GROUP CHIEF EXECUTIVE'S STATEMENT

 

In the first three months of 2019 we have again delivered a strong business performance with continued strategic progress, increased statutory and underlying profit and strong financial returns. While Brexit uncertainty persists, and continued uncertainty could further impact the economy, I remain confident that our unique business model, and in particular our market leading efficiency and targeted investment, will continue to deliver superior performance and returns for our customers and shareholders.

António Horta-Osório

Group Chief Executive

 

HIGHLIGHTS FOR THE THREE MONTHS ENDED 31 MARCH 2019   Good progress against strategic priorities with accelerated investment in the business ·     Strategic investment of £1.2 billion since launch of GSR3 in February 2018 ·     Further progress on digitising the Group and enhancing customer propositions ·     MBNA migration completed ahead of schedule with increased return on investment of 18 per cent expected ·     Schroders Personal Wealth on track to launch in second quarter   Continued strong business performance with increased profits and market leading returns ·     Statutory profit after tax of £1.2 billion up 2 per cent with strong return on tangible equity of 12.5 per cent and earnings per share up 2 per cent to 1.49 pence ·     Underlying profit of £2.2 billion up 8 per cent driven by increased net income and lower operating costs ·     Net income increased by 2 per cent to £4.4 billion with a robust net interest margin of 2.91 per cent, higher other income and lower operating lease depreciation ·     Total costs of £1,977 million down 4 per cent driven by lower operating costs and remediation charges ·     Cost:income ratio further improved to 44.7 per cent with positive jaws of 6 per cent ·     Credit quality remains strong, with no deterioration in credit risk. Net asset quality ratio of 25 basis points up on fourth quarter reflecting expected lower releases and write backs ·     Statutory profit before tax of £1.6 billion with higher underlying profit offset by movements in below the line items, including an estimated charge for exiting the Standard Life Aberdeen investment management agreement ·     Tangible net assets per share increased to 53.4 pence driven by strong underlying profit   Balance sheet strength maintained with lower capital requirement ·     CET1 capital build of 31 basis points in the quarter after the expected one off impact from the implementation of IFRS 16 (11 basis points); CET1 ratio of 14.2 per cent, pre dividend accrual ·     Systemic Risk Buffer confirmed by the PRA at 200 basis points for the Ring Fenced Bank, equivalent to 170 basis points for the Group, 40 basis points lower than previously included in guidance due to management action ·     As a result of the lower Systemic Risk Buffer and net 30 basis point reduction in the Pillar 2A announced in July 2018, the Board's view of the current 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   Financial targets for 2019 and the longer term reaffirmed ·     Net interest margin of c.2.90 per cent in 2019 and resilient through the plan period ·     Ongoing capital build of 170 to 200 basis points per annum ·     Net asset quality ratio expected to be less than 30 basis points in 2019 and through the plan period ·     Operating costs to be less than £8 billion in 2019; cost:income ratio expected to fall every year and be in the low 40s exiting 2020, including remediation ·     Return on tangible equity of 14 to 15 per cent in 2019

 

 

INCOME STATEMENT − UNDERLYING BASIS

 

		Quarter		Quarter				Quarter
		ended		ended				ended
		31 Mar		31 Mar				31 Dec
		2019		2018		Change		2018		Change
		£m		£m		%		£m		%
Net interest income		3,083		3,171		(3)		3,170		(3)
Other income		1,506		1,411		7		1,400		8
Operating lease depreciation		(219)		(252)		13		(225)		3
Vocalink gain on sale		50		–				–
Net income		4,420		4,330		2		4,345		2
Operating costs		(1,957)		(2,008)		3		(2,151)		9
Remediation		(20)		(60)		67		(234)		91
Total costs		(1,977)		(2,068)		4		(2,385)		17
Impairment		(275)		(258)		(7)		(197)		(40)
Underlying profit		2,168		2,004		8		1,763		23
Restructuring		(126)		(138)		9		(267)		53
Volatility and other items		(339)		(174)		(95)		(270)		(26)
Payment protection insurance provision		(100)		(90)		(11)		(200)		50
Statutory profit before tax		1,603		1,602		–		1,026		56
Tax expense1		(403)		(431)		6		(260)		(55)
Statutory profit after tax1		1,200		1,171		2		766		57
Earnings per share		1.49p		1.47p		2		0.88p		69
Banking net interest margin		2.91%		2.93%		(2)bp		2.92%		(1)bp
Average interest-earning banking assets		£433bn		£437bn		(1)		£436bn		(1)
Cost:income ratio		44.7%		47.8%		(3.1)pp		54.9%		(10.2)pp
Cost:income ratio excluding remediation		44.3%		46.4%		(2.1)pp		49.5%		(5.2)pp
Asset quality ratio		0.25%		0.23%		2bp		0.18%		7bp
Underlying return on tangible equity		17.0%		15.4%		1.6pp		13.6%		3.4pp
Return on tangible equity		12.5%		12.3%		0.2pp		7.8%		4.7pp

