TIDMLLOY

RNS Number : 8336G

Lloyds Banking Group PLC

29 July 2021

Lloyds Banking Group plc

2021 Half-Year Results

29 July 2021

Part 1 of 2

 
 
                           BASIS OF PRESENTATION 
    This release covers the results of Lloyds Banking Group plc together 
       with its subsidiaries (the Group) for the six months ended 30 
                                 June 2021. 
   Underlying basis: In addition to the statutory basis of presentation, 
      the results are also presented on an underlying basis. The Group 
      Executive Committee, which is the chief operating decision maker 
     for the Group, reviews the Group's results on an underlying basis 
     in order to assess performance and allocate resources. Management 
       uses underlying profit before tax, an alternative performance 
     measure, as a measure of performance and believes that it provides 
   important information for investors because it allows for a comparable 
      representation of the Group's performance by removing the impact 
      of certain items including volatility caused by market movements 
                     outside the control of management. 
       In arriving at underlying profit, statutory profit before tax 
       is adjusted for the items below, to allow a comparison of the 
                      Group's underlying performance: 
           *    Restructuring, including severance-related costs, 
                 property transformation, technology research and 
                  development, regulatory programmes and merger, 
                        acquisition and integration costs 
 
 
             *    Volatility and other items, which includes the 
                  effects of certain asset sales, the volatility 
              relating to the Group's hedging arrangements and that 
                 arising in the insurance business, the unwind of 
                acquisition-related fair value adjustments and the 
                   amortisation of purchased intangible assets 
 
 
                *    Payment protection insurance provisions 
 
 
     The analysis of lending and expected credit loss (ECL) allowances 
       is presented on an underlying basis and reconciled to figures 
       prepared on a statutory basis. On a statutory basis, purchased 
      or originated credit-impaired (POCI) assets include a fixed pool 
      of mortgages that were purchased as part of the HBOS acquisition 
     at a deep discount to face value reflecting credit losses incurred 
       from the point of origination to the date of acquisition. Over 
       time, these POCI assets will run off as the loans redeem, pay 
       down or losses crystallise. The underlying basis assumes that 
       the lending assets acquired as part of a business combination 
      were originated by the Group and are classified as either Stage 
      1, 2 or 3 according to the change in credit risk over the period 
     since origination. Underlying ECL allowances have been calculated 
      accordingly. The Group uses the underlying basis to monitor the 
   creditworthiness of the lending portfolio and related ECL allowances. 
       Commentary within the results for the full year on page 1 and 
       within the Interim Group Chief Executive's statement on pages 
                  7 to 9 is given on an underlying basis. 
     Unless otherwise stated, income statement commentaries throughout 
       this document compare the six months ended 30 June 2021 to the 
       six months ended 30 June 2020, and the balance sheet analysis 
      compares the Group balance sheet as at 30 June 2021 to the Group 
                   balance sheet as at 31 December 2020. 
        Alternative performance measures: The Group uses a number of 
       alternative performance measures, including underlying profit, 
   in the discussion of its business performance and financial position. 
      These measures are labelled with a ' ' throughout this document. 
       Further information on these measures is set out on page 149 . 
 
 

CONTENTS

 
                                                                    Page 
Results for the half-year                                              1 
Income statement - underlying basis                                    3 
Key balance sheet metrics                                              3 
Quarterly information                                                  5 
Balance sheet analysis                                                 6 
Group results - statutory basis                                        7 
Interim Group Chief Executive's statement                              9 
Summary of Group results                                              13 
Segmental analysis - underlying basis                                 23 
 
Divisional results 
Retail                                                                26 
Commercial Banking                                                    28 
Insurance and Wealth                                                  30 
Central items                                                         34 
 
Other financial information 
Reconciliation between statutory and underlying basis financial 
 information                                                          35 
Banking net interest margin and average interest-earning 
 assets                                                               37 
Volatility arising in the insurance business                          38 
Changes in Insurance assumptions                                      38 
Tangible net assets per share                                         40 
Return on tangible equity                                             40 
Support measures                                                      41 
 
Risk management 
Principal risks and uncertainties                                     42 
Credit risk portfolio                                                 44 
Funding and liquidity management                                      68 
Capital management                                                    73 
 
Statutory information 
Condensed consolidated half-year financial statements (unaudited)     85 
Consolidated income statement                                         86 
Consolidated statement of comprehensive income                        87 
Consolidated balance sheet                                            88 
Consolidated statement of changes in equity                           90 
Consolidated cash flow statement                                      93 
Notes to the condensed consolidated half-year financial 
 statements                                                           94 
 
Statement of directors' responsibilities                             144 
Independent review report to Lloyds Banking Group plc                145 
Forward looking statements                                           147 
Summary of alternative performance measures                          149 
Contacts                                                             150 
 

RESULTS FOR THE HALF-YEAR

"During the first six months of 2021, the Group has delivered a solid financial performance with continued business momentum, bolstered by an improved macroeconomic outlook for the UK. While we are seeing clear progress in the vaccine roll out and emergence from lockdown restrictions, the coronavirus pandemic continues to have a significant impact on the people, businesses and communities of the UK. In this context, the Group remains committed to Helping Britain Recover from the pandemic and delivering for all stakeholders."

William Chalmers

Interim Group Chief Executive

Solid financial performance with continued business momentum, bolstered by improved macroeconomic outlook

-- Good progress on Strategic Review 2021 priorities, including record customer satisfaction scores, improved capabilities in Markets products and a leading payments card spend market share

-- Announced today the acquisition of Embark, a fast growing investment and retirement platform business. Embark enhances our capabilities to address the attractive mass market and self-directed Wealth segment, completing the Group's Wealth proposition. Embark will also enable the Group to re-platform its pensions and retirement proposition, significantly strengthening its offering in Retirement, an important growth market

-- Statutory profit before tax of GBP3.9 billion, increased significantly on first half of 2020, benefiting from solid business momentum and a net impairment credit in the period

-- Net income of GBP7.6 billion, up 2 per cent, with increased average interest-earning assets at GBP441 billion, a strong banking net interest margin of 2.50 per cent and other income of GBP2.4 billion, alongside a reduction in operating lease depreciation

-- Sustained cost discipline with operating costs of GBP3.7 billion, including the impact of rebuilding variable pay in the context of stronger than expected financial performance

-- Remediation charge of GBP425 million, materially driven by the GBP91 million regulatory fine relating to the communication of historical insurance renewals, GBP150 million of redress and operational costs for HBOS Reading, and charges in relation to other ongoing legacy programmes

-- Net impairment credit of GBP656 million, including GBP333 million in the second quarter, as a result of an GBP837 million release driven by improvements to the macroeconomic outlook for the UK, combined with robust credit performance. Management judgements in respect of coronavirus retained, now c.GBP1.2 billion

Balance sheet and capital strength further enhanced

-- Loans and advances at GBP447.7 billion, up GBP7.5 billion in the period, driven by strong growth of GBP12.6 billion in the open mortgage book

-- Customer deposits of GBP474.4 billion up GBP23.7 billion in the period, with continued inflows into the Group's trusted brands, including Retail current accounts which were up GBP9.9 billion in the period. Resulting loan to deposit ratio of 94 per cent, continues to provide a strong liquidity position and significant potential to lend into recovery

-- Strong capital build of 93 basis points in the first half prior to the interim ordinary dividend. Reintroduced a progressive and sustainable ordinary dividend policy, with an interim ordinary dividend of 0.67 pence per share

-- CET1 ratio of 16.7 per cent after dividend accrual, significantly ahead of both the ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent and regulatory requirement of c.11 per cent

Outlook

-- Given our solid financial performance and the improved UK macroeconomic outlook, the Group is enhancing its guidance for 2021. Based on the Group's current macroeconomic assumptions:

   -      Net interest margin now expected to be around 250 basis points 
   -      Operating costs now expected to be c.GBP7.6 billion 
   -      Net asset quality ratio now expected to be below 10 basis points 

- Return on tangible equity now expected to be c.10 per cent, excluding the c.2.5 percentage point benefit from tax rate changes

   -      Risk-weighted assets in 2021 now expected to be below GBP200 billion 

-

INCOME STATEMENT - UNDERLYING BASIS

 
                                                                  Half-year 
                                  Half-year   Half-year               to 31 
                                      to 30       to 30                 Dec 
                                  June 2021   June 2020   Change       2020     Change 
                                       GBPm        GBPm        %       GBPm          % 
 
Net interest income                   5,418       5,478      (1)      5,295        2 
Other income                          2,417       2,461      (2)      2,054       18 
Operating lease depreciation          (271)       (526)       48      (358)       24 
                                 ----------  ----------           --------- 
Net income                            7,564       7,413        2      6,991        8 
                                 ----------  ----------           --------- 
Operating costs                     (3,730)     (3,699)      (1)    (3,886)        4 
Remediation                           (425)       (177)               (202) 
                                 ----------  ----------           --------- 
Total costs                         (4,155)     (3,876)      (7)    (4,088)      (2) 
                                 ----------  ----------           --------- 
Underlying profit before 
 impairment                           3,409       3,537      (4)      2,903       17 
Impairment                              656     (3,818)               (429) 
                                 ----------  ----------           --------- 
Underlying profit (loss)              4,065       (281)               2,474       64 
Restructuring                         (255)       (133)     (92)      (388)       34 
Volatility and other items               95       (188)               (173) 
Payment protection insurance 
 provision                                -           -                (85) 
                                 ----------  ----------           --------- 
Statutory profit (loss) before 
 tax                                  3,905       (602)               1,828 
Tax (expense) credit                   (40)         621               (460)       91 
                                 ----------  ----------           --------- 
Statutory profit after tax            3,865          19               1,368 
                                 ----------  ----------           --------- 
 
Earnings (loss) per share              5.1p      (0.3)p                1.5p 
Dividends per share - ordinary        0.67p           -               0.57p         18 
 
Banking net interest margin           2.50%       2.59%    (9)bp      2.44%        6bp 
Average interest-earning 
 banking assets                    GBP441bn    GBP433bn        2   GBP437bn        1 
Cost:income ratio                     54.9%       52.3%    2.6pp      58.5%    (3.6)pp 
Asset quality ratio                 (0.30)%       1.73%  (203)bp      0.19%     (49)bp 
Return on tangible equity(1,)         19.2%      (1.3)%   20.5pp       5.9%     13.3pp 
 

KEY BALANCE SHEET METRICS

 
                                          At 30       At 30   Change      At 31     Change 
                                      June 2021   June 2020        %   Dec 2020          % 
 
Loans and advances to customers(2)     GBP448bn    GBP440bn        2   GBP440bn        2 
Customer deposits(3)                   GBP474bn    GBP441bn        8   GBP451bn        5 
Loan to deposit ratio                       94%        100%    (6)pp        98%      (4)pp 
CET1 ratio                                16.7%       14.6%    2.1pp      16.2%      0.5pp 
CET1 ratio pre IFRS 9 transitional 
 relief and software(4)                   15.5%       13.4%    2.1pp      14.5%      1.0pp 
Transitional MREL ratio                   36.3%       36.8%  (0.5)pp      36.4%    (0.1)pp 
UK leverage ratio                          5.8%        5.4%    0.4pp       5.8%          - 
Risk-weighted assets                   GBP201bn    GBP207bn      (3)   GBP203bn      (1) 
Tangible net assets per share             55.6p       51.6p     4.0p      52.3p       3.3p 
 

(1) Revised basis, calculation shown on page 31.

(2) Excludes reverse repos of GBP52.7 billion (30 June 2020: GBP61.1 billion; 31 December 2020: GBP58.6 billion).

(3) Excludes repos of GBP7.9 billion (30 June 2020: GBP12.3 billion; 31 December 2020 GBP9.4 billion).

(4) CET1 ratio 'pre IFRS 9 transitional relief and software' reflects the full impact of IFRS 9, prior to the application of the transitional relief arrangements and the reversal of the beneficial treatment currently applied to intangible software assets.

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 
                              2021      2021      2020      2020      2020      2020 
                              GBPm      GBPm      GBPm      GBPm      GBPm      GBPm 
 
Net interest income          2,741     2,677     2,677     2,618     2,528     2,950 
Other income                 1,282     1,135     1,066       988     1,235     1,226 
Operating lease 
 depreciation                (123)     (148)     (150)     (208)     (302)     (224) 
                          --------  --------  --------  --------  --------  -------- 
Net income                   3,900     3,664     3,593     3,398     3,461     3,952 
                          --------  --------  --------  --------  --------  -------- 
Operating costs            (1,879)   (1,851)   (2,028)   (1,858)   (1,822)   (1,877) 
Remediation                  (360)      (65)     (125)      (77)      (90)      (87) 
                          --------  --------  --------  --------  --------  -------- 
Total costs                (2,239)   (1,916)   (2,153)   (1,935)   (1,912)   (1,964) 
                          --------  --------  --------  --------  --------  -------- 
Underlying profit before 
 impairment                  1,661     1,748     1,440     1,463     1,549     1,988 
Impairment                     333       323     (128)     (301)   (2,388)   (1,430) 
                          --------  --------  --------  --------  --------  -------- 
Underlying profit (loss)     1,994     2,071     1,312     1,162     (839)       558 
Restructuring                 (82)     (173)     (233)     (155)      (70)      (63) 
Volatility and other 
 items                          95         -     (202)        29       233     (421) 
Payment protection 
 insurance 
 provision                       -         -      (85)         -         -         - 
                          --------  --------  --------  --------  --------  -------- 
Statutory profit (loss) 
 before tax                  2,007     1,898       792     1,036     (676)        74 
Tax credit (expense)           461     (501)     (112)     (348)       215       406 
                          --------  --------  --------  --------  --------  -------- 
Statutory profit (loss) 
 after tax                   2,468     1,397       680       688     (461)       480 
                          --------  --------  --------  --------  --------  -------- 
 
Banking net interest 
 margin                      2.51%     2.49%     2.46%     2.42%     2.40%     2.79% 
Average interest-earning 
 banking assets           GBP442bn  GBP439bn  GBP437bn  GBP436bn  GBP435bn  GBP432bn 
 
Cost:income ratio            57.4%     52.3%     59.9%     56.9%     55.2%     49.7% 
 
Asset quality ratio        (0.30)%   (0.29)%     0.11%     0.27%     2.16%     1.30% 
 
Return on tangible 
 equity(1,)                  24.4%     13.9%      5.9%      6.0%    (6.1%)      3.7% 
 
Loans and advances to 
customers(2)              GBP448bn  GBP444bn  GBP440bn  GBP439bn  GBP440bn  GBP443bn 
Customer deposits(3)      GBP474bn  GBP462bn  GBP451bn  GBP447bn  GBP441bn  GBP428bn 
Loan to deposit ratio          94%       96%       98%       98%      100%      103% 
Risk-weighted assets      GBP201bn  GBP199bn  GBP203bn  GBP205bn  GBP207bn  GBP209bn 
Tangible net assets per 
 share                       55.6p     52.4p     52.3p     52.2p     51.6p     57.4p 
 

(1) Revised basis, calculation shown on page 31.

(2) Excludes reverse repos.

(3) Excludes repos.

