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Lloyds Banking Group PLC: 2022 Q3 Interim Management Statement

EQS-News: Lloyds Banking Group PLC / Key word(s): Interim Report
Lloyds Banking Group PLC: 2022 Q3 Interim Management Statement
27.10.2022 / 08:35 CET/CEST
The issuer is solely responsible for the content of this announcement.

 

Lloyds Banking Group plc

Q3 2022 Interim Management Statement

27 October 2022

 

RESULTS FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2022

 

“In February we announced an ambitious new strategy. While the operating environment has changed significantly since then, our customer focus remains unchanged. We continue to execute against our strategic goals, based on our objectives of transforming the business, while generating a stronger growth trajectory and enabling the Group to deliver higher, more sustainable returns.

Our income growth, balance sheet momentum and resilient customer franchise have enabled the Group to deliver a robust financial performance and strong capital generation, alongside updated guidance for 2022.

The current environment is concerning for many people and we are committed to maintaining support for our customers. The Group’s resilient business model and prudent approach to risk position the Group well to face the current macroeconomic uncertainties while generating enhanced returns for our shareholders.”

Charlie Nunn, Group Chief Executive

Robust financial results with resilient credit performance and continued business momentum

  • Maintaining support for customers and progressing strategic priorities with significant strategic investment

  • Supporting the transition to a low carbon economy; announced new sector-based 2030 emissions reduction targets and a new net zero ambition for our supply chain in our Net Zero Activity Update1

  • Statutory profit after tax of £4.0 billion (nine months to 30 September 2021: £5.5 billion), with higher net income more than offset by impairment charges as a result of the revised economic outlook (versus a significant write-back in 2021)

  • Robust revenue growth supported by continued recovery in customer activity and UK Bank Rate changes. Net income of £13.0 billion, up 12 per cent; higher net interest and other income and continued low operating lease depreciation

  • Underlying net interest income up 15 per cent, significantly driven by a stronger banking net interest margin of 2.84 per cent year to date (2.98 per cent in the third quarter)

  • Operating costs of £6.4 billion, up 6 per cent compared to the first nine months of 2021, reflecting stable business-as-usual costs alongside higher planned strategic investment and new businesses

  • Underlying profit before impairment up 29 per cent to £6.5 billion in the period (with £2.4 billion in the third quarter), as a result of robust net income growth

  • Observed asset quality remains strong and the portfolio is well-positioned in the context of cost of living pressures. Underlying impairment of £1.0 billion (of which £0.7 billion was recognised in the third quarter) reflects a resilient observed credit performance, but impacted by the weakening economic outlook and associated scenarios in the third quarter, partially offset by COVID-19 releases

Continued franchise growth and strong capital generation

  • Loans and advances to customers at £456.3 billion were up £7.7 billion in the first nine months and up £0.2 billion in the quarter, with continued growth in the open mortgage book

  • Customer deposits of £484.3 billion were up £8.0 billion in the first nine months and £6.1 billion in the quarter. Loan to deposit ratio of 94 per cent continues to provide robust funding and liquidity and potential for growth

  • Capital generation of 191 basis points2 in the first nine months based on robust banking performance and including the Insurance dividend paid in July 2022

  • CET1 ratio of 15.0 per cent after ordinary dividend and variable pension contributions, remaining well ahead of the ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent. Commitment to consider excess capital returns as usual at year-end

Outlook

Given the robust financial performance in the first nine months of 2022 and incorporating revised macroeconomic forecasts in the third quarter, the Group is updating its 2022 guidance:

  • Banking net interest margin now expected to be greater than 290 basis points

  • Operating costs expected to be c.£8.8 billion

  • Asset quality ratio now expected to be c.30 basis points

  • Return on tangible equity expected to be c.13 per cent

  • Risk-weighted assets at the end of 2022 expected to be c.£210 billion

  • Capital generation now expected to be between 225 and 250 basis points2

1 The Net Zero Activity Update can be found at www.lloydsbankinggroup.com/investors/esg-information.html.

2 Excluding regulatory changes on 1 January 2022, ordinary dividend and variable pension contributions.

 

 

 

INCOME STATEMENT – UNDERLYING BASISA AND KEY BALANCE SHEET METRICS

 

Nine months ended
30 Sep
2022
£m

 

 

Nine months ended
30 Sep 2021
£m

 

 

Change
%

 

Three months ended
30 Sep 2022
£m

 

 

Three months ended
30 Sep 2021
£m

 

 

Change
%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying net interest income

9,529

 

 

8,270

 

 

15

 

3,394

 

 

2,852

 

 

19

Underlying other income

3,811

 

 

3,753

 

 

2

 

1,282

 

 

1,336

 

 

(4)

Operating lease depreciation

(295)

 

 

(382)

 

 

23

 

(82)

 

 

(111)

 

 

26

Net income

13,045

 

 

11,641

 

 

12

 

4,594

 

 

4,077

 

 

13

Operating costs1

(6,436)

 

 

(6,066)

 

 

(6)

 

(2,187)

 

 

(2,013)

 

 

(9)

Remediation

(89)

 

 

(525)

 

 

83

 

(10)

 

 

(100)

 

 

90

Total costs

(6,525)

 

 

(6,591)

 

 

1

 

(2,197)

 

 

(2,113)

 

 

(4)

Underlying profit before impairment

6,520

 

 

5,050

 

 

29

 

2,397

 

 

1,964

 

 

22

Underlying impairment (charge) credit1

(1,045)

 

 

853

 

 

 

 

(668)

 

 

119

 

 

 

Underlying profit

5,475

 

 

5,903

 

 

(7)

 

1,729

 

 

2,083

 

 

(17)

Restructuring1

(69)

 

 

(34)

 

 

 

 

(22)

 

 

(24)

 

 

8

Volatility and other items

(237)

 

 

65

 

 

 

 

(199)

 

 

(30)

 

 

 

Statutory profit before tax

5,169

 

 

5,934

 

 

(13)

 

1,508

 

 

2,029

 

 

(26)

Tax expense

(1,134)

 

 

(469)

 

 

 

 

(299)

 

 

(429)

 

 

30

Statutory profit after tax

4,035

 

 

5,465

 

 

(26)

 

1,209

 

 

1,600

 

 

(24)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

5.2p

 

 

7.1p

 

 

(1.9)p

 

1.5p

 

 

2.0p

 

 

(0.5)p

Banking net interest marginA

2.84%

 

 

2.52%

 

 

32bp

 

2.98%

 

 

2.55%

 

 

43bp

Average interest-earning banking assetsA

£451.4bn

 

 

£443.0bn

 

 

2

 

£454.9bn

 

 

£447.2bn

 

 

2

Cost:income ratioA,1

50.0%

 

 

56.6%

 

 

(6.6)pp

 

47.8%

 

 

51.8%

 

 

(4.0)pp

Asset quality ratioA,1

0.30%

 

 

(0.25)%

 

 

 

 

0.57%

 

 

(0.10)%

 

 

 

Return on tangible equityA

12.9%

 

 

17.6%

 

 

(4.7)pp

 

11.9%

 

 

14.5%

 

 

(2.6)pp

1 2021 comparatives have been presented to reflect the new costs basis, consistent with the current period. See page 23.

 

 

 

At 30 Sep
2022

 

 

At 30 Jun
2022

 

 

Change
%

 

 

 

 

At 31 Dec
2021

 

 

Change
%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers

£456.3bn

 

 

£456.1bn

 

 

 

 

 

 

 

£448.6bn

 

 

2

Customer deposits

£484.3bn

 

 

£478.2bn

 

 

1

 

 

 

 

£476.3bn

 

 

2

Loan to deposit ratioA

94%

 

 

95%

 

 

(1pp)

 

 

 

 

94%

 

 

 

CET1 ratio

15.0%

 

 

14.7%

 

 

0.3pp

 

 

 

 

17.3%

 

 

(2.3)pp

Pro forma CET1 ratioA,1

15.0%

 

 

14.8%

 

 

0.2pp

 

 

 

 

16.3%

 

 

(1.3)pp

Total capital ratio

19.4%

 

 

19.3%

 

 

0.1pp

 

 

 

 

23.6%

 

 

(4.2)pp

MREL ratio

32.8%

 

 

32.4%

 

 

0.4pp

 

 

 

 

37.2%

 

 

(4.4)pp

UK leverage ratio

5.3%

 

 

5.3%

 

 

 

 

 

 

 

5.8%

 

 

(0.5)pp

Risk-weighted assets

£210.8bn

 

 

£209.6bn

 

 

1

 

 

 

 

£196.0bn

 

 

8

Wholesale funding

£98.9bn

 

 

£97.7bn

 

 

1

 

 

 

 

£93.1bn

 

 

6

Liquidity coverage ratio2

146%

 

 

142%

 

 

4.0pp

 

 

 

 

135%

 

 

11.0pp

Tangible net assets per shareA

49.0p

 

 

54.8p

 

 

(5.8)p

 

 

 

 

57.5p

 

 

(8.5)p

A See page 25.

1 The pro forma CET1 ratio comparative for 30 June 2022 reflects the interim dividend received from Insurance in July 2022. The 31 December 2021 comparative reflects the dividend received from Insurance in February 2022 and the full impact of the share buyback, but prior to the impact of regulatory changes that came into effect on 1 January 2022.

