RESULTS FOR THE HALF-YEAR

 

The Group has continued to make strong strategic progress during the first half of 2019 and delivered a good financial performance with market leading efficiency and returns. The economy has remained resilient although economic uncertainty has led to some softening in business confidence as well as in international economic indicators. In this environment our strategy continues to be the right one and we are well placed to support our customers and continue to help Britain prosper.

António Horta-Osório, Group Chief Executive

 

Strong strategic progress and the right strategy in the current environment

·    The economy has remained resilient however, as indicated at the first quarter results, the continuing uncertainty is having an impact and leading to some softening in business confidence as well as in international economic indicators

·    The Group has taken a prudent approach to growth and risk in recent years, whilst reducing costs and increasing the investment in the business for the benefit of our customers

·    Since the launch of GSR3 in 2018, the Group has invested £1.5 billion in improving customer experience, increasing efficiency and delivering superior returns. This investment means the Group is well placed to continue to support its customers, help Britain prosper and deliver sustainable returns for shareholders

 

Good financial performance with market leading efficiency and returns

·    Statutory profit after tax of £2.2 billion with strong return on tangible equity of 11.5 per cent; earnings per share of 2.7 pence

·    Robust underlying profit of £4.2 billion with slightly lower net income and expected higher impairment offset by lower total costs

·    Net income of £8.8 billion with a resilient net interest margin of 2.90 per cent, slightly lower average interest earning banking assets and other income, with other income benefiting from strong performance in Insurance and Wealth

·    Total costs of £4.0 billion down 5 per cent with operating costs down 3 per cent and remediation down 44 per cent. Market leading cost:income ratio further improved to 45.9 per cent and positive jaws of 3 per cent

·    Credit quality remains strong with a net asset quality ratio of 26 basis points

·    Additional PPI charge of £550 million in the second quarter driven by significant increase in information request volumes in the second quarter, ahead of the August deadline

·    Tangible net assets per share of 53.0 pence

·    Interim ordinary dividend of 1.12 pence per share, up 5 per cent, in line with our progressive and sustainable policy

 

Balance sheet strength maintained with lower capital requirement

·    Balance sheet remains strong with targeted lending and deposit growth in the quarter including the open mortgage book, SME, UK Motor Finance and current accounts

·    CET1 capital build of 70 basis points after the impact of PPI (33 basis points) and IFRS 16 (11 basis points); pro forma CET1 ratio of 14.6 per cent, pre dividend

·    As previously reported, given the lower Systemic Risk Buffer and Pillar 2A requirement, the Board's view of the level of capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties has reduced from around 13 per cent to around 12.5 per cent, plus a management buffer of around 1 per cent

 

Outlook

·    The Group's strategy remains the right one in the current environment and the Group continues to expect to deliver sustainable, superior performance for its customers and shareholders

·    The resilience of the Group's business model is reflected in its 2019 guidance:

−      Net interest margin of c.2.90 per cent

−      Operating costs to be less than £8 billion and cost:income ratio expected to fall

−      Net asset quality ratio of less than 30 basis points

−      Given below the line charges, including PPI, in 2019 the Group now expects capital build to be at the lower end of the Group's ongoing 170 to 200 basis points range, and for return on tangible equity to be around 12 per cent

 

 

·    Beyond 2019, longer term targets remain unchanged although continued economic uncertainty could impact outlook

INCOME STATEMENT − UNDERLYING BASIS

 

 

		Half-year		Half-year				Half-year
		to 30 June		to 30 June				to 31 Dec
		2019		2018		Change		2018		Change
		£m		£m		%		£m		%
Net interest income		6,145		6,344		(3)		6,370		(4)
Other income		3,100		3,124		(1)		2,886		7
Operating lease depreciation		(473)		(497)		5		(459)		(3)
Vocalink gain on sale		50		-				-
Net income		8,822		8,971		(2)		8,797		-
Operating costs		(3,906)		(4,024)		3		(4,141)		6
Remediation		(143)		(257)		44		(343)		58
Total costs		(4,049)		(4,281)		5		(4,484)		10
Impairment		(579)		(456)		(27)		(481)		(20)
Underlying profit		4,194		4,234		(1)		3,832		9
Restructuring		(182)		(377)		52		(502)		64
Volatility and other items		(465)		(190)				(287)		(62)
Payment protection insurance provision		(650)		(550)		(18)		(200)
Statutory profit before tax		2,897		3,117		(7)		2,843		2
Tax expense1		(672)		(800)		16		(654)		(3)
Statutory profit after tax1		2,225		2,317		(4)		2,189		2
Earnings per share		2.7p		2.9p		(7)		2.6p		4
Interim dividend per share - ordinary		1.12p		1.07p		5
Banking net interest margin		2.90%		2.93%		(3)bp		2.93%		(3)bp
Average interest-earning banking assets		£433bn		£436bn		(1)		£436bn		(1)
Cost:income ratio		45.9%		47.7%		(1.8)pp		51.0%		(5.1)pp
Asset quality ratio		0.26%		0.20%		6bp		0.22%		4bp
Underlying return on tangible equity		16.3%		16.3%		-		14.7%		1.6pp
Return on tangible equity		11.5%		12.1%		(0.6)pp		11.3%		0.2pp

 

 

KEY BALANCE SHEET METRICS

 

		At 30 June		At 30 June		Change		At 31 Dec		Change
		2019		2018		%		2018		%
Loans and advances to customers2		£441bn		£442bn		-		£444bn		(1)
Customer deposits3		£418bn		£418bn		-		£416bn		-
Loan to deposit ratio		106%		106%		-		107%		(1)pp
Capital build4		70bp		121bp				210bp
Pro forma CET1 ratio pre dividend accrual5		14.6%		15.1%		(0.5)pp		13.9%		0.7pp
Pro forma CET1 ratio5		14.0%		14.5%		(0.5)pp		13.9%		0.1pp
Pro forma transitional MREL ratio5		32.2%		29.7%		2.5pp		32.6%		(0.4)pp
Pro forma UK leverage ratio5		5.1%		5.3%		(0.2)pp		5.6%		(0.5)pp
Pro forma risk-weighted assets5		£207bn		£207bn		-		£206bn		-
Tangible net assets per share		53.0p		52.1p		0.9p		53.0p		-

 

1	Comparatives restated to reflect amendments to IAS 12, see basis of presentation.
2	Excludes reverse repos of £54.1 billion (30 June 2018: £26.7 billion; 31 December 2018: £40.5 billion).
3	Excludes repos of £4.1 billion (30 June 2018: £4.0 billion; 31 December 2018: £1.8 billion).
4	Capital build is reported on a pro forma basis before ordinary dividends and share buyback.
5	The CET1, MREL and leverage ratios at 30 June 2019, 30 June 2018 and 31 December 2018 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent reporting period. The CET1 ratios at 31 December 2018 are reported post share buyback and post dividend accrual. In addition the pro forma ratios and pro forma risk-weighted assets at 30 June 2018 reflected the sale of the Irish mortgage portfolio.

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
		2019		2019		2018		2018		2018		2018
		£m		£m		£m		£m		£m		£m
Net interest income		3,062		3,083		3,170		3,200		3,173		3,171
Other income		1,594		1,506		1,400		1,486		1,713		1,411
Operating lease depreciation		(254)		(219)		(225)		(234)		(245)		(252)
Vocalink gain on sale		-		50		-		-		-		-
Net income		4,402		4,420		4,345		4,452		4,641		4,330
Operating costs		(1,949)		(1,957)		(2,151)		(1,990)		(2,016)		(2,008)
Remediation		(123)		(20)		(234)		(109)		(197)		(60)
Total costs		(2,072)		(1,977)		(2,385)		(2,099)		(2,213)		(2,068)
Impairment		(304)		(275)		(197)		(284)		(198)		(258)
Underlying profit		2,026		2,168		1,763		2,069		2,230		2,004
Restructuring		(56)		(126)		(267)		(235)		(239)		(138)
Volatility and other items		(126)		(339)		(270)		(17)		(16)		(174)
Payment protection insurance provision		(550)		(100)		(200)		-		(460)		(90)
Statutory profit before tax		1,294		1,603		1,026		1,817		1,515		1,602
Tax expense1		(269)		(403)		(260)		(394)		(369)		(431)
Statutory profit after tax1		1,025		1,200		766		1,423		1,146		1,171
Banking net interest margin		2.89%		2.91%		2.92%		2.93%		2.93%		2.93%
Average interest-earning banking assets		£433bn		£433bn		£436bn		£435bn		£436bn		£437bn
Cost:income ratio		47.1%		44.7%		54.9%		47.1%		47.7%		47.8%
Asset quality ratio		0.27%		0.25%		0.18%		0.25%		0.18%		0.23%
Gross asset quality ratio		0.38%		0.30%		0.30%		0.30%		0.26%		0.27%
Underlying return on tangible equity		15.6%		17.0%		13.6%		15.9%		17.3%		15.4%
Return on tangible equity		10.5%		12.5%		7.8%		14.8%		11.9%		12.3%
Loans and advances to customers2		£441bn		£441bn		£444bn		£445bn		£442bn		£445bn
Customer deposits3		£418bn		£417bn		£416bn		£422bn		£418bn		£413bn
Loan to deposit ratio		106%		106%		107%		105%		106%		108%
Risk-weighted assets4		£207bn		£208bn		£206bn		£207bn		£207bn		£211bn
Tangible net assets per share		53.0p		53.4p		53.0p		51.3p		52.1p		52.3p

 

1	Comparatives restated to reflect amendments to IAS 12, see basis of presentation.
2	Excludes reverse repos.
3	Excludes repos.
4	Risk-weighted assets at June 2018 are reported on a pro forma basis reflecting the sale of the Irish mortgage portfolio.