BALANCE SHEET ANALYSIS

 
                             At 30      At 31               At 30              At 31 
                         June 2021   Mar 2021  Change   June 2020  Change   Dec 2020    Change 
                             GBPbn      GBPbn       %       GBPbn       %      GBPbn         % 
 
Loans and advances 
 to customers 
Open mortgage book           289.9      283.3       2       267.1       9      277.3       5 
Closed mortgage 
 book                         15.3       15.9     (4)        17.5    (13)       16.5     (7) 
Credit cards                  13.6       13.5       1        15.2    (11)       14.3     (5) 
UK Retail unsecured 
 loans                         8.0        7.8       3         8.2     (2)        8.0       - 
UK Motor Finance              14.4       14.9     (3)        15.3     (6)       14.7     (2) 
Overdrafts                     1.0        0.9      11         1.0       -        0.9      11 
Retail other(1)               10.5       10.3       2         9.7       8       10.4       1 
SME(2)                        40.4       41.1     (2)        38.4       5       40.6       - 
Mid Corporates                 3.8        4.0     (5)         4.6    (17)        4.1     (7) 
Corporate and 
 Institutional                44.9       45.6     (2)        55.0    (18)       46.0     (2) 
Commercial Banking 
 other                         3.9        4.1     (5)         5.0    (22)        4.3     (9) 
Wealth                         1.0        1.0       -         0.9      11        0.9      11 
Central items                  1.0        1.1     (9)         2.5    (60)        2.2    (55) 
                        ----------  ---------          ----------          --------- 
Loans and advances 
 to customers(3)             447.7      443.5       1       440.4       2      440.2       2 
                        ----------  ---------          ----------          --------- 
 
Customer deposits 
Retail current 
 accounts                    107.3      103.0       4        87.5      23       97.4      10 
Commercial current 
 accounts(2,4)                49.5       47.2       5        44.2      12       47.6       4 
Retail relationship 
 savings accounts            161.3      158.2       2       148.5       9      154.1       5 
Retail tactical 
 savings accounts             16.4       13.8      19        12.7      29       14.0      17 
Commercial 
 deposits(2,5)               124.5      125.5     (1)       133.8     (7)      122.7       1 
Wealth                        14.8       14.1       5        13.5      10       14.1       5 
Central items                  0.6        0.6       -         0.9    (33)        0.8    (25) 
                        ----------  ---------          ----------          --------- 
Total customer 
 deposits(6)                 474.4      462.4       3       441.1       8      450.7       5 
                        ----------  ---------          ----------          --------- 
 
Total assets                 879.7      869.5       1       873.0       1      871.3       1 
Total liabilities            827.8      820.0       1       824.1       -      821.9       1 
 
Ordinary shareholders' 
 equity                       45.8       43.4       6        42.8       7       43.3       6 
Other equity 
 instruments                   5.9        5.9       -         5.9       -        5.9       - 
Non-controlling 
 interests                     0.2        0.2       -         0.2       -        0.2       - 
                        ----------  ---------          ----------          --------- 
Total equity                  51.9       49.5       5        48.9       6       49.4       5 
                        ----------  ---------          ----------          --------- 
 
Ordinary shares 
 in issue, excluding 
 own shares                70,956m    70,936m       -     70,735m       -    70,812m       - 
 

(1) Primarily 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.

GROUP RESULTS - STATUTORY BASIS

The results below are prepared in accordance with International Financial Reporting Standards (IFRSs). The underlying results are shown on page 2. A reconciliation between the statutory and underlying results is shown on page 28.

Income statement

 
                                 Half-year 
                                     to 30    Half-year           Half-year 
                                      June   to 30 June           to 31 Dec 
                                      2021         2020  Change        2020    Change 
                                      GBPm         GBPm       %        GBPm         % 
 
Net interest income                  4,373        6,556    (33)       4,193       4 
Other income                        15,195          316              18,102    (16) 
                                 ---------  -----------          ---------- 
Total income                        19,568        6,872              22,295    (12) 
Insurance claims                  (11,489)        1,023            (15,064)    (24) 
                                 ---------  -----------          ---------- 
Total income, net of insurance 
 claims                              8,079        7,895       2       7,231      12 
Operating expenses                 (4,897)      (4,668)     (5)     (5,077)       4 
Impairment                             723      (3,829)               (326) 
                                 ---------  -----------          ---------- 
Profit (loss) before tax             3,905        (602)               1,828 
Tax (expense) credit                  (40)          621               (460)      91 
                                 ---------  -----------          ---------- 
Profit for the period                3,865           19               1,368 
                                 ---------  -----------          ---------- 
 

The Group's statutory income statement includes income and expense attributable to the policyholders of the Group's long-term assurance funds. These items materially offset in arriving at profit attributable to equity shareholders but can, depending on market movements, lead to significant variances on a statutory basis between total income and insurance claims from one period to the next. In the six months to 30 June 2021, due to strong market conditions, the Group recognised significant gains on policyholder investments within total income which were materially offset by an increase within insurance claims expense, representing the growth in the corresponding insurance and investment contract liabilities.

GROUP RESULTS - STATUTORY BASIS (continued)

Balance sheet

 
                                     At 30 June  At 30 June          At 31 Dec 
                                           2021        2020  Change       2020    Change 
                                           GBPm        GBPm       %       GBPm         % 
 
Assets 
Cash and balances at central 
 banks                                   78,966      78,139       1     73,257       8 
Financial assets at fair 
 value through profit or 
 loss                                   177,589     157,113      13    171,626       3 
Derivative financial instruments         22,193      32,978    (33)     29,613    (25) 
Financial assets at amortised 
 cost                                   516,175     518,314       -    514,994       - 
Financial assets at fair 
 value through other comprehensive 
 income                                  26,213      27,211     (4)     27,603     (5) 
Other assets                             58,551      59,239     (1)     54,176       8 
                                     ----------  ----------          --------- 
Total assets                            879,687     872,994       1    871,269       1 
                                     ----------  ----------          --------- 
 
Liabilities 
Deposits from banks                      20,655      34,124    (39)     31,465    (34) 
Customer deposits                       482,349     453,446       6    460,068       5 
Financial liabilities at 
 fair value through profit 
 or loss                                 21,054      21,474     (2)     22,646     (7) 
Derivative financial instruments         17,951      28,631    (37)     27,313    (34) 
Debt securities in issue                 81,268      99,931    (19)     87,397     (7) 
Liabilities arising from 
 insurance and investment 
 contracts                              162,399     143,052      14    154,512       5 
Subordinated liabilities                 13,527      17,717    (24)     14,261     (5) 
Other liabilities                        28,598      25,757      11     24,194      18 
                                     ----------  ----------          --------- 
Total liabilities                       827,801     824,132       -    821,856       1 
Total equity                             51,886      48,862       6     49,413       5 
                                     ----------  ----------          --------- 
Total equity and liabilities            879,687     872,994       1    871,269       1 
                                     ----------  ----------          --------- 
 

The Group's balance sheet includes assets and liabilities associated with the policyholders of the Group's long-term assurance funds. These items have no material impact in total upon the net assets attributable to equity shareholders but can, depending on market movements, lead to significant variances on a statutory basis, predominantly between financial assets at fair value through profit or loss and liabilities arising from insurance and investment contracts from one period to the next. In the six months to 30 June 2021, due to strong market conditions, significant growth was seen in policyholder investments, primarily within financial assets at fair value through profit or loss. This was materially offset by an increase in the corresponding insurance and investment contract liabilities.

INTERIM GROUP CHIEF EXECUTIVE'S STATEMENT

Since the start of the pandemic the Group has continued to Help Britain Recover, supporting Retail and Commercial customers and communities across the UK. In this context, over the last six months the Group has delivered a solid financial performance, with continued business momentum and balance sheet growth. It has been an honour to be Interim Group Chief Executive since May and I am proud of the positive impact that we have been able to make. The dedication of colleagues and their support of customers and businesses in these unique and challenging times is impressive.

Today, the coronavirus pandemic continues to have a significant impact on the people, businesses and communities in the UK and Government support measures remain important. While we are clearly seeing positive developments and the macroeconomic outlook is improving, supported by the successful vaccine roll out in the UK and emergence from lockdown restrictions, the outlook remains uncertain.

As we look forward into the remainder of 2021, I am confident that the Group's people, financial strength and business model will continue to Help Britain Recover. I look forward to working with Charlie Nunn when he starts in August as our new Group Chief Executive. I am confident he will find a truly customer focused business in a strong financial and strategic position. We remain committed to supporting our customers, colleagues and communities and ensuring a sustainable recovery.

Financial performance

In the context of continued business momentum and balance sheet growth the Group has delivered a solid financial performance with statutory profit before tax of GBP3.9 billion in the first half of 2021, significantly higher than the first half of 2020 and benefiting from a net impairment credit in the period. Net income of GBP7.6 billion was up 2 per cent, benefiting from increased average interest-earning assets and a strengthened net interest margin in the second quarter of 2021, as well as some early signs of recovery in other income and a reduction in operating lease depreciation. The Group continues to maintain its focus on cost management, with a market-leading cost:income ratio of 54.9 per cent. Operating costs increased slightly over the period due to the rebuilding of variable pay in the context of stronger than expected financial performance in income and impairments. Remediation charges also increased in the period as we took charges relating to a number of ongoing legacy issues. Increased profits were supported by the net impairment credit of GBP656 million, as a result of a release of expected credit loss (ECL) allowances of GBP837 million driven by the improved macroeconomic outlook for the UK, combined with robust credit performance.

The balance sheet continues to grow with loans and advances to customers at GBP447.7 billion, up 2 per cent in the first half of 2021, driven by strong growth in mortgage lending. Customer deposits continued to increase, with growth of GBP23.7 billion since the end of 2020, including significant growth in Retail current accounts and relationship savings balances. Deposit balances are now up c.GBP63 billion over the last eighteen months.

The Group's capital position remains strong with a CET1 ratio of 16.7 per cent after dividend accrual. Given the strength of the capital position and the regulator's clarification that banks may resume capital distributions, the Board has announced an interim ordinary dividend of 0.67 pence per share, in line with the Board's commitment to future capital returns, and has reintroduced a progressive and sustainable ordinary dividend policy.

Strategic progress

We launched Strategic Review 2021 in February this year, with a focus on Helping Britain Recover and further enhancing our core capabilities, specifically technology, payments, data and our people. Strategic Review 2021 supports the creation of sustainable shareholder value through revenue generation and diversification, further efficiency gains and disciplined growth as we accelerate our transformation and build the UK's preferred financial partner for personal customers and the best bank for business. In the first half of 2021, we invested GBP0.4 billion to support these strategic initiatives.

INTERIM GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

We are committed to helping our customers, clients, colleagues and communities through the coronavirus pandemic and rebuilding livelihoods, whilst delivering long-term sustainable returns for shareholders. We recognise that the focus of the Group's purpose, Helping Britain Prosper, must evolve in response to the current environment with changing societal and customer needs and expectations. We are therefore committed to Helping Britain Recover and supporting a sustainable recovery which benefits all of our stakeholders.

During the first half of 2021 we have made meaningful progress across all five of our Helping Britain Recover priority areas that are embedded in our business ambitions and where we can make the most difference. For example:

-- We have helped rebuild households' financial health and wellbeing through directing customers to free independent debt advice for more than 130,000 accounts

-- We have supported businesses to recover, adapt and grow through supporting over 48,000 businesses to start up and helping 75,000 small businesses boost their digital capability

-- We have expanded the availability of affordable and quality homes with new lending of c.GBP9.0 billion to nearly 43,000 first-time buyers, almost reaching our full year 2021 target of GBP10 billion, as well as delivering GBP2.1 billion of new funding support to the social housing sector, exceeding our full year target

-- We are accelerating the transition to a low carbon economy, expanding the funding available under our discounted green finance initiatives from GBP3 billion to GBP5 billion in the first half of 2021, with more than GBP8.6 billion of total green finance delivered since 2016. In addition, we have renewed our strategic relationship with Jaguar Land Rover, and have extended our contract with Tesla, supporting the delivery of the Group's goal of helping to reduce the emissions we finance by more than 50 per cent by 2030 on path to net zero by 2050, or sooner. Furthermore, our progress on reducing our own operational emissions has recently been recognised in being ranked sixth in the Financial Times' inaugural listing of Europe's Climate Leaders

-- We are continuing to contribute to an inclusive society and build an inclusive organisation. In June 2021 we collaborated with City Mental Health Alliance to publish a research report on 'Mental Health And Race at Work' and have launched a pilot to improve free access to cash in underserved areas

Building the UK's preferred financial partner for personal customers and best bank for business

We are building on our position as the UK's largest personal customer franchise with our multi-brand, multi-channel model, leveraging our unique capabilities to meet more of our customers' needs. During the first half of 2021, we increased our net open mortgage book by GBP12.6 billion. We are exceeding our target to maintain record all channel net promoter score with a 3 point increase in the first half of 2021. We have seen positive annual net new money in Insurance and Wealth, with cumulative net flows for open book assets under administration of GBP4 billion in the first half of 2021.

We have today announced that we intend to acquire the Embark Group (Embark), a fast growing investment and retirement platform business. Embark enhances our capabilities to address the attractive mass market and self-directed Wealth segment, completing the Group's Wealth proposition. Embark will also enable us to re-platform the Group's pensions and retirement proposition, delivering a market-leading platform for intermediaries and significantly strengthening the Group's offering in Retirement, an important growth market.

As announced within Strategic Review 2021, the Group aims to meet more of its customers' broader financial needs, whilst retaining more of the c.GBP10 billion assets under administration which customers invest with third parties each year. The acquisition of Embark will deliver a modern, industry-leading mass market, direct-to-consumer proposition, complementing the Group's existing advice offerings through Schroders Personal Wealth and Cazenove Capital. The acquisition will see the Group acquire c.GBP35 billion of assets under administration on behalf of c.410,000 consumer clients.

We are targeting a top-three position in direct-to-consumer self-directed and robo-advice business in the medium term. We are also targeting a top-three position in the individual pensions and retirement drawdown market by 2025. The acquisition of Embark transforms our ability to achieve these objectives. As a consequence, we are increasing our Strategic Review 2021 net new money target from GBP25 billion to c.GBP40 billion by 2023, to reflect this increased growth potential.

INTERIM GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

Through a combination of the Group's new capabilities and its multi-brand, multi-channel distribution model across more than 25 million customers, the Group expects this acquisition to deliver attractive growth and returns over time and create value for shareholders. A consideration of c.GBP390 million will be paid for the entire share capital of Embark upon completion. The transaction is expected to have a c.30 basis points impact on Group CET1 capital and deliver a mid-teens return on invested capital in the medium term, both including all integration and restructuring costs.

We have progressed towards our vision to be the best bank for business, building on our outstanding reach, supported by our brand and scale, our historic above-market growth in SME and a strong presence among large corporate clients. During the first half of 2021, we increased our SME and Retail Business Banking digital net promoter score by 3 points, targeting a 5 point increase by the end of 2023. We have also improved our share of FX products for core clients in 2021 and have improved our GBP rates ranking by four places to sixth.

Enhanced capabilities

We are progressively modernising our technology architecture in order to deliver better customer propositions and to structurally improve our operational efficiency and agility. We have further strengthened our digital offering for customers, including increasing the volume of mobile releases and improving customer satisfaction, with our record mobile app net promoter score increasing by 4 points in the first half of 2021, surpassing our target. Additionally, in line with the technology R&D investment we highlighted at the full year, we safely migrated around 120,000 customer accounts to our pilot new bank architecture in the first half. Although fewer than the c.400,000 originally planned, it was sufficient to provide a significant proof-point for our investment, allowing work to progress.

We have further invested in our payments proposition with a leading market share of card spend, in line with target. In addition, we have achieved a twofold increase in the number of corporate clients onboarded to the new cash management and payments platform with its improved capability to meet client needs. We remain on track for a threefold increase by the end of the year.

We have further invested in data capabilities to deliver more effective outcomes for our customers and our colleagues. During the first half of 2021, we have extended machine learning capabilities to drive faster mortgage approvals for 20,000 franchise customers using automated income verification analysis. In addition, we migrated 45 million customer records to private cloud hosting to prove our data migration capabilities. This reflects another important proof-point.

The pandemic has accelerated many of the trends previously evident in the workplace. These require a reduced office footprint, but also enhanced workspaces to foster collaboration and creativity. It is very important that we respond to this opportunity to best serve our colleagues and to enhance efficiency. During the first half of 2021, we have reduced office space by c.3 per cent, on track to meet our target of an 8 per cent reduction in 2021. We have also created three distinct workstyles, known as 'home', 'hub' and 'hybrid', as part of our planning for future ways of working. We expect around 80 per cent of colleagues to work in a hybrid manner under this model.