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

 

 

QUARTERLY INFORMATIONA

 

Quarter ended
30 Sep 2022
£m

 

 

Quarter ended
30 Jun 2022
£m

 

 

Quarter
ended
31 Mar
2022
£m

 

 

Quarter
ended
31 Dec
2021
£m

 

 

Quarter
ended
30 Sep
2021
£m

 

 

Quarter
ended
30 Jun
2021
£m

 

 

Quarter
ended
31 Mar
2021
£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying net interest income

3,394

 

 

3,190

 

 

2,945

 

 

2,893

 

 

2,852

 

 

2,741

 

 

2,677

 

Underlying other income

1,282

 

 

1,268

 

 

1,261

 

 

1,307

 

 

1,336

 

 

1,282

 

 

1,135

 

Operating lease depreciation

(82)

 

 

(119)

 

 

(94)

 

 

(78)

 

 

(111)

 

 

(123)

 

 

(148)

 

Net income

4,594

 

 

4,339

 

 

4,112

 

 

4,122

 

 

4,077

 

 

3,900

 

 

3,664

 

Operating costs1

(2,187)

 

 

(2,151)

 

 

(2,098)

 

 

(2,246)

 

 

(2,013)

 

 

(2,008)

 

 

(2,045)

 

Remediation

(10)

 

 

(27)

 

 

(52)

 

 

(775)

 

 

(100)

 

 

(360)

 

 

(65)

 

Total costs

(2,197)

 

 

(2,178)

 

 

(2,150)

 

 

(3,021)

 

 

(2,113)

 

 

(2,368)

 

 

(2,110)

 

Underlying profit before impairment

2,397

 

 

2,161

 

 

1,962

 

 

1,101

 

 

1,964

 

 

1,532

 

 

1,554

 

Underlying impairment (charge) credit1

(668)

 

 

(200)

 

 

(177)

 

 

532

 

 

119

 

 

374

 

 

360

 

Underlying profit

1,729

 

 

1,961

 

 

1,785

 

 

1,633

 

 

2,083

 

 

1,906

 

 

1,914

 

Restructuring1

(22)

 

 

(23)

 

 

(24)

 

 

(418)

 

 

(24)

 

 

6

 

 

(16)

 

Volatility and other items

(199)

 

 

100

 

 

(138)

 

 

(247)

 

 

(30)

 

 

95

 

 

 

Statutory profit before tax

1,508

 

 

2,038

 

 

1,623

 

 

968

 

 

2,029

 

 

2,007

 

 

1,898

 

Tax (expense) credit

(299)

 

 

(416)

 

 

(419)

 

 

(548)

 

 

(429)

 

 

461

 

 

(501)

 

Statutory profit after tax

1,209

 

 

1,622

 

 

1,204

 

 

420

 

 

1,600

 

 

2,468

 

 

1,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking net interest marginA

2.98%

 

 

2.87%

 

 

2.68%

 

 

2.57%

 

 

2.55%

 

 

2.51%

 

 

2.49%

 

Average interest-earning banking assetsA

£454.9bn

 

 

£451.2bn

 

 

£448.0bn

 

 

£449.4bn

 

 

£447.2bn

 

 

£442.2bn

 

 

£439.4bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost:income ratioA,1

47.8%

 

 

50.2%

 

 

52.3%

 

 

73.3%

 

 

51.8%

 

 

60.7%

 

 

57.6%

 

Asset quality ratioA,1

0.57%

 

 

0.17%

 

 

0.16%

 

 

(0.46)%

 

 

(0.10)%

 

 

(0.33)%

 

 

(0.33)%

 

Return on tangible equityA

11.9%

 

 

15.6%

 

 

10.8%

 

 

2.9%

 

 

14.5%

 

 

24.4%

 

 

13.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers

£456.3bn

 

 

£456.1bn

 

 

£451.8bn

 

 

£448.6bn

 

 

£450.5bn

 

 

£447.7bn

 

 

£443.5bn

 

Customer deposits

£484.3bn

 

 

£478.2bn

 

 

£481.1bn

 

 

£476.3bn

 

 

£479.1bn

 

 

£474.4bn

 

 

£462.4bn

 

Loan to deposit ratioA

94%

 

 

95%

 

 

94%

 

 

94%

 

 

94%

 

 

94%

 

 

96%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets

£210.8bn

 

 

£209.6bn

 

 

£210.2bn

 

 

£196.0bn

 

 

£200.7bn

 

 

£200.9bn

 

 

£198.9bn

 

Tangible net assets per shareA

49.0p

 

 

54.8p

 

 

56.5p

 

 

57.5p

 

 

56.6p

 

 

55.6p

 

 

52.4p

 

1 2021 comparatives have been presented to reflect the new costs basis, consistent with the current period. See page 23.

 

BALANCE SHEET ANALYSIS

 

At 30 Sep
2022
£bn

 

 

At 30 Jun
2022
£bn

 

 

Change
%

 

At 30 Sep
2021
£bn

 

 

Change
%

 

At 31 Dec
2021
£bn

 

 

Change
%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Open mortgage book

298.4

 

 

296.6

 

 

1

 

292.6

 

 

2

 

293.3

 

 

2

Closed mortgage book

12.3

 

 

13.1

 

 

(6)

 

14.8

 

 

(17)

 

14.2

 

 

(13)

Credit cards2

14.3

 

 

14.2

 

 

1

 

13.5

 

 

6

 

13.8

 

 

4

UK Retail unsecured loans

8.8

 

 

8.5

 

 

4

 

8.1

 

 

9

 

8.1

 

 

9

UK Motor Finance

14.2

 

 

14.2

 

 

 

 

14.1

 

 

1

 

14.0

 

 

1

Overdrafts

1.0

 

 

1.0

 

 

 

 

1.0

 

 

 

 

1.0

 

 

 

Retail other1

13.0

 

 

12.5

 

 

4

 

10.8

 

 

20

 

10.9

 

 

19

Wealth2

1.0

 

 

1.0

 

 

 

 

1.0

 

 

 

 

1.0

 

 

 

Small and Medium Businesses2

39.8

 

 

41.1

 

 

(3)

 

43.8

 

 

(9)

 

42.5

 

 

(6)

Corporate and Institutional Banking2

57.6

 

 

55.7

 

 

3

 

51.0

 

 

13

 

50.0

 

 

15

Central items2,3

(4.1)

 

 

(1.8)

 

 

 

 

(0.2)

 

 

 

 

(0.2)

 

 

 

Loans and advances to customers

456.3

 

 

456.1

 

 

 

 

450.5

 

 

1

 

448.6

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail current accounts

115.7

 

 

113.4

 

 

2

 

109.6

 

 

6

 

111.5

 

 

4

Retail relationship savings accounts

165.7

 

 

165.8

 

 

 

 

162.6

 

 

2

 

164.5

 

 

1

Retail tactical savings accounts

16.2

 

 

16.9

 

 

(4)

 

16.8

 

 

(4)

 

16.8

 

 

(4)

Wealth2

14.9

 

 

14.9

 

 

 

 

15.1

 

 

(1)

 

15.6

 

 

(4)

Commercial Banking deposits

170.2

 

 

166.7

 

 

2

 

174.5

 

 

(2)

 

167.5

 

 

2

Central items2

1.6

 

 

0.5

 

 

 

 

0.5

 

 

 

 

0.4

 

 

 

Total customer deposits

484.3

 

 

478.2

 

 

1

 

479.1

 

 

1

 

476.3

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

892.9

 

 

890.4

 

 

 

 

882.0

 

 

1

 

886.6

 

 

1

Total liabilities

846.5

 

 

840.3

 

 

1

 

829.4

 

 

2

 

833.4

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary shareholders’ equity

40.0

 

 

44.4

 

 

(10)

 

46.5

 

 

(14)

 

47.1

 

 

(15)

Other equity instruments

6.2

 

 

5.5

 

 

13

 

5.9

 

 

5

 

5.9

 

 

5

Non-controlling interests

0.2

 

 

0.2

 

 

 

 

0.2

 

 

 

 

0.2

 

 

 

Total equity

46.4

 

 

50.1

 

 

(7)

 

52.6

 

 

(12)

 

53.2

 

 

(13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary shares in issue, excluding own shares

67,464m

 

 

68,702m

 

 

(2)

 

70,979m

 

 

(5)

 

70,996m

 

 

(5)

1 Primarily Europe.

2 The portfolios shown reflect the new organisation structure; comparatives have been presented on a consistent basis. See page 25.

3 Includes central fair value hedge accounting adjustments. 30 June 2022 included a £200 million ECL central adjustment that was not allocated to specific portfolios (30 September 2021 and 31 December 2021: £400 million). In the third quarter of 2022 this central adjustment was released.

 

 

GROUP RESULTS – STATUTORY BASIS

 

 

Summary income statement

Nine months ended
30 Sep
2022
£m

 

 

Nine months ended
30 Sep
2021
£m

 

 

Change
%

Net interest income

11,061

 

 

7,073

 

 

56

Other income

(17,984)

 

 

20,012

 

 

 

Total income1

(6,923)

 

 

27,085

 

 

 

Insurance claims1

20,181

 

 

(14,803)

 

 

 

Total income, net of insurance claims

13,258

 

 

12,282

 

 

8

Operating expenses

(7,033)

 

 

(7,194)

 

 

2

Impairment (charge) credit

(1,056)

 

 

846

 

 

 

Profit before tax

5,169

 

 

5,934

 

 

(13)

Tax expense

(1,134)

 

 

(469)

 

 

 

Profit for the period

4,035

 

 

5,465

 

 

(26)

 

 

 

 

 

 

 

 

Profit attributable to ordinary shareholders

3,632

 

 

5,064

 

 

(28)

Profit attributable to other equity holders

327

 

 

321

 

 

2

Profit attributable to non-controlling interests

76

 

 

80

 

 

(5)

Profit for the period

4,035

 

 

5,465

 

 

(26)

 

 

 

 

 

 

 

 

Ordinary shares in issue (weighted-average – basic)

69,478m

 

 

70,919m

 

 

(2)

Basic earnings per share

5.2p

 

 

7.1p

 

 

(1.9)p

1 Includes income and expense attributable to the policyholders of the Group’s long-term assurance funds that materially offset in arriving at profit attributable to equity shareholders. These can, depending on market movements, lead to significant variances on a statutory basis in total income and insurance claims from one period to the next.

 

 

Summary balance sheet

At 30 Sep 2022
£m

 

 

At 31 Dec
2021
£m

 

 

Change
%

Assets

 

 

 

 

 

 

 

Cash and balances at central banks

84,841

 

 

76,420

 

 

11

Financial assets at fair value through profit or loss

174,235

 

 

206,771

 

 

(16)

Derivative financial instruments

34,919

 

 

22,051

 

 

58

Financial assets at amortised cost

536,843

 

 

517,156

 

 

4

Financial assets at fair value through other comprehensive income

21,303

 

 

28,137

 

 

(24)

Other assets

40,781

 

 

35,990

 

 

13

Total assets

892,922

 

 

886,525

 

 

1

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits from banks

9,032

 

 

7,647

 

 

18

Customer deposits

484,303

 

 

476,344

 

 

2

Repurchase agreements at amortised cost1

46,378

 

 

31,125

 

 

49

Financial liabilities at fair value through profit or loss

21,012

 

 

23,123

 

 

(9)

Derivative financial instruments

33,983

 

 

18,060

 

 

88

Debt securities in issue

72,448

 

 

71,552

 

 

1

Liabilities arising from insurance and investment contracts

142,977

 

 

168,463

 

 

(15)

Other liabilities

26,174

 

 

23,951

 

 

9

Subordinated liabilities

10,242

 

 

13,108

 

 

(22)

Total liabilities

846,549

 

 

833,373

 

 

2

Total equity

46,373

 

 

53,152

 

 

(13)

Total equity and liabilities

892,922

 

 

886,525

 

 

1

1 Repurchase agreements at amortised cost, previously included within other liabilities, are now shown separately; comparatives have been presented on a consistent basis.