 

 

 

BALANCE SHEET ANALYSIS

 

	At 30 June			At 31 Mar			At 30 June					At 31 Dec
		2019		2019		Change		2018		Change		2018		Change
		£bn		£bn		%		£bn		%		£bn		%
Loans and advances to customers
Open mortgage book		264.9		264.1		-		267.1		(1)		266.6		(1)
Closed mortgage book		19.8		20.5		(3)		22.2		(11)		21.2		(7)
Credit cards		17.7		17.7		-		18.5		(4)		18.1		(2)
UK Retail unsecured loans		8.2		8.1		1		7.8		5		7.9		4
UK Motor Finance		15.5		15.3		1		13.9		12		14.6		6
Overdrafts		1.2		1.2		-		1.2		-		1.3		(8)
Retail other1		9.0		8.5		6		8.2		10		8.6		5
SME2		32.3		32.1		1		31.5		3		31.8		2
Mid Markets		30.6		30.6		-		30.1		2		31.7		(3)
Global Corporates and Financial Institutions		34.7		34.3		1		32.7		6		34.4		1
Commercial Banking other		4.3		4.6		(7)		4.9		(12)		4.3		-
Wealth		0.9		0.9		-		0.8		13		0.9		-
Central items		1.9		2.6		(27)		3.4		(44)		3.0		(37)
Loans and advances to customers3		441.0		440.5		-		442.3		-		444.4		(1)
Customer deposits
Retail current accounts		76.0		75.2		1		73.1		4		73.7		3
Commercial current accounts2,4		34.0		33.9		-		33.7		1		34.9		(3)
Retail relationship savings accounts		144.4		144.7		-		147.4		(2)		145.9		(1)
Retail tactical savings accounts		15.3		15.6		(2)		18.4		(17)		16.8		(9)
Commercial deposits2, 5		133.2		133.0		-		130.4		2		130.1		2
Wealth		13.8		13.9		(1)		13.6		1		14.1		(2)
Central items		0.9		0.7		29		1.0		(10)		0.8		13
Total customer deposits6		417.6		417.0		-		417.6		-		416.3		-
Total assets7		822.2		818.3		-		829.8		(1)		797.6		3
Total liabilities7		773.2		767.8		1		781.2		(1)		747.4		3
Shareholders' equity		43.4		43.8		(1)		42.9		1		43.4		-
Other equity instruments		5.4		6.5		(17)		5.4		-		6.5		(17)
Non-controlling interests		0.2		0.2		-		0.3		(33)		0.3		(33)
Total equity		49.0		50.5		(3)		48.6		1		50.2		(2)
Ordinary shares in issue, excluding own shares		70,740m		71,165m		(1)		71,944m		(2)		71,149m		(1)

 

1	Primarily includes Europe.
2	Includes Retail Business Banking.
3	Excludes reverse repos.
4	Primarily non interest-bearing Commercial Banking current accounts.
5	Primarily Commercial Banking interest-bearing accounts.
6	Excludes repos.
7	The adoption of IFRS 16 on 1 January 2019 resulted in the recognition of a right-of-use asset of £1.7 billion and lease liabilities of £1.8 billion.

 

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT

 

In the first six months of 2019 we have continued to deliver for our customers whilst making strong strategic progress, increasing investment in the business and helping Britain prosper. At the same time we have delivered a good financial performance with market leading efficiency and returns which has enabled the Board to announce an increased interim dividend.

 

Given our clear UK focus, our performance is inextricably linked with the health of the UK economy. The economy has remained resilient, however the continued economic uncertainty is having an impact on business confidence and leading to some softening in international economic indicators. Companies' investment and employment intentions have both declined in the second quarter of 2019 while global growth has softened and interest rate expectations have declined. Despite this the consumer sector remains robust with increased levels of employment and rising real wages, supporting consumption and GDP growth.

 

In recent years we have deliberately taken a prudent approach to growth and risk and have continued to invest in the business while maintaining a relentless focus on costs. The success of this approach is demonstrated by our financial performance in the first half of the year, which shows the resilience of our business model and the ability to generate market leading returns in an uncertain environment. This further reinforces my confidence that our strategy remains the right one in the current environment and that our significant cost advantage and unique business model mean the Group is well placed to continue to support its customers, help Britain prosper and deliver sustainable, superior returns to our shareholders.

 

Financial performance

In the first six months we have delivered a robust underlying profit of £4.2 billion, in line with prior year, with a statutory profit after tax of £2.2 billion, despite an additional PPI charge of £650 million. Net interest margin remained resilient at 2.90 per cent, cost:income ratio further improved to 45.9 per cent, while business as usual costs reduced 5 per cent due to our relentless focus on efficiency, enabling increased strategic investment in the business. Statutory return on tangible equity was strong at 11.5 per cent despite higher below the line charges including PPI. Credit quality also remains strong and our loan portfolios continue to be well positioned, reflecting the Group's prudent through the cycle approach to credit risk. The CET1 capital build totalled 70 basis points with the Group's pro forma CET1 ratio increasing to 14.6 per cent, pre dividend.

 

As announced in May, the Board's view of the level of CET1 capital targeted is around 12.5 per cent, plus a management buffer of around 1 per cent, following the notification by the regulator of the Systemic Risk Buffer and the reduction in the Group's Pillar 2A in July 2018.

 

The strong capital build has enabled the Board to announce an increased interim ordinary dividend of 1.12 pence per share, up 5 per cent, in line with the Group's progressive and sustainable ordinary dividend policy. Good progress has also been made on the share buyback that was announced with our full year results at the time of issuing results we have bought back approximately 1.4 billion shares, with around 50 per cent of the up to £1.75 billion programme now completed.

 

As also announced in May, the Group will commence paying quarterly dividends in 2020 which will provide a more regular flow of dividend income to shareholders.

 

Strategic progress

We are now half way through the third stage of our ambitious strategy launched in February 2018. In the last eighteen months we have made significant progress in transforming the Group for success in a digital world and, in line with our commitment to invest more than £3 billion over the plan period, have invested £1.5 billion to date to build new sources of competitive advantage across our four strategic pillars.

 

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

 

Leading customer experience

We continue to believe that our customers' evolving needs are best served through a multi-brand, multi-channel strategy and are therefore committed to maintaining the UK's largest digital bank and branch network. In line with this commitment, we have continued to improve our digital proposition, with our digitally active customer base increasing to 15.9 million, of which 9.8 million are mobile app customers. While 75 per cent of products are now initiated via digital channels, branches remain a vital channel for meeting our customers' more complex needs. Since the start of 2018, we have improved our relationship mortgage new business market share by 3 percentage points and, through Schroders Personal Wealth we will extend wealth capabilities to our branch network. Our overall success in improving the customer experience is reflected in our net promoter scores, which increased to 65 for all channels and 67 for digital channels, both up c.5 per cent since year end 2018.

 

Digitising the Group

We have continued to increase our investment in technology. This now represents 19 per cent of operating costs, up from 16 per cent in 2018, with over 70 per cent of this amount relating to enhancing existing capabilities and creating new ones. This investment is enabling us to improve the experience of our customers and colleagues, while also driving operational efficiencies that will support increased investment going forward. Consistent with this focus, we have made strong progress in transforming customer and colleague end-to-end processes, with activity to date having now covered c.40 per cent of our cost base, up from 12 per cent in the previous strategic plan period.

 

Maximising the Group's capabilities

We have continued to build on our Open Banking proposition, which is now available to all of our digital customers, and we were the first in the market to extend this functionality to both savings products and credit cards. In addition, our unique Single Customer View capability, which enables customers to view all of the pension and insurance products that they hold with the Group alongside their banking products, continues to go from strength to strength and is now available to more than four million customers, up by more than one million since the start of the year. We also established Schroders Personal Wealth in June and will launch this to the market in the second half of the year, with the ambition of becoming a top three financial planning business within five years.

 

Transforming ways of working

In 2019 we have increased our investment in our colleagues, with a focus on ensuring that we are able to continue to attract, develop and retain the talent and capabilities we will need in the future. As part of this, we have increased the 'skills of the future' training delivered to our colleagues to a cumulative 2.1 million hours since 2018, putting us well on track to meet our target of 4.4 million hours by the end of the plan period. We have also hired over 900 colleagues across critical areas such as engineering, data science and cyber security, in line with our plan to treble our strategic hiring compared to 2018. Consistent with our focus on improving our overall operating efficiency, building internal capabilities through these initiatives has also enabled us to reduce the use of external resource by 20 per cent since the end of 2017.

 

Helping Britain Prosper Plan

As part of our purpose of helping Britain prosper, we believe we have a responsibility to help address some of the societal, economic and environmental challenges that the UK faces. During the first half of the year, we contributed £10 billion of gross new lending to businesses, and we are on course to meet our commitment to lend up to £18 billion to UK businesses in 2019 as part of our continued support for the UK economy. Similarly, we are on track to meet our target of £6 billion of additional net lending to start-up, SME and Mid Market clients over the three years to the end of 2020.

 

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

 

We have now trained around 4,000 people in digital life skills through our Lloyds Bank Academy and have around 23,000 colleagues volunteering as Digital Champions in their local communities as part of our efforts to help close the digital skills gap in the UK. I am also very proud of the Stonewall Top Financial Services Employer and Times Top 50 Employer for Women awards, which we received this year in recognition of our role in championing inclusion and diversity.

 

To help the UK transition into a sustainable, low carbon economy, which we believe is key to the UK's prosperity, we are actively incentivising sustainable lending with our clients. In recognition of the Green Lending Initiatives we have put in place so far, we recently won the Real Estate Capital Sustainable Finance Provider of the year award. We also have a portfolio of new propositions under development and are currently piloting a digital app which aims to help our Commercial Banking customers understand and improve the energy efficiency of their buildings.

 

Outlook

Our results for the first half of the year continue to demonstrate the resilience of our business model and that our strategy remains the right one in the current environment. We expect the Group to continue to deliver sustainable, superior performance for our customers and shareholders, and the resilience of the business model is reflected in our guidance for 2019:

·    Net interest margin of c.2.90 per cent

·    Operating costs of less than £8 billion and cost:income ratio expected to fall

·    Net asset quality ratio of less than 30 basis points

·    Given the below the line charges, including PPI, in 2019 we now expect capital build to be at the lower end of our ongoing 170 to 200 basis points range, and for return on tangible equity to be around 12 per cent

 

Beyond 2019, our longer term targets remain unchanged although continued economic uncertainty could impact outlook.

 

Summary

We will maintain our prudent approach to growth and risk whilst retaining our relentless focus on costs and continuing to invest and transform the business for success in a digital world. We are well placed to continue to support our customers, help Britain prosper, and deliver sustainable, superior returns for shareholders.

 

 

SUMMARY OF GROUP RESULTS

 

Good financial performance with market leading efficiency and returns

The Group's statutory profit after tax was £2,225 million, 4 per cent lower than in the first half of 2018 with robust underlying profit more than offset by higher below the line items, including the PPI provision charge. The return on tangible equity remained strong at 11.5 per cent.

