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Lloyds Banking Group (LLOY)

  Print          Annual reports

Friday 27 February, 2015

Lloyds Banking Group

Final Results

RNS Number : 0345G
Lloyds Banking Group PLC
27 February 2015
 



Lloyds Banking Group plc

 

2014 Full-Year Results

 

27 February 2015

 

 



 

BASIS OF PRESENTATION

This release covers the results of Lloyds Banking Group plc together with its subsidiaries (the Group) for the year ended 31 December 2014.

Statutory basis

Statutory information is set out on pages 67 to 113. 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 2014 results with 2013 is of limited benefit.

Underlying basis

In order to present a more meaningful view of business performance, the results are presented on an underlying basis excluding items that in management's view would distort the comparison of performance between periods. Based on this principle the following items are excluded from underlying profit:

-   the amortisation of purchased intangible assets and the unwind of acquisition-related fair value adjustments;

-   the effects of certain asset sales, the impact of liability management actions and the volatility relating to the Group's own debt and hedging arrangements as well as that arising in the insurance businesses and insurance gross up;

-   Simplification costs, TSB build and dual running costs;

-   payment protection insurance and other regulatory provisions; and

-   certain past service pensions credits or charges in respect of the Group's defined benefit pension arrangements.

Unless otherwise stated, income statement commentaries throughout this document compare the year ended 31 December 2014 to the year ended 31 December 2013, and the balance sheet analysis compares the Group balance sheet as at 31 December 2014 to the Group balance sheet as at 31 December 2013.

Segment information and TSB

The segment results and balance sheet information have been restated to reflect the previously announced changes to the Group operating structure implemented from 1 January 2014. The Group's underlying profit and statutory results are unchanged as a result of these restatements. The Group's consolidated results and balance sheet include TSB. Any TSB disclosures in the document are presented on a Lloyds Banking Group basis and may differ to the equivalent figures disclosed in the TSB results release.

 

FORWARD LOOKING STATEMENTS

This document contains certain forward looking statements with respect to the business, strategy and plans of Lloyds Banking Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Lloyds Banking Group's or its directors' and/or management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments, fluctuations in exchange rates, stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group's credit ratings; the ability to derive cost savings; changing customer behaviour including consumer spending, saving and borrowing habits; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; pandemic, natural and other disasters, adverse weather and similar contingencies outside the Group's control; inadequate or failed internal or external processes or systems; acts of war, other acts of hostility, terrorist acts and responses to those acts, geopolitical, pandemic or other such events; changes in laws, regulations, accounting standards or taxation, including as a result of further Scottish devolution; changes to regulatory capital or liquidity requirements and similar contingencies outside the Group's control; the policies, decisions and actions of governmental or regulatory authorities in the UK, the European Union (EU), the US or elsewhere including the implementation of key legislation and regulation; 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; actions or omissions by the Group's directors, management or employees including industrial action; changes to the Group's post-retirement defined benefit scheme obligations; the ability to complete satisfactorily the disposal of certain assets as part of the Group's EU State Aid obligations; the provision of banking operations services to TSB Banking Group plc; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; the value and effectiveness of any credit protection purchased by the Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and exposure to regulatory or competition scrutiny, legal proceedings, regulatory or competition investigations or complaints. Please refer to the latest Annual Report on Form 20-F filed with the US Securities and Exchange Commission for a discussion of certain factors together with examples of forward looking statements. Except as required by any applicable law or regulation, the forward looking statements contained in this document are made as of today's date, and Lloyds Banking Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements.



CONTENTS

 


Page 

Key highlights

Consolidated income statement

Balance sheet and key ratios

Summary consolidated balance sheet

Group Chief Executive's statement

Chief Financial Officer's review of financial performance

Underlying basis segmental analysis

17 

Underlying basis quarterly information

18 



Divisional highlights


Retail

19 

Commercial Banking

21 

Consumer Finance

23 

Insurance

25 

Run-off and Central items

28 



Additional information


Reconciliation between statutory and underlying basis results

29 

Banking net interest margin

30 

Volatility arising in the insurance businesses

30 

Number of employees (full-time equivalent)

32 

TSB

32 

Remuneration

33 



Risk management

34 

Principal risks and uncertainties

35 

Credit risk portfolio

37 

Funding and liquidity management

53 

Capital management

58 



Statutory information

67 

Primary statements


Consolidated income statement

68 

Consolidated statement of comprehensive income

69 

Consolidated balance sheet

70 

Consolidated statement of changes in equity

72 

Consolidated cash flow statement

74 

Notes

75 



Contacts

114 




RESULTS FOR THE FULL YEAR

Substantial strategic progress and improved performance

 

'Over the last four years we have transformed Lloyds Banking Group into a low cost, low risk, UK focused retail and commercial bank. This has been made possible by the hard work of everyone at the Group.

 

Today's results also demonstrate that our profitability and capital position have improved significantly, and this has enabled the Board, for the first time in over six years, to recommend we pay a dividend to our shareholders.

 

While we recognise we have more to do, we enter the next phase of our strategy from a position of strength. We will remain focused on our customers, embrace the digital age throughout the whole Group, continue our support for the UK economy and aim to deliver strong and sustainable returns for our shareholders.'

António Horta-Osório

Group Chief Executive

 

Delivery of 2011 strategic priorities has transformed the business; strategy updated in October

·     Group has been reshaped with Run-off assets reduced to £16.9 billion (2013: £33.3 billion) and international presence reduced to six countries from 30 countries in 2010

·     Strong balance sheet and liquidity position attained with, post dividend, a CET1 ratio of 12.8 per cent, a total capital ratio of 22.0 per cent and a leverage ratio of 4.9 per cent

·     Cost leadership position achieved with cost:income ratio of 51 per cent

·     Lending and deposit growth in key customer segments and relationship brands

·     Strategy updated in October with focus on creating the best customer experience, becoming simpler and more efficient and delivering sustainable growth

 

Continue to support customers and the UK economy

·     £11.9 billion of mortgage lending to over 89,000 first-time buyers and continued growth in SME lending, up 5 per cent

·     Continued to support our communities with over 2,200 apprenticeship positions and over 940,000 paid volunteer hours

 

Substantial increase in underlying profit and returns

·     Underlying profit increased 26 per cent to £7.8 billion (2013: £6.2 billion)

·     Return on risk-weighted assets increased to 3.02 per cent (2013: 2.14 per cent)

·     Income of £18.4 billion, up 1 per cent excluding St. James's Place effects in 2013

-    Net interest income up 8 per cent, driven by margin improvement to 2.45 per cent

-    Other income down 9 per cent reflecting disposals and a challenging operating environment

·     Costs down 2 per cent to £9.4 billion (cost base of £9.0 billion excluding TSB)

·     Impairment charge reduced 60 per cent to £1.2 billion; asset quality ratio improved 33 basis points to 0.24 per cent

 

Statutory profit before tax of £1.8 billion (2013: £0.4 billion) despite legacy items

·     £2.2 billion provision for PPI in the year (2013: £3.1 billion) and a £0.9 billion provision for other regulatory items

·     Statutory profit after tax of £1.5 billion (2013: loss of £0.8 billion)

·     Tangible net assets per share increased to 54.9p (31 Dec 2013: 48.5p)

 

Guidance reflects confidence in the future

·     2015 full year net interest margin expected to be around 2.55 per cent

·     2015 full year asset quality ratio expected to be around 30 basis points

·     Expect other income to be broadly stable in 2015

·     Targeting cost:income ratio to exit 2017 at around 45 per cent, with reductions in each year

·     Expect to generate between 1.5 and 2 percentage points of common equity tier 1 per annum (pre dividend)

·     Expected return on required equity of 13.5-15 per cent by the end of the strategic plan period (2017)

 

Dividend

·     Recommending a dividend of 0.75 pence per share in respect of 2014, amounting to £535 million

 

CONSOLIDATED INCOME STATEMENT − UNDERLYING BASIS

 



2014 


2013 


Change



£ million 


£ million 


%

Net interest income


11,761 


10,885 


Other income


6,607 


7,920 


(17)

Total income


18,368 


18,805 


(2)

Total costs


(9,412)


(9,635)


Impairment


(1,200)


(3,004)


60 

Underlying profit


7,756 


6,166 


26 








Asset sales and other items


(1,719)


(280)



Simplification and TSB costs


(1,524)


(1,517)



Payment Protection Insurance provision


(2,200)


(3,050)



Other regulatory provisions


(925)


(405)



Other items


374 


(499)



Profit before tax - statutory


1,762 


415 



Taxation


(263)


(1,217)



Profit (loss) for the year


1,499 


(802)










Underlying earnings per share1


8.1p 


6.6p 


1.5p 

Earnings (loss) per share


1.7p 


(1.2)p 


2.9p 








Banking net interest margin


2.45% 


2.12% 


33bp 

Cost:income ratio2


51.2% 


52.9% 


(1.7)pp 

Asset quality ratio


0.24% 


0.57% 


(33)bp 

Return on risk-weighted assets3


3.02% 


2.14% 


88bp 

Return on assets3


0.92% 


0.70% 


22bp 

Underlying return on required equity4


13.6% 


9.7% 


3.9pp 

Statutory return on required equity4


3.0% 


(1.3)% 


4.3pp 

 

BALANCE SHEET AND KEY RATIOS

 



At 31 Dec 

2014 


At 31 Dec 

2013 


Change 

Loans and advances to customers5


£478bn 


£493bn 


(3)

Loans and advances to customers excluding TSB,
Run-off and other5,6


£406bn 


£402bn 


Customer deposits7


£447bn 


£436bn 


Loan to deposit ratio


107% 


113% 


(6)pp 

Total assets


£855bn 


£842bn 


Run-off assets


£17bn 


£33bn 


(49)

Wholesale funding


£116bn 


£138bn 


(15)

Common equity tier 1 ratio8,9


12.8% 


10.3% 


2.5pp 

Transitional total capital ratio8,9


22.0% 


18.8% 


3.2pp 

Risk-weighted assets8,9


£240bn 


£272bn 


(12)

Leverage ratio9,10


4.9% 


3.8% 


1.1pp 

 







Tangible net assets per share


54.9p 


48.5p 


6.4p 

 

1

In calculating underlying earnings per share, tax has been assumed at the standard UK corporation tax rate for the year.

2

Excluding impact of St. James's Place.

3

Underlying profit before tax divided by average quarter end risk-weighted and total assets respectively.

4

See definition on page 13.

5

Excludes reverse repos of £5.1 billion (31 December 2013: £0.1 billion). Loans and advances comparative restated, see note 1, page 75.

6

Other includes the specialist mortgage book, Intelligent Finance and Dutch mortgages.

7

Excludes repos of £nil (31 December 2013: £3.0 billion). Customer deposits comparative restated, see note 1, page 75.

8

31 December 2013 comparatives reflect CRD IV rules as implemented by the PRA at 1 January 2014.

9

31 December 2013 comparatives are reported on a pro forma basis that includes the benefit of the sales of Heidelberger Leben, Scottish Widows Investment Partnership and the Group's 50 per cent stake in Sainsbury's Bank.

10

Following PRA guidance, calculated in accordance with the January 2014 revised Basel III leverage ratio framework.

SUMMARY CONSOLIDATED BALANCE SHEET

 



At 31 Dec 
2014 


At 31 Dec 
2013 

Assets


£ million 


£ million 






Cash and balances at central banks


50,492 


49,915 

Trading and other financial assets at fair value through profit or loss


151,931 


142,683 

Derivative financial instruments1


36,128 


30,804 

Loans and receivables:





Loans and advances to customers1


482,704 


492,952 

Loans and advances to banks


26,155 


25,365 

Debt securities


1,213 


1,355 



510,072 


519,672 

Available-for-sale financial assets


56,493 


43,976 

Other assets


49,780 


55,330 

Total assets


854,896 


842,380 

 

Liabilities

Deposits from banks


10,887 


13,982 

Customer deposits1


447,067 


439,467 

Trading and other financial liabilities at fair value through profit or loss


62,102 


43,625 

Derivative financial instruments1


33,187 


27,658 

Debt securities in issue


76,233 


87,102 

Liabilities arising from insurance and investment contracts


114,486 


110,758 

Subordinated liabilities


26,042 


32,312 

Other liabilities


34,989 


48,140 

Total liabilities


804,993 


803,044 






Shareholders' equity


43,335 


38,989 

 

Other equity instruments


5,355 


− 

 

Non-controlling interests


1,213 


347 

 

Total equity


49,903 


39,336 

 

Total liabilities and equity


854,896 


842,380 

 

 

1

See note 1, page 75.

 



 

GROUP CHIEF EXECUTIVE'S STATEMENT

 

Highlights

2014 was a year of continued delivery for the Group, with the achievement of the key objectives set out in our 2011 strategic plan resulting in a significant transformation of the business and improvement in performance. Strategically, we are now a low risk bank, with a strong balance sheet and funding position and industry cost leadership, all of which provide competitive differentiation.

 

This delivery has, in turn, enabled the UK government to make further progress in returning the Group to full private ownership. In 2014 the UK government reduced its shareholding through the second successful sale of part of its stake in March and the launch of a pre-arranged trading plan in December which provides a means for an orderly sell down that will end no later than June 2015. On 20 February 2015, we were advised that UKFI's interest in the Group had reduced to 23.9 per cent. In the summer, we sold 38.5 per cent of TSB via a well-received Initial Public Offering, with this and the subsequent sale of a further 11.5 per cent stake in September resulting in us being firmly on track to meet our European Commission State Aid commitments.

 

The Board recognises the importance of sustainable and growing dividends to our shareholders and is today announcing the resumption of dividend payments, with a recommended dividend payment of 0.75 pence per share in respect of 2014. This is a symbolic development that bears testament to our successful transformation and improved risk profile of the business.

 

Given this strong strategic progress and the improvement in our financial performance and position, we have a firm foundation to deliver the new strategic priorities that we set out in October and we are well placed to continue to support and benefit from the strengthening UK economy and to be the best bank for our customers and shareholders.