 

 

REVIEW OF PERFORMANCE

Robust financial performance with continued business momentum

Statutory results

The Group’s statutory profit before tax for the first nine months of 2022 was £5,169 million, 13 per cent lower than the same period in 2021. Results benefitted from higher income, more than offset by the impact of an impairment charge (compared to a credit in the prior year), including updates to the economic outlook in the third quarter. Statutory profit after tax was £4,035 million (nine months to 30 September 2021: £5,465 million, which included the benefit of a deferred tax remeasurement). In the third quarter of the year, statutory profit before tax was £1,508 million and statutory profit after tax was £1,209 million, a decrease on the second quarter of 26 per cent and 25 per cent respectively, again as a result of higher income more than offset by the impairment charge in light of the deterioration in the macroeconomic outlook as at 30 September 2022.

The Group’s statutory income statement includes income and expenses attributable to the policyholders of the Group’s long-term assurance funds. These items materially offset in arriving at profit attributable to equity shareholders but can, depending on market movements, lead to significant variances on a statutory basis between total income and insurance claims from one period to the next. In the nine months to 30 September 2022, due to deteriorating market conditions, the Group recognised losses on policyholder investments within total income which were materially offset by the corresponding reduction in insurance and investment contract liabilities, recognised as a decrease in insurance claims expense and a decrease in the amounts payable to unit holders in the Group’s consolidated open-ended investment companies, recognised within net interest income.

Total statutory income net of insurance claims for the first nine months was £13,258 million, an increase of 8 per cent on the first nine months of 2021, reflecting continued recovery in customer activity and UK Bank Rate changes. The Group has maintained its focus on cost management, whilst increasing strategic investment as planned.

Loans and advances to customers are up 2 per cent on 31 December 2021 at £456.3 billion, including continued growth of £5.1 billion in the open mortgage book (£1.8 billion in the third quarter), alongside higher retail unsecured loan and credit card balances. Commercial Banking balances increased by £4.9 billion (including £0.6 billion in the third quarter) due to attractive growth opportunities as well as foreign exchange movements in the Corporate and Institutional Banking portfolio. Customer deposits have increased by £8.0 billion since the end of 2021, to £484.3 billion. This included Retail current account growth of £4.2 billion and Retail relationship savings growth of £1.2 billion, along with Commercial Banking deposit growth of £2.7 billion. In the nine months to 30 September 2022, due to market conditions, a reduction was seen in policyholder investments, primarily within financial assets at fair value through profit or loss. This was materially offset by a corresponding reduction in the related insurance and investment contract liabilities.

Total equity reduced during the period as the Group’s profits were more than offset by reductions in the cash flow hedging reserve due to the rising rate environment, the impact of pension scheme remeasurements given market conditions and the impact of in-year distributions, including the share buyback programme that was announced in February 2022. This programme completed on 11 October 2022, with c.4.5 billion ordinary shares repurchased.

 

 

REVIEW OF PERFORMANCE (continued)

Underlying resultsA

The Group’s underlying profit for the first nine months of the year was £5,475 million, compared to £5,903 million for the same period in 2021. Growth in net income was more than offset by an increased impairment charge, largely given the impact of the updated economic outlook and associated scenarios in the third quarter versus the underlying impairment credit for the same period in 2021. Underlying profit before impairment for the period was up 29 per cent to £6,520 million, driven by robust net income growth and lower remediation costs. In the third quarter, underlying profit before impairment was £2,397 million, up 11 per cent on the second quarter.

 

Net income of £13,045 million was up 12 per cent on the first nine months of 2021, with higher net interest income and other income as well as a continued low charge for operating lease depreciation.

Net interest income of £9,529 million was up 15 per cent, largely driven by a stronger banking net interest margin of 2.84 per cent (nine months to 30 September 2021: 2.52 per cent). The net interest margin benefitted from the UK Bank Rate increases, structural hedge earnings from the rising rate environment, continued funding and capital optimisation and robust balance growth, partly offset by mortgage margin reductions. In the third quarter, the net interest margin rose to 2.98 per cent. Average interest-earning banking assets were up 2 per cent compared to the first nine months of 2021 at £451.4 billion, driven by continued growth in the open mortgage book. The Group now expects the banking net interest margin for 2022 to be greater than 290 basis points.

The Group manages the risk to its earnings and capital from movements in interest rates by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 30 September 2022, the Group’s structural hedge had an approved capacity of £250 billion (up £10 billion on 31 December 2021 and stable compared to 30 June 2022), including some of the balances from the deposit growth since the start of the coronavirus pandemic. The Group continues to review recent periods’ deposit growth and its eligibility for the structural hedge. The nominal balance of the structural hedge was £250 billion at 30 September 2022 (31 December 2021: £240 billion) with a weighted-average duration of approximately three-and-a-half years (31 December 2021: approximately three-and-a-half years). The Group generated £1.9 billion of total gross income from structural hedge balances in the first nine months of 2022, representing material growth over the same period in 2021 (nine months to 30 September 2021: £1.6 billion).

Other income of £3,811 million was 2 per cent higher compared to £3,753 million for the first nine months of 2021, reflecting solid performance across Retail, Commercial Banking, Insurance, Pensions and Investments (previously Insurance and Wealth) and the Group’s equity investments businesses. This included £1,282 million in the third quarter, slightly up on the second quarter.

Within Retail, other income was up 11 per cent on prior year, including improved current account and credit card performance. Commercial Banking was up 3 per cent versus the prior year due to higher financial markets activity and strong performance in transaction banking, partly offset by lower levels of corporate financing. Insurance, Pensions and Investments other income was 6 per cent higher than the prior year. This largely reflected the impact of increased workplace pension sales and bulk annuity deals along with the inclusion of Embark income and a benefit from assumption changes. Growth was partly offset by a decrease in the general insurance business contribution driven by market challenges, and particularly storm and subsidence claims. Assumption changes were £119 million including £47 million in the third quarter (nine months to 30 September 2021: £33 million). Other income associated with the Group’s equity investments businesses, including Lloyds Development Capital, was lower after high contributions and releases in 2021.

Operating lease depreciation decreased to £295 million (nine months to 30 September 2021: £382 million), reflecting continued strength in used car prices, combined with the ongoing impact of a reduced, but stabilising Lex fleet size, given industry-wide supply constraints in the new car market. Operating lease depreciation further reduced to £82 million in the third quarter, compared to £119 million in the second quarter.

The Group delivered good organic growth in Insurance, Pensions and Investments and Wealth (within Retail) assets under administration (AuA), with over £6 billion net new money in open book AuA over the period. In total, open book AuA stand at £154 billion.

 

 

 

 

 

 

 

 

REVIEW OF PERFORMANCE (continued)

Cost discipline remains a core focus for the Group. The Group’s cost:income ratio was 50.0 per cent compared to 56.6 per cent in the first nine months of 2021. Total costs of £6,525 million were 1 per cent lower than in the first nine months of 2021 (with £2,197 million in the third quarter). Within this, lower remediation costs (down 83 per cent) were partially offset by increased operating costs of £6,436 million (up 6 per cent), reflecting higher planned strategic investment and new businesses. Business-as-usual costs were stable. Operating costs as previously guided are still expected to be c.£8.8 billion for full-year 2022 (2021: £8.3 billion).

In the first nine months of 2022 the Group recognised remediation costs of £89 million (£10 million in the third quarter), principally relating to pre-existing programmes and significantly lower compared to the first nine months of 2021 (£525 million). There have been no further charges relating to HBOS Reading since the year-end and the provision held continues to reflect the Group’s best estimate of its full liability, albeit significant uncertainties remain.

 

Impairment was a net charge of £1,045 million (including £668 million in the third quarter), compared to a net credit of £853 million for the first nine months of 2021. This reflected an observed performance charge of £532 million in the year to date (nine months to 30 September 2021: £245 million, net of £261 million of write-backs), equivalent to an asset quality ratio of 15 basis points and a £513 million charge (nine months to 30 September 2021: a credit of £1,098 million) from updates to the assessment of the economic outlook and associated scenarios. The updated outlook includes elevated risks from a higher inflation and interest rate environment, offset by a £200 million release of the COVID-19 central adjustment, driving £418 million of the £668 million charge in the third quarter. The asset quality ratio year to date is now 30 basis points.

The Group’s loan portfolio continues to be well-positioned, reflecting a prudent through-the-cycle approach to lending with high levels of security, also reflected in strong recovery performance. Observed credit performance remains stable, with very modest evidence of deterioration and the flow of assets into arrears, defaults and write-offs at low levels and below pre-pandemic levels. These help sustain a low observed performance charge of £250 million in the third quarter, higher than earlier quarters in the year, largely due to fewer write-backs from asset sales and model-related releases. Stage 3 loans and advances have been stable across the third quarter (see below). Credit card minimum payers and overdraft and revolving credit facility (RCF) utilisation rates have remained low and in line with recent trends.

The Group’s expected credit loss (ECL) allowance has increased in the first nine months of the year to £5.0 billion (31 December 2021: £4.5 billion). This reflects the balance of risks shifting from COVID-19 to increased inflationary pressures and rising interest rates within the Group’s base case and wider economic scenarios. The deterioration in the economic outlook is now reflected in variables which credit models better capture. As a result, the Group’s reliance on judgemental overlays for modelling risks in relation to inflationary pressures has reduced from £0.3 billion at the half-year to £0.1 billion in the third quarter, with these risks now captured more fully in models.

Management judgements in respect of COVID-19 are now £0.1 billion, having reduced by £0.2 billion in the third quarter and compared to £0.8 billion at 31 December 2021. Of the £0.7 billion reduction since 31 December 2021, £0.2 billion is now captured as expected within ECL portfolio models where previously distorted data or trends have now normalised. The remaining £0.5 billion release drives a net ECL reduction and credit to the impairment charge, with the bulk relating to the £0.4 billion central adjustment (£0.2 billion released in each of the second and third quarters) and £0.1 billion relating to ECL held against certain Commercial sectors in relation to the specific risk posed by the virus and potential social restrictions (released to profit in the first half).

Stage 2 loans and advances increased to £64 billion (31 December 2021: £42 billion), with 92 per cent up to date. Of the £22 billion increase, £15 billion occurred in the third quarter as a result of the updated economic outlook, largely in UK mortgages and Commercial Banking. 99 per cent of the increase in the third quarter related to up to date loans. The increases in Stage 2 assets during the first half of the year, and in Stage 3 loans in the year to date, are not reflective of observed deterioration, but driven by changes in credit risk measurement and modelling associated with CRD IV regulatory requirements1 since the end of 2021. Stage 3 loans of £11 billion as at 30 September 2022 were stable compared to the second quarter.

