investment mandates, cash is invested in the money markets. For these funds, the exposure is analysed on a look through basis to the underlying assets held and the Insurance business's pro rata share of these assets rather than treating all the holding in the fund as exposure to Ireland. Within the above exposures there are no sovereign exposures.
The Group continued to reduce its exposure to these countries and exposures have been proactively managed down in line with its risk appetite. The Group's total exposure has reduced 13 per cent from £18,703 million to £16,240 million.
EXPOSURES TO EUROZONE COUNTRIES (continued)
Ireland
|
|
|
At 30 June 2013 |
|
At 31 December 2012 |
||||||||
|
|
|
Carrying |
|
Netting |
|
Net |
|
Carrying |
|
Netting |
|
Net |
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial institutions - banks |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
115 |
|
- |
|
115 |
|
47 |
|
- |
|
47 |
|
Net trading assets |
|
- |
|
- |
|
- |
|
7 |
|
- |
|
7 |
|
Available-for-sale |
|
- |
|
- |
|
- |
|
53 |
|
- |
|
53 |
|
Derivatives |
|
177 |
|
(177) |
|
- |
|
188 |
|
(180) |
|
8 |
|
|
|
292 |
|
(177) |
|
115 |
|
295 |
|
(180) |
|
115 |
|
Financial institutions - other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
918 |
|
- |
|
918 |
|
557 |
|
- |
|
557 |
|
Net trading assets |
|
277 |
|
- |
|
277 |
|
86 |
|
- |
|
86 |
|
Derivatives |
|
9 |
|
(4) |
|
5 |
|
4 |
|
(3) |
|
1 |
|
|
|
1,204 |
|
(4) |
|
1,200 |
|
647 |
|
(3) |
|
644 |
|
Asset backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
148 |
|
- |
|
148 |
|
216 |
|
- |
|
216 |
|
Available-for-sale |
|
36 |
|
- |
|
36 |
|
89 |
|
- |
|
89 |
|
|
|
184 |
|
- |
|
184 |
|
305 |
|
- |
|
305 |
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
4,503 |
|
- |
|
4,503 |
|
5,400 |
|
- |
|
5,400 |
|
Derivatives |
|
33 |
|
(1) |
|
32 |
|
39 |
|
(1) |
|
38 |
|
Off-balance sheet exposures |
|
701 |
|
- |
|
701 |
|
534 |
|
- |
|
534 |
|
|
|
5,237 |
|
(1) |
|
5,236 |
|
5,973 |
|
(1) |
|
5,972 |
|
Personal amortised cost |
|
5,704 |
|
- |
|
5,704 |
|
5,559 |
|
- |
|
5,559 |
|
Insurance assets |
|
103 |
|
- |
|
103 |
|
111 |
|
- |
|
111 |
|
Total |
|
12,724 |
|
(182) |
|
12,542 |
|
12,890 |
|
(184) |
|
12,706 |
The Group held impairment provisions of £7,058 million (31 December 2012: £6,597 million) against corporate amortised cost exposures and £1,177 million (31 December 2012: £1,111 million) against personal amortised cost exposures. £14 million (31 December 2012: £34 million) was included in reserves in respect of available-for-sale securities included in the table above.
In addition to the above balances, there are unutilised and uncommitted money market lines and repo facilities of approximately £0.5 billion (31 December 2012: £nil).
The Group has exposures to a structured vehicle incorporated in Ireland. In accordance with the reporting protocol outlined above, the exposures classified as bonds have been reported on the basis of the underlying country of risk, while other exposures have been reported against the country of registration of the structured vehicle.
The movement in the period within exposures to financial institutions is primarily due to reverse repurchase transactions secured primarily on UK gilts.
Personal exposures increased in the year due to the exchange rate movements, however on an underlying Euro basis, the exposures decreased by 2 per cent. See page 77 for further details on Irish corporate and personal exposures. The off-balance sheet exposures to corporates are principally undrawn facilities.
EXPOSURES TO EUROZONE COUNTRIES (continued)
Spain
|
|
|
At 30 June 2013 |
|
At 31 December 2012 |
||||||||
|
|
|
Carrying |
|
Netting |
|
Net |
|
Carrying |
|
Netting |
|
Net |
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct sovereign exposures |
|
7 |
|
- |
|
7 |
|
5 |
|
- |
|
5 |
|
Central bank balances |
|
7 |
|
- |
|
7 |
|
14 |
|
- |
|
14 |
|
|
|
14 |
|
- |
|
14 |
|
19 |
|
- |
|
19 |
|
Financial institutions - banks |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
26 |
|
- |
|
26 |
|
32 |
|
- |
|
32 |
|
Net trading assets |
|
17 |
|
- |
|
17 |
|
64 |
|
- |
|
64 |
|
Available-for-sale |
|
459 |
|
- |
|
459 |
|
1,055 |
|
- |
|
1,055 |
|
Derivatives |
|
227 |
|
(224) |
|
3 |
|
197 |
|
(178) |
|
19 |
|
|
|
729 |
|
(224) |
|
505 |
|
1,348 |
|
(178) |
|
1,170 |
|
Financial institutions - other |
|
- |
|
- |
|
- |
|
7 |
|
- |
|
7 |
|
Asset backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
10 |
|
- |
|
10 |
|
31 |
|
- |
|
31 |
|
Available-for-sale |
|
24 |
|
- |
|
24 |
|
101 |
|
- |
|
101 |
|
|
|
34 |
|
- |
|
34 |
|
132 |
|
- |
|
132 |
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
1,291 |
|
- |
|
1,291 |
|
1,427 |
|
- |
|
1,427 |
|
Net trading assets |
|
6 |
|
- |
|
6 |
|
1 |
|
- |
|
1 |
|
Derivatives |
|
163 |
|
(3) |
|
160 |
|
197 |
|
(5) |
|
192 |
|
Off-balance sheet exposures |
|
746 |
|
- |
|
746 |
|
490 |
|
- |
|
490 |
|
|
|
2,206 |
|
(3) |
|
2,203 |
|
2,115 |
|
(5) |
|
2,110 |
|
Personal |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
52 |
|
- |
|
52 |
|
1,414 |
|
- |
|
1,414 |
|
Off-balance sheet exposures |
|
- |
|
- |
|
- |
|
58 |
|
- |
|
58 |
|
|
|
52 |
|
- |
|
52 |
|
1,472 |
|
- |
|
1,472 |
|
Insurance assets |
|
20 |
|
- |
|
20 |
|
25 |
|
- |
|
25 |
|
Total |
|
3,055 |
|
(227) |
|
2,828 |
|
5,118 |
|
(183) |
|
4,935 |
Spanish exposure reduced considerably in the period, primarily due to the sale of retail banking business to Banco Sabadell. The Corporate banking business was retained and 81 per cent of the remaining £2,203 million corporate exposure is mainly local lending. This comprises of corporate loans and project finance facilities (89 per cent) and commercial real estate portfolio (11 per cent).
The Group held impairment provisions of £132 million (31 December 2012: £112 million) against corporate amortised cost exposures and £13 million (31 December 2012: £105 million) against personal amortised cost exposures. £78 million (31 December 2012: £220 million) was included in reserves in respect of available-for-sale securities included in the table above.
Included within exposures to banks, and treated as available-for-sale assets are covered bonds of £0.5 billion (31 December 2012: £1.1 billion), which are ultimately secured on a pool of mortgage assets in the countries concerned and benefit from over-collateralisation and have an overall weighted maturity of approximately five years. The Group has credit default swap positions referenced to banking groups domiciled in Spain (net short of £4.3 million), which are included in the balances detailed above, and unutilised and uncommitted money market lines and repo facilities of approximately £0.4 billion (31 December 2012: £1.0 billion) in respect of Spanish banks. Bank limits have been closely monitored with amounts and tenors reduced where appropriate.