Much work remains to be done on Strategic Review 2021, but the first half represents a strong start on our programme.

Outlook

-- Given our solid financial performance and the improved UK macroeconomic outlook, the Group is enhancing its guidance for 2021. Based on the Group's current macroeconomic assumptions:

   -      Net interest margin now expected to be around 250 basis points 
   -      Operating costs now expected to be c.GBP7.6 billion 
   -      Net asset quality ratio now expected to be below 10 basis points 

- Return on tangible equity now expected to be c.10 per cent, excluding the c.2.5 percentage point benefit from tax rate changes

   -      Risk-weighted assets in 2021 now expected to be below GBP200 billion 

Although the macroeconomic outlook remains uncertain, the Group's people, financial strength and business model will ensure that we can continue to support our customers and Help Britain Recover. This is fully aligned with the Group's long term strategic objectives, the position of the franchise and the interests of our shareholders.

SUMMARY OF GROUP RESULTS

Solid financial performance with continued business momentum, bolstered by macroeconomic outlook

Statutory results

The Group's statutory profit before tax for the half-year to 30 June 2021 was GBP3,905 million, whilst statutory profit after tax was GBP3,865 million, both benefiting from solid business momentum and a net impairment credit driven by the UK's improved macroeconomic outlook, combined with robust credit performance. The Group's statutory profit after tax included a benefit of GBP970 million from the revaluation of deferred tax assets given the revised corporation tax rate effective from 1 April 2023, substantively enacted in the second quarter.

On a statutory basis, net income was up 2 per cent on the first half of 2020 reflecting lower net interest income given the reduced margins combined with lower levels of customer activity, more than offset by the positive impact of market volatility. Statutory operating expenses were up GBP229 million, impacted by a higher remediation charge in the period and increased restructuring costs. Statutory impairment for the period was a net credit as a result of a release of expected credit loss (ECL) allowances driven by the improved macroeconomic outlook for the UK, combined with robust credit performance.

Underlying results

The Group's underlying profit was GBP4,065 million for the period, compared to an underlying loss of GBP281 million in the first six months of 2020, reflecting both solid financial performance and the improved macroeconomic outlook.

Underlying profit before impairment for the period of GBP3,409 million continues to recover and although down 4 per cent on the first six months of 2020 is up 17 per cent on the second six months of 2020. Net income was 2 per cent higher than in the first half of 2020 at GBP7,564 million and 8 per cent higher when compared to the second half of 2020. The Group continues to maintain its focus on cost management, with a market-leading cost:income ratio, although operating costs increased slightly on prior year due to the rebuilding of variable pay, given stronger than expected financial performance in income and impairments. Total costs, including remediation, were up 7 per cent on the prior year, given the slight increase in operating costs and a higher remediation charge in the period, materially driven by a regulatory fine relating to the communication of historical insurance renewals, further costs in relation to HBOS Reading and other litigation relating to ongoing legacy programmes.

The Group's balance sheet remains strong. Loans and advances to customers were 2 per cent higher at GBP448 billion, driven by strong growth in mortgage lending. Customer deposits increased 5 per cent to GBP474 billion with significant growth in Retail current accounts and relationship savings balances, continuing the trend seen since 2019. The Group's CET1 ratio was 16.7 per cent after dividend accrual, significantly ahead of both the ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent and the regulatory requirement of c.11 per cent.

Net income

 
                                                                Half-year 
                                Half-year   Half-year               to 31 
                                    to 30       to 30                 Dec 
                                June 2021   June 2020  Change        2020    Change 
                                     GBPm        GBPm       %        GBPm         % 
 
Net interest income                 5,418       5,478     (1)       5,295       2 
Other income                        2,417       2,461     (2)       2,054      18 
Operating lease depreciation        (271)       (526)      48       (358)      24 
                               ----------  ----------          ---------- 
Net income                          7,564       7,413       2       6,991       8 
                               ----------  ----------          ---------- 
 
Banking net interest margin         2.50%       2.59%   (9)bp       2.44%       6bp 
Average interest-earning 
 banking assets                GBP440.8bn  GBP433.2bn       2  GBP436.6bn       1 
 
   SUMMARY OF GROUP RESULTS   (continued) 

Net income of GBP7,564 million was up 2 per cent on the first half of 2020, with slightly lower net interest income and other income more than offset by a reduction in operating lease depreciation. Compared to the second half of 2020, net income was up 8 per cent, driven by significant improvements in other income as well as an increase in net interest income and lower operating lease depreciation.

Net interest income of GBP5,418 million was down 1 per cent versus the first half of 2020, impacted by a reduction in the banking net interest margin which more than offset the effects of higher average interest-earning banking assets. The banking net interest margin reduced by 9 basis points to 2.50 per cent, reflecting the lower rate environment and change in asset mix, including lower unsecured balances. The banking net interest margin in the second quarter of 2021 improved to 2.51 per cent versus the first quarter, benefiting from improving structural hedge earnings and asset and liability mix in Commercial Banking. Average interest-earning banking assets were up 2 per cent compared to the first half of 2020, driven by strong growth in the open mortgage book and the impact of Government supported loan schemes. These were partially offset by the effects of the continued optimisation of the Corporate and Institutional book within Commercial Banking and lower unsecured and motor balances.

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 2021 the Group's structural hedge had an approved capacity of GBP225 billion, a prudent increase from GBP210 billion at year end 2020, capturing part of the liability growth since year end 2019, given the success in attracting deposit balances. The nominal balance of the structural hedge was GBP215 billion as at 30 June 2021 (31 December 2020: GBP186 billion) with a weighted-average duration of around three-and-a-half years (31 December 2020: around two-and-a-half years). The Group generated GBP1.1 billion of total gross income from the structural hedge balances in the first half of 2021 (half-year to 30 June 2020: GBP1.3 billion), impacted by market rates.

Taking all of these factors into account, the Group now expects the net interest margin for full year 2021 to be around 250 basis points, with low single-digit percentage growth in average interest-earning assets in 2021.

Other income of GBP2,417 million was 2 per cent lower than the first half of 2020, reflecting lower levels of insurance new business income, a lower Lex fleet size and significantly lower levels of gilt and other liquid asset sales (half-year to 30 June 2021: GBP23 million, half-year to 30 June 2020: GBP135 million). This was in part mitigated by strong performance in the Group's equity investment businesses, including Lloyds Development Capital, of GBP280 million (half-year to 30 June 2020: GBP9 million loss). The Group's other income was up 18 per cent on the second half of 2020, significantly due to the absence of the negative insurance assumption changes and experience variance seen in the second half of 2020.

In the second quarter of 2021, other income of GBP1,282 million was up GBP147 million against the previous three months, including a strong contribution from the Group's equity investment businesses and positive assumption changes in Insurance. The Group is also seeing some early signs of increasing customer activity and new business, particularly in Retail and workplace pensions within Insurance and Wealth.

Operating lease depreciation reduced to GBP271 million (half-year to 30 June 2020: GBP526 million) driven by strength in used vehicle prices during the first half of 2021, as well as the continued impact of a smaller Lex fleet size.

   SUMMARY OF GROUP RESULTS   (continued) 

Total costs

 
                                                    Half-year 
                     Half-year   Half-year              to 31 
                         to 30       to 30                Dec 
                     June 2021   June 2020  Change       2020     Change 
                          GBPm        GBPm       %       GBPm          % 
 
Operating costs          3,730       3,699     (1)      3,886        4 
Remediation                425         177                202 
                    ----------  ----------          --------- 
Total costs              4,155       3,876     (7)      4,088      (2) 
                    ----------  ----------          --------- 
 
Cost:income ratio        54.9%       52.3%   2.6pp      58.5%    (3.6)pp 
 

Total costs of GBP4,155 million were 7 per cent higher than in the first half of 2020, due to slightly higher operating costs and a higher remediation charge in the period. The Group continues to maintain its focus on cost management, with a market-leading cost:income ratio of 54.9 per cent. In the context of stronger than expected financial performance in income and impairments, the Group is accelerating the rebuild of variable pay in 2021, which has resulted in the slight increase in operating costs in the period.

Total investment spend in the first half of 2021 amounted to GBP0.9 billion, prioritising technology and digital projects whilst building on the customer ambitions and enhanced capabilities outlined in Strategic Review 2021, including GBP0.4 billion strategic investment spend. During the first half of 2021 the Group capitalised c.GBP0.6 billion of investment spend, of which c.GBP0.4 billion related to intangible assets. Total capitalised spend amounted to 64 per cent of investment.

The Group now expects operating costs for 2021 to be broadly in line with 2020 at c.GBP7.6 billion, as a result of the accelerated rebuild of variable pay in the context of stronger than expected financial performance.

Remediation charges increased to GBP425 million, materially driven by the GBP91 million regulatory fine relating to the communication of historic home insurance renewals, HBOS Reading charges as previously flagged, as well as litigation costs and charges in relation to other ongoing legacy programmes. With respect to HBOS Reading, GBP150 million was incurred in the first half of 2021, including operational costs to provide for the likelihood of activities spanning across 2022 as well as the outcome to date of decisions from the independent panel re-review on direct and consequential losses. Further significant charges over 2021 and 2022 could be required as more panel decisions are published, but at this stage it is not possible to reliably estimate the potential impact or timings.

   SUMMARY OF GROUP RESULTS   (continued) 

Impairment

Asset quality remains strong, with low levels of new to arrears. Impairment in the first half of the year was a net credit of GBP656 million, compared to a net charge of GBP3,818 million in the first half of 2020. The net credit in the period resulted from an GBP837 million release of expected credit loss (ECL) allowances driven by improvements to the macroeconomic outlook for the UK, of which GBP378 million was recognised in the second quarter of 2021. This was partially offset by a low run-rate impairment charge of GBP252 million, reflecting strong asset quality in a continued benign credit environment and some releases against Commercial Banking exposures.

The Group's ECL allowance reduced in the first half of the year by GBP1.3 billion to GBP5.6 billion (31 December 2020: GBP6.9 billion, 31 December 2019: GBP4.2 billion), of which GBP837 million resulted from improvements to the macroeconomic outlook, including stronger GDP performance, improved unemployment outlook partly given the impact of the extension of the Government's Coronavirus Job Retention Scheme announced in the first quarter of 2021 and strength in house prices. Observed credit performance remained robust in the period, with the flow of assets into arrears, defaults and write-offs remaining at low levels. Reductions in Commercial Banking ECL allowances also reflect improved outcomes on restructuring cases, reduction in Stage 2 exposures and lower flows to default.

The ECL allowance remains high by historical standards, GBP1.4 billion above 31 December 2019 and assumes that a large proportion of these additional expected losses will crystallise over the next 12 months. This is expected to take place as support measures subside and unemployment increases, with the Group's base case predicting a peak of 6.6 per cent in the fourth quarter of 2021. The ECL allowance continues to reflect a probability-weighted view of future economic scenarios with a 30 per cent weighting of base case, upside and downside and a 10 per cent weighting of the severe downside. The improvement in unemployment and asset price outlook we have seen in 2021 within the base case is further reflected in all scenarios which have improved significantly since the year end.

The Group has retained the judgemental overlays applied at year end and has continued to offset modelled releases not deemed reflective of underlying risk. Management judgements in respect of coronavirus of c.GBP1.2 billion (31 December 2020: c.GBP0.9 billion) include a central GBP400 million overlay, as well as c.GBP800 million of judgements within the underlying portfolios (31 December 2020: c.GBP500 million). The central overlay was added at year end in recognition of the significant uncertainty with regard to the efficacy of coronavirus vaccines, the vaccination rollout, potential virus mutations and economic performance post lockdown restrictions and Government support. Although the base case outlook has improved throughout the first half, the Group considers these risks remain and that the conditioning assumptions for the improved base case and associated scenarios do not capture these unprecedented risks.

Overall the Group's loan portfolio continues to be well positioned, reflecting a prudent, through-the-cycle approach to credit risk and high levels of security. The Retail portfolio is heavily weighted towards high quality mortgage lending where low loan-to-value ratios provide security against potential risks. The prime consumer finance portfolio also benefits from previous high quality growth and the Group's prudent risk appetite. The Commercial portfolio reflects a diverse client base with limited exposure to sectors most affected by the coronavirus pandemic. Within Commercial Banking, management of concentration risk includes single name and country limits as well as controls over the overall exposure to certain higher risk sectors and asset classes.

Whilst covered by Government guarantees and with significant adoption of the Government's Pay As You Grow scheme, early trends in Bounce Back Loan Scheme (BBLS) repayments indicate fewer than 10 per cent of customers due to commence repayment across the Group have entered arrears.

Given the experience of the first half of the year and the Group's current macroeconomic assumptions, the full year impairment charge is expected to be materially lower than the guidance set out in the first quarter, with the net asset quality ratio for 2021 now expected to be below 10 basis points.

   SUMMARY OF GROUP RESULTS   (continued) 
 
                                      Half-year   Half-year           Half-year 
                                          to 30       to 30               to 31 
                                      June 2021   June 2020   Change   Dec 2020    Change 
                                           GBPm        GBPm        %       GBPm         % 
 
Charges pre-updated multiple 
 economic scenarios(1) 
                                     ----------  ----------           --------- 
  Retail                                    527         578        9        781      33 
  Commercial Banking                      (272)         206                  46 
  Other                                     (3)           4                 (5)      40 
                                     ----------  ----------           --------- 
                                            252         788       68        822      69 
Coronavirus impacted restructuring 
 cases(2)                                  (71)         432                (29) 
Updated economic outlook: 
                                     ----------  ----------           --------- 
  Retail                                  (544)       1,517               (492)    (11) 
  Commercial Banking                      (293)         881                (72) 
  Other                                       -         200                 200 
                                     ----------  ----------           --------- 
                                          (837)       2,598               (364) 
                                     ----------  ----------           --------- 
Impairment (credit) charge                (656)       3,818                 429 
                                     ----------  ----------           --------- 
 
Asset quality ratio                     (0.30)%       1.73%  (203)bp      0.19%    (49bp) 
 

(1) Charges based on the economic outlook as at 31 December 2019, prior to the impact of the coronavirus pandemic on forward looking expected losses.

(2) Additional (credits)/charges on cases subject to restructuring at the end of 2019, where the coronavirus pandemic is considered to have had a direct effect upon the recovery strategy.

 
                                                        At 30         At 31 
                                                 June 2021(1)   Dec 2020(1) 
                                                         GBPm          GBPm     Change 
                                                                                     % 
 
Stage 2 gross loans and advances to customers          54,129        60,514     (11) 
Stage 2 loans and advances to customers 
 as % of total                                          10.7%         12.0%    (1.3)pp 
Stage 2 ECL allowances(2)                               2,081         2,727     (24) 
Stage 2 ECL allowances(2) as % of Stage 
 2 drawn balances                                        3.8%          4.5%    (0.7)pp 
 
Stage 3 gross loans and advances to customers           8,616         9,089      (5) 
Stage 3 loans and advances to customers 
 as a % of total                                         1.7%          1.8%    (0.1)pp 
Stage 3 ECL allowances(2)                               2,108         2,508     (16) 
Stage 3 ECL allowances(2) as % of Stage 
 3 drawn balances(3)                                    25.6%         28.6%    (3.0)pp 
 
Total loans and advances to customers(4)              505,496       505,129        - 
Total ECL allowance on loans and advances 
 to customers(2)                                        5,555         6,832     (19) 
Total ECL allowances on loans and advances 
 to customers(2) as % of drawn balances(3)               1.1%          1.4%    (0.3)pp 
 

(1) Underlying basis. Refer to basis of presentation.

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

(3) Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail and Commercial Banking of GBP380 million (31 December 2020: GBP317 million). Comparatives restated to reflect exclusion of Commercial Banking recoveries.

(4) Includes reverse repos of GBP52.7 billion (31 December 2020: GBP58.6 billion).