On the basis of the Group’s updated base case and the significant change in economic context and associated scenarios since half-year, the Group now expects the 2022 asset quality ratio to be c.30 basis points.

1 As previously outlined, on 1 January 2022 the Group amended its definition of Stage 3 for UK mortgages, maintaining alignment between IFRS 9 and regulatory definitions of default. For UK mortgages, default was previously deemed to have occurred no later than when a payment was 180 days past due. In line with CRD IV this definition has now been reduced to 90 days, as well as including end-of-term payments on past due interest-only accounts and any non-performing loans. Furthermore, additional assets moved to Stage 2 given the consequential change in approach to the prediction and modelling of up to date accounts and their likelihood of reaching the new broader definition of default in the future. Given the accounts that moved to Stage 2 were up to date with low probability of default, there was no material ECL impact

 

 

 

REVIEW OF PERFORMANCE (continued)

Restructuring costs of £69 million were higher than in the first nine months of 2021 (£34 million) and included costs associated with the integration of Embark. Since the first quarter of 2022 all restructuring costs, with the exception of merger, acquisition and integration costs, have been reported as part of the Group’s operating costs.

Volatility and other items were a net loss of £237 million in the first nine months of 2022, comprising £95 million of negative market volatility and £142 million relating to amortisation of purchased intangibles and fair value unwind. Market volatility included negative insurance volatility of £144 million due to rising interest rates and wider bond spreads which was partly offset by positive banking volatility of £74 million. This compares to gains in the first nine months of 2021 including £132 million of positive insurance volatility. In the third quarter, market volatility included £102 million of negative insurance volatility and £35 million of negative banking volatility, again principally from rising interest rates.

The return on tangible equity for the first nine months of 2022 was 12.9 per cent reflecting the Group’s robust financial performance (nine months to 30 September 2021: 17.6 per cent, benefitting from a net impairment credit and remeasurement of deferred tax assets). The Group continues to expect the return on tangible equity for 2022 to be c.13 per cent.

 

Capital

 

The Group’s CET1 capital ratio reduced from 16.3 per cent on a pro forma basis at 31 December 2021 to 15.0 per cent at 30 September 2022. This included a reduction of 230 basis points on 1 January 2022 for regulatory changes (as previously reported), subsequently offset by strong capital generation of 191 basis points during the first nine months of this year. Capital generation reflected banking profitability of 169 basis points, including a net impairment offset of 31 basis points, plus 16 basis points for the interim dividend received from the Insurance business in July 2022 (£300 million). The capital generation further benefitted from a reduction in underlying risk-weighted assets, post 1 January 2022 regulatory changes, equivalent to 14 basis points and other movements of 23 basis points. This was offset in part by 31 basis points related to the full 2022 fixed pension deficit contributions for the Group’s defined benefit pension schemes. Capital generation during the third quarter of 52 basis points was driven by banking profitability of 52 basis points (including a net impairment offset of 18 basis points) and other movements of 6 basis points. This was offset by a reduction of 6 basis points from an increase in risk-weighted assets.

The net impairment offset of 31 basis points for the year to date reflects the impairment charge of 41 basis points, offset by IFRS 9 dynamic relief of 10 basis points resulting from the increase in Stage 1 and Stage 2 expected credit losses in the third quarter. In relation to capital usage, the impact of the interim ordinary dividend and the foreseeable ordinary dividend accrual at 30 September 2022 equated to 60 basis points.

During the first nine months of the year a total of £1.8 billion in pension deficit contributions (both fixed and variable) has been paid into the Group’s three main defined benefit pension schemes. As previously announced, the fixed contributions for the year of £0.8 billion (equivalent to 31 basis points) were paid in full in the first quarter. The variable contributions of £1.0 billion reflected £0.5 billion paid in the first quarter and £0.5 billion in the third quarter (equivalent to 37 basis points in total). This substantially covers the payment of the agreed variable pension contributions (c.95 per cent) relating to 30 per cent of in-year distributions, in accordance with the current agreement with the Trustees, with a small residual to be paid in the fourth quarter. The impact of recent volatility has had no material impact on the funding position of the pension schemes.

The Group now expects capital generation in 2022 of between 225 and 250 basis points. The Group maintains its commitment to consider the return of excess capital as usual at year-end.

 

REVIEW OF PERFORMANCE (continued)

Pro forma CET1 ratio as at 31 December 20211

16.3%

 

Regulatory change on 1 January 2022 (bps)

(230)

 

Pro forma CET1 ratio as at 1 January 2022

14.0%

 

Banking build (including impairment charge) (bps)

169

 

Insurance dividend (bps)

16

 

Underlying risk-weighted assets (bps)

14

 

Fixed pension deficit contributions (bps)

(31)

 

Other movements (bps)

23

 

Capital generation (bps)

191

 

Ordinary dividend (bps)

(60)

 

Variable pension contributions (bps)

(37)

 

Net movement in CET1 ratio excluding regulatory change (bps)

94

 

CET1 ratio as at 30 September 2022

15.0%

 

1 31 December 2021 ratio reflects the dividend received from Insurance in February 2022 and the full impact of the share buyback.

 

Risk-weighted assets increased by £16 billion to £212 billion (pro forma) on 1 January 2022, reflecting regulatory changes which include the anticipated impact of the implementation of new CRD IV models to meet revised regulatory standards for modelled outputs. Risk-weighted assets subsequently reduced by £1 billion during the first nine months of the year to £211 billion at 30 September 2022, largely reflecting optimisation activity and Retail model reductions linked to the resilient underlying credit performance, partly offset by the growth in balance sheet lending and impact of foreign exchange. The £1 billion increase in risk-weighted assets during the third quarter was largely driven by the growth in lending and foreign exchange impacts, partially offset by further optimisation and Retail model reductions. The new CRD IV models remain subject to finalisation and approval by the PRA and therefore the final risk-weighted asset impact remains subject to this.

The Group continues to expect risk-weighted assets at the end of 2022 to be around £210 billion.

In October the PRA reduced the Group’s Pillar 2A CET1 capital requirement to around 1.5 per cent of risk-weighted assets (previously around 2 per cent of risk-weighted assets), with the Group’s regulatory minimum CET1 capital requirement now around 10.5 per cent. The planned increases in the UK countercyclical capital buffer rate to 1 per cent in December 2022 and to 2 per cent from July 2023 will lead to an increase in the Group’s countercyclical capital buffer (CCyB), initially to around 0.9 per cent and then to 1.8 per cent, which will be partially offset by the removal of the 0.25 per cent CCyB related element of the PRA buffer. The Board’s view of the ongoing level of CET1 capital required to grow the business, meet current and future regulatory requirements and cover uncertainties continues to be around 12.5 per cent, plus a management buffer of around 1 per cent.

Tangible net assets per share were 49.0 pence, down from 57.5 pence at 31 December 2021, with the favourable impact from profits more than offset by cash flow hedging reserve movements as a result of increased interest rates (9.5 pence), pensions remeasurements (2.2 pence) and the impacts from payment of ordinary dividends (2.2 pence).

 

FURTHER IMPAIRMENT DETAIL

The analyses which follow have been presented on an underlying basis. See page 23.

 

Underlying impairmentA

 

Nine months ended
30 Sep
2022
£m

 

 

Nine months ended
30 Sep
20211
£m

 

 

Change
%

 

Three months ended
30 Sep 2022
£m

 

 

Three months ended
30 Sep 20211
£m

 

 

Change
%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charges (credits) pre-updated MES2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail3

520

 

 

601

 

 

13

 

235

 

 

163

 

 

(44)

Commercial Banking3

1

 

 

(354)

 

 

 

 

8

 

 

(21)

 

 

 

Other3

11

 

 

(2)

 

 

 

 

7

 

 

 

 

 

 

532

 

 

245

 

 

 

 

250

 

 

142

 

 

 

Updated economic outlook

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail3

541

 

 

(678)

 

 

 

 

370

 

 

(141)

 

 

 

Commercial Banking3

372

 

 

(420)

 

 

 

 

248

 

 

(120)

 

 

 

Other3

(400)

 

 

 

 

 

 

(200)

 

 

 

 

 

 

513

 

 

(1,098)

 

 

 

 

418

 

 

(261)

 

 

 

Underlying impairment charge (credit)A

1,045

 

 

(853)

 

 

 

 

668

 

 

(119)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset quality ratioA

0.30%

 

 

(0.25)%

 

 

 

 

0.57%

 

 

(0.10)%

 

 

 

1 Non lending-related fraud costs, previously reported within underlying impairment, are now included within operating costs. Comparatives have been presented on a consistent basis.

2 Impairment charges absent the impact from updated economic outlook, thus reflecting observed movements in credit quality. Coronavirus impacted restructuring cases, previously disclosed separately, are now reported within charges pre-updated MES (multiple economic scenarios); comparatives have been presented on a consistent basis.

3 Impairment charges for Retail, Commercial Banking and Other reflect the new organisation structure; comparatives have been presented on a consistent basis. See page 25.

 

 

Total expected credit loss allowance

 

Underlying basisA

 

At 30 Sep 2022
£m

 

 

At 30 Jun 2022
£m

 

 

At 31 Dec
2021
£m

 

 

 

 

 

 

 

 

 

 

Customer related balances

 

 

 

 

 

 

 

 

Drawn

4,685

 

 

4,247

 

 

4,277

 

Undrawn

286

 

 

236

 

 

200

 

 

4,971

 

 

4,483

 

 

4,477

 

Loans and advances to banks

7

 

 

4

 

 

1

 

Debt securities

6

 

 

4

 

 

3

 

Other assets

33

 

 

23

 

 

18

 

Total ECL allowance

5,017

 

 

4,514

 

 

4,499

 

 

 

 

FURTHER IMPAIRMENT DETAIL (continued)

Loans and advances to customers and expected credit loss allowance – underlying basisA

At 30 September 2022

Stage 1
£m

 

 

Stage 2
£m

 

 

Stage 3
£m

 

 

Total
£m

 

 

Stage 2
as % of
total

 

 

Stage 3
as % of
total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers

UK mortgages

259,541

 

 

46,153

 

 

6,613

 

 

312,307

 

 

14.8

 

 

2.1

 

Credit cards

12,018

 

 

2,526

 

 

292

 

 

14,836

 

 

17.0

 

 

2.0

 

Loans and overdrafts

8,723

 

 

1,339

 

 

255

 

 

10,317

 

 

13.0

 

 

2.5

 

UK Motor Finance

12,335

 

 

1,949

 

 

169

 

 

14,453

 

 

13.5

 

 

1.2

 

Other

13,294

 

 

650

 

 

158

 

 

14,102

 

 

4.6

 

 

1.1

 

Retail1

305,911

 

 

52,617

 

 

7,487

 

 