EXPOSURES TO EUROZONE COUNTRIES (continued)
Portugal
|
|
|
At 30 June 2013 |
|
At 31 December 2012 |
||||||||
|
|
|
Carrying |
|
Netting |
|
Net |
|
Carrying |
|
Netting |
|
Net |
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial institutions - banks |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
11 |
|
- |
|
11 |
|
14 |
|
- |
|
14 |
|
Net trading assets |
|
21 |
|
- |
|
21 |
|
20 |
|
- |
|
20 |
|
Available-for-sale |
|
- |
|
- |
|
- |
|
83 |
|
- |
|
83 |
|
Derivatives |
|
4 |
|
(4) |
|
- |
|
5 |
|
(4) |
|
1 |
|
|
|
36 |
|
(4) |
|
32 |
|
122 |
|
(4) |
|
118 |
|
Asset backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
87 |
|
- |
|
87 |
|
119 |
|
- |
|
119 |
|
Available-for-sale |
|
117 |
|
- |
|
117 |
|
105 |
|
- |
|
105 |
|
|
|
204 |
|
- |
|
204 |
|
224 |
|
- |
|
224 |
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
91 |
|
- |
|
91 |
|
86 |
|
- |
|
86 |
|
Net trading assets |
|
8 |
|
- |
|
8 |
|
- |
|
- |
|
- |
|
Off-balance sheet exposures |
|
119 |
|
- |
|
119 |
|
101 |
|
- |
|
101 |
|
|
|
218 |
|
- |
|
218 |
|
187 |
|
- |
|
187 |
|
Personal amortised cost |
|
10 |
|
- |
|
10 |
|
10 |
|
- |
|
10 |
|
Total |
|
468 |
|
(4) |
|
464 |
|
543 |
|
(4) |
|
539 |
The Group held impairment provisions of £22 million (31 December 2012: £21 million) against corporate amortised cost exposures. £32 million (31 December 2012: £55 million) was included in reserves in respect of available-for-sale securities in the table above.
Greece
|
|
|
At 30 June 2013 |
|
At 31 December 2012 |
||||||||
|
|
|
Carrying |
|
Netting |
|
Net |
|
Carrying |
|
Netting |
|
Net |
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
154 |
|
- |
|
154 |
|
249 |
|
- |
|
249 |
|
Derivatives |
|
7 |
|
- |
|
7 |
|
12 |
|
- |
|
12 |
|
Off-balance sheet exposures |
|
- |
|
- |
|
- |
|
16 |
|
- |
|
16 |
|
Total |
|
161 |
|
- |
|
161 |
|
277 |
|
- |
|
277 |
The Group held impairment provisions of £33 million (31 December 2012: £40 million) against corporate amortised cost exposures.
The exposures in Greece principally relate to shipping loans to Greek shipping companies where the assets are generally secured and the vessels operate in international waters; repayment is mainly dependent on international trade and the industry is less sensitive to the Greek economy.
EXPOSURES TO EUROZONE COUNTRIES (continued)
Italy
|
|
|
At 30 June 2013 |
|
At 31 December 2012 |
||||||||
|
|
|
Carrying |
|
Netting |
|
Net |
|
Carrying |
|
Netting |
|
Net |
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct sovereign exposures |
|
2 |
|
- |
|
2 |
|
5 |
|
- |
|
5 |
|
Financial institutions - banks |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
16 |
|
- |
|
16 |
|
22 |
|
- |
|
22 |
|
Net trading assets |
|
38 |
|
- |
|
38 |
|
19 |
|
- |
|
19 |
|
Derivatives |
|
42 |
|
(41) |
|
1 |
|
58 |
|
(55) |
|
3 |
|
|
|
96 |
|
(41) |
|
55 |
|
99 |
|
(55) |
|
44 |
|
Financial institutions - other |
|
18 |
|
- |
|
18 |
|
- |
|
- |
|
- |
|
Asset backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
11 |
|
- |
|
11 |
|
10 |
|
- |
|
10 |
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
48 |
|
- |
|
48 |
|
76 |
|
- |
|
76 |
|
Net trading assets |
|
13 |
|
- |
|
13 |
|
4 |
|
- |
|
4 |
|
Derivatives |
|
49 |
|
(2) |
|
47 |
|
54 |
|
(4) |
|
50 |
|
Off-balance sheet exposures |
|
20 |
|
- |
|
20 |
|
20 |
|
- |
|
20 |
|
|
|
130 |
|
(2) |
|
128 |
|
154 |
|
(4) |
|
150 |
|
Insurance assets |
|
31 |
|
- |
|
31 |
|
37 |
|
- |
|
37 |
|
Total |
|
288 |
|
(43) |
|
245 |
|
305 |
|
(59) |
|
246 |
The Group held impairment provisions of £nil (31 December 2012: £2 million) against corporate amortised cost exposures. No balances were included in reserves in respect of available-for-sale securities in the table above.
In addition to the above balances there are unutilised and uncommitted money market lines and repo facilities of approximately £0.4 billion (31 December 2012: £0.2 billion) predominantly in respect of Italian banks. Bank limits have been closely monitored with amounts and tenors reduced where appropriate.
EXPOSURES TO EUROZONE COUNTRIES (continued)
In addition to the exposures detailed above, the Group has the following exposures to sovereigns, financial institutions, asset backed securities, corporates and personal customers in the following Eurozone countries:
|
|
Sovereign |
|
|
Asset |
Corporate |
Personal |
Insurance |
|
Total |
|||||||||
|
Direct |
Cash at |
|
Financial |
|
||||||||||||||
|
Banks |
|
Other |
||||||||||||||||
|
At 30 June 2013 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netherlands |
|
- |
|
18,931 |
|
1,476 |
|
55 |
|
211 |
|
2,372 |
|
5,779 |
|
980 |
|
29,804 |
|
France |
|
- |
|
- |
|
1,793 |
|
55 |
|
76 |
|
3,221 |
|
316 |
|
1,154 |
|
6,615 |
|
Germany |
|
332 |
|
1,890 |
|
1,153 |
|
72 |
|
292 |
|
1,661 |
|
- |
|
925 |
|
6,325 |
|
Luxembourg |
|
- |
|
- |
|
4 |
|
1,210 |
|
- |
|
1,418 |
|
- |
|
120 |
|
2,752 |
|
Belgium |
|
2 |
|
- |
|
475 |
|
- |
|
- |
|
744 |
|
- |
|
51 |
|
1,272 |
|
Austria |
|
- |
|
- |
|
3 |
|
- |
|
- |
|
275 |
|
- |
|
11 |
|
289 |
|
Finland |
|
- |
|
- |
|
15 |
|
- |
|
- |
|
9 |
|
- |
|
203 |
|
227 |
|
Malta |
|
- |
|
- |
|
6 |
|
- |
|
- |
|
97 |
|
- |
|
- |
|
103 |
|
Cyprus |
|
- |
|
- |
|
- |
|
- |
|
- |
|
31 |
|
- |
|
- |
|
31 |
|
Slovenia |
|
- |
|
- |
|
31 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
31 |
|
Estonia |
|
- |
|
- |
|
- |
|
- |
|
- |
|
2 |
|
- |
|
- |
|
2 |
|
|
|
334 |
|
20,821 |
|
4,956 |
|
1,392 |
|
579 |
|
9,830 |
|
6,095 |
|
3,444 |
|
47,451 |
|
At 31 December 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netherlands |
|
1 |
|
33,232 |
|
478 |
|
2 |
|
268 |
|
2,207 |
|
5,649 |
|
977 |
|
42,814 |
|
France |
|
6 |
|
- |
|
853 |
|
- |
|
77 |
|
3,226 |
|
312 |
|
1,457 |
|
5,931 |
|
Germany |
|
284 |
|
1,809 |
|
389 |
|
414 |
|
400 |
|
2,117 |
|
- |
|
977 |
|
6,390 |
|
Luxembourg |
|
- |
|
2 |
|
- |
|
834 |
|
- |
|
1,841 |
|
- |
|
71 |
|
2,748 |
|
Belgium |
|
- |
|
- |
|
309 |
|
25 |
|
- |
|
568 |
|
- |
|
64 |
|
966 |
|
Austria |
|
- |
|
- |
|
3 |
|
- |
|
- |
|
73 |
|
- |
|
- |
|
76 |
|
Finland |
|
- |
|
- |
|
16 |
|
- |
|
- |
|
43 |
|
- |
|
214 |
|
273 |
|
Malta |
|
- |
|
- |
|
- |
|
- |
|
- |
|
218 |
|
- |
|
- |
|
218 |
|
Cyprus |
|
- |
|
- |
|
2 |
|
- |
|
- |
|
102 |
|
- |
|
- |
|
104 |
|
Slovenia |
|
- |
|
- |
|
35 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
35 |
|
Estonia |
|
- |
|
- |
|
- |
|
- |
|
- |
|
2 |
|
- |
|
- |
|
2 |
|
|
|
291 |
|
35,043 |
|
2,085 |
|
1,275 |
|
745 |
|
10,397 |
|
5,961 |
|
3,760 |
|
59,557 |
Total balances with other Eurozone countries have decreased from £59,557 million to £47,451 million. This is primarily due to a decrease in Dutch central bank balances. Derivatives with sovereigns and sovereign referenced credit default swaps are insignificant.
