Lloyds Bank plc: 2023 Half-Year Results
Member of the Lloyds Banking Group
CONTENTS
Financial review |
1 |
|
|
Risk management |
|
Principal risks and uncertainties |
3 |
Capital risk |
5 |
Credit risk |
9 |
Funding and liquidity risk |
20 |
|
|
Statutory information |
|
Condensed consolidated half-year financial statements
(unaudited) |
23 |
Consolidated income statement |
24 |
Consolidated statement of comprehensive income |
25 |
Consolidated balance sheet |
26 |
Consolidated statement of changes in equity |
27 |
Consolidated cash flow statement |
30 |
Notes to the condensed consolidated half-year financial
statements |
31 |
|
|
Statement of directors' responsibilities |
62 |
Independent review report to Lloyds Bank plc |
63 |
Forward looking statements |
64 |
FINANCIAL REVIEW
Principal activities
Lloyds Bank plc (the Bank) and its subsidiary
undertakings (the Group) provide a wide range of banking and
financial services through branches and offices in the UK and in
certain overseas locations. The Group's revenue is earned through
interest and fees on a broad range of financial services products
including current accounts, savings, mortgages, credit cards, motor
finance and unsecured loans to personal and business banking
customers; and lending, transactional banking, working capital
management and risk management services to commercial
customers.
Income statement
The Group's profit before tax for the first half
of 2023 was £3,530 million, 8 per cent higher than the same period
in 2022, benefiting from higher total income, partly offset by
operating expense and impairment charge increases. Profit after tax
was £2,590 million (half-year to 30 June 2022: £2,441 million).
Total income for the first half of 2023 was
£9,040 million, an increase of 12 per cent on the same period in
2022, primarily reflecting higher net interest income in the
period. Net interest income of £7,009 million was up 15 per cent on
the prior year, driven by stronger margins as a result of the
higher rate environment and higher average interest-earning banking
assets, supported by growth in the open mortgage book, Retail
unsecured and European retail business.
Other income was £68 million higher at £2,031
million in the half-year to 30 June 2023 compared to
£1,963 million in the same period in 2022. Net fee and
commission income was broadly stable at £646 million. Net trading
income was £101 million lower at £107 million in the half-year
to 30 June 2023, in part reflecting the effects of the higher
rate environment on the Group's derivatives. Other operating income
increased to £1,278 million compared to £1,107 million in the
half-year to 30 June 2022 as a result of improved Lex
performance and the acquisition of Tusker.
Total operating expenses of £4,829 million were
10 per cent higher than in the prior year, given the higher planned
strategic investment, new business costs and inflationary effects,
partially mitigated by continued cost efficiency. In addition there
was a higher operating lease depreciation charge in the six months
to June 2023 reflecting the depreciation cost of higher value
vehicles, the Tusker acquisition, lower gains on disposal and
recent declines in battery electric used car prices.
The Group recognised remediation costs of £62
million largely in relation to pre-existing programmes (half-year
to 30 June 2022: £58 million). There have been no further
charges relating to HBOS Reading and the provision held continues
to reflect the Group's best estimate of its full liability, albeit
uncertainties remain. Following the FCA's Motor Market review, the
Group continues to receive complaints and is engaging with the
Financial Ombudsman Service in respect of historical motor
commission arrangements. Discussions are continuing, with the
remediation and financial impact, if any, remaining uncertain.
The impairment charge was £681 million compared
with a £364 million charge in the half-year to 30 June 2022. The
increase reflects the expected credit loss (ECL) allowance build
from Stage 1 loans rolling forward into a more adverse economic
outlook, as well as increased flows to default primarily in legacy
variable rate UK mortgage portfolios and higher charges on existing
Stage 3 clients in Commercial Banking. This increase was partly
offset by a lower charge from economic outlook revisions. The
Group's ECL allowance increased to £5,028 million, compared to
£4,796 million at 31 December 2022 resulting from the Stage 3
increases in UK mortgages and Commercial Banking alongside low
levels of write offs in the period. Asset quality remains resilient
with only modest deterioration to date from a low base, with credit
performance similar, or remaining favourable, to pre-pandemic
experience.
The Group recognised a tax expense of £940
million in the period compared to £842 million in the first half of
2022.FINANCIAL REVIEW (continued)
Balance sheet
Total assets were £2,598 million lower at
£614,330 million at 30 June 2023 compared to £616,928 million at
31 December 2022. Cash and balances at central banks rose by
£3,724 million to £75,729 million reflecting increased liquidity
holdings. Financial assets at amortised cost were £8,961 million
lower at £482,435 million compared to £491,396 million at
31 December 2022 with increases in debt securities of £2,709
million and loans and advances to banks of £888 million, offset by
a reduction in reverse repurchase agreements of £8,729 million and
loans and advances to customers of £3,982 million to
£431,645 million. The reduction in loans and advances to
customers was largely as a result of the exit of £2.5 billion of
legacy Retail mortgage loans (including £2.1 billion in the
closed mortgage book) during the first quarter. Financial assets at
fair value through other comprehensive income decreased
£875 million as a result of asset sales during the period.
Other assets increased £2,269 million, reflecting higher settlement
balances and higher operating lease assets following the
acquisition of Tusker in February 2023.
Total liabilities were £3,403 million lower at
£574,466 million compared to £577,869 million at 31 December 2022.