   SUMMARY OF GROUP RESULTS   (continued) 

Statutory profit

 
                                                                         Half-year 
                                          Half-year   Half-year              to 31 
                                              to 30       to 30                Dec 
                                          June 2021   June 2020  Change       2020    Change 
                                               GBPm        GBPm       %       GBPm         % 
 
Statutory profit (loss) before 
 tax                                          3,905       (602)              1,828 
 
Adjustments: 
Restructuring 
                                         ----------  ----------          --------- 
  Severance costs                              (69)        (28)              (128)      46 
  Property transformation                      (42)        (37)    (14)      (109)      61 
  Technology research and development          (81)        (19)               (42)    (93) 
  Regulatory programmes                        (32)        (19)    (68)       (23)    (39) 
  Mergers and acquisitions, 
   integration and other restructuring 
   costs                                       (31)        (30)     (3)       (86)      64 
                                         ----------  ----------          --------- 
                                              (255)       (133)    (92)      (388)      34 
Volatility and other items 
                                         ----------  ----------          --------- 
  Market volatility and asset 
   sales                                        239        (43)               (16) 
  Amortisation of purchased 
   intangibles                                 (35)        (34)     (3)       (35) 
  Fair value unwind                           (109)       (111)       2      (122)      11 
                                         ----------  ----------          --------- 
                                                 95       (188)              (173) 
Payment protection insurance 
 provision                                        -           -               (85) 
                                         ----------  ----------          --------- 
Total adjustments                             (160)       (321)      50      (646)      75 
                                         ----------  ----------          --------- 
 
Underlying profit (loss)                      4,065       (281)              2,474      64 
 
Earnings (loss) per share                      5.1p      (0.3)p               1.5p 
Return on tangible equity(1,)                 19.2%      (1.3)%  20.5pp       5.9%    13.3pp 
 

(1) Calculation shown on page 31.

Further information on the reconciliation of underlying to statutory results is included on page 28.

Restructuring costs of GBP255 million, up from GBP133 million in the first half of 2020, reflected an increase in technology research and development spend as the Group invests in investigating and proving new technologies, as well as higher severance costs. A further increase in restructuring costs beyond the level of the first half is expected in the second half of 2021.

Volatility and other items, comprising market volatility and asset sales of GBP239 million, largely offset by the amortisation of purchased intangibles and the unwind of acquisition fair value adjustments, resulted in a net gain of GBP95 million compared to a net loss of GBP188 million in the first half of 2020. Within market volatility and asset sales, insurance volatility was favourable compared to prior year, driven largely by rising equity markets compared to the significant downturn in the first half of 2020, along with the narrowing spreads experienced this year. This was alongside reduced levels of positive banking volatility as a result of exchange rate movements.

   SUMMARY OF GROUP RESULTS   (continued) 

Tax

The Group recognised a tax expense of GBP40 million in the period compared to a net credit of GBP621 million in the first six months of 2020. In March 2021, the UK Government announced its intention to increase the rate of corporation tax from 19 per cent to 25 per cent with effect from 1 April 2023 and this was substantively enacted on 24 May 2021. As a result of this change in tax rate, the Group has recognised a GBP970 million deferred tax credit in the income statement and a GBP184 million debit within other comprehensive income, increasing the Group's net deferred tax asset by GBP786 million. The prior year tax credit included an uplift in deferred tax assets following the announcement by the UK Government that it would maintain the corporation tax rate at 19 per cent.

Return on tangible equity

The return on tangible equity for the first half of the year was 19.2 per cent, which included the annualised c.5 percentage point benefit from the corporation tax rate change. Based on the Group's current macroeconomic assumptions, return on tangible equity for the full year is now expected to be c.10 per cent, excluding the equivalent c.2.5 percentage point benefit from tax rate changes over the year.

Balance sheet

 
                                                                        At 31 
                                          At 30       At 30  Change       Dec    Change 
                                      June 2021   June 2020       %      2020         % 
 
Loans and advances to customers(1)     GBP448bn    GBP440bn       2  GBP440bn       2 
Customer deposits(2)                   GBP474bn    GBP441bn       8  GBP451bn       5 
Loan to deposit ratio                       94%        100%   (6)pp       98%     (4)pp 
 
Wholesale funding                      GBP103bn    GBP125bn    (17)  GBP109bn     (6) 
Wholesale funding <1 year 
 maturity                               GBP34bn     GBP40bn    (16)   GBP34bn     (2) 
Of which money-market funding 
 <1 year maturity(3)                    GBP21bn     GBP26bn    (17)   GBP22bn       - 
Liquidity coverage ratio - 
 eligible assets(4)                    GBP139bn    GBP138bn       1  GBP142bn     (2) 
Liquidity coverage ratio(5)                131%        140%   (9)pp      136%     (5)pp 
 

(1) Excludes reverse repos of GBP52.7 billion (30 June 2020: GBP61.1 billion; 31 December 2020: GBP58.6 billion).

(2) Excludes repos of GBP7.9 billion (30 June 2020: GBP12.3 billion; 31 December 2020 GBP9.4 billion).

(3) Excludes balances relating to margins of GBP4.0 billion (30 June 2020: GBP6.9 billion; 31 December 2020: GBP5.3 billion).

(4) Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts.

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

The Group's balance sheet reflects healthy franchise growth. Loans and advances to customers were 2 per cent higher at GBP448 billion compared to GBP440 billion at 31 December 2020. Within Retail, strong growth in the open mortgage book of GBP12.6 billion was only partially offset by the continued run off of the closed mortgage book and lower cards balances. Commercial Banking experienced reductions as a result of continued optimisation activity within the Corporate and Institutional book and a market where corporate liquidity levels are high and demand for new lending restrained. Customer deposits have increased by GBP23.7 billion since the end of 2020, with continued inflows into the Group's trusted brands and significant growth of GBP47.2 billion seen in Retail current accounts and relationship savings balances since 2019. Within Commercial Banking, deposits were up GBP3.6 billion, largely driven by the inflow of short-term balances, in June 2021.

The Group's loan to deposit ratio of 94 per cent continues to provide a strong liquidity position and significant potential to lend into recovery. The Group's funding and liquidity position is further discussed on page 54.

   SUMMARY OF GROUP RESULTS   (continued) 

Capital

 
                                          At 30               Change     At 31     Change 
                                      June 2021       At 30        %       Dec          % 
                                                  June 2020               2020 
 
CET1 ratio                                16.7%       14.6%    2.1pp     16.2%      0.5pp 
CET1 ratio pre IFRS 9 transitional 
 relief and software(1)                   15.5%       13.4%    2.1pp     14.5%      1.0pp 
Transitional total capital 
 ratio                                    23.1%       22.3%    0.8pp     23.3%    (0.2)pp 
Transitional MREL ratio                   36.3%       36.8%  (0.5)pp     36.4%    (0.1)pp 
UK leverage ratio                          5.8%        5.4%    0.4pp      5.8%          - 
Risk-weighted assets                   GBP201bn    GBP207bn      (3)  GBP203bn        (1) 
 
Ordinary shareholders' equity           GBP46bn     GBP43bn        7   GBP43bn        6 
Tangible net assets per share             55.6p       51.6p     4.0p     52.3p       3.3p 
 
 

(1) CET1 ratio 'pre IFRS 9 transitional relief and software' reflects the full impact of IFRS 9, prior to the application of the transitional relief arrangements, and the reversal of the beneficial treatment currently applied to intangible software assets.

 
Capital movements                                              bps 
 
Banking build (pre impairment credit)                          115 
Impairment credit net of IFRS 9 transitional relief release    (6) 
Underlying risk-weighted assets                                 16 
Pension contributions and other movements                     (32) 
                                                              ---- 
Capital build                                                   93 
Revised software rules(1)                                      (6) 
Ordinary dividend accrual                                     (37) 
                                                              ---- 
Net movement in CET1 ratio                                      50 
                                                              ---- 
 

(1) Reduction in benefit driven by prudential amortisation.

The Group's CET1 capital ratio increased from 16.2 per cent at 31 December 2020 to 16.7 per cent post dividend accrual. The strong capital build of 93 basis points during the first six months of the year largely reflected banking build (pre impairment credit), with a limited offset from the net impact of the impairment credit and partial release of IFRS 9 transitional relief which included 5 basis points relating to the phased reduction in static relief. Further increases in capital build from a reduction in underlying risk-weighted assets and other movements were more than offset by pension contributions of 35 basis points made during the period which reflected the full 2021 fixed contributions for the Group's three main defined benefit pension schemes. The accrual for foreseeable ordinary dividends includes the impact of the interim ordinary dividend.

The PRA have confirmed their intention to remove the beneficial treatment currently applied to intangible software assets and reinstate the original requirement to deduct these assets in full. This change will be implemented on 1 January 2022 and is expected to reduce the Group's reported CET 1 ratio by c.50 basis points at that time.

The Group continues to apply the revised IFRS 9 transitional arrangements for capital, with the total relief recognised at 30 June 2021 amounting to 78 basis points.

Excluding the IFRS 9 transitional relief and removing the current beneficial treatment applied to intangible software assets would reduce the Group's CET1 capital ratio from 16.7 per cent to 15.5 per cent, on the basis of the position at 30 June 2021.

   SUMMARY OF GROUP RESULTS   (continued) 

The Board's view of the ongoing level of CET1 capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties is around 12.5 per cent, plus a management buffer of around 1 per cent.

Risk-weighted assets at GBP201 billion reduced by GBP1.8 billion in the first six months of the year, primarily driven by continued optimisation activity undertaken in Commercial Banking, partially offset by a temporary increase in market risk and limited impacts from credit deterioration, the latter in part due to the mitigating impact of house price increases. Given the improved macroeconomic outlook, ris k-weighted assets in 2021 are now expected to be below GBP200 billion by the end of the year. On 1 January 2022, regulatory headwinds from the implementation of new CRD IV models (predominantly relating to mortgages) and changes to counterparty credit risk rules (SA-CCR) are expected to increase risk-weighted assets by GBP15-GBP20 billion. Significant uncertainty remains around the outcome of the implementation and the macroeconomic environment at the time, both of which may impact this assessment.

Tangible net assets per share increased by 3.3 pence to 55.6 pence at 30 June 2021 from 52.3 pence at 31 December 2020.

Dividend

In respect of the first half of 2021 and following the PRA update of 13 July 2021, the Board has announced an interim ordinary dividend of 0.67 pence per share, reintroducing a progressive and sustainable ordinary dividend policy.

Going forward, the Group will revert to paying any ordinary dividends half yearly, rather than quarterly, with the quantum announced with the half year and full year results. The Board believes this approach is appropriate in the current environment given its simplicity, environmental benefits and the additional flexibility it provides to the business. The Board will continue to give due consideration at each year end to the return of any surplus capital through the use of special dividends or buybac ks.

SEGMENTAL ANALYSIS - UNDERLYING BASIS

 
                                           Commercial    Insurance    Central 
                                   Retail     Banking   and Wealth      items       Group 
Half-year to 30 June 2021            GBPm        GBPm         GBPm       GBPm        GBPm 
 
Net interest income                 4,218       1,153           36         11       5,418 
Other income                          812         677          660        268       2,417 
Operating lease depreciation        (263)         (8)            -          -       (271) 
                               ----------  ----------  -----------  ---------  ---------- 
Net income                          4,767       1,822          696        279       7,564 
                               ----------  ----------  -----------  ---------  ---------- 
Operating costs                   (2,296)       (901)        (493)       (40)     (3,730) 
Remediation                         (153)       (169)        (116)         13       (425) 
                               ----------  ----------  -----------  ---------  ---------- 
Total costs                       (2,449)     (1,070)        (609)       (27)     (4,155) 
                               ----------  ----------  -----------  ---------  ---------- 
Underlying profit before 
 impairment                         2,318         752           87        252       3,409 
Impairment                             17         636            2          1         656 
                               ----------  ----------  -----------  ---------  ---------- 
Underlying profit                   2,335       1,388           89        253       4,065 
                               ----------  ----------  -----------  ---------  ---------- 
 
Banking net interest margin         2.45%       2.96%                               2.50% 
Average interest-earning 
 banking assets                GBP358.3bn   GBP81.6bn     GBP0.9bn          -  GBP440.8bn 
Asset quality ratio               (0.01)%     (1.48)%                             (0.30)% 
Return on risk-weighted 
 assets                             4.75%       3.82%                               4.08% 
Loans and advances to 
 customers(1)                  GBP361.5bn   GBP84.2bn     GBP1.0bn   GBP1.0bn  GBP447.7bn 
Customer deposits(2)           GBP309.8bn  GBP149.2bn    GBP14.8bn   GBP0.6bn  GBP474.4bn 
Risk-weighted assets           GBP100.0bn   GBP72.7bn     GBP1.4bn  GBP26.8bn  GBP200.9bn 
 
 
                                           Commercial    Insurance    Central 
                                   Retail     Banking   and Wealth      items       Group 
Half-year to 30 June 
 2020                                GBPm        GBPm         GBPm       GBPm        GBPm 
 
Net interest income                 4,233       1,222           14          9       5,478 
Other income                          919         658          853         31       2,461 
Operating lease depreciation        (518)         (8)            -          -       (526) 
                               ----------  ----------  -----------  ---------  ---------- 
Net income                          4,634       1,872          867         40       7,413 
                               ----------  ----------  -----------  ---------  ---------- 
Operating costs                   (2,277)       (906)        (459)       (57)     (3,699) 
Remediation                          (50)       (115)         (19)          7       (177) 
                               ----------  ----------  -----------  ---------  ---------- 
Total costs                       (2,327)     (1,021)        (478)       (50)     (3,876) 
                               ----------  ----------  -----------  ---------  ---------- 
Underlying profit before 
 impairment                         2,307         851          389       (10)       3,537 
Impairment                        (2,095)     (1,519)         (10)      (194)     (3,818) 
                               ----------  ----------  -----------  ---------  ---------- 
Underlying profit (loss)              212       (668)          379      (204)       (281) 
                               ----------  ----------  -----------  ---------  ---------- 
 
Banking net interest 
 margin                             2.59%       2.92%                               2.59% 
Average interest-earning 
 banking assets                GBP342.3bn   GBP90.0bn     GBP0.9bn          -  GBP433.2bn 
Asset quality ratio                 1.23%       3.12%                               1.73% 
Return on risk-weighted 
 assets                             0.43%     (1.70)%                             (0.27)% 
Loans and advances to 
 customers(1)                  GBP341.0bn   GBP96.0bn     GBP0.9bn   GBP2.5bn  GBP440.4bn 
Customer deposits(2)           GBP272.2bn  GBP154.5bn    GBP13.5bn   GBP0.9bn  GBP441.1bn 
Risk-weighted assets            GBP99.4bn   GBP78.4bn     GBP1.3bn  GBP28.0bn  GBP207.1bn 
 

(1) Excludes reverse repos.

(2) Excludes repos.