EXPOSURES TO EUROZONE COUNTRIES (continued)
Eurozone redenomination risk
Redenomination risk arises from the uncertainty over how an exiting member state would deal with pre-incurred euro contractual liabilities and, in particular, whether it (or a competent European body) legislates to re-denominate such liabilities into a post-euro currency. It is generally expected that an exiting member state would introduce a new national currency and determine an opening rate of exchange, which would then change when trading commences in the new currency, exposing the holders of the new currency to the risk of changes in the value of the new currency against the Euro. Although considered less likely, multiple member exits may also take place, and in the case of a total dissolution of the Eurozone, the Euro may cease to be a valid currency, with the possibility of all states introducing their own currencies.
The Group has considered redenomination risk in respect of its exposures to Ireland, Spain, Portugal, Italy,Greece and Cyprus; and in the event of a member exit believes that the risks can be broadly classified as follows:
- The Group is not significantly exposed to the redenomination impact of a Greek exit from the Euro as Greek-related exposures are very limited and are in any case predominantly ship finance facilities denominated in US dollar or Sterling with contracts subject to English law. The Group's exposures to Italy, Ireland, Portugal, Spain and Cyprus are considered to be at potential risk of redenomination. Redenomination of contractual liabilities depends on, amongst other things, the terms of relevant contracts, the contents of the legislation passed by the exiting member state, the governing law and jurisdiction of the contract and the nationality of the parties of the contracts;
- The Group has undertaken actions to mitigate redenomination risk for both assets and liabilities where possible, but it is not clear that such mitigation will be effective in the event of a member exit; and
- The introduction of one or more new currencies would be likely to lead to significant operational issues for clearing and payment systems. The Group continues to work actively with central banks, regulators and with the main clearing and payment systems to better understand and mitigate the impact of these risks on the Group and its customers.
LIQUIDITY AND FUNDING MANAGEMENT
Liquidity and funding continues to remain a key area of focus for the Group and the industry as a whole. Like all major banks, the Group is dependent on confidence in the short and long-term wholesale funding markets. Should the Group, due to exceptional circumstances, be unable to continue to source sustainable funding, its ability to fund its financial obligations could be impacted.
During the first half of 2013 the Group continued the run down of the non-core asset portfolios. The continued successful right-sizing of the Group's balance sheet and the growth in customer deposits has strengthened the Group's funding position and reduced exposure to wholesale funding. In turn the improved funding position in 2013 has enabled the Group to repay early the full amount of the €13.5 billion Long Term Refinancing Operation funding from the European Central Bank and cancel other term funding totalling £8.7 billion. The combination of a strong balance sheet and access to a wide range of funding markets, including government schemes, provides the Group with a broad range of options with respect to funding the balance sheet in the remainder of 2013.
The key dependencies on successfully funding the Group's balance sheet include the continued functioning of the money and capital markets; successful right-sizing of the Group's balance sheet; limited further deterioration in the UK's and the Group's credit rating; and no significant or sudden withdrawal of customer deposits. Additionally, in 2009 the Group entered into a number of EU state aid related obligations one of which was reductions in certain parts of its balance sheet by the end of 2014. The Group has achieved the asset reduction commitment ahead of the mandated completion date and has received a formal release from this obligation from the European Commission. The Group notes the recent announcement from the Financial Policy Committee on the Liquidity Coverage Ratio and will work with the regulator to ensure regulatory requirements that are implemented are met.
The progress the Group has made to date in diversifying its funding sources has further strengthened its funding base. Funding concentration by counterparty is not considered significant by the Group. Where concentrations do exist (i.e. maturity profile); these are limited by the internal risk appetite and considered manageable.
Group funding sources
Total wholesale funding reduced by £12.6 billion to £157.0 billion, with the volume with a residual maturity less than one year remaining stable at £50.7 billion (£50.6 billion at 31 December 2012). The Group's term funding ratio (wholesale funding with a remaining life of over one year as a percentage of total wholesale funding) reduced to 68 per cent (70 per cent at 31 December 2012) as expected in line with maturities of wholesale term funding and limited term wholesale issuance for the half year to 30 June 2013.