 

Underlying profit of £4,194 million includes a 2 per cent reduction in net income and the expected higher impairment charge largely offset by lower total costs. The underlying return on tangible equity was 16.3 per cent.

 

The balance sheet remains strong with lending growth in targeted segments in the quarter including the open mortgage book and SME, and deposit growth largely driven by current accounts. The Group's pro forma CET1 ratio was 14.6 per cent pre dividend and 14.0 per cent post dividend with capital build in the first half of 2019 of 70 basis points, despite 33 basis points impact from PPI and 11 basis points from the implementation of IFRS 16. The capital build includes the impact of the interim Insurance dividend of £100 million paid in July 2019.

 

Net income

 

		Half-year		Half-year				Half-year
		to 30 June		to 30 June				to 31 Dec
		2019		2018		Change		2018		Change
		£m		£m		%		£m		%
Net interest income		6,145		6,344		(3)		6,370		(4)
Other income		3,100		3,124		(1)		2,886		7
Operating lease depreciation1		(473)		(497)		5		(459)		(3)
Vocalink gain on sale		50		-				-
Net income		8,822		8,971		(2)		8,797		-
Banking net interest margin		2.90%		2.93%		(3)bp		2.93%		(3)bp
Average interest-earning banking assets		£433.3bn		£436.4bn		(1)		£435.5bn		(1)

 

1	Net of profits on disposal of operating lease assets of £14 million (half-year to 30 June 2018: £29 million; half-year to 31 December 2018: £31 million).

 

Net income of £8,822 million was 2 per cent lower than in the first half of 2018, with lower net interest income and a decrease of 1 per cent in other income partly offset by lower operating lease depreciation.

 

Net interest income of £6,145 million was down 3 per cent with a resilient net interest margin and lower average interest-earning banking assets. Net interest margin was 2.90 per cent, in line with guidance, with the benefit of lower deposit costs and higher current account balances offset by continued pressure on asset margins. Average interest-earning banking assets were down £3.1 billion year on year with growth in targeted segments, in particular SME (£0.8 billion) and UK Motor Finance (£1.4 billion), more than offset by lower balances in the closed mortgage book (£2.4 billion) and the sale of the Irish mortgage portfolio (£3.3 billion).

 

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 2019 the Group's hedge had a nominal balance of £172 billion (31 December 2018: £180 billion) and an average duration of around three years (31 December 2018: around four years). The Group generated £1.3 billion of income from the structural hedge balances in the first six months of 2019 (half-year to 30 June 2018: £1.3 billion). The benefit from the hedge in the six months was £0.5 billion over LIBOR (half-year to 30 June 2018: £0.8 billion) with a fixed earnings rate of approximately 0.6 per cent over LIBOR (half-year to 30 June 2018: 0.9 per cent).

 

 

 

SUMMARY OF GROUP RESULTS (continued)

 

Other income decreased by 1 per cent to £3,100 million with strong performance within Insurance and Wealth, which increased by 21 per cent reflecting increased workplace pensions new business income and the benefit from the planned change in investment management provider. In Retail, other income reduced 4 per cent with higher current account fee income offset by lower Lex Autolease volumes, with an associated reduction in operating lease depreciation. Commercial Banking income was down 13 per cent and continues to be impacted by challenging conditions in particular within the markets business, resulting in lower levels of client activity. Other income also included a gain of £181 million on the sale of £6 billion of gilts and other liquid assets, (half-year to 30 June 2018: £191 million gain). In addition, in the first quarter the Group recognised a £50 million performance related earn-out following the sale of Vocalink in 2017.

 

Total costs

 

		Half-year		Half-year				Half-year
		to 30 June		to 30 June				to 31 Dec
		2019		2018		Change		2018		Change
		£m		£m		%		£m		%
Operating costs		3,906		4,024		3		4,141		6
Remediation		143		257		44		343		58
Total costs		4,049		4,281		5		4,484		10
Business as usual costs1		2,677		2,832		5		3,004		11
Cost:income ratio		45.9%		47.7%		(1.8)pp		51.0%		(5.1)pp

 

1	Business as usual costs in the half-year to 30 June 2018 and half-year to 31 December 2018 are adjusted to reflect the impact of applying IFRS 16. Excluding the impact of IFRS 16 business as usual costs in the half-year to 2018 were £2,942 million and £3,106 million in the half-year to 31 December 2018.

 

Total costs of £4,049 million were 5 per cent lower than in the first half of 2018, driven by both a reduction in operating costs and lower remediation charges.

 

Operating costs of £3,906 million were 3 per cent lower than in the same period in 2018. The Group continues to focus on reducing its underlying cost base to create capacity to further invest in the business. Business as usual costs were down 5 per cent in the period driven by increased efficiency from digitalisation and process improvements in parallel with increased strategic investment of £0.6 billion in the business, up 41 per cent compared to the first half of 2018. During the first six months of 2019 the Group capitalised c.£0.8 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 the full year 2018.

 

Remediation charges were significantly lower than in the first half of 2018, at £143 million (half-year to 30 June 2018: £257 million) and included additional charges of £123 million in the second quarter of 2019 relating to a number of items across existing programmes.

 

The Group's market leading cost:income ratio continues to provide competitive advantage and improved by 1.8 percentage points to 45.9 per cent, with positive jaws of 3 per cent.

 

The Group continues to expect operating costs (which excludes remediation) of less than £8 billion for the full year 2019, and is targeting a cost:income ratio including remediation in the low 40s exiting 2020, with reductions every year.

 

 

 

SUMMARY OF GROUP RESULTS (continued)

 

Impairment

 

		Half-year		Half-year				Half-year
		to 30 June		to 30 June				to 31 Dec
		2019		2018		Change		2018		Change
		£m		£m		%		£m		%
Impairment charge		579		456		(27)		481		(20)
Asset quality ratio		0.26%		0.20%		6bp		0.22%		4bp
Gross asset quality ratio		0.34%		0.27%		7bp		0.30%		4bp
		At 30 June		At 30 June				At 31 Dec
		20191		20181				20181
		%		%		Change		%		Change
Stage 2 loans and advances to customers as % of total		8.1		9.8		(1.7)pp		7.8		0.3pp
Stage 2 ECL2 allowances as % of Stage 2 drawn balances		3.6		3.6		-		4.1		(0.5)pp
Stage 3 loans and advances to customers as % of total		1.9		1.8		0.1pp		1.9		-
Stage 3 ECL2 allowances as % of Stage 3 drawn balances		23.0		25.2		(2.2)pp		24.3		(1.3)pp
Total ECL2 allowances as % of drawn balances		0.9		0.9		-		0.9		-

 

1	Underlying basis.
2	Expected credit losses.

 

Credit quality remains strong with a net asset quality ratio of 26 basis points and a gross asset quality ratio of 34 basis points compared with 20 basis points and 27 basis points respectively in the first half of 2018. The impairment charge increased to £579 million and was driven by a number of items including some weakening in used car prices, alignment of credit card provisioning methodologies, lower cash recoveries following prior year debt sales and two corporate cases in Commercial Banking.

 

The Group's loan portfolios continue to be well positioned, reflecting the Group's prudent, through the cycle approach to credit risk, and benefiting from continued low interest rates and a resilient UK economy.

 

Overall credit performance in the secured book remains strong with the average mortgage loan to value improving slightly to 42.6 per cent (Dec 2018: 44.1 per cent). New business average loan to value was 63.1 per cent and around 91 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 book remains low in both the secured and unsecured books. In Commercial Banking, the book continues to benefit from effective risk management, including a prudent approach to vulnerable sectors and concentration risk.

 

The economic assumptions included in the Group's IFRS 9 model scenarios have been refined to reflect the economic outlook through 2019, although the impact on the overall Group expected credit loss (ECL) has not changed significantly. The Group's ECL allowance continues to reflect a probability-weighted view of future economic scenarios including a 30 per cent weighting of downside and a 10 per cent weighting of severe downside. Total ECL allowances as a percentage of drawn balances remains unchanged at 0.9 per cent over the last year.

 

Stage 2 loans and advances to customers as a percentage of total lending reduced by 1.7 percentage points to 8.1 per cent reflecting model refinements and portfolio improvements in 2018, whilst Stage 3 loans and advances were broadly stable at 1.9 per cent. The Group's coverage of Stage 2 assets was stable at 3.6 per cent whilst coverage of Stage 3 assets reduced by 2.2 percentage points to 23.0 per cent due to increased Commercial Banking Stage 3 balances with lower likelihood of net loss. The Group's total balance sheet provision at 30 June was £4.4 billion (31 December 2018: £4.4 billion), equivalent to around four years of total normalised annual cash write-offs.

 

The Group continues to expect an asset quality ratio of less than 30 basis points in 2019, reflecting strong credit quality.
 

SUMMARY OF GROUP RESULTS (continued)

 

Statutory profit

 

		Half-year		Half-year				Half-year
		to 30 June		to 30 June				to 31 Dec
		2019		2018		Change		2018		Change
		£m		£m		%		£m		%
Underlying profit		4,194		4,234		(1)		3,832		9
Restructuring		(182)		(377)		52		(502)		64
Volatility and other items
Market volatility and asset sales		(296)		34				(84)
Amortisation of purchased intangibles		(34)		(53)		36		(55)		38
Fair value unwind and other		(135)		(171)		21		(148)		9
		(465)		(190)				(287)		(62)
Payment protection insurance provision		(650)		(550)		(18)		(200)
Statutory profit before tax		2,897		3,117		(7)		2,843		2
Tax expense1		(672)		(800)		16		(654)		(3)
Statutory profit after tax1		2,225		2,317		(4)		2,189		2
Earnings per share		2.7p		2.9p		(7)		2.6p		4
Return on tangible equity		11.5%		12.1%		(0.6)pp		11.3%		0.2pp

 

1	Comparatives restated to reflect amendments to IAS 12, see basis of presentation.

 

Further information on the reconciliation of underlying to statutory results is included on page 24.

 

The Group's statutory profit after tax of £2,225 million was 4 per cent lower than in the first half of 2018 with robust underlying profit and lower restructuring costs more than offset by an increase in volatility and other items and a higher PPI provision charge. The return on tangible equity was 11.5 per cent and earnings per share was 2.7 pence.