 

Financial performance in 2014

We delivered a significant improvement in financial performance at both an underlying and statutory level. Underlying profit increased by 26 per cent to £7,756 million, with the Group's return on risk-weighted assets (RoRWA) improving by 88 basis points to 3.02 per cent. At a divisional level, all of our banking businesses delivered a robust performance with improvements in underlying profit and RoRWA in our Retail, Commercial Banking and Consumer Finance divisions after increased investment made to deliver growth. Underlying profit was lower in our Insurance division, reflecting the challenging market backdrop and regulatory and legislative changes that have similarly affected the wider industry.

 

Net interest income increased by 8 per cent, driven by a 33 basis point improvement in the net interest margin to 2.45 per cent and increased lending in our key customer segments. Other income excluding St. James's Place effects was 9 per cent lower, reflecting business disposals and a challenging operating environment. Underlying costs were reduced by 2 per cent, while the effective management of our lending portfolio, coupled with the benign economic and low interest rate environment, resulted in a substantial 60 per cent reduction in the impairment charge to £1,200 million.

 

On a statutory basis, the Group reported a profit before tax of £1,762 million compared to £415 million in 2013. This was after £2,200 million of charges in respect of PPI (2013: £3,050 million) and other regulatory provisions of £925 million (2013: £405 million).

 

Helping Britain Prosper and delivering growth in our key customer segments

As a UK centric retail and commercial bank, our future is inextricably linked to the health of the UK economy. In 2014 the UK economy continued to recover, with GDP growing robustly, unemployment falling, and both consumer and business confidence increasing. UK house prices have also continued to recover strongly, with an 8.4 per cent increase in the year. Against this, affordability measures remain good, with the recent calming of house price appreciation in London and the South East a welcome development.



 

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

 

We are committed to helping Britain and its communities and in March we launched our Helping Britain Prosper Plan. This initiative comprises a number of public commitments in areas where we can make the biggest difference and create value for our customers across households, businesses and our communities, in turn supporting our goal of being the best bank for customers. Since its launch, all of our divisions have made good progress in implementing this Plan, with the Group exceeding each of its lending commitments in 2014 while also delivering lending growth in our key customer segments.

 

In our Retail division, we provided £11.9 billion of lending to over 89,000 first-time buyers as well as 1 in 5 of all mortgage loans to customers buying their home in the UK in 2014, with total gross mortgage lending of £40 billion, 13 per cent higher than the prior year. We remain the largest participant in the UK government's Help to Buy mortgage guarantee scheme, lending £1.9 billion through this scheme in the year. In Retail Business Banking, we also supported over 100,000 new business start-ups.

 

The Commercial Banking division continued to take a leading role in supporting the UK economic recovery, with SME lending growing for the fourth consecutive year against a market that has contracted each year, increasing by 5 per cent in 2014. Lending to Mid Market corporates also increased by 2 per cent in a market that contracted by around 3 per cent. We remain firm supporters of the UK government's Funding for Lending scheme, committing over £15.5 billion of eligible lending and £1 billion to UK manufacturing during 2014.

 

In Consumer Finance, we achieved UK lending growth of 17 per cent to £16.0 billion, driven by 43 per cent growth in Asset Finance and a return to growth in our cards business following eight years of decline. New business growth was also strong, with a 48 per cent increase in Black Horse new business partly reflecting the launch of the Jaguar Land Rover partnership, and Cards benefiting from a 15 per cent increase in balance transfer volumes from new and existing customers as well as a 4 per cent increase in new consumer credit card accounts opened.

 

In Insurance, we have seen good momentum in our corporate pensions business where we are a market leader, serving over 11,500 employers and 1.4 million employees who have invested a total of £27 billion of assets with us. In 2014, the number of employees covered by these schemes increased by 40 per cent, principally reflecting our ongoing support for employers through the auto-enrolment process.

 

Our support for our customers and communities does not just extend to the lending commitments we have made to our key customer groups. It also covers a number of other initiatives through the Helping Britain Prosper Plan. In 2014, we delivered against the majority of these major commitments, donating £16.5 million to the Bank's Foundations to help tackle disadvantage and now having trained over 1,300 colleagues as mentors to SMEs and social entrepreneurs and provided over 940,000 of paid volunteer hours to support community projects.

 

Delivering the best bank to our key stakeholders

Our strong performance in 2014 marks the culmination of four years of delivery against our strategic plan that has transformed the business for the benefit of our stakeholders.

 

For our shareholders, we have delivered a significant improvement in financial performance, while improving the risk profile of the bank and strengthening the balance sheet.

 

We have strengthened underlying performance from a loss of £0.9 billion in 2010 to a profit of £7.8 billion in 2014, driven by a combination of lower impairment charges and a reduction in the Group's cost base. While our statutory result has also increased significantly over this period, our pre-tax profit of £1.8 billion in 2014 continued to be affected by PPI and other regulatory provisions as well as costs associated with TSB, the Simplification programme and the ECN exchange.

 

Looking ahead, while regulatory and conduct risks remain, we believe that the Group's statutory performance will become significantly less impacted by such issues, resulting in a far greater proportion of our underlying financial performance flowing through to shareholder returns over time.



 

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

 

In 2014 we achieved our enhanced target of delivering £2 billion of annual run-rate savings through the first phase of our Simplification programme, resulting in a reduction in our cost base from over £11 billion in 2010 to £9.0 billion (excluding TSB). Our cost:income ratio of 51.2 per cent is now the lowest amongst our major UK banking peers, in turn delivering a cost leadership position as a strategic differentiator and source of competitive advantage.

 

Being a low risk bank is also central to our strategy and business model, while supporting our aim of being best bank for our shareholders by reducing earnings volatility. This is illustrated by our credit default swap (CDS) spread reducing from over 300 basis points (bps) at the end of 2011 to less than 50 bps at the end of 2014, which is one of the best in the banking sector worldwide. We have significantly reduced risk in our lending business through careful portfolio management, the centralisation of the risk division and the implementation of tighter underwriting standards and controls. As a consequence, non-performing loans have reduced from over 10 per cent of lending balances in 2010 to less than 3 per cent in 2014. Over the same period, we have successfully reshaped the Group, reducing our non-core portfolio from £194 billion, or 25 per cent of customer loans, by £148 billion in a capital accretive way. As of December 2014, we now have a remaining Run-off portfolio of £16.9 billion, with lending assets of £14.4 billion within this total representing 3 per cent of customer loans.

 

Our balance sheet and funding position have also been transformed, with our post dividend Common Equity Tier 1 (CET1) ratio strengthening to 12.8 per cent through a combination of earnings generation, a reduction in risk-weighted assets as we de-risk the business, and other management actions. Our CET1 ratio is now amongst the strongest within the banking sector worldwide, positioning us well against the backdrop of evolving regulatory requirements for capital and leverage. Most recently this has been demonstrated by the Group exceeding the minimum thresholds set in the recent stress tests conducted by the European Banking Authority (EBA) and the PRA, despite the heavy weighting of the stress parameters against a UK retail and commercial banking business model such as ours.

 

At the same time, we have significantly reduced our reliance on wholesale funding through the careful management of our lending portfolio and the growth in our relationship deposit base, with our loan to deposit ratio strengthening from 154 per cent in 2010 to 107 per cent. Our wholesale funding requirement at the end of 2014 of £116 billion compares to £298 billion at the end of 2010 and is broadly matched by our primary liquid asset portfolio of £109 billion.

 

Being the best bank for customers is at the heart of our strategy. In support of this, we have continued to invest in our product propositions as well as our branches, digital and telephony channels, with key customer benefits from this investment ranging from reduced processing times, improved ease of access and convenience, and greater efficiency. Digital remains a key area of growth and investment for the business and has now been expanded as a Group-wide division spanning across all business areas, reflecting our customers' evolving preferences in how they interact with us. At the end of 2014, our active online user base was over 10.4 million customers, within which our active mobile users were over 5 million: a 29 per cent increase compared to the end of 2013.

 

Our success in improving the customer experience has been reflected in net promoter scores (NPS), which have increased by 50 per cent since 2010, and Group reportable banking complaints (excluding PPI), which have reduced significantly over the same period and are now approximately 50 per cent lower than the average of our major banking peers.

 

Rebuilding customer trust remains a key imperative for the business. In support of this, we have continued to transform the corporate culture and have completely overhauled the performance and reward framework for our customer-facing colleagues, with performance now predominantly assessed on the basis of customer feedback.

 

We have also strengthened the control environment through changes to our organisational design and the introduction of standardised templates across the Group to assess and monitor our risk appetite. While these improvements have been essential in helping us to rebuild customer trust, we recognise there is more to do and that we still have legacy issues to work through.

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

 

Strategic update

In October 2014 we set out the next phase of our strategy, highlighting our key priorities for the next three years and how we intend to deliver value and high quality experiences for customers, alongside strong and sustainable financial performance for our shareholders within a prudent risk and conduct framework.

 

The first of our three strategic priorities is 'creating the best customer experience'. We will achieve this through our multi-brand, multi-channel approach by combining comprehensive online and mobile capabilities with face-to-face services delivered through our branch and relationship manager network. We will invest £1 billion over the next three years in digital capability across all business divisions, delivering better service with greater efficiency. This transformation will reflect our customers' changing preferences in how they choose to interact with us, providing seamless access through a secure and resilient digital infrastructure.

 

Secondly, we will create operational capability by 'becoming simpler and more efficient', enabling us to be more responsive to changing customer expectations and to maintain our cost leadership position amongst UK high street banks as a source of competitive advantage. Through the simplification and increased automation of key processes, the reduction in third party spend and changes to our organisational design, we expect to deliver a further £1 billion of annual run-rate savings by the end of 2017, creating value for customers and improving our long-term competitiveness.

 

Finally, we expect to 'deliver sustainable growth' by seeking Group-wide growth opportunities while maintaining our prudent risk appetite. We intend to maintain market leadership in our main retail business lines of mortgages and current accounts by growing in line with the market, making the most of our multi-brand, multi-channel strategy to meet customer needs. We have also identified a number of growth opportunities in segments and areas where we are currently underrepresented and will look to grow above the market, including business banking, financial planning and retirement, and unsecured consumer lending. Consequently, over the next three years we expect to grow net lending in our key customer segments by over £30 billion, comprising growth in line with the market in retail mortgages, coupled with increases in net lending of £3 billion in both our SME and Mid Markets segments, £4 billion growth in customer assets in Asset Finance and £2 billion in credit cards. We also expect to grow customer assets by over £10 billion in our Insurance division over this timeframe through supporting our retail and corporate customers in making long-term preparations for retirement.

 

Over the next three years, we expect the UK financial services industry to undergo an unprecedented rate of change, driven by technology, changing customer behaviour and increasing regulatory requirements at a time when traditional competitors' strategies converge and new entrants compete for customers. The successful delivery of our strategic priorities over the next three years will ensure that we are well placed to anticipate and react to these changes, in turn enabling us to retain our leading position in the UK market while delivering value to our customers and shareholders.

 

Outlook

Thanks to the hard work and commitment of our colleagues, we are entering the next three year phase of our strategy from a position of strength. Together we have delivered the strategic objectives we set out in 2011 resulting in a business that has been transformed, with a reshaped and lower risk portfolio focused on our core UK markets, a strengthened capital and funding position, and a more efficient cost base.

 

While we recognise we still have a lot more to do, these strong foundations give us confidence in our prospects and our ability to achieve our strategic objectives over the next three years, despite uncertainties with regard to the political, regulatory, economic and competitive environment. We are therefore well positioned to continue to progress towards being the best bank for our customers while delivering strong and sustainable returns for our shareholders and supporting the UK economic recovery.

 

António Horta-Osório

Group Chief Executive



 

CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE

 

Overview: strong underlying profitability and balance sheet

The Group's underlying profit increased by 26 per cent in the year to £7,756 million, with a 2 per cent fall in income more than offset by a 2 per cent reduction in costs and a 60 per cent improvement in impairments. Excluding the effects of St. James's Place, which benefited the 2013 results, total underlying income was up 1 per cent, and expenses were down 2 per cent with underlying profit up 40 per cent.

 

Statutory profit before tax in 2014 was £1,762 million (2013: £415 million) after provisions for PPI of £2,200 million (2013: £3,050 million) and other regulatory matters of £925 million (2013: £405 million), liability management losses of £1,386 million (2013: £142 million), Simplification and TSB build and dual running costs of £1,524 million (2013: £1,517 million) and a pension credit of £710 million (2013: charge £104 million). The statutory profit after tax in 2014 was £1,499 million compared to a loss after tax of £802 million in 2013. In the 2014 half year results news release we stated that we expected the full year statutory profit to be significantly ahead of the first half. Statutory profit before tax in the year was £1,762 million compared with £863 million in the first half.

 

Total loans and advances to customers were £477.6 billion at 31 December 2014, 3 per cent lower than at 31 December 2013, with growth in the key customer segments of mortgages, SME lending, Mid Markets and UK Consumer Finance offset by reductions in balances in the Run-off portfolio and lending to Global Corporate customers. Customer deposits were £447.1 billion at 31 December 2014, an increase of £10.6 billion, or 2 per cent, since 31 December 2013 with growth of relationship deposits, partly offset by a reduction in tactical brands.

 

The Group's risk-weighted assets have fallen by 12 per cent to £239.7 billion reflecting the reduction in Run-off assets, active portfolio management in Commercial Banking and the improving economic conditions.

 

The Group's liquidity position continues to improve with increased primary liquidity up £20.0 billion to £109.3 billion. In addition, the Group has a further £99.2 billion of secondary liquid assets, a proportion of which are expected to be eligible for the Liquidity Coverage Ratio (LCR). Based on the Group's current understanding of the LCR standards due to be implemented in October 2015, the Group believes that it met the upcoming requirements as at 31 December 2014.

