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Lloyds Banking Group (LLOY)

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Thursday 30 July, 2020

Lloyds Banking Group

2020 Half-Year Results - Part 1 of 2

RNS Number : 5412U
Lloyds Banking Group PLC
30 July 2020
 

 

 

2020 Half-Year Results

News Release

 

Lloyds Banking Group plc

 

30 July 2020

 

Part 1 of 2

 

 

Y'

 

 

BASIS OF PRESENTATION

 

This release covers the results of Lloyds Banking Group plc together with its subsidiaries (the Group) for the six months ended 30 June 2020.

Statutory basis: Statutory profit / loss before tax and statutory profit after tax are included within this document. However, a number of factors have had a significant effect on the comparability of the Group's financial position and results. Accordingly, the results are also presented on an underlying basis.

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

− restructuring, including severance-related costs, the rationalisation of the non-branch property portfolio, the establishment of the Schroders partnership, the integration of MBNA and Zurich's UK workplace pensions and savings business;

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

− payment protection insurance provisions.

Unless otherwise stated, income statement commentaries throughout this document compare the six months ended 30 June 2020 to the six months ended 30 June 2019 and the balance sheet analysis compares the Group balance sheet as at 30 June 2020 to the Group balance sheet as at 31 December 2019.

Segmental information: During the half-year to 30 June 2020, the Group migrated certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail. In addition, Commercial Banking has been resegmented to reflect the division's new client coverage model and is now analysed according to SME, Mid Corporates, Corporate & Institutional, and Other. The Group has also revised its approach to internal funding charges, including the adoption of the Sterling Overnight Index Average (SONIA) interest rate benchmark in place of LIBOR. Comparatives have been restated accordingly.

Alternative performance measures: The Group uses a number of alternative performance measures, including underlying profit, in the discussion of its business performance and financial position. There have been no changes to the definitions of alternative performance measures used by the Group; further information on these measures is set out in the summary of alternative performance measures.

 

 

 

 

This document can also be found on the Group's website under "Financial Performance Downloads" via this link www.lloydsbankinggroup.com/investors/financial-performance/.

In addition, the Group Chief Executive's letter to shareholders is also available from the same link.

 

 

 

 

CONTENTS

 

 

 

 

Page 

Results for the half-year

1

Income statement - underlying basis

3

Key balance sheet metrics

3

Quarterly information

4

Balance sheet analysis

5

Group Chief Executive's statement

6

Summary of Group results

10

Underlying basis segmental analysis

23

 

 

Divisional results

 

Retail

25

Commercial Banking

27

Insurance and Wealth

29

Central items

31

 

 

Other financial information

 

Reconciliation between statutory and underlying basis results

32

Banking net interest margin and average interest-earning banking assets

33

Volatility arising in insurance businesses

33

Tangible net assets per share

34

Return on tangible equity

34

 

 

Risk management

 

Principal risks and uncertainties

35

Credit risk portfolio

37

Funding and liquidity management

56

Capital management

60

 

 

Statutory information

 

Condensed consolidated half-year financial statements

 

Consolidated income statement

71

Consolidated statement of comprehensive income

72

Consolidated balance sheet

73

Consolidated statement of changes in equity

75

Consolidated cash flow statement

78

Notes to the consolidated financial statements

79

Statement of directors' responsibilities

124

Independent review report to Lloyds Banking Group plc

125

 

 

Summary of alternative performance measures

128

Contacts

129

 

 

 

 

 

RESULTS FOR THE HALF-YEAR

 

"The impact of the coronavirus pandemic in the first half of 2020 has been profound on the way we live our lives and on the global economy. We remain fully focused on helping our customers and the UK economy recover, in collaboration with Government and our regulators.

 

I want to express my sincere gratitude to all my colleagues across the Group for their dedication and persistence which have allowed us to deliver vital banking services to our customers effectively throughout the pandemic.

 

Although the outlook is uncertain, the Group's financial strength and business model allow us to help Britain recover and play our part in returning our country to prosperity. Our customer focused strategic plan remains fully aligned with the Group's long term strategic objectives, the position of our franchise and the interests of shareholders."

 

António Horta-Osório

Group Chief Executive

 

 

Supporting customers, colleagues and the economy in difficult times

· Actively supporting retail, small business and commercial customers through a range of flexible propositions

Over £9 billion lending provided to businesses through government-backed schemes, including Bounce Back Loan, Coronavirus Business Interruption Loan and Coronavirus Large Business Interruption Loan schemes

Over 1.1 million payment holidays granted to retail customers and c.33,000 capital repayment holidays provided to small businesses and corporates to alleviate temporary financial pressures

Payment holidays granted on insurance premiums and advance payments for life and critical illness claims to support customers in financial difficulty during the pandemic

· Job and pay security provided to all colleagues since March. c.50,000 colleagues now working from home

· Multi-channel distribution model, with the UK's leading digital bank, combined with around 90 per cent of branches remaining open throughout the lockdown, enabling the Group to continue to serve customers

 

Continued strategic progress

· Continued progress against strategy with particular focus on building a leading customer experience, further digitising the Group, transforming the way we work and maximising Group capabilities. Over £2.4 billion invested in strategic initiatives during GSR3 to help deliver sustainable shareholder value creation

· The benefits of our investments from GSR3 have positioned us well in the current environment:

Operating the UK's leading digital bank we now have more than 17 million digitally active users, up 4 per cent during lockdown, while recording digital customer satisfaction levels at an all-time high, even in a period of increased demand

Our commitment to delivering cost efficiencies and creating capacity to invest in the business has enabled us to respond quickly to new challenges, such as using robotics to process c.98 per cent of Bounce Back Loan applications

Our unique Single Customer View, which added another 1 million customers in the first half of the year, enables us to serve a wider range of our customers' financial needs than ever before

· The opportunity exists to accelerate our transformation, and further enhance and adapt strategy, customer propositions and colleague work practices as the Group learns from the crisis

 

 

RESULTS FOR THE HALF-YEAR (continued)

 

Financial performance reflects revised economic outlook

· Net income of £7.4 billion, down 16 per cent. Lower net interest margin of 2.59 per cent reflecting lower rates, actions taken to support customers and changes in asset mix; average interest earning assets were broadly stable. Other income of £2.5 billion, impacted by slowdown across key markets in the first half

· Total costs of £3.9 billion, 4 per cent lower, with business as usual costs down 6 per cent, enabling continued investment in digital projects and enhanced support for customers during the pandemic

· Trading surplus of £3.5 billion, a reduction of 26 per cent compared to the first six months of 2019, providing still significant capacity to absorb impairment impacts of the coronavirus crisis

· Impairment charge of £3.8 billion, including £2.4 billion in the second quarter primarily reflecting a significant deterioration in forward looking economic outlook. Loan books, based on actual defaults to date, continue to perform well, with the additional provisions building balance sheet resilience

· Statutory loss before tax of £602 million and statutory profit after tax of £19 million, both impacted by income developments and the increased impairment charge. Tangible net asset value per share of 51.6 pence

 

Balance sheet remains strong and well positioned to absorb coronavirus impacts

· Loans and advances at £440 billion were stable compared to the year end but reduced by £3 billion in the second quarter with expected reductions in the mortgage book, lower unsecured balances and repayment of lending facilities by Corporate & Institutional clients. This was partially offset by new SME lending through government support schemes

· Customer deposits increased by £29 billion in the half and £13 billion in the second quarter as a result of reduced consumer spending and inflows to the Group's trusted brands in an uncertain environment, with growth in Retail deposits ahead of the market. Commercial deposits benefited from clients' increased liquidity due to increased government support scheme borrowing

· Loan to deposit ratio now 100 per cent, providing significant potential to lend into recovery, with a strong liquidity position

· CET1 ratio of 14.6 per cent and 13.4 per cent pre IFRS 9 transitional relief, along with lower Pillar 2A requirement, resulting in significant headroom above lower regulatory requirements of c.11 per cent as cushion against potential credit impairment

· In line with the Group's announcement on 31 March, no shareholder distributions will be undertaken in 2020. The Board will decide on any dividend distributions or buybacks on ordinary shares in respect of 2020 at year end, in line with the approved dividend policy

 

Outlook

· There have been early signs of recovery in the Group's core markets, mainly in consumer spending and the housing market, but the outlook remains highly uncertain and the impact of lower rates and economic fragility will continue for at least the rest of the year. The Group's updated 2020 guidance reflects a proactive response to the challenging economic environment and is based on the Group's recently revised current economic assumptions, which have deteriorated since the first quarter

Net interest margin expected to remain broadly stable on the second quarter level at c.240 basis points for the rest of the year resulting in a full year margin of c.250 basis points

Operating costs to be below £7.6 billion

Impairment expected to be between £4.5 billion and £5.5 billion

Risk-weighted assets expected to be flat to modestly up compared to the first half of 2020

 

 

· Although the economic outlook remains uncertain, the Group's financial strength and business model will ensure that it can continue to support its customers and help Britain recover. This is fully aligned with the Group's long term strategic objectives, the position of the franchise and the interests of our shareholders

INCOME STATEMENT − UNDERLYING BASIS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year 

 

Half-year 

 

 

 

Half-year 

 

 

 

 

to 30 June 

 

to 30 June 

 

 

 

to 31 Dec 

 

 

 

 

2020 

 

2019 

 

Change

 

2019 

 

Change

 

 

£m 

 

£m 

 

%

 

£m 

 

%

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 5,478  

 

 6,145  

 

(11)

 

 6,232  

 

(12)

Other income

 

 2,461  

 

 3,150  

 

(22)

 

 2,582  

 

(5)

Operating lease depreciation

 

 (526) 

 

 (473) 

 

(11)

 

 (494) 

 

(6)

Net income

 

 7,413  

 

 8,822  

 

(16)

 

 8,320  

 

(11)

Operating costs

 

 (3,699) 

 

 (3,906) 

 

5

 

 (3,969) 

 

7

Remediation

 

 (177) 

 

 (143) 

 

(24)

 

 (302) 

 

41

Total costs

 

 (3,876) 

 

 (4,049) 

 

4

 

 (4,271) 

 

9

Trading surplus

 

 3,537  

 

 4,773  

 

(26)

 

 4,049  

 

(13)

Impairment

 

 (3,818) 

 

 (579) 

 

 

 

 (712) 

 

 

Underlying (loss) / profit

 

 (281) 

 

 4,194  

 

 

 

 3,337  

 

 

Restructuring

 

 (133) 

 

 (182) 

 

27

 

 (289) 

 

54

Volatility and other items

 

 (188) 

 

 (465) 

 

60

 

 248  

 

 

Payment protection insurance provision

 

 -  

 

 (650) 

 

100

 

 (1,800) 

 

100

Statutory (loss) / profit before tax

 

 (602) 

 

 2,897  

 

 

 

 1,496  

 

 

Tax credit / (expense)

 

 621  

 

 (672) 

 

 

 

 (715) 

 

 

Statutory profit after tax

 

 19  

 

 2,225  

 

(99)

 

 781  

 

(98)

 

 

 

 

 

 

 

 

 

 

 

(Loss) / earnings per share

 

(0.3)p

 

2.7p

 

 

 

0.8p

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.59%

 

2.90%

 

(31)bp

 

2.86%

 

(27)bp

Average interest-earning banking assets

 

£433bn

 

£433bn

 

-

 

£436bn

 

(1)

Cost:income ratio

 

52.3%

 

45.9%

 

6.4pp

 

51.3%

 

1.0pp

Asset quality ratio

 

1.73%

 

0.26%

 

147bp

 

0.31%

 

142bp

Underlying return on tangible equity

 

(0.7)%

 

16.3%

 

(17.0)pp

 

13.3%

 

(14.0)pp

Return on tangible equity

 

0.1%

 

11.5%

 

(11.4)pp

 

4.0%

 

(3.9)pp

 

 

 

 

KEY BALANCE SHEET METRICS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June

 

At 30 June

 

Change

 

At 31 Dec

 

Change

 

 

2020

 

2019

 

%

 

2019

 

%

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers1

 

£440bn

 

£441bn

 

-

 

£440bn

 

-

Customer deposits2

 

£441bn

 

£418bn

 

6

 

£412bn

 

7

Loan to deposit ratio

 

100%

 

106%

 

(6)pp

 

107%

 

(7.0)pp

CET1 ratio3

 

14.6%

 

14.0%

 

0.6pp

 

13.8%

 

0.8pp

CET1 ratio pre IFRS 9 transitional relief3,4

 

13.4%

 

13.7%

 

(0.3)pp

 

13.4%

 

-

Transitional MREL ratio3

 

36.8%

 

32.2%

 

4.6pp

 

32.6%

 

4.2pp

UK leverage ratio3

 

5.4%

 

5.1%

 

0.3pp

 

5.2%

 

0.2pp

Risk-weighted assets3

 

£207bn

 

£207bn

 

-

 

£203bn

 

2

Tangible net assets per share

 

51.6p

 

53.0p

 

(1.4)p

 

50.8p

 

0.8p

 

 

 

1

Excludes reverse repos of £61.1 billion (30 June 2019: £54.1 billion; 31 December 2019: £54.6 billion).

2

Excludes repos of £12.3 billion (30 June 2019: £4.1 billion; 31 December 2019: £9.5 billion).

3

The CET1, MREL and leverage ratios and risk-weighted assets at 30 June 2019 and 31 December 2019 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent reporting period.

4

CET1 ratio reflecting the full impact of IFRS 9, prior to the application of transitional arrangements for capital that provide relief for the impact of IFRS 9.

 

 

QUARTERLY INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter 

 

Quarter 

 

Quarter 

 

Quarter 

 

Quarter 

 

Quarter 

 

 

ended 

 

ended 

 

ended 

 

ended 

 

ended 

 

ended 

 

 

30 June 

 

31 Mar 

 

31 Dec 

 

30 Sept 

 

30 June 

 

31 Mar 

 

 

2020 

 

2020 

 

2019 

 

2019 

 

2019 

 

2019 

 

 

£m 

 

£m 

 

£m 

 

£m 

 

£m 

 

£m 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 2,528  

 

 2,950  

 

 3,102  

 

 3,130  

 

 3,062  

 

 3,083  

Other income

 

 1,235  

 

 1,226  

 

 1,267  

 

 1,315  

 

 1,594  

 

 1,556  

Operating lease depreciation

 

 (302) 

 

 (224) 

 

 (236) 

 

 (258) 

 

 (254) 

 

 (219) 

Net income

 

 3,461  

 

 3,952  

 

 4,133  

 

 4,187  

 

 4,402  

 

 4,420  

Operating costs

 

 (1,822) 

 

 (1,877) 

 

 (2,058) 

 

 (1,911) 

 

 (1,949) 

 

 (1,957) 

Remediation

 

 (90) 

 

 (87) 

 

 (219) 

 

 (83) 

 

 (123) 

 

 (20) 

Total costs

 

 (1,912) 

 

 (1,964) 

 

 (2,277) 

 

 (1,994) 

 

 (2,072) 

 

 (1,977) 

Trading surplus

 

 1,549  

 

 1,988  

 

 1,856  

 

 2,193  

 

 2,330  

 

 2,443  

Impairment

 

 (2,388) 

 

 (1,430) 

 

 (341) 

 

 (371) 

 

 (304) 

 

 (275) 

Underlying (loss) / profit

 

 (839) 

 

 558  

 

 1,515  

 

 1,822  

 

 2,026  

 

 2,168  

Restructuring

 

 (70) 

 

 (63) 

 

 (191) 

 

 (98) 

 

 (56) 

 

 (126) 

Volatility and other items

 

 233  

 

 (421) 

 

 122  

 

 126  

 

 (126) 

 

 (339) 

Payment protection insurance provision

 

 -  

 

 -  

 

 -  

 

 (1,800) 

 

 (550) 

 

 (100) 

Statutory (loss) / profit before tax

 

 (676) 

 

 74  

 

 1,446  

 

 50  

 

 1,294  

 

 1,603  

Tax credit / (expense)

 

 215  

 

 406  

 

 (427) 

 

 (288) 

 

 (269) 

 

 (403) 

Statutory (loss) / profit after tax

 

 (461) 

 

 480  

 

 1,019  

 

 (238) 

 

 1,025  

 

 1,200  

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.40%

 

2.79%

 

2.85%

 

2.88%

 

2.89%

 

2.91%

Average interest-earning banking assets

 

£435bn

 

£432bn

 

£437bn

 

£435bn

 

£433bn

 

£433bn

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost:income ratio

 

55.2%

 

49.7%

 

55.1%

 

47.6%

 

47.1%

 

44.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset quality ratio

 

2.16%

 

1.30%

 

0.30%

 

0.33%

 

0.27%

 

0.25%

Gross asset quality ratio

 

2.19%

 

1.35%

 

0.39%

 

0.40%

 

0.38%

 

0.30%

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying return on tangible equity

 

(6.0)%

 

4.7%

 

12.2%

 

14.3%

 

15.6%

 

17.0%

Return on tangible equity

 

(4.8)%

 

5.0%

 

11.0%

 

(2.8)%

 

10.5%

 

12.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers1

 

£440bn

 

£443bn

 

£440bn

 

£447bn

 

£441bn

 

£441bn

Customer deposits2

 

£441bn

 

£428bn

 

£412bn

 

£419bn

 

£418bn

 

£417bn

Loan to deposit ratio

 

100%

 

103%

 

107%

 

107%

 

106%

 

106%

Risk-weighted assets3

 

£207bn

 

£209bn

 

£203bn

 

£209bn

 

£207bn

 

£208bn

Tangible net assets per share

 

51.6p

 

57.4p

 

50.8p

 

52.0p

 

53.0p

 

53.4p

 

 

 

1

Excludes reverse repos.

2

Excludes repos.