 

Restructuring costs were £182 million, primarily reflecting the completion of the migration of MBNA in the first quarter of 2019, severance costs relating to the Group's strategic investment plans and the rationalisation of the non-branch property portfolio. Restructuring costs were significantly lower than the previous year due to the completion of the ring-fencing programme and the completion of MBNA integration in the first quarter.

 

Market volatility and asset sales of £296 million included adverse movements in banking volatility and a charge for exiting the Standard Life Aberdeen investment management agreement.

 

The reduction in amortisation of purchased intangibles to £34 million (half-year to 30 June 2018: £53 million) was driven by a number of intangible assets fully amortising in 2018. Fair value unwind and other items reduced to £135 million (half-year to 30 June 2018: £171 million) reflecting the run down of the subordinated liabilities acquired during the HBOS acquisition.

 

The PPI provision charge of £650 million included an additional £550 million charged in the second quarter. The additional charge in the quarter is largely driven by the significant increase in PPI information requests received in the second quarter onwards, which will lead to higher total complaints and associated administration costs. PPI information requests and complaint volumes remain uncertain, however the outstanding balance sheet provision at 30 June 2019 was £1.1 billion and assumes total expected complaint volumes increasing from 5.6 million to 5.8 million.

 

 

SUMMARY OF GROUP RESULTS (continued)

 

Taxation

The tax expense was £672 million (half-year to 30 June 2018: £800 million) representing an effective tax rate of 23 per cent (half-year to 2018: 26 per cent) and benefited from the release of a deferred tax liability. The Group continues to expect the effective tax rate be around 25 per cent in 2020.

 

Return on tangible equity

The return on tangible equity was 11.5 per cent and the underlying return on tangible equity was flat at 16.3 per cent primarily reflecting robust underlying profit.

 

Given the below the line charges, including PPI, the Group now expects return on tangible equity to be around 12 per cent in 2019.

 

Balance sheet

 

		At 30 June		At 31 Mar		Change		At 30 June		Change		At 31 Dec		Change
		2019		2019		%		2018		%		2018		%
Loans and advances to customers1		£441bn		£441bn		-		£442bn		-		£444bn		(1)
Customer deposits2		£418bn		£417bn		-		£418bn		-		£416bn		-
Loan to deposit ratio		106%		106%		-		106%		-		107%		(1)pp
Wholesale funding		£131bn		£125bn		5		£122bn		7		£123bn		6
Wholesale funding <1 year maturity		£44bn		£40bn		11		£38bn		17		£33bn		33
Of which money-market funding <1 year maturity3		£25bn		£24bn		1		£25bn		-		£21bn		18
Liquidity coverage ratio - eligible assets		£132bn		£135bn		(2)		£129bn		2		£129bn		2
Liquidity coverage ratio4		130%		129%		1pp		125%		5pp		128%		2pp

 

1	Excludes reverse repos of £54.1 billion (30 June 2018: £26.7 billion; 31 December 2018: £40.5 billion).
2	Excludes repos of £4.1 billion (30 June 2018: £4.0 billion; 31 December 2018: £1.8 billion).
3	Excludes balances relating to margins of £5.1 billion (30 June 2018: 4.0 billion; 31 December 2018: £3.8 billion) and settlement accounts of £2.0 billion (30 June 2018: £1.7 billion; 31 December 2018: £1.2 billion).
4	The Liquidity coverage ratio is calculated as a simple average of month end observations over the 12 months preceding the end of each quarter.

 

Loans and advances to customers were £441 billion with growth in a number of targeted segments in the last three months, including the open mortgage book, which grew £0.8 billion, SME and UK Motor Finance, offset by reductions in the closed mortgage book and Commercial Banking run-off. The Group continues to expect the open mortgage book at the year end to be in line with 2018.

 

The Group continues to optimise funding and target current account balance growth, with Retail current accounts up 3 per cent over the last six months at £76.0 billion (31 December 2018: £73.7 billion). The loan to deposit ratio was slightly lower at 106 per cent.

 

Wholesale funding increased by 6 per cent to £131 billion (31 December 2018: £123 billion) as the Group refinanced Funding for Lending Scheme (FLS) funding. The Group's liquidity continues to exceed the regulatory minimum and internal risk appetite.

 

 

SUMMARY OF GROUP RESULTS (continued)

 

Capital

 

		At 30 June		At 30 June		Change		At 31 Dec		Change
		2019		2018		%		2018		%
Pro forma CET1 ratio pre dividend accrual1		14.6%		15.1%		(0.5)pp		13.9%		0.7pp
Pro forma CET1 ratio1		14.0%		14.5%		(0.5)pp		13.9%		0.1pp
Pro forma transitional total capital ratio1		21.7%		22.1%		(0.4)pp		23.1%		(1.4)pp
Pro forma transitional MREL ratio1		32.2%		29.7%		2.5pp		32.6%		(0.4)pp
Pro forma UK leverage ratio1		5.1%		5.3%		(0.2)pp		5.6%		(0.5)pp
Pro forma risk-weighted assets1		£207bn		£207bn		-		£206bn		-
Shareholders' equity		£43bn		£43bn		1		£43bn		-
Tangible net assets per share		53.0p		52.1p		0.9p		53.0p		-

 

1

The CET1, total, MREL and leverage ratios at 30 June 2019, 30 June 2018 and 31 December 2018 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in subsequent reporting period. The CET1 ratios at 31 December 2018 are reported post share buyback and post dividend accrual. In addition the pro forma ratios and pro forma risk-weighted assets at 30 June 2018 reflected the sale of the Irish mortgage portfolio.

 

The Group's balance sheet remains strong with capital build of 70 basis points in the first six months of 2019. The Group's CET1 capital ratio increased to 14.6 per cent on a pro forma basis pre dividend and 14.0 per cent post dividend (31 December 2018: 13.9 per cent pro forma post dividend and share buyback).

 

The increase in the CET1 capital ratio included 97 basis points from underlying capital build, primarily driven by underlying profit, and 5 basis points relating to the dividends received from the Insurance business. Market and other movements amounted to 12 basis points. This was partly offset by 33 basis points for PPI and 11 basis points from the implementation of IFRS 16.

 

The Group continues to expect an ongoing capital build of 170 to 200 basis points per annum, pre dividend. Given the additional below the line charges, particularly PPI, we now expect capital build to be at the lower end of this range in 2019.

 

The Board's view of the level of CET1 capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties remains unchanged since the announced reduction in the first quarter of 2019, at around 12.5 per cent, plus a management buffer of around 1 per cent.

 

The transitional total capital ratio reduced to 21.7 per cent on a pro forma basis (30 June 2018: 22.1 per cent; 31 December 2018: 23.1 per cent) and the Group remains well positioned to meet its MREL requirement from 2020 with a pro forma transitional MREL ratio of 32.2 per cent (30 June 2018: 29.7 per cent; 31 December 2018: 32.6 per cent). The leverage ratio on a pro forma basis reduced to 5.1 per cent (30 June 2018: 5.3 per cent; 31 December 2018: 5.6 per cent pro forma).

 

Tangible net assets per share of 53.0 pence (30 June 2018: 52.1 pence; 31 December 2018: 53.0 pence) increased by 2.1 pence before the payment of the 2018 final dividend of 2.14 pence.

 

 

 

SUMMARY OF GROUP RESULTS (continued)

 

Dividend

In respect of the first half of 2019, the Board has announced an interim ordinary dividend of 1.12 pence per share, an increase of 5 per cent on prior year and in line with the progressive and sustainable ordinary dividend policy.

 

The Board will continue to give due consideration at each year end to the return of any surplus capital. In February this year, the Board decided to return surplus capital through a share buyback programme of up to £1.75 billion. This commenced in March 2019 and at the time of issuing results is c.50 per cent complete having purchased c.1.4 billion shares.

 

The Group announced in May 2019 that it would move to the payment of quarterly dividends in 2020 in order to accelerate payment of dividends to all shareholders. The Group intends to adopt three equal interim ordinary dividend payments for the first three quarters of the year followed by, subject to performance, a larger final dividend for the fourth quarter of the year. The first three quarterly payments, payable in June, September and December will be 20 per cent of the previous year's total ordinary dividend per share. The fourth quarter payment will be announced with the full year results, with the amount reflecting the Group's financial performance and our objective of a progressive and sustainable ordinary dividend. The final dividend will continue to be paid in May, following approval at the Annual General Meeting.

 

 

 

UNDERLYING BASIS SEGMENTAL ANALYSIS

 

Half-year to 30 June 2019
				Commercial		Insurance		Central
		Retail		Banking		and Wealth		items		Group
		£m		£m		£m		£m		£m
Net interest income		4,366		1,460		58		261		6,145
Other income		1,007		733		1,183		177		3,100
Operating lease depreciation		(461)		(12)		-		-		(473)
Vocalink gain on sale		-		-		-		50		50
Net income		4,912		2,181		1,241		488		8,822
Operating costs		(2,325)		(1,034)		(539)		(8)		(3,906)
Remediation		(48)		(90)		(25)		20		(143)
Total costs		(2,373)		(1,124)		(564)		12		(4,049)
Impairment		(556)		(65)		-		42		(579)
Underlying profit		1,983		992		677		542		4,194
Banking net interest margin		2.64%		3.15%						2.90%
Average interest-earning banking assets		£339.8bn		£92.6bn		£0.9bn		-		£433.3bn
Asset quality ratio		0.33%		0.13%						0.26%
Return on risk-weighted assets		4.23%		2.35%						4.09%
Loans and advances to customers1		£338.1bn		£100.1bn		£0.9bn		£1.9bn		£441.0bn
Customer deposits2		£252.4bn		£150.6bn		£13.8bn		£0.8bn		£417.6bn
Risk-weighted assets		£95.8bn		£83.0bn		£1.3bn		£26.4bn		£206.5bn

 