 

The combination of strong underlying profitability and continued reduction in risk-weighted assets resulted in a further improvement in the Group's common equity tier 1 ratio to 12.8 per cent at 31 December 2014 after the 0.2 per cent impact of the recommended dividend (31 December 2013: 10.3 per cent pro forma) and the leverage ratio to 4.9 per cent post dividend (31 December 2013: 3.8 per cent pro forma). The increase in the leverage ratio also reflects the issue of additional tier 1 securities (AT1) in the second quarter.

 

Total income



2014 


2013 


Change 



£ million 


£ million 









Net interest income


11,761 


10,884 


Banking fees and commissions


2,775 


2,987 


(7)

Insurance income


1,944 


2,234 


(13)

Operating lease and other income


1,437 


1,434 


− 

Run-off


451 


604 


(25)

Other income


6,607 


7,259 


(9)

Total underlying income


18,368 


18,143 


St. James's Place


− 


662 



Total income


18,368 


18,805 


(2)








Banking net interest margin


2.45% 


2.12% 


33bp 

Banking net interest margin excluding TSB


2.40% 


2.10% 


30bp 

Average interest-earning banking assets


£483.7bn 


£510.9bn 


(5)

Average interest-earning banking assets excluding TSB


£461.1bn 


£486.7bn 


(5)



 

CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Total income of £18,368 million was 2 per cent lower than in 2013, with strong growth in net interest income offset by lower other income. Adjusting for St. James's Place effects, total underlying income increased by 1 per cent.

 

Net interest income increased 8 per cent to £11,761 million, reflecting the continued improvement in net interest margin and loan growth in our key customer segments, partly offset by the effect of disposals and the reduced Run-off portfolio. Net interest margin increased to 2.45 per cent, up 33 basis points, benefiting from improved deposit pricing and lower funding costs (including approximately 7 basis points from the Enhanced Capital Notes (ECNs) exchange in the first half), partly offset by continued pressure on asset prices. The net interest margin in the fourth quarter was 2.47 per cent, 4 basis points lower than in the previous quarter as a result of a one-off charge to net interest income following the decision to simplify the range of savings products available to customers.

 

The Group expects the net interest margin for the 2015 full year will be around 2.55 per cent.

 

Excluding St. James's Place effects, other income in the year was 9 per cent lower at £6,607 million. The reduction was due to lower insurance income which was affected by changes in the pensions and annuities markets, the continued challenging market conditions experienced by the Debt Capital Markets and Financial Markets businesses and lower valuations in the private equity business within Commercial Banking, and the impact of business disposals and the smaller Run-off portfolio. The Group expects other income will be broadly stable in 2015 compared with 2014.

 

Total costs



2014 


2013 


Change 



£ million 


£ million 









Total costs


9,412 


9,635 


Operating lease depreciation included in costs


720 


746 


Cost:income ratio1


51.2% 


52.9% 


(1.7)pp 

Underlying cost:income ratio2


49.8% 


49.8% 


 

Simplification savings annual run-rate


2,042 


1,457 


40 

 

1

Excluding income of £662 million and costs of £44 million relating to St. James's Place in 2013.

2

Excluding St. James's Place, operating lease depreciation deducted from income and costs and excluding TSB running costs.

 

Total costs of £9,412 million were 2 per cent lower than in 2013. The reduction was driven by incremental savings from the Simplification programme of £449 million and business disposals of £392 million, partly offset by pay and inflation of £116 million, and increased investment in the business. Total costs excluding TSB running costs in the year were £9,042 million (2013: £9,072 million). Costs in the fourth quarter included the Bank levy of £254 million (2013: £238 million).

 

The Simplification programme which began in 2011 is now delivering annual run-rate savings of £2 billion, meeting the increased target announced with the 2013 results. In October the Group announced the next phase of the programme and is targeting a cost:income ratio excluding TSB and adjusting for operating lease depreciation of around 45 per cent by the end of 2017 with annual improvements in the ratio in the intervening years.

 

Impairment



2014 


2013 


Change 



£ million 


£ million 









Impairment charge excluding Run-off


997 


1,615 


38 

Run-off impairment charge


203 


1,389 


85 

Total impairment charge


1,200 


3,004 


60 

Asset quality ratio


0.24% 


0.57% 


(33)bp 

Impaired loans as a % of closing advances


2.9% 


6.3% 


(3.4)pp 

Provisions as a % of impaired loans


56.4% 


50.1% 


6.3pp 



 

CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

The impairment charge was £1,200 million, 60 per cent lower than in 2013 as a result of a significant reduction in run-off business and improvements in all divisions. The improvement reflects lower levels of new impairment as a result of effective risk management, improving economic conditions and the continued low interest rate environment. The net charge has also benefited from significant provision releases but at lower levels than seen in 2013. The asset quality ratio in 2014 was 24 basis points. The impairment charge and asset quality ratio in the fourth quarter were £183 million and 15 basis points, respectively.

 

The Group expects the asset quality ratio for the 2015 full year will be around 30 basis points.

 

Impaired loans as a percentage of closing advances reduced from 6.3 per cent at the end of December 2013 to 2.9 per cent at the end of December 2014, driven by reductions within both the continuing and the Run-off portfolios. Provisions as a percentage of impaired loans increased from 50.1 per cent to 56.4 per cent.

 

Statutory profit

Statutory profit before tax was £1,762 million compared to a pre-tax profit of £415 million in 2013. Further information on the reconciliation of underlying to statutory results is included on page 29.

 


2014 


2013 



£ million 


£ million 






Underlying profit


7,756 


6,166 

Asset sales and other items:





Asset sales


138 


(687)

Sale of government securities


− 


787 

Liability management


(1,386)


(142)

Own debt volatility


398 


(221)

Other volatile items


(112)


(457)

Volatility arising in insurance businesses


(228)


668 

Fair value unwind


(529)


(228)



(1,719)


(280)

Simplification and TSB costs:





Simplification costs


(966)


(830)

TSB build and dual running costs


(558)


(687)



(1,524)


(1,517)

Payment Protection Insurance provision


(2,200)


(3,050)

Other regulatory provisions


(925)


(405)






Other items:





Past service pensions credit (charge)


710 


(104)

Amortisation of purchased intangibles


(336)


(395)



374 


(499)

Profit before tax - statutory


1,762 


415 

Taxation


(263)


(1,217)

Profit/(loss) for the year


1,499 


(802)






Underlying earnings per share


8.1p 


6.6p 

Earnings per share


1.7p 


(1.2)p 

 



 

CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Asset sales and other items

The net gain from asset sales of £138 million included a gain of £122 million from the sale of Scottish Widows Investment Partnership. In 2013 there was a net loss from asset sales of £687 million and a £787 million gain on the sale of government securities.

 

The loss for liability management in 2014 of £1,386 million largely related to the Group's ECN exchange offers completed in the second quarter. This was partly offset by the credit from own debt volatility of £398 million which mainly reflected the change in value of the equity conversion feature of the ECNs.

 

There was a charge for other volatile items of £112 million (2013: charge of £457 million) relating to the change in fair value of interest rate derivatives and foreign exchange hedges in the banking book not mitigated through hedge accounting.

 

Negative volatility arising in insurance businesses was £228 million in 2014, principally reflecting lower than expected returns on equity markets and cash investments. This compared to positive insurance volatility of £668 million in 2013 driven by strong equity market performance.

 

The fair value unwind was a net charge of £529 million compared with a net charge of £228 million in 2013. The charge largely related to the amortisation of fair value adjustments relating to the subordinated debt acquired as part of the HBOS acquisition in 2009.

 

Simplification and TSB costs

Total Simplification costs in 2014 were £966 million (2013: £830 million). The total spent on Simplification to the end of December 2014 was £2.4 billion with a further £0.2 billion of redundancy costs in 2014 relating to the acceleration of the next phase of the programme. The original programme has delivered annual run-rate savings of £2.0 billion, meeting the increased target announced with the 2013 results. In the next phase of Simplification the Group is targeting a further £1 billion of annual run-rate savings by the end of 2017.

 

The Group holds 50 per cent of TSB's ordinary shares. TSB build and dual running costs in the year were £232 million and £326 million, respectively. In 2013 TSB build costs were £687 million.

 

PPI

The Group increased the provision for expected PPI costs by a further £700 million in the fourth quarter. This brings the amount provided in 2014 to £2,200 million (2013: £3,050 million), and the total amount provided to £12,025 million. Total costs incurred in the fourth quarter were £700 million and as at 31 December 2014, £2,549 million or 21 per cent of the total provision, remained unutilised.

 

The volume of reactive PPI complaints in 2014 fell by 22 per cent compared with 2013 and by 12 per cent in the fourth quarter. During 2014 there has been a more sustained level of Claims Management Company (CMC) activity and as a result the Group is forecasting a slower decline in future volumes than previously expected. The provision remaining at 31 December 2014 assumes that we will receive a further 0.6 million complaints. This revised forecast of complaint volumes accounts for £1,080 million, approximately half of the additional provision taken in the year and of which £300 million in the fourth quarter. However, the provisions remains sensitive to future trends; as an example, were reactive complaint levels in the first two quarters of 2015 to remain broadly in line with the fourth quarter of 2014 then the revised modelled total complaints and associated administration costs would increase the provision by approximately £700 million.

 

The Group has mailed the original Past Business Review (PBR) scope of 2.7 million policies as at 31 December 2014. During the year response rates to mailings have been slightly higher than expected, and some limited additional mailing has been added to the scope. This covers £300 million of the provision increase in the year and £45 million in the fourth quarter.



 

CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

The Group has now commenced re-reviewing previously handled cases. During the course of the year the scope of remediation has increased, which combined with higher uphold rates following complaint handling policy changes, has resulted in an additional provision being required of £250 million for the year, of which £140 million was in the fourth quarter.

 

The Group has also revised its forecast for uphold rates and average redress and increased its estimate for the associated administrative expenses connected with the above which combined have resulted in an increase in the provision of £570 million, of which £215 million was in the fourth quarter.

 

The total amount provided for PPI represents our best estimate of the likely future costs. The run-rate of spend in the first quarter of 2015 is expected to increase as a result of cash payments for remediation and residual PBR responses. The run-rate of spend in the first half of 2015 overall however, is expected to remain broadly in line with the second half of 2014 as remediation spend reduces. These programmes will be largely complete by mid year, and as a result the Group expects a further reduction in cash outflow in the second half of 2015. However, a number of risks and uncertainties remain in particular in respect of complaint volumes, uphold rates, average redress costs, the cost of proactive mailings and remediation, and the outcome of the FCA Enforcement Team investigation. The cost of these factors could differ materially from our estimates, with the risk that a further provision could be required.

 

Other regulatory provisions

During 2014 the Group has charged £925 million (2013: £405 million) in respect of other regulatory and conduct related matters of which £425 million was charged in the fourth quarter.

 

In July 2014, the Group announced that it had reached settlements totalling £217 million (at 30 June 2014 exchange rate) with the UK Financial Conduct Authority, the United States Commodity Futures Trading Commission and the United States Department of Justice regarding the manipulation several years ago of submissions to the British Bankers' Association London Interbank Offered Rate and Sterling Repo Rate between May 2006 and 2009, as well as the associated systems and control failings. In addition to these regulatory settlements, the Group paid nearly £8 million to the Bank of England to compensate for fees that were underpaid as a direct consequence of the manipulation of the Sterling Repo Rate in 2008 and 2009. These costs were recognised in the first half.

 

Further provisions of £150 million have been made relating to the past sale of interest rate hedging products (IRHPs) to certain small and medium-sized businesses of which £100 million was recognised in the fourth quarter. The further provision brings the total amount provided for redress and related administration costs for customers in scope of the agreement with the FCA to £680 million of which £109 million was unutilised at 31 December 2014.

 

Other provisions also included £120 million recognised in the fourth quarter given the emerging experience relative to expectations for claims relating to policies issued by Clerical Medical Investment Group Limited in Germany, bringing the total provision to £520 million of which £199 million was unutilised at 31 December 2014.

 

In the course of its business, the Group is engaged in discussions with the PRA, FCA and other UK and overseas regulators and other governmental authorities on a range of matters. The Group also receives complaints and claims from customers in connection with its past conduct, and where significant, provisions are held against the costs expected to be incurred as a result of the conclusions reached. In 2014, the Group made further provisions of £430 million in respect of a number of matters affecting the Retail, Commercial Banking and Consumer Finance divisions, including potential claims and remediation in respect of products sold through the branch network and continuing investigation of matters highlighted through industry wide regulatory reviews, as well as legacy product sales and historical systems and controls such as those governing legacy incentive schemes. Of the additional provision, £205 million was recognised in the fourth quarter. The increase reflected the Group's assessment of a limited number of matters under discussion, none of which are individually considered financially material in the context of the Group.



 

CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Other items

The Group made a number of changes to its defined benefit pension scheme arrangements in the first half of the year. These changes and other actions resulted in a £710 million net credit which was recognised in the second quarter.

 

Taxation

The tax charge for the year to 31 December 2014 was £263 million, representing an effective tax rate of 15 per cent.

 

The effective tax rate was lower than the UK corporation tax rate largely as a result of tax exempt gains on sales of businesses in the first half and a lower deferred tax liability in respect of the value of in-force assets for the life business partially offset by the effect of non-deductible expenses.

 

The high tax charge in 2013 was driven by the write down of deferred tax assets following the changes in corporation tax rates and the sale of the Australian business.

 

In December 2014 the Chancellor of the Exchequer announced proposals to restrict to 50 per cent the amount of banks' profits that can be offset by carried forward tax losses for the purposes of calculating corporation tax liabilities. These proposals are expected to be included in the Finance Bill 2015 and, if passed into law, will take effect in respect of profits arising after 1 April 2015. The Group estimates that these proposals will result in no change to the level of deferred tax recognition although it will increase the period over which it expects to fully utilise its tax losses from 2019 to 2025.