3

Risk-weighted assets at 30 June 2019 and 31 December 2019 are reported on a pro forma basis reflecting the Insurance dividend paid to the Group in the subsequent reporting period.

 

 

 

BALANCE SHEET ANALYSIS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June

 

At 31 Mar

 

 

 

At 30 June

 

 

 

At 31 Dec

 

 

 

 

2020

 

2020

 

Change

 

2019

 

Change

 

2019

 

Change

 

 

£bn

 

£bn

 

%

 

£bn

 

%

 

£bn

 

%

Loans and advances to customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Open mortgage book

 

267.1

 

268.1

 

-

 

264.9

 

1

 

270.1

 

(1)

Closed mortgage book

 

17.5

 

17.9

 

(2)

 

19.8

 

(12)

 

18.5

 

(5)

Credit cards

 

15.2

 

16.7

 

(9)

 

17.7

 

(14)

 

17.7

 

(14)

UK Retail unsecured loans

 

8.2

 

8.6

 

(5)

 

8.2

 

-

 

8.4

 

(2)

UK motor finance

 

15.3

 

15.8

 

(3)

 

15.5

 

(1)

 

15.6

 

(2)

Overdrafts

 

1.0

 

1.2

 

(17)

 

1.2

 

(17)

 

1.3

 

(23)

Retail other1

 

9.7

 

9.3

 

4

 

9.0

 

8

 

9.0

 

8

SME2

 

38.4

 

32.0

 

20

 

32.3

 

19

 

32.1

 

20

Mid Corporates3

 

4.6

 

4.7

 

(2)

 

5.5

 

(16)

 

5.3

 

(13)

Corporate and Institutional3

 

55.0

 

60.9

 

(10)

 

59.8

 

(8)

 

54.6

 

1

Commercial Banking other

 

5.0

 

4.9

 

2

 

4.3

 

16

 

5.2

 

(4)

Wealth 

 

0.9

 

0.9

 

-

 

0.9

 

-

 

0.9

 

-

Central items

 

2.5

 

2.1

 

19

 

1.9

 

32

 

1.7

 

47

Loans and advances to customers4

 

440.4

 

443.1

 

(1)

 

441.0

 

-

 

440.4

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail current accounts

 

87.5

 

79.9

 

10

 

76.0

 

15

 

76.9

 

14

Commercial current accounts2,5

 

44.2

 

34.5

 

28

 

34.0

 

30

 

34.9

 

27

Retail relationship savings accounts

 

148.5

 

144.1

 

3

 

144.4

 

3

 

144.5

 

3

Retail tactical savings accounts

 

12.7

 

12.7

 

-

 

15.3

 

(17)

 

13.3

 

(5)

Commercial deposits2,6

 

133.8

 

142.5

 

(6)

 

133.2

 

-

 

127.6

 

5

Wealth 

 

13.5

 

13.3

 

2

 

13.8

 

(2)

 

13.7

 

(1)

Central items

 

0.9

 

1.4

 

(36)

 

0.9

 

-

 

0.9

 

 

Total customer deposits7

 

441.1

 

428.4

 

3

 

417.6

 

6

 

411.8

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

873.0

 

861.7

 

1

 

822.2

 

6

 

833.9

 

5

Total liabilities

 

824.1

 

809.0

 

2

 

773.2

 

7

 

786.1

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

42.8

 

46.6

 

(8)

 

43.4

 

(1)

 

41.7

 

3

Other equity instruments

 

5.9

 

5.9

 

-

 

5.4

 

9

 

5.9

 

-

Non-controlling interests

 

0.2

 

0.2

 

-

 

0.2

 

-

 

0.2

 

-

Total equity

 

48.9

 

52.7

 

(7)

 

49.0

 

-

 

47.8

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary shares in issue, excluding own shares

 

70,735m

 

70,411m

 

-

 

70,740m

 

-

 

70,031m

 

1

 

 

 

1

Primarily Europe.

2

Includes Retail Business Banking.

3

Commercial Banking segmentation has been updated to reflect new client coverage model.

4

Excludes reverse repos.

5

Primarily non interest-bearing Commercial Banking current accounts.

6

Primarily Commercial Banking interest-bearing accounts.

7

Excludes repos.

 

 

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT

 

In the first six months of 2020, the coronavirus pandemic has had an unprecedented impact on the people and economies of the world. In the UK we have witnessed the fastest contraction in economic activity seen in modern times as the country was forced into lockdown in March, alongside the most comprehensive and co-ordinated set of government and central bank support packages ever implemented. Although the economy has now started to re-open and activity in the Group's core markets has somewhat rebounded, it largely remains below pre-crisis levels and the economic outlook remains uncertain. There also continues to be uncertainty relating to the ongoing trade negotiations with the EU, the UK's largest export market. Despite this challenging operating environment, the Group's financial strength, business model and successful strategic delivery have enabled us to play a significant role, together with Government, regulators and other authorities, in helping the country manage through this crisis and will continue to ensure that we can support customers and help Britain recover.

 

Lloyds Banking Group has always been at the heart of the British economy and I am proud of the continuing financial and social support we have been able to provide. Thousands of colleagues across the Group have worked tirelessly over the past few months to ensure continued service to our customers. I would like to sincerely thank all of them for their resilience, dedication and professionalism during this time of difficulty and national need.

 

It was with mixed emotions that, earlier this month, I announced my intention to step down as Group Chief Executive of Lloyds Banking Group by the end of June of next year. It has been an honour to play my part in the transformation of large parts of our business. I will continue to be completely focused with my executive team on delivering the remainder of our current strategic plan, as well as the plans put in place to address the COVID-19 pandemic effects and support our customers during these difficult times.

 

Support for customers

Customers remain a priority throughout this crisis and beyond. Working closely with the UK Government and our regulators, we have continued to support our retail, small business and commercial customers through a comprehensive and unprecedented range of flexible measures.

 

Since the start of the crisis we have provided over 1.1 million payment holidays in respect of mortgages, loans, cards and motor finance to our retail customers. We also continue to support our customers with access to a £500 interest free overdraft facility, with no fees for missed payments and access to fixed term savings accounts without charge. We have offered a dedicated phone line for elderly customers and ensure that NHS staff calls are answered as a priority.

 

Similarly, we are providing significant support for our small business and commercial customers. We have approved over £9 billion in loans to businesses under the different Government schemes, including Bounce Back Loans (BBL), Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS). We have also supported customers through the Group's own £2 billion COVID-19 fund which includes fee-free lending for new overdrafts or overdraft limit increases as well as new or increased invoice discounting and finance facilities and, in certain circumstances, capital repayment holidays. For our SME customers, we are offering a mentoring service to help navigate a path beyond the pandemic.

 

To support our Insurance and Wealth customers during the pandemic, we have offered payment holidays on insurance premiums and accelerated claims payments on life and critical illness policies. We have also supported the NHS by providing free additional insurance cover to its workers and by alleviating pressure on GPs with a reduction in medical evidence required for customers' claims.

 

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

 

Beyond providing financial support, we have stood by our customers and communities, offering a range of expert support and guidance, to help alleviate the pressure of the current crisis. For example, we have helped our customers to stay digitally connected during the lockdown and have partnered with 'We Are Digital', a leading expert in supporting people with digital skills and financial inclusion, to deliver up to 2,000 tablet devices free of charge to over-70s to help them keep connected. Our Lloyds Bank Academy, which offers free digital skills training, has supported c.32,000 individuals, charities and small businesses in the first half of the year with online webinars and training courses. Through additional funding from the Group, our long-term charity partner Mental Health UK has been able to extend their mental health services at a time when social distancing and self-isolation can put significant pressure on many people.

 

We are, of course, aware that the support we are providing to our personal and business customers to help them through the current crisis will have a cost to the Group. We believe this is the right thing to do, as supporting our customers directly aids the recovery of the economy from which we benefit. We view this as an investment in the business, which is fully aligned with our purpose of Helping Britain Prosper and the long-term success of the Group, and therefore in the interests of our shareholders.

 

Operational resilience

I am particularly pleased with how quickly the Group adapted at scale when the lockdown began and how willing and able colleagues were to adopt new ways of working and collaborate remotely to support customers. Throughout the pandemic, the business has remained fully operational and our technology infrastructure has performed well under significant pressure. Around 90 per cent of branches have remained open throughout the coronavirus outbreak and importantly, our digital banking proposition has performed well in a period of significantly heightened usage while also achieving all time high user feedback scores. As a thank you to our front-line colleagues we have made a range of awards, including a cash payment for our most junior colleagues, to recognise their continued significant contribution during the pandemic.

 

Market commentary and economic projections

The economic outlook remains uncertain and largely dependent on how COVID-19 transmission responds as the economy gradually re-opens. The outlook has clearly become more challenging since our first quarter results, with the economic impact of lockdown much larger than expected at that time. With the gradual easing of social distancing measures we have more recently seen consumer spending levels increase, housing market activities reawaken, and the economy return to growth in May and June. However, the negative economic impact remains profound and we have revised our expectations accordingly. With the success of the Group inextricably linked to the health of the UK economy, we remain committed to being part of the national solution and putting the Group's strength to work in support of the wider economy and its recovery over time.

 

Financial performance

The effects of the coronavirus outbreak are reflected in our financial performance. The trading surplus for the first six months of the year of £3.5 billion was 26 per cent down on the prior year, with lower interest rates and activity levels having an impact on the top line. Due to our continued focus on efficiency, total costs reduced by 4 per cent, with a 6 per cent reduction in business as usual costs.

 

The most significant impact of COVID-19 is seen in the impairment charge. The first half impairment charge of £3.8 billion includes an additional £2.4 billion taken in the second quarter, mainly reflecting the significant deterioration in the economic outlook during the quarter. The introduction of IFRS 9 requires us to look forward and estimate a future level of credit losses based on a range of potential outcomes using multiple economic scenarios. Consequently, our overall balance sheet provision for impairments has increased by £3.1 billion in the first half of 2020, as we built additional balance sheet resilience. Given the economic outlook, we will inevitably be impacted within the existing book and potentially in the new lending we are undertaking to support our customers. However, the Group's loan portfolio remains robust and well positioned given our business model.

 

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

 

The statutory result before tax was a loss of £602 million. After tax relief from the deferred tax asset adjustment, statutory profit after tax for the first half of the year was £19 million, with the reduction on the prior year predominantly driven by impairments and lower rates. The Group's balance sheet remains strong, with a CET1 ratio of 14.6 per cent, significantly ahead of updated regulatory requirements.

 

Dividend decision

We announced the cancellation of the final 2019 dividend on 31 March. Our decision on the outstanding 2019 dividend was taken by the Group's Board at the specific request of our regulator, the Prudential Regulation Authority (PRA) and was in line with all other major UK listed banks. At that time, the Board also decided, again in line with all other major UK listed banks, that until the end of 2020 we will undertake no quarterly or interim dividend payments, accrual of dividends, or share buybacks on ordinary shares in order to improve further our capacity to serve the needs of businesses and households through the extraordinary challenges presented by the coronavirus pandemic.

 

These are difficult decisions and, while we recognise the disappointment and frustration this causes our shareholders, in particular those relying on dividends for income, we agreed that this was a prudent and appropriate response to what were and are exceptional circumstances. The Board will decide on any dividend distributions or buybacks on ordinary shares in respect of 2020 at year end, in line with the approved dividend policy.

 

In conjunction with this decision and in solidarity with the communities in which we operate, the whole of the Group Executive Committee have asked not to be considered for their Group Performance Share for 2020, meaning that they will give up all of their bonus entitlement for 2020. In addition, no cash bonuses are payable to senior staff for the rest of 2020.

 

Strategic update

We have continued to make strategic progress, despite our primary focus over the last couple of months on supporting our customers and ensuring operational resilience during this exceptional and challenging period. Indeed, in many respects, the benefits of investment made over the course of our third strategic phase, particularly in digital, transformation and Single Customer View have positioned us well during the pandemic.

 

In the last six months we continued to enhance our leading customer experience and digital capabilities, with the adoption of digital services by our customers accelerating during the lockdown. We operate the UK's leading digital bank with 17 million active customers, with daily logins now exceeding 11 million, up 12 per cent on the prior year. Our unique Single Customer View has been expanded to include stockbroking portfolios, with over 6 million customers now able to access their insurance and savings products alongside their bank accounts. Our digital net promoter score of 69 is at an all-time high, up 8 per cent in the first half of the year, despite increased usage levels.

 

To further enhance the functionality and accessibility of our services, we have rolled out new features to improve our mobile app, such as the transaction search functionality and ability to use biometrics to authorise new payments. In Commercial, over £350 million of payments per month are now processed through a payables API launched in 2019, representing a
30-fold increase in the first half of 2020. This enables business clients to send Faster Payments directly from their systems without human intervention, with the payment time as fast as less than a second.

 

We have also continued to develop propositions that maximise the Group's capabilities for the benefit of our customers. We have launched a new Scottish Widows branded equity release mortgage that enables our retail customers to use equity in their home to help their family members onto the housing ladder or supplement their own retirement income. The Group has also strengthened its presence in the open market for individual annuities since launching in September 2019, achieving a 14 per cent share of the whole individual annuities market as at 31 March 2020 and successfully sourcing long-term assets in collaboration with Commercial Banking.

 

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

 

In Wealth, the transition of assets to the new Schroders Personal Wealth platform is on track and the Group remains committed to become a top three financial planning business by the end of 2023.

 

In March, we announced a new strategic collaboration with Google Cloud that will build on our multi-cloud strategy, accelerating our ambition to deploy smarter technology and bring new services to our customers quickly and at scale.

 

The coronavirus pandemic has accelerated many trends around ways of working, digital adoption, societal expectations of companies, and our external environment and sustainability. Our third Group strategic review was and remains focused on many of these areas but we now expect to even further accelerate our transformation, and enhance and adapt customer propositions and colleague working practices as the Group is learning from the crisis.

 

Helping Britain recover

In the face of the ongoing uncertainties facing the UK, we remain fully committed to helping Britain recover as the economy gradually re-opens. We believe that the pandemic provides a unique opportunity to build a stronger bank whilst supporting a more resilient economy, with a more sustainable future.

 

In our communities, we will continue our work to ensure fairer and more inclusive societal outcomes and more even regional development as we rebuild our country. We have made a commitment to our four independent charitable foundations to provide the same £25.5 million funding in 2021 that they have received this year, to help the foundations plan ahead and ensure they can continue their vital work in communities.

 

To help the economy to transition to a more environmentally sustainable future, we plan to play a leading role in financing the UK's green recovery and in helping our customers make green choices and benefit from the clean growth opportunity.

 

We see all these efforts as integral to the Group's purpose and building a more successful Lloyds Banking Group.

 

Strategic positioning and outlook

There have been early signs of recovery in the Group's core markets, especially within the personal customer segment, but the outlook remains highly uncertain and the impact of lower rates and economic fragility will continue for at least the rest of the year. The Group's updated 2020 guidance reflects our proactive response to the challenging economic environment and is based on our recently revised current economic assumptions which have deteriorated since the first quarter.

· Net interest margin expected to remain broadly stable on the second quarter level at c.240 basis points for the rest of the year resulting in a full year margin of c.250 basis points

· Operating costs to be below £7.6 billion

· Impairment expected to be between £4.5 billion and £5.5 billion

· Risk-weighted assets expected to be flat to modestly up compared to the first half of 2020

Although the economic outlook remains uncertain, the Group's financial strength and business model will ensure that it can continue to support its customers and help Britain recover. This is fully aligned with the Group's long term strategic objectives, the position of our franchise and the interests of our shareholders.

 

 

SUMMARY OF GROUP RESULTS

 

Financial performance reflects revised economic outlook

The Group's statutory loss before tax for the six months ended 30 June 2020 was £602 million whilst statutory profit after tax was £19 million, with both being impacted by a significantly increased impairment charge in the period of £3,818 million. The increased impairment charge was primarily due to future potential losses arising from the revised economic outlook for the UK economy as a result of the coronavirus outbreak.

 

In this challenging external environment the trading surplus for the period was £3,537 million, a reduction of 26 per cent compared to the first six months of 2019, and 13 per cent on the second six months of 2019. Net income was down 16 per cent at £7,413 million, with both lower net interest income and lower other income in the period. The Group continued its progress in delivering cost reductions, with total costs down 4 per cent on the prior year.

 

The Group's underlying loss was £281 million for the period, compared to an underlying profit of £4,194 million in the first six months of 2019, reflecting lower net income and significantly higher impairment charges. Underlying return on tangible equity was marginally negative at 0.7 per cent.

 

The Group's balance sheet remains strong. Loans and advances to customers were stable compared to year end at £440 billion. Growth in SME lending, primarily driven by government support schemes, was offset by expected reductions in the mortgage book along with reductions in credit cards and other unsecured lending, where customer activity reduced in the second quarter of 2020. Corporate & Institutional lending remained broadly flat. Customer deposits increased by £29 billion from year end to £441 billion. Retail current accounts growth was significant, in part due to lower levels of customer spending as well as inflows to the Group's trusted brands. Commercial Banking current account growth reflects our strong customer relationships and SME clients placing government lending onto deposits.

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year

 

Half-year

 

 

 

Half-year

 

 

 

 

to 30 June

 

to 30 June

 

 

 

to 31 Dec

 

 

 

 

2020

 

2019

 

Change

 

2019

 

Change

 

 

£m

 

£m

 

%

 

£m

 

%

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 5,478

 

 6,145

 

(11)

 

 6,232

 

(12)

Other income

 

 2,461

 

 3,150

 

(22)

 

 2,582

 

(5)

Operating lease depreciation1

 

 (526)

 

 (473)

 

(11)

 

 (494)

 

(6)

Net income

 

 7,413

 

 8,822

 

(16)

 

 8,320

 

(11)

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.59%

 

2.90%

 

(31)bp

 

2.86%

 

(27)bp

Average interest-earning banking assets

 

£433.2bn

 

£433.3bn

 

-

 

£436.1bn

 

(1)

 

1

Net of profits on disposal of operating lease assets of £18 million (half-year to 30 June 2019: £14 million; half-year to 31 December 2019: £27 million).