Half-year to 30 June 2018
				Commercial		Insurance		Central
		Retail3		Banking3		and Wealth		items3		Group
		£m		£m		£m		£m		£m
Net interest income		4,511		1,501		60		272		6,344
Other income		1,052		842		979		251		3,124
Operating lease depreciation		(477)		(20)		-		-		(497)
Net income		5,086		2,323		1,039		523		8,971
Operating costs		(2,401)		(1,073)		(534)		(16)		(4,024)
Remediation		(91)		(75)		(25)		(66)		(257)
Total costs		(2,492)		(1,148)		(559)		(82)		(4,281)
Impairment		(460)		6		-		(2)		(456)
Underlying profit		2,134		1,181		480		439		4,234
Banking net interest margin		2.69%		3.32%						2.93%
Average interest-earning banking assets		£342.0bn		£90.3bn		£0.8bn		£3.3bn		£436.4bn
Asset quality ratio		0.27%		(0.03)%						0.20%
Return on risk-weighted assets		4.71%		2.74%						4.05%
Loans and advances to customers1		£340.8bn		£97.3bn		£0.8bn		£3.4bn		£442.3bn
Customer deposits2		£254.6bn		£148.5bn		£13.6bn		£0.9bn		£417.6bn
Risk-weighted assets		£92.4bn		£86.7bn		£1.3bn		£26.5bn		£206.9bn

 

1	Excludes reverse repos.
2	Excludes repos.
3	Prior period segmental comparatives restated. See basis of presentation.

 

 

 

UNDERLYING BASIS SEGMENTAL ANALYSIS (continued)

 

Half-year to 31 December 2018
				Commercial		Insurance		Central
		Retail1		Banking1		and Wealth		items1		Group
		£m		£m		£m		£m		£m
Net interest income		4,549		1,512		63		246		6,370
Other income		1,045		828		886		127		2,886
Operating lease depreciation		(444)		(15)		-		-		(459)
Net income		5,150		2,325		949		373		8,797
Operating costs		(2,496)		(1,118)		(487)		(40)		(4,141)
Remediation		(176)		(128)		(14)		(25)		(343)
Total costs		(2,672)		(1,246)		(501)		(65)		(4,484)
Impairment		(401)		(77)		(1)		(2)		(481)
Underlying profit		2,077		1,002		447		306		3,832
Banking net interest margin		2.66%		3.22%						2.93%
Average interest-earning banking assets		£342.6bn		£92.1bn		£0.8bn		-		£435.5bn
Asset quality ratio		0.23%		0.16%						0.22%
Return on risk-weighted assets		4.43%		2.30%						3.65%
Loans and advances to customers2		£340.1bn		£100.4bn		£0.9bn		£3.0bn		£444.4bn
Customer deposits3		£252.8bn		£148.6bn		£14.1bn		£0.8bn		£416.3bn
Risk-weighted assets		£93.5bn		£86.5bn		£1.2bn		£25.2bn		£206.4bn

 

1	Prior period segmental comparatives restated. See basis of presentation.
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 and flexibility, with propositions increasingly personalised to their needs. Retail operates a multi-brand and multi-channel strategy. It continues to simplify its business and provide more transparent products, helping to improve service levels and reduce conduct risks, whilst working within a prudent risk appetite.

 

Progress against strategic priorities

Leading customer experience

·    UK's largest digital bank with 15.9 million active digital customers; 9.8 million mobile banking app customers and 75 per cent of new products are now originated digitally, whilst also maintaining the UK's largest branch network

·    First to market in extending open banking functionality, to both savings products and credit cards

·    Launched the Lloyds 'M Word' campaign to support customers being more confident and comfortable talking about money, along with a refreshed Halifax brand

·    Supporting customers in branches with around 50 per cent of customer facing time spent on complex financial needs, resulting in the relationship new mortgage market share improving by 3 percentage points since start of 2018

 

Digitising the Group

·    Continued to significantly enhance the mobile app experience for customers by introducing:

−      Virtual Assistant available any time resolving over 25 per cent of messaging queries

−      Upcoming payments helping customers budget better, with over 40 million views since launch

−      Self-service capability to update address, providing flexibility and control

−      Relaunched Save the Change so more customers can establish a savings habit linked to everyday transactions

·    Voice ID now the most popular form of security for telephone banking with over 12 million verifications since launch

·    Rolled out Black Horse Finance Online, a new point of sale technology platform to around 4,000 motor retailers

 

Maximising the Group's capabilities

·    MBNA integration completed ahead of schedule with migration of over 8 million customer accounts

·    Launched an electric vehicle fund initiative through Lex Autolease to support lower UK emissions

 

Transforming ways of working

·    Launched a pilot with local shops to boost the number of retailers offering cashback to support access to cash

·    Invested around 24,000 training hours in colleagues to support customers with fraud and disputes

 

Financial performance

·    Underlying profit of £1,983 million decreased 7 per cent

·    Net interest income was 3 per cent lower, reflecting a 5 basis point reduction in net interest margin with continued mortgage competition pressure partly offset by lower funding costs

·    Other income reduced 4 per cent with lower Lex fleet size, with an associated benefit in operating lease depreciation

·    Operating costs reduced 3 per cent, as efficiency savings more than offset increased investment in the business.

·    Impairment increased 21 per cent as a result of some weakening in used car prices, alignment of credit card methodologies and lower cash recoveries following prior year debt sales

·    Customer lending was broadly flat with growth in Black Horse and unsecured loans being offset by mortgages. Open mortgage balances grew by £0.8 billion in the second quarter of 2019

·    Customer deposits include improved current account mix, stable relationship balances and reduced tactical savings

·    Risk-weighted assets increased by 4 per cent mainly driven by model refinements within mortgages
 

Retail performance summary

 

		Half-year		Half-year				Half-year
		to 30 June		to 30 June				to 31 Dec
		2019		20181		Change		20181		Change
		£m		£m		%		£m		%
Net interest income		4,366		4,511		(3)		4,549		(4)
Other income		1,007		1,052		(4)		1,045		(4)
Operating lease depreciation		(461)		(477)		3		(444)		(4)
Net income		4,912		5,086		(3)		5,150		(5)
Operating costs		(2,325)		(2,401)		3		(2,496)		7
Remediation		(48)		(91)		47		(176)		73
Total costs		(2,373)		(2,492)		5		(2,672)		11
Impairment		(556)		(460)		(21)		(401)		(39)
Underlying profit		1,983		2,134		(7)		2,077		(5)
Banking net interest margin		2.64%		2.69%		(5)bp		2.66%		(2)bp
Average interest-earning banking assets		£339.8bn		£342.0bn		(1)		£342.6bn		(1)
Asset quality ratio		0.33%		0.27%		6bp		0.23%		10bp
Return on risk-weighted assets		4.23%		4.71%		(48)bp		4.43%		(20)bp

 

 

		At 30 June		At 30 June				At 31 Dec
		2019		2018		Change		2018		Change
		£bn		£bn		%		£bn		%
Open mortgage book		264.9		267.1		(1)		266.6		(1)
Closed mortgage book		19.8		22.2		(11)		21.2		(7)
Credit cards		17.7		18.5		(4)		18.1		(2)
UK unsecured loans		8.2		7.8		5		7.9		4
UK Motor Finance		15.5		13.9		12		14.6		6
Business Banking		1.8		1.9		(5)		1.8		-
Overdrafts		1.2		1.2		-		1.3		(8)
Other2		9.0		8.2		10		8.6		5
Loans and advances to customers		338.1		340.8		(1)		340.1		(1)
Operating lease assets		4.5		4.7		(4)		4.7		(4)
Total customer assets		342.6		345.5		(1)		344.8		(1)
Relationship balances3		236.3		235.3		-		235.3		-
Tactical balance3		16.1		19.3		(17)		17.5		(8)
Customer deposits		252.4		254.6		(1)		252.8		-
Risk-weighted assets		95.8		92.4		4		93.5		2

 

1	Prior periods restated. See basis of presentation.
2	Includes Europe and run-off.
3	Prior period restated to show European deposits as tactical balances.

 

 

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 services. 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.

 

Progress against strategic priorities

Leading customer experience

·    Co-piloted shared business banking hubs alongside major UK peers, improving accessibility for corporate clients through longer opening hours and ability to conduct transactions through a shared facility

·    Awarded 'Business Bank of the Year' at the FDs' Excellence Awards for the 15th consecutive year

 

Digitising the Group

·    Delivered the first release of our new cash management and payments platform, allowing clients to benefit from a multi-channel experience when making and receiving payments, supporting continued development of API enabled client propositions

·    Improved our eTrading capability, enabling clients in LBCM to undertake FX trades electronically 24 hours per day across multiple geographies and in turn allowing us to support larger clients in automating their businesses

 

Maximising the Group's capabilities

·    Contributed over £10 billion of gross new lending to businesses in the first half of the year, and on course to meet our commitment to lend up to £18 billion to UK businesses in 2019

·    On track to meet our target of £6 billion additional net lending to start-up, SME and Mid Market clients by the end of 2020

·    On course to meet our sustainability targets of supporting energy efficiency improvements for a further one million square feet of commercial real estate in 2019 and renewable energy projects capable of powering 3.5 million homes by 2020

 

Transforming ways of working

·    Launched the SME Business Lending Tool, freeing up additional relationship manager time to allow for increased engagement with clients, as well as increasing productivity and simplifying the lending journey

·    Over 450 relationship managers trained on climate change and sustainability related risks and opportunities in collaboration with Cambridge Institute for Sustainable Leadership

 

Financial performance

·      Net interest income of £1,460 million reduced 3 per cent largely reflecting ongoing asset margin pressure

·      Other income of £733 million was 13 per cent lower than the first half of 2018, driven by lower levels of client activity, particularly in the markets business  

·      Operating costs of £1,034 million reduced 4 per cent, as increased investment in the business was more than offset by efficiency savings

·      Asset quality ratio of 13 basis points was 16 basis points higher, largely driven by provision increases on two individual corporate cases

·      Return on risk-weighted assets of 2.35 per cent, was 39 basis points lower driven by lower underlying profit, partly offset by a reduction in risk-weighted assets of 4 per cent as a result of ongoing optimisation

·      Continued lending growth in SME with balances up 2 per cent

·      Increased customer deposits at £150.6 billion, reflected continued success in attracting high quality deposit balances in a competitive market

 

Commercial Banking performance summary

 

		Half-year		Half-year				Half-year
		to 30 June		to 30 June				to 31 Dec
		2019		20181		Change		20181		Change
		£m		£m		%		£m		%
Net interest income		1,460		1,501		(3)		1,512		(3)
Other income		733		842		(13)		828		(11)
Operating lease depreciation		(12)		(20)		40		(15)		20
Net income		2,181		2,323		(6)		2,325		(6)
Operating costs		(1,034)		(1,073)		4		(1,118)		8
Remediation		(90)		(75)		(20)		(128)		30
Total costs		(1,124)		(1,148)		2		(1,246)		10
Impairment		(65)		6				(77)		16
Underlying profit		992		1,181		(16)		1,002		(1)
Banking net interest margin		3.15%		3.32%		(17)bp		3.22%		(7)bp
Average interest-earning banking assets		£92.6bn		£90.3bn		3		£92.1bn		1
Asset quality ratio		0.13%		(0.03)%		16bp		0.16%		(3)bp
Return on risk-weighted assets		2.35%		2.74%		(39)bp		2.30%		5bp

 

		At 30 June		At 30 June				At 31 Dec
		2019		2018		Change		2018		Change
		£bn		£bn		%		£bn		%
SME		30.5		29.6		3		30.0		2
Mid Markets		30.6		30.1		2		31.7		(3)
Global Corporates and Financial Institutions		34.7		32.7		6		34.4		1
Other		4.3		4.9		(12)		4.3		-
Loans and advances to customers		100.1		97.3		3		100.4		-
SME including Retail Business Banking		32.3		31.5		3		31.8		2
Customer deposits		150.6		148.5		1		148.6		1
Risk-weighted assets		83.0		86.7		(4)		86.5		(4)

 

1	Prior periods restated. See basis of presentation.

 

 

 

INSURANCE AND WEALTH

 

Insurance and Wealth offers insurance, investment and wealth management products and services. It supports around 10 million customers with assets under administration of £155 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 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.