   SEGMENTAL ANALYSIS - UNDERLYING BASIS   (continued) 
 
                                           Commercial    Insurance    Central 
                                   Retail     Banking   and Wealth      items       Group 
Half-year to 31 December 
 2020                                GBPm        GBPm         GBPm       GBPm        GBPm 
 
Net interest income                 4,151       1,135           35       (26)       5,295 
Other income                          814         634          397        209       2,054 
Operating lease depreciation        (338)        (20)            -          -       (358) 
                               ----------  ----------  -----------  ---------  ---------- 
Net income                          4,627       1,749          432        183       6,991 
                               ----------  ----------  -----------  ---------  ---------- 
Operating costs                   (2,484)       (945)        (443)       (14)     (3,886) 
Remediation                          (75)        (95)         (31)        (1)       (202) 
                               ----------  ----------  -----------  ---------  ---------- 
Total costs                       (2,559)     (1,040)        (474)       (15)     (4,088) 
                               ----------  ----------  -----------  ---------  ---------- 
Underlying profit before 
 impairment                         2,068         709         (42)        168       2,903 
Impairment                          (289)          55            1      (196)       (429) 
                               ----------  ----------  -----------  ---------  ---------- 
Underlying profit (loss)            1,779         764         (41)       (28)       2,474 
                               ----------  ----------  -----------  ---------  ---------- 
 
Banking net interest margin         2.45%       2.74%                               2.44% 
Average interest-earning 
 banking assets                GBP348.5bn   GBP87.2bn     GBP0.9bn          -  GBP436.6bn 
Asset quality ratio                 0.17%     (0.12)%                               0.19% 
Return on risk-weighted 
 assets                             3.56%       1.98%                               2.40% 
Loans and advances to 
 customers(1)                  GBP350.9bn   GBP86.2bn     GBP0.9bn   GBP2.2bn  GBP440.2bn 
Customer deposits(2)           GBP290.2bn  GBP145.6bn    GBP14.1bn   GBP0.8bn  GBP450.7bn 
Risk-weighted assets            GBP99.0bn   GBP75.0bn     GBP1.3bn  GBP27.4bn  GBP202.7bn 
 

(1) Excludes reverse repos.

(2) Excludes repos.

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 preferred financial partner for personal customers, by building deep and enduring relationships that meet more of its customers' financial needs and to improve their financial resilience throughout their lifetime, with personalised products and services. 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 risk, while working within a prudent risk appetite.

Strategic progress

-- Record net promoter scores across branch (80) and digital (71), reflecting continued improved customer satisfaction and the Group's focus on improving customer experience

-- Expanded the availability of affordable and quality homes, with strong open mortgage book growth of GBP12.6 billion, including new lending of c.GBP9.0 billion to nearly 43,000 first-time buyers, almost reaching the Group's full year GBP10 billion 2021 target

-- Strengthened our mortgage proposition with 1,500 Mortgage Advisers now having video capability, alongside face to face and phone, providing enhanced access and flexibility with 800 appointments per week outside branch opening hours

-- Helped rebuild households' financial health and wellbeing through directing customers to free independent debt advice for more than 130,000 accounts

-- Continued modernisation of the Group's technology architecture, demonstrated by being the first major bank to market giving customers the ability to settle their credit card balance via open banking. Over 850,000 uses since launch

-- Maintained UK's largest branch network; piloting a scheme to strengthen free access to cash, with over 400 retail sites to date agreeing to provide cashback; supported industry commitments to access to cash through the BankHub pilot

-- Flexed ways of working to meet customer demand, with 800 branch colleagues moving into customer service roles

-- Progress towards deepening relationships via a 133 per cent increase in referrals to Schroders Personal Wealth (compared to the second half of 2020), allowing the Group to meet more of our customers' financial needs

-- Renewed strategic relationship with Jaguar Land Rover, and extended contract with Tesla, contributing to the transition to a low carbon economy

Financial performance

-- Net interest income of GBP4,218 million, in line with prior year. Benefit of mortgage and business banking growth, offset by the low rate environment, lower unsecured balances and reduced activity and demand during the pandemic

-- Other income reduced by 12 per cent, including a market driven reduction in Lex fleet size. Operating lease depreciation decreased by 49 per cent, driven by strength in used vehicle prices and the smaller fleet size

-- Operating costs 1 per cent higher; reflecting investment in IT and increased variable pay costs, compared to first half 2020. Remediation charges increased on prior year to GBP153 million

-- Impairment significantly decreased, with a GBP17 million credit in the first half of 2021, underpinned by benign credit environment and strong asset quality, alongside an improved macroeconomic outlook for the UK

-- Customer lending increased 3 per cent in the period driven by strong open mortgage book growth of GBP12.6 billion, partially offset by the continued run off of the closed mortgage book and lower cards balances

-- Customer deposits increased 7 per cent in 2021, demonstrating the strength of the Group's trusted brands

-- Risk-weighted assets up 1 per cent, in part influenced by model calibrations and a larger mortgage book, offset by house price growth and lower unsecured balances

Retail performance summary

 
                                                                   Half-year 
                                  Half-year   Half-year                to 31 
                                      to 30       to 30                  Dec 
                                  June 2021   June 2020   Change        2020    Change 
                                       GBPm        GBPm        %        GBPm         % 
 
Net interest income                   4,218       4,233        -       4,151       2 
Other income                            812         919     (12)         814       - 
Operating lease depreciation          (263)       (518)       49       (338)      22 
                                 ----------  ----------           ---------- 
Net income                            4,767       4,634        3       4,627       3 
                                 ----------  ----------           ---------- 
Operating costs                     (2,296)     (2,277)      (1)     (2,484)       8 
Remediation                           (153)        (50)                 (75) 
                                 ----------  ----------           ---------- 
Total costs                         (2,449)     (2,327)      (5)     (2,559)       4 
                                 ----------  ----------           ---------- 
Underlying profit before 
 impairment                           2,318       2,307        -       2,068      12 
Impairment                               17     (2,095)                (289) 
                                 ----------  ----------           ---------- 
Underlying profit                     2,335         212                1,779      31 
                                 ----------  ----------           ---------- 
 
Banking net interest margin           2.45%       2.59%   (14)bp       2.45%         - 
Average interest-earning 
 banking assets                  GBP358.3bn  GBP342.3bn        5  GBP348.5bn       3 
Asset quality ratio                 (0.01)%       1.23%  (124)bp       0.17%    (18)bp 
Return on risk-weighted assets        4.75%       0.43%    432bp       3.56%     119bp 
 
 
                                       At 30       At 30              At 31 
                                   June 2021   June 2020  Change   Dec 2020    Change 
                                       GBPbn       GBPbn       %      GBPbn         % 
 
Open mortgage book                     289.9       267.1       9      277.3       5 
Closed mortgage book                    15.3        17.5    (13)       16.5     (7) 
Credit cards                            13.6        15.2    (11)       14.3     (5) 
UK unsecured loans                       8.0         8.2     (2)        8.0       - 
UK Motor Finance                        14.4        15.3     (6)       14.7     (2) 
Business Banking                         8.8         7.0      26        8.8       - 
Overdrafts                               1.0         1.0       -        0.9      11 
Other(1)                                10.5         9.7       8       10.4       1 
                                  ----------  ----------          --------- 
Loans and advances to customers        361.5       341.0       6      350.9       3 
Operating lease assets                   4.0         4.1     (2)        3.9       3 
                                  ----------  ----------          --------- 
Total customer assets                  365.5       345.1       6      354.8       3 
                                  ----------  ----------          --------- 
 
Current accounts                       107.3        87.5      23       97.4      10 
Relationship savings(2)                186.1       172.0       8      178.8       4 
Tactical savings                        16.4        12.7      29       14.0      17 
                                  ----------  ----------          --------- 
Customer deposits                      309.8       272.2      14      290.2       7 
                                  ----------  ----------          --------- 
 
Risk-weighted assets                   100.0        99.4       1       99.0       1 
 

(1) Includes Europe and run-off.

(2) Includes Business Banking.

COMMERCIAL BANKING

Through its segmented client coverage model, Commercial Banking provides clients with a range of products and services such as lending, transaction banking, working capital management, risk management and debt capital markets. Commercial Banking is committed to becoming the best bank for business through its client-led, low-risk, capital efficient strategy. Continued investment in capabilities and digital propositions will enable the business to build a leading digital SME proposition and a strengthened Corporate and Institutional client franchise.

Strategic progress

-- Supporting the UK recovery by investing in 1,100 business specialists to help business customers develop appropriate recovery plans

-- Exceeded the full year target to help expand the availability of affordable and quality homes, delivering GBP2.1 billion of new funding support to the social housing sector in the first half, including GBP1.4 billion of ESG-linked funding via a new, dedicated sustainability team

-- Expanded the funding available under the Group's discounted green finance initiatives from GBP3 billion to GBP5 billion in the first half of 2021 to support businesses transition to a low carbon economy, with more than GBP8.6 billion of total green finance delivered since 2016

-- Strengthening the Markets proposition through an enhanced product offering and improved pricing capabilities; achieving growth in the share of FX products for core clients and improving GBP rates ranking(1) to sixth

-- Increased the number of new clients using the Group's merchant services by 8 per cent through targeted investment, providing a simplified and quicker onboarding service

-- Twofold increase in the number of corporate clients onboarded to the new cash management and payments platform through improved capabilities to meet client needs; remain on track for a threefold increase by the end of the year

-- Enhanced digital platform delivering a 3 point improvement in SME and Retail Business Banking digital net promoter score, reflecting improved service and the commitment to be the best bank for business

-- On track to achieve greater than 50 per cent growth in SME products originated via a digital source by the end of 2021

Financial performance

-- Net interest income of GBP1,153 million down 6 per cent on prior year, reflecting lower deposit income given the rate environment, partly offset by disciplined asset pricing and portfolio optimisation across both sides of the balance sheet

-- Other income up 3 per cent at GBP677 million, driven by higher levels of corporate financing activity offset by reductions in financial markets following the market volatility in the second quarter of last year

-- Operating costs 1 per cent lower reflecting continued benefit from efficiency initiatives partly offset by investment and increased variable pay costs

-- Impairment credit of GBP636 million in the first half of 2021, driven by the UK's improved macroeconomic outlook, improved credit outlook across Stage 1 and 2 and releases on a small number of specific single names in Stage 3

-- Customer lending 2 per cent lower at GBP84.2 billion due to lower consumer activity and continued optimisation of the corporate portfolio

-- Customer deposits 2 per cent higher at GBP149.2 billion, largely driven by the inflow of short-term balances in June 2021; focus remains on optimising for liquidity

-- Risk-weighted assets decreased 3 per cent to GBP72.7 billion, driven by ongoing optimisation in the corporate book

(1) Combined Tradeweb and Bloomberg GBP IRS ranking.

Commercial Banking performance summary

 
                                                                  Half-year 
                                  Half-year   Half-year               to 31 
                                      to 30       to 30                 Dec 
                                  June 2021   June 2020   Change       2020     Change 
                                       GBPm        GBPm        %       GBPm          % 
 
Net interest income                   1,153       1,222      (6)      1,135        2 
Other income                            677         658        3        634        7 
Operating lease depreciation            (8)         (8)        -       (20)       60 
                                 ----------  ----------           --------- 
Net income                            1,822       1,872      (3)      1,749        4 
                                 ----------  ----------           --------- 
Operating costs                       (901)       (906)        1      (945)        5 
Remediation                           (169)       (115)     (47)       (95)     (78) 
                                 ----------  ----------           --------- 
Total costs                         (1,070)     (1,021)      (5)    (1,040)      (3) 
                                 ----------  ----------           --------- 
Underlying profit before 
 impairment                             752         851     (12)        709        6 
Impairment                              636     (1,519)                  55 
                                 ----------  ----------           --------- 
Underlying profit (loss)              1,388       (668)                 764       82 
                                 ----------  ----------           --------- 
 
Banking net interest margin           2.96%       2.92%      4bp      2.74%       22bp 
Average interest-earning 
 banking assets                   GBP81.6bn   GBP90.0bn      (9)  GBP87.2bn      (6) 
Asset quality ratio                 (1.48)%       3.12%  (460)bp    (0.12)%    (136)bp 
Return on risk-weighted assets        3.82%     (1.70)%    552bp      1.98%      184bp 
 
 
                                         At 30       At 30              At 31 
                                     June 2021   June 2020  Change   Dec 2020    Change 
                                         GBPbn       GBPbn       %      GBPbn         % 
 
SME                                       31.6        31.4       1       31.8     (1) 
Mid Corporates                             3.8         4.6    (17)        4.1     (7) 
Corporate and Institutional               44.9        55.0    (18)       46.0     (2) 
Other                                      3.9         5.0    (22)        4.3     (9) 
                                    ----------  ----------          --------- 
Loans and advances to customers           84.2        96.0    (12)       86.2     (2) 
                                    ----------  ----------          --------- 
 
SME loans and advances including 
 Retail Business Banking                  40.4        38.4       5       40.6       - 
 
Customer deposits                        149.2       154.5     (3)      145.6       2 
 
Current accounts including 
 Retail Business Banking                  49.5        44.2      12       47.6       4 
Other customer deposits including 
 Retail Business Banking                 124.5       133.8     (7)      122.7       1 
                                    ----------  ----------          --------- 
Customer deposits including 
 Retail Business Banking                 174.0       178.0     (2)      170.3       2 
                                    ----------  ----------          --------- 
 
Risk-weighted assets                      72.7        78.4     (7)       75.0     (3) 
 

INSURANCE AND WEALTH

Insurance and Wealth offers insurance, investment and wealth management products and services. It supports over 10 million customers with assets under administration (AuA) of GBP185 billion and annualised annuity payments of over GBP1.1 billion. The Group continues to invest significantly in the development of the business, with the aim of becoming Britain's preferred financial partner for pensions and financial planning, helping to rebuild households' financial health and wellbeing, and meeting more of the Group customers' financial needs, increasingly with carbon neutral investments.

Strategic progress

-- Announced acquisition of Embark, a fast growing investment and retirement platform business with c.GBP35 billion of AuA on behalf of c.410,000 consumer clients. Embark enhances the Group's capabilities to address the attractive mass market and self-directed Wealth segment, completing the Group's Wealth proposition, alongside Schroders Personal Wealth and the Group's investment in Cazenove Capital, and significantly strengthens the Group's offering in Retirement, an important growth market

-- Deepened customer relationships via a 220 per cent increase in referrals to Schroders Personal Wealth (compared to the first half of 2020), allowing the Group to meet more of our customers' financial needs

-- Progressed the Group's vision to be the preferred financial partner for personal customers, with GBP4 billion net new money in Insurance and Wealth open book AuA over the period (GBP125 billion as at 30 June 2021)

-- Scottish Widows has invested in its first sustainability-linked loan, helping accelerate the transition to a low carbon economy and our ambition to halve the carbon footprint of our investments by 2030, on the path to net zero by 2050

-- Launched a new digital protection journey through Halifax, with rollout to other Group platforms planned for the second half of 2021. Scottish Widows are proud to have maintained a protection claims payout rate of over 98 per cent during the pandemic, helping rebuild households' financial health and wellbeing

-- Continued modernisation of the Group's technology architecture, with over 22 million views of insurance products each month in the Group's unique Single Customer View proposition (up from 17 million, 31 December 2020)

Financial performance

-- LP&I sales have increased by 14 per cent (20 per cent excluding bulk annuities), driven by strong performance across most propositions. A change in workplace pensions business mix and assumptions has resulted in the associated income recognition being deferred to future years and a reduction in reported new business margin

-- Continued momentum in workplace pensions has driven strong growth: scheme membership has increased by 5 per cent, year to date premiums received by 33 per cent, and AuA by 25 per cent (compared to 30 June 2020)

-- Strong growth in volumes of protection business, with an increase of over 40 per cent in the number of new policies sold (compared to the first half of 2020), including a 10 per cent growth in sales through the Group's Retail channels

-- Life and pensions experience includes GBP27 million positive impact from assumption changes (prior period included GBP91 million from methodology changes)

-- Persistency experience for the first half of 2021 is GBP36 million favourable to expectation, driven by strong retention of business in workplace, planning and retirement, and longstanding LP&I

-- Wealth income was resilient, with net interest income ahead of prior year, driven by higher customer deposits; Stockbroking income has also grown year on year, driven by continued high trading volumes

-- Other income of GBP660 million reduced from GBP853 million in the first half of 2020 largely driven by reduced activity in the bulk annuity market and the non recurrence of a positive methodology change in the first half of 2020. Compared to the second half of 2020 other income increased by GBP263 million, primarily as a result of renewed activity in workplace pensions, and resilient experience compared to long term persistency, mortality and longevity assumptions

-- Total costs increased by GBP131 million, driven by a GBP91 million regulatory fine relating to the way the Group historically communicated with home insurance customers regarding their renewals. Operating costs increased by GBP34 million due to investment in IT and increased variable pay costs. The increase compared to the second half of 2020 also reflects the timing of the Flood Re levy