 

Net income of £7,413 million was 16 per cent lower than in the first half of 2019, with both lower net interest income and lower other income in the period alongside an increase in operating lease depreciation.

 

Net interest income of £5,478 million was down 11 per cent with a reduction in the banking net interest margin and broadly stable average interest-earning banking assets. The net interest margin reduced by 31 basis points to 2.59 per cent, reflecting the lower rate environment, actions taken to support customers, including free overdrafts, and a change in asset mix partly as a result of reduced levels of customer demand during the coronavirus pandemic. In particular, the net interest margin in the second quarter of 2020 saw a reduction of 39 basis points to 2.40 per cent, including a 21 basis point impact from lower interest rates.

 

 

SUMMARY OF GROUP RESULTS (continued)

 

Average interest-earning banking assets were broadly stable year-on-year at £433 billion with growth due to government backed lending to support corporate clients through the coronavirus crisis, partly offset by lower balances in the closed mortgage book and in credit cards, as well as balance sheet optimisation within Commercial Banking in the second half of 2019. Total average interest-earning banking assets are expected to remain broadly stable at the level of the first half, through the rest of the year.

 

The Group manages the risk to its earnings and capital from movements in interest rates centrally by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 30 June 2020 the Group's structural hedge had an approved capacity of £190 billion (yet to reflect exceptional deposit growth in the first half of 2020), a nominal balance of £180 billion (31 December 2019: £179 billion; 30 June 2019: £172 billion) and an average duration of around two and a half years (31 December 2019: around three years; 30 June 2019: around three years). The Group generated £1.3 billion of income from the structural hedge balances in the first half of 2020 (half-year to 30 June 2019: £1.3 billion). Within this, the benefit from the hedge to the half-year was £0.6 billion over average LIBOR (half-year to 30 June 2019: £0.5 billion) with a fixed earnings rate of approximately 0.7 per cent over average LIBOR (30 June 2019: 0.6 per cent).

 

Other income decreased by 22 per cent to £2,461 million. In Retail, a reduction of 9 per cent to £919 million included the continuing impact of a lower Lex fleet size and lower payments revenues following the introduction of coronavirus related lockdown restrictions and corresponding lower levels of customer activity. Within Commercial Banking, other income reduced by 10 per cent to £658 million, primarily driven by lower transaction banking income due to the coronavirus related trading restrictions, with resilience in markets income. Insurance and Wealth was impacted by increased general insurance weather-related claims in February, reduced branch-based sales of general insurance and protection products, and more modest activity in workplace pensions compared to the prior year, partly offset by a one-off c.£90 million benefit from methodology changes in the second quarter. In the first half of 2019, Insurance and Wealth benefited from a £136 million one-off benefit due to the change in investment management provider, a c.£100 million gain arising from longevity assumption changes and the c.£120 million benefit from increased auto-enrolment contributions to workplace pensions. No changes have been made in respect of demographic assumptions (including persistency and longevity) at the half-year. Persistency and longevity assumption changes will be considered in the second half of the year, with the former focusing on potential risk from higher unemployment levels.

 

Other income includes a gain of £135 million (£181 million in the first half of 2019) on the sale of gilts and other liquid assets, which is not expected to be repeated in the second half of the year. This was largely offset by adverse valuations in the Group's private equity business, Lloyds Development Capital, given market conditions, with a negative revaluation of £110 million recognised in the period. The comparative for the six months to 30 June 2019 included a gain of £50 million relating to the sale of the Group's interest in Vocalink.

 

Operating lease depreciation of £526 million, increased by 11 per cent despite a lower Lex fleet size and included a charge to reflect a prudent reassessment of residual values given the economic outlook.

 

Although customer activity is now starting to recover, the Group expects the impact of economic uncertainty, lower rates, changes in balance sheet mix and fee holidays to continue to impact income for the rest of the year.

 

Based on the Group's current economic expectations, the low rate environment and a slow resumption of activity, the Group expects the net interest margin to remain broadly stable on the second quarter level at c.240 basis points for the rest of the year, resulting in a full year margin of c.250 basis points.

 

 

SUMMARY OF GROUP RESULTS (continued)

 

Total costs

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year

 

Half-year

 

 

 

Half-year

 

 

 

 

to 30 June

 

to 30 June

 

 

 

to 31 Dec

 

 

 

 

2020

 

2019

 

Change

 

2019

 

Change

 

 

£m

 

£m

 

%

 

£m

 

%

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

 3,699

 

 3,906

 

5

 

 3,969

 

7

Remediation

 

 177

 

 143

 

(24)

 

 302

 

41

Total costs

 

 3,876

 

 4,049

 

4

 

 4,271

 

9

 

 

 

 

 

 

 

 

 

 

 

Business as usual costs

 

 2,509

 

 2,677

 

6

 

 2,801

 

10

 

 

 

 

 

 

 

 

 

 

 

Cost:income ratio

 

52.3%

 

45.9%

 

6.4pp

 

51.3%

 

1.0pp

 

Total costs of £3,876 million were 4 per cent lower than in the first half of 2019, driven by a reduction in operating costs.

 

Operating costs of £3,699 million were 5 per cent lower, despite continued investment in the Group's digital proposition and coronavirus related costs. Business as usual costs reduced 6 per cent on the prior year driven by continued cost discipline, efficiencies gained through digitalisation and other process improvements, and lower bonus accruals.

 

Total investment spend in the first half of 2020 amounted to £1.1 billion, down 15 per cent on the prior year, with £0.5 billion relating to strategic investment, taking the cumulative strategic investment since the start of GSR3 to over £2.4 billion. Although the investment spend was carefully managed down in the first half of the year in response to the current operating environment, the Group has continued to prioritise technology and digital projects and will continue to invest through the cycle in the strength of the business.

 

During the first half of 2020 the Group capitalised c.£0.7 billion of investment spend of which c.£0.5 billion related to intangible assets, which is deducted from capital. Total capitalised spend was equivalent to c.60 per cent of above the line investment, which was in line with prior periods.

 

Remediation charges were £177 million (half-year to 30 June 2019: £143 million) and included additional charges of £90 million in the second quarter relating to a number of items across existing programmes, including the Group's response to the Cranston review in relation to HBOS Reading. During the period the Group paid a fine of £64 million in relation to mortgage arrears handling, which had largely been provided for in 2019.

 

The Group's cost:income ratio of 52.3 per cent was higher than in the first half of 2019, having been impacted by lower net income in the period to 30 June 2020.

 

The Group's market leading efficiency remains more important than ever and continues to provide competitive advantage. The focus on cost discipline will continue. The Group tailors its approach to strategic investment to reflect changes in the operating environment, targeting opportunities for the long-term strength of the business. Sustainable underlying cost focus will continue in the second half of the year and as a result operating costs are expected to be below £7.6 billion in 2020.

 

 

SUMMARY OF GROUP RESULTS (continued)

 

Impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year

 

Half-year

 

 

 

Half-year

 

 

 

 

to 30 June

 

to 30 June

 

 

 

to 31 Dec

 

 

 

 

2020

 

2019

 

Change

 

2019

 

Change

 

 

£m

 

£m

 

 

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment charge

 

 3,818

 

 579

 

 

 

 712

 

 

Asset quality ratio

 

1.73%

 

0.26%

 

147bp

 

0.31%

 

142bp

Gross asset quality ratio

 

1.77%

 

0.34%

 

143bp

 

0.40%

 

137bp

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June 

 

At 30 June 

 

 

 

At 31 Dec 

 

 

 

 

20201

 

20191

 

Change

 

20191

 

Change

 

 

£m 

 

£m 

 

%

 

£m 

 

%

 

 

 

 

 

 

 

 

 

 

 

Stage 2 gross loans and advances to customers

 

 67,858

 

 40,272

 

68

 

 38,440

 

77

Stage 2 loans and advances to customers as % of total

 

13.4%

 

8.1%

 

5.3pp

 

7.7%

 

5.7pp

Stage 2 ECL2 allowances

 

 2,817

 

 1,449

 

94

 

 1,423

 

98

Stage 2 ECL2 allowances as % of Stage 2 drawn balances

 

4.2%

 

3.6%

 

0.6pp

 

3.7%

 

0.5pp

 

 

 

 

 

 

 

 

 

 

 

Stage 3 loans and advances to customers

 

 9,538

 

 9,616

 

(1)

 

 8,754

 

9

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

 

1.9%

 

1.9%

 

-

 

1.8%

 

0.1pp

Stage 3 ECL2 allowances

 

 2,763

 

 2,149

 

29

 

 1,922

 

44

Stage 3 ECL2 allowances as % of Stage 3 drawn balances3

 

29.6%

 

23.0%

 

6.6pp

 

22.5%

 

7.1pp

 

 

 

 

 

 

 

 

 

 

 

Total loans and advances to customers

 

 508,076

 

 499,124

 

2

 

 498,805

 

2

Total ECL2 allowances

 

 7,186

 

 4,337

 

66

 

 4,142

 

73

Total ECL2 allowances as % of drawn balances

 

1.4%

 

0.9%

 

0.5pp

 

0.8%

 

0.6pp

 

 

 

1

Underlying basis.

2

Expected credit loss.

3

Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail of £206 million (30 June 2019: £260 million; 31 December 2019: £205 million).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year 

 

Half-year 

 

 

 

Half-year 

 

 

 

 

to 30 June 

 

to 30 June 

 

 

 

to 31 Dec 

 

 

 

 

2020 

 

2019 

 

Change

 

2019 

 

Change

 

 

£m 

 

£m 

 

%

 

£m 

 

%

 

 

 

 

 

 

 

 

 

 

 

Charges pre-updated multiple economic scenarios

 

 

 

 

 

 

 

 

 

 

Retail

 

 578 

 

 556 

 

(4)

 

 482 

 

(20)

Commercial Banking

 

 206 

 

 65 

 

 

 

 241 

 

15

Other

 

 4 

 

 (42) 

 

 

 

 (11) 

 

 

 

 

 788 

 

 579 

 

(36)

 

 712 

 

(11)

Coronavirus impacted restructuring cases1

 

 432 

 

 - 

 

 

 

 - 

 

 

Updated economic outlook

 

 

 

 

 

 

 

 

 

 

Retail

 

 1,517 

 

 - 

 

 

 

 

 

Commercial Banking

 

 881 

 

 - 

 

 

 

 - 

 

 

Other

 

 200 

 

 - 

 

 

 

 - 

 

 

 

 

 2,598 

 

 - 

 

 

 

 - 

 

 

Impairment charge

 

 3,818 

 

 579 

 

 

 

 712 

 

 

 

 

 

1

Additional charges made during the first half of 2020 on cases subject to restructuring at the end of 2019, where the coronavirus pandemic is considered to have had a direct affect upon the recovery strategy.

 

 

 

SUMMARY OF GROUP RESULTS (continued)

 

The impairment charge increased significantly in the first six months of the year to £3,818 million (half-year to 30 June 2019: £579 million) with an additional charge of £2,388 million taken in the second quarter primarily reflecting further deterioration in the economic outlook. Impairment provisions reflect the net impact of economic scenarios and Government support programmes with the increase on prior year of more than £3 billion building additional balance sheet resilience.

 

Observed credit quality remains robust with arrears and defaults remaining low. The Group recognises that this is likely to be influenced by the temporary support provided, including payment holidays and furlough arrangements. The expected credit loss (ECL) allowances of £7.2 billion as at 30 June 2020 assumes additional losses will emerge as the support subsides.

 

The Group's stock of ECL allowances has increased by over £3 billion to £7.2 billion, and as a percentage of drawn balances increased to 1.4 per cent from 0.8 per cent since 31 December 2019. As referenced, the Group's outlook and IFRS 9 base case economic scenario used to calculate ECL have been updated to reflect revised economic assumptions, which take into account the Group's best estimate of the impact of the coronavirus outbreak on the Group's customer and client base.

 

The Group's ECL allowance continues to reflect a probability weighted view of future economic scenarios including a 30 per cent weighting of base case, upside and downside and a 10 per cent weighting of severe downside, although all scenarios have deteriorated significantly since the year end. The base case upon which these scenarios are built assumes unemployment rate reaches 9.0 per cent in the fourth quarter of 2020 and more sustained reductions in asset prices. Given the weightings attached to scenarios, the ECL represents an uplift of £510 million from the base case ECL.

 

Judgement has been applied to the model-generated severe downside scenario to recognise the greater levels of uncertainty in the short-term economic outlook and therefore a greater severity of potential adverse shocks from the base case. In this scenario, this results in a peak unemployment rate of 12.5 per cent in the second quarter of 2021 and a GDP drop of 17.2 per cent in 2020. The impact of this adjustment has been estimated at portfolio level but outside the core IFRS 9 process and as such is reflected as a central overlay of £200 million, reflecting an estimated £2 billion higher ECL provision within the severe downside scenario.

 

The Group's net asset quality ratio was 173 basis points compared with 26 basis points in the first half of 2019, largely driven by increases in ECL (36 basis points excluding the updated economic assumptions and coronavirus-impacted restructuring cases).

 

Stage 2 loans and advances to customers increased by £29.4 billion, up 5.7 percentage points to 13.4 per cent as a percentage of total lending, reflecting the deterioration of the Group's forward looking economic assumptions, whilst Stage 3 loans and advances were broadly stable at 1.9 per cent. In the absence of other credit risk indicators, the granting of payment holidays for COVID-19 related requests is not in and of itself an indication of a significant increase in credit risk and therefore will not automatically result in a customer balance moving from Stage 1 to Stage 2. For the duration of the payment holiday the Group continues to recognise interest income on an effective interest rate basis. The Group's coverage of Stage 2 assets increased to 4.2 per cent whilst coverage of Stage 3 assets increased from 22.5 per cent to 29.6 per cent.

 

Overall the Group's loan portfolio continues to be well positioned, reflecting a prudent, through the cycle approach to credit risk and high levels of security. The Retail portfolio is heavily weighted to high quality mortgage lending where improved loan to values provide security against potential risks. The prime consumer finance portfolio also benefits from high quality growth and the Group's prudent risk appetite. The commercial portfolio reflects a diverse client base with limited exposure to the most vulnerable sectors affected by the coronavirus outbreak. Within Commercial, the Group's management of concentration risk includes single name and country limits as well as controls over the overall exposure to certain higher risk and vulnerable sectors and asset classes.

 

 

 

SUMMARY OF GROUP RESULTS (continued)

 

In the Retail secured book, credit performance remains strong with the average mortgage loan to value improving slightly to 44.0 per cent (31 December 2019: 44.9 per cent). New business average loan to value was 63.0 per cent and around 90 per cent of the portfolio has a loan to value ratio of less than 80 per cent. New to arrears as a proportion of the total mortgage book remains low. The impairment charge for the first half of 2020 was £603 million, compared with a £38 million release for the same period in 2019, largely as a result of the change to economic outlook, and impacting the second quarter in particular given the additional reduction in house price forecasts.

 

The impairment charge in the credit card book increased by £389 million to £656 million in the first half of 2020, largely due to updates to the Group's economic outlook (£487 million of the charge). Coverage for credit card lending increased to 6.3 per cent (31 December 2019: 3.4 per cent); including coverage of 43.9 per cent on the Stage 3 cards portfolio, which employs a proactive charge off policy at 4 months in arrears. While the credit card portfolios were the last to receive payment holidays, the Group has seen a large uptake in the second quarter of 2020, which has resulted in very low levels of flows into arrears.

 

The motor finance portfolio continues to benefit from a prudent approach to residual values at origination and reassessment of provisions through the loan lifecycle. The impairment charge increased to £241 million for the first half of 2020, compared to £104 million for the same period in 2019 and coverage for the portfolio increased to 3.6 per cent (31 December 2019: 2.4 per cent). This reflects the impact of the updated economic outlook on anticipated levels of defaults and the severity of losses given anticipated reductions in used car prices. In addition to credit risk, this coverage also includes a specific provision for residual value risk on returned vehicles of £191 million as at 30 June 2020, £10 million lower than the provision held as at 31 December 2019. In relation to this residual value risk, no material charge was needed in the first half of this year, with sufficient provision already raised to accommodate the expected temporary price volatility in the automotive market.

 

The Commercial Banking impairment charge in the first six months increased significantly to £1,519 million compared with £65 million in the first half of 2019, with the ECL provision stock increasing by £1.4 billion to £2.7 billion at 30 June 2020. The increased impairment charge largely reflects the updates to the economic outlook, with a charge of £881 million. Additional charges of £432 million were raised against a small number of existing Stage 3 large corporate restructuring cases in the BSU where the coronavirus pandemic has hampered the client's existing recovery strategy. The Commercial Banking impairment charge pre revised economic outlook and before the existing restructuring cases was £206 million.

 

Further detail on the impairment charge by division and product can be found on page 38.

 

Significant uncertainty in the economic outlook remains and the extent of the annual impairment charge will depend on the severity and the duration of the economic shock experienced in the UK. The Group has increased provisions by over £3 billion in the period, largely for assets that have not currently defaulted.

 

Assuming current economic assumptions, the impairment charge is expected to be between £4.5 billion and £5.5 billion for the full year 2020, reflecting additional charges in the second half of 2020 for provisions taken on new assets, future losses on stage 1 assets as the 12 month provision window rolls forward and experience variance.