 

Return on required equity



At 31 Dec 

2014 


At 31 Dec 

2013 


Change 

Underlying return on required equity


13.6% 


9.7% 


3.9pp 

Statutory return on required equity


3.0% 


(1.3)% 


4.3pp 

 

Underlying return on equity is calculated as the underlying profit after tax at the standard UK corporation tax rate less the post tax profit attributable to other equity holders divided by the average required equity in the year. Required equity is made up of shareholders' equity and non-controlling interests and is the amount required to achieve a common equity tier 1 ratio of 12.0 per cent after allowing for regulatory adjustments and deductions. An adjustment is also made to reflect the notional earnings on any excess or shortfall in equity.

 

Statutory return on required equity is calculated as the statutory profit after tax less the post tax profit attributable to other equity holders divided by the average required equity in the year. An adjustment is also made to reflect the notional earnings on any excess or shortfall in equity.

 

Both return measures have improved significantly in the year reflecting the strong growth in underlying profit and the return to statutory profit. The Group has a target statutory return on required equity of between 13.5 per cent and 15 per cent by the end of 2017.



 

CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Capital ratios and risk-weighted assets



At 31 Dec 

2014 


At 31 Dec 

2013 


Change 








Common equity tier 1 capital ratio1,3


12.8% 


10.3% 


2.5pp 

Transitional tier 1 capital ratio1,3


16.5% 


11.7% 


4.8pp 

Transitional total capital ratio1,3


22.0% 


18.8% 


3.2pp 

Leverage ratio2,3


4.9% 


3.8% 


1.1pp 

Risk-weighted assets1,3


£240bn 


£272bn 


(12)% 








Shareholders' equity


£43bn 


£39bn 


11% 

 

1

Common equity tier 1 ratio is the same on both fully loaded and transitional bases. 31 December 2013 comparatives reflect CRD IV rules as implemented by the PRA at 1 January 2014.

2

Calculated in accordance with the January 2014 revised Basel III leverage ratio framework.

3

31 December 2013 comparatives are reported on a pro forma basis that includes the benefit of the sales of Heidelberger Leben, Scottish Widows Investment Partnership and the Group's 50 per cent stake in Sainsbury's Bank.

 

The Group continued to strengthen its capital position, with the common equity tier 1 (CET1) ratio increasing to 12.8 per cent (31 December 2013: 10.3 per cent pro forma). The improvement was driven by a combination of underlying profit, further dividends from the Insurance business, changes to and improved valuations of the Group's defined benefit pension arrangements, and a reduction in risk-weighted assets. The positive effect of these items was partly offset by charges relating to legacy issues which reduced the CET1 ratio by 1.5 per cent, the ECN exchange and tender offers which reduced the ratio by 0.5 per cent and the recommended dividend which reduced the ratio by 0.2 per cent.

 

The regulatory framework in which the Group operates has continued to evolve following the implementation of the Capital Requirements Directive (CRD IV) on 1 January 2014. The Group's Pillar 2A requirement at 31 December 2014 was 3.8 per cent of risk-weighted assets of which 2.1 per cent must be covered by CET1 capital. This reflects a point in time estimate by the PRA, which may change over time, of the total capital that is needed in relation to risks that are not covered or fully covered by Pillar 1. The Group is now assuming a steady state CET1 ratio requirement of around 12 per cent.

 

Risk-weighted assets reduced by 12 per cent, or £32.2 billion, in the year, to £239.7 billion (31 December 2013: £271.9 billion pro forma), primarily due to asset reductions in the Run-off portfolio, active portfolio management in Commercial Banking and improvements in economic conditions.

 

The Group's leverage ratio increased to 4.9 per cent from 3.8 per cent (pro forma) in December 2013, with the AT1 issuance in the first half, where the Group repurchased the equivalent of £5 billion nominal (£4 billion regulatory value) of ECNs and issued £5.3 billion of new AT1 securities, accounting for 0.5 per cent of the increase.

 

The Group's leverage ratio exceeds the aggregate minimum levels proposed by the Financial Policy Committee (FPC) which require major domestic banks to meet a minimum ratio of 3 per cent, a supplementary systemic risk based buffer of up to 1.05 per cent (to apply from 2016 for G-SIBs and from 2019 for major domestic banks) and a time-varying countercyclical leverage buffer of up to 0.9 per cent (currently set at zero per cent).



 

CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Stress tests

During the year, the Group was subject to stress testing exercises carried out by both the European Banking Authority (EBA) and the PRA. As announced in October and December respectively, the Group exceeded the capital thresholds set for both these tests and was not required to take any action as a result of these exercises.

 

The remaining issued Enhanced Capital Notes (ECNs) were not taken into account for the purpose of core capital for the PRA stress test. A Capital Disqualification Event (CDE) occurred allowing the Group, under certain conditions, to redeem, with the permission of the PRA, any series of ECNs. The Group has also indicated its intention to redeem those series of ECNs listed in the announcement, resulting in a reduction in tier 2 capital resources of £0.5 billion.

 

Funding and liquidity



At 31 Dec 

2014 


At 31 Dec 

2013 


Change 








Loans and advances to customers1


£478bn 


£493bn 


(3)

Loans and advances to customers excluding TSB,

 Run-off and other1


£406bn 


£402bn 


Run-off assets


£17bn 


£33bn 


(49)

Non-retail run-off assets


£11bn 


£25bn 


(57)

Funded assets


£493bn 


£508bn 


(3)

Customer deposits2


£447bn 


£436bn 


Wholesale funding


£116bn 


£137bn 


(15)

Wholesale funding <1 year maturity


£41bn 


£44bn 


(7)

Of which money-market funding <1 year maturity3


£19bn 


£21bn 


(11)

Loan to deposit ratio


107% 


113


(6)pp 

Primary liquid assets4


£109bn 


£89bn 


22 

 

1

Excludes reverse repos of £5.1 billion (31 December 2013: £0.1 billion). Loans and advances comparative restated, see note 1, page 75.

2

Excludes repos of £nil (31 December 2013: £3.0 billion). Deposits comparative restated, see note 1, page 75.

3

Excludes balances relating to margins of £2.8 billion (31 December 2013: £2.3 billion) and settlement accounts of £1.4 billion (31 December 2013: £1.3 billion).

4

Includes off-balance sheet liquid assets; includes TSB £4.5 billion (31 December 2013: £nil).

 

The Group increased its net lending in key customer segments by 1 per cent with growth of 2 per cent in mortgages (excluding books closed to new business), growth of 5 per cent and 2 per cent in SME and Mid Markets respectively and 17 per cent in the UK consumer finance business. Overall, loans and advances to customers have fallen by 3 per cent to £477.6 billion as the growth in key segments has been more than offset by a reduction in Run-off loans and advances. The Group reduced total Run-off assets by 49 per cent to £16.9 billion.

 

The growth in deposits, together with the reduction in total loans and advances, resulted in the loan to deposit ratio improving to 107 per cent from 113 per cent at the end of 2013, and has reduced the Group's wholesale funding requirement. Wholesale funding at 31 December 2014 was £116.5 billion, with 65 per cent having a maturity of greater than one year.

 

The Group's liquidity position remains strong, with primary liquid assets of £109.3 billion (31 December 2013: £89.3 billion). Primary liquid assets represent almost six times our money-market funding with a maturity of less than one year, and just under three times our total short-term wholesale funding, in turn providing a substantial buffer in the event of market dislocation. In addition to primary liquid assets, the Group has significant secondary liquidity holdings of £99.2 billion (31 December 2013: £105.4 billion). Total liquid assets represent approximately five times our short-term wholesale funding with primary liquid assets broadly equivalent to total wholesale funding.

 

Based on the Group's current understanding of the LCR standards due to be implemented in October 2015, the Group believes that it met the upcoming requirements as at 31 December 2014.



 

CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Dividend

The Board has recommended a dividend of 0.75 pence per ordinary share in respect of 2014, amounting to £535 million. The Group's aim is to have a progressive dividend policy, with dividends starting at a modest level and increasing over the medium term to a dividend payout ratio of at least 50 per cent of sustainable earnings. Subject to performance, the intention is to pay an interim and final dividend for 2015.

 

Conclusion

The Group has delivered a strong underlying performance and a statutory profit after tax of £1.5 billion in 2014 despite recognising further PPI and other regulatory provisions. At the same time, the Group has continued to reduce balance sheet risk, with significantly improved credit quality supported by a further £16 billion reduction in the Run-off portfolio. These achievements have helped strengthen the Group's funding position, key capital and leverage ratios and enabled the Board to recommend a dividend in respect of 2014.

 

George Culmer

Chief Financial Officer

 



 

UNDERLYING BASIS - SEGMENTAL ANALYSIS

 

2014


Retail 

Commercial  Banking 

Consumer  Finance 


Insurance 


Run-off 

and 

Central 

items 


TSB1


Group 



£m 


£m 


£m 


£m 


£m 


£m 


£m 
















Net interest income


7,079 


2,480 


1,290 


(131)


257 


786 


11,761 

Other income


1,212 


1,956 


1,364 


1,725 


210 


140 


6,607 

Total income


8,291 


4,436 


2,654 


1,594 


467 


926 


18,368 

Total costs


(4,464)


(2,147)


(1,429)


(672)


(330)


(370)


(9,412)

Impairment


(599)


(83)


(215)


− 


(205)


(98)


(1,200)

Underlying profit (loss)


3,228 


2,206 


1,010 


922 


(68)


458 


7,756 
















Banking net interest margin


2.29% 


2.67% 


6.49% 








2.45% 

Asset quality ratio


0.19% 


0.08% 


1.05% 








0.24% 

Return on risk-weighted assets


4.60% 


1.92% 


4.87% 








3.02% 

Return on assets


1.02% 


0.94% 


4.02% 








0.92% 
















Key balance sheet items
at 31 December 2014


£bn 


£bn 


£bn 




£bn 


£bn 


£bn 
















Loans and advances to customers


315.2 


100.9 


20.9 




19.0 


21.6 


477.6 

Customer deposits


285.5 


119.9 


15.0 




2.1 


24.6 


447.1 

Total customer balances2


600.7 


220.8 


39.0 




21.1 


46.2 


927.8 
















Risk-weighted assets


67.7 


106.2 


20.9 




39.7 


5.2 


239.7 

 

 

 

20133


£m 


£m 


£m 


£m 


£m 


£m 


£m 
















Net interest income


6,500 


2,113 


1,333 


(107)


431 


615 


10,885 

 

Other income


1,435 


2,259 


1,359 


1,864 


840 


163 


7,920 

 

Total income


7,935 


4,372 


2,692 


1,757 


1,271 


778 


18,805 

 

Total costs


(4,160)


(2,084)


(1,384)


(669)


(775)


(563)


(9,635)

 

Impairment


(760)


(398)


(343)


− 


(1,394)


(109)


(3,004)

 

Underlying profit (loss)


3,015 


1,890 


965 


1,088 


(898)


106 


6,166 

 
















 

Banking net interest margin


2.09% 


2.21% 


6.94% 








2.12% 

 

Asset quality ratio


0.24% 


0.37% 


1.76% 








0.57% 

 

Return on risk-weighted assets


3.81% 


1.53% 


4.51% 








2.14% 

 

Return on assets


0.95% 


0.77% 


3.90% 








0.70% 

 
















 

Key balance sheet items
at 31 December 2013


£bn 


£bn 


£bn 




£bn 


£bn 


£bn 

 
















 

Loans and advances to customers


314.3 


105.7 


19.1 




30.3 


23.5 


492.9 

 

Customer deposits


283.2 


108.7 


18.7 




2.8 


23.1 


436.5 

 

Total customer balances2


597.5 


214.4 


40.6 




33.1 


46.6 


932.2 

 
















 

Risk-weighted assets4


72.9 


124.0 


20.1 




48.5 


5.6 


271.1 

 

 

1

See note 5, page 82.

2

Total customer balances include loans and advances to customers, customer deposit balances and Consumer Finance operating lease assets.

3

Segment information has been restated to reflect the changes made to the Group's operating structure that came into effect from 1 January 2014. Loans and advances to customers and customer deposits have been restated, see note 1, page 75.

4

31 December 2013 comparatives reflect CRD IV rules on a fully loaded basis as implemented by the PRA at 1 January 2014.



 

UNDERLYING BASIS - QUARTERLY INFORMATION

 



Quarter 
ended 
31 Dec 
2014 


Quarter 
ended 
30 Sept 
2014 


Quarter 
ended 
30 June 
2014 


Quarter 
ended 
31 Mar 
2014 



£m 


£m 


£m 


£m 










Net interest income


2,923 


3,034 


2,993 


2,811 

Other income


1,547 


1,612 


1,730 


1,718 

Total income


4,470 


4,646 


4,723 


4,529 

Total costs


(2,505)


(2,232)


(2,377)


(2,298)

Impairment


(183)


(259)


(327)


(431)

Underlying profit


1,782 


2,155 


2,019 


1,800 

Asset sales and other items


34 


(186)


(1,687)


120 

Simplification and TSB costs


(460)


(236)


(362)


(466)

PPI


(700)


(900)


(600)


− 

Other regulatory provisions


(425)


− 


(500)


− 

Other items


(83)


(82)


624 


(85)

Statutory profit (loss)


148 


751 


(506)


1,369 










Banking net interest margin


2.47% 


2.51% 


2.48% 


2.32% 

Asset quality ratio


0.15% 


0.20% 


0.26% 


0.35% 

Cost:income ratio


56.0% 


48.0% 


50.3% 


50.7% 

Return on risk-weighted assets


2.89% 


3.37% 


3.09% 


2.71% 

Return on assets


0.83% 


1.01% 


0.97% 


0.87% 

 



Quarter 
ended 
31 Dec 
2013 


Quarter 
ended 
30 Sept 
2013 


Quarter 
ended 
30 June 
2013 


Quarter 
ended 
31 Mar 
2013 



£m 


£m 


£m 


£m 










Net interest income


2,918 


2,761 


2,653 


2,552 

Other income


1,754 


1,776 


1,872 


1,857 

St. James's Place


114 


18 


50 


480 

Total income


4,786 


4,555 


4,575 


4,889 

Total costs


(2,525)


(2,361)


(2,341)


(2,408)

Impairment


(521)


(670)


(811)


(1,002)

Underlying profit


1,740 


1,524 


1,423 


1,479 

Asset sales and other items


(468)


(709)


(176)


1,073 

Simplification and TSB costs


(323)


(408)


(377)


(409)

PPI


(1,800)


(750)


(500)


− 

Other regulatory provisions


(330)


− 


(75)


− 

Other items


(98)


(97)


(201)


(103)

Statutory (loss) profit


(1,279)


(440)


94 


2,040 










Banking net interest margin


2.29% 


2.17% 


2.06% 


1.96% 

Asset quality ratio


0.40% 


0.51% 


0.57% 


0.80% 

Cost:income ratio1


54.0% 


52.0% 


51.7% 


53.6% 

Return on risk-weighted assets


2.55% 


2.14% 


1.93% 


1.96% 

Return on assets


0.81% 


0.69% 


0.65% 


0.66% 

 

1

Excluding impact of St. James's Place.