LIQUIDITY AND FUNDING MANAGEMENT (continued)
Group funding position
|
|
|
At 2013 |
|
At 20121 |
|
Change |
|
|
|
£bn |
|
£bn |
|
% |
|
|
|
|
|
|
|
|
|
Funding requirement |
|
|
|
|
|
|
|
Loans and advances to customers2 |
|
503.9 |
|
512.1 |
|
(2) |
|
Loans and advances to banks3 |
|
7.8 |
|
12.5 |
|
(38) |
|
Debt securities |
|
1.7 |
|
5.3 |
|
(68) |
|
Reverse repurchase agreements |
|
0.8 |
|
- |
|
|
|
Available-for-sale financial assets - secondary4 |
|
2.6 |
|
5.3 |
|
(51) |
|
Cash balances5 |
|
3.4 |
|
3.5 |
|
(3) |
|
Funded assets |
|
520.2 |
|
538.7 |
|
(3) |
|
Other assets6 |
|
271.5 |
|
302.2 |
|
(10) |
|
|
|
791.7 |
|
840.9 |
|
(6) |
|
On balance sheet primary liquidity assets7 |
|
|
|
|
|
|
|
Reverse repurchase agreements |
|
2.0 |
|
5.8 |
|
(66) |
|
Balances at central banks - primary5 |
|
57.2 |
|
76.8 |
|
(26) |
|
Available-for-sale financial assets - primary |
|
33.9 |
|
26.1 |
|
30 |
|
Trading and fair value through profit and loss |
|
(7.9) |
|
(9.4) |
|
16 |
|
Repurchase agreements |
|
(0.1) |
|
(5.9) |
|
98 |
|
|
|
85.1 |
|
93.4 |
|
(9) |
|
Total Group assets |
|
876.8 |
|
934.3 |
|
(6) |
|
Less: Other liabilities6 |
|
(240.4) |
|
(277.8) |
|
13 |
|
Funding requirement |
|
636.4 |
|
656.5 |
|
(3) |
|
Funded by |
|
|
|
|
|
|
|
Customer deposits8 |
|
430.6 |
|
422.5 |
|
2 |
|
Wholesale funding9 |
|
157.0 |
|
169.6 |
|
(7) |
|
|
|
587.6 |
|
592.1 |
|
(1) |
|
Repurchase agreements |
|
5.1 |
|
21.8 |
|
(77) |
|
Total equity |
|
43.7 |
|
42.6 |
|
3 |
|
Total funding |
|
636.4 |
|
656.5 |
|
(3) |
|
1 |
Restated to reflect the implementation of IAS 19R and IFRS 10. See page 145. |
|
2 |
Excludes £1.9 billion (31 December 2012: £5.1 billion) of reverse repurchase agreements. |
|
3 |
Excludes £23.9 billion (31 December 2012: £19.6 billion) of loans and advances to banks within the Insurance business and £0.9 billion (31 December 2012: £0.7 billion) of reverse repurchase agreements. |
|
4 |
Secondary liquidity assets comprise a diversified pool of highly rated unencumbered collateral (including retained issuance). |
|
5 |
Cash balances and balances at central banks - primary are combined in the Group's balance sheet. |
|
6 |
Other assets and other liabilities primarily include balances in the Group's Insurance business and the fair value of derivative assets and liabilities. |
|
7 |
Primary liquidity assets are PRA eligible liquid assets including UK Gilts, US Treasuries, Euro AAA government debt and unencumbered cash balances held at central banks. |
|
8 |
Excluding repurchase agreements of £3.0 billion (31 December 2012: £4.4 billion). |
|
9 |
The Group's definition of wholesale funding aligns with that used by other international market participants; including interbank deposits, debt securities in issue and subordinated liabilities. |
LIQUIDITY AND FUNDING MANAGEMENT (continued)
Reconciliation of Group funding to the balance sheet
|
At 30 June 2013 |
|
Included in |
|
Repos |
|
Fair value |
|
Balance |
|
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
|
|
|
|
|
|
|
|
|
|
Deposits from banks |
|
12.0 |
|
2.2 |
|
- |
|
14.2 |
|
Debt securities in issue |
|
109.7 |
|
- |
|
(3.4) |
|
106.3 |
|
Subordinated liabilities |
|
35.3 |
|
- |
|
(1.1) |
|
34.2 |
|
Total wholesale funding |
|
157.0 |
|
2.2 |
|
|
|
|
|
Customer deposits |
|
430.6 |
|
3.0 |
|
- |
|
433.6 |
|
Total |
|
587.6 |
|
5.2 |
|
|
|
|
|
At 31 December 20121 |
|
Included in |
|
Repos |
|
Fair value |
|
Balance |
|
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
|
|
|
|
|
|
|
|
|
|
Deposits from banks |
|
15.1 |
|
23.3 |
|
- |
|
38.4 |
|
Debt securities in issue |
|
120.4 |
|
- |
|
(3.1) |
|
117.3 |
|
Subordinated liabilities |
|
34.1 |
|
- |
|
- |
|
34.1 |
|
Total wholesale funding |
|
169.6 |
|
23.3 |
|
|
|
|
|
Customer deposits |
|
422.5 |
|
4.4 |
|
- |
|
426.9 |
|
Total |
|
592.1 |
|
27.7 |
|
|
|
|
|
1 |
Restated to reflect the implementation of IAS 19R and IFRS 10. See page 145. |
Total wholesale funding by type and expected residual maturity is detailed below.
Analysis of 2013 total wholesale funding by residual maturity
|
|
Less |
One to |
Three |
Six to |
Nine |
One to |
Two to |
More |
Total |
Total |
||||||||||
|
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit from banks |
|
9.1 |
|
1.0 |
|
0.5 |
|
0.1 |
|
0.4 |
|
0.2 |
|
0.2 |
|
0.5 |
|
12.0 |
|
15.1 |
|
Debt securities in issue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
2.8 |
|
4.0 |
|
2.0 |
|
0.6 |
|
2.9 |
|
0.1 |
|
- |
|
- |
|
12.4 |
|
10.7 |
|
Commercial paper |
|
2.9 |
|
4.2 |
|
0.4 |
|
0.2 |
|
0.2 |
|
- |
|
- |
|
- |
|
7.9 |
|
7.9 |
|
Medium-term notes1 |
|
0.2 |
|
0.1 |
|
1.9 |
|
0.8 |
|
2.4 |
|
5.4 |
|
10.0 |
|
9.1 |
|
29.9 |
|
34.6 |
|
Covered bonds |
|
- |
|
- |
|
2.3 |
|
2.7 |
|
0.7 |
|
7.2 |
|
10.5 |
|
13.0 |
|
36.4 |
|
38.7 |
|
Securitisation |
|
0.3 |
|
2.0 |
|
1.9 |
|
2.8 |
|
0.9 |
|
5.1 |
|
10.1 |
|
- |
|
23.1 |
|
28.5 |
|
|
|
6.2 |
|
10.3 |
|
8.5 |
|
7.1 |
|
7.1 |
|
17.8 |
|
30.6 |
|
22.1 |
|
109.7 |
|
120.4 |
|
Subordinated liabilities |
|
- |
|
- |
|
- |
|
0.3 |
|
0.1 |
|
1.8 |
|
5.7 |
|
27.4 |
|
35.3 |
|
34.1 |
|
Total wholesale funding2 |
|
15.3 |
|
11.3 |
|
9.0 |
|
7.5 |
|
7.6 |
|
19.8 |
|
36.5 |
|
50.0 |
|
157.0 |
|
169.6 |
|
1 |
Medium-term notes include funding from the National Loan Guarantee Scheme (30 June 2013: £1.4 billion; 31 December 2012: £1.4 billion). |
|
2 |
The Group's definition of wholesale funding aligns with that used by other international market participants; including interbank deposits, debt securities in issue and subordinated liabilities. |
LIQUIDITY AND FUNDING MANAGEMENT (continued)
Total wholesale funding by currency
|
|
|
Sterling |
|
US Dollar |
|
Euro |
|
Other |
|
Total |
|
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
|
|
|
|
|
|
|
|
|
|
|
|
At 30 June 2013 |
|
47.9 |
|
44.7 |
|
53.6 |
|
10.8 |
|
157.0 |
|
At 31 December 2012 |
|
54.3 |
|
41.6 |
|
60.2 |
|
13.5 |
|
169.6 |
The commitment to a core loan to deposit ratio of 100 per cent and the decline in non-core assets has allowed the Group to reduce its wholesale funding balance through a combination of redemptions and debt buy backs. Total term issuance for the first half of 2013 has been through private placements and totals £0.7 billion (US Dollars: £0.2 billion; Euro: £0.4 billion; other currencies: £0.1 billion).
The Group drew down £3 billion during the year ended 31 December 2012 under the Government's Funding for Lending Scheme (FLS). No further drawings have been made during the first half of 2013.
The core loan to deposit ratio also improved to 100 per cent from 101 per cent at 31 December 2012. The Group intends to target a core loan to deposit ratio of 100 per cent throughout the year. The Group loan to deposit ratio has improved to 117 per cent compared with 121 per cent at 31 December 2012, driven by strong deposit growth and non-core asset reduction. Excluding reverse repos and repos loans and advances reduced by £8.2 billion; customer deposits increased by £8.1 billion, and there was a continued reduction in non-core assets (30 June 2013: £82.6 billion; 31 December 2012: £98.4 billion).
Encumbered assets
The Group has not issued in secured funding markets in the half year to 30 June 2013. Maturities have led to a reduction in externally held notes from residential mortgage backed securities and covered bonds issuance transactions. The Board monitors and manages total balance sheet encumbrance via a risk appetite metric. The table below summarises the assets encumbered through the Group's external issuance transactions.