 

 

SUMMARY OF GROUP RESULTS (continued)

 

Statutory profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year

 

Half-year

 

 

 

Half-year

 

 

 

 

to 30 June

 

to 30 June

 

 

 

to 31 Dec

 

 

 

 

2020

 

2019

 

Change

 

2019

 

Change 

 

 

£m

 

£m

 

%

 

£m

 

%

 

 

 

 

 

 

 

 

 

 

 

Underlying (loss) / profit

 

 (281) 

 

 4,194  

 

 

 

 3,337  

 

 

Restructuring

 

 (133) 

 

 (182) 

 

27

 

 (289) 

 

54

Volatility and other items

 

 

 

 

 

 

 

 

 

 

Market volatility and asset sales

 

 (43) 

 

 (296) 

 

 

 

 422  

 

 

Amortisation of purchased intangibles

 

 (34) 

 

 (34) 

 

-

 

 (34) 

 

-

Fair value unwind and other

 

 (111) 

 

 (135) 

 

18

 

 (140) 

 

21

 

 

 (188) 

 

 (465) 

 

60

 

 248  

 

 

Payment protection insurance provision

 

 -  

 

 (650) 

 

100

 

 (1,800) 

 

100

Statutory (loss) / profit before tax

 

 (602) 

 

 2,897  

 

 

 

 1,496  

 

 

Tax credit / (expense)

 

 621  

 

 (672) 

 

 

 

 (715) 

 

 

Statutory profit after tax

 

 19  

 

 2,225  

 

(99)

 

 781  

 

(98)

 

 

 

 

 

 

 

 

 

 

 

(Loss) / earnings per share

 

(0.3)p

 

2.7p

 

 

 

0.8p

 

 

Return on tangible equity

 

0.1%

 

11.5%

 

(11.4)pp

 

4.0%

 

(3.9)pp

 

Further information on the reconciliation of underlying to statutory results is included on page 32.

 

The Group's statutory profit after tax of £19 million was impacted by lower income and a significantly increased impairment charge of £3,818 million given the revised economic outlook.

 

Restructuring costs of £133 million were down 27 per cent compared to the first half of 2019 mainly driven by the completion of MBNA integration and lower severance costs relating to the Group's strategic investment plans. The latter was in part due to the deferral of redundancy programmes given the coronavirus pandemic.

 

Market volatility and asset sales of £43 million included £370 million of negative insurance volatility, largely driven by falling equity markets and widening corporate bond credit spreads, partly offset by positive banking volatility of £308 million, primarily reflecting exchange rate movements. The comparatives for the first half of 2019 include a one-off charge for exiting the Standard Life Aberdeen investment management agreement.

 

Amortisation of purchased intangibles was flat at £34 million. Fair value unwind and other items reduced to £111 million (half-year to 2019: £135 million) reflecting the run down of subordinated liabilities acquired during the HBOS acquisition.

 

No further provision has been taken for PPI in the first half of 2020. Good progress has been made with the review of PPI information requests received and the conversion rate remains low and consistent with the provision assumption of around 10 per cent, albeit operations have been impacted by the coronavirus pandemic in the second quarter. The unutilised provision at 30 June 2020 was £745 million.

 

 

 

SUMMARY OF GROUP RESULTS (continued)

 

Taxation

The Group recognised a tax credit of £621 million in the period, primarily as a result of statutory losses and an uplift in the value of deferred tax assets of £354 million following the announcement by the Government that it would maintain the corporation tax rate at 19 per cent, which was substantively enacted on 17 March 2020.

 

Return on tangible equity

The return on tangible equity was 0.1 per cent and the underlying return on tangible equity was a negative 0.7 per cent.

 

Balance sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June

 

At 31 Mar

 

Change

 

At 30 June

 

Change

 

At 31 Dec

 

Change

 

 

2020

 

2020

 

%

 

2019

 

%

 

2019

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers1

 

£440bn

 

£443bn

 

(1)

 

£441bn

 

-

 

£440bn

 

-

Customer deposits2

 

£441bn

 

£428bn

 

3

 

£418bn

 

6

 

£412bn

 

7

Loan to deposit ratio

 

100%

 

103%

 

(3)pp

 

106%

 

(6)pp

 

107%

 

(7)pp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale funding3

 

£125bn

 

£126bn

 

(1)

 

£126bn

 

(1)

 

£124bn

 

1

Wholesale funding <1 year maturity3

 

£40bn

 

£39bn

 

3

 

£39bn

 

2

 

£39bn

 

2

Of which money-market funding <1 year maturity3

 

£26bn

 

£26bn

 

(1)

 

£27bn

 

(4)

 

£25bn

 

4

Liquidity coverage ratio - eligible assets4

 

£138bn

 

£132bn

 

5

 

£132bn

 

4

 

£131bn

 

5

Liquidity coverage ratio5

 

140%

 

138%

 

2pp

 

132%

 

8pp

 

137%

 

3pp

 

 

 

 

1

Excludes reverse repos of £61.1 billion (31 March 2020: £55.2 billion; 30 June 2019: £54.1 billion; 31 December 2019: £54.6 billion).

2

Excludes repos of £12.3 billion (31 March 2020: £9.4 billion; 30 June 2019: £4.1 billion; 31 December 2019: £9.5 billion).

3

Excludes balances relating to margins of £6.9 billion (31 December 2019: £4.2 billion).

4

Eligible assets are calculated as a simple average of month end observations over the previous 12 months.

5

The Liquidity coverage ratio is calculated as a simple average of month end observations over the previous 12 months.

 

Loans and advances to customers were stable compared to year end at £440 billion. Corporate & Institutional lending was broadly flat, while SME lending, primarily driven by government support schemes, increased. This growth was offset by expected reductions in the mortgage book along with reductions in credit cards and other unsecured lending, given reduced customer activity in the second quarter of 2020. In the second quarter, loans and advances to customers decreased by £3 billion from £443 billion at 31 March 2020 as repayments of revolving credit facilities in Commercial Banking and reductions in mortgage and consumer finance balances more than offset new government supported lending within SME.

 

In the first half of the year, Commercial Banking has focused on supporting SME clients through the access to government lending schemes and providing access to liquidity facilities for Corporate and Institutional clients. SME balances have increased 20 per cent (£6 billion) over the last six months as clients made use of the government backed lending schemes to safeguard their cash flow in response to the coronavirus lockdown. Bounce Back Loans granted currently total £7.3 billion, including to Retail Business Banking customers. Lending to Corporate and Institutional clients increased 1 per cent over the last six months with a significant draw down of facilities in response to the coronavirus outbreak in the first quarter largely reversed in the second quarter as other sources of funding became available.

 

The Group has seen some signs of recovery in activity levels since the middle of the second quarter in its core markets, mainly in Retail, with a gradual pick-up in consumer spending and re-opening of the housing market as the social distancing measures were eased.

 

In mortgages, application levels have rebounded, with June volumes outperforming the same period last year. Also, in motor finance, new business levels rose strongly in June as car dealerships reopened. However, it remains unclear whether this is a sustainable development or reflects pent up demand. In cards, whilst consumer spending levels have begun to recover slightly in the second quarter, the demand for new credit cards remains subdued, reinforced by credit tightening.
 

SUMMARY OF GROUP RESULTS (continued)

 

At the same time, in Commercial Banking, transaction and payment volumes have increased as the economy has started to reopen but currently remain below pre-lockdown levels.

 

Activity levels in Insurance and Wealth remain subdued. It is too early to estimate the timing and speed at which activity will recover, or the long term economic impact of the pandemic. This may become clearer in the second-half of the year.

 

Customer deposits increased by £13 billion in the quarter to 30 June 2020 with a 10 per cent increase in Retail current accounts as a result of reduced consumer spending during the coronavirus lockdown period and reflecting the strength of the Group's trusted brands, and a 28 per cent increase in Commercial current accounts partly due to SME clients placing government lending balances onto deposits. This was partly offset by a reduction in Commercial deposits as corporate clients repaid revolving credit facilities and moved term deposits to more liquid current accounts.

 

The Group has maintained its strong funding and liquidity position with a liquidity coverage ratio (LCR) of 140 per cent (based on a 12 month rolling average). In addition to its liquid asset buffer averaging £137.5 billion over the last 12 months, the Group has a significant amount of pre-positioned collateral eligible for use in a range of central bank facilities, including the Bank of England's Term Funding Scheme with additional incentives for SMEs (TFSME) against which £1 billion of funds have been drawn down as at 30 June 2020.

 

The Group continues to access wholesale funding markets across a variety of currencies and markets to maintain a stable and diverse source of funds. Despite the more challenging funding conditions around the end of the first quarter, the Group has seen strong demand in a number of public issuances, and completed £8.5 billion of funding in the first half of 2020 across the Group's main issuing entities. In addition, the Group has been active in offering liquidity to investors through buyback activity, whilst maintaining a prudent approach to managing funding and liquidity with term funding buyback volumes of £5.6 billion in the first half of 2020. Overall, total wholesale funding increased slightly to £125.1 billion as at 30 June 2020 (31 December 2019: £124.2 billion).

 

The Group's credit ratings continue to reflect the resilience of the Group's business model and the strength of the balance sheet. In March, Fitch revised the outlooks on all the Group's rated entities, alongside the majority of other UK banks, to Negative, citing concerns around the coronavirus pandemic. In addition, Fitch upgraded the Senior Unsecured rating of Lloyds Bank Corporate Markets to A+. In April, S&P revised the outlook on the Group's banking entities, alongside the majority of other large UK banks, to Negative, citing the potential earnings pressures arising from the economic and market impact of the coronavirus pandemic. The Negative outlooks that Moody's assigned on Lloyds Banking Group plc and Lloyds Bank plc, to reflect the weakening of the country's finances and the potential impact on asset quality and profitability, remain in place.

 
 

SUMMARY OF GROUP RESULTS (continued)

 

Payment holidays1

Retail payment holiday characteristics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgages

 

Cards

 

Loans

 

Motor

As of 24 July 2020

 

 

 

 

 

 

 

 

 

 

Total payment holidays granted (000s)

 

 

 

472

 

299

 

234

 

126

Total payment holidays matured (000s)

 

 

 

193

 

74

 

145

 

70

Repaying (%)

 

 

 

72%

 

74%

 

67%

 

59%

 

 

 

 

1

At 24 July 2020 mortgage maturities exclude c.5,000 St James Place, Intelligent Finance and Tesco portfolio payment holidays; motor finance maturities exclude c.12,000 Lex Autolease payment holidays.

 

As at 24 July 2020, over 1.1 million retail payment holidays have been granted to help alleviate temporary financial pressure on customers during the crisis, of which around 750,000 are still in force. Payment holidays of up to three months have been granted across a range of retail products including mortgages, personal loans, credit cards and motor finance, with extensions available of up to three months should customers request them. Of the original payment holidays that have matured, 69 per cent have restarted payments. 

 

Mortgages account for the largest proportion of the payment holidays, with a total of around 472,000 granted. As at 24 July, nearly 41 per cent, c.193,000 had matured, with 72 per cent of those having resumed repayments, around 23 per cent having extended their payment holidays and the remainder in early arrears. Customers extending their mortgage payment holidays generally have weaker risk characteristics than those without a payment holiday, however, the average LTV for customers extending their payment holidays remains relatively low at 52 per cent, compared to 42 per cent for customers who have never taken a payment holiday and 44 per cent for the total mortgage book. Approximately 84 per cent, of customers extending their payment holiday, have an LTV of less than 80 per cent.

 

As indicated, payment holidays have also been granted across all other main consumer finance and unsecured products with c.126,000 in motor finance, c.234,000 in personal loans and c.299,000 on credit cards. Given the payment holidays on other retail products commenced later than for mortgages repayment trends are less developed. However, as outlined in the table above, current experience of maturity of initial payment holidays indicates that a broadly similar number of customers resume payment (74 per cent cards, 67 per cent loans, 59 per cent motor finance). The higher percentage of personal loan and motor finance holidays maturing and slightly lower proportion of customers resuming payment is largely driven by the fact that initial payment holidays were generally for one month before being extended for an additional two months i.e. total of three months.

 

Across all products, customers who have sought to extend their payment holiday are typically of a lower credit quality and tend to have higher average balances and lower credit scores than customers who have never taken a payment holiday.

 

The Group continues to recognise interest income for the duration of payment holidays and in the absence of other credit risk indicators, the granting of a coronavirus-related payment holiday does not result in a transfer between stages for the purposes of IFRS 9.

 

The Group is confident that the modelled ECL is appropriate at portfolio level, adequately covering the potential elevated risk of customers on payment holidays. The £19 billion increase in Stage 2 assets to £51 billion reflects the modelled increase in credit risk and at the end of June 2020 approximately 25 per cent of outstanding Retail payment holidays were in Stage 2, broadly consistent with customers on payment holidays who have not recommenced payment. As a sensitivity, moving all remaining Stage 1 payment holiday customers at June into Stage 2 at the end of June 2020 would drive an estimated additional £0.3 billion ECL charge.
 

SUMMARY OF GROUP RESULTS (continued)

 

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June

 

At 30 June

 

Change

 

At 31 Dec

 

Change

 

 

2020

 

2019

 

%

 

2019

 

%

 

 

 

 

 

 

 

 

 

 

 

CET1 ratio1

 

14.6%

 

14.0%

 

0.6pp

 

13.8%

 

0.8pp

CET1 ratio pre IFRS 9 transitional relief1,2

 

13.4%

 

13.7%

 

(0.3)pp

 

13.4%

 

-

Transitional total capital ratio1

 

22.3%

 

21.7%

 

0.6pp

 

21.5%

 

0.8pp

Transitional MREL ratio1

 

36.8%

 

32.2%

 

4.6pp

 

32.6%

 

4.2pp

UK leverage ratio1

 

5.4%

 

5.1%

 

0.3pp

 

5.2%

 

0.2pp

Risk-weighted assets1

 

£207bn

 

£207bn

 

-

 

£203bn

 

2

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

£43bn

 

£43bn

 

(1)

 

£42bn

 

3

Tangible net assets per share

 

51.6p

 

53.0p

 

(1.4)p

 

50.8p

 

0.8p

 

 

 

1

The CET1, total, MREL and leverage ratios and risk-weighted assets at 30 June 2019 and 31 December 2019 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent reporting period.

2

CET1 ratio reflecting the full impact of IFRS 9, prior to the application of transitional arrangements for capital that provide relief for the impact of IFRS 9.

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma CET1 ratio at 31 December 2019

 

 

 

 

 

 

 

 

 

13.8%

Banking business underlying capital build excluding impairment charge (bps)

 

 

 

 

 

 

 

 

 

 100 

Impairment charge (bps)

 

 

 

 

 

 

 

 

 

 (153)

Banking business underlying capital build (bps)

 

 

 

 

 

 

 

 

 

 (53)

IFRS 9 transitional relief (bps)

 

 

 

 

 

 

 

 

 

 79 

RWA and other movements (bps)

 

 

 

 

 

 

 

 

 

 11 

Pensions contributions (bps)

 

 

 

 

 

 

 

 

 

 (39)

Reversal of FY 2019 ordinary dividend accrual (bps)

 

 

 

 

 

 

 

 

 

 83 

CET1 ratio at 30 June 2020

 

 

 

 

 

 

 

 

 

14.6%

 

The Group's CET1 capital ratio increased by 81 basis points to 14.6 per cent over the first six months of the year. Underlying capital build before impairment charge of 100 basis points was more than offset by the 153 basis points of impairment charge. Further reductions were incurred for pension contributions (39 basis points reflecting the full 2020 contribution to the Group's three main defined benefit pension schemes), partially offset by risk-weighted asset and other movements (11 basis points), which included increases related to market movements (17 basis points) and the excess expected loss offset against the increase in impairment provisions (11 basis points) less a reduction of 15 basis points from the increase in underlying risk-weighted assets. However, given the benefit of the in-year IFRS 9 transitional relief (79 basis points) and the reversal of the full year 2019 ordinary dividend (83 basis points), the capital ratio increased to 14.6 per cent.

 

The Group has applied the IFRS 9 transitional arrangements for capital set out under European capital regulations since 1 January 2018. This provides temporary capital relief for the increase in accounting impairment provisions following the initial implementation of IFRS 9 ('static' relief) and subsequent relief for any increases in Stage 1 and Stage 2 expected credit losses ('dynamic' relief). Both static relief and dynamic relief amortise over a set transition period. Following recent changes to the regulation, dynamic relief is now based on any increase in Stage 1 and Stage 2 expected credit losses since 1 January 2020. In addition, the amortisation factor for dynamic relief has now been set at 100 per cent for 2020 and 2021 (prior to reducing in stages over subsequent years) thereby mitigating the capital impact of Stage 1 and Stage 2 increases during this period. The transitional arrangements do not cover Stage 3 expected credit losses. It is expected that dynamic relief will reduce materially in the second half of the year and the first half of 2021, as a result of ongoing credit migrations (i.e. movements into Stage 3).

 

Whilst the net increase in IFRS 9 transitional relief in the first six months of the year amounted to 79 basis points, the Group's total relief recognised at 30 June 2020 amounted to 116 basis points including the static relief.
 

SUMMARY OF GROUP RESULTS (continued)

 

Risk-weighted assets increased by £3.7 billion over the first six months, with a significant increase in the first quarter partially offset by a smaller reduction in the second quarter. The six month increase is largely a result of the impact of credit migrations and retail model calibrations (c.£3.9 billion); regulatory changes resulting from the full implementation of the new securitisation framework (£2.3 billion) partly offset by the impact of the revised SME supporting factor (£1.4 billion); foreign currency impacts and increases in counterparty credit risk and credit valuation adjustment risk (£1.6 billion); and other various movements (£1.7 billion). These increases have been partially offset by the reduction in underlying lending balances (excluding government backed lending schemes that attract limited to no risk-weighted assets) (c.£2 billion) and optimisation activity undertaken in Commercial Banking (c.£2.4 billion).