Customer deposits at £439,914 million have decreased by £6,258
million (1 per cent) since the end of 2022. This included decreases
in Retail current account balances of £6.2 billion as a result of
tax payments, higher spend and a more competitive market, including
the Group's own savings offers where balances increased by £3.5
billion. Commercial Banking deposits were stable during the first
half of 2023. In addition, there were decreases in deposits from
banks of £1,289 million and repurchase agreements at amortised
cost of £3,968 million. Offsetting these reductions, debt
securities in issue increased by £7,387 million following
issuances of commercial paper, and other liabilities increased
£2,493 million as a result of higher settlement balances and
lease liabilities.
Total equity increased from £39,059 million at
31 December 2022 to £39,864 million at 30 June 2023, as a result of
profit for the period and issuance of other equity instruments
partially offset by a £1.9 billion dividend paid in the period and
market movements impacting the cash flow hedge reserve and
pensions.
Capital
The Group's common equity tier 1 (CET1) capital
ratio remained flat at 14.8 per cent at 30 June 2023 (31 December
2022: 14.8 per cent). This largely reflected profit for the
period, offset by the accelerated full year payment of fixed
pension deficit contributions made to the Group's three main
defined benefit pension schemes, an increase in the deduction for
goodwill and other intangible assets, including those related to
the acquisition of Tusker in February 2023, the accrual for
foreseeable ordinary dividends and an increase in risk-weighted
assets.
Risk-weighted assets have increased by £3.6
billion during the first half of the year to £178.5 billion at 30
June 2023 (31 December 2022: £174.9 billion). This largely
reflects the adjustment for the anticipated impact of CRD IV models
taken in the second quarter. Excluding this, lending growth and a
small uplift from model calibration were partly offset by capital
efficient securitisation activity and other optimisation
activity.
The CRD IV model updates reflect an updated
impact assessment following a further iteration of model
development. The models remain subject to further development and
final approval by the PRA. On that basis final impacts remain
uncertain and further increases could be required.
RISK MANAGEMENT
PRINCIPAL RISKS AND
UNCERTAINTIES
The most important risks faced by the Group are
detailed below. The external risks 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 macroeconomic
uncertainty; high interest rates and high inflation which are
contributing to the cost of living increases and associated
implications for UK consumers and businesses.
Heightened monitoring is in place across the
Group's portfolios to identify signs of affordability stress. The
Group has experienced only modest deterioration in credit
performance across its portfolio to date, most notably in UK
mortgages where new to arrears and flows to default have increased
on legacy variable rate loans. The Group continues to work with its
customers to proactively support them through cost of living
pressures, the impact from rising interest rates and any
deterioration in broader economic conditions.
The Group remains committed to the effective
implementation and embedding of Consumer Duty into its purpose,
strategy and culture in order to deliver good outcomes for our
customers throughout their journeys. This activity seeks to align
and enhance the Group's approach to supporting all customers,
including those who may be vulnerable and customers in financial
difficulty.
CRD IV model changes reflecting the revised
regulatory standards introduced in 2022 remain subject to approval
by the PRA with the resultant risk-weighted asset and expected loss
outcome dependent upon this. An adjustment to risk-weighted assets
has been taken in the second quarter, to reflect the anticipated
impact of CRD IV models, following a further iteration of model
development. On that basis final impacts remain uncertain and
further increases could be required.
There have been minor changes to the definition
of these risks compared to those disclosed in the Group's 2022
Annual Report and Accounts, such as clarifying third
party and outsourced arrangements. The Group continues to conduct a
detailed review of its Enterprise Risk Management Framework, which
may result in a reclassification of the principal risks.
The Group's principal risks and uncertainties
are reviewed and reported regularly to the Board in alignment with
Lloyds Banking Group's Enterprise Risk Management Framework.
Capital risk - The risk
that an insufficient quantity or quality of capital is held to meet
regulatory requirements or to support business strategy, an
inefficient level of capital is held 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
available and effective customer and colleague services, and/or
operate within the Group's risk appetite.
Climate risk - The risk
that the Group experiences losses and/or reputational damage,
either from the impacts of climate change and the transition to net
zero, or as a result of the Group's responses to tackling climate
change.
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. Customer harm or
detriment is defined as consumer loss, distress or inconvenience to
customers due to breaches of regulatory or internal requirements or
our wider duty to act fairly and reasonably.
Credit risk - The risk
that parties with whom the Group has contracted fail to meet their
financial obligations (both on and off-balance sheet).
Data risk - The risk of
the Group failing to effectively govern, manage and protect its
data throughout its lifecycle, including data processed by third
parties, or failure to drive value from data; leading to unethical
decision making, poor customer outcomes, loss of value to the Group
and mistrust.
Funding and liquidity risk
- Funding risk is defined as the risk that the Group
does not have sufficiently stable and diverse sources of funding or
the funding structure is inefficient. Liquidity risk is defined as
the risk that the Group has insufficient financial resources to
meet its commitments as they fall due, or can only secure them at
excessive cost.
Market risk - The risk
that the Group's capital or earnings profile is affected by adverse
market rates or prices, in particular interest
rates, and credit spreads.PRINCIPAL RISKS AND
UNCERTAINTIES (continued)
Model risk - The risk of
financial loss, regulatory censure, reputational damage or customer
detriment, as a result of deficiencies in the development,
application or ongoing operation of models and rating systems.
Operational risk - 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 including those that are outsourced,
underlying infrastructure and controls (people, property, process,
technology) so that it is able to withstand external or internal
events which could impact the continuation of operations, and fails
to respond in a way which meets customers and stakeholder
expectations and needs when the continuity of operations is
compromised.
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.
Strategic risk - The risk
which results from:
• Incorrect assumptions about internal or
external operating environments
• Failure to understand the potential
impact of strategic responses and business plans on existing risk
types
• Failure to respond or the inappropriate
strategic response to material changes in the external or internal
operating environments
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