 

DIVISIONAL HIGHLIGHTS

 

RETAIL

 

Retail offers a broad range of financial service products, including current accounts, savings, personal loans and mortgages, to UK personal customers, including Wealth and small business customers. It is also a distributor of insurance, protection and credit cards, and a range of long-term savings and investment products. Retail's aim is to be the best bank for customers in the UK, by building deep and enduring relationships that deliver value to customers, and by providing them with greater choice and flexibility. Retail will maintain its multi-brand and multi-channel strategy, and continue to simplify the business and provide more transparent products, helping to improve service levels and reduce conduct risks.

 

Progress against strategic initiatives

·     Continued development of its digital capability, with the launch of its new App and the optimisation of browser sites for mobile users. The online user base has increased to over 10.4 million customers, including more than 5 million active mobile users, an increase of 29 per cent from 2013.

·     Increased Net Promoter Scores across all channels in 2014.

·     Continued to attract new customers through positive switching activity, particularly through the Halifax challenger brand which has attracted around 250,000 customers in 2014.

·     Launch of a number of new products, including the Club Lloyds current account proposition which has attracted over 600,000 customers since launch, and the Club Lloyds Saver and Monthly Saver Accounts.

·     Launched two new unsecured lending products, enhancing account flexibility and online functionality.

·     Announced the simplification of the existing savings products range, which will lead to the consolidation of 47 accounts into three standard products.

·     Achieved £40 billion of gross new mortgage lending in 2014, providing 1 in 5 of all mortgage loans to customers buying their homes in the UK. Exceeded our lending commitment to first-time buyers, lending £11.9 billion to over 89,000 customers, providing 1 in 4 of all mortgages. Retail continues to be a leading supporter of the UK government's Help to Buy scheme, lending £1.9 billion in 2014.

·     Improved proposition to small business customers through the launch of a new mobile App, online account opening and online lending and successfully transferred 120,000 customers onto a new multi-channel model in Retail. Exceeded its lending commitment by supporting over 100,000 new business start-ups.

 

Financial performance

·     Underlying profit increased 7 per cent to £3,228 million.

·     Net interest income increased 9 per cent. Margin increased 20 basis points to 2.29 per cent, driven by improved deposit mix and margin, more than offsetting reduced lending rates.

·     Other income down 16 per cent, with lower protection income partly due to the decision to close the face-to-face advised protection role in branches, and lower wealth related income due to regulatory changes.

·     Total costs increased 7 per cent to £4,464 million, reflecting higher indirect overheads previously absorbed in the TSB segment and costs associated with ongoing investment in the business.

·     Impairment reduced 21 per cent to £599 million, with unsecured charges decreasing consistent with lower impaired loan and arrears balances. Secured coverage strengthened to 37 per cent, resulting in a 13 per cent increase to the impairment charge.

·     Return on risk-weighted assets increased 79 basis points driven by 7 per cent increase in underlying profit and reduced risk-weighted assets.

 

Balance sheet

·     Loans and advances to customers increased slightly to £315.2 billion, with stronger growth of 2 per cent in the open mortgage book (excludes closed specialist book and Intelligent Finance).

·     Customer deposits increased 1 per cent to £285.5 billion, with relationship balances (including Lloyds, Halifax and BoS) up 4 per cent year-on-year.

·     Risk-weighted assets decreased by £5.2 billion to £67.7 billion driven by an improvement in the credit quality of retail assets and improving house prices.



RETAIL (continued)

 



2014 


20131


Change 



£m 


£m 









Net interest income


7,079 


6,500 


Other income


1,212 


1,435 


(16)

Total income


8,291 


7,935 


Total costs


(4,464)


(4,160)


(7)

Impairment


(599)


(760)


21 

Underlying profit


3,228 


3,015 









Banking net interest margin


2.29% 


2.09% 


20bp 

Asset quality ratio


0.19% 


0.24% 


(5)bp 

Return on risk-weighted assets


4.60% 


3.81% 


79bp 

Return on assets


1.02% 


0.95% 


7bp 

 

 

Key balance sheet items


At 31 Dec 
2014 


At 31 Dec 
2013 


Change 



£bn 


£bn 









Loans and advances excluding closed portfolios


284.7 


280.4 


Closed portfolios


30.5 


33.9 


(10)

Loans and advances to customers


315.2 


314.3 


− 








Relationship balances


247.9 


238.4 


Tactical balances


37.6 


44.8 


(16)

Customer deposits


285.5 


283.2 


Customer deposits


285.5 


283.2 


Total customer balances


600.7 


597.5 









Risk-weighted assets2


67.7 


72.9 


(7)

 

1

Restated to reflect the changes to the Group operating structure that came into effect from 1 January 2014.

2

31 December 2013 comparatives reflect CRD IV rules as implemented by the PRA at 1 January 2014.



COMMERCIAL BANKING

 

Commercial Banking supports UK businesses from SMEs to large corporates and financial institutions. It has a client led, low risk strategy targeting sustainable returns on risk-weighted assets above 2 per cent by the end of 2015 and 2.4 per cent by the end of 2017, whilst simplifying operating processes, building digital capability and maintaining capital discipline. Commercial Banking aims to be the best bank for clients delivering a through-the-cycle relationship approach that provides affordable, simple and transparent finance, as well as support for complex needs and access to Government funding schemes.

 

Progress against strategic initiatives

·     Continued its support of SMEs, growing lending by 5 per cent in a contracting market. Its network of local and key markets relationship managers enables a quick response to the needs of the significant client base.

·     Strengthened the capabilities and increased the number of relationship managers in Mid Markets, resulting in an increase in client numbers, particularly in the local authority, business services and education sectors.

·     Enhanced returns in Global Corporates as a result of continued capital optimisation and increased profitability due to resilient income performance in challenging market conditions.

·     Further developed the Financial Institutions franchise, meeting a broader range of client needs, delivering growth in income and profitability whilst supporting financial services in the UK

·     Continued to invest in digital capability, with CB Online launching in 2015 and the continued development of mobile services to clients.

·     Continued to help Britain prosper; committing over £15.5 billion of UK lending through Funding for Lending, over £1 billion of funding support to UK manufacturing. In line with the Group's focus on sustainability and responsible lending Commercial Banking became the first UK bank to issue an Environmental, Social and Governance (ESG) bond. The Debt Capital Markets team also pioneered market leading product innovation with the first green loan and first ESG bond for a housing association.

·     Its community based actions include the Enterprise Mentoring scheme, with over 400 Group colleagues now trained as Enterprise Mentors, providing support to over 700 SME businesses to date.

 

Financial performance

·     Underlying profit of £2,206 million, up 17 per cent on 2013, driven by strong income growth in SME, Mid Markets and Financial Institutions and lower impairments.

·     Income increased by 1 per cent to £4,436 million as a result of increased net interest income in all client segments offset by declining performance in other income reflecting challenging market conditions and lower income from Lloyds Development Capital.

·     Net interest margin increased by 46 basis points to 2.67 per cent as a result of disciplined pricing of new lending, customer repricing in deposits and a reduction in funding costs helped by the increase in Global Transaction Banking deposits.

·     Other income decreased 13 per cent driven by lower client income in Debt Capital Markets and Financial Markets due to the continued low interest rate and low volatility environment in 2014 and a lower level of revaluation gains in Lloyds Development Capital.

·     Asset quality ratio of 8 basis points improved by 29 basis points reflecting lower gross charges, improved credit quality and progress in executing its strategy of building a low risk commercial bank.

·     Return on risk-weighted assets increased by 39 basis points to 1.92 per cent, making good progress towards achieving its 2015 target of 2 per cent by the end of 2015.

 

Balance sheet

·     Lending decreased by 5 per cent as a result of selective participation in Global Corporates partially offset by growth in SME and Financial Institutions.

·     Customer deposits increased by 10 per cent with Global Transaction Banking balances growing year-on-year in all client segments.

·     Risk-weighted assets decreased by £17.8 billion with reductions in credit and market risk-weighted assets as a result of active portfolio management, including reductions in Global Corporates reflecting the successful progress on improving returns.



 

COMMERCIAL BANKING (continued)

 



2014 


20131


Change 



£m 


£m 









Net interest income


2,480 


2,113 


17 

Other income


1,956 


2,259 


(13)

Total income


4,436 


4,372 


Total costs


(2,147)


(2,084)


(3)

Impairment


(83)


(398)


79 

Underlying profit


2,206 


1,890 


17 








Banking net interest margin


2.67% 


2.21% 


46bp 

Asset quality ratio


0.08% 


0.37% 


(29)bp 

Return on risk-weighted assets


1.92% 


1.53% 


39bp 

Return on assets


0.94% 


0.77% 


17bp 

 

 

Key balance sheet items


At 31 Dec 
2014 


At 31 Dec 
20131


Change 



£bn 


£bn 









SME


27.9 


26.6 


Other


73.0 


79.1 


(8)

Loans and advances to customers


100.9 


105.7 


(5)








Customer deposits


119.9 


108.7 


10 








Total customer balances


220.8 


214.4 









Risk-weighted assets2


106.2 


124.0 


(14)

 

1

Restated to reflect the changes to the Group operating structure that came into effect from 1 January 2014. Loans and advances to customers and customer deposits have been restated, see note 1, page 75.

2

31 December 2013 comparatives reflect CRD IV rules as implemented by the PRA at 1 January 2014.

 



 

CONSUMER FINANCE

 

Consumer Finance aims to extend its market leadership in Asset Finance by building its digital capability and creating new propositions in both the Black Horse and Lex Autolease businesses. In Credit Cards, better use will be made of Group customer relationships and insight to seek growth within its current risk profile from both franchise and
non-franchise customers.

 

Progress against strategic initiatives

·     UK loan growth of 17 per cent year-on-year, increasing momentum from the first half of 2014.

·     New business growth of 48 per cent within Black Horse, supported by the launch of the Jaguar Land Rover partnership in the first quarter of 2014 and strong underlying business performance.

·     Growth of 23 per cent in new Lex Autolease fleet deliveries with leads from the franchise more than double 2013.

·     Growth in lending balances within Credit Cards for the first time in eight years.

·     Growth in new consumer credit cards including a 4 per cent increase in new accounts opened and a 15 per cent increase in balance transfer volumes from new and existing customers.

·     Net gainer in balance transfers compared to competitors in Credit Cards new business, leveraging the breadth of the product lines, brands, and channels, and making strong progress in building  non-franchise capabilities.

·     Growth of 45 per cent in transaction volumes within the Cardnet Acquiring Solutions business, driven in part by new partnerships, in addition to increased activity from existing customers.

·     Successful implementation of initial regulatory changes following change of regulator from the Office of Fair Trading to the Financial Conduct Authority.

 

Financial performance

·     Underlying profit increased by 5 per cent to £1,010 million driven by significant reductions in impairment charges across the portfolio and income growth in Asset Finance, partially offset by a fall in income in Credit Cards and investing for future growth in the businesses.

·     Net interest margin reduced by 45 basis points to 6.49 per cent, resulting in a 3 per cent fall in net interest income to £1,290 million. Strong new business growth and deposit repricing have been offset by a change in mix towards higher quality, lower margin lending to the new vehicle market and the impact of the current year's strategic focus on growing the volume of new credit cards. Consistent with the strategy of acquiring high quality new business, the asset quality ratio improved by 71 basis points.

·     Other income increased slightly as a result of the growth strategy.

·     Total costs increased by 3 per cent driven by investment in growth initiatives and increased operating lease depreciation as a result of growth in the Lex Autolease fleet, offset by cost savings and increased gains for end of life lease asset sales. In 2014 a further £45 million was invested in improving propositions and customer's digital experience.

·     Impairment charges reduced by 37 per cent to £215 million, with a substantial improvement in the asset quality ratio. This has been driven by a continued underlying improvement of portfolio quality supported by the sale of recoveries assets in the Credit Cards and Asset Finance portfolios.

·     Return on risk-weighted assets increased to 4.87 per cent. This reflected a 5 per cent improvement in underlying profit, while risk-weighted assets increased by only 4 per cent driven by increased customer assets partially offset by an improved credit risk profile of customers.

 

Balance sheet

·     Net lending increased by 9 per cent to £20.9 billion driven by growth across both the underlying and the Jaguar Land Rover portfolios within UK Asset Finance where net lending increased by 43 per cent, and within Credit Cards following eight years of decline where net lending increased by 2 per cent. Balances in the European businesses were down 9 per cent, driven largely by foreign exchange rate movements.

·     Operating lease assets increased by 11 per cent to £3.1 billion reflecting Lex Autolease fleet growth of 7 per cent.