 

Going forward, risk-weighted assets will continue to be affected by credit migration and potential movements in the balance sheet. The Group expects some further credit migration in the second half of the year, but this is expected to be largely offset by Commercial Banking optimisation and reduced balances in Retail, resulting in risk-weighted assets at the end of the year to be flat to modestly up compared to the first half of 2020. 

 

During the first half of 2020 the PRA reduced the Group's Pillar 2A CET1 requirement from 2.6 per cent to 2.3 per cent. The PRA has also concluded its consultation on a proposed reduction in Pillar 2A to partially offset increased CET1 requirements from the UK countercyclical capital buffer rate in normal conditions being set at 2 per cent (currently set at 0 per cent). This is expected to reduce the Group's Pillar 2A CET1 requirement by a further 0.3 per cent when it becomes effective later this year.

 

The Board's view of the ongoing level of CET1 capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties is around 12.5 per cent, plus a management buffer of around 1 per cent.

 

Following the decision by the PRA to reduce the UK countercyclical capital buffer rate to zero, combined with the Pillar 2A adjustment noted above, the Group's CET1 capital regulatory requirement has reduced to c.11 per cent and subsequently headroom over requirements has increased.

 

The transitional total capital ratio increased to 22.3 per cent (31 December 2019: 21.5 per cent on a pro forma basis) and the Group's transitional minimum requirement for own funds and eligible liabilities (MREL), which came into force on 1 January 2020, is 36.8 per cent (31 December 2019: 32.6 per cent on a pro forma basis). The UK leverage ratio increased to 5.4 per cent.

 

Tangible net assets per share increased by 0.8 pence to 51.6 pence at 30 June 2020 from 50.8 pence at 31 December 2019. This was largely due to an increase in the net pension asset driven by wider credit spreads in the first quarter and an increase in the Group's cash flow hedge reserve. In the second quarter of 2020 tangible net assets per share reduced by 5.8 pence as a result of the increased impairment charge and some reversal of the credit spread movements seen in the first quarter.

 

During 2020 the Group was scheduled to make £798 million of additional deficit contributions to its three main schemes under the current recovery plan with the trustees. These payments were made in full during the first half of the year.  The next funding valuation for these schemes, with an effective date of 31 December 2019, is currently in progress and is due to be completed by March 2021.

 

 

 

SUMMARY OF GROUP RESULTS (continued)

 

Dividend

On 31 March, the Group announced the cancellation of its final 2019 ordinary dividend. This decision was taken by the Board at the specific request of the regulator, the PRA, and was in line with all other major UK listed banks. At that time, the Board also decided, again in line with all other major UK listed banks, that until the end of 2020 the Group will undertake no quarterly or interim dividend payments, accrual of dividends, or share buybacks on ordinary shares. This will help the Group to further serve the needs of businesses and households through the extraordinary challenges presented by the coronavirus crisis.

 

These are difficult decisions and while the Group recognises the disappointment and frustration this will cause shareholders, in particular those relying on dividends for income, this is a prudent and appropriate response to exceptional circumstances. The Board will decide on any dividend distributions or buybacks on ordinary shares in respect of 2020 at year end, in line with the approved dividend policy.

 

Outlook

There have been early signs of recovery in the Group's core markets, especially within the personal customer segment, but the outlook remains highly uncertain and the impact of lower rates and economic fragility will continue for at least the rest of the year. The Group's updated 2020 guidance reflects the proactive response to the challenging economic environment and is based on the Group's recently revised current economic assumptions which have deteriorated since the first quarter.

· Net interest margin expected to remain broadly stable on the second quarter level at c.240 basis points for the rest of the year resulting in a full year margin of c.250 basis points

· Operating costs to be below £7.6 billion

· Impairment expected to be between £4.5 billion and £5.5 billion

· Risk-weighted assets expected to be flat to modestly up compared to the first half of 2020

 

Although the economic outlook remains uncertain, the Group's financial strength and business model will ensure that it can continue to support its customers and help Britain recover. This is fully aligned with the Group's long term strategic objectives, the position of the franchise and the interests of our shareholders.

 

 

UNDERLYING BASIS SEGMENTAL ANALYSIS

 

 

 

 

 

 

 

 

 

 

 

 

Half-year to 30 June 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial 

 

Insurance 

 

Central 

 

 

 

 

Retail 

 

Banking 

 

and Wealth 

 

items 

 

Group 

 

 

£m 

 

£m 

 

£m 

 

£m 

 

£m 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 4,233  

 

 1,222  

 

 14  

 

 9  

 

 5,478  

Other income

 

 919  

 

 658  

 

 853  

 

 31  

 

 2,461  

Operating lease depreciation

 

 (518) 

 

 (8) 

 

 -  

 

 -  

 

 (526) 

Net income

 

 4,634  

 

 1,872  

 

 867  

 

 40  

 

 7,413  

Operating costs

 

 (2,277) 

 

 (906) 

 

 (459) 

 

 (57) 

 

 (3,699) 

Remediation

 

 (50) 

 

 (115) 

 

 (19) 

 

 7  

 

 (177) 

Total costs

 

 (2,327) 

 

 (1,021) 

 

 (478) 

 

 (50) 

 

 (3,876) 

Trading surplus

 

 2,307  

 

 851  

 

 389  

 

 (10) 

 

 3,537  

Impairment

 

 (2,095) 

 

 (1,519) 

 

 (10) 

 

 (194) 

 

 (3,818) 

Underlying profit / (loss)

 

 212  

 

 (668) 

 

 379  

 

 (204) 

 

 (281) 

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.59%

 

2.92%

 

 

 

 

 

2.59%

Average interest-earning banking assets

 

£342.3bn

 

£90.0bn

 

£0.9bn

 

 -  

 

£433.2bn

Asset quality ratio

 

1.23%

 

3.12%

 

 

 

 

 

1.73%

Return on risk-weighted assets

 

0.43%

 

(1.70)%

 

 

 

 

 

(0.27)%

Loans and advances to customers1

 

£341.0bn

 

£96.0bn

 

£0.9bn

 

£2.5bn

 

£440.4bn

Customer deposits2

 

£272.2bn

 

£154.5bn

 

£13.5bn

 

£0.9bn

 

£441.1bn

Risk-weighted assets

 

£99.4bn

 

£78.4bn

 

£1.3bn

 

£28.0bn

 

£207.1bn

 

 

 

 

 

 

 

 

 

 

 

 

Half-year to 30 June 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial 

 

Insurance 

 

Central 

 

 

 

 

Retail3  

 

Banking

 

and Wealth 

 

items

 

Group 

 

 

£m 

 

£m 

 

£m 

 

£m 

 

£m 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 4,561  

 

 1,449  

 

 40  

 

 95  

 

 6,145  

Other income

 

 1,009  

 

 731  

 

 1,183  

 

 227  

 

 3,150  

Operating lease depreciation

 

 (461) 

 

 (12) 

 

 -  

 

 -  

 

 (473) 

Net income

 

 5,109  

 

 2,168  

 

 1,223  

 

 322  

 

 8,822  

Operating costs

 

 (2,328) 

 

 (1,031) 

 

 (539) 

 

 (8) 

 

 (3,906) 

Remediation

 

 (48) 

 

 (90) 

 

 (25) 

 

 20  

 

 (143) 

Total costs

 

 (2,376) 

 

 (1,121) 

 

 (564) 

 

 12  

 

 (4,049) 

Trading surplus

 

 2,733  

 

 1,047  

 

 659  

 

 334  

 

 4,773  

Impairment

 

 (556) 

 

 (65) 

 

 -  

 

 42  

 

 (579) 

Underlying profit

 

 2,177  

 

 982  

 

 659  

 

 376  

 

 4,194  

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.79%

 

3.24%

 

 

 

 

 

2.90%

Average interest-earning banking assets

 

£340.1bn

 

£92.3bn

 

£0.9bn

 

 -  

 

£433.3bn

Asset quality ratio

 

0.33%

 

0.13%

 

 

 

 

 

0.26%

Return on risk-weighted assets

 

4.64%

 

2.33%

 

 

 

 

 

4.09%

Loans and advances to customers1

 

£338.4bn

 

£99.8bn

 

£0.9bn

 

£1.9bn

 

£441.0bn

Customer deposits2

 

£253.5bn

 

£149.5bn

 

£13.8bn

 

£0.8bn

 

£417.6bn

Risk-weighted assets

 

£95.8bn

 

£83.0bn

 

£1.3bn

 

£26.4bn

 

£206.5bn

 

 

 

1

Excludes reverse repos.

 

2

Excludes repos.

 

3

Restated to reflect migration of certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail. Segmental net interest income also restated to reflect the Group's adoption of the Sterling Overnight Index Average (SONIA).

 

    
 

 

UNDERLYING BASIS SEGMENTAL ANALYSIS (continued)

 

 

 

 

 

 

 

 

 

 

 

 

Half-year to 31 December 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial 

 

Insurance 

 

Central 

 

 

 

 

Retail

 

Banking

 

and Wealth

 

items  

 

Group 

 

 

£m 

 

£m 

 

£m 

 

£m 

 

£m 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 4,623  

 

 1,443  

 

 37  

 

 129  

 

 6,232  

Other income

 

 1,010  

 

 686  

 

 838  

 

 48  

 

 2,582  

Operating lease depreciation

 

 (485) 

 

 (9) 

 

 -  

 

 -  

 

 (494) 

Net income

 

 5,148  

 

 2,120  

 

 875  

 

 177  

 

 8,320  

Operating costs

 

 (2,440) 

 

 (1,042) 

 

 (443) 

 

 (44) 

 

 (3,969) 

Remediation

 

 (190) 

 

 (65) 

 

 (25) 

 

 (22) 

 

 (302) 

Total costs

 

 (2,630) 

 

 (1,107) 

 

 (468) 

 

 (66) 

 

 (4,271) 

Trading surplus

 

 2,518  

 

 1,013  

 

 407  

 

 111  

 

 4,049  

Impairment

 

 (482) 

 

 (241) 

 

 -  

 

 11  

 

 (712) 

Underlying profit

 

 2,036  

 

 772  

 

 407  

 

 122  

 

 3,337  

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.76%

 

3.20%

 

 

 

 

 

2.86%

Average interest-earning banking assets

 

£343.7bn

 

£91.5bn

 

£0.9bn

 

 -  

 

£436.1bn

Asset quality ratio

 

0.28%

 

0.46%

 

 

 

 

 

0.31%

Return on risk-weighted assets

 

4.14%

 

1.89%

 

 

 

 

 

3.21%

Loans and advances to customers2

 

£342.6bn

 

£95.2bn

 

£0.9bn

 

£1.7bn

 

£440.4bn

Customer deposits3

 

£253.2bn

 

£144.0bn

 

£13.7bn

 

£0.9bn

 

£411.8bn

Risk-weighted assets

 

£98.4bn

 

£77.4bn

 

£1.3bn

 

£26.3bn

 

£203.4bn

 

 

 

 

1

Restated to reflect migration of certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail. Segmental net interest income also restated to reflect the Group's adoption of the Sterling Overnight Index Average (SONIA).

2

Excludes reverse repos.

3

Excludes repos.

    

 

 

 

 

#

DIVISIONAL RESULTS

RETAIL

 

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

 

COVID-19 response

· Flexible and sensitive treatment of customers with over 1.1 million payment holidays granted across mortgages, credit cards, unsecured loans and motor finance, whilst removing fees for missed payments

· Implementation of safeguarding measures across the UK's largest branch network to protect customers and colleagues, with around 90 per cent of branches remaining open during lockdown and ATM availability exceeding 95 per cent

· Over 440,000 calls from NHS workers and over 70s customers handled through dedicated telephone lines, and partnership with 'We Are Digital' to support vulnerable customers get online 

· Over 120 million proactive letters, emails and SMS messages sent to customers outlining available support with over 600,000 proactive outbound calls to vulnerable and elderly customers

· £500 interest free overdraft buffer was automatically made available to over 9 million customers

· Around 19,000 colleagues able to work from home with over 12,000 laptops distributed to colleagues. Over 1,000 colleagues redeployed to coronavirus related activities to support customer based demand

 

Progress against strategic priorities

Leading customer experience

· UK's largest digital bank with 17 million active digital customers, with daily logins now exceeding 11 million, up 12 per cent on prior year. Digital net promoter score of 69, an all-time high, with improvement of 8 per cent in year

· Supporting first time buyers with over £30 billion of lending since 2017, ahead of target with £5 billion in first half of 2020

· First bank to launch confirmation of payee for online banking, helping keep customers safe against Authorised Push Payment scam ahead of industry adoption deadline, with over 20 million name checks already carried out

Digitising the Group

· Increased cheque scanning limit to £1,000, with over 80 per cent rise in number of cheques being deposited, and increased contactless card limit to £45, contributing to additional 29 million contactless transactions since 1 April

Maximising Group capabilities

· Launched Scottish Widows branded equity release mortgage in collaboration with Insurance & Wealth, enabling customers to use equity in their home to help their family onto housing ladder and/or supplementing retirement income

 

Financial performance

· Net interest income 7 per cent lower with the continued reduction of mortgage reversionary book, lower overdraft income including the impact of £500 interest free buffer to support customers, partly offset by lower funding costs

· Other income reduced 9 per cent with lower payments revenues and continued impact of a lower Lex fleet size, whilst operating lease depreciation included a charge to reflect a reassessment of residual values

· Operating costs were 2 per cent lower, with efficiency savings and lower investment spend, more than offsetting an increase in costs relating to response of the coronavirus outbreak. Remediation remained broadly flat 

· Impairment increased significantly to £2,095 million, primarily reflecting a material deterioration in the economic outlook

· Customer lending broadly flat with expected reductions in the mortgage book and lower unsecured balances as customer activity reduced, partly offset by support for business banking customers with government schemes

· Customer deposits increased by 8 per cent from growth in current accounts and relationship savings given lower spend activity and increased Bounce Back Loan driven deposits. Low margin tactical savings continued to decrease

 

 

· Risk-weighted assets increased 1 per cent driven by impacts of risk profile changes partly offset by lower balances

Retail performance summary

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year 

 

Half-year 

 

 

 

Half-year 

 

 

 

 

to 30 June 

 

to 30 June 

 

 

 

to 31 Dec 

 

 

 

 

2020 

 

2019 

 

Change

 

2019 

 

Change

 

 

£m 

 

£m 

 

%

 

£m 

 

%

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 4,233  

 

 4,561  

 

(7)

 

 4,623  

 

(8)

Other income

 

 919  

 

 1,009  

 

(9)

 

 1,010  

 

(9)

Operating lease depreciation

 

 (518) 

 

 (461) 

 

(12)

 

 (485) 

 

(7)

Net income

 

 4,634  

 

 5,109  

 

(9)

 

 5,148  

 

(10)

Operating costs

 

 (2,277) 

 

 (2,328) 

 

2

 

 (2,440) 

 

7

Remediation

 

 (50) 

 

 (48) 

 

(4)

 

 (190) 

 

74

Total costs

 

 (2,327) 

 

 (2,376) 

 

2

 

 (2,630) 

 

12

Trading surplus

 

 2,307  

 

 2,733  

 

(16)

 

 2,518  

 

8

Impairment

 

 (2,095) 

 

 (556) 

 

 

 

 (482) 

 

 

Underlying profit

 

 212  

 

 2,177  

 

(90)

 

 2,036  

 

(90)

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.59%

 

2.79%

 

(20)bp

 

2.76%

 

(17)bp

Average interest-earning banking assets

 

£342.3bn

 

£340.1bn

 

1

 

£343.7bn

 

-

Asset quality ratio

 

1.23%

 

0.33%

 

90bp

 

0.28%

 

95bp

Return on risk-weighted assets

 

0.43%

 

4.64%

 

(421)bp

 

4.14%

 

(371)bp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June

 

At 30 June

 

 

 

At 31 Dec

 

 

 

 

2020

 

20191

 

Change

 

20191

 

 

 

 

£bn

 

£bn

 

%

 

£bn

 

%

 

 

 

 

 

 

 

 

 

 

 

Open mortgage book

 

267.1

 

264.9

 

1

 

270.1

 

(1)

Closed mortgage book

 

17.5

 

19.8

 

(12)

 

18.5

 

(5)

Credit cards

 

15.2

 

17.7

 

(14)

 

17.7

 

(14)

UK unsecured loans

 

8.2

 

8.2

 

-

 

8.4

 

(2)

UK motor finance

 

15.3

 

15.5

 

(1)

 

15.6

 

(2)

Business Banking

 

7.0

 

2.1

 

 

 

2.0

 

 

Overdrafts

 

1.0

 

1.2

 

(17)

 

1.3

 

(23)

Other2

 

9.7

 

9.0

 

8

 

9.0

 

8

Loans and advances to customers

 

341.0

 

338.4

 

1

 

342.6

 

-

Operating lease assets

 

4.1

 

4.5

 

(9)

 

4.3

 

(5)

Total customer assets

 

345.1

 

342.9

 

1

 

346.9

 

(1)

 

 

 

 

 

 

 

 

 

 

 

Current Accounts

 

87.5

 

76.0

 

15

 

76.9

 

14

Relationship savings3

 

172.0

 

162.2

 

6

 

163.0

 

6

Tactical savings

 

12.7

 

15.3

 

(17)

 

13.3

 

(5)

Customer deposits

 

272.2

 

253.5

 

7

 

253.2

 

8

 

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets

 

99.4

 

95.8

 

4

 

98.4

 

1

 

 

 

1

Restated to reflect migration of certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail. Also restated to reflect the Group's adoption of the Sterling Overnight Index Average (SONIA).

2

Includes Europe and run-off.

3

Includes Business Banking.