LIQUIDITY AND FUNDING MANAGEMENT (continued)
Secured external issuance transactions
|
|
|
Notes issued |
Assets encumbered3 |
|
|
At 30 June 2013 |
|
£bn |
|
£bn |
|
|
|
|
|
|
|
Securitisations1 |
|
23.3 |
|
37.6 |
|
Covered bonds2 |
|
37.7 |
|
52.0 |
|
Total |
|
61.0 |
|
89.6 |
|
|
|
|
|
|
|
At 31 December 2012 |
|
|
|
|
|
|
|
|
|
|
|
Securitisations1 |
|
28.1 |
|
46.3 |
|
Covered bonds2 |
|
40.7 |
|
56.9 |
|
Total |
|
68.8 |
|
103.2 |
|
1 |
In addition the Group retained internally £44.5 billion (31 December 2012: £58.7 billion) of notes secured with £59.1 billion (31 December 2012: £71.9 billion) of assets. |
|
2 |
In addition the Group retained internally £25.8 billion (31 December 2012: £26.3 billion) of notes secured with £35.9 billion (31 December 2012: £37.5 billion) of assets. |
|
3 |
Pro-rated by programme (31 December: 2012 number restated on this basis). |
Total notes issued externally from secured programmes (asset backed securities and covered bonds) have fallen from £68.8 billion at 31 December 2012 to £61.0 billion. A total of £70.3 billion (31 December 2012: £85.0 billion) of notes issued under securitisation and covered bond programmes have also been retained internally, most of which are held to provide a pool of collateral eligible for use at central bank liquidity facilities. This reduction in retained notes partially reflects the Group's increased use of whole loans as eligible collateral at central banks.
The Group uses secured transactions to manage short-term cash and collateral needs. At 30 June 2013, the fair value of on balance sheet collateral (excluding assets within the Insurance business) pledged as security in repo and securities lending transactions was £20.5 billion (31 December 2012: £42.5 billion). Internally held notes, encumbered through repo activity or assets pledged, are included in these disclosure amounts. The early repayment of the full amount of €13.5 billion Long Term Refinancing Operation funding from the European Central Bank has significantly reduced the amount of internally held notes encumbered through repo activity. Within asset-backed commercial paper (ABCP) conduits that currently issue to the market, assets pledged as security for ABCP investors totalled £4.7 billion (31 December 2012: £4.7 billion).
LIQUIDITY AND FUNDING MANAGEMENT (continued)
Liquidity portfolio
At 30 June 2013, the Group had £86.5 billion (2012: £87.6 billion) of highly liquid unencumbered assets in its primary liquidity portfolio which are available to meet cash and collateral outflows, as illustrated in the table below. In addition the Group had £128.0 billion (2012: £117.1 billion) of secondary liquidity covering a range of ratings but all investment grade and central bank eligible. This liquidity is managed as a single pool in the centre and is under the control of the function charged with managing the liquidity of the Group. It is available for deployment at immediate notice, subject to complying with regulatory requirements, and is a key component of the Group's liquidity management process.
|
Primary liquidity |
|
At 2013 |
|
At 2012 |
|
Average 2013 |
|
Average |
|
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
|
|
|
|
|
|
|
|
|
|
Central bank cash deposits |
|
57.2 |
|
76.8 |
|
67.7 |
|
78.3 |
|
Government bonds |
|
29.3 |
|
10.8 |
|
18.2 |
|
21.1 |
|
Total |
|
86.5 |
|
87.6 |
|
85.9 |
|
99.4 |
|
Secondary liquidity |
|
At 2013 |
|
At 2012 |
|
Average 2013 |
|
Average |
|
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
|
|
|
|
|
|
|
|
|
|
High-quality ABS/covered bonds1 |
|
1.9 |
|
2.8 |
|
2.5 |
|
2.1 |
|
Credit institution bonds1 |
|
1.4 |
|
3.4 |
|
1.4 |
|
2.8 |
|
Corporate bonds1 |
|
0.1 |
|
0.1 |
|
0.1 |
|
0.1 |
|
Own securities (retained issuance) |
|
43.4 |
|
44.9 |
|
40.3 |
|
50.2 |
|
Other securities |
|
5.1 |
|
5.0 |
|
4.5 |
|
8.3 |
|
Other2 |
|
76.1 |
|
60.9 |
|
71.8 |
|
49.8 |
|
Total |
|
128.0 |
|
117.1 |
|
120.6 |
|
113.3 |
|
|
|
|
|
|
|
|
|
|
|
Total liquidity |
|
214.5 |
|
204.7 |
|
|
|
|
|
1 |
Assets rated A- or above. |
|
2 |
Includes other central bank eligible assets. |
Liquidity portfolio: currency
|
|
|
Sterling |
|
US Dollar |
|
Euro |
|
Other |
|
Total |
|
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
|
|
|
|
|
|
|
|
|
|
|
|
At 30 June 2013 |
|
|
|
|
|
|
|
|
|
|
|
Primary liquidity |
|
43.2 |
|
15.0 |
|
21.2 |
|
7.1 |
|
86.5 |
|
Secondary liquidity |
|
109.7 |
|
0.9 |
|
15.8 |
|
1.6 |
|
128.0 |
|
Total |
|
152.9 |
|
15.9 |
|
37.0 |
|
8.7 |
|
214.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2012 |
|
|
|
|
|
|
|
|
|
|
|
Primary liquidity |
|
42.2 |
|
7.2 |
|
36.5 |
|
1.7 |
|
87.6 |
|
Secondary liquidity |
|
109.2 |
|
1.6 |
|
4.7 |
|
1.6 |
|
117.1 |
|
Total |
|
151.4 |
|
8.8 |
|
41.2 |
|
3.3 |
|
204.7 |
The Group manages its risk appetite and liquidity position as a coverage ratio (proportion of stressed outflows covered by primary liquid assets) rather than by reference to a quantum of liquid assets; this corresponds with PRA liquidity requirements.
LIQUIDITY AND FUNDING MANAGEMENT (continued)
Primary liquid assets of £86.5 billion represent approximately 2.7 times (2.6 times at 31 December 2012) the Group's money market funding positions and are approximately 1.7 times (1.7 times at 31 December 2012) all wholesale funding with a maturity of less than one year, and thus provides a substantial buffer in the event of continued market dislocation.
In addition to primary liquidity holdings the Group has significant secondary liquidity holdings providing access to open market operations at a number of central banks which the Group routinely makes use of as part of its normal liquidity management practices. Future use of such facilities will be based on prudent liquidity management and economic considerations, having regard for external market conditions.
Stress testing results
Internal stress testing results at the end of June 2013 show that the Group has liquidity resources representing 170 per cent of modelled outflows from all wholesale funding sources, retail and corporate deposits, intra-day requirements and rating dependent contracts under the Group's most severe liquidity stress scenario (the three month combined (market wide and Group specific) scenario).
The Group's stress testing assumes that further credit rating downgrades may reduce investor appetite for some of the Group's liability classes and therefore funding capacity. A hypothetical idiosyncratic two notch downgrade of the Group's current long-term debt rating and accompanying short-term downgrade implemented instantaneously by all major rating agencies, could result in an outflow of £12.3 billion of cash over a period of up to one year, £3.6 billion of collateral posting related to customer financial contracts and £17.9 billion of collateral posting associated with secured funding. The Group's internal liquidity risk appetite includes such a stress scenario. The stress scenario modelling demonstrates the Group has available liquidity resources to manage such an event.