 

Progress against strategic priorities

Leading customer experience

·    Successful migration of around 200,000 policies from a number of legacy systems to a single platform managed by our long term partner Diligenta, enabling customers to better manage their policies with Scottish Widows

·    Concluded remaining transfers of the acquired Zurich UK workplace pensions and savings business in July 2019, adding around £9 billion to assets under administration and bringing the total transferred to £18 billion

·    Launched simple in branch application process for new 'Plan and Protect' life and critical illness product which takes c.30 minutes for cover up to £500,000, making it easier for homeowners to protect themselves and their families

·    Scottish Widows won 'Pension Firm of the Year' at the FD Excellence Awards for the third consecutive year

 

Digitising the Group

·    Launched online home insurance claims process, with over 55 per cent of claims now being managed in this way

·    Single Customer View, a unique capability that provides customers with integrated access to banking and insurance products, now available to over 4 million customers, with around 200,000 engaging with their pension every month

 

Maximising the Group's capabilities

·    As part of our partnership with Schroders plc, established Schroders Personal Wealth with around 300 advisers, and transferred over £500 million of high net worth customer assets to Cazenove Capital

·    Good progress towards the target of growing open book assets under administration by £50 billion by the end of 2020, with strong customer net inflows of £12 billion (including the Zurich transfer in July) and positive market movements of £8 billion in the first half of 2019. Cumulative net inflows of £25 billion and small positive market movements give overall growth of £28 billion since the start of current strategic plan in 2018

·    Already achieved the 1 million new pension customers target since the start of 2018

 

Financial performance

·    Strong growth in life and pensions sales, up 14 per cent, driven by increases in new members in existing workplace schemes and increased auto enrolment workplace contributions

·    New underwritten household premiums increased 33 per cent, reflecting progress of direct and corporate partnership propositions; total underwritten premiums decreased 2 per cent driven by a competitive renewal market

·    Life and pensions new business income up 27 per cent to £340 million. Lower existing business income due to equity hedging strategy to reduce capital and earnings volatility. Higher experience and other items includes benefits from the planned change in investment management provider and higher in year benefits from changes to annuitant mortality assumptions. General insurance income net of claims benefits from benign weather in 2019

·    Underlying profit increased by 41 per cent to £677 million. Net income increased by £202 million to £1,241 million whilst operating costs increased by £5 million with cost savings partly offsetting higher investment in the business

 

Insurance capital

·    Estimated pre interim dividend Solvency II ratio of 149 per cent (31 December 2018 pre final dividend position: 165 per cent). The fall in the ratio primarily reflects the impact of a £350 million dividend paid to Group in February 2019 and market volatility over the period, particularly reductions in long term interest rates

·    A dividend of £100 million was paid to Group in July 2019, with c.£7 billion cumulative dividends paid to the Group since 2011

Insurance and Wealth performance summary

 

		Half-year		Half-year				Half-year
		to 30 June		to 30 June				to 31 Dec
		2019		2018		Change		2018		Change
		£m		£m		%		£m		%
Net interest income		58		60		(3)		63		(8)
Other income		1,183		979		21		886		34
Net income		1,241		1,039		19		949		31
Operating costs		(539)		(534)		(1)		(487)		(11)
Remediation		(25)		(25)		-		(14)		(79)
Total costs		(564)		(559)		(1)		(501)		(13)
Impairment		-		-				(1)
Underlying profit		677		480		41		447		51
Life and pensions sales (PVNBP)1		8,568		7,483		14		6,901		24
General insurance underwritten new GWP2		64		48		33		59		8
General insurance underwritten total GWP2		335		342		(2)		348		(4)
General insurance combined ratio		80%		103%		(23)pp		89%		(9)pp

 

 

		At 30 June		At 30 June				At 31 Dec
		2019		2018		Change		2018		Change
		£bn		£bn		%		£bn		%
Insurance Solvency II ratio3		149%		153%		(4)pp		165%		(16)pp
UK Wealth Loans and advances to customers		0.9		0.8		13		0.9		-
UK Wealth Customer deposits		13.8		13.6		1		14.1		(2)
UK Wealth Risk-weighted assets		1.3		1.3		-		1.2		8
Total customer assets under administration		155.0		151.0		3		141.3		10

 

Income by product group

 

		Half-year to 30 June 2019						Half-year to 30 June 2018						Half-year
		New		Existing				New		Existing				to 31 Dec
		business		business		Total		business		business		Total		2018
		£m		£m		£m		£m		£m		£m		£m
Workplace, planning and retirement		245		56		301		165		75		240		246
Individual and bulk annuities		78		34		112		88		45		133		111
Protection		11		12		23		8		11		19		23
Longstanding LP&I		6		191		197		7		208		215		212
		340		293		633		268		339		607		592
Life and pensions experience and other items						248						140		3
General insurance						179						103		169
						1,060						850		764
Wealth						181						189		185
Net income						1,241						1,039		949

 

1	Present value of new business premiums. Further information on page 112.
2	Gross written premiums.
3	Equivalent regulatory view of ratio (including With Profits funds) at 30 June 2019 was 141 per cent (30 June 2018: 148 per cent; 31 December 2018: 156 per cent).

 

CENTRAL ITEMS

 

		Half-year		Half-year				Half-year
		to 30 June		to 30 June				to 31 Dec
		2019		20181		Change		20181		Change
		£m		£m		%		£m		%
Net income		488		523		(7)		373		31
Operating costs		(8)		(16)		50		(40)		80
Remediation		20		(66)				(25)
Total costs		12		(82)				(65)
Impairment		42		(2)				(2)
Underlying profit		542		439		23		306		77

 

1	Prior periods restated. See basis of presentation.

 

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.

 

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

 

During 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 investments 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 2019		£m		£m		£m		£m		£m
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)
Impairment		(579)		-		-		-		(579)
Profit before tax		2,897		647		-		650		4,194
Half-year to 30 June 2018
Net interest income		6,007		93		244		-		6,344
Other income, net of insurance claims		3,564		(119)		(321)		-		3,124
Operating lease depreciation				(497)		-		-		(497)
Net income		9,571		(523)		(77)		-		8,971
Operating expenses5		(5,998)		1,090		77		550		(4,281)
Impairment		(456)		-		-		-		(456)
Profit before tax		3,117		567		-		550		4,234
Half-year to 31 December 2018
Net interest income		7,389		59		(1,078)		-		6,370
Other income, net of insurance claims		1,666		226		994		-		2,886
Operating lease depreciation				(459)		-		-		(459)
Net income		9,055		(174)		(84)		-		8,797
Operating expenses5		(5,731)		963		84		200		(4,484)
Impairment		(481)		-		-		-		(481)
Profit before tax		2,843		789		-		200		3,832

 

1	Half-year to 30 June 2019 comprises the effects of asset sales (gains of £5 million); volatility and other items (losses of £301 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).
2	Half-year to 30 June 2018 comprises the effects of asset sales (losses of £120 million); volatility and other items (gains of £154 million); the amortisation of purchased intangibles (£53 million); restructuring (£377 million, comprising severance related costs, the rationalisation of the non-branch property portfolio, the work on implementing the ring-fencing requirements and the integration of MBNA and Zurich's UK workplace pensions and savings business); and the fair value unwind and other items (losses of £171 million).
3	Half-year to 31 December 2018 comprises the effects of asset sales (losses of £25 million); volatility and other items (losses of £59 million); the amortisation of purchased intangibles (£55 million); restructuring (£502 million, comprising severance related costs, the rationalisation of the non-branch property portfolio, the work on implementing the ring-fencing requirements and the integration of MBNA and Zurich's UK workplace pensions and savings business); and the fair value unwind and other items (losses of £148 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
		2019		2018		2018
Group net interest income - statutory basis (£m)		4,639		6,007		7,389
Insurance gross up (£m)		1,303		244		(1,078)
Volatility and other items (£m)		203		93		59
Group net interest income - underlying basis (£m)		6,145		6,344		6,370
Non-banking net interest expense (£m)1		79		3		51
Banking net interest income - underlying basis (£m)		6,224		6,347		6,421
Net loans and advances to customers (£bn)2		441.0		442.3		444.4
Impairment provision and fair value adjustments (£bn)		4.0		4.0		4.0
Non-banking items:
Fee based loans and advances (£bn)		(7.5)		(5.3)		(7.2)
Other non-banking (£bn)		(2.5)		(2.2)		(4.7)
Gross banking loans and advances (£bn)		435.0		438.8		436.5
Averaging (£bn)		(1.7)		(2.4)		(1.0)
Average interest-earning banking assets (£bn)		433.3		436.4		435.5
Banking net interest margin (%)		2.90		2.93		2.93

 

1	Half-year to 2019 includes impact from the implementation of IFRS 16.
2	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
		2019		2018		2018
		£m		£m		£m
Insurance volatility		221		(194)		(312)
Policyholder interests volatility		105		122		(76)
Total volatility		326		(72)		(388)
Insurance hedging arrangements		(299)		111		246
Total		27		39		(142)

 

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 in addition to results based on the actual return. The impact of the actual return on these investments differing from the expected return is included within insurance volatility.