 

 

 

COMMERCIAL BANKING

 

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

 

COVID-19 response

· Actively supported clients with over £9 billion of government backed lending, c.33,000 capital repayment holidays, c.20,000 fee-free overdrafts as part of the £2 billion COVID-19 fund to support clients with turnover of up to £100 million

· Registered as a commercial paper dealer to provide clients with access to the Covid Corporate Financing Facility

· Implemented an extensive Client Outreach Programme across SME & Mid Corporates in response to the COVID-19 crisis, reaching c.60,000 businesses impacted by the pandemic

· SME mentoring service launched in partnership with Be The Business to support help clients recover from the pandemic

· Increased deployment of robotics to automate the loan application process for Bounce Back Loans, allowing the majority of clients to receive funds within 24 hours

· Upgraded the Business Banking Online Lending Tool to accommodate the Government's COVID-19 lending schemes, enabling faster decision making and freeing up Relationship Manager time to help customers

· Redeployed a significant number of colleagues across operational teams to manage client demand and strengthen critical processes during the pandemic

 

Progress against strategic priorities

Leading customer experience

· Launched the Business Finance Assistant pilot, an accounting and business insight tool for SMEs, in collaboration with Fintech partner OneUp, helping clients to save time on financial administration and manage finances more effectively

· Launched a new Green Buildings Tool to inform customers of measures to make their properties more energy efficient

Digitising the Group

· Over £350 million of payments per month processed through the payables API, a 30-fold increase since the start of the year, allowing clients to send Faster Payments directly from their systems without human intervention

· Increased the online cheque deposit limit from £1,000 to £2,000, a 40 per cent increase in cheques processed

Maximising Group capabilities

· Exceeded the Group's target to provide £6 billion of additional net lending to start-up, SME and Mid Market clients by year end 2020 and on track to meet the committed £18 billion gross new lending to UK businesses for 2020

· Completed the Bank's first UK Export Finance backed Export Development Guarantee transaction

 

Financial performance

· Net interest income of £1,222 million was down 16 per cent on prior year, reflecting competitive asset markets, lower income on deposits following the bank base rate reduction and ongoing business optimisation

· Other income decreased by 10 per cent to £658 million primarily driven by lower transaction banking income due to the coronavirus-related trading restrictions, with markets income resilient

· Operating costs were 12 per cent lower reflecting continued investment in efficiency initiatives

· Impairments increased significantly to £1,519 million, largely driven by the updated economic outlook, as well as a small number of single name charges

· Customer lending increased by 1 per cent to £96 billion driven by the increased government backed lending in SME

· Customer deposits grew by 7 per cent to £155 billion, significantly exceeding lending growth, as customers increased their liquidity positions in uncertain market conditions

 

 

· Risk-weighted assets increased 1 per cent to £78 billion driven by the implementation of the new securitisation framework, credit migrations and exchange rates, offset by the revised SME supporting factor and on-going optimisation

Commercial Banking performance summary

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year 

 

Half-year 

 

 

 

Half-year 

 

 

 

 

to 30 June 

 

to 30 June 

 

 

 

to 31 Dec 

 

 

 

 

2020 

 

2019

 

Change

 

20191 

 

Change

 

 

£m 

 

£m 

 

%

 

£m 

 

%

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 1,222  

 

 1,449  

 

(16)

 

 1,443  

 

(15)

Other income

 

 658  

 

 731  

 

(10)

 

 686  

 

(4)

Operating lease depreciation

 

 (8) 

 

 (12) 

 

33

 

 (9) 

 

11

Net income

 

 1,872  

 

 2,168  

 

(14)

 

 2,120  

 

(12)

Operating costs

 

 (906) 

 

 (1,031) 

 

12

 

 (1,042) 

 

13

Remediation

 

 (115) 

 

 (90) 

 

(28)

 

 (65) 

 

(77)

Total costs

 

 (1,021) 

 

 (1,121) 

 

9

 

 (1,107) 

 

8

Trading surplus

 

 851  

 

 1,047  

 

(19)

 

 1,013  

 

16

Impairment

 

 (1,519) 

 

 (65) 

 

 

 

 (241) 

 

 

Underlying (loss) / profit

 

 (668) 

 

 982  

 

 

 

 772  

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking net interest margin

 

2.92%

 

3.24%

 

(32)bp

 

3.20%

 

(28)bp

Average interest-earning banking assets

 

£90.0bn

 

£92.3bn

 

(2)

 

£91.5bn

 

(2)

Asset quality ratio

 

3.12%

 

0.13%

 

299bp

 

0.46%

 

266bp

Return on risk-weighted assets

 

(1.70)%

 

2.33%

 

(403)bp

 

1.89%

 

(359)bp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June

 

At 30 June

 

 

 

At 31 Dec

 

 

 

 

2020

 

20191

 

Change

 

20191

 

Change

 

 

£bn

 

£bn

 

%

 

£bn

 

%

 

 

 

 

 

 

 

 

 

 

 

SME

 

31.4

 

30.2

 

4

 

30.1

 

4

Mid Corporates

 

4.6

 

5.5

 

(16)

 

5.3

 

(13)

Corporate and Institutional

 

55.0

 

59.8

 

(8)

 

54.6

 

1

Other

 

5.0

 

4.3

 

16

 

5.2

 

(4)

Loans and advances to customers

 

96.0

 

99.8

 

(4)

 

95.2

 

1

 

 

 

 

 

 

 

 

 

 

 

SME including Retail Business Banking

 

38.4

 

32.3

 

19

 

32.1

 

20

 

 

 

 

 

 

 

 

 

 

 

Customer deposits

 

154.5

 

149.5

 

3

 

144.0

 

7

 

 

 

 

 

 

 

 

 

 

 

Current accounts including Retail Business Banking

 

44.2

 

34.0

 

30

 

34.9

 

27

Other deposits including Retail Business Banking

 

133.8

 

133.2

 

-

 

127.6

 

5

 

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets

 

78.4

 

83.0

 

(6)

 

77.4

 

1

 

1

Restated to reflect migration of certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail. Also restated to reflect the Group's adoption of the Sterling Overnight Index Average (SONIA).

 

 

 

INSURANCE AND WEALTH

 

Insurance and Wealth offers insurance, investment and wealth management products and services. It supports over 10 million customers with assets under administration of £160 billion and annualised annuity payments in retirement of over £1 billion. The Group continues to invest significantly in the development of the business, with the aims of capturing the considerable opportunities in pensions and financial planning, offering customers a single home for their banking and insurance needs and driving growth across intermediary and relationship channels through a strong distribution model.

 

COVID-19 response

· Offered payment holidays on insurance premiums and accelerated claims payments for life and critical illness policyholders to support customers in financial difficulty during the pandemic

· Supported the NHS by providing free additional insurance cover to its workers and alleviating pressure on GPs by reducing requirements for medical evidence

· Over 3,700 laptops distributed to colleagues to enable them to work from home and continue to serve customer needs

 

Progress against strategic initiatives

Leading customer experience

· Further strengthened presence in the open market for individual annuities since launch in September 2019. Achieved a 14 per cent share of the whole individual annuities market as at 31 March 2020

· On track to achieve 15 per cent market share of workplace business by end of 2020, up from 10 per cent at start of 2018

· Launched a new responsible investment and stewardship framework to enhance sustainability practices

· Scottish Widows won Best Retirement Provider and Best Financial Education Initiative Money Marketing Awards (July)

Digitising the Group

· Single Customer View expanded to include stockbroking portfolios with over 6 million customers able to access their insurance and wealth products alongside their bank account (up from over 5 million at the end of 2019)

· Enabled customers to notify us of their home insurance claims online - a significant development in the digital journey

Maximising Group capabilities

· Completed the transfer of £77 billion of Insurance assets to Schroders

· Transition of customers to the new Schroders Personal Wealth platform on track. Remain committed to become a top three financial planning business by the end of 2023

 

Financial performance

· Life and pensions sales, excluding the non-recurring benefit from workplace auto-enrolment step-ups in 2019, increased by c.15 per cent. New business income, excluding this benefit of c.£120 million from the first half of 2019, was resilient. On a reported basis, life and pension sales and new business income both decreased year on year, by 8 and 28 per cent, respectively. Protection sales were adversely affected by branch traffic as a result of lockdown

· General insurance combined operating ratio remains strong at 89 per cent despite absorbing additional claims caused by storms in early 2020. Total gross written premiums remain resilient despite the reduction in branch footfall

· Life and pensions experience and other items decreased by £158 million, where prior year included the £136 million one-off benefit from the change in investment management provider and a c.£100 million gain from longevity assumption changes, whilst the impact of methodology changes in the current period included a c.£90 million benefit. No changes to demographic assumptions (including longevity and persistency) have been made in the first six months of the year

· The reduction in Wealth income reflects the transfer of business to Schroders Personal Wealth in 2019 (c.£50 million, cost impact was c.£40 million). Stockbroking income more than doubled, with daily average trades increasing over twofold

 

Insurance capital

 

 

· Estimated Solvency II ratio of 140 per cent, reflects the dividend paid in February, continued investment in new business, and the impact of lower interest rates. Credit asset portfolio is average 'A' rated, well diversified and non-cyclical, with less than 1 per cent sub investment grade or unrated; the Group continues to actively monitor and manage the portfolio in light of the potential impact of the COVID-19 pandemic

Insurance and Wealth performance summary

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year 

 

Half-year 

 

 

 

Half-year 

 

 

 

 

to 30 June 

 

to 30 June 

 

 

 

to 31 Dec 

 

 

 

 

2020 

 

20191 

 

Change

 

20191 

 

Change

 

 

£m 

 

£m 

 

%

 

£m 

 

%

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 14  

 

 40  

 

(65)

 

 37  

 

(62)

Other income

 

 853  

 

 1,183  

 

(28)

 

 838  

 

2

Net income

 

 867  

 

 1,223  

 

(29)

 

 875  

 

(1)

Operating costs

 

 (459) 

 

 (539) 

 

15

 

 (443) 

 

(4)

Remediation

 

 (19) 

 

 (25) 

 

24

 

 (25) 

 

24

Total costs

 

 (478) 

 

 (564) 

 

15

 

 (468) 

 

(2)

Trading surplus

 

 389  

 

 659  

 

(41)

 

 407  

 

(4)

Impairment

 

 (10) 

 

 -  

 

 

 

 -  

 

 

Underlying profit

 

 379  

 

 659  

 

(42)

 

 407  

 

(7)

 

 

 

 

 

 

 

 

 

 

 

Life and pensions sales (PVNBP)2

 

 7,880  

 

 8,568  

 

(8)

 

 8,947  

 

(12)

General insurance underwritten new GWP3

 

 56  

 

 64  

 

(13)

 

 63  

 

(11)

General insurance underwritten total GWP3

 

 327  

 

 335  

 

(2)

 

 336  

 

(3)

General insurance combined ratio

 

89%

 

80%

 

9pp

 

82%

 

7pp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June

 

At 30 June

 

 

 

At 31 Dec

 

 

 

 

2020

 

2019

 

Change

 

2019

 

Change

 

 

£bn

 

£bn

 

%

 

£bn

 

%

 

 

 

 

 

 

 

 

 

 

 

Insurance Solvency II ratio4

 

140%

 

149%

 

(9)pp

 

170%

 

(30)pp

UK Wealth Loans and advances to customers

 

0.9

 

0.9

 

-

 

0.9

 

-

UK Wealth Customer deposits

 

13.5

 

13.8

 

(2)

 

13.7

 

(1)

UK Wealth Risk-weighted assets

 

1.3

 

1.3

 

-

 

1.3

 

-

Total customer assets under administration

 

159.6

 

155.0

 

3

 

170.0

 

(6)

 

Income by product group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year to 30 June 2020

 

Half-year to 30 June 2019

 

Half-year

 

 

New

 

Existing

 

 

 

New

 

Existing

 

 

 

to 31 Dec

 

 

business

 

business

 

Total

 

business

 

business

 

Total

 

20191

 

 

£m

 

£m

 

£m

 

£m

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Workplace, planning and retirement

 

121

 

62

 

183

 

245

 

56

 

301

 

206

Individual and bulk annuities

 

108

 

41

 

149

 

78

 

34

 

112

 

165

Protection

 

11

 

10

 

21

 

11

 

12

 

23

 

22

Longstanding LP&I

 

4

 

175

 

179

 

6

 

191

 

197

 

198

 

 

244

 

288

 

532

 

340

 

293

 

633

 

591

Life and pensions experience and other items

 

 

 

 

 

72

 

 

 

 

 

230

 

(10)

General insurance

 

 

 

 

 

155

 

 

 

 

 

179

 

147

 

 

 

 

 

 

759

 

 

 

 

 

1,042

 

728

Wealth

 

 

 

 

 

108

 

 

 

 

 

181

 

147

Net income

 

 

 

 

 

867

 

 

 

 

 

1,223

 

875

 

 

 

1

Restated to reflect the Group's adoption of the Sterling Overnight Index Average (SONIA).

2

Present value of new business premiums.

3

Gross written premiums.

4

Equivalent regulatory view of ratio (including With Profits funds) was 135 per cent (30 June 2019: 141 per cent; 31 December 2019: 154 per cent).

 

 

CENTRAL ITEMS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year 

 

Half-year 

 

 

 

Half-year 

 

 

 

 

to 30 June 

 

to 30 June 

 

 

 

to 31 Dec 

 

 

 

 

2020 

 

2019

 

Change

 

2019

 

Change

 

 

£m 

 

£m 

 

%

 

£m 

 

%

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 40  

 

 322  

 

(88)

 

 177  

 

(77)

Operating costs

 

 (57) 

 

 (8) 

 

 

 

 (44) 

 

(30)

Remediation

 

 7  

 

 20  

 

(65)

 

 (22) 

 

 

Total costs

 

 (50) 

 

 12  

 

 

 

 (66) 

 

24

Trading surplus

 

 (10) 

 

 334  

 

 

 

 111  

 

 

Impairment

 

 (194) 

 

 42  

 

 

 

 11  

 

 

Underlying (loss) / profit

 

 (204) 

 

 376  

 

 

 

 122  

 

 

 

 

 

1

Restated to reflect the Group's adoption of the Sterling Overnight Index Average (SONIA).

 

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

 

Within net income, the Group's private equity business, LDC, generating net positive other income, was adversely impacted by c.£110 million of negative market valuations in the period on investments impacted by the coronavirus pandemic. Net income also includes a gain of £135 million on the sale of gilts and other liquid assets, which is not expected to be repeated in the second half of the year, compared with a £181 million gain on sale of such assets in 2019. The net income comparative for the six months to 30 June 2019 included a gain of £50 million relating to the sale of the Group's interest in Vocalink.

 

Remediation in the half-year to 30 June 2019 reflected the release of provisions relating to discontinued business.

 

The impairment charge incurred in the six months to 30 June 2020 included a £200 million central overlay applied in respect of updates to the Group's severe scenario used to calculate expected credit loss provisions. In the first half of 2019 impairment included releases relating to the reassessment of credit risk associated with debt instruments held within the Group's equity investment business.

 

 

 

 

 

OTHER FINANCIAL INFORMATION

 

1. Reconciliation between statutory and underlying basis results

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Removal of:

 

 

 

 

 

Volatility

 

 

 

 

 

 

 

 

Statutory

 

and other

 

Insurance

 

 

 

Underlying

 

 

basis

 

items1,2,3

 

gross up4

 

PPI

 

basis

Half-year to 30 June 2020

 

£m

 

£m

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

6,556

 

54

 

(1,132)

 

 -

 

 5,478

Other income, net of insurance claims

 

1,339

 

104

 

1,018

 

 -

 

 2,461

Operating lease depreciation

 

 

 

(526)

 

 -

 

 -

 

 (526)

Net income

 

7,895

 

(368)

 

(114)

 

 -

 

 7,413

Operating expenses5

 

(4,668)

 

689

 

103

 

-

 

 (3,876)

Trading surplus

 

3,227

 

321

 

 (11)

 

 -

 

3,537

Impairment

 

(3,829)

 

 -

 

 11

 

 -

 

 (3,818)

(Loss) / profit before tax

 

(602)

 

321

 

 -

 

-

 

(281)

 

 

 

 

 

 

 

 

 

 

 

Half-year to 30 June 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 4,639

 

 203

 

 1,303

 

 -

 

 6,145

Other income, net of insurance claims

 

 4,492

 

 76

 

 (1,418)

 

 -

 

 3,150

Operating lease depreciation

 

 

 

(473)

 

 -

 

 -

 

(473)

Net income

 

 9,131

 

 (194)

 

 (115)

 

 -

 

 8,822

Operating expenses5

 

(5,655)

 

 841

 

115

 

 650

 

 (4,049)

Trading surplus

 

 3,476

 

 647

 

 -

 

 650

 

 4,773

Impairment

 

(579)

 

 -

 

 -

 

 -

 

 (579)

Profit before tax

 

 2,897

 

 647

 

 -

 

 650

 

 4,194

 

 

 

 

 

 

 

 

 

 

 

Half-year to 31 December 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 5,541

 

 176

 

 515

 

 -

 

 6,232

Other income, net of insurance claims

 

 3,687

 

 (502)

 

 (603)

 

 -

 

 2,582

Operating lease depreciation

 

 

 

(494)

 

 -

 

 -

 

(494)

Net income

 

 9,228

 

 (820)

 

 (88)

 

 -

 

 8,320

Operating expenses5

 

(7,015)

 

 856

 

88

 

 1,800

 

 (4,271)

Trading surplus

 

 2,213

 

 36

 

 -

 

 1,800

 

 4,049

Impairment

 

(717)

 

 5

 

 -

 

 -

 

 (712)

Profit before tax

 

 1,496

 

 41

 

 -

 

 1,800

 

 3,337

 

 

 

 

1

Half-year to 30 June 2020 comprises the effects of market volatility and asset sales (losses of £43 million); the amortisation of purchased intangibles (£34 million); restructuring (£133 million, comprising severance related costs, the rationalisation of the non-branch property portfolio, the integration of Zurich's UK workplace pensions and savings business); and the fair value unwind and other items (losses of £111 million).