Group borrowing costs
The Group's borrowing costs and issuance in the capital markets are dependent on a number of factors, and increased cost or reduction of capacity could materially adversely affect the Group's results of operations, financial condition and prospects. In particular, reduction in the credit rating of the Group or deterioration in the capital markets' perception of the Group's financial resilience could significantly increase its borrowing costs and limit its issuance capacity in the capital markets. In November 2012, Standard & Poor's revised its outlook on the Group's long term rating to negative from stable. As an indicator over the last six months the spread between an index of A rated long-term senior unsecured bank debt and an index of similar BBB rated bank debt, both of which are publicly available, averaged 0.94 per cent. The applicability to and implications for the Group's funding cost would depend on the type of issuance, and prevailing market conditions. The impact on the Group's funding cost is subject to a number of assumptions and uncertainties and is therefore impossible to quantify precisely. However, with a materially lower wholesale refinancing requirement, this risk is lower than in previous years.
CAPITAL MANAGEMENT
The Group continues to actively manage its capital position and has made significant progress in further strengthening that position through its strongly capital generative strategy, including capital-efficient profit generation in the core business, the release of capital through non-core asset disposals and the successful delivery of management actions.
As a result the Group's core tier 1 ratio, based on current rules, has increased from 12.0 per cent to 13.7 per cent and, on an estimated pro forma fully loaded CRD IV basis, has increased from 8.1 per cent to 9.6 per cent over the half year, ahead of expectations.
The Group's leverage ratio is 4.2 per cent on an estimated pro forma fully loaded CRD IV basis with ineligible tier 1 instruments grandfathered, and is 3.5 per cent including only common equity (core) tier 1 capital resources, comfortably exceeding the Basel Committee's 3 per cent minimum requirement.
By the year end the Group expects to meet the additional requirements agreed with the PRA following the FPC's recommendations, without recourse to further equity issuance or the utilisation of additional contingent capital securities. The Group expects its estimated pro forma fully loaded CRD IV common equity (core) tier 1 ratio to increase to above 10 per cent by the end of 2013, twelve months ahead of plan.
Capital position at 30 June 2013
The Group's capital position, at 30 June 2013 and applying the existing regulatory framework, is set out in the following section. Additionally, estimated pro forma information about the Group's capital position on a CRD IV basis is set out on page 100.
CAPITAL MANAGEMENT (continued)
Capital Ratios
|
Capital resources |
|
At |
|
At |
|
|
|
£m |
|
£m |
|
|
|
|
|
|
|
Core tier 1 |
|
|
|
|
|
Shareholders' equity per balance sheet |
|
43,364 |
|
43,999 |
|
Non-controlling interests per balance sheet |
|
323 |
|
685 |
|
Regulatory adjustments: |
|
|
|
|
|
Regulatory adjustments to non-controlling interests |
|
(285) |
|
(628) |
|
Adjustment for own credit |
|
213 |
|
217 |
|
Defined benefit pension adjustment |
|
(662) |
|
(1,438) |
|
Unrealised reserve on available-for-sale debt securities |
|
613 |
|
(343) |
|
Unrealised reserve on available-for-sale equity investments |
|
(54) |
|
(56) |
|
Cash flow hedging reserve |
|
(124) |
|
(350) |
|
Other items |
|
349 |
|
33 |
|
|
|
43,737 |
|
42,119 |
|
Less: deductions from core tier 1 |
|
|
|
|
|
Goodwill |
|
(2,016) |
|
(2,016) |
|
Intangible assets |
|
(1,794) |
|
(2,091) |
|
50 per cent excess of expected losses over impairment provisions |
|
(311) |
|
(636) |
|
50 per cent of securitisation positions |
|
(56) |
|
(183) |
|
Core tier 1 capital |
|
39,560 |
|
37,193 |
|
Non-controlling preference shares1 |
|
1,602 |
|
1,568 |
|
Preferred securities1 |
|
4,070 |
|
4,039 |
|
Less: deductions from tier 1 |
|
|
|
|
|
50 per cent of material holdings |
|
(4,273) |
|
(46) |
|
Total tier 1 capital |
|
40,959 |
|
42,754 |
|
|
|
|
|
|
|
Tier 2 |
|
|
|
|
|
Undated subordinated debt |
|
1,962 |
|
1,828 |
|
Dated subordinated debt |
|
19,811 |
|
19,886 |
|
Unrealised gains on available-for-sale equity investments provisions |
|
54 |
|
56 |
|
Eligible provisions |
|
705 |
|
977 |
|
Less: deductions from tier 2 |
|
|
|
|
|
50 per cent excess of expected losses over impairment provisions |
|
(311) |
|
(636) |
|
50 per cent of securitisation positions |
|
(56) |
|
(183) |
|
50 per cent of material holdings |
|
(4,273) |
|
(46) |
|
Total tier 2 capital |
|
17,892 |
|
21,882 |
|
|
|
|
|
|
|
Supervisory deductions |
|
|
|
|
|
Unconsolidated investments - life |
|
- |
|
(10,104) |
|
- general insurance and other |
|
- |
|
(929) |
|
Total supervisory deductions |
|
- |
|
(11,033) |
|
Total capital resources |
|
58,851 |
|
53,603 |
|
|
|
|
|
|
|
Risk-weighted assets |
|
288,730 |
|
310,299 |
|
Core tier 1 capital ratio |
|
13.7% |
|
12.0% |
|
Tier 1 capital ratio |
|
14.2% |
|
13.8% |
|
Total capital ratio |
|
20.4% |
|
17.3% |
|
1 |
Covered by grandfathering provisions issued by the FSA. |
|
2 |
31 December 2012 comparatives have not been restated to reflect the implementation of IAS 19R and IFRS 10. |
CAPITAL MANAGEMENT (continued)
The movements in core tier 1, tier 1, tier 2 and total capital in the period are shown below:
Movements in capital
|
|
|
Core tier 1 |
|
Tier 1 |
|
Tier 2 |
Supervisory deductions |
|
Total |
|
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December 20121 |
|
37,193 |
|
5,561 |
|
21,882 |
|
(11,033) |
|
53,603 |
|
Profit attributable to ordinary shareholders |
|
1,560 |
|
- |
|
- |
|
- |
|
1,560 |
|
Share issuance |
|
493 |
|
- |
|
- |
|
- |
|
493 |
|
Pension movements: |
|
|
|
|
|
|
|
|
|
|
|
Deduction of pension asset |
776 |
|
- |
|
- |
|
- |
|
776 |
|
|
Movement through other comprehensive income |
(1,348) |
|
- |
|
- |
|
- |
|
(1,348) |
|
|
Goodwill and intangible assets deductions |
|
297 |
|
- |
|
- |
|
- |
|
297 |
|
Excess of expected losses over impairment provisions |
325 |
|
- |
|
325 |
|
- |
|
650 |
|
|
Material holdings deduction |
|
- |
|
(4,227) |
|
(4,227) |
|
11,033 |
|
2,579 |
|
Eligible provisions |
|
- |
|
- |
|
(272) |
|
- |
|
(272) |
|
Subordinated debt movements: |
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange |
|
- |
|
268 |
|
754 |
|
- |
|
1,022 |
|
New issuances |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Repurchases, redemptions, amortisation and other |
|
- |
|
(203) |
|
(695) |
|
- |
|
(898) |
|
Other movements |
|
264 |
|
- |
|
125 |
|
- |
|
389 |
|
At 30 June 2013 |
|
39,560 |
|
1,399 |
|
17,892 |
|
- |
|
58,851 |
|
1 |
31 December 2012 comparatives have not been restated to reflect the implementation of IAS 19R and IFRS 10. |
Core tier 1 capital resources have increased by £2,367 million in the period largely driven by attributable profit and share issuances partially offset by movements relating to defined benefit pension schemes. The movements relating to pension schemes primarily reflect the impact of the adoption of amendments to IAS 19 whereby valuation impacts relating to Group defined benefit schemes flow through other comprehensive income, partially offset by a reduction in the regulatory deduction of the defined benefit pension scheme asset.