 

In-year volatility movements were largely driven by insurance volatility arising from interest rate movements. The capital impact of equity market movements is now hedged within Insurance and this also reduces the IFRS earnings exposure to equity market movements. Prior to 2019 insurance hedging arrangements were also in place within the Bank.

 

The Group actively manages its exposures to interest rate, foreign currency exchange rate, inflation and market movements within the banking book through a comprehensive hedging strategy. This helps to mitigate earnings volatility and reduces the impact of market movements on the capital position.
 

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
		2019		2018		2018
		£m		£m		£m
Shareholders' equity		43,448		42,940		43,434
Goodwill		(2,314)		(2,310)		(2,310)
Intangible assets		(3,615)		(3,061)		(3,347)
Purchased value of in-force business		(255)		(291)		(271)
Other, including deferred tax effects		203		240		228
Tangible net assets		37,467		37,518		37,734
Ordinary shares in issue, excluding own shares		70,740m		71,944m		71,149m
Tangible net assets per share		53.0p		52.1p		53.0p

 

5.         Return on tangible equity

 

		Half-year		Half-year		Half-year
		to 30 June		to 30 June		to 31 Dec
		2019		2018		2018
Average shareholders' equity (£bn)		43.6		43.2		42.8
Average intangible assets (£bn)		(5.8)		(5.3)		(5.6)
Average tangible equity (£bn)		37.8		37.9		37.2
Underlying profit after tax (£m)1		3,160		3,174		2,883
Add back amortisation of intangible assets (post tax) (£m)		178		138		158
Less profit attributable to non-controlling interests and other equity holders (£m)1		(283)		(242)		(289)
Adjusted underlying profit after tax (£m)		3,055		3,070		2,752
Underlying return on tangible equity (%)		16.3		16.3		14.7
Group statutory profit after tax (£m)1		2,225		2,317		2,189
Add back amortisation of intangible assets (post tax) (£m)		178		138		158
Add back amortisation of purchased intangible assets (post tax) (£m)		38		59		52
Less profit attributable to non-controlling interests and other equity holders (£m)1		(283)		(242)		(289)
Adjusted statutory profit after tax (£m)		2,158		2,272		2,110
Statutory return on tangible equity (%)		11.5		12.1		11.3

 

1	Prior period restated to reflect amendments to IAS 12, see basis of presentation.

 

 

 

 

 

RISK MANAGEMENT

PRINCIPAL RISKS AND UNCERTAINTIES

 

The Group's principal risks and uncertainties are reviewed and reported regularly as advised in our 2018 Annual Report. Following a review of the Group's risk categories, change and execution risk, data risk and operational resilience risk were elevated from secondary to primary risk categories in the Group's Risk Management Framework, reflecting the greater focus in these key areas.

 

The external risk faced by the Group may impact the success of delivering against the Group's long term strategic objectives. They include but are not limited to global macro-economic conditions, regulatory developments and market liquidity.

 

These changes are being embedded during 2019 and are now reflected within the Group's principal risks as below:

 

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

 

Change and execution risk - The risk that in delivering its 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 risk appetite.

 

Conduct risk - 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.

 

Credit risk - 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 or anticipated changes in the economic environment could impact profitability due to an increase in delinquency, defaults, write-downs and/or expected credit losses.

 

Data risk  - The risk of the Group failing to effectively govern, manage, and protect its data (or the data shared with third party suppliers) impacting the Group's agility, accuracy, access and availability of data, ultimately leading to poor customer outcomes, loss of value to the Group and mistrust from regulators.

 

Funding and liquidity risk - The risk that the Group has insufficient financial resources to meet its commitments as they fall due.

 

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

 

Insurance underwriting risk - 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. Longevity risk is expected to increase as the Group's presence in the annuity market increases.

 

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

 

Model risk - 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.

 

Operational risk - Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

 

Operational resilience risk - The risk that the Group fails to design resilience into business operations, underlying infrastructure and controls (people, process, technical) 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 expectations and needs when the continuity of operations is compromised.

 

 

PRINCIPAL RISKS AND UNCERTAINTIES (continued)

 

People risk - 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.

 

Regulatory and legal risk - 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.

 

 

CREDIT RISK PORTFOLIO

 

Overview

·    Credit quality remains strong despite continued uncertainty and a softening in the external market

·    The Group's loan portfolios continue to be well positioned, reflecting the Group's continued effective risk management and benefiting from low interest rates

·    The gross asset quality ratio increased to 34 basis points (half-year to 30 June 2018: 27 basis points)

·    The net asset quality ratio increased to 26 basis points (half-year to 30 June 2018: 20 basis points)

·    The impairment charge increased to £579 million (half-year to 30 June 2018: £456 million), driven by a number of items including some weakening in used car prices, alignment of credit card provisioning methodologies, lower cash recoveries following prior year debt sales and two corporate cases in Commercial Banking

·    Stage 2 loans as a proportion of total loans and advances to customers increased slightly to 8.1 per cent (31 December 2018: 7.8 per cent). Stage 2 loans and advances were up by £2.0 billion to £40.3 billion, driven by the impact of changes in IFRS 9 economic scenarios, weighted towards the Retail portfolio and improved data quality and IFRS 9 model refinements within Commercial Banking

·    Stage 2 expected credit loss allowances as a percentage of drawn balances (coverage) decreased to 3.6 per cent (31 December 2018: 4.1 per cent), mainly driven by a reduction in Stage 2 expected credit loss (ECL) allowances within SME largely as a result of an enhanced approach to loan amortisation within the IFRS 9 model and a number of other model refinements

·    Stage 3 loans as a proportion of total loans and advances to customers have remained stable at 1.9 per cent, with Stage 3 loans and advances up £0.4 billion to £9.6 billion. Coverage of Stage 3 drawn balances reduced to 23.0 per cent (31 December 2018: 24.3 per cent), largely as a result of the transfers of a small number of larger, individually assessed names to Stage 3 within Commercial Banking, with lower likelihood of net loss

 

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 at origination and a prudent through the cycle credit risk appetite

·    Although not immune, credit portfolios are well positioned against an uncertain economic outlook and potential market volatility, including that related to the UK's exit from the EU

·    The Group continues to grow lending to targeted segments while maintaining a prudent risk appetite

·    The Group's effective risk management ensures early identification and management of customers and counterparties who may be showing signs of distress

·    Sector concentrations within the portfolios are closely monitored and controlled, with mitigating actions taken where appropriate. Sector and product caps limit exposure to certain higher risk and 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
		2019		20181		Change		20181		Change
		£m		£m		%		£m		%
Retail:
Secured		(38)		20				18
Unsecured		461		386		(19)		297		(55)
UK Motor Finance		104		49				64		(63)
Other		29		5				22		(32)
		556		460		(21)		401		(39)
Commercial Banking:
SME		(48)		14				49
Other		113		(20)				28
		65		(6)				77		16
Insurance and Wealth		-		-				1
Central items		(42)		2				2
Total impairment charge		579		456		(27)		481		(20)
Asset quality ratio		0.26%		0.20%		6bp		0.22%		4bp
Gross asset quality ratio		0.34%		0.27%		7bp		0.30%		4bp

 

1	Prior period segmental comparatives restated. See basis of presentation.

 

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.

 

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 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 are 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

 

										Purchased
										or
										originated
										credit-		Stage 2		Stage 3
		Total		Stage 1		Stage 2		Stage 3		impaired		as %		as %
At 30 June 2019		£m		£m		£m		£m		£m		of total		of total
Retail:
Secured		285,293		252,260		16,876		1,543		14,614		5.9		0.5
Unsecured		27,895		24,578		2,639		678		-		9.5		2.4
UK Motor Finance		15,882		14,343		1,402		137		-		8.8		0.9
Other		10,908		9,957		790		161		-		7.2		1.5
		339,978		301,138		21,707		2,519		14,614		6.4		0.7
Commercial Banking:
SME		30,835		26,069		4,074		692		-		13.2		2.2
Other		70,688		64,264		3,339		3,085		-		4.7		4.4
		101,523		90,333		7,413		3,777		-		7.3		3.7
Insurance and Wealth		895		789		50		56		-		5.6		6.3
Central items		56,055		55,986		1		68		-		-		0.1
Total gross lending		498,451		448,246		29,171		6,420		14,614		5.9		1.3
ECL allowance on drawn balances		(3,313)		(621)		(953)		(1,558)		(181)
Net balance sheet carrying value		495,138		447,625		28,218		4,862		14,433
ECL allowance (drawn and undrawn) as a percentage of gross lending (%)1		0.7		0.2		3.5		25.4

 

1	Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured of £242 million and £18 million for Business Banking within Retail other.

 

 

 

CREDIT RISK PORTFOLIO (continued)

 

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

 

										Purchased
										or
										originated
										credit-		Stage 2		Stage 3
		Total		Stage 1		Stage 2		Stage 3		impaired		as %		as %
At 31 December 20181		£m		£m		£m		£m		£m		of total		of total
Retail:
Secured		288,235		257,797		13,654		1,393		15,391		4.7		0.5
Unsecured		28,115		24,705		2,707		703		-		9.6		2.5
UK Motor Finance		14,933		13,224		1,580		129		-		10.6		0.9
Other		10,399		9,434		800		165		-		7.7		1.6
		341,682		305,160		18,741		2,390		15,391		5.5		0.7
Commercial Banking:
SME		30,296		26,099		3,484		713		-		11.5		2.4
Other		71,528		65,903		3,108		2,517		-		4.3		3.5
		101,824		92,002		6,592		3,230		-		6.5		3.2
Insurance and Wealth		865		804		6		55		-		0.7		6.4
Central items		43,637		43,565		6		66		-		-		0.2
Total gross lending		488,008		441,531		25,345		5,741		15,391		5.2		1.2
ECL allowance on drawn balances		(3,150)		(525)		(994)		(1,553)		(78)
Net balance sheet carrying value		484,858		441,006		24,351		4,188		15,313
ECL allowance (drawn and undrawn) as a percentage of gross lending (%)2		0.7		0.1		4.2		28.4

 