366,015

 

 

14.4

 

 

2.0

 

Small and Medium Businesses

31,783

 

 

6,266

 

 

2,279

 

 

40,328

 

 

15.5

 

 

5.7

 

Corporate and Institutional Banking

52,001

 

 

5,029

 

 

1,650

 

 

58,680

 

 

8.6

 

 

2.8

 

Commercial Banking

83,784

 

 

11,295

 

 

3,929

 

 

99,008

 

 

11.4

 

 

4.0

 

Equity Investments and Central Items2

(4,010)

 

 

 

 

6

 

 

(4,004)

 

 

 

 

 

 

 

Total gross lending

385,685

 

 

63,912

 

 

11,422

 

 

461,019

 

 

13.9

 

 

2.5

 

ECL allowance on drawn balances

(632)

 

 

(1,847)

 

 

(2,206)

 

 

(4,685)

 

 

 

 

 

 

 

Net balance sheet carrying value

385,053

 

 

62,065

 

 

9,216

 

 

456,334

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer related ECL allowance (drawn and undrawn)

UK mortgages

48

 

 

705

 

 

823

 

 

1,576

 

 

 

 

 

 

 

Credit cards

182

 

 

382

 

 

118

 

 

682

 

 

 

 

 

 

 

Loans and overdrafts

175

 

 

273

 

 

138

 

 

586

 

 

 

 

 

 

 

UK Motor Finance3

107

 

 

85

 

 

93

 

 

285

 

 

 

 

 

 

 

Other

15

 

 

18

 

 

48

 

 

81

 

 

 

 

 

 

 

Retail1

527

 

 

1,463

 

 

1,220

 

 

3,210

 

 

 

 

 

 

 

Small and Medium Businesses

104

 

 

292

 

 

153

 

 

549

 

 

 

 

 

 

 

Corporate and Institutional Banking

133

 

 

243

 

 

832

 

 

1,208

 

 

 

 

 

 

 

Commercial Banking

237

 

 

535

 

 

985

 

 

1,757

 

 

 

 

 

 

 

Equity Investments and Central Items

 

 

 

 

4

 

 

4

 

 

 

 

 

 

 

Total

764

 

 

1,998

 

 

2,209

 

 

4,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers4

UK mortgages

 

 

1.5

 

 

12.4

 

 

0.5

 

 

 

 

 

 

 

Credit cards

1.5

 

 

15.1

 

 

54.4

 

 

4.6

 

 

 

 

 

 

 

Loans and overdrafts

2.0

 

 

20.4

 

 

72.6

 

 

5.7

 

 

 

 

 

 

 

UK Motor Finance

0.9

 

 

4.4

 

 

55.0

 

 

2.0

 

 

 

 

 

 

 

Other

0.1

 

 

2.8

 

 

30.4

 

 

0.6

 

 

 

 

 

 

 

Retail1

0.2

 

 

2.8

 

 

16.6

 

 

0.9

 

 

 

 

 

 

 

Small and Medium Businesses

0.3

 

 

4.7

 

 

13.0

 

 

1.4

 

 

 

 

 

 

 

Corporate and Institutional Banking

0.3

 

 

4.8

 

 

50.5

 

 

2.1

 

 

 

 

 

 

 

Commercial Banking

0.3

 

 

4.7

 

 

34.9

 

 

1.8

 

 

 

 

 

 

 

Equity Investments and Central Items

 

 

 

 

 

66.7

 

 

 

 

 

 

 

 

 

 

Total

0.2

 

 

3.1

 

 

21.7

 

 

1.1

 

 

 

 

 

 

 

1 Retail balances exclude the impact of the HBOS acquisition-related adjustments.

2 Contains centralised fair value hedge accounting adjustments.

3 UK Motor Finance for Stages 1 and 2 include £93 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

4 Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of £75 million, Loans and overdrafts of £65 million, Small and Medium Businesses of £1,104 million and Corporate and Institutional Banking of £1 million.

 

FURTHER IMPAIRMENT DETAIL (continued)

Loans and advances to customers and expected credit loss allowance – underlying basisA (continued)

At 30 June 2022

Stage 1
£m

 

 

Stage 2
£m

 

 

Stage 3
£m

 

 

Total
£m

 

 

Stage 2
as % of
total

 

 

Stage 3
as % of
total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers

UK mortgages

268,568

 

 

35,555

 

 

6,764

 

 

310,887

 

 

11.4

 

 

2.2

 

Credit cards1

12,186

 

 

2,289

 

 

280

 

 

14,755

 

 

15.5

 

 

1.9

 

Loans and overdrafts

8,666

 

 

1,144

 

 

256

 

 

10,066

 

 

11.4

 

 

2.5

 

UK Motor Finance

12,476

 

 

1,832

 

 

179

 

 

14,487

 

 

12.6

 

 

1.2

 

Other1

12,711

 

 

626

 

 

150

 

 

13,487

 

 

4.6

 

 

1.1

 

Retail2

314,607

 

 

41,446

 

 

7,629

 

 

363,682

 

 

11.4

 

 

2.1

 

Small and Medium Businesses1

34,310

 

 

5,053

 

 

2,147

 

 

41,510

 

 

12.2

 

 

5.2

 

Corporate and Institutional Banking1

52,129

 

 

2,910

 

 

1,653

 

 

56,692

 

 

5.1

 

 

2.9

 

Commercial Banking

86,439

 

 

7,963

 

 

3,800

 

 

98,202

 

 

8.1

 

 

3.9

 

Equity Investments and Central Items3

(1,549)

 

 

1

 

 

6

 

 

(1,542)

 

 

 

 

 

 

 

Total gross lending

399,497

 

 

49,410

 

 

11,435

 

 

460,342

 

 

10.7

 

 

2.5

 

ECL allowance on drawn balances

(776)

 

 

(1,389)

 

 

(2,082)

 

 

(4,247)

 

 

 

 

 

 

 

Net balance sheet carrying value

398,721

 

 

48,021

 

 

9,353

 

 

456,095

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer related ECL allowance (drawn and undrawn)

UK mortgages

45

 

 

470

 

 

716

 

 

1,231

 

 

 

 

 

 

 

Credit cards1

172

 

 

346

 

 

111

 

 

629

 

 

 

 

 

 

 

Loans and overdrafts

164

 

 

243

 

 

135

 

 

542

 

 

 

 

 

 

 

UK Motor Finance4

105

 

 

80

 

 

105

 

 

290

 

 

 

 

 

 

 

Other1

14

 

 

16

 

 

48

 

 

78

 

 

 

 

 

 

 

Retail2

500

 

 

1,155

 

 

1,115

 

 

2,770

 

 

 

 

 

 

 

Small and Medium Businesses1

106

 

 

177

 

 

153

 

 

436

 

 

 

 

 

 

 

Corporate and Institutional Banking1

93

 

 

166

 

 

814

 

 

1,073

 

 

 

 

 

 

 

Commercial Banking

199

 

 

343

 

 

967

 

 

1,509

 

 

 

 

 

 

 

Equity Investments and Central Items

200

 

 

 

 

4

 

 

204

 

 

 

 

 

 

 

Total

899

 

 

1,498

 

 

2,086

 

 

4,483

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers5

UK mortgages

 

 

1.3

 

 

10.6

 

 

0.4

 

 

 

 

 

 

 

Credit cards1

1.4

 

 

15.1

 

 

53.6

 

 

4.3

 

 

 

 

 

 

 

Loans and overdrafts

1.9

 

 

21.2

 

 

70.7

 

 

5.4

 

 

 

 

 

 

 

UK Motor Finance

0.8

 

 

4.4

 

 

58.7

 

 

2.0

 

 

 

 

 

 

 

Other1

0.1

 

 

2.6

 

 

32.0

 

 

0.6

 

 

 

 

 

 

 

Retail2

0.2

 

 

2.8

 

 

14.9

 

 

0.8

 

 

 

 

 

 

 

Small and Medium Businesses1

0.3

 

 

3.5

 

 

12.5

 

 

1.1

 

 

 

 

 

 

 

Corporate and Institutional Banking1

0.2

 

 

5.7

 

 

49.3

 

 

1.9

 

 

 

 

 

 

 

Commercial Banking

0.2

 

 

4.3

 

 

33.6

 

 

1.6

 

 

 

 

 

 

 

Equity Investments and Central Items6

 

 

 

 

 

66.7

 

 

 

 

 

 

 

 

 

 

Total

0.2

 

 

3.0

 

 

20.1

 

 

1.0

 

 

 

 

 

 

 

1 Reflects the new organisation structure. See page 25.

2 Retail balances exclude the impact of the HBOS acquisition-related adjustments.

3 Contains centralised fair value hedge accounting adjustments.

4 UK Motor Finance for Stages 1 and 2 include £94 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 Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of £73 million, Loans and overdrafts of £65 million, Small and Medium Businesses of £921 million and Corporate and Institutional Banking of £1 million.

6 Equity Investments and Central Items excludes the £200 million ECL central adjustment.

FURTHER IMPAIRMENT DETAIL (continued)

Loans and advances to customers and expected credit loss allowance – underlying basisA (continued)

At 31 December 2021

Stage 1
£m

 

 

Stage 2
£m

 

 

Stage 3
£m

 

 

Total
£m

 

 

Stage 2
as % of
total

 

 

Stage 3
as % of
total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers

UK mortgages

276,021

 

 

28,579

 

 

4,191

 

 

308,791

 

 

9.3

 

 

1.4

 

Credit cards1

11,905

 

 

2,075

 

 

292

 

 

14,272

 

 

14.5

 

 

2.0

 

Loans and overdrafts

8,181

 

 

1,105

 

 

271

 

 

9,557

 

 

11.6

 

 

2.8

 

UK Motor Finance

12,247

 

 

1,828

 

 

201

 

 

14,276

 

 

12.8

 

 

1.4

 

Other1

11,198

 

 

593

 

 

169

 

 

11,960

 

 

5.0

 

 

1.4

 

Retail2

319,552

 

 

34,180

 

 

5,124

 

 

358,856

 

 

9.5

 

 

1.4

 

Small and Medium Businesses1

36,134

 

 

4,992

 

 

1,747

 

 

42,873

 

 

11.6

 

 

4.1

 

Corporate and Institutional Banking1

46,585

 

 

2,538

 

 

1,816

 

 

50,939

 

 

5.0

 

 

3.6

 

Commercial Banking

82,719

 

 

7,530

 

 

3,563

 

 

93,812

 

 

8.0

 

 

3.8

 

Equity Investments and Central Items3

144

 

 

 

 

7

 

 

151

 

 

 

 

4.6

 

Total gross lending

402,415

 

 

41,710

 

 

8,694

 

 

452,819

 