Tier 1 and tier 2 capital resources have reduced primarily due to the reallocation of unconsolidated investments in life and general insurance businesses, which were previously deducted as supervisory deductions from total capital, to become deductions from tier 1 capital (50 per cent of the total) and tier 2 capital (also 50 per cent).
The material holdings deduction from capital, predominantly relating to the Group's investment in its insurance businesses, has reduced by £2,579 million during the period reflecting payment by the insurance businesses to the banking group of dividends totalling £1,555 million, elements of the Group's subordinated debt holdings in the insurance business that have been repaid following the issuance of external subordinated debt in the period and the partial disposal of the Group's holding in St. James's Place plc.
CAPITAL MANAGEMENT (continued)
|
Risk-weighted assets |
|
At 2013 |
|
At 2012 |
|
|
|
£m |
|
£m |
|
|
|
|
|
|
|
Divisional analysis of risk-weighted assets: |
|
|
|
|
|
Retail |
|
91,600 |
|
95,470 |
|
Commercial Banking |
|
150,489 |
|
165,209 |
|
Wealth, Asset Finance and International |
|
32,167 |
|
36,167 |
|
Group Operations and Central items |
|
14,474 |
|
13,453 |
|
|
|
288,730 |
|
310,299 |
|
|
|
|
|
|
|
Risk type analysis of risk-weighted assets: |
|
|
|
|
|
Foundation IRB |
|
86,396 |
|
80,612 |
|
Retail IRB |
|
86,892 |
|
91,445 |
|
Other IRB |
|
9,199 |
|
12,396 |
|
IRB approach |
|
182,487 |
|
184,453 |
|
Standardised approach |
|
57,917 |
|
73,665 |
|
Credit risk |
|
240,404 |
|
258,118 |
|
Operational risk |
|
27,939 |
|
27,939 |
|
Market and counterparty risk |
|
20,387 |
|
24,242 |
|
Total risk-weighted assets |
|
288,730 |
|
310,299 |
Risk-weighted assets reduced by £21,569 million to £288,730 million, a decrease of 7 per cent. Management of the balance sheet, mainly non-core asset disposals, reduced risk weighted assets by £11,177 million. Movements in external economic factors (for example house price index, foreign exchange movements and changes in risk ratings) contributed to a £5,923 million reduction. Recalibration of models in order to comply with updated regulatory requirements, principally the implementation of slotting models relating to Corporate Real Estate (CRE) and other exposures in the UK and Ireland, reduced risk weighted assets by £4,331 million. Other factors, including other model updates, contributed to a £138 million decrease.
Retail risk-weighted assets reduced by £3,870 million primarily due to a reduction in lending balances and improvements in credit quality of retail assets. Credit quality strengthened due to ongoing effective portfolio management and positive macroeconomic factors.
The reductions of risk-weighted assets of £14,720 million in Commercial Banking and £4,000 million in Wealth, Asset Finance and International primarily reflect further non-core asset reduction and the move to slotting models for CRE businesses. The reduction in Standardised approach risk weighted assets and increase in Foundation IRB risk-weighted assets, is also partly due to the implementation of slotting models in the period, resulting in a reclassification between asset categories.
Pro forma CRD IV Capital and Leverage information
The data in the following tables represents estimates reflecting the Group's current interpretation of the final CRD IV rules which were published on 27 June 2013 via the Official Journal of the European Union. The actual capital ratios under CRD IV may differ as the final rules are assessed in their entirety, related technical standards are published and other guidance is issued by the relevant regulatory bodies. The actual ratios will also be dependent on required regulatory approvals and the extent to which further management action is undertaken prior to implementation.
A number of draft technical standards have already been issued by the European Banking Authority (EBA). The Group has not reflected the impact of these draft standards though it does not currently believe that these would make a material difference to the capital position outlined below.
CAPITAL MANAGEMENT (continued)
Capital position on a CRD IV basis
The Group's capital position at 30 June 2013 calculated on current regulatory rules and also estimated on a pro forma basis, applying the CRD IV rules and assuming existing regulatory waivers still apply, is shown in the table below.
The pro forma CRD IV capital resources and risk weighted assets shown reflect estimates of the impact of the CRD IV rules on both a transitional basis, as if 2013 is the first year of transition, and on a fully loaded basis (referred to as the CRD IV 'end-point definition' in PRA documentation).
Disclosure of the Group's CRD IV transitional and fully loaded capital positions at 30 June 2013 in accordance with the format prescribed in the draft EBA technical standard on Own Funds disclosure has been published on the Group's website www.lloydsbankinggroup.com/investors/financial_performance/company_results.asp. A similar table was published within the Group's Pillar 3 disclosures for December 2012. The template lays out the expected CRD IV capital positions for 30 June 2013 on the same basis as shown in the table below.
CAPITAL MANAGEMENT (continued)
Capital position on CRD IV basis
|
|
|
|
|
Pro forma CRD IV rules |
||
|
At 30 June 2013 |
|
Current rules |
|
Transitional estimate |
Fully loaded estimate |
|
|
|
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
Core/common equity tier 1 (CET1) |
|
|
|
|
|
|
|
Shareholders' equity per balance sheet |
|
43,364 |
|
43,364 |
|
43,364 |
|
Regulatory adjustments: |
|
|
|
|
|
|
|
Non-controlling interests |
|
38 |
|
31 |
|
- |
|
Unrealised reserves on available-for-sale assets |
|
559 |
|
447 |
|
- |
|
Other adjustments |
|
(224) |
|
(686) |
|
(686) |
|
|
|
43,737 |
|
43,156 |
|
42,678 |
|
less: deductions from core/common equity tier 1 |
|
|
|
|
|
|
|
Goodwill and other intangible assets |
|
(3,810) |
|
(762) |
|
(3,810) |
|
Excess of expected losses over impairment provisions |
|
(311) |
|
(134) |
|
(670) |
|
Securitisation deductions |
|
(56) |
|
(112) |
|
(112) |
|
Significant investments |
|
- |
|
(723) |
|
(3,820) |
|
Deferred tax assets |
|
- |
|
- |
|
(5,649) |
|
Excess AT1 deductions reallocated to CET1 |
|
- |
|
(921) |
|
- |
|
Core/common equity tier 1 capital |
|
39,560 |
|
40,504 |
|
28,617 |
|
|
|
|
|
|
|
|
|
Additional tier 1 (AT1) |
|
|
|
|
|
|
|
Additional tier 1 instruments |
|
5,672 |
|
4,512 |
|
- |
|
less: deductions from tier 1 |
|
|
|
|
|
|
|
Goodwill and other intangible assets |
|
- |
|
(3,048) |
|
- |
|
Excess of expected losses over impairment provisions |
|
- |
|
(268) |
|
- |
|
Significant investments |
|
(4,273) |
|
(2,117) |
|
- |
|
Reallocated excess AT1 deductions to CET1 |
|
- |
|
921 |
|
- |
|
Total tier 1 capital |
|
40,959 |
|
40,504 |
|
28,617 |
|
|
|
|
|
|
|
|
|
Tier 2 |
|
|
|
|
|
|
|
Tier 2 instruments |
|
21,773 |
|
22,250 |
|
19,240 |
|
Unrealised gain on available-for-sale equity investments |
|
54 |
|
43 |
|
- |
|
Eligible provisions |
|
705 |
|
470 |
|
470 |
|
less: deductions from tier 2 |
|
|
|
|
|
|
|
Excess of expected losses over impairment provisions |
|
(311) |
|
(268) |
|
- |
|
Securitisation deductions |