 

KEY BALANCE SHEET METRICS

 

		At 31 Mar		At 31 Mar		Change		At 31 Dec		Change
		2019		2018		%		2018		%
Loans and advances to customers2		£441bn		£445bn		(1)		£444bn		(1)
Customer deposits3		£417bn		£413bn		1		£416bn		–
Loan to deposit ratio		106%		108%		(2)pp		107%		(1)pp
CET1 ratio pre dividend accrual4,5		14.2%		14.4%		(0.2)pp		13.9%		0.3pp
CET1 ratio4,5		13.9%		14.1%		(0.2)pp		13.9%		–
Transitional MREL ratio4,5		31.5%		27.4%		4.1pp		32.6%		(1.1)pp
UK leverage ratio4,5		5.3%		5.3%		–		5.6%		(0.3)pp
Risk-weighted assets		£208bn		£211bn		(1)		£206bn		1
Tangible net assets per share		53.4p		52.3p		1.1p		53.0p		0.4p

 

1	Comparatives restated to reflect amendments to IAS 12, see basis of presentation.
2	Excludes reverse repos of £49.3 billion (31 March 2018: £21.8 billion, 31 December 2018: £40.5 billion).
3	Excludes repos of £5.0 billion (31 March 2018: £3.3 billion, 31 December 2018: £1.8 billion).
4	The CET1, MREL and leverage ratios at 31 December 2018 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in February 2019 in relation to prior year earnings. The CET1 ratios are also reported post share buyback.
5	Incorporating profits, net of foreseeable dividends (unless otherwise stated), for the period that remain subject to formal verification in accordance with the Capital Requirements Regulation.

QUARTERLY INFORMATION

 

		Quarter		Quarter		Quarter		Quarter		Quarter
		ended		ended		ended		ended		ended
		31 Mar		31 Dec		30 Sept		30 June		31 Mar
		2019		2018		2018		2018		2018
		£m		£m		£m		£m		£m
Net interest income		3,083		3,170		3,200		3,173		3,171
Other income		1,506		1,400		1,486		1,713		1,411
Operating lease depreciation		(219)		(225)		(234)		(245)		(252)
Vocalink gain on sale		50		–		–		–		–
Net income		4,420		4,345		4,452		4,641		4,330
Operating costs		(1,957)		(2,151)		(1,990)		(2,016)		(2,008)
Remediation		(20)		(234)		(109)		(197)		(60)
Total costs		(1,977)		(2,385)		(2,099)		(2,213)		(2,068)
Impairment		(275)		(197)		(284)		(198)		(258)
Underlying profit		2,168		1,763		2,069		2,230		2,004
Restructuring		(126)		(267)		(235)		(239)		(138)
Volatility and other items		(339)		(270)		(17)		(16)		(174)
Payment protection insurance provision		(100)		(200)		–		(460)		(90)
Statutory profit before tax		1,603		1,026		1,817		1,515		1,602
Tax expense1		(403)		(260)		(394)		(369)		(431)
Statutory profit after tax1		1,200		766		1,423		1,146		1,171
Banking net interest margin		2.91%		2.92%		2.93%		2.93%		2.93%
Average interest-earning banking assets		£433bn		£436bn		£435bn		£436bn		£437bn
Cost:income ratio		44.7%		54.9%		47.1%		47.7%		47.8%
Cost:income ratio excluding remediation		44.3%		49.5%		44.7%		43.4%		46.4%
Asset quality ratio		0.25%		0.18%		0.25%		0.18%		0.23%
Gross asset quality ratio		0.30%		0.30%		0.30%		0.26%		0.27%
Underlying return on tangible equity		17.0%		13.6%		15.9%		17.3%		15.4%
Return on tangible equity		12.5%		7.8%		14.8%		11.9%		12.3%
Loans and advances to customers2		£441bn		£444bn		£445bn		£442bn		£445bn
Customer deposits3		£417bn		£416bn		£422bn		£418bn		£413bn
Loan to deposit ratio		106%		107%		105%		106%		108%
Risk-weighted assets		£208bn		£206bn		£207bn		£211bn		£211bn
Tangible net assets per share		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.