2

Half-year to 30 June 2019 comprises the effects of market volatility and asset sales (losses of £296 million); the amortisation of purchased intangibles (£34 million); restructuring (£182 million, comprising severance related costs, the rationalisation of the non-branch property portfolio, the integration of MBNA and Zurich's UK workplace pensions and savings business); and the fair value unwind and other items (losses of £135 million).

3

Half-year to 31 December 2019 comprises the effects of market volatility and asset sales (gains of £422 million); the amortisation of purchased intangibles (£34 million); restructuring (£289 million, comprising severance related costs, the rationalisation of the non-branch property portfolio, the integration of Zurich's UK workplace pensions and savings business); and the fair value unwind and other items (losses of £140 million).

4

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

5

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

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

 

 

 

 

 

 

 

 

 

 

Half-year

 

Half-year

 

Half-year

 

 

to 30 June

 

to 30 June

 

to 31 Dec

 

 

2020

 

2019

 

2019

 

 

 

 

 

 

 

Group net interest income - statutory basis (£m)

 

 6,556

 

 4,639

 

 5,541

Insurance gross up (£m)

 

 (1,132)

 

 1,303

 

 515

Volatility and other items (£m)

 

 54

 

 203

 

 176

Group net interest income - underlying basis (£m)

 

 5,478

 

 6,145

 

 6,232

Non-banking net interest expense (£m)

 

 110

 

 79

 

 66

Banking net interest income - underlying basis (£m)

 

 5,588

 

 6,224

 

 6,298

 

 

 

 

 

 

 

Net loans and advances to customers (£bn)1

 

 440.4

 

 441.0

 

 440.4

Impairment provision and fair value adjustments (£bn)

 

 6.6

 

 4.0

 

 3.9

Non-banking items:

 

 

 

 

 

 

Fee-based loans and advances (£bn)

 

 (6.5)

 

 (7.5)

 

 (6.3)

Other non-banking (£bn)

 

 (2.4)

 

 (2.5)

 

 (3.1)

Gross banking loans and advances (£bn)

 

 438.1

 

 435.0

 

 434.9

Averaging (£bn)

 

 (4.9)

 

 (1.7)

 

 1.2

Average interest-earning banking assets (£bn)

 

 433.2

 

 433.3

 

 436.1

 

 

 

 

 

 

 

Banking net interest margin (%)

 

 2.59

 

 2.90

 

 2.86

 

 

 

1

Excludes reverse repos.

 

 

3.  Volatility arising in insurance businesses

 

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

 

 

 

 

 

 

 

 

 

 

Half-year 

 

Half-year 

 

Half-year 

 

 

to 30 June 

 

to 30 June 

 

to 31 Dec 

 

 

2020 

 

2019 

 

2019 

 

 

£m 

 

£m 

 

£m 

 

 

 

 

 

 

 

Insurance volatility

 

 (393) 

 

 221  

 

 9  

Policyholder interests volatility

 

 (205) 

 

 105  

 

 88  

Total volatility

 

 (598) 

 

 326  

 

 97  

Insurance hedging arrangements

 

 228  

 

 (299) 

 

 (48) 

Total insurance volatility

 

 (370) 

 

 27  

 

 49  

 

The Group's insurance business has policyholder liabilities that are supported by substantial holdings of investments. IFRS requires that the changes in both the value of the liabilities and investments are reflected within the income statement. The value of the liabilities does not move exactly in line with changes in the value of the investments. As the investments are substantial, movements in their value can have a significant impact on the profitability of the Group. Management believes that it is appropriate to disclose the division's results on the basis of an expected return. The impact of the actual return on these investments differing from the expected return is included within insurance volatility.

 

Insurance volatility movements in the six months to 30 June 2020 were largely driven by significant movements in global equity markets, credit spreads and interest rate movements. Although the Group manages its exposures to equity, interest rate, foreign currency exchange rate, inflation and market movements within the Insurance division, it does so by balancing the importance of managing the impacts on both capital and earnings volatility. For example, equity market movements is hedged within Insurance on a Solvency II capital basis and whilst this also reduces the IFRS earnings exposure to equity market movements, the hedge is not perfect from an IFRS earnings perspective.

 

 

4.  Tangible net assets per share

 

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

 

 

 

 

 

 

 

 

 

 

At 30 June

 

At 30 June

 

At 31 Dec

 

 

2020

 

2019

 

2019

 

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

Shareholders' equity

 

42,734

 

43,448

 

41,697

Goodwill

 

(2,324)

 

(2,314)

 

(2,324)

Intangible assets

 

(3,985)

 

(3,615)

 

(3,808)

Purchased value of in-force business

 

(234)

 

(255)

 

(247)

Other, including deferred tax effects

 

309

 

203

 

269

Tangible net assets

 

36,500

 

37,467

 

35,587

 

 

 

 

 

 

 

Ordinary shares in issue, excluding own shares

 

70,735m

 

70,740m

 

70,031m

Tangible net assets per share

 

51.6p

 

53.0p

 

50.8p

 

5.  Return on tangible equity

 

 

 

 

 

 

 

 

 

 

Half-year

 

Half-year

 

Half-year

 

 

to 30 June

 

to 30 June

 

to 31 Dec

 

 

2020

 

2019

 

2019

 

 

 

 

 

 

 

Average shareholders' equity (£bn)

 

 43.7

 

 43.6

 

 42.6

Average intangible assets (£bn)

 

 (6.2)

 

 (5.8)

 

 (6.1)

Average tangible equity (£bn)

 

 37.5

 

 37.8

 

 36.5

 

 

 

 

 

 

 

Underlying (loss) / profit after tax (£m)

 

(93)

 

3,160

 

2,530

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

 

212

 

178

 

186

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

 

(253)

 

(283)

 

(264)

Adjusted underlying (loss) / profit after tax (£m)

 

(134)

 

3,055

 

2,452

 

 

 

 

 

 

 

Underlying return on tangible equity (%)

 

(0.7)

 

16.3

 

13.3

 

 

 

 

 

 

 

Group statutory profit after tax (£m)

 

19

 

2,225

 

781

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

 

212

 

178

 

186

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

 

35

 

38

 

36

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

 

(253)

 

(283)

 

(264)

Adjusted statutory profit after tax (£m)

 

13

 

2,158

 

739

 

 

 

 

 

 

 

Statutory return on tangible equity (%)

 

0.1

 

11.5

 

4.0

 

 

 

 

 

 

 

RISK MANAGEMENT

PRINCIPAL RISKS AND UNCERTAINTIES

 

The significant risks faced by the Group are detailed below. There has been no change to the definition of these risks since disclosed in the Group's 2019 Annual Report and Accounts.

 

The external risks faced by the Group may also impact the success of delivering against the Group's long-term strategic objectives. They include, but are not limited to the coronavirus pandemic, global macro-economic conditions, regulatory developments and the exit of the UK from the European Union.

 

Through the coronavirus pandemic, the Group has offered help and support to customers with a range of measures, for example with payment holidays and government lending schemes, and continues to actively monitor the outcomes to ensure fair customer treatment. The Group has been required to take a series of unprecedented actions to protect colleagues, and has been proactive in limiting the impact with a number of mitigating actions to support their safety and wellbeing. Transition planning, including continued engagement with colleagues, remains a key focus in ensuring that the Group continues to protect colleagues and services to customers as the situation continues to evolve, and that any lessons learned from the pandemic can be embedded into future working practices.

 

The Group's key cyber controls have continued to operate effectively during the coronavirus pandemic. During this period, the Group has also enhanced monitoring of key suppliers to protect the services received by the Group and its ability to protect and maintain services to customers. The Group continues to work with the regulators constructively with regular engagement to ensure they are aware of the impacts on, and mitigating actions taken by the Group.

 

The Group's principal risks and uncertainties are reviewed and reported regularly to the Board in alignment with the Group's Enterprise Risk Management Framework and the specific challenges of COVID-19 and proposed responses have been actively discussed.

 

Climate risk is also being introduced as a new principal risk category, reflecting the focus in this key area, and work already undertaken by the Group.

 

Change / Execution - The risk that, in delivering the change agenda, the Group fails to ensure compliance with laws and regulation, maintain effective customer service and availability, and/or operate within the Group's approved risk appetite.

 

Data - The risk that the Group fails to effectively govern, manage, and control data (including data processed by third party suppliers) leading to unethical decisions, poor customer outcomes, loss of value to the Group and mistrust.

 

Operational Resilience - The risk that the Group fails to design resilience into business operations, underlying infrastructure and controls (people, process, technology) so that it is able to withstand external or internal events which could impact the continuation of operations, and fails to respond in a way which meets customer and stakeholder expectations and needs when the continuity of operations is compromised.

 

Strategic - The risks which result from strategic plans which do not adequately reflect trends in external factors, ineffective business strategy execution, or failure to respond in a timely manner to external environments or changes in stakeholder behaviours and expectations.

 

Credit - The risk that parties with whom the Group has contracted, fail to meet their financial obligations (both on and off balance sheet). For example observed, anticipated or unexpected changes in the economic environment could impact profitability due to an increase in delinquency, defaults, write-downs and/or expected credit losses.

 

Regulatory and Legal - The risk of financial penalties, regulatory censure, criminal or civil enforcement action or customer detriment as a result of failure to identify, assess, correctly interpret, comply with, or manage regulatory and/or legal requirements.

 

 

 

RISK MANAGEMENT (continued)

 

Conduct - The risk of customer detriment across the customer lifecycle including: failures in product management, distribution and servicing activities; from other risks materialising, or other activities which could undermine the integrity of the market or distort competition, leading to unfair customer outcomes, regulatory censure, reputational damage or financial loss.

 

Operational - The risk of loss from inadequate or failed internal processes, people and systems, or from external events.

 

People - The risk that the Group fails to provide an appropriate colleague and customer-centric culture, supported by robust reward and wellbeing policies and processes; effective leadership to manage colleague resources; effective talent and succession management; and robust control to ensure all colleague-related requirements are met.

 

Insurance Underwriting - The risk of adverse developments in the timing, frequency and severity of claims for insured / underwritten events and in customer behaviour, leading to reductions in earnings and/or value.

 

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

 

Funding and Liquidity - Funding risk is the risk that the Group does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient. Liquidity risk is the risk that the Group does not have sufficient financial resources to meet commitments when they fall due, or can only secure them at excessive cost.

 

Governance - The risk that the organisational infrastructure fails to provide robust oversight of decision making and the control mechanisms to ensure strategies and management instructions are implemented effectively.

 

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

 

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

 

 

 

CREDIT RISK PORTFOLIO

 

Overview

· Economic conditions worsened in the first half of 2020 as a result of the coronavirus crisis

· However, with c.85 per cent of the Group's lending secured, with robust LTVs, and a prudent approach to credit risk appetite and risk management, the credit portfolios were well positioned ahead of the crisis

· The Group is actively supporting its customers in these challenging times and continues to offer a range of flexible options and payment holidays across major products as well as lending through the various UK Government support schemes. There is however an expectation of increased arrears and defaults as these various arrangements designed to help alleviate short term financial pressures come to an end

· Given the challenging external environment and expectations of further economic deterioration, the impairment charge has increased significantly during the first half of 2020 to £3,818 million (half-year to 30 June 2019: £579 million), predominantly driven by updates to the Group's economic outlook as well as the impact on restructuring cases and single name charges in the Commercial Banking Business Support Unit (BSU). As a result, expected credit loss allowances increased to £7,186 million at 30 June 2020 (31 December 2019: £4,142 million)

· Stage 2 loans and advances to customers as a percentage of total lending have increased by 5.7 percentage points to 13.4 per cent at 30 June 2020, reflecting the deterioration of the Group's forward looking economic assumptions (31 December 2019: 7.7 per cent). Stage 2 coverage increased to 4.2 per cent (31 December 2019: 3.7 per cent)

· Stage 3 loans and advances increased by £784 million to £9,538 million (31 December 2019: £8,754 million), although as a percentage of total lending remained broadly stable at 1.9 per cent (31 December 2019: 1.8 per cent). Stage 3 coverage increased by 7.1 percentage points to 29.6 per cent (31 December 2019: 22.5 per cent) largely driven by additional provisions predominantly raised against historical restructuring cases in Commercial Banking's BSU and to a lesser extent in Retail, due to the change in the Group's economic forecast of collateral values for Secured and Motor

· There are a number of headwinds which have the potential to further impact the portfolios, including uncertainty around future UK and global economic conditions, the risk of a second wave of the virus and further, perhaps deeper, measures worsening the economy and the financial health of the Group's customers. Outside of these, the possibility still remains of no-deal at the end of the transition period of the UK exit from the European Union

· In the context of numerous uncertainties, the Group's risk appetite and risk management approach continues to help ensure the Group takes timely and proactive actions

 

Low risk culture and prudent risk appetite

· The Group continues to take a prudent approach to credit risk with robust credit quality and affordability controls and a prudent through the cycle credit risk appetite

· Providing support under the UK Government schemes does however mean that in certain circumstances, for example lending under the Coronavirus Business Interruption Loan Scheme (CBILS), which is 80 per cent UK Government guaranteed, the Group has extended its lending risk appetite in line with the scheme guidelines

· The Group's effective risk management seeks to ensure early identification and management of customers and counterparties who may be showing signs of financial difficulty

· The Group continues to work closely with its customers and clients to ensure they receive the appropriate level of support, including where payment holidays are maturing

· Sector concentrations within the portfolios are closely monitored and controlled, with mitigating actions taken where appropriate. Sector and product controls help manage exposure to certain higher risks, vulnerable sectors and asset classes

 

 

CREDIT RISK PORTFOLIO (continued)

 

Impairment charge by division

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year 

 

Half-year 

 

 

 

Half-year 

 

 

 

 

to 30 June 

 

to 30 June 

 

 

 

to 31 Dec 

 

 

 

 

2020

 

2019 

 

Change 

 

2019 

 

Change 

 

 

£m 

 

£m 

 

 

£m 

 

Retail:

 

 

 

 

 

 

 

 

 

 

Secured

 

 603

 

 (38)

 

 

 

 (130)

 

 

Credit Cards

 

 656

 

 267 

 

146

 

 236 

 

178

UK Motor Finance

 

 241

 

 104 

 

132

 

 99 

 

143

Other

 

 595

 

 223 

 

167

 

 277 

 

115

 

 

 2,095

 

 556 

 

277

 

 482 

 

335

Commercial Banking:

 

 

 

 

 

 

 

 

 

 

SME

 

 257

 

 (48)

 

 

 

 (17)

 

 

Other

 

 1,262

 

 113 

 

1,017

 

 258 

 

389

 

 

 1,519

 

 65 

 

2,237

 

 241 

 

530

Insurance and Wealth

 

 10

 

 - 

 

 

 

 - 

 

 

Central items

 

 194

 

 (42)

 

 

 

 (11)

 

 

Total impairment charge

 

 3,818

 

 579 

 

559

 

 712 

 

436

 

 

 

 

 

 

 

 

 

 

 

Asset quality ratio

 

1.73%

 

0.26%

 

147bp

 

0.31%

 

142bp

Gross asset quality ratio

 

1.77%

 

0.34%

 

143bp

 

0.40%

 

137bp

 

Credit risk basis of presentation

The analyses which follow have been presented on two bases; the statutory basis which is consistent with the presentation in the Group's accounts and the underlying basis which is used for internal management purposes. Reconciliations between the two bases have been provided on page 43.

 

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

 

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

 

 

 

CREDIT RISK PORTFOLIO (continued)

 

Group loans and advances to customers - statutory basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stage 2

 

Stage 3

 

 

Total 

 

Stage 1 

 

Stage 2 

 

Stage 3 

 

POCI 

 

as % 

 

as % 

At 30 June 2020

 

£m 

 

£m 

 

£m 

 

£m 

 

£m 

 

Total 

 

Total 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 285,727 

 

 236,577 

 

 34,307 

 

 1,800 

 

 13,043 

 

 12.0 

 

 0.6 

Credit Cards

 

 15,895 

 

 13,439 

 

 2,088 

 

 368 

 

 - 

 

 13.1 

 

 2.3 

UK Motor Finance

 

 15,830 

 

 12,674 

 

 2,920 

 

 236 

 

 - 

 

 18.4 

 

 1.5 

Other1

 

 26,780 

 

 24,239 

 

 2,061 

 

 480 

 

 - 

 

 7.7 

 

 1.8 

 

 

 344,232 

 

 286,929 

 

 41,376 

 

 2,884 

 

 13,043 

 

 12.0 

 

 0.8 

Commercial Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SME

 

 31,769 

 

 25,742 

 

 5,181 

 

 846 

 

 - 

 

 16.3 

 

 2.7 

Other

 

 66,841 

 

 52,320 

 

 11,559 

 

 2,962 

 

 - 

 

 17.3 

 

 4.4 

 

 

 98,610 

 

 78,062 

 

 16,740 

 

 3,808 

 

 - 

 

 17.0 

 

 3.9 

Insurance and Wealth

 

 871 

 

 765 

 

 23 

 

 83 

 

 - 

 

 2.6 

 

 9.5 

Central items

 

 63,781 

 

 63,773 

 

 - 

 

 8 

 

 - 

 

 - 

 

 - 

Total gross lending

 

 507,494 

 

 429,529 

 

 58,139 

 

 6,783 

 

 13,043 

 

 11.5 

 

 1.3 

ECL allowance on drawn balances

 

 (5,986) 

 

 (1,332) 

 

 (2,168) 

 

 (2,161) 

 

 (325) 

 

 

 

 

Net balance sheet carrying value

 

 501,508 

 

 428,197 

 

 55,971 

 

 4,622 

 

 12,718 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ECL allowance (drawn and undrawn) as a percentage of gross lending (%)2

 

 1.3 

 

 0.4 

 

 4.1 

 

 33.4 

 

 

 

 

 

 

 

 

 

1

Retail Other includes Business Banking, Loans, Overdrafts, Europe and Retail run-off.