 

9.2

 

 

1.9

 

ECL allowance on drawn balances

(919)

 

 

(1,377)

 

 

(1,981)

 

 

(4,277)

 

 

 

 

 

 

 

Net balance sheet carrying value

401,496

 

 

40,333

 

 

6,713

 

 

448,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer related ECL allowance (drawn and undrawn)

UK mortgages

50

 

 

653

 

 

581

 

 

1,284

 

 

 

 

 

 

 

Credit cards1

147

 

 

253

 

 

131

 

 

531

 

 

 

 

 

 

 

Loans and overdrafts

136

 

 

170

 

 

139

 

 

445

 

 

 

 

 

 

 

UK Motor Finance4

108

 

 

74

 

 

116

 

 

298

 

 

 

 

 

 

 

Other1

15

 

 

15

 

 

52

 

 

82

 

 

 

 

 

 

 

Retail2

456

 

 

1,165

 

 

1,019

 

 

2,640

 

 

 

 

 

 

 

Small and Medium Businesses1

104

 

 

176

 

 

179

 

 

459

 

 

 

 

 

 

 

Corporate and Institutional Banking1

68

 

 

122

 

 

782

 

 

972

 

 

 

 

 

 

 

Commercial Banking

172

 

 

298

 

 

961

 

 

1,431

 

 

 

 

 

 

 

Equity Investments and Central Items

400

 

 

 

 

6

 

 

406

 

 

 

 

 

 

 

Total

1,028

 

 

1,463

 

 

1,986

 

 

4,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers5

UK mortgages

 

 

2.3

 

 

13.9

 

 

0.4

 

 

 

 

 

 

 

Credit cards1

1.2

 

 

12.2

 

 

58.2

 

 

3.7

 

 

 

 

 

 

 

Loans and overdrafts

1.7

 

 

15.4

 

 

67.5

 

 

4.7

 

 

 

 

 

 

 

UK Motor Finance

0.9

 

 

4.0

 

 

57.7

 

 

2.1

 

 

 

 

 

 

 

Other1

0.1

 

 

2.5

 

 

30.8

 

 

0.7

 

 

 

 

 

 

 

Retail2

0.1

 

 

3.4

 

 

20.4

 

 

0.7

 

 

 

 

 

 

 

Small and Medium Businesses1

0.3

 

 

3.5

 

 

14.5

 

 

1.1

 

 

 

 

 

 

 

Corporate and Institutional Banking1

0.1

 

 

4.8

 

 

43.1

 

 

1.9

 

 

 

 

 

 

 

Commercial Banking

0.2

 

 

4.0

 

 

31.6

 

 

1.5

 

 

 

 

 

 

 

Equity Investments and Central Items6

 

 

 

 

85.7

 

 

4.0

 

 

 

 

 

 

 

Total

0.3

 

 

3.5

 

 

24.7

 

 

1.0

 

 

 

 

 

 

 

1 Reflects the new organisation structure. See page 25.

2 Retail balances exclude the impact of the HBOS and MBNA acquisition-related adjustments.

3 Contains centralised fair value hedge accounting adjustments.

4 UK Motor Finance for Stages 1 and 2 include £95 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 Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of £67 million, Loans and overdrafts of £65 million, Small and Medium Businesses of £515 million and Corporate and Institutional Banking of £3 million.

6 Equity Investments and Central Items excludes the £400 million ECL central adjustment.

 

FURTHER IMPAIRMENT DETAIL (continued)

Stage 2 loans and advances to customers and expected credit loss allowance – underlying basisA

 

Up to date

 

1 to 30 days
past due2

 

Over 30 days
past due

 

Total

 

PD movements

 

Other1

 

 

 

At 30 September 2022

Gross
lending
£m

 

 

ECL3
£m

 

 

Gross
lending
£m

 

 

ECL3
£m

 

 

Gross
lending
£m

 

 

ECL3
£m

 

 

Gross
lending
£m

 

 

ECL3
£m

 

 

Gross
lending
£m

 

 

ECL3
£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UK mortgages

34,716

 

 

257

 

 

7,915

 

 

213

 

 

2,349

 

 

118

 

 

1,173

 

 

117

 

 

46,153

 

 

705

 

Credit cards

2,275

 

 

291

 

 

132

 

 

47

 

 

90

 

 

28

 

 

29

 

 

16

 

 

2,526

 

 

382

 

Loans and overdrafts

943

 

 

169

 

 

232

 

 

45

 

 

121

 

 

39

 

 

43

 

 

20

 

 

1,339

 

 

273

 

UK Motor Finance

854

 

 

27

 

 

927

 

 

23

 

 

136

 

 

25

 

 

32

 

 

10

 

 

1,949

 

 

85

 

Other

166

 

 

4

 

 

394

 

 

8

 

 

54

 

 

4

 

 

36

 

 

2

 

 

650

 

 

18

 

Retail

38,954

 

 

748

 

 

9,600

 

 

336

 

 

2,750

 

 

214

 

 

1,313

 

 

165

 

 

52,617

 

 

1,463

 

Small and Medium Businesses

4,408

 

 

246

 

 

1,235

 

 

26

 

 

399

 

 

13

 

 

224

 

 

7

 

 

6,266

 

 

292

 

Corporate and Institutional Banking

4,856

 

 

242

 

 

39

 

 

 

 

14

 

 

 

 

120

 

 

1

 

 

5,029

 

 

243

 

Commercial Banking

9,264

 

 

488

 

 

1,274

 

 

26

 

 

413

 

 

13

 

 

344

 

 

8

 

 

11,295

 

 

535

 

Equity Investments and Central Items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

48,218

 

 

1,236

 

 

10,874

 

 

362

 

 

3,163

 

 

227

 

 

1,657

 

 

173

 

 

63,912

 

 

1,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UK mortgages

24,356

 

 

193

 

 

7,836

 

 

161

 

 

2,290

 

 

60

 

 

1,073

 

 

56

 

 

35,555

 

 

470

 

Credit cards4

2,042

 

 

257

 

 

131

 

 

45

 

 

87

 

 

28

 

 

29

 

 

16

 

 

2,289

 

 

346

 

Loans and overdrafts

735

 

 

140

 

 

235

 

 

42

 

 

134

 

 

43

 

 

40

 

 

18

 

 

1,144

 

 

243

 

UK Motor Finance

675

 

 

24

 

 

977

 

 

21

 

 

143

 

 

25

 

 

37

 

 

10

 

 

1,832

 

 

80

 

Other4

169

 

 

3

 

 

354

 

 

7

 

 

54

 

 

3

 

 

49

 

 

3

 

 

626

 

 

16

 

Retail

27,977

 

 

617

 

 

9,533

 

 

276

 

 

2,708

 

 

159

 

 

1,228

 

 

103

 

 

41,446

 

 

1,155

 

Small and Medium Businesses4

3,146

 

 

139

 

 

1,257

 

 

22

 

 

413

 

 

10

 

 

237

 

 

6

 

 

5,053

 

 

177

 

Corporate and Institutional Banking4

2,672

 

 

160

 

 

123

 

 

3

 

 

26

 

 

3

 

 

89

 

 

 

 

2,910

 

 

166

 

Commercial Banking

5,818

 

 

299

 

 

1,380

 

 

25

 

 

439

 

 

13

 

 

326

 

 

6

 

 

7,963

 

 

343

 

Equity Investments and Central Items

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

Total

33,795

 

 

916

 

 

10,914

 

 

301

 

 

3,147

 

 

172

 

 

1,554

 

 

109

 

 

49,410

 

 

1,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UK mortgages

17,917

 

 

226

 

 

6,053

 

 

222

 

 

2,270

 

 

73

 

 

2,339

 

 

132

 

 

28,579

 

 

653

 

Credit cards4

1,754

 

 

179

 

 

209

 

 

41

 

 

86

 

 

21

 

 

26

 

 

12

 

 

2,075

 

 

253

 

Loans and overdrafts

505

 

 

82

 

 

448

 

 

43

 

 

113

 

 

30

 

 

39

 

 

15

 

 

1,105

 

 

170

 

UK Motor Finance

581

 

 

20

 

 

1,089

 

 

26

 

 

124

 

 

19

 

 

34

 

 

9

 

 

1,828

 

 

74

 

Other4

194

 

 

4

 

 

306

 

 

7

 

 

44

 

 

2

 

 

49

 

 

2

 

 

593

 

 

15

 

Retail

20,951

 

 

511

 

 

8,105

 

 

339

 

 

2,637

 

 

145

 

 

2,487

 

 

170

 

 

34,180

 

 

1,165

 

Small and Medium Businesses4

3,570

 

 

153

 

 

936

 

 

14

 

 

297

 

 

6

 

 

189

 

 

3

 

 

4,992

 

 

176

 

Corporate and Institutional Banking4

2,479

 

 

119

 

 

25

 

 

3

 

 

6

 

 

 

 

28

 

 

 

 

2,538

 

 

122

 

Commercial Banking

6,049

 

 

272

 

 

961

 

 

17

 

 

303

 

 

6

 

 

217

 

 

3

 

 

7,530

 

 

298

 

Equity Investments and Central Items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

27,000

 

 

783

 

 

9,066

 

 

356

 

 

2,940

 

 

151

 

 

2,704

 

 

173

 

 

41,710

 

 

1,463

 

1 Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments.

2 Includes assets that have triggered PD movements, or other rules, given that being 1-29 days in arrears in and of itself is not a Stage 2 trigger.

3 Expected credit loss allowance on loans and advances to customers (drawn and undrawn).

4 Reflects the new organisation structure. See page 25.

 

FURTHER IMPAIRMENT DETAIL (continued)

ECL sensitivity to economic assumptions

The measurement of ECL reflects an unbiased probability-weighted range of possible future economic outcomes. The Group achieves this by generating four economic scenarios to reflect the range of outcomes; the central scenario reflects the Group’s base case assumptions used for medium-term planning purposes, an upside and a downside scenario are also selected together with a severe downside scenario. If the base case moves adversely it generates a new, more adverse downside and severe downside which are then incorporated into the ECL. The base case, upside and downside scenarios carry a 30 per cent weighting; the severe downside is weighted at 10 per cent. These assumptions can be found on pages 19 and 18.

The table below shows the Group’s ECL for the probability-weighted, upside, base case, downside and severe downside scenarios, the severe downside scenario incorporating adjustments made to CPI inflation and UK Bank Rate paths. The stage allocation for an asset is based on the overall scenario probability-weighted PD and hence the staging of assets is constant across all the scenarios. In each economic scenario the ECL for individual assessments and post-model adjustments is constant reflecting the basis on which they are evaluated.