Insurance capital

-- Estimated Shareholder Solvency II ratio of 162 per cent, with 11 percentage points increase from 31 December 2020, reflecting the positive impact of recent long term rate increases, with positive earnings from in-force business

-- Credit asset portfolio remains strong, rated 'A -' on average, well diversified and non-cyclical, with less than 1 per cent of assets backing annuities being sub investment grade or unrated

Insurance and Wealth performance summary

 
                                                                      Half-year 
                                       Half-year   Half-year              to 31 
                                           to 30       to 30                Dec 
                                       June 2021   June 2020  Change       2020    Change 
                                            GBPm        GBPm       %       GBPm         % 
 
Net interest income                           36          14                 35       3 
Other income                                 660         853    (23)        397      66 
                                      ----------  ----------          --------- 
Net income                                   696         867    (20)        432      61 
                                      ----------  ----------          --------- 
Operating costs                            (493)       (459)     (7)      (443)    (11) 
Remediation                                (116)        (19)               (31) 
                                      ----------  ----------          --------- 
Total costs                                (609)       (478)    (27)      (474)    (28) 
                                      ----------  ----------          --------- 
Underlying profit before 
 impairment                                   87         389    (78)       (42) 
Impairment                                     2        (10)                  1 
                                      ----------  ----------          --------- 
Underlying profit (loss)                      89         379    (77)       (41) 
                                      ----------  ----------          --------- 
 
Life and pensions sales (PVNBP)(1,)        9,006       7,880      14      6,649      35 
General insurance underwritten 
 new gross written premiums                   47          56    (16)         55    (15) 
General insurance underwritten 
 total gross written premiums                315         327     (4)        335     (6) 
General insurance combined 
 ratio(2)                                   114%         89%    25pp        82%      32pp 
 
 
                                      At 30       At 30              At 31 
                                  June 2021   June 2020  Change   Dec 2020    Change 
                                      GBPbn       GBPbn       %      GBPbn         % 
 
Insurance Solvency II ratio(3)         162%        140%    22pp       151%      11pp 
UK Wealth Loans and advances 
 to customers                           1.0         0.9      11        0.9      11 
UK Wealth Customer deposits            14.8        13.5      10       14.1       5 
UK Wealth Risk-weighted assets          1.4         1.3       8        1.3       8 
Total customer assets under 
 administration                       184.6       159.6      16      171.9       7 
 

Income by product group

 
                 Half-year to 30 June       Half-year to 30 June 
                          2021                       2020 
               ------------------------- 
                                                                     Half-year 
                    New  Existing              New  Existing             to 31 
               business  business  Total  business  business  Total   Dec 2020 
                   GBPm      GBPm   GBPm      GBPm      GBPm   GBPm       GBPm 
 
Workplace, 
 planning 
 and 
 retirement          98        55    153       121        62    183        144 
Individual 
 and 
 bulk 
 annuities           43        38     81       108        41    149        101 
Protection           14        10     24        11        10     21         16 
Longstanding 
 LP&I                 7       150    157         4       175    179        176 
               --------  --------  -----  --------  --------  -----  --------- 
                    162       253    415       244       288    532        437 
               --------  --------         --------  -------- 
Life and 
 pensions 
 experience 
 and 
 other items                           8                         72      (267) 
General 
 insurance                           158                        155        154 
                                   -----                      -----  --------- 
                                     581                        759        324 
Wealth                               115                        108        108 
                                   -----                      -----  --------- 
Net income                           696                        867        432 
                                   -----                      -----  --------- 
 

(1) Present value of new business premiums. Further information on page 125.

(2) Includes GBP91 million regulatory fine relating to the way the Group historically communicated with home insurance customers regarding their renewals. Excluding the fine this ratio was 84 per cent.

(3) Equivalent estimated regulatory view of ratio (including With Profits funds) was 153 per cent (30 June 2020: 144 per cent).

CENTRAL ITEMS

 
                                                           Half-year 
                            Half-year   Half-year              to 31 
                                to 30       to 30                Dec 
                            June 2021   June 2020  Change       2020    Change 
                                 GBPm        GBPm       %       GBPm         % 
 
Net income                        279          40                183      52 
                           ----------  ----------          --------- 
Operating costs                  (40)        (57)      30       (14) 
Remediation                        13           7      86        (1) 
                           ----------  ----------          --------- 
Total costs                      (27)        (50)      46       (15)    (80) 
                           ----------  ----------          --------- 
Underlying profit (loss) 
 before impairment                252        (10)                168      50 
Impairment                          1       (194)              (196) 
                           ----------  ----------          --------- 
Underlying profit (loss)          253       (204)               (28) 
                           ----------  ----------          --------- 
 

Central items includes income and expenditure not attributed to divisions, including residual net interest income after transfer pricing (including the central recovery of the Group's distributions on other equity instruments), in period gains from gilt sales and the unwind of associated hedging costs, as well as the Group's equities business, including Lloyds Development Capital and the Business Growth Fund.

Net income in the period of GBP279 million improved by GBP239 million on the first six months of 2020 largely due to the non-recurrence of negative coronavirus-related revaluations taken in 2020 and strong performance in the equities businesses in the first half of 2021. Other income also included a significantly reduced gain of GBP23 million (half-year to 30 June 2020: GBP135 million) on the sale of gilts and other liquid assets.

Impairment for the period was a credit of GBP1 million compared to a charge of GBP194 million in the first half of 2020 and a charge of GBP196 million in the second half of 2020. The impairment charge for the first and second halves of 2020 included GBP200 million in each period in respect of uncertainty in the economic outlook not captured within modelled ECL allowances.

OTHER FINANCIAL INFORMATION

   1.             Reconciliation between statutory and underlying basis financial information 

The tables below set out the reconciliation from the statutory results to the underlying basis results, the principles of which are set out in the basis of presentation.

 
                                                     Removal of: 
                                            ------------------------------ 
                                               Volatility  Insurance 
                                 Statutory      and other      gross        Underlying 
                                     basis   items(1,2,3)      up(4)   PPI       basis 
Half-year to 30 June 2021             GBPm           GBPm       GBPm  GBPm        GBPm 
 
Net interest income                  4,373            107        938     -       5,418 
Other income, net of insurance 
 claims                              3,706          (263)    (1,026)     -       2,417 
Operating lease depreciation                        (271)          -     -       (271) 
                                 ---------  -------------  ---------  ----  ---------- 
Net income                           8,079          (427)       (88)     -       7,564 
Operating expenses(5)              (4,897)            654         88     -     (4,155) 
Impairment(6)                          723           (67)          -     -         656 
                                 ---------  -------------  ---------  ----  ---------- 
Profit (loss) before tax             3,905            160          -     -       4,065 
                                 ---------  -------------  ---------  ----  ---------- 
 
Half-year to 30 June 2020 
Net interest income                  6,556             54    (1,132)     -       5,478 
Other income, net of insurance 
 claims                              1,339            104      1,018     -       2,461 
Operating lease depreciation                        (526)          -     -       (526) 
                                 ---------  -------------  ---------  ----  ---------- 
Net income                           7,895          (368)      (114)     -       7,413 
Operating expenses(5)              (4,668)            689        103     -     (3,876) 
Impairment(6)                      (3,829)              -         11     -     (3,818) 
                                 ---------  -------------  ---------  ----  ---------- 
Profit (loss) before tax             (602)            321          -     -       (281) 
                                 ---------  -------------  ---------  ----  ---------- 
 
Half-year to 31 December 
 2020 
Net interest income                  4,193            120        982     -       5,295 
Other income, net of insurance 
 claims                              3,038             61    (1,045)     -       2,054 
Operating lease depreciation                        (358)          -     -       (358) 
                                 ---------  -------------  ---------  ----  ---------- 
Net income                           7,231          (177)       (63)     -       6,991 
Operating expenses(5)              (5,077)            833         71    85     (4,088) 
Impairment(6)                        (326)           (95)        (8)     -       (429) 
                                 ---------  -------------  ---------  ----  ---------- 
Profit (loss) before tax             1,828            561          -    85       2,474 
                                 ---------  -------------  ---------  ----  ---------- 
 

(1) In the half-year to 30 June 2021 this comprises the effects of market volatility and asset sales (gain of GBP239 million); the amortisation of purchased intangibles (GBP35 million); restructuring (GBP255 million, including severance costs, property transformation, technology research and development, regulatory programmes and merger, acquisition and integration costs); and fair value unwind (losses of GBP109 million).

(2) In the half-year to 30 June 2020 this comprises the effects of market volatility and asset sales (loss of GBP43 million); the amortisation of purchased intangibles (GBP34 million); restructuring (GBP133 million, including severance costs, property transformation, technology research and development, regulatory programmes and merger, acquisition and integration costs); and fair value unwind (losses of GBP111 million).

(3) In the half-year to 31 December 2020 this comprises the effects of market volatility and asset sales (loss of GBP16 million); the amortisation of purchased intangibles (GBP35 million); restructuring (GBP388 million, including severance costs, property transformation, technology research and development, regulatory programmes and merger, acquisition and integration costs); and fair value unwind (losses of GBP122 million).

(4) The Group's insurance businesses' income statements include income and expense attributable to the policyholders of the Group's long-term assurance funds. These items have no impact in total upon profit attributable to equity shareholders and, 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.

(6) Certain derivative valuation adjustments associated with credit-impaired customers are included within the impairment charge on an underlying basis but reported within other income, net of insurance claims on a statutory basis.

OTHER FINANCIAL INFORMATION (continued)

(1.) Reconciliation between statutory and underlying basis financial information (continued)

The table below sets out the reconciliation from statutory profit before tax to underlying profit before impairment.

 
                                                                Half-year 
                                       Half-year   Half-year        to 31 
                                           to 30       to 30          Dec 
                                       June 2021   June 2020         2020 
                                            GBPm        GBPm         GBPm 
 
Statutory profit before tax                3,905       (602)      1,828 
Impairment                                 (723)       3,829        326 
Volatility and other items(1)                227         321        656 
Insurance gross up                             -        (11)          8 
Payment protection insurance                   -           -         85 
                                      ----------  ----------  --------- 
Underlying profit before impairment        3,409       3,537      2,903 
                                      ----------  ----------  --------- 
 

(1) See page 28.

   2.             Banking net interest margin and average interest-earning assets 
 
                                                   Half-year              Half-year 
                                                       to 30   Half-year      to 31 
                                                   June 2021       to 30        Dec 
                                                               June 2020       2020 
 
Group net interest income - statutory basis 
 (GBPm)                                                4,373       6,556      4,193 
Insurance gross up (GBPm)                                938     (1,132)        982 
Volatility and other items (GBPm)                        107          54        120 
                                                  ----------  ----------  --------- 
Group net interest income - underlying basis 
 (GBPm)                                                5,418       5,478      5,295 
Non-banking net interest expense (GBPm)                   58         110         67 
                                                  ----------  ----------  --------- 
Banking net interest income - underlying 
 basis (GBPm)                                          5,476       5,588      5,362 
                                                  ----------  ----------  --------- 
 
Net loans and advances to customers (GBPbn)(1)         447.7       440.4      440.2 
Impairment provision and fair value adjustments 
 (GBPbn)                                                 5.1         6.6        6.3 
Non-banking items: 
Fee-based loans and advances (GBPbn)                   (4.6)       (6.5)      (5.1) 
Other non-banking (GBPbn)                              (0.4)       (2.4)      (2.6) 
                                                  ----------  ----------  --------- 
Gross banking loans and advances (GBPbn)               447.8       438.1      438.8 
Averaging (GBPbn)                                      (7.0)       (4.9)      (2.2) 
                                                  ----------  ----------  --------- 
Average interest-earning banking assets 
 (GBPbn)                                               440.8       433.2      436.6 
                                                  ----------  ----------  --------- 
 
Banking net interest margin (%)                         2.50        2.59       2.44 
 

(1) Excludes reverse repos.

OTHER FINANCIAL INFORMATION (continued)

   3.             Volatility arising in the insurance business 

Volatility included in the Group's statutory results before tax comprises the following:

 
                                     Half-year              Half-year 
                                         to 30   Half-year      to 31 
                                     June 2021       to 30        Dec 
                                                 June 2020       2020 
                                          GBPm        GBPm       GBPm 
 
Insurance volatility                       275       (393)        173 
Policyholder interests volatility          214       (205)        131 
                                    ----------  ----------  --------- 
Total volatility                           489       (598)        304 
Insurance hedging arrangements           (340)         228      (156) 
                                    ----------  ----------  --------- 
Total                                      149       (370)        148 
                                    ----------  ----------  --------- 
 

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. The impact of the actual return on these investments differing from the expected return is included within insurance volatility.

Insurance volatility movements in the first half of 2021 were largely driven by an increase in global equity markets and narrowing gilt spreads. Although the Group manages its exposures to equity, interest rate, foreign currency exchange rate, inflation and market movements within the Insurance division, it does so by balancing the importance of managing the impacts on both capital and earnings volatility. For example, equity market movements are hedged within Insurance on a Solvency II capital basis and whilst this also reduces the IFRS earnings exposure to equity market movements, the hedge works to a lesser extent from an IFRS earnings perspective.

   4.             Changes in insurance assumptions and methodology 

The following impacts from assumption changes are included within Insurance and Wealth other operating income.

 
                                            Half-year              Half-year 
                                                to 30   Half-year      to 31 
                                            June 2021       to 30        Dec 
                                                        June 2020       2020 
                                                 GBPm        GBPm       GBPm 
 
Persistency                                         -           -       (74) 
Mortality, longevity and morbidity                 34           -         52 
Expense assumptions                              (29)           -      (124) 
Other                                              22           -        (5) 
                                           ----------  ----------  --------- 
Total assumption changes                           27           -      (151) 
Methodology changes                                 -          91          - 
                                           ----------  ----------  --------- 
Total assumption and methodology changes           27          91      (151) 
                                           ----------  ----------  --------- 
 

Key life and pensions assumptions and methodologies are formally updated through the annual basis review in the fourth quarter of each year. However, assumptions are monitored throughout the year and are updated at half year where there is a compelling reason to do so.

Current period changes reflect updated annuitant longevity assumptions, increased future short-term committed expenditure on specific projects and an update to reinsurance recovery assumptions.

OTHER FINANCIAL INFORMATION (continued)

   5.             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       At 30      At 31 
                                           June 2021   June 2020   Dec 2020 
                                                GBPm        GBPm       GBPm 
 
Ordinary shareholders' equity                 45,761      42,734     43,278 
Goodwill                                     (2,320)     (2,324)    (2,320) 
Intangible assets                            (4,299)     (3,985)    (4,140) 
Purchased value of in-force business           (209)       (234)      (221) 
Other, including deferred tax effects            552         309        459 
                                          ----------  ----------  --------- 
Tangible net assets                           39,485      36,500     37,056 
                                          ----------  ----------  --------- 
 
Ordinary shares in issue, excluding own 
 shares                                      70,956m     70,735m    70,812m 
 
Tangible net assets per share                  55.6p       51.6p      52.3p 
 
   6.             Return on tangible equity 

As announced at the full year results, the Group has revised its definition of return on tangible equity. Statutory profit after tax is adjusted to deduct profit attributable to non-controlling interests and other equity holders and is divided by average tangible equity.

 
                                                       Half-year              Half-year 
                                                           to 30   Half-year      to 31 
                                                       June 2021       to 30        Dec 
                                                                   June 2020       2020 
 
Average shareholders' equity (GBPbn)                        44.2        43.7       43.1 
Average intangible assets (GBPbn)                          (6.3)       (6.2)      (6.3) 
                                                      ----------  ----------  --------- 
Average tangible equity (GBPbn)                             37.9        37.5       36.8 
                                                      ----------  ----------  --------- 
 
Profit (loss) attributable to ordinary shareholders 
 (GBPm)(1)                                                 3,611       (234)      1,099 
 
Return on tangible equity (%)(1,)                           19.2       (1.3)        5.9 
 

(1) Revised basis, half-year to 30 June 2020 and half-year to 31 December 2020 restated.