|
(56) |
|
- |
|
- |
|
Significant investments |
|
(4,273) |
|
(2,456) |
|
(1,692) |
|
Subsidiary surplus tier 2 |
|
- |
|
(13) |
|
(64) |
|
less: deductions from total capital |
|
|
|
|
|
|
|
Significant investments |
|
- |
|
- |
|
- |
|
Total capital resources |
|
58,851 |
|
60,530 |
|
46,571 |
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
288,730 |
|
300,383 |
|
299,606 |
|
Core/common equity tier 1 capital ratio |
|
13.7% |
|
13.5% |
|
9.6% |
|
Tier 1 capital ratio |
|
14.2% |
|
13.5% |
|
9.6% |
|
Total capital ratio |
|
20.4% |
|
20.2% |
|
15.5% |
|
|
|
|
|
|
|
|
|
31 December 20121 |
|
|
|
|
|
|
|
Risk-weighted assets |
|
310,299 |
|
322,468 |
|
321,097 |
|
Core/common equity tier 1 capital ratio |
|
12.0% |
|
11.6% |
|
8.1% |
|
Tier 1 capital ratio |
|
13.8% |
|
11.6% |
|
8.1% |
|
Total capital ratio |
|
17.3% |
|
16.7% |
|
11.3% |
|
1 |
As disclosed at 31 December 2012. |
CAPITAL MANAGEMENT (continued)
The movements in fully loaded common equity tier 1, tier 1, tier 2 and total capital in the period under estimated pro forma CRD IV rules are shown below:
Movements in capital
|
|
|
Common equity tier 1 |
|
Tier 1 |
|
Tier 2 |
|
Total |
|
|
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2012 |
|
25,858 |
|
- |
|
10,293 |
|
36,151 |
|
Profit attributable to ordinary shareholders |
|
1,560 |
|
- |
|
- |
|
1,560 |
|
Share issuance |
|
493 |
|
- |
|
- |
|
493 |
|
Pension movements: |
|
|
|
|
|
|
|
|
|
Deduction of pension asset |
|
776 |
|
- |
|
- |
|
776 |
|
Movement through other comprehensive income |
(1,348) |
|
- |
|
- |
|
(1,348) |
|
|
Available-for-sale reserve |
|
(958) |
|
- |
|
- |
|
(958) |
|
Deferred tax asset |
|
6 |
|
- |
|
- |
|
6 |
|
Goodwill and intangible assets deductions |
|
297 |
|
- |
|
- |
|
297 |
|
Excess of expected losses over impairment provisions |
602 |
|
- |
|
- |
|
602 |
|
|
Significant investment deduction |
|
1,245 |
|
- |
|
1,215 |
|
2,460 |
|
Eligible provisions |
|
- |
|
- |
|
470 |
|
470 |
|
Subordinated debt movements: |
|
|
|
|
|
|
|
|
|
Foreign exchange |
|
- |
|
- |
|
544 |
|
544 |
|
Restructuring to ensure CRD IV compliance |
|
- |
|
- |
|
6,748 |
|
6,748 |
|
Repurchases, redemptions and other |
|
- |
|
- |
|
(1,622) |
|
(1,622) |
|
Other movements |
|
86 |
|
- |
|
306 |
|
392 |
|
At 30 June 2013 |
|
28,617 |
|
- |
|
17,954 |
|
46,571 |
Common equity tier 1 capital resources have increased by £2,759 million in the period. In addition to the movements noted in current rules section on page 98, the further increase is largely driven by the £1,555 million dividend from the insurance businesses.
Tier 2 capital resources have increased by £7,661 million in the period, largely driven by management actions on subordinated debt to ensure full compliance with CRD IV rules.
Leverage ratio on a CRD IV basis
The Basel III reforms include the introduction of a capital leverage measure defined as the ratio of tier 1 capital to total exposure. This is intended to reinforce the risk based capital requirements with a simple, non-risk based 'backstop' measure. The Basel Committee have proposed that final adjustments to the definition and calibration of the leverage ratio be carried out in 2017, with a view to migrating to a Pillar 1 treatment in 2018.
In the interim, the PRA has asked the Group to publish the estimated leverage ratio on a fully loaded CRD IV basis, with and without ineligible tier 1 instruments, to indicate the approximate leverage ratio that the Group would have now were the CRD IV rules fully implemented. The application of the CRD IV rules has been adjusted in accordance with PRA requirements that require the exposure value to be calculated on the basis of the original December 2010 Basel III proposals, as interpreted through guidance released in 2012. The Group considers there to be minimal difference between the ratios calculated per the basis prescribed by the PRA and the final CRD IV rules.
CAPITAL MANAGEMENT (continued)
The Group's estimates of its leverage ratio at 30 June 2013 are shown in the table below on three different bases:
- The 'CRD IV Transitional' basis uses the tier 1 capital calculated by applying the CRD IV rules on a transitional basis as if 2013 is the first year of transition. The tier 1 capital amount corresponds to that shown in the second column of the table on page 101.
- The 'CRD IV fully loaded' basis uses the tier 1 capital calculated by applying the CRD IV rules without applying any transitional provisions and corresponds to the amount shown in the third column in the table on page 101.
- The 'CRD IV fully loaded with ineligible tier 1 instruments grandfathered' basis uses the tier 1 capital calculated by applying the CRD IV rules without transition, with the exception that tier 1 instruments which will be ineligible once the transitional phase has elapsed are counted in full.
Leverage ratio on a CRD IV basis
|
|
|
Pro forma CRD IV rules |
||||
|
At 30 June 2013 |
|
Transitional estimate |
Fully loaded estimate |
Fully loaded estimate (with ineligible tier 1 instruments grandfathered) |
||
|
|
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
Total tier 1 capital for leverage ratio |
|
|
|
|
|
|
|
Common equity tier 1 |
|
40,504 |
|
28,617 |
|
28,617 |
|
Tier 1 subordinated debt allowable for leverage |
|
4,512 |
|
- |
|
5,672 |
|
Tier 1 deductions |
|
(4,512) |
|
- |
|
- |
|
|
|
40,504 |
|
28,617 |
|
34,289 |
|
Exposures for leverage ratio |
|
|
|
|
|
|
|
Total statutory balance sheet assets |
|
876,779 |
|
876,779 |
|
876,779 |
|
Adjustment for insurance assets |
|
(69,892) |
|
(83,631) |
|
(83,631) |
|
Removal of accounting value for derivatives and securities financing transactions |
|
(69,127) |
|
(69,127) |
|
(69,127) |
|
Exposure value for derivatives and securities financing transactions |
|
23,514 |
|
23,514 |
|
23,514 |
|
Off-balance sheet including unconditionally cancellable |
|
81,108 |
|
81,108 |
|
81,108 |
|
Other regulatory adjustments |
|
(5,572) |
|
(11,489) |
|
(11,489) |
|
Total exposures |
|
836,810 |
|
817,154 |
|
817,154 |
|
|
|
|
|
|
|
|
|
Leverage ratio |
|
4.8% |
|
3.5% |
|
4.2% |
|
Leverage ratio at 31 December 20121 |
|
4.4% |
|
3.1% |
|
3.8% |
|
1 |
As disclosed at 31 December 2012. |
Exposure values for derivatives and securities financing transactions have been calculated in accordance with the methodologies under the leverage ratio rules as prescribed by the PRA.
To ensure that the capital and exposure components of the ratio are measured consistently, the assets of the insurance entities included in the accounting consolidation have been excluded from the exposure measure in proportion to the capital that is excluded in tier 1.
The Group's estimated fully loaded leverage ratio (with ineligible tier 1 instruments grandfathered) is 4.2 per cent and the Group's estimated fully loaded leverage ratio, excluding the ineligible tier 1 instruments, is 3.5 per cent, exceeding the Basel Committee's minimum ratio of 3 per cent which it is proposed should become a Pillar 1 requirement by 1 January 2018. The Group will continue to monitor closely the leverage ratio against the emerging rules and minimum calibration.
This information is provided by RNS
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