Underlying basisA

Probability-
weighted
£m

 

 

Upside
£m

 

 

Base case
£m

 

 

Downside
£m

 

 

Severe
downside
£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UK mortgages

 

1,576

 

 

877

 

 

1,147

 

 

1,788

 

 

4,327

 

Credit cards

 

682

 

 

594

 

 

649

 

 

742

 

 

866

 

Other Retail

 

952

 

 

903

 

 

937

 

 

984

 

 

1,048

 

Commercial Banking

 

1,768

 

 

1,365

 

 

1,580

 

 

1,909

 

 

3,117

 

Other

 

39

 

 

39

 

 

39

 

 

39

 

 

39

 

At 30 September 2022

 

5,017

 

 

3,778

 

 

4,352

 

 

5,462

 

 

9,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UK mortgages

 

1,231

 

 

856

 

 

1,004

 

 

1,374

 

 

2,607

 

Credit cards1

 

629

 

 

546

 

 

597

 

 

686

 

 

804

 

Other Retail1

 

910

 

 

863

 

 

895

 

 

941

 

 

1,004

 

Commercial Banking1

 

1,515

 

 

1,316

 

 

1,413

 

 

1,587

 

 

2,200

 

Other1

 

229

 

 

229

 

 

229

 

 

229

 

 

229

 

At 30 June 2022

 

4,514

 

 

3,810

 

 

4,138

 

 

4,817

 

 

6,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UK mortgages

 

1,284

 

 

1,084

 

 

1,170

 

 

1,414

 

 

1,833

 

Credit cards1

 

531

 

 

453

 

 

511

 

 

579

 

 

682

 

Other Retail1

 

825

 

 

760

 

 

811

 

 

863

 

 

950

 

Commercial Banking1

 

1,433

 

 

1,295

 

 

1,358

 

 

1,505

 

 

1,859

 

Other1

 

426

 

 

426

 

 

427

 

 

426

 

 

424

 

At 31 December 2021

 

4,499

 

 

4,018

 

 

4,277

 

 

4,787

 

 

5,748

 

1 Reflects the new organisation structure. See page 25.

 

 

FURTHER IMPAIRMENT DETAIL (continued)

Base case and MES economic assumptions

The Group’s base case economic scenario reflects the outlook as of 30 September 2022 and was revised in light of developments in energy pricing, changes in UK fiscal policy prior to the balance sheet date and a continuing shift towards a more restrictive monetary policy stance by central banks. The Group’s updated base case scenario was based upon three conditioning assumptions: first, the war in Ukraine remains ‘local’, without overtly involving neighbouring countries, NATO or China; second, the fiscal loosening implied by the UK Government’s ‘Growth Plan’ of 23 September 2022 would be offset principally by Government spending cuts; and third, central bank reaction functions, including of the Bank of England, are focused on controlling inflation, motivating a more rapid tightening of UK monetary policy. The Group continues to assume that no further UK COVID-19 national lockdowns are mandated. Based on these assumptions and incorporating the macroeconomic information published in the third quarter, the Group’s base case scenario comprises an economic downturn with a rise in the unemployment rate, declining residential and commercial property prices, and continuing increases in the UK Bank Rate against a backdrop of elevated inflationary pressures. Risks to the base case economic view exist in both directions and are partly captured by the generation of alternative economic scenarios. Each of the scenarios includes forecasts for key variables as of the third quarter of 2022, for which data or revisions to history may have since emerged prior to publication.

At 30 September 2022, the Group has included an adjusted severe downside scenario to incorporate high CPI inflation and UK Bank Rate profiles and has adopted this adjusted severe downside scenario in calculating its ECL allowance. This is because the historic macroeconomic and loan loss data upon which the scenario model is calibrated imply an association of downside economic outcomes with lower inflation rates, easier monetary policy, and therefore low interest rates. This adjustment is considered to better reflect the risks around the Group’s base case view in a macroeconomic environment in which supply shocks are the principal concern.

UK economic assumptions – base case scenario by quarter

Key quarterly assumptions made by the Group in the base case scenario are shown below. Gross domestic product is presented quarter-on-quarter. House price growth, commercial real estate price growth and CPI inflation are presented year-on-year, i.e from the equivalent quarter in the previous year. Unemployment rate and UK Bank Rate are presented as at the end of each quarter.

At 30 September 2022

First
quarter
2022
%

Second
quarter
2022
%

Third
quarter
2022
%

Fourth
quarter
2022
%

First
quarter
2023
%

Second
quarter
2023
%

Third
quarter
2023
%

Fourth
quarter
2023
%

 

 

 

 

 

 

 

 

 

Gross domestic product

0.8

(0.1)

(0.1)

(0.3)

(0.4)

(0.3)

(0.2)

(0.1)

Unemployment rate

3.7

3.8

3.7

3.8

4.3

4.7

5.1

5.4

House price growth

11.1

12.5

10.4

5.0

(0.2)

(5.8)

(8.2)

(7.9)

Commercial real estate price growth

18.0

18.0

12.3

2.8

(5.6)

(11.8)

(13.7)

(14.4)

UK Bank Rate

0.75

1.25

2.25

4.00

4.00

4.00

4.00

4.00

CPI inflation

6.2

9.2

10.2

10.7

9.8

6.5

5.2

3.2

FURTHER IMPAIRMENT DETAIL (continued)

UK economic assumptions – scenarios by year

Key annual assumptions made by the Group are shown below. Gross domestic product and Consumer Price Index (CPI) inflation are presented as an annual change, house price growth and commercial real estate price growth are presented as the growth in the respective indices within the period. Unemployment rate and UK Bank Rate are averages for the period.

 

t 30 September 2022

2022
%

2023
%

2024
%

2025
%

2026
%

2022
to 2026 average
%

 

 

 

 

 

 

 

Upside

 

 

 

 

 

 

Gross domestic product

3.6

0.4

1.0

1.5

2.1

1.7

Unemployment rate

3.3

2.8

3.2

3.5

3.8

3.3

House price growth

6.1

(2.7)

7.2

8.5

6.1

5.0

Commercial real estate price growth

8.7

(3.6)

0.1

1.0

1.9

1.6

UK Bank Rate

2.16

5.28

5.17

4.30

4.12

4.20

CPI inflation

9.0

6.1

2.9

3.2

2.6

4.8

 

 

 

 

 

 

 

Base case

 

 

 

 

 

 

Gross domestic product

3.4

(1.0)

0.4

1.4

2.0

1.2

Unemployment rate

3.7

4.9

5.4

5.5

5.5

5.0

House price growth

5.0

(7.9)

(0.5)

2.5

2.3

0.2

Commercial real estate price growth

2.8

(14.4)

(2.7)

0.4

1.9

(2.6)

UK Bank Rate

2.06

4.00

3.38

2.56

2.50

2.90

CPI inflation

9.1

6.2

2.5

2.2

1.3

4.2

 

 

 

 

 

 

 

Downside

 

 

 

 

 

 

Gross domestic product

3.2

(2.3)

(0.2)

1.2

1.9

0.8

Unemployment rate

4.1

6.6

7.5

7.3

7.2

6.5

House price growth

3.9

(12.9)

(8.9)

(5.4)

(3.3)

(5.5)

Commercial real estate price growth

(1.4)

(23.0)

(6.5)

(2.5)

(0.2)

(7.1)

UK Bank Rate

2.00

2.93

1.76

1.04

1.07

1.76

CPI inflation

9.0

6.0

1.9

1.1

0.0

3.6

 

 

 

 

 

 

 

Severe downside

 

 

 

 

 

 

Gross domestic product

2.4

(4.5)

(0.3)

1.0

1.8

0.0

Unemployment rate

4.9

9.8

10.5

10.0

9.5

8.9

House price growth

2.4

(17.9)

(16.6)

(10.3)

(6.0)

(10.0)

Commercial real estate price growth

(9.2)

(35.7)

(13.6)

(6.4)

(0.7)

(14.1)

UK Bank Rate – modelled

1.78

0.91

0.36

0.21

0.23

0.70

UK Bank Rate – adjusted

2.44

7.00

4.88

3.00

2.75

4.01

CPI inflation – modelled

9.1

5.9

1.0

(0.4)

(1.9)

2.7

CPI inflation – adjusted

9.9

14.3

9.0

4.1

1.3

7.7

 

 

 

 

 

 

 

Probability-weighted

 

 

 

 

 

 

Gross domestic product

3.3

(1.3)

0.3

1.4

2.0

1.1

Unemployment rate

3.8

5.3

5.9

5.9

5.9

5.4

House price growth

4.7

(8.8)

(2.3)

0.6

0.9

(1.1)

Commercial real estate price growth

2.1

(15.8)

(4.1)

(1.0)

1.0

(3.8)

UK Bank Rate – modelled

2.04

3.75

3.13

2.39

2.33

2.73

UK Bank Rate – adjusted

2.11

4.36

3.58

2.67

2.58

3.06

CPI inflation – modelled

9.1

6.1

2.3

1.9

1.0

4.1

CPI inflation – adjusted

9.1

6.9

3.1

2.4

1.3

4.6

 

 

INTEREST RATE SENSITIVITY

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 September 2022, the Group’s structural hedge had an approved capacity of £250 billion (up £10 billion on 31 December 2021 and stable compared to 30 June 2022).

 

Illustrative cumulative impact of parallel shifts in interest rate curve1

The table below shows the banking book net interest income sensitivity to an instantaneous parallel increase in interest rates. Sensitivities reflect shifts in the interest rate curve. The marginal reduction in Year 1 sensitivity compared to the year-end and half-year has been driven by structural hedge maturity reinvestment. The actual impact will also depend on the prevailing regulatory and competitive environment at the time. This sensitivity is illustrative and does not reflect new business margin implications and/or pricing actions today or in future periods, other than as outlined.

The following assumptions have been applied:

  • Instantaneous parallel shift in interest rate curve, including UK Bank Rate

  • Balance sheet remains constant

  • Illustrative 50 per cent pass-through on deposits and 100 per cent pass-through on assets, which could be different in practice

 

Year 1
£m

 

 

Year 2
£m

 

 

Year 3
£m

 

 

 

 

 

 

 

 

 

 

+100bps

c.625

 

 

c.1,025

 

 

c.1,450

 

+50bps

c.300

 

 

c.525

 

 

c.725

 

+25bps

c.150

 

 

c.250

 

 

c.350

 

1 Sensitivity based on modelled impact on banking book net interest income, including the future impact of structural hedge maturities. Annual impacts are presented for illustrative purposes only and are based on a number of assumptions which are subject to change. Year 1 reflects the 12 months from the 30 September 2022 balance sheet position.

