Lloyds Banking Group - Q3 2018 Interim Management Statement

Statutory profit after tax of £3.7 billion up 18 per cent, with a 5 per cent increase in underlying profit, an 11 per cent reduction in below the line charges and a lower effective tax rate

−      Net income at £13.4 billion, 2 per cent higher, with net interest margin stable in the quarter at 2.93 per cent

−      Operating costs reducing with lower business as usual costs1 offsetting increased investment; cost:income ratio further improved to 47.5 per cent with positive jaws of 5 per cent

−      Asset quality remains strong with no deterioration in credit risk; gross asset quality ratio stable at 28 basis points with increased net asset quality ratio of 22 basis points reflecting expected lower write backs and releases

·     Loans and advances up £2.3 billion in the quarter with prudent lending growth in targeted segments

·     Return on tangible equity increased to 13.0 per cent and earnings per share up 21 per cent to 4.7 pence

·     Balance sheet strength maintained with strong CET1 capital build of 41 basis points in the quarter and 162 basis points year to date; CET1 ratio of 14.6 per cent post dividend accrual

·     £1 billion share buyback complete with more than £3.2 billion returned to shareholders during 2018, equivalent to over 4.5 pence per share

·     Tangible net assets per share of 51.3 pence; increased in the quarter by 0.3 pence before interim dividend

·     Financial targets for 2018 and longer term reaffirmed


Significant strategic progress with strong start to the Group's latest strategic plan

·     Digitising the Group

−      Investment in robotics driving process improvement and enhanced productivity with c.600,000 hours saved

−      Private Cloud solutions delivering more efficient, scalable and flexible infrastructure

·     Leading Customer Experience

−      Reduced branch account opening times by c.40 per cent

−      Integrated API-led Open Banking proposition to be launched in November

·     Maximising Group Capabilities: Financial Planning and Retirement

−      Announced strategic partnership with Schroders to create a market-leading wealth proposition. Aim to be top-three UK financial planning business within 5 years

−      Insurance and banking single customer view rolled out to more than 3 million customers

−      Simplified pension consolidation process, reducing completion time and increasing conversion rates

·     Transforming Ways of Working

−      c.40 per cent uplift in colleague training to c.550,000 hours


In the first nine months of 2018 we have delivered a strong and sustainable financial performance, with increased profits and returns and continued strong capital build. These results further demonstrate the strength of our business model and the benefits of our low risk, customer focused approach.


We have also made a strong start to our 2018 to 2020 strategic plan. We have been implementing the initiatives which we announced in February as part of our ambitious strategy to transform the Group for success in a digital world. As planned, our strategic investment has accelerated and is already delivering real benefits to customers whilst operating costs continue to reduce. We have also just announced a wealth management joint venture initiative with Schroders, demonstrating the Group's focus on enhancing our customer proposition and growing our financial planning and retirement businesses.


We remain on track to deliver the improved financial targets for 2018 that we announced in August, as well as all of our longer term guidance.

António Horta-Osório, Group Chief Executive



Strong and sustainable financial performance with increased profits and returns

The Group's statutory profit after tax of £3,664 million was 18 per cent higher than the first nine months of 2017, driven by a 5 per cent increase in underlying profit to £6,303 million, an 11 per cent reduction in below the line charges and a lower effective tax rate of 26 per cent. Profit attributable to ordinary shareholders was 19 per cent higher at £3,272 million; statutory return on tangible equity improved by 2.5 percentage points to 13.0 per cent.


Net income of £13,423 million was 2 per cent higher than in the first nine months of 2017, with a 5 per cent increase in net interest income partly offset by lower other income, while operating lease depreciation reduced by 5 per cent.


Net interest income of £9,544 million increased 5 per cent on the first nine months of 2017, reflecting an improved net interest margin and increased average interest-earning banking assets which at £436 billion were 1 per cent higher than in the same period last year. The net interest margin was stable on the second quarter at 2.93 per cent with lower deposit costs offsetting continued pressure on asset margins. Other income of £4,610 million for the first nine months of 2018 was broadly flat excluding the £146 million for Vocalink and increased 4 per cent in the third quarter compared to the same period in 2017.


Operating costs at £6,014 million were slightly down on the first nine months of 2017, with underlying business as usual costs1 down 4 per cent offset by increased investment in the business. Operating costs for the quarter were down 1 per cent on the third quarter last year largely driven by increased efficiency from digitalisation and process improvements. The Group's market leading cost:income ratio continues to provide competitive advantage and improved by 2.5 percentage points to 47.5 per cent (or 1.1 percentage points to 44.8 per cent, excluding remediation) with positive jaws of 5 per cent. Remediation costs were down 32 per cent on the first nine months of 2017.


Credit quality across the portfolio remains strong with no deterioration in credit risk. The gross asset quality ratio remains in line with full year 2017 and 2016 at 28 basis points, despite the inclusion of MBNA. On a net basis the asset quality ratio increased to 22 basis points reflecting the expected lower write backs and releases.


Restructuring costs were £612 million, with £235 million in the third quarter. The third quarter charge included £35 million for severance costs relating to the Group's strategic investment plans as well as the expected costs of the integration of MBNA and Zurich's UK workplace pensions and savings business, ring-fencing and the rationalisation of the non-branch property portfolio. Volatility and other items of £207 million for the nine months included the £105 million loss on sale of the Irish mortgage portfolio. No additional charge was taken for Payment Protection Insurance in the quarter.


Balance sheet strength maintained with strong increase in capital

Group loans and advances to customers increased by £2.3 billion in the quarter to £445 billion with growth in targeted segments partly offset by a reduction of £0.7 billion in the closed mortgage book. Over the last nine months, SME and Mid-markets grew by £1.9 billion and Motor Finance by £0.9 billion whilst balances on the open mortgage book of £267 billion are in line with the start of the year. The Group continues to expect the year end position for open mortgages to be slightly higher than the end of 2017. The Group continues to optimise funding and target current account balance growth, with combined Retail and Commercial current account balances up 7 per cent in the year.


In August, the Group completed its £1 billion share buyback programme and, with the final and interim dividends paid this year, has now returned more than £3.2 billion back to shareholders in 2018, equivalent to more than 4.5 pence per share. The Group's CET1 ratio has strengthened to 15.5 per cent, pre dividend, an increase of 41 basis points in the quarter with continued strong profit generation partially offset by market movements and expected additional pension contributions. Capital build was 162 basis points for the year to date and post dividend accrual, the Group's CET1 ratio was 14.6 per cent. The Group continues to expect to deliver c.200 basis points of capital build, pre dividend, in 2018 after the full year Insurance dividend, further pension contributions and bank levy in the fourth quarter.


Tangible net assets per share of 51.3 pence with underlying increase in the quarter of 0.3 pence before interim dividend payment.