2

Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Credit Cards of £77 million and £129 million in Loans, Overdrafts and Business Banking within Retail other.

 

 

 

 

 

CREDIT RISK PORTFOLIO (continued)

 

Group loans and advances to customers - statutory basis (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stage 2 

 

Stage 3 

 

 

Total 

 

Stage 1 

 

Stage 2 

 

Stage 3 

 

POCI 

 

as % 

 

as % 

At 31 December 20191

 

£m 

 

£m 

 

£m 

 

£m 

 

£m 

 

Total 

 

Total 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 289,198 

 

 257,043 

 

 16,935 

 

 1,506 

 

 13,714 

 

 5.9 

 

 0.5 

Credit Cards

 

 18,198 

 

 16,132 

 

 1,681 

 

 385 

 

 - 

 

 9.2 

 

 2.1 

UK Motor Finance

 

 15,976 

 

 13,884 

 

 1,942 

 

 150 

 

 - 

 

 12.2 

 

 0.9 

Other2

 

 21,111 

 

 18,692 

 

 1,976 

 

 443 

 

 - 

 

 9.4 

 

 2.1 

 

 

 344,483 

 

 305,751 

 

 22,534 

 

 2,484 

 

 13,714 

 

 6.5 

 

 0.7 

Commercial Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SME

 

 30,433 

 

 27,206 

 

 2,507 

 

 720 

 

 - 

 

 8.2 

 

 2.4 

Other

 

 66,065 

 

 59,868 

 

 3,470 

 

 2,727 

 

 - 

 

 5.3 

 

 4.1 

 

 

 96,498 

 

 87,074 

 

 5,977 

 

 3,447 

 

 - 

 

 6.2 

 

 3.6 

Insurance and Wealth

 

 862 

 

 753 

 

 32 

 

 77 

 

 - 

 

 3.7 

 

 8.9 

Central items

 

 56,404 

 

 56,397 

 

 - 

 

 7 

 

 - 

 

 - 

 

 - 

Total gross lending

 

 498,247 

 

 449,975 

 

 28,543 

 

 6,015 

 

 13,714 

 

 5.7 

 

 1.2 

ECL allowance on drawn balances

 

 (3,259) 

 

 (675) 

 

 (995) 

 

 (1,447) 

 

 (142) 

 

 

 

 

Net balance sheet carrying value

 

 494,988 

 

 449,300 

 

 27,548 

 

 4,568 

 

 13,572 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ECL allowance (drawn and undrawn) as a percentage of gross lending (%)3

 

 0.7 

 

 0.2 

 

 3.8 

 

 25.0 

 

 1.0 

 

 

 

 

 

 

 

1

Restated to reflect migration of certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail.

2

Retail Other includes Business Banking, Loans, Overdrafts, Europe and Retail run-off.

3

Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Credit Cards of £80 million and £125 million in Loans, Overdrafts and Business Banking within Retail other.

 

 

CREDIT RISK PORTFOLIO (continued)

 

Group loans and advances to customers - underlying basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stage 2 

 

Stage 3 

 

 

Total 

 

Stage 1 

 

Stage 2 

 

Stage 3 

 

as % 

 

as % 

At 30 June 20201

 

£m 

 

£m 

 

£m 

 

£m 

 

Total 

 

Total 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 286,379 

 

 237,787 

 

 44,035 

 

 4,557 

 

 15.4 

 

 1.6 

Credit Cards

 

 15,825 

 

 13,380 

 

 2,079 

 

 366 

 

 13.1 

 

 2.3 

UK Motor Finance

 

 15,830 

 

 12,674 

 

 2,920 

 

 236 

 

 18.4 

 

 1.5 

Other2

 

 26,780 

 

 24,239 

 

 2,061 

 

 480 

 

 7.7 

 

 1.8 

 

 

 344,814 

 

 288,080 

 

 51,095 

 

 5,639 

 

 14.8 

 

 1.6 

Commercial Banking:

 

 

 

 

 

 

 

 

 

 

 

 

SME

 

 31,769 

 

 25,742 

 

 5,181 

 

 846 

 

 16.3 

 

 2.7 

Other

 

 66,841 

 

 52,320 

 

 11,559 

 

 2,962 

 

 17.3 

 

 4.4 

 

 

 98,610 

 

 78,062 

 

 16,740 

 

 3,808 

 

 17.0 

 

 3.9 

Insurance and Wealth

 

 871 

 

 765 

 

 23 

 

 83 

 

 2.6 

 

 9.5 

Central items

 

 63,781 

 

 63,773 

 

 - 

 

 8 

 

 - 

 

 - 

Total gross lending

 

 508,076 

 

 430,680 

 

 67,858 

 

 9,538 

 

 13.4 

 

 1.9 

ECL allowance on drawn balances

 

 (6,685) 

 

 (1,355) 

 

 (2,602) 

 

 (2,728) 

 

 

 

 

Net balance sheet carrying value

 

 501,391 

 

 429,325 

 

 65,256 

 

 6,810 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ECL allowance (drawn and undrawn) as a percentage of gross lending (%)3

 

 1.4 

 

 0.4 

 

 4.2 

 

 29.6 

 

 

 

 

 

 

 

1

These balances exclude the impact of the HBOS and MBNA acquisition related adjustments.

2

Retail Other includes Business Banking, Loans, Overdrafts, Europe and Retail run-off.

3

Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Credit Cards of £77 million and £129 million in Loans, Overdrafts and Business Banking within Retail other.

 

 

CREDIT RISK PORTFOLIO (continued)

 

Group loans and advances to customers - underlying basis (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stage 2 

 

Stage 3 

 

 

Total 

 

Stage 1 

 

Stage 2 

 

Stage 3 

 

as % 

 

as % 

At 31 December 20191,2

 

£m 

 

£m 

 

£m 

 

£m 

 

Total 

 

Total 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 289,845 

 

 258,760 

 

 26,838 

 

 4,247 

 

 9.3 

 

 1.5 

Credit Cards

 

 18,110 

 

 16,052 

 

 1,675 

 

 383 

 

 9.2 

 

 2.1 

UK Motor Finance

 

 15,976 

 

 13,884 

 

 1,942 

 

 150 

 

 12.2 

 

 0.9 

Other3

 

 21,110 

 

 18,691 

 

 1,976 

 

 443 

 

 9.4 

 

 2.1 

 

 

 345,041 

 

 307,387 

 

 32,431 

 

 5,223 

 

 9.4 

 

 1.5 

Commercial Banking:

 

 

 

 

 

 

 

 

 

 

 

 

SME

 

 30,433 

 

 27,206 

 

 2,507 

 

 720 

 

 8.2 

 

 2.4 

Other

 

 66,065 

 

 59,868 

 

 3,470 

 

 2,727 

 

 5.3 

 

 4.1 

 

 

 96,498 

 

 87,074 

 

 5,977 

 

 3,447 

 

 6.2 

 

 3.6 

Insurance and Wealth

 

 862 

 

 753 

 

 32 

 

 77 

 

 3.7 

 

 8.9 

Central items

 

 56,404 

 

 56,397 

 

 - 

 

 7 

 

 - 

 

 - 

Total gross lending

 

 498,805 

 

 451,611 

 

 38,440 

 

 8,754 

 

 7.7 

 

 1.8 

ECL allowance on drawn balances

 

 (3,965) 

 

 (702) 

 

 (1,346) 

 

 (1,917) 

 

 

 

 

Net balance sheet carrying value

 

 494,840 

 

 450,909 

 

 37,094 

 

 6,837 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ECL allowance (drawn and undrawn) as a percentage of gross lending (%)4

 

 0.8 

 

 0.2 

 

 3.7 

 

 22.5 

 

 

 

 

 

 

 

1

These balances exclude the impact of the HBOS and MBNA acquisition related adjustments.

2

Restated to reflect migration of certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail.

3

Retail Other includes Business Banking, Loans, Overdrafts, Europe and Retail run-off.

4

Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Credit Cards of £80 million and £125 million in Loans, Overdrafts and Business Banking within Retail other.

 

Group total expected credit loss allowance - statutory basis

 

 

 

 

 

 

 

At 30 June

 

At 31 Dec

 

 

2020

 

2019

 

 

£m

 

£m

Customer related balances

 

 

 

 

Drawn

 

 5,986

 

 3,259

Undrawn

 

 501

 

 177

 

 

 6,487

 

 3,436

Other assets

 

 54

 

 19

Total ECL allowance

 

 6,541

 

 3,455

 

Group total expected credit loss allowance - underlying basis

 

 

 

 

 

 

 

At 30 June

 

At 31 Dec

 

 

2020

 

2019

 

 

£m

 

£m

Customer related balances

 

 

 

 

Drawn

 

 6,685

 

 3,965

Undrawn

 

 501

 

 177

 

 

 7,186

 

 4,142

Other assets

 

 54

 

 19

Total ECL allowance

 

 7,240

 

 4,161

CREDIT RISK PORTFOLIO (continued)

 

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

 

 

 

 

 

 

 

 

 

 

 

Total 

 

Stage 1 

 

Stage 2 

 

Stage 3 

 

POCI 

 

£m 

 

£m 

 

£m 

 

£m 

 

£m 

At 30 June 2020

 

 

 

 

 

 

 

 

 

Underlying basis

 508,076 

 

 430,680 

 

 67,858 

 

 9,538 

 

 - 

POCI assets

 - 

 

 (1,210)

 

 (9,728)

 

 (2,757)

 

 13,695 

Acquisition fair value adjustment

 (582)

 

 59 

 

 9 

 

 2 

 

 (652)

 

 (582)

 

 (1,151)

 

 (9,719)

 

 (2,755)

 

 13,043 

Statutory basis

 507,494 

 

 429,529 

 

 58,139 

 

 6,783 

 

 13,043 

 

 

 

 

 

 

 

 

 

 

At 31 December 2019

 

 

 

 

 

 

 

 

 

Underlying basis

 498,805 

 

 451,611 

 

 38,440 

 

 8,754 

 

 - 

POCI assets

 - 

 

 (1,718)

 

 (9,903)

 

 (2,740)

 

 14,361 

Acquisition fair value adjustment

 (558)

 

 82 

 

 6 

 

 1 

 

 (647)

 

 (558)

 

 (1,636)

 

 (9,897)

 

 (2,739)

 

 13,714 

Statutory basis

 498,247 

 

 449,975 

 

 28,543 

 

 6,015 

 

 13,714 

 

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

 

 

 

 

 

 

 

 

 

 

 

Total 

 

Stage 1 

 

Stage 2 

 

Stage 3 

 

POCI 

 

£m 

 

£m 

 

£m 

 

£m 

 

£m 

At 30 June 2020

 

 

 

 

 

 

 

 

 

Underlying basis

 6,685 

 

 1,355 

 

 2,602 

 

 2,728 

 

 - 

POCI assets

 - 

 

 - 

 

 (416)

 

 (561)

 

 977 

Acquisition fair value adjustment

 (699)

 

 (23)

 

 (18)

 

 (6)

 

 (652)

 

 (699)

 

 (23)

 

 (434)

 

 (567)

 

 325 

Statutory basis

 5,986 

 

 1,332 

 

 2,168 

 

 2,161 

 

 325 

 

 

 

 

 

 

 

 

 

 

At 31 December 2019

 

 

 

 

 

 

 

 

 

Expected credit losses on drawn balances

 

 

 

 

 

 

 

 

 

Underlying basis

 3,965 

 

 702 

 

 1,346 

 

 1,917 

 

 - 

POCI assets

 - 

 

 - 

 

 (334)

 

 (455)

 

 789 

Acquisition fair value adjustment

 (706)

 

 (27)

 

 (17)

 

 (15)

 

 (647)

 

 (706)

 

 (27)

 

 (351)

 

 (470)

 

 142 

Statutory basis

 3,259 

 

 675 

 

 995 

 

 1,447 

 

 142 

 

 

 

CREDIT RISK PORTFOLIO (continued)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Stage 1

 

Stage 2

 

Stage 3

 

POCI

At 30 June 2020

 

£m 

 

%1,2

 

£m 

 

%1,2

 

£m 

 

%1,2

 

£m 

 

%1,2,3

 

£m 

 

%1,2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 1,111 

 

 0.4

 

 108 

 

 -

 

 491 

 

 1.4

 

 187 

 

 10.4

 

 325 

 

 2.5

Credit Cards

 

 944 

 

 6.0

 

 403 

 

 3.0

 

 420 

 

 20.1

 

 121 

 

 41.6

 

 - 

 

 -

UK Motor Finance4

 

 563 

 

 3.6

 

 194 

 

 1.5

 

 217 

 

 7.4

 

 152 

 

 64.4

 

 - 

 

 -

Other5

 

 897 

 

 3.4

 

 341 

 

 1.4

 

 383 

 

 18.6

 

 173 

 

49.3

 

 - 

 

 -

 

 

 3,515 

 

 1.0

 

 1,046 

 

 0.4

 

 1,511 

 

 3.7

 

 633 

 

 23.6

 

 325 

 

 2.5

Commercial Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SME

 

 502 

 

 1.6

 

 115 

 

 0.4

 

 269 

 

 5.2

 

 118 

 

 13.9

 

 - 

 

 -

Other

 

 2,238 

 

 3.3

 

 210 

 

 0.4

 

 602 

 

 5.2

 

 1,426 

 

 48.1

 

 - 

 

 -

 

 

 2,740 

 

 2.8

 

 325 

 

 0.4

 

 871 

 

 5.2

 

 1,544 

 

 40.5

 

 - 

 

 -

Insurance and Wealth

 

 25 

 

 2.9

 

 11 

 

 1.4

 

 1 

 

 4.3

 

 13 

 

 15.7

 

 - 

 

 -

Central items

 

 207 

 

 0.3

 

 201 

 

 0.3

 

 - 

 

 -

 

 6 

 

 75.0

 

 - 

 

 -

Total

 

 6,487 

 

 1.3

 

 1,583 

 

 0.4

 

 2,383 

 

 4.1

 

 2,196 

 

 33.4

 

 325 

 

 2.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 569 

 

 0.2

 

 24 

 

 -

 

 281 

 

 1.7

 

 122 

 

 8.1

 

 142 

 

 1.0

Credit Cards

 

 546 

 

 3.0

 

 203 

 

 1.3

 

 218 

 

 13.0

 

 125 

 

 41.0

 

 - 

 

 -

UK Motor Finance4

 

 387 

 

 2.4

 

 216 

 

 1.6

 

 87 

 

 4.5

 

 84 

 

 56.0

 

 - 

 

 -

Other5

 

 588 

 

 2.8

 

 196 

 

 1.0

 

 233 

 

 11.8

 

 159 

 

 50.0

 

 - 

 

 -

 

 

 2,090 

 

 0.6

 

 639 

 

 0.2

 

 819 

 

 3.6

 

 490 

 

 21.5

 

 142 

 

 1.0

Commercial Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SME

 

 273 

 

 0.9

 

 45 

 

 0.2

 

 127 

 

 5.1

 

 101 

 

 14.0

 

 - 

 

 -

Other

 

 1,040 

 

 1.6

 

 70 

 

 0.1

 

 125 

 

 3.6

 

 845 

 

 31.0

 

 - 

 

 -

 

 

 1,313 

 

 1.4

 

 115 

 

 0.1

 

 252 

 

 4.2

 

 946 

 

 27.4

 

 - 

 

 -

Insurance and Wealth

 

 17 

 

 2.0

 

 6 

 

 0.8

 

 1 

 

 3.1

 

 10 

 

 13.0

 

 - 

 

 -

Central items

 

 16 

 

 -

 

 10 

 

 -

 

 - 

 

-

 

 6 

 

 85.7

 

 - 

 

 -

Total

 

 3,436 

 

 0.7

 

 770 

 

 0.2

 

 1,072 

 

 3.8

 

 1,452 

 

 25.0

 

 142 

 

 1.0

 

 

 

1

As a percentage of drawn balances.

2

ECL allowances as a percentage of drawn balances as at 31 December 2019 restated to reflect migration of certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail.

3

Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Credit Cards of £77 million (31 December 2019: £80 million) and £129 million (31 December 2019: £125 million) in Loans, Overdrafts and Business Banking within Retail other.

4

UK motor finance for Stages 1 and 2 include £191 million (31 December 2019: £201 million) relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

5

Retail Other includes Business Banking, Loans, Overdrafts, Europe and Retail run-off.

 

 

CREDIT RISK PORTFOLIO (continued)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Stage 1

 

Stage 2

 

Stage 3

 

 

£m 

 

%2,3

 

£m 

 

%2,3

 

£m 

 

%2,3

 

£m 

 

%2,3,4

At 30 June 20201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 1,763 

 

 0.6

 

 108 

 

 -

 

 907 

 

 2.1

 

 748 

 

 16.4

Credit Cards

 

 991 

 

 6.3

 

 426 

 

 3.2

 

 438 

 

 21.1

 

 127 

 

 43.9

UK Motor Finance5

 

 563 

 

 3.6

 

 194 

 

 1.5

 

 217 

 

 7.4

 

 152 

 

 64.4

Other6

 

 897 

 

 3.4

 

 341 

 

 1.4

 

 383 

 

 18.6

 

 173 

 

 49.3

 

 

 4,214 

 

 1.2

 

 1,069 

 

 0.4

 

 1,945 

 

 3.8

 

 1,200 

 

 22.1

Commercial Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SME

 

 502 

 

 1.6

 

 115 

 

 0.4

 

 269 

 

 5.2

 

 118 

 

 13.9

Other

 

 2,238 

 

 3.3

 

 210