·     Customer deposits reduced by 20 per cent within Online Deposits driven by deposit re-pricing activity in response to European Central Bank policy actions and foreign exchange rate movements.

·     Risk-weighted assets increased by 4 per cent.

 

CONSUMER FINANCE (continued)

 



2014 


20131


Change 



£m 


£m 









Net interest income


1,290 


1,333 


(3)

Other income


1,364 


1,359 


− 

Total income


2,654 


2,692 


(1)

Total costs


(1,429)


(1,384)


(3)

Of which operating lease depreciation


(667)


(653)


(2)

Impairment


(215)


(343)


37 

Underlying profit


1,010 


965 









Banking net interest margin


6.49% 


6.94% 


(45)bp 

Asset quality ratio


1.05% 


1.76% 


(71)bp 

Impaired loans as % of closing advances


3.4% 


4.8% 


(140)bp 

Return on risk-weighted assets


4.87% 


4.51% 


36bp 

Return on assets


4.02% 


3.90% 


12bp 

 

Key balance sheet items


At 31 Dec 
2014 


At 31 Dec 
2013 


Change 



£bn 


£bn 









Loans and advances to customers


20.9 


19.1 


Of which UK


16.0 


13.7 


17 

Operating lease assets


3.1 


2.8 


11 

Total customer assets


24.0 


21.9 


10 

Of which UK


19.1 


16.5 


16 








Customer deposits


15.0 


18.7 


(20)








Total customer balances


39.0 


40.6 


(4)








Risk-weighted assets2


20.9 


20.1 


 

1

Restated to reflect the changes to the Group operating structure that came into effect from 1 January 2014.

2

31 December 2013 comparatives reflect CRD IV rules as implemented by the PRA at 1 January 2014.

 



 

INSURANCE

 

The Insurance division is focused on helping customers protect themselves today whilst preparing for a secure financial future.  The division provides a range of simple, trusted, value for money insurance, protection and retirement products to Retail and Corporate customers, primarily through the Bank and Intermediary networks.

 

Progress against strategic initiatives

·     Insurance is a market leader in the corporate pensions market serving over 11,500 employers (including 19 per cent of the FTSE 350) and 1.4 million employees with £27 billion of assets invested with us. In 2014 the number of employees covered by these schemes grew by 40 per cent principally reflecting the ongoing support for employers through the auto-enrolment process.

·     The roll out of the Pensions Freedoms legislation in 2015 presents a significant opportunity to help customers with their retirement planning needs and a range of products to support this is being developed.  With access to 24 million Retail customers, the Group remains very well placed to participate in this market.

·     Re-launched the Scottish Widows brand in 2014 and increased investment in strategic initiatives specifically in digital and mobile solutions, demonstrating the Group's commitment to being a leader in the changing market.

·     In 2014 the underwriting of the Home insurance direct channel business was brought in-house offering all customers access to the first class claims service we provide. Investment is being made in the Group's direct digital capability with the aim of increasing market share in General Insurance and responding to changes in the way customers buy General Insurance, moving more towards online distribution channels.

·     Continued commitment to supporting customer protection needs, with focus now on the sale of our standalone protection products through investment in digital solutions and in the Independent Financial Adviser distribution channel alongside continued in-branch protection advice for mortgage applications. In recognition of the change in consumer focus, the Group withdrew standalone protection advice through Retail branches in November.

·     Completion of the sale of Heidelberger Leben and Scottish Widows Investment Partnership helped simplify the Insurance business, allowing increased focus on the remaining core business.

 

Financial performance

·     Resilient performance against a backdrop of significant change throughout the industry in 2014.

·     Operating cash generation increased by £55 million, to £737 million, primarily reflecting lower commission paid on corporate pensions and increased returns on shareholder free assets offset by reduced General Insurance premiums.

·     Underlying profit down 15 per cent to £922 million impacted by the cost of structural changes in the corporate pensions book, primarily the cap on pension charges, and lower life new business and General Insurance premiums offset by improved economics and an increase in yields on assets backing annuity business as a result of the strategy to invest in long-term, low risk, higher yielding assets.

·     A 10 per cent increase in corporate funds under management has driven a £3 billion increase in unit linked pension funds under management to £79 billion.

·     LP&I sales (PVNBP) reduced by 13 per cent in the year with sales of auto enrolment corporate pension business higher than expected but more than offset by an overall reduction in sales in 2014 following the Retail Distribution Review.

·     General Insurance Gross Written Premiums (GWP) down 8 per cent, reflecting the run off of legacy products and a competitive market during 2014.

 

Capital

·     Remitted £1.0 billion of dividends to the Group in 2014 (2013: £2.2 billion), including the £0.3 billion of Heidelberger Leben sale proceeds, whilst maintaining a strong capital base.

·     Estimated capital surplus for Pillar 1 is £2.3 billion (Scottish Widows plc, £2.7 billion in 2013) and for Insurance Groups Directive is £3.0 billion (Insurance Group, £2.9 billion in 2013) with the decrease in Pillar 1 reflecting the dividends paid over the period.



 

INSURANCE (continued)

 

Performance summary



2014 


20131


Change 



£m 


£m 









Net interest income


(131)


(107)


(22)

Other income


2,054


2,220 


(7)

Insurance claims


(329)


(356)


Total income


1,594 


1,757 


(9)

Total costs


(672)


(669)


− 

Underlying profit


922 


1,088 


(15)








Operating cash generation


737 


682 


UK LP&I sales (PVNBP)2


8,601 


9,934 


(13)

General Insurance total GWP


1,197 


1,307 


(8)

General Insurance combined ratio


76% 


77% 


(1)pp 

 

1

Restated to reflect changes to the Group operating structure that came into effect from 1 January 2014.

2

Present value of new business premiums.

 

Profit by product group

 


2014


2013


Pensions & 

investments 

Protection 

& retirement1

General 

Insurance 

 

Other2

 

Total 


 

Total 


£m 

£m 

£m 

£m 

£m 


£m 

New business income

189 

74 

− 

268 


423 

Existing business income

658 

120 

− 

114 

892 


807 

Assumption changes and experience variances

(219)

277 

− 

(24)

34 


70 

General Insurance income net
of claims

− 

− 

400 

− 

400 


457 

Total income

628 

471 

400 

95 

1,594 


1,757 

Total costs

(381)

(127)

(144)

(20)

(672)


(669)

Underlying profit 2014

247 

344 

256 

75 

922 


1,088 









Underlying profit 20133

357 

445 

297 

(11)

1,088



1

Retirement assumption changes and experience variances include the benefit of acquiring, from Commercial Banking, £1.7 billion of loans during 2014; bringing total social housing, infrastructure and education acquired loans to £3.9 billion.

 

2

'Other' is primarily income from return on free assets, interest expense, certain provisions plus a small element of European business.

 

3

Full 2013 comparator tables for the profit and cash disclosures can be found on the Lloyds Banking Group investor site.

 

 

The new business income of £268 million includes a reduction in pensions new business income due to lower volumes relative to the spike in 2013 sales as pre-Retail Distribution Review sales completed. In calculating new business income on auto-enrolment schemes, allowance has been made for low initial contribution levels and does not include future automatic increases in contribution levels. These increases will be reported in future years. In addition Protection & retirement new business income has reduced following the 2014 Budget announcement which led to industry wide reductions in annuities volumes following changes to the freedoms consumers have in accessing their pension savings.



 

INSURANCE (continued)

 

Existing business income has increased by £85 million reflecting improved economics benefiting the life and pensions business.

 

Assumption changes and experience variances include, within Protection and retirement, the benefits arising from the acquisition of attractive higher yielding assets to match long duration annuity liabilities and benefits from assumption changes. This has been offset by assumption changes within the existing Pensions and investments book including actions being taken to prepare for the structural changes arising from the DWP's announcement, which introduced a cap on pension charges. These changes to corporate pensions will ensure that future new business is less capital intensive.

 

General Insurance profit has fallen by £41 million, due to the continued run-off of legacy books and the impact of storms during the first quarter, offset by good prior year experience. During the year underwriting of the Home Insurance business was brought in-house, ensuring delivery of a first class service to all our customers and continued sustainable growth in the underwritten customer base. Excellent technical capabilities and scale have enabled Insurance to respond to competitive pressures and a number of severe weather events in the early part of 2014, and maintain a strong combined ratio.

 

Operating cash generation

 


2014


2013

 


Pensions & 

investments

Protection & 

retirement 

General 

Insurance 

 

Other1

 

Total 


 

Total 


£m 

£m 

£m 

£m 

£m 


£m 









Cash invested in new business

(238)

(38)

− 

(12)

(288)


(270)

Cash generated from existing business

452 

177 

− 

140 

769 


655 

Cash generated from General Insurance

− 

− 

256 

− 

256 


297 

Operating cash generation

214 

139 

256 

128 

737 


682 

Intangibles and other adjustments2

33 

205 

− 

(53)

185 


406 

Underlying profit

247 

344 

256 

75 

922 


1,088 









Operating cash generation 2013

224

136 

297 

25 

682 



1

Derived from IFRS underlying profit by removing the effect of movements in intangible (non-cash) items and assumption changes.

2

Intangible items include the value of in-force life business, deferred acquisition costs and deferred income reserves.

 

The Insurance business generated £737 million of operating cash in 2014, £55 million higher than the prior year. The growth in cash generated from existing business resulted from increased yields on assets backing the annuity business and increased returns on shareholder free assets. In Pensions and investments, cash invested in new business has reduced due to lower volumes of corporate and individual pensions and reduced commission costs, partially offset by increased reserves for auto-enrolment business (these reserves are expected to unwind over the next few years as contribution levels increase). In Protection and retirement, cash invested in new business is greater than 2013, reflecting lower profitability of standard annuities.



 

RUN-OFF AND CENTRAL ITEMS

 

RUN-OFF

 



2014 


20131



£m 


£m 






Net interest income


(116)


138 

Other income


451 


1,266 

Total income


335 


1,404 

Total costs


(308)


(726)

Impairment


(203)


(1,389)

Underlying loss


(176)


(711)






Total income excluding St. James's Place


335 


742 

Underlying loss excluding St. James's Place


(176)


(1,329)

 



2014 


20131



£bn 


£bn 






Loans and advances to customers


14.4 


27.7 

Total assets


16.9 


33.3 






Risk-weighted assets2


16.8 


30.6 

 

1

Restated to reflect the changes to the Group operating structure that came into effect from 1 January 2014.

2

31 December 2013 comparatives reflect CRD IV rules as implemented by the PRA at 1 January 2014.

 

·     Run-off includes certain assets previously classified as non-core and the results and gains or losses on sale of businesses sold in 2013 and 2014.

·     The reduction in income and costs largely related to the sales of St. James's Place in 2013 and Scottish Widows Investment Partnership in the first quarter of 2014.

·     The reduction in the impairment charge reflects continued proactive risk management and the success in managing down the Run-off portfolios.

 

CENTRAL ITEMS

 



2014 


20131



£m 


£m 






Total income (expense)


132 


(133)

Total costs


(22)


(49)

Impairment


(2)


(5)

Underlying profit/(loss)


108 


(187)

 

1

Restated.

 

·     Central items include income and expenditure not recharged to divisions, including the costs of certain central and head office functions.

·     Underlying income in 2014 included the benefit relating to the reduction in interest payable following the ECN exchange in the second quarter, which has not been passed onto divisions.

 



 

ADDITIONAL INFORMATION

 

1.         Reconciliation between statutory and underlying basis results

 

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

 




Removal of:




Lloyds 
Banking 
Group 
statutory 

Acquisition  
related and  
other items

Volatility  
arising in  
insurance  
businesses  

Insurance  
gross up  

PPI  

and other  
regulatory  
provisions

Fair value  
unwind  

Underlying 
basis 

2014


£m 


£m 


£m 


£m 


£m 


£m 


£m 

 
















 

Net interest income


10,660 


(7)


− 


482 


− 


626 


11,761 

 

Other income, net of insurance claims


5,739 


1,141 


228 


(614)


− 


113 


6,607 

 

Total income


16,399 


1,134 


228 


(132)


− 


739 


18,368 

 

Operating expenses3


(13,885)


1,175 


− 


132 


3,125 


41 


(9,412)

 

Impairment


(752)


(197)


− 


− 


− 


(251)


(1,200)

 

Profit (loss)


1,762 


2,112 


228 


− 


3,125 


529 


7,756 

 

 




Removal of:




Lloyds 
Banking 
Group 
statutory 

Acquisition  
related and  
other items

Volatility  
arising in  
insurance  
businesses  

Insurance  
gross up  

PPI  

and other  
regulatory  
provisions

Fair value  
unwind  

Underlying 
basis 

2013


£m 


£m 


£m 


£m 


£m 


£m 


£m 

 
















 

Net interest income


7,338 


(14)


- 


2,930 



631 


10,885 

 

Other income, net of insurance claims


11,140 


460 


(668)


(3,074)



62 


7,920 

 

Total income


18,478 


446 


(668)


(144)



693 


18,805 

 

Operating expenses3


(15,322)


2,041 



144 


3,455 


47 


(9,635)

 

Impairment


(2,741)


249 





(512)


(3,004)

 

Profit (loss)


415 


2,736 


(668)



3,455 


228 


6,166 

 

 

1

Comprises the effects of asset sales (gain of £138 million), volatile items (gain of £286 million), liability management (loss of £1,386 million), Simplification costs related to severance, IT and business costs of implementation (£966 million), TSB build and dual running costs (£558 million), the past service pensions credit (£710 million) and the amortisation of purchased intangibles (£336 million).

2

Comprises the payment protection insurance provision of £2,200 million (2013: £3,050 million) and other regulatory provisions of £925 million (2013: £405 million).

3

On an underlying basis, this is described as total costs.

4

Comprises the effects of asset sales (gain of £100 million), volatile items (loss of £678 million), liability management (loss of £142 million), Simplification costs (£830 million), TSB build and dual running costs (£687 million), the past service pensions charge  (£104 million) and the amortisation of purchased intangibles (£395 million).