 

 

 

BALANCE SHEET ANALYSIS

 

		At 31 Mar		At 31 Mar				At 31 Dec
		2019		2018		Change		2018		Change
		£bn		£bn		%		£bn		%
Loans and advances to customers
Open mortgage book		264.1		266.7		(1)		266.6		(1)
Closed mortgage book		20.5		22.8		(10)		21.2		(3)
Credit cards		17.7		18.0		(2)		18.1		(2)
UK Retail unsecured loans		8.1		7.8		4		7.9		3
UK Motor Finance		15.3		13.8		11		14.6		5
Overdrafts		1.2		1.2		–		1.3		(8)
Retail other1		8.5		8.0		6		8.6		(1)
SME2		32.1		31.4		2		31.8		1
Mid Markets		30.6		29.3		4		31.7		(3)
Global Corporates and Financial Institutions		34.3		32.2		7		34.4		–
Commercial Banking other		4.6		8.5		(46)		4.3		7
Wealth		0.9		0.8		13		0.9		–
Central items		2.6		4.0		(35)		3.0		(13)
Loans and advances to customers3		440.5		444.5		(1)		444.4		(1)
Customer deposits
Retail current accounts		75.2		72.7		3		73.7		2
Commercial current accounts2		33.9		29.7		14		34.9		(3)
Retail relationship savings accounts		144.7		148.9		(3)		145.9		(1)
Retail tactical savings accounts		15.6		18.7		(17)		16.8		(7)
Commercial deposits2,4		133.0		129.7		3		130.1		2
Wealth		13.9		13.4		4		14.1		(1)
Central items		0.7		0.3				0.8		(13)
Total customer deposits5		417.0		413.4		1		416.3		–
Total assets6		818.3		805.1		2		797.6		3
Total liabilities6		767.8		756.4		2		747.4		3
Shareholders' equity		43.8		43.0		2		43.4		1
Other equity instruments		6.5		5.4		20		6.5		–
Non-controlling interests		0.2		0.3		(33)		0.3		(33)
Total equity		50.5		48.7		4		50.2		1
Ordinary shares in issue, excluding own shares		71,165m		72,128m		(1)		71,149m		–

 

1	Retail other primarily includes Europe.
2	Includes Retail Business Banking.
3	Excludes reverse repos.
4	Contains all Commercial interest-bearing accounts.
5	Excludes repos.
6	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.

 

 REVIEW OF PERFORMANCE

 

Continued strong business performance with increased profits and market leading returns

 

The Group's statutory profit after tax was £1,200 million, up 2 per cent, with higher underlying profit offset by movements in below the line items. The Group's underlying profit of £2,168 million was 8 per cent higher driven by increased net income and lower operating costs. Earnings per share increased 2 per cent to 1.49 pence and statutory return on tangible equity remained strong at 12.5 per cent.

 

Net income of £4,420 million was 2 per cent higher than in the first quarter of 2018 with higher other income and lower operating lease depreciation. Net interest income of £3,083 million was down 3 per cent reflecting a lower net interest margin and average interest-earning assets. Net interest margin remained robust at 2.91 per cent and is in line with guidance, with lower deposit costs and increased contribution from higher hedgeable balances offset by continued pressure on asset margins. Average interest-earning assets were lower with growth in targeted segments offset by reduced mortgage balances. Other income increased by 7 per cent including a £136 million benefit in Insurance and Wealth from the planned change in investment management provider. In addition, the Group has recognised a £50 million performance related earn out following the 2017 sale of Vocalink. Operating lease depreciation reduced by 13 per cent mainly due to robust used car prices.