1	Segmental comparatives restated. See basis of presentation.
2	Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured of £233 million and £17 million for 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 20191		£m		£m		£m		£m		of total		of total
Retail:
Secured		286,073		253,348		27,985		4,740		9.8		1.7
Unsecured		27,788		24,480		2,631		677		9.5		2.4
UK Motor Finance		15,882		14,343		1,402		137		8.8		0.9
Other		10,908		9,957		790		161		7.2		1.5
		340,651		302,128		32,808		5,715		9.6		1.7
Commercial Banking:
SME		30,835		26,069		4,074		692		13.2		2.2
Other		70,688		64,264		3,339		3,085		4.7		4.4
		101,523		90,333		7,413		3,777		7.3		3.7
Insurance and Wealth		895		789		50		56		5.6		6.3
Central items		56,055		55,986		1		68		-		0.1
Total gross lending		499,124		449,236		40,272		9,616		8.1		1.9
ECL allowance on drawn balances		(4,164)		(650)		(1,370)		(2,144)
Net balance sheet carrying value		494,960		448,586		38,902		7,472
ECL allowance (drawn and undrawn) as a percentage of gross lending (%)2		0.9		0.2		3.6		23.0

 

1	These balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
2	Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured of £242 million and £18 million for 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 20181,2		£m		£m		£m		£m		of total		of total
Retail:
Secured		289,237		257,797		26,571		4,869		9.2		1.7
Unsecured		27,990		24,593		2,696		701		9.6		2.5
UK Motor Finance		14,933		13,224		1,580		129		10.6		0.9
Other		10,399		9,434		800		165		7.7		1.6
		342,559		305,048		31,647		5,864		9.2		1.7
Commercial Banking:
SME		30,296		26,099		3,484		713		11.5		2.4
Other		71,528		65,903		3,108		2,517		4.3		3.5
		101,824		92,002		6,592		3,230		6.5		3.2
Insurance and Wealth		865		804		6		55		0.7		6.4
Central items		43,637		43,565		6		66		-		0.2
Total gross lending		488,885		441,419		38,251		9,215		7.8		1.9
ECL allowance on drawn balances		(4,236)		(556)		(1,506)		(2,174)
Net balance sheet carrying value		484,649		440,863		36,745		7,041
ECL allowance (drawn and undrawn) as a percentage of gross lending (%)3		0.9		0.2		4.1		24.3

 

1	These balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
2	Segmental comparatives restated. See basis of presentation.
3	Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured of  £233 million and £17 million for Business Banking within Retail other.

 

Group total expected credit loss allowance - statutory basis

 

		At 30 June		At 31 Dec
		2019		2018
		£m		£m
Customer related balances
Drawn		3,313		3,150
Undrawn		173		193
		3,486		3,343
Other assets		25		19
Total expected credit loss allowance		3,511		3,362

 

Group total expected credit loss allowance - underlying basis

 

		At 30 June		At 31 Dec
		2019		2018
		£m		£m
Customer related balances
Drawn		4,164		4,236
Undrawn		173		193
		4,337		4,429
Other assets		25		19
Total expected credit loss allowance		4,362		4,448

 

 

CREDIT RISK PORTFOLIO (continued)

 

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

 

									Purchased or
									originated
	Total		Stage 1		Stage 2		Stage 3		credit-impaired
	£m		£m		£m		£m		£m
At 30 June 2019
Underlying basis	499,124		449,236		40,272		9,616		-
Purchased or originated credit-impaired assets	-		(1,087)		(11,109)		(3,197)		15,393
Acquisition fair value adjustment	(673)		97		8		1		(779)
	(673)		(990)		(11,101)		(3,196)		14,614
Statutory basis	498,451		448,246		29,171		6,420		14,614
At 31 December 2018
Underlying basis	488,885		441,419		38,251		9,215		-
Purchased or originated credit-impaired assets	-		-		(12,917)		(3,476)		16,393
Acquisition fair value adjustment	(877)		112		11		2		(1,002)
	(877)		112		(12,906)		(3,474)		15,391
Statutory basis	488,008		441,531		25,345		5,741		15,391

 

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

 

									Purchased or
									originated
	Total		Stage 1		Stage 2		Stage 3		credit-impaired
	£m		£m		£m		£m		£m
At 30 June 2019
Underlying basis	4,164		650		1,370		2,144		-
Purchased or originated credit-impaired assets	-		(2)		(393)		(565)		960
Acquisition fair value adjustment	(851)		(27)		(24)		(21)		(779)
	(851)		(29)		(417)		(586)		181
Statutory basis	3,313		621		953		1,558		181
At 31 December 2018
Expected credit losses on drawn balances
Underlying basis	4,236		556		1,506		2,174		-
Purchased or originated credit-impaired assets	-		-		(481)		(599)		1,080
Acquisition fair value adjustment	(1,086)		(31)		(31)		(22)		(1,002)
	(1,086)		(31)		(512)		(621)		78
Statutory basis	3,150		525		994		1,553		78

 

 

 

CREDIT RISK PORTFOLIO (continued)

 

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

 

																		Purchased or
																		originated
																		credit-
		Total				Stage 1				Stage 2				Stage 3				impaired
At 30 June 20191		£m		%3		£m		%3		£m		%3		£m		%2,3		£m		%3
Retail:
Secured		619		0.2		38		-		266		1.6		134		8.7		181		1.2
Unsecured		911		3.3		319		1.3		377		14.3		215		49.3		-		-
UK Motor Finance		349		2.2		202		1.4		70		5.0		77		56.2		-		-
Other		126		1.2		40		0.4		34		4.3		52		36.4		-		-
		2,005		0.6		599		0.2		747		3.4		478		21.2		181		1.2
Commercial Banking:
SME		311		1.0		37		0.1		165		4.1		109		15.8		-		-
Other		1,122		1.6		62		0.1		118		3.5		942		30.5		-		-
		1,433		1.4		99		0.1		283		3.8		1,051		27.8		-		-
Insurance and Wealth		17		1.9		5		0.6		1		2.0		11		19.6		-		-
Central items		31		0.1		7		-		1		100.0		23		33.8		-		-
Total		3,486		0.7		710		0.2		1,032		3.5		1,563		25.4		181		1.2
At 31 December 20181,4
Retail:
Secured		460		0.2		38		-		226		1.7		118		8.5		78		0.5
Unsecured		896		3.2		287		1.2		379		14.0		230		48.9		-		-
UK Motor Finance		290		1.9		127		1.0		78		4.9		85		65.9		-		-
Other		122		1.2		41		0.4		30		3.8		51		34.5		-		-
		1,768		0.5		493		0.2		713		3.8		484		22.6		78		0.5
Commercial Banking:
SME		384		1.3		40		0.2		231		6.6		113		15.8		-		-
Other		1,102		1.5		71		0.1		107		3.4		924		36.7		-		-
		1,486		1.5		111		0.1		338		5.1		1,037		32.1		-		-
Insurance and Wealth		18		2.1		6		0.7		1		16.7		11		20.0		-		-
Central items		71		0.2		38		0.1		6		100.0		27		40.9		-		-
Total		3,343		0.7		648		0.1		1,058		4.2		1,559		28.4		78		0.5

 

1	UK Motor Finance expected credit loss allowances for Stages 1 and 2 include £179 million (31 December 2018: £99 million) relating to provisions held against the residual value of vehicles that are returned to the Group at the end of contract, in addition to covering losses for exposures to customers that choose to voluntarily terminate their agreements early. The provisions are included within the calculation of coverage ratios.
2	Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured (30 June 2019: £242 million; 31 December 2018: £233 million) and Business Banking within Retail other (30 June 2019: £18 million; 31 December 2018: £17 million).
3	As a percentage of drawn balances.
4	Segmental comparatives restated. See basis of presentation.

 

 

 

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
At 30 June 20191,2		£m		%4		£m		%4		£m		%4		£m		%3,4
Retail:
Secured		1,398		0.5		40		-		659		2.4		699		14.7
Unsecured		983		3.5		346		1.4		401		15.2		236		54.3
UK Motor Finance		349		2.2		202		1.4		70		5.0		77		56.2
Other		126		1.2		40		0.4		34		4.3		52		36.4
		2,856		0.8		628		0.2		1,164		3.5		1,064		19.5
Commercial Banking:
SME		311		1.0		37		0.1		165		4.1		109		15.8
Other		1,122		1.6		62		0.1		118		3.5		942		30.5
		1,433		1.4		99		0.1		283		3.8		1,051		27.8
Insurance and Wealth		17		1.9		5		0.6		1		2.0		11		19.6
Central items		31		0.1		7		-		1		100.0		23		33.8
Total		4,337		0.9		739		0.2		1,449		3.6		2,149		23.0
At 31 December 20181,2,5
Retail:
Secured		1,462		0.5		38		-		707		2.7		717		14.7
Unsecured		980		3.5		318		1.3		410		15.2		252		53.8
UK Motor Finance		290		1.9		127		1.0		78		4.9		85		65.9
Other		122		1.2		41		0.4		30		3.8		51		34.5
		2,854		0.8		524		0.2		1,225		3.9		1,105		19.7
Commercial Banking:
SME		384		1.3		40		0.2		231		6.6		113		15.8
Other		1,102		1.5		71		0.1		107		3.4		924		36.7
		1,486		1.5		111		0.1		338		5.1		1,037		32.1
Insurance and Wealth		18		2.1		6		0.7		1		16.7		11		20.0
Central items		71		0.2		38		0.1		6		100.0		27		40.9
Total		4,429		0.9		679		0.2		1,570		4.1		2,180		24.3

 

1	These balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
2	UK Motor Finance expected credit loss allowances for Stages 1 and 2 include £179 million (31 December 2018: £99 million) relating to provisions held against the residual value of vehicles that are returned to the Group at the end of contract, in addition to covering losses for exposures to customers that choose to voluntarily terminate their agreements early. The provisions are included within the calculation of coverage ratios.
3	Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured (30 June 2019: £242 million; 31 December 2018: £233 million) and Business Banking within Retail other (30 June 2019: £18 million; 31 December 2018: £17 million).
4	As a percentage of drawn balances.
5	Prior period segmental comparatives restated. See basis of presentation.

 

 

CREDIT RISK PORTFOLIO (continued)

 

Group Stage 2 loans and advances to customers - statutory basis

 

Up to date

1-30 days past due

Over 30 days past due

Expected

as % of

Expected

as % of

Expected

as % of

Gross

credit

gross

Gross

credit

gross

Gross

credit

gross

lending

loss

lending

lending

loss

lending

lending

loss

lending

£m

£m

%

£m

£m

%

£m

£m

%

At 30 June 2019