ADDITIONAL INFORMATION (continued)

 

2.         Banking net interest margin

 

Banking net interest margin is calculated by dividing banking net interest income by average interest-earning banking assets. 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:

 



2014 


2013 



£m 


£m 






Banking net interest income - underlying basis


11,845 


10,841 

Insurance division


(131)


(107)

Other net interest income (including trading activity)


47 


151 

Group net interest income - underlying basis


11,761 


10,885 

Fair value unwind


(626)


(631)

Banking volatility and liability management gains



14 

Insurance gross up


(482)


(2,930)

Group net interest income - statutory


10,660 


7,338 

 

Average interest-earning banking assets are calculated gross of related impairment allowances, and relate solely to customer and product balances in the banking businesses on which interest is earned or paid.

 



2014 


2013 



£bn 


£bn 






Average loans and advances (gross)


504.2 


518.7 

Non-banking assets


(11.6)


(8.8)

Other1


(8.9)


1.0 

Average interest-earning assets


483.7 


510.9 

 

1

Other includes adjustments for assets that are netted for interest earning purposes, reverse repos and the timing effect of disposals.

 

3.         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 2014 the Group's statutory result before tax included negative insurance and policyholder interests volatility totalling £228 million compared to positive volatility of £668 million in 2013.

 

Volatility comprises the following:



2014 


2013 



£m 


£m 






Insurance volatility


(219)


218 

Policyholder interests volatility1


17 


564 

Total volatility


(202)


782 

Insurance hedging arrangements


(26)


(114)

Total


(228)


668 

 

1

Includes volatility relating to the Group's interest in St. James's Place in 2013.

 



 

ADDITIONAL INFORMATION (continued)

 

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


2014 


2013 









Investments backing annuity liabilities


4.54 


3.83 

Equities and property


6.48 


5.58 

UK Government bonds


3.48 


2.58 

Corporate bonds


4.08 


3.18 

 

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 include appropriate returns for these assets.

 

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 negative insurance volatility during 2014 of £219 million primarily reflects an adverse performance on equity and cash investments in the period relative to expected return.

 

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 2014, the statutory results before tax included a credit to other income which relates to policyholder interests volatility totalling £17 million (2013: £564 million) relating to offsetting movements in equity, bond and gilt returns.

 

Insurance hedging arrangements

The Group purchased put option contracts in 2014 to protect against deterioration in equity market conditions and the consequent negative impact on the value of in-force business on the Group balance sheet. These were financed by selling some upside potential from equity market movements. A charge of £26 million was taken on hedging contracts in 2014 (2013: £114 million).



 

ADDITIONAL INFORMATION (continued)

4.         Number of employees (full-time equivalent)

 



2014 


2013 






Retail


35,383 


38,844 

Commercial Banking


6,188 


6,752 

Consumer Finance


3,485 


3,393 

Insurance


2,015 


2,373 

Run-off and Central items


32,078 


32,813 

TSB


7,685 


7,140 



86,834 


91,315 

Agency staff (full-time equivalent)


(2,344)


(2,338)

Total number of employees (full-time equivalent)


84,490 


88,977 

Total number of employees excluding TSB


76,978 


81,840 

 

5.         TSB

 

The financial results for TSB are presented on a Lloyds Banking Group basis and differ to those reported by TSB for the reasons shown below. Investors in TSB should only rely on financial information published by TSB.

 



2014 


2013 

Profit before tax:


£m 


£m 






On a Lloyds Banking Group reporting basis (underlying profit)


458 


106 

Recognition of product transfers1


− 


(200)

Cost allocation2


− 


217 

TSB dual running costs3


(326)


− 

Volatile items4


(26)


(46)

Defined benefit pension scheme settlement gain5


64 


− 

FSCS levy adjustment6


− 


10 

Other


− 


(2)

Reported in the TSB results announcement


170 


85 

 

 


2014 


2013 

Risk-weighted assets:


£bn 


£bn 






On a Lloyds Banking Group reporting basis


5.2 


5.6 

Risk-weighted assets for operational risk7


1.5 


0.4 

Other8


0.2 


0.2 

Reported in the TSB results announcement


6.9 


6.2 

 

1

On the Lloyds Banking Group reporting basis, all product transfers to TSB are assumed to have occurred on 1 January 2013.

2

In 2013, TSB was allocated costs on the same basis as the other business segments. In 2014, costs have been charged to TSB in accordance with the Transitional Service Agreement and the costs that were previously allocated to TSB have been charged to the other business segments.

3

This represents corporate head office and similar costs incurred by TSB. The Group has excluded these from underlying profit to provide a more meaningful view of underlying business costs as they represent the duplicated costs of running two corporate head offices. These costs form part of the continuing TSB cost base and are reflected in the Group's statutory profit before tax.

4

Banking volatility reported below underlying profit in the Lloyds Banking Group results.

5

Following the transfer of employees from employment with Lloyds Banking Group companies to TSB Bank, the defined benefit scheme assets and liabilities have been derecognised from the TSB Bank balance sheet and settled with nil cash consideration, resulting in a one off gain of £64 million. This is eliminated at Lloyds Banking Group level.

6

Adjustment to reflect the change in timing of the FSCS charge.

7

The TSB risk-weighted asset for operational risk is determined by TSB as a standalone organisation.

8

Other relates mainly to risk-weighted assets that result from TSB's standalone capital calculations, for example threshold adjustments and exposures with other businesses in the Lloyds Banking Group.



 

ADDITIONAL INFORMATION (continued)

 

6.         Remuneration

 

The Group believes in pay for performance and providing a competitive package that allows us to attract and retain the key talent necessary to deliver the strategy set by the Board, and in ensuring that fixed and variable remuneration costs are properly managed.

 

As part of the Group's goal to be the best bank for customers, we reward our colleagues in a way that recognises the very highest expectations in respect of conduct and customer treatment whilst continuing to be mindful of the economic environment. Key remuneration decisions also take into consideration the views of our major shareholders and other stakeholders.

 

The Group's bonus pool has been determined by reference to risk-adjusted performance, affordability and the views of key stakeholders. Material adjustments have been made to the outcome in 2014 (as in 2013) to reflect the impacts of legacy items. Discretionary annual bonus awards of £386 million (including £17 million relating to TSB) will be made for 2014 (2013: £395 million including £12 million relating to TSB). The aggregate bonus awards as a percentage of pre bonus underlying profit before tax has reduced from 6.0 per cent in 2013 to 4.7 per cent.

 

Further information regarding remuneration awards is included in the separate announcement covering remuneration released today.



 

RISK MANAGEMENT

 


Page 

Principal risks and uncertainties

35 

Credit risk portfolio

37 

Funding and liquidity management

53 

Capital management

58 

 

The income statement numbers in this section are presented on an underlying basis.

 



 

PRINCIPAL RISKS AND UNCERTAINTIES

 

The most significant risks faced by the Group which could impact the success of delivering against the Group's long-term strategic objectives together with key mitigating actions are outlined below.

 

Credit risk

Principal risks

Any adverse changes in the economic and market environment we operate in, or the credit quality and/or behaviour of our borrowers and counterparties would reduce the value of our assets and potentially increase our write-downs and allowances for impairment losses, adversely impacting profitability.

 

Mitigating actions

·     Credit policy incorporating prudent lending criteria aligned with the Board approved risk appetite to effectively manage credit risk.

·     Clearly defined levels of authority ensure we lend appropriately and responsibly with separation of origination and sanctioning activities.

·     Robust credit processes and controls including well-established governance to ensure distressed and impaired loans are identified early, considered and controlled with independent credit risk assurance.

 

Conduct risk

Principal risks

We face significant potential conduct risk, including selling products to customers which do not meet their needs; failing to deal with customers' complaints effectively; not meeting customers' expectations; and exhibiting behaviours which do not meet market or regulatory standards.

 

Mitigating actions

·     Customer focused conduct strategy implemented to ensure customers are at the heart of everything we do.

·     Product approval, review processes and outcome testing supported by conduct management information.

·     Clear customer accountabilities for colleagues, with rewards driven off customer-centric metrics.

·     Learning from past mistakes, including root-cause analysis.

 

Market risk

Principal risks

Key market risks include interest rate risk across the Banking and Insurance businesses. However, our most significant market risk is from the Defined Benefit Pension Schemes where asset and liability movements impact on our capital position.

 

Mitigating actions

·     A structural hedge programme has been implemented to manage liability margins and margin compression.

·     Board approved pensions risk appetite covering interest rate, credit spreads and equity risks. Credit assets are being purchased and equity holdings have reduced in the pension schemes.

·     Stress and scenario testing of risk exposures.

 

Operational risk

Principal risks

We face significant operational risks which may result in financial loss, disruption or damage to the reputation of the Group. These include the availability, resilience and security of our core IT systems and the potential for failings in our customer processes.

 

Mitigating actions

·     Continually review IT system architecture to ensure that our systems are resilient, and the confidentiality, integrity and availability of our critical systems and information assets are protected against cyber attacks.

·     Continue to implement the actions from the 2013 independent IT Resilience Review to enhance the resilience of systems supporting the processes most critical to our customers.

 

PRINCIPAL RISKS AND UNCERTAINTIES (continued)

 

Funding and liquidity

Principal risks

Our funding and liquidity position is supported by a significant and stable customer deposit base. A deterioration in either our or the UK's credit rating, or a sudden and significant withdrawal of customer deposits could adversely impact our funding and liquidity position.

 

Mitigating actions

·     At 31 December 2014 the Group had £109.3 billion of unencumbered primary liquid assets and the Group maintains a further large pool of secondary assets that can be used to access Central Bank liquidity facilities.

·     Daily monitoring against a number of market and Group specific early warning indicators and regular stress tests.

·     Contingency funding plan to identify liquidity concerns earlier.

 

Capital risk

Principal risks

Our future capital position is potentially at risk from a worsening macroeconomic environment. This could lead to adverse financial performance for the Group which could deplete capital resources and/or increase capital requirements due to a deterioration in customers' creditworthiness.

 

Mitigating actions

·     Close monitoring of capital and leverage ratios to ensure we meet our current and future regulatory requirements.

·     Comprehensive stress testing analysis to evidence sufficient levels of capital adequacy for the Group under various adverse scenarios.

·     In addition to accumulating retained profits, we can raise additional capital in a variety of ways.

 

Regulatory risk

Principal risks

We are subject to industry wide investigations and reviews into a perceived lack of competition in UK banking and financial services. The outcomes of the UK General Election in May 2015 and the investigations by the CMA and FCA are presently unclear and their impact therefore remains uncertain. Other initiatives under review include the ring-fencing proposals in the Banking Reform Act 2013,the new FCA Consumer Credit regime and CRD IV.

 

Mitigating actions

·     The Legal, Regulatory and Mandatory Change Committee ensures we develop plans for regulatory changes and tracks their progress.

·     Continued investment in our people, processes and IT systems is enabling us to meet our regulatory commitments.

·     Continued engagement with government and regulatory authorities on forthcoming regulatory changes and market investigations and reviews.

 

People risk

Principal risks

Key people risks include the risk that the Group fails to lead responsibly in an increasingly competitive marketplace, particularly with the introduction of the Senior Managers' Regime and Certification Regime which will come into force in 2015. This may dissuade capable individuals from taking up senior positions within our Group.

 

Mitigating actions

·     Work collaboratively with regulators to implement the new Individual Accountability Regime in 2015, ensuring burden of proof and attestation requirements are effectively implemented.

·     Maintain competitive working practices to attract retain and engage high quality people.

·     Create a work environment which listens and acts on colleague feedback, making the Group the best bank for colleagues.



 

             

CREDIT RISK PORTFOLIO

 

Significant reduction in impairments

·     The impairment charge decreased by 60 per cent from £3,004 million in 2013 to £1,200 million in 2014. The impairment charge has decreased across all divisions. The material reduction reflects lower levels of new impairment as a result of effective risk management, improving economic conditions and the continued low interest rate environment.

·     The charge also benefited from significant provision releases but at lower levels than seen during 2013.

·     The impairment charge as a percentage of average loans and advances to customers improved to 24 basis points compared to 57 basis points during 2013.

·     Impaired loans as a percentage of closing advances reduced to 2.9 per cent at 31 December 2014, from 6.3 per cent at 31 December 2013, driven by improvements in all divisions. Impaired loans reduced substantially by £18 billion during the period, mainly due to disposals, write-offs and lower levels of newly impaired loans.

·     Impairment provisions as a percentage of impaired loans increased from 50.1 per cent at 31 December 2013 to 56.4 per cent at 31 December 2014, driven by the Retail, Commercial Banking and Run-off divisions.

 

Low risk culture and prudent risk appetite

·     The Group is delivering sustainable growth by maintaining the Group's lower risk origination discipline. The overall quality of the portfolio has improved over the last 12 months.

·     The Group continues to deliver above market lending growth in SME whilst maintaining the Group's prudent risk appetite. Portfolio credit quality has remained stable or improved across key metrics.

·     The Group continues to adopt a conservative stance across the Eurozone, maintaining close portfolio scrutiny and oversight. Detailed contingency plans are in place and exposures to financial institutions domiciled in peripheral Eurozone countries remain modest and managed within tight risk parameters.

 

Re-shaping of the Group is substantially complete

·     Run-off net assets have reduced from £33.3 billion to £16.9 billion at the end of 2014. This reduction was capital accretive.

·     The Run-off portfolio now represents only 3.0 per cent of the overall Group's total loans and advances and poses substantially less downside risk to the Group. The remaining assets are the subject of frequent review, and are impaired to appropriate levels based on external evidence and internal reviews.