 

Total costs of £1,977 million were 4 per cent lower than in the same period last year driven by lower operating costs and remediation charges. Operating costs reduced by 3 per cent and the cost:income ratio reduced further to 44.7 per cent with positive jaws of 6 per cent.

 

Credit quality remains strong, with no deterioration in credit risk and the gross asset quality ratio of 30 basis points stable on the previous quarter. The impairment charge increased on the fourth quarter to £275 million with a net asset quality ratio of 25 basis points, both reflecting expected lower releases and write backs.

 

Restructuring costs for the quarter were £126 million and down 9 per cent on prior year, primarily reflecting the completion of the migration of MBNA, severance costs relating to the Group's strategic investment plans and the initial costs to establish the personal wealth joint venture with Schroders. Volatility and other items of £339 million includes adverse movements in banking volatility and an estimated charge for exiting the Standard Life Aberdeen investment management agreement. An additional charge of £100 million was taken for Payment Protection Insurance in the first quarter of 2019 reflecting increased costs from higher gross complaint volumes. Net complaints remain in line with the Group's expectation of around 13,000 per week.

 

Balance sheet strength maintained with lower capital requirement

 

Loans and advances to customers were £441 billion with growth in targeted segments in the last 12 months, including £0.7 billion in SME and £1.5 billion in UK Motor Finance, offset by a reduction of £4.9 billion in mortgages. Open mortgage book balances were down £2.5 billion on 31 December 2018 driven by expected maturities and ongoing pricing discipline. The Group continues to expect the open mortgage book at the year-end to be in line with 2018.

 

Risk-weighted assets increased in the quarter to £208 billion with the reduction in low risk-weighted mortgage assets in the last three months offset by the risk-weighted asset increase from the implementation of IFRS 16.

 

The Group continues to optimise funding and target current account balance growth, with Retail current accounts up 3 per cent over the last 12 months to £75.2 billion (31 March 2018: £72.7 billion) and Commercial Banking current accounts up 14 per cent over the same period to £33.9 billion (31 March 2018: £29.7 billion). The loan to deposit ratio was 106 per cent.

 

Tangible net assets per share increased to 53.4 pence driven by strong underlying profit.

 

 

REVIEW OF PERFORMANCE (continued)

 

The CET1 ratio strengthened to 14.2 per cent before dividend accrual with an increase of 31 basis points in the quarter primarily driven by underlying performance and the expected one off 11 basis point reduction from the implementation of IFRS 16. After accruing for dividends the CET1 ratio remains strong at 13.9 per cent. The Group remains well positioned to meet its minimum requirement for own funds and eligible liabilities (MREL) from 2020 and, as at 31 March 2019, had a transitional MREL ratio of 31.5 per cent. The UK leverage ratio remains strong at 5.3 per cent.

 

The Group has been notified by the Prudential Regulation Authority (PRA) that the Systemic Risk Buffer for the Group's Ring Fenced Bank will be 200 basis points which equates to 170 basis points at a Group level. This is less than the 210 basis points previously included in the Group's capital guidance following action to manage the size of the Ring Fenced Bank. This decrease in the Systemic Risk Buffer follows the net 30 basis point reduction in the Group's Pillar 2A, as announced to the market in 2018 and with effect from 1 January 2019. Given these decreases, the Board's view of the current 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.

 

The Group remains strongly capital generative and continues to expect ongoing capital build of 170 to 200 basis points per annum. The Group has a progressive and sustainable ordinary dividend policy and the Board will continue to give consideration to the distribution of surplus capital at the end of the year.

 

Outlook

 

We have continued to deliver on our ambitious strategic plan to transform the Group for success in a digital world. While Brexit uncertainty persists and continued uncertainty could further impact the economy, given the current strong performance, we are reaffirming all of our financial targets. This includes the net interest margin remaining resilient around 290 basis points, operating costs below £8 billion in 2019 and a net asset quality ratio below 30 basis points through the plan. As a result, the Group continues to expect a return on tangible equity of 14 to 15 per cent in 2019 and ongoing capital build of 170 to 200 basis points per annum.