OTHER FINANCIAL INFORMATION (continued)

   7.             Support measures 

Retail payment holiday characteristics(1)

 
                                  Mortgages       Cards        Loans        Motor         Total 
                                 ------------  -----------  -----------  -----------  -------------- 
                                  000s  GBPbn  000s  GBPbn  000s  GBPbn  000s  GBPbn   000s    GBPbn 
 
Total payment holidays granted     491   59.1   341    1.7   304    2.4   161    2.0  1,297   65.1 
 
First payment holiday still 
 in force                            0    0.1     1    0.0     0    0.0     0    0.0      2    0.1 
Matured payment holidays 
 - repaying                        460   55.2   290    1.4   274    2.2   149    1.8  1,173   60.6 
Matured payment holidays 
 - extended                          2    0.2     1    0.0     1    0.0     1    0.0      5    0.3 
Matured payment holidays 
 - missed payment                   29    3.6    48    0.2    29    0.2    11    0.2    116    4.2 
 
As a percentage of total 
 matured 
Matured payment holidays 
 - repaying                        94%    94%   85%    86%   90%    91%   92%    90%    91%      93% 
Matured payment holidays 
 - extended                       0.3%   0.4%  0.3%   0.4%  0.2%    0.3  0.7%   1.1%   0.4%     0.4% 
Matured payment holidays 
 - missed payment                   6%     6%   14%    14%    9%     9%    7%     9%     9%       6% 
 

(1) Mortgages, credit cards and personal loans at 3 July 2021; Motor finance at 6 July 2021. Analysis of mortgage payment holidays excludes St James Place, Intelligent Finance and Tesco; Motor finance payment holidays excludes Lex Autolease. Total payment holidays granted are equal to the sum of first payment holiday still in force and matured payment holidays. Totals and percentages calculated using unrounded numbers.

RISK MANAGEMENT

PRINCIPAL RISKS AND UNCERTAINTIES

The significant risks faced by the Group are detailed below. There has been no change to the definition of these risks from those disclosed in the Group's 2020 Annual Report and Accounts.

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

The coronavirus pandemic has had an impact on all risk types and continues to be a major area of focus. The Group responded quickly to the challenges faced, putting in place risk mitigation strategies and refining investment and strategic plans. Transition planning remains a key focus in ensuring that the Group continues to protect colleagues and services to customers as the situation continues to evolve and in ensuring that the lessons learned from the pandemic are embedded into future working practices.

The Group is participating in the 2021 Bank of England Biennial Exploratory Scenario on Climate (CBES) for submission in October. The scope is to consider credit losses under three different temperature scenarios over a thirty year horizon, and the strategic actions the Group could take to mitigate Climate Risk. The CBES may be used to inform FPC and PRA supervision and will not be used to set capital requirements.

The Group's principal risks and uncertainties are reviewed and reported regularly to the Board in alignment with the Group's Enterprise Risk Management Framework.

Climate - The risk that the Group experiences losses and/or reputational damage as a result of climate change, either directly or through its customers. These losses may be realised from physical events, the required adaptation in transitioning to a low carbon economy, or as a consequence of the responses to managing these changes.

Market - 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 in the Banking business, interest rates, equity prices and credit spreads in the Insurance business, and credit spreads in the Group's defined benefit pension schemes.

Credit - The risk that parties with whom the Group has contracted fail to meet their financial obligations (both on and off- balance sheet).

Funding and liquidity - 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.

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

Insurance underwriting - 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.

Change/execution - 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 operation within the Group's risk appetite.

Conduct - 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.

PRINCIPAL RISKS AND UNCERTAINTIES (continued)

Data - The risk of the Group failing to effectively govern, manage and control its data (including data processed by third party suppliers), leading to unethical decisions, poor customer outcomes, loss of value to the Group and mistrust.

Governance - 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.

People - 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.

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

Operational - The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Model - 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.

Regulatory and legal - 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 - The risk which results from:

   --     Incorrect assumptions about internal or external operating environments 

-- Failure to respond or the inappropriate strategic response to material changes in the external or internal operating environments

-- Failure to understand the potential impact of strategic responses and business plans on existing risk types

CREDIT RISK PORTFOLIO

Overview

The Group has continued to actively support its customers throughout the pandemic with a range of flexible options and payment holidays across major products, as well as lending through the various UK Government support schemes.

The macroeconomic outlook has improved and as the UK shows signs of exiting the crisis, the Group's focus is now on supporting its customers to recover.

The Group's lending portfolios were well positioned entering the crisis and we retain a prudent approach to credit risk appetite and risk management, with robust LTVs in our secured portfolios. Considering the external environment, flows of assets into arrears, defaults and write-off have remained at low levels.

It is recognised that Government support measures mean that the true underlying risk may not be reflected in asset performance and there is an expectation of increased arrears and defaults as these various arrangements, designed to alleviate short-term financial pressure, come to an end.

The Group has participated fully in UK Government lending schemes, including the Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme, where UK Government guarantees are in place at 100 per cent and 80 per cent, respectively. Repayments under these schemes have started to become due, which will be coupled with the withdrawal of Government support schemes in the second half of 2021. The level of arrears is therefore being carefully monitored, and the Group will continue to review customer trends and indicators for early signs of distress.

The net impairment credit in the first half of 2021 was GBP656 million, compared to a charge of GBP3,818 million in the first half of 2020. The first half credit resulted from an GBP837 million release of expected credit loss (ECL) allowances driven by improvements to the macroeconomic outlook in the UK, combined with robust credit performance, with a low run-rate impairment charge of GBP252 million given the continued benign credit environment.

As a result, the Group's ECL allowance on loans and advances to customers reduced in the period from GBP6,832 million to GBP5,555 million, of which GBP837 million resulted from improvements to the economic outlook, including the impact of the extension of the Government's Coronavirus Job Retention Scheme in the first quarter of 2021. Reductions in Commercial Banking ECL allowances also reflect improved outcomes on restructuring cases, reduction in Stage 2 exposures and lower flows to default.

Stage 2 loans and advances to customers reduced from GBP60,514 million to GBP54,129 million, and as a percentage of total lending reduced by 1.3 percentage points to 10.7 per cent (31 December 2020: 12.0 per cent), predominantly reflecting the improvement in the Group's forward looking macroeconomic assumptions. Of these, 88.8 per cent are up to date (31 December 2020: 88.9 per cent). Stage 2 coverage reduced to 3.8 per cent (31 December 2020: 4.5 per cent).

Stage 3 loans and advances reduced in the period to GBP8,616 million (31 December 2020: GBP9,089 million), and as a percentage of total lending reduced to 1.7 per cent (31 December 2020: 1.8 per cent). Stage 3 coverage reduced by 3.0 percentage points to 25.6 per cent (31 December 2020: 28.6 per cent) largely driven by a small number of single name releases in Commercial Banking, including on coronavirus impacted restructuring cases and favourable asset price inflation benefiting the UK Mortgages and UK Motor Finance portfolios in the Retail division.

Prudent risk appetite and risk management

-- The Group continues to take a prudent approach to credit risk and a through-the-cycle credit risk appetite, whilst working closely with customers to help them through and recover from the crisis

-- Sector and asset class 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

-- The Group's effective risk management seeks to ensure early identification and management of customers and counterparties who may be showing signs of distress

-- As the UK starts to exit the crisis, the Group will continue to work closely with its customers to ensure they receive the appropriate level of support, including where repayments under the UK Government scheme lending fall due

CREDIT RISK PORTFOLIO (continued)

Impairment charge by division - underlying basis

 
                                                             Half-year 
                             Half-year   Half-year               to 31 
                                 to 30       to 30                 Dec 
                             June 2021   June 2020   Change       2020    Change 
                                  GBPm        GBPm        %       GBPm         % 
 
  UK Mortgages                   (175)         603               (125)    (40) 
  Credit cards                      67         656       90        144      53 
  Loans and overdrafts             130         462       72        277      53 
  UK Motor Finance                (40)         241                (15) 
  Other                              1         133                   8      88 
                            ----------  ----------           --------- 
Retail                            (17)       2,095                 289 
                            ----------  ----------           --------- 
  SME                            (146)         257                   7 
  Other                          (490)       1,262                (62) 
                            ----------  ----------           --------- 
Commercial Banking               (636)       1,519                (55) 
Insurance and Wealth               (2)          10                 (1) 
Central items                      (1)         194                 196 
                            ----------  ----------           --------- 
Total impairment (credit) 
 charge                          (656)       3,818                 429 
                            ----------  ----------           --------- 
 
Asset quality ratio            (0.30)%       1.73%  (203)bp      0.19%    (49)bp 
 

Credit Risk 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. A reconciliation between the two bases has 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 expected credit loss (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 total expected credit loss allowance

 
                               Statutory basis         Underlying basis 
                                 At 30      At 31        At 30      At 31 
                             June 2021   Dec 2020    June 2021   Dec 2020 
                                  GBPm       GBPm         GBPm       GBPm 
 
Customer related balances 
                            ----------  ---------  -----------  --------- 
  Drawn                          4,672      5,760        5,197      6,373 
  Undrawn                          359        459          358        459 
                            ----------  ---------  -----------  --------- 
                                 5,031      6,219        5,555      6,832 
Other assets                        27         28           27         28 
                            ----------  ---------  -----------  --------- 
Total ECL allowance              5,058      6,247        5,582      6,860 
                            ----------  ---------  -----------  --------- 
 

Reconciliation between statutory and underlying basis of Group gross loans and advances to customers and expected credit loss allowances on drawn balances

 
                Gross loans and advances to                               Expected credit loss allowances 
                         customers                                               on drawn balances 
  -------------------------------------------------------    --------------------------------------------------------- 
       Stage      Stage      Stage                             Stage        Stage       Stage 
           1          2          3      POCI      Total            1            2           3       POCI       Total 
        GBPm       GBPm       GBPm      GBPm       GBPm         GBPm         GBPm        GBPm       GBPm        GBPm 
 
At 30 June 
2021 
 
 
Underlying 
 basis        442,751   54,129    8,616       -  505,496  1,196  1,902  2,099      -  5,197 
              -------  -------  -------  ------  -------  -----  -----  -----  -----  ----- 
POCI assets   (1,854)  (8,100)  (2,433)  12,387        -    (2)  (269)  (420)    691      - 
Acquisition 
 fair value 
 adjustment        27        5        1   (501)    (468)    (8)   (12)    (4)  (501)  (525) 
              -------  -------  -------  ------  -------  -----  -----  -----  -----  ----- 
              (1,827)  (8,095)  (2,432)  11,886    (468)   (10)  (281)  (424)    190  (525) 
              -------  -------  -------  ------  -------  -----  -----  -----  -----  ----- 
Statutory 
 basis        440,924   46,034    6,184  11,886  505,028  1,186  1,621  1,675    190  4,672 
              -------  -------  -------  ------  -------  -----  -----  -----  -----  ----- 
 
At 31 December 
 2020 
Underlying 
 basis        435,526   60,514    9,089       -  505,129  1,385  2,493  2,495      -  6,373 
              -------  -------  -------  ------  -------  -----  -----  -----  -----  ----- 
POCI assets   (1,625)  (8,864)  (2,600)  13,089        -    (3)  (330)  (506)    839      - 
Acquisition 
 fair value 
 adjustment        42        9        1   (578)    (526)   (10)   (18)    (7)  (578)  (613) 
              -------  -------  -------  ------  -------  -----  -----  -----  -----  ----- 
              (1,583)  (8,855)  (2,599)  12,511    (526)   (13)  (348)  (513)    261  (613) 
              -------  -------  -------  ------  -------  -----  -----  -----  -----  ----- 
Statutory 
 basis        433,943   51,659    6,490  12,511  504,603  1,372  2,145  1,982    261  5,760 
              -------  -------  -------  ------  -------  -----  -----  -----  -----  ----- 
 

CREDIT RISK PORTFOLIO (continued)

Movements in Group total expected credit loss allowance - statutory basis

 
                                                              Income 
                           ECL at                          statement   ECL at 
                          30 June    Net ECL  Write-offs      charge   31 Dec 
                             2021   decrease   and other    (credit)     2020 
                             GBPm       GBPm        GBPm        GBPm     GBPm 
 
  UK Mortgages                905      (122)          53       (175)    1,027 
  Credit cards                802      (121)       (188)          67      923 
  Loans and overdrafts        606      (109)       (167)          58      715 
  UK Motor Finance            434       (67)        (27)        (40)      501 
  Other                       211       (18)        (19)           1      229 
                         --------  ---------  ----------  ----------  ------- 
Retail                      2,958      (437)       (348)        (89)    3,395 
  SME                         347      (155)         (9)       (146)      502 
  Other                     1,303      (597)       (109)       (488)    1,900 
                         --------  ---------  ----------  ----------  ------- 
Commercial Banking          1,650      (752)       (118)       (634)    2,402 
Other                         450          -           -           -      450 
                         --------  ---------  ----------  ----------  ------- 
Total(1)                    5,058    (1,189)       (466)       (723)    6,247 
                         --------  ---------  ----------  ----------  ------- 
 

(1) Total ECL includes GBP27 million relating to other non customer-related assets (31 December 2020: GBP28 million).

Movements in Group total expected credit loss allowance - underlying basis

 
                                                              Income 
                           ECL at                          statement   ECL at 
                          30 June    Net ECL  Write-offs      charge   31 Dec 
                             2021   decrease   and other    (credit)     2020 
                             GBPm       GBPm        GBPm        GBPm     GBPm 
 
  UK Mortgages              1,406      (199)        (24)       (175)    1,605 
  Credit cards                825      (133)       (200)          67      958 
  Loans and overdrafts        606      (109)       (239)         130      715 
  UK Motor Finance            434       (67)        (27)        (40)      501 
  Other                       211       (18)        (19)           1      229 
                         --------  ---------  ----------  ----------  ------- 
Retail                      3,482      (526)       (509)        (17)    4,008 
  SME                         347      (155)         (9)       (146)      502 
  Other                     1,303      (597)       (107)       (490)    1,900 
                         --------  ---------  ----------  ----------  ------- 
Commercial Banking          1,650      (752)       (116)       (636)    2,402 
Other                         450          -           3         (3)      450 
                         --------  ---------  ----------  ----------  ------- 
Total(1)                    5,582    (1,278)       (622)       (656)    6,860 
                         --------  ---------  ----------  ----------  ------- 
 

(1) Total ECL includes GBP27 million relating to other non customer-related assets (31 December 2020: GBP28 million).