 

ALTERNATIVE PERFORMANCE MEASURES

In addition to the statutory basis of presentation, the results are also presented on an underlying basis. The Group Executive Committee, which is the chief operating decision maker for the Group, reviews the Group’s results on an underlying basis in order to assess performance and allocate resources. Management uses underlying profit before tax, an alternative performance measure, as a measure of performance and believes that it provides important information for investors because it allows for a comparable representation of the Group’s performance by removing the impact of items such as volatility caused by market movements outside the control of management.

In arriving at underlying profit, statutory profit before tax is adjusted for the items below, to allow a comparison of the Group’s underlying performance:

  • Restructuring costs relating to merger, acquisition and integration activities

  • 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 business, the unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets

As announced at the 2021 full-year, in the first quarter of 2022 the Group adopted a new basis for cost reporting, including all restructuring costs, with the exception of merger, acquisition and integration costs, within operating costs. Non lending-related fraud costs, previously included within underlying impairment, are also now reported as part of operating costs. This has not impacted the statutory impairment charge. Comparatives have been presented on a consistent basis.

The analysis of lending and expected credit loss (ECL) allowances is presented on an underlying basis. On a statutory basis, 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. Over time, these POCI assets will run off as the loans redeem, pay down or losses crystallise. 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. The Group uses the underlying basis to monitor the creditworthiness of the lending portfolio and related ECL allowances.

The Group calculates a number of metrics that are used throughout the banking and insurance industries on an underlying basis. A description of these measures and their calculation, which remain unchanged since the year-end, is set out on pages 27 to 31 of the Group’s 2022 Half-Year Results News Release.

 

ALTERNATIVE PERFORMANCE MEASURES (continued)

 

Nine months ended
30 Sep
2022

 

 

Nine months ended
30 Sep
2021

 

 

 

 

 

 

 

Banking net interest marginA

 

 

 

 

 

Underlying net interest income (£m)

9,529

 

 

8,270

 

Remove non-banking underlying net interest expense (£m)

69

 

 

86

 

Banking underlying net interest income (£m)

9,598

 

 

8,356

 

 

 

 

 

 

 

Statutory net loans and advances to customers (£bn)

456.3

 

 

450.5

 

Add back expected credit loss allowance (drawn) (£bn)

4.3

 

 

4.4

 

Acquisition related fair value adjustments (£bn)

0.4

 

 

0.4

 

Underlying gross loans and advances to customers (£bn)

461.0

 

 

455.3

 

Adjustment for non-banking and other items:

 

 

 

 

 

Fee-based loans and advances (£bn)

(8.1)

 

 

(5.4)

 

Other non-banking and other items (£bn)

4.4

 

 

0.9

 

Interest-earning banking assets (£bn)

457.3

 

 

450.8

 

Averaging (£bn)

(5.9)

 

 

(7.8)

 

Average interest-earning banking assets (£bn)A

451.4

 

 

443.0

 

 

 

 

 

 

 

Banking net interest marginA

2.84%

 

 

2.52%

 

 

 

 

 

Nine months ended
30 Sep
2022

 

 

Nine months ended
30 Sep
2021

 

 

 

 

 

 

 

Return on tangible equityA

 

 

 

 

 

Profit attributable to ordinary shareholders (£m)

3,632

 

 

5,064

 

 

 

 

 

 

 

Average shareholders’ equity (£bn)

44.4

 

 

44.7

 

Remove average intangible assets (£bn)

(6.6)

 

 

(6.3)

 

Average tangible equity (£bn)

37.8

 

 

38.4

 

 

 

 

 

 

 

Return on tangible equityA

12.9%

 

 

17.6%

 

 

BASIS OF PRESENTATION

This news release covers the results of Lloyds Banking Group plc together with its subsidiaries (the Group) for the nine months to 30 September 2022. Unless otherwise stated, income statement commentaries throughout this document compare the nine months to 30 September 2022 to the nine months to 30 September 2021, and the balance sheet analysis compares the Group balance sheet as at 30 September 2022 to the Group balance sheet as at 31 December 2021. The Group uses a number of alternative performance measures, including underlying profit, in the discussion of its business performance and financial position. These measures are labelled with a superscript ‘A’ throughout this document. Further information on these measures is set out on page 23. Unless otherwise stated, commentary on page 1 is given on an underlying basis. The Q3 2022 Interim Pillar 3 Report can be found at www.lloydsbankinggroup.com/investors/financial-downloads.

Operating cost comparatives have been presented to reflect the new costs basis, consistent with the current period. See page 23.

Segmental information: On 1 July 2022 the Group adopted a new organisation structure, aligned to our strategic objectives and our existing three customer-facing divisions. Disclosure will continue to be based on these three divisions, reflecting the basis on which management runs the Group. To reflect the new organisation structure, the Group migrated certain business units between these divisions, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been represented accordingly. Total Group figures are unaffected by these changes.

 

FORWARD LOOKING STATEMENTS

This document contains certain forward-looking statements within the meaning of Section 21E of the US Securities Exchange Act of 1934, as amended, and section 27A of the US Securities Act of 1933, as amended, with respect to Lloyds Banking Group plc together with its subsidiaries (the Group) and its current goals and expectations. Statements that are not historical or current facts, including statements about the Group’s or its directors’ and/or management’s beliefs and expectations, are forward looking statements. Words such as, without limitation, ‘believes’, ‘achieves’, ‘anticipates’, ‘estimates’, ‘expects’, ‘targets’, ‘should’, ‘intends’, ‘aims’, ‘projects’, ‘plans’, ‘potential’, ‘will’, ‘would’, ‘could’, ‘considered’, ‘likely’, ‘may’, ‘seek’, ‘estimate’, ‘probability’, ‘goal’, ‘objective’, ‘deliver’, ‘endeavour’, ‘prospects’, ‘optimistic’ and similar expressions or variations on these expressions are intended to identify forward looking statements. These statements concern or may affect future matters, including but not limited to: projections or expectations of the Group’s future financial position, including profit attributable to shareholders, provisions, economic profit, dividends, capital structure, portfolios, net interest margin, capital ratios, liquidity, risk-weighted assets (RWAs), expenditures or any other financial items or ratios; litigation, regulatory and governmental investigations; the Group’s future financial performance; the level and extent of future impairments and write-downs; the Group’s ESG targets and/or commitments; statements of plans, objectives or goals of the Group or its management and other statements that are not historical fact; expectations about the impact of COVID-19; and statements of assumptions underlying such statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from forward looking statements include, but are not limited to: general economic and business conditions in the UK and internationally; market related risks, trends and developments; risks concerning borrower and counterparty credit quality; fluctuations in interest rates, inflation, exchange rates, stock markets and currencies; volatility in credit markets; volatility in the price of the Group’s securities; changes in consumer behaviour; any impact of the transition from IBORs to alternative reference rates; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group’s credit ratings; the ability to derive cost savings and other benefits including, but without limitation, as a result of any acquisitions, disposals and other strategic transactions; inability to capture accurately the expected value from acquisitions; potential changes in dividend policy; the ability to achieve strategic objectives; insurance risks; management and monitoring of conduct risk; exposure to counterparty risk; credit rating risk; tightening of monetary policy in jurisdictions in which the Group operates; instability in the global financial markets, including within the Eurozone, and as a result of ongoing uncertainty following the exit by the UK from the European Union (EU) and the effects of the EU-UK Trade and Cooperation Agreement; political instability including as a result of any UK general election and any further possible referendum on Scottish independence; operational risks; conduct risk; technological changes and risks to the security of IT and operational infrastructure, systems, data and information resulting from increased threat of cyber and other attacks; natural pandemic (including but not limited to the COVID-19 pandemic) and other disasters; inadequate or failed internal or external processes or systems; acts of hostility or terrorism and responses to those acts, or other such events; geopolitical unpredictability; the war between Russia and Ukraine; the tensions between China and Taiwan; risks relating to sustainability and climate change (and achieving climate change ambitions), including the Group’s ability along with the government and other stakeholders to measure, manage and mitigate the impacts of climate change effectively; changes in laws, regulations, practices and accounting standards or taxation; changes to regulatory capital or liquidity requirements and similar contingencies; assessment related to resolution planning requirements; the policies and actions of governmental or regulatory authorities or courts together with any resulting impact on the future structure of the Group; failure to comply with anti-money laundering, counter terrorist financing, anti-bribery and sanctions regulations; failure to prevent or detect any illegal or improper activities; projected employee numbers and key person risk; increased labour costs; assumptions and estimates that form the basis of the Group’s financial statements; the impact of competitive conditions; and exposure to legal, regulatory or competition proceedings, investigations or complaints. A number of these influences and factors are beyond the Group’s control. Please refer to the latest Annual Report on Form 20-F filed by Lloyds Banking Group plc with the US Securities and Exchange Commission (the SEC), which is available on the SEC’s website at www.sec.gov, for a discussion of certain factors and risks. Lloyds Banking Group plc may also make or disclose written and/or oral forward-looking statements in other written materials and in oral statements made by the directors, officers or employees of Lloyds Banking Group plc to third parties, including financial analysts. Except as required by any applicable law or regulation, the forward-looking statements contained in this document are made as of today’s date, and the Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this document whether as a result of new information, future events or otherwise. The information, statements and opinions contained in this document do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments.

 

CONTACTS

For further information please contact:

INVESTORS AND ANALYSTS

Douglas Radcliffe

Group Investor Relations Director

020 7356 1571

douglas.radcliffe@lloydsbanking.com

Edward Sands

Director of Investor Relations

020 7356 1585

edward.sands@lloydsbanking.com

Nora Thoden

Director of Investor Relations – ESG

020 7356 2334

nora.thoden@lloydsbanking.com

CORPORATE AFFAIRS

Grant Ringshaw

External Relations Director

020 7356 2362

grant.ringshaw@lloydsbanking.com

Matt Smith

Head of Media Relations

020 7356 3522

matt.smith@lloydsbanking.com

 

 

Copies of this News Release may be obtained from:

Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN

The statement can also be found on the Group’s website – www.lloydsbankinggroup.com

Registered office: Lloyds Banking Group plc, The Mound, Edinburgh, EH1 1YZ

Registered in Scotland No. SC095000

 

 

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

 


27.10.2022 CET/CEST Dissemination of a Corporate News, transmitted by EQS News - a service of EQS Group AG.
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Language:

English

Company:

Lloyds Banking Group PLC

Gresham Street

EC2V 7HN London

United Kingdom

Phone:

020 7626 1500

Internet:

www.lloydsbankinggroup.com

ISIN:

GB0008706128

WKN:

871784

Listed:

Regulated Unofficial Market in Berlin, Dusseldorf, Frankfurt, Hamburg, Hanover, Munich, Stuttgart, Tradegate Exchange; London, BX, SIX

EQS News ID:

1473103


 

End of News

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