·     The Group's UK Direct Real Estate gross lending at 31 December 2014 in Commercial Banking, Wealth (within Retail division) and Run-off divisions was £21.6 billion (31 December 2013: gross £27.8 billion). The portfolio continues to reduce significantly, and the higher risk Run-off element of the book has reduced from gross £7.6 billion to gross £3.3 billion during 2014. The remaining gross lending of £18.3 billion (31 December 2013: £20.2 billion) is the lower risk element in Commercial Banking and Wealth, where the Group continues to write new business within conservative risk appetite parameters. The loan to value (LTV) profile of the UK Direct Real Estate portfolio in Commercial Banking continues to improve.

·     The Group continues to reduce its exposure to Ireland with gross loans and advances reducing by £7.5 billion during 2014 mainly due to strategic transactions, disposals, write-offs and net repayments. The Group has disposed of two significant impaired portfolios in 2014, with a combined gross book value of £2.4 billion.

·     The Irish commercial portfolio remains significantly impaired at 89 per cent, with provision coverage of 81 per cent. Net exposure in Ireland commercial has fallen to £1.0 billion (31 December 2013: £3.4 billion).

·     The Irish retail portfolio has reduced from £5,944 million at 31 December 2013 to £4,464 million at 31 December 2014. Within this portfolio, impaired loans have reduced from £1,002 million (16.9 per cent) at 31 December 2013 to £120 million (2.7 per cent) at 31 December 2014, driven primarily by the disposal of the majority of impaired assets in the second half of 2014.

·     The Acquisition Finance (leverage lending) portfolio has materially reduced and gross loans and advances totalled £1,910 million as at 31 December 2014. The Run-off element of the Acquisition Finance portfolio totalled only £40 million (net £22 million) as at 31 December 2014.



 

CREDIT RISK PORTFOLIO (continued)

 

Impairment charge by division



2014 


2013 


Change 



£m 


£m 









Retail:







Secured


281 


249 


(13)

Loans and overdrafts


279 


478 


42 

Other


39 


33 


(18)



599 


760 


21 

Commercial Banking:







SME


15 


162 


91 

Other


68 


236 


71 



83 


398 


79 

Consumer Finance:







Credit Cards


186 


274 


32 

Asset Finance UK


30 


52 


42 

Asset Finance Europe


(1)


17 





215 


343 


37 

Run-off:







Ireland retail


(6)


(26)


(77)

Ireland commercial real estate


67 


219 


69 

Ireland corporate


247 


415 


40 

Corporate and real estate and other corporate


(28)


522 



Specialist finance


22 


345 


94 

Other


(99)


(86)


15 



203 


1,389 


85 

TSB


98 


109 


10 

Central items




60 

Total impairment charge


1,200 


3,004 


60 








Impairment charge as a % of average advances


0.24% 


0.57% 



 

Total impairment charge comprises:

 




2014 


2013 


Change 

 


£m 


£m 


 







Loans and advances to customers


1,183 


2,988 


60 

Debt securities classified as loans and receivables




(100)

Available-for-sale financial assets



15 


67 

Other credit risk provision


10 


− 


− 

Total impairment charge


1,200 


3,004 


60 



 

CREDIT RISK PORTFOLIO (continued)

 

Group impaired loans and provisions

At 31 December 2014


Loans and   

advances to   

customers   

Impaired   

Loans   

Impaired   

loans as %   
of closing   

advances   

Impairment  provisions1

Impairment 

provision 

as % of 

impaired 

loans2



£m   

£m   

%   

£m 













Retail:











Secured


303,121 


3,911 


1.3 


1,446 


37.0 

Loans and overdrafts


10,395 


695 


6.7 


220 


85.3 

Other


3,831 


321 


8.4 


68 


23.1 



317,347 


4,927 


1.6 


1,734 


38.8 

Commercial Banking:











SME


28,256 


1,546 


5.5 


398 


25.7 

Other


74,203 


1,695 


2.3 


1,196 


70.6 



102,459 


3,241 


3.2 


1,594 


49.2 

Consumer Finance:











Credit Cards


9,119 


499 


5.5 


166 


76.5 

Asset Finance UK


7,204 


160 


2.2 


112 


70.0 

Asset Finance Europe


4,950 


61 


1.2 


31 


50.8 



21,273 


720 


3.4 


309 


70.5 

Run-off:











Ireland retail


4,464 


120 


2.7 


141 


117.5 

Ireland commercial real estate


1,797 


1,659 


92.3 


1,385 


83.5 

Ireland corporate


1,639 


1,393 


85.0 


1,095 


78.6 

Corporate real estate and other corporate


3,947 


1,548 


39.2 


911 


58.9 

Specialist finance


4,835 


364 


7.5 


254 


69.8 

Other


1,634 


131 


8.0 


141 


107.6 



18,316 


5,215 


28.5 


3,927 


75.3 

TSB


21,729 


205 


0.9 


88 


42.9 

Reverse repos and other items3


9,635 









Total gross lending


490,759 


14,308 


2.9 


7,652 


56.4 

Impairment provisions


(7,652)









Fair value adjustments4


(403)









Total Group


482,704 









 

1

Impairment provisions include collective unimpaired provisions.

2

Impairment provisions as a percentage of impaired loans are calculated excluding Retail and Consumer Finance loans in recoveries
(31 December 2014: £437 million in Retail loans and overdrafts, £26 million in Retail other and £282 million in Consumer Finance credit cards).

3

Includes £4.4 billion (31 December 2013: £2.6 billion) of lower risk loans (social housing, infrastructure and education) transferred from Commercial Banking division into Insurance division's shareholder funds to support the Group's annuity portfolio.

4

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 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 commercial 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 £251 million for the period ended 31 December 2014 (31 December 2013: £512 million). 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)

 

Group impaired loans and provisions (continued)

At 31 December 2013


Loans and  

advances to  

customers  

Impaired  

loans  

Impaired  

loans as %  
of closing  

advances  

Impairment  provisions1

Impairment 

provision 

as % of 

impaired 

loans2



£m  

£m  

%  

£m 
























Retail:











Secured


302,019 


5,503 


1.8 


1,447 


26.3 

Loans and overdrafts


10,598 


819 


7.7 


285 


83.1 

Other


4,148 


408 


9.8 


106 


28.3 



316,765 


6,730 


2.1 


1,838 


29.5 

Commercial Banking:











SME


27,268 


2,194 


8.0 


623 


28.4 

Other3


80,782 


2,853 


3.5 


1,761 


61.7 



108,050 


5,047 


4.7 


2,384 


47.2 

Consumer Finance:











Credit Cards


9,008 


639 


7.1 


226 


96.6 

Asset Finance UK


5,061 


221 


4.4 


140 


63.3 

Asset Finance Europe


5,478 


86 


1.6 


45 


52.3 



19,547 


946 


4.8 


411 


76.0 

Run-off:











Ireland retail


5,944 


1,002 


16.9 


638 


63.7 

Ireland commercial real estate


5,512 


5,087 


92.3 


3,775 


74.2 

Ireland corporate


3,918 


3,235 


82.6 


2,305 


71.3 

Corporate real estate and other corporate


11,571 


8,131 


70.3 


3,320 


40.8 

Specialist finance


9,017 


1,368 


15.2 


565 


41.3 

Other


2,519 


486 


19.3 


372 


76.5 



38,481 


19,309 


50.2 


10,975 


56.8 

TSB


23,553 


227 


1.0 


99 


43.6 

Reverse repos and other items


2,779 









Total gross lending


509,175 


32,259 


6.3 


15,707 


50.1 

Impairment provisions


(15,707)









Fair value adjustments


(516)









Total Group


492,952 









 

1

Impairment provisions include collective unimpaired provisions.

2

Impairment provisions as a percentage of impaired loans are calculated excluding Retail and Consumer Finance loans in recoveries (31 December 2013: £476 million in Retail loans and overdrafts, £34 million in Retail other and £405 million in Consumer Finance credit cards).

3

Loans and advances to customers restated. See note 1, page 75.

 



 

CREDIT RISK PORTFOLIO (continued)

 

Retail

 

·     The Retail impairment charge was £599 million in 2014, a decrease of 21 per cent compared to 2013. The decrease was primarily driven by underlying improvements in portfolio quality and the sale of recoveries assets in the Loans and Overdrafts portfolios.

·     The Retail impairment charge, as an annualised percentage of average loans and advances to customers, decreased to 19 basis points in 2014 from 24 basis points in 2013.

·     Retail impaired loans decreased by £1,803 million to £4,927 million compared with 31 December 2013 driven by the Secured portfolio. Retail impaired loans represent 1.6 per cent of closing loans and advances to customers compared with 2.1 per cent at 31 December 2013.

 

Secured

·     Impaired loans reduced to £3,911 million at 31 December 2014 compared to £5,503 million at 31 December 2013.

·     Impairment provisions remained stable at £1,446 million at 31 December 2014 (31 December 2013: £1,447 million). As a result of this impairment provisions as a percentage of impaired loans increased to 37.0 per cent from 26.3 per cent at 31 December 2013.

·     The impairment charge increased by £32 million, to £281 million compared with 2013. The impairment charge as an annualised percentage of average loans and advances to customers, increased to 9 basis points in 2014 from 8 basis points in 2013.

·     The value of mortgages greater than three months in arrears (excluding repossessions) decreased by £2,249 million to £6,344 million at 31 December 2014 compared to £8,593 million at 31 December 2013.

·     The average indexed loan to value (LTV) on the mortgage portfolio at 31 December 2014 decreased to 49.2 per cent compared with 53.3 per cent at 31 December 2013. The percentage of closing loans and advances with an indexed LTV in excess of 100 per cent decreased to 2.2 per cent at 31 December 2014, compared with 5.4 per cent at 31 December 2013.

·     The average LTV for new mortgages and further advances written in 2014 was 64.8 per cent compared with 64.0 per cent for 2013 reflecting the Group's participation in the UK government's Help to Buy scheme.

 

Loans and overdrafts

·     The impairment charge decreased by £199 million, to £279 million compared with 2013. The annualised impairment charge, as a percentage of average loans and advances to customers, reduced to 2.6 per cent in 2014 from 4.2 per cent in 2013.

·     Impaired loans have decreased by £124 million since 31 December 2013 to £695 million at 31 December 2014 which represents 6.7 per cent of closing loans and advances to customers, compared with 7.7 per cent at 31 December 2013.

·     Impairment provisions decreased by £65 million, compared with 31 December 2013.

 



 

CREDIT RISK PORTFOLIO (continued)

 

Retail (continued)

 

Retail secured and unsecured loans and advances to customers

 



At 31 Dec 

2014 


At 31 Dec 

2013 



£m 


£m 






Mainstream


228,176 


228,030 

Buy-to-let


53,322 


50,346 

Specialist1


21,623 


23,643 



303,121 


302,019 






Loans


8,204 


8,282 

Overdrafts


2,191 


2,316 

Wealth


2,962 


3,232 

Retail Business Banking


869 


916 



14,226 


14,746 






Total


317,347 


316,765 

 

1

Specialist lending has been closed to new business since 2009.

 

Retail mortgages greater than three months in arrears (excluding repossessions)

 



Number of cases


Total mortgage accounts %


Value of loans1


Total mortgage balances %


2014 


2013 

2014 


2013 

2014 


2013 

2014 


2013 



Cases 


Cases 




£m 


£m 




















Mainstream


37,849 


50,437 


1.7 


2.2 


4,102 


5,683 


1.8 


2.5 

Buy-to-let


5,077 


6,250 


1.1 


1.4 


658 


859 


1.2 


1.7 

Specialist


9,429 


11,870 


6.3 


7.3 


1,584 


2,051 


7.3 


8.7 

Total


52,355 


68,557 


1.8 


2.3 


6,344 


8,593 


2.1 


2.8 

 

1

Value of loans represents total book value of mortgages more than three months in arrears.

 

The stock of repossessions decreased to 1,740 cases at 31 December 2014 compared to 2,179 cases at 31 December 2013.

 



 

CREDIT RISK PORTFOLIO (continued)

 

Retail(continued)

 

Period end and average LTVs across the Retail mortgage portfolios

 

At 31 December 2014


Mainstream 


Buy-to-let 


Specialist 


Total 


Unimpaired 


Impaired 





















Less than 60%


44.6 


32.4 


31.4 


41.5 


41.7 


22.5 

60% to 70%


19.9 


27.3 


19.5 


21.2 


21.3 


15.3 

70% to 80%


18.5 


21.8 


19.8 


19.2 


19.2 


17.8 

80% to 90%


10.6 


9.4 


14.9 


10.7 


10.6 


16.7 

90% to 100%


4.5 


6.8 


8.7 


5.2 


5.2 


11.9 

Greater than 100%


1.9 


2.3 


5.7 


2.2 


2.0 


15.8 

Total


100.0 


100.0 


100.0 


100.0 


100.0 


100.0 

Outstanding loan value (£m)


228,176 


53,322 


21,623 


303,121 


299,210 


3,911 

Average loan to value:1













Stock of residential mortgages


46.3 


61.3 


59.2 


49.2 





New residential lending


65.3 


62.7 


n/a 


64.8 





Impaired mortgages


60.1 


81.0 


72.6 


64.9 


















At 31 December 2013


Mainstream 


Buy-to-let 


Specialist 


Total 


Unimpaired 


Impaired 





















Less than 60%


36.4 


19.1 


20.1 


32.3 


32.6 


15.3 

60% to 70%


16.6 


20.7 


15.7 


17.2 


17.3 


11.2 

70% to 80%


19.8 


26.5 


19.3 


20.9 


21.0 


15.4 

80% to 90%


15.2 


15.7 


20.1 


15.6 


15.6 


17.7 

90% to 100%


7.4 


11.6 


14.3 


8.6 


8.5 


16.1 

Greater than 100%


4.6 


6.4 


10.5 


5.4 


5.0 


24.3 

Total


100.0 


100.0 


100.0 


100.0 


100.0 


100.0 

Outstanding loan value (£m)


228,030 


50,346 


23,643 


302,019 


296,516 


5,503 

Average loan to value:1













Stock of residential mortgages


49.9 


67.9