CREDIT RISK PORTFOLIO (continued)

Group loans and advances to customers and expected credit loss allowances - statutory basis

 
                                    Stage    Stage    Stage 
                                        1        2        3    POCI    Total 
                                                                               Stage     Stage 
                                                                                   2         3 
                                                                                as %      as % 
                                                                                  of        of 
At 30 June 2021                      GBPm     GBPm     GBPm    GBPm     GBPm   total     total 
 
Loans and advances to customers 
  UK Mortgages                    262,541   29,770    1,924  11,886  306,121     9.7     0.6 
  Credit cards                     10,956    2,936      323       -   14,215    20.7     2.3 
  Loans and overdrafts              7,782    1,413      312       -    9,507    14.9     3.3 
  UK Motor Finance                 12,347    2,272      233       -   14,852    15.3     1.6 
  Other                            18,074    1,203      244       -   19,521     6.2     1.2 
                                  -------  -------  -------  ------  -------  ------  ------ 
Retail                            311,700   37,594    3,036  11,886  364,216    10.3     0.8 
  SME                              27,952    3,139      863       -   31,954     9.8     2.7 
  Other                            46,292    5,265    2,215       -   53,772     9.8     4.1 
                                  -------  -------  -------  ------  -------  ------  ------ 
Commercial Banking                 74,244    8,404    3,078       -   85,726     9.8     3.6 
Insurance and Wealth                  877       36       63       -      976     3.7     6.5 
Central items(1)                   54,103        -        7       -   54,110       -       - 
                                  -------  -------  -------  ------  -------  ------  ------ 
Total gross lending               440,924   46,034    6,184  11,886  505,028     9.1     1.2 
ECL allowance on drawn balances   (1,186)  (1,621)  (1,675)   (190)  (4,672) 
                                  -------  -------  -------  ------  ------- 
Net balance sheet carrying 
 value                            439,738   44,413    4,509  11,696  500,356 
                                  -------  -------  -------  ------  ------- 
 
Group ECL allowance (drawn and 
 undrawn) 
  UK Mortgages                        129      411      175     190      905    45.4    19.3 
  Credit cards                        200      462      140       -      802    57.6    17.5 
  Loans and overdrafts                178      277      151       -      606    45.7    24.9 
  UK Motor Finance(2)                 154      129      151       -      434    29.7    34.8 
  Other                                51      105       55       -      211    49.8    26.1 
                                  -------  -------  -------  ------  -------  ------  ------ 
Retail                                712    1,384      672     190    2,958    46.8    22.7 
  SME                                 106      129      112       -      347    37.2    32.3 
  Other                               131      286      883       -    1,300    22.0    67.9 
                                  -------  -------  -------  ------  -------  ------  ------ 
Commercial Banking                    237      415      995       -    1,647    25.2    60.4 
Insurance and Wealth                    9        1       11       -       21     4.8    52.4 
Central items                         400        -        5       -      405       -     1.2 
                                  -------  -------  -------  ------  -------  ------  ------ 
Total ECL allowance (drawn 
 and undrawn)                       1,358    1,800    1,683     190    5,031    35.8    33.5 
                                  -------  -------  -------  ------  -------  ------  ------ 
 
Group ECL allowances (drawn and 
 undrawn) 
 as a % of loans and advances 
 to customers(3) 
  UK Mortgages                          -      1.4      9.1     1.6      0.3 
  Credit cards                        1.8     15.7     55.3       -      5.7 
  Loans and overdrafts                2.3     19.6     62.4       -      6.4 
  UK Motor Finance                    1.2      5.7     64.8       -      2.9 
  Other                               0.3      8.7     41.4       -      1.1 
                                  -------  -------  -------  ------  ------- 
Retail                                0.2      3.7     24.1     1.6      0.8 
  SME                                 0.4      4.1     15.2       -      1.1 
  Other                               0.3      5.4     40.0       -      2.4 
                                  -------  -------  -------  ------  ------- 
Commercial Banking                    0.3      4.9     33.7       -      1.9 
Insurance and Wealth                  1.0      2.8     17.5       -      2.2 
Central items                         0.7        -     71.4       -      0.7 
                                  -------  -------  -------  ------  ------- 
Total ECL allowances (drawn 
 and 
 undrawn) as a % of loans 
 and advances to customers            0.3      3.9     29.0     1.6      1.0 
                                  -------  -------  -------  ------  ------- 
 

(1) Includes reverse repos of GBP52.7 billion.

(2) UK Motor Finance for Stages 1 and 2 include GBP136 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

(3) Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of GBP70 million, Loans and overdrafts of GBP70 million, Retail other of GBP111 million, SME of GBP124 million and Commercial Banking other of GBP5 million.

CREDIT RISK PORTFOLIO (continued)

Group loans and advances to customers and expected credit loss allowances - statutory basis (continued)

 
                                    Stage    Stage    Stage 
                                        1        2        3    POCI    Total 
                                                                               Stage     Stage 
                                                                                   2         3 
                                                                                as %      as % 
                                                                                  of        of 
At 31 December 2020                  GBPm     GBPm     GBPm    GBPm     GBPm   total     total 
 
Loans and advances to customers 
  UK Mortgages                    251,418   29,018    1,859  12,511  294,806     9.8     0.6 
  Credit cards                     11,496    3,273      340       -   15,109    21.7     2.3 
  Loans and overdrafts              7,710    1,519      307       -    9,536    15.9     3.2 
  UK Motor Finance                 12,786    2,216      199       -   15,201    14.6     1.3 
  Other                            17,879    1,304      184       -   19,367     6.7     1.0 
                                  -------  -------  -------  ------  -------  ------  ------ 
Retail                            301,289   37,330    2,889  12,511  354,019    10.5     0.8 
  SME                              27,015    4,500      791       -   32,306    13.9     2.4 
  Other                            43,543    9,816    2,733       -   56,092    17.5     4.9 
                                  -------  -------  -------  ------  -------  ------  ------ 
Commercial Banking                 70,558   14,316    3,524       -   88,398    16.2     4.0 
Insurance and Wealth                  832       13       70       -      915     1.4     7.7 
Central items(1)                   61,264        -        7       -   61,271       -       - 
                                  -------  -------  -------  ------  -------  ------  ------ 
Total gross lending               433,943   51,659    6,490  12,511  504,603    10.2     1.3 
ECL allowance on drawn balances   (1,372)  (2,145)  (1,982)   (261)  (5,760) 
                                  -------  -------  -------  ------  ------- 
Net balance sheet carrying 
 value                            432,571   49,514    4,508  12,250  498,843 
                                  -------  -------  -------  ------  ------- 
 
Group ECL allowance (drawn 
 and undrawn) 
  UK Mortgages                        107      468      191     261    1,027    45.6    18.6 
  Credit cards                        240      530      153       -      923    57.4    16.6 
  Loans and overdrafts                224      344      147       -      715    48.1    20.6 
  UK Motor Finance(2)                 197      171      133       -      501    34.1    26.5 
  Other                                46      124       59       -      229    54.1    25.8 
                                  -------  -------  -------  ------  -------  ------  ------ 
Retail                                814    1,637      683     261    3,395    48.2    20.1 
  SME                                 142      234      126       -      502    46.6    25.1 
  Other                               217      507    1,169       -    1,893    26.8    61.8 
                                  -------  -------  -------  ------  -------  ------  ------ 
Commercial Banking                    359      741    1,295       -    2,395    30.9    54.1 
Insurance and Wealth                   11        1       11       -       23     4.3    47.8 
Central items                         400        -        6       -      406       -     1.5 
                                  -------  -------  -------  ------  -------  ------  ------ 
Total ECL allowance (drawn 
 and undrawn)                       1,584    2,379    1,995     261    6,219    38.3    32.1 
                                  -------  -------  -------  ------  -------  ------  ------ 
 
Group ECL allowances (drawn and 
 undrawn) 
 as a % of loans and advances 
 to customers(3) 
  UK Mortgages                          -      1.6     10.3     2.1      0.3 
  Credit cards                        2.1     16.2     56.0       -      6.1 
  Loans and overdrafts                2.9     22.6     64.2       -      7.6 
  UK Motor Finance                    1.5      7.7     66.8       -      3.3 
  Other                               0.3      9.5     39.3       -      1.2 
                                  -------  -------  -------  ------  ------- 
Retail                                0.3      4.4     25.2     2.1      1.0 
  SME                                 0.5      5.2     19.1       -      1.6 
  Other                               0.5      5.2     42.9       -      3.4 
                                  -------  -------  -------  ------  ------- 
Commercial Banking                    0.5      5.2     38.2       -      2.7 
Insurance and Wealth                  1.3      7.7     15.7       -      2.5 
Central items                         0.7        -     85.7       -      0.7 
                                  -------  -------  -------  ------  ------- 
Total ECL allowances (drawn 
 and 
 undrawn) as a % of loans 
 and advances 
 to customers                         0.4      4.6     32.3     2.1      1.2 
                                  -------  -------  -------  ------  ------- 
 

(1) Includes reverse repos of GBP58.6 billion.

(2) UK Motor Finance for Stages 1 and 2 include GBP192 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

(3) Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of GBP67 million, Loans and overdrafts of GBP78 million, Retail other of GBP34 million, SME of GBP132 million and Commercial Banking other of GBP6 million.

CREDIT RISK PORTFOLIO (continued)

Group loans and advances to customers and expected credit loss allowances - underlying basis

 
                                             Stage    Stage    Stage 
                                                 1        2        3    Total 
                                                                                Stage     Stage 
                                                                                    2         3 
                                                                                 as %      as % 
                                                                                   of        of 
At 30 June 2021                               GBPm     GBPm     GBPm     GBPm   total     total 
 
Loans and advances to customers 
  UK Mortgages                             264,395   37,870    4,357  306,622    12.4     1.4 
  Credit cards                              10,929    2,931      322   14,182    20.7     2.3 
  Loans and overdrafts                       7,782    1,413      312    9,507    14.9     3.3 
  UK Motor Finance                          12,347    2,272      233   14,852    15.3     1.6 
  Other                                     18,074    1,203      244   19,521     6.2     1.2 
                                           -------  -------  -------  -------  ------  ------ 
Retail(1)                                  313,527   45,689    5,468  364,684    12.5     1.5 
  SME                                       27,952    3,139      863   31,954     9.8     2.7 
  Other                                     46,292    5,265    2,215   53,772     9.8     4.1 
                                           -------  -------  -------  -------  ------  ------ 
Commercial Banking                          74,244    8,404    3,078   85,726     9.8     3.6 
Insurance and Wealth                           877       36       63      976     3.7     6.5 
Central items(2)                            54,103        -        7   54,110       -       - 
                                           -------  -------  -------  -------  ------  ------ 
Total gross lending                        442,751   54,129    8,616  505,496    10.7     1.7 
ECL allowance on drawn balances            (1,196)  (1,902)  (2,099)  (5,197) 
                                           -------  -------  -------  ------- 
Net balance sheet carrying value           441,555   52,227    6,517  500,299 
                                           -------  -------  -------  ------- 
 
Group ECL allowance (drawn and 
 undrawn) 
  UK Mortgages                                 131      680      595    1,406    48.4    42.3 
  Credit cards                                 206      474      145      825    57.5    17.6 
  Loans and overdrafts                         178      277      151      606    45.7    24.9 
  UK Motor Finance(3)                          154      129      151      434    29.7    34.8 
  Other                                         51      105       55      211    49.8    26.1 
                                           -------  -------  -------  -------  ------  ------ 
Retail(1)                                      720    1,665    1,097    3,482    47.8    31.5 
  SME                                          106      129      112      347    37.2    32.3 
  Other                                        131      286      883    1,300    22.0    67.9 
                                           -------  -------  -------  -------  ------  ------ 
Commercial Banking                             237      415      995    1,647    25.2    60.4 
Insurance and Wealth                             9        1       11       21     4.8    52.4 
Central items                                  400        -        5      405       -     1.2 
                                           -------  -------  -------  -------  ------  ------ 
Total ECL allowance (drawn and 
 undrawn)                                    1,366    2,081    2,108    5,555    37.5    37.9 
                                           -------  -------  -------  -------  ------  ------ 
 
Group ECL allowances (drawn and 
 undrawn) as a 
 % of loans and advances to customers(4) 
  UK Mortgages                                   -      1.8     13.7      0.5 
  Credit cards                                 1.9     16.2     57.5      5.8 
  Loans and overdrafts                         2.3     19.6     62.4      6.4 
  UK Motor Finance                             1.2      5.7     64.8      2.9 
  Other                                        0.3      8.7     41.4      1.1 
                                           -------  -------  -------  ------- 
Retail(1)                                      0.2      3.6     21.0      1.0 
  SME                                          0.4      4.1     15.2      1.1 
  Other                                        0.3      5.4     40.0      2.4 
                                           -------  -------  -------  ------- 
Commercial Banking                             0.3      4.9     33.7      1.9 
Insurance and Wealth                           1.0      2.8     17.5      2.2 
Central items                                  0.7        -     71.4      0.7 
                                           -------  -------  -------  ------- 
Total ECL allowances (drawn and 
 undrawn) as a 
 % of loans and advances to customers          0.3      3.8     25.6      1.1 
                                           -------  -------  -------  ------- 
 

(1) Retail balances exclude the impact of the HBOS and MBNA acquisition related adjustments.

(2) Includes reverse repos of GBP52.7 billion.

(3) UK Motor Finance for Stages 1 and 2 include GBP136 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

(4) Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of GBP70 million, Loans and overdrafts of GBP70 million, Retail other of GBP111 million, SME of GBP124 million and Commercial Banking other of GBP5 million.

CREDIT RISK PORTFOLIO (continued)

Group loans and advances to customers and expected credit loss allowances - underlying basis (continued)

 
                                             Stage    Stage    Stage 
                                                 1        2        3    Total 
                                                                                Stage     Stage 
                                                                                    2         3 
                                                                                 as %      as % 
                                                                                   of        of 
At 31 December 2020                           GBPm     GBPm     GBPm     GBPm   total     total 
 
Loans and advances to customers 
  UK Mortgages                             253,043   37,882    4,459  295,384    12.8     1.5 
  Credit cards                              11,454    3,264      339   15,057    21.7     2.3 
  Loans and overdrafts                       7,710    1,519      307    9,536    15.9     3.2 
  UK Motor Finance                          12,786    2,216      199   15,201    14.6     1.3 
  Other                                     17,879    1,304      184   19,367     6.7     1.0 
                                           -------  -------  -------  -------  ------  ------ 
Retail(1)                                  302,872   46,185    5,488  354,545    13.0     1.5 
  SME                                       27,015    4,500      791   32,306    13.9     2.4 
  Other                                     43,543    9,816    2,733   56,092    17.5     4.9 
                                           -------  -------  -------  -------  ------  ------ 
Commercial Banking                          70,558   14,316    3,524   88,398    16.2     4.0 
Insurance and Wealth                           832       13       70      915     1.4     7.7 
Central items(2)                            61,264        -        7   61,271       -       - 
                                           -------  -------  -------  -------  ------  ------ 
Total gross lending                        435,526   60,514    9,089  505,129    12.0     1.8 
ECL allowance on drawn balances            (1,385)  (2,493)  (2,495)  (6,373) 
                                           -------  -------  -------  ------- 
Net balance sheet carrying value           434,141   58,021    6,594  498,756 
                                           -------  -------  -------  ------- 
 
Group ECL allowance (drawn and 
 undrawn) 
  UK Mortgages                                 110      798      697    1,605    49.7    43.4 
  Credit cards                                 250      548      160      958    57.2    16.7 
  Loans and overdrafts                         224      344      147      715    48.1    20.6 
  UK Motor Finance(3)                          197      171      133      501    34.1    26.5 
  Other                                         46      124       59      229    54.1    25.8 
                                           -------  -------  -------  -------  ------  ------ 
Retail(1)                                      827    1,985    1,196    4,008    49.5    29.8 
  SME                                          142      234      126      502    46.6    25.1 
  Other                                        217      507    1,169    1,893    26.8    61.8 
                                           -------  -------  -------  -------  ------  ------ 
Commercial Banking                             359      741    1,295    2,395    30.9    54.1 
Insurance and Wealth                            11        1       11       23     4.3    47.8 
Central items                                  400        -        6      406       -     1.5 
                                           -------  -------  -------  -------  ------  ------ 
Total ECL allowance (drawn and 
 undrawn)                                    1,597    2,727    2,508    6,832    39.9    36.7 
                                           -------  -------  -------  -------  ------  ------ 
 
Group ECL allowances (drawn and 
 undrawn) as a 
 % of loans and advances to customers(4) 
  UK Mortgages                                   -      2.1     15.6      0.5 
  Credit cards                                 2.2     16.8     58.8      6.4 
  Loans and overdrafts                         2.9     22.6     64.2      7.6 
  UK Motor Finance                             1.5      7.7     66.8      3.3 
  Other                                        0.3      9.5     39.3      1.2 
                                           -------  -------  -------  ------- 
Retail(1)                                      0.3      4.3     22.5      1.1 
  SME                                          0.5      5.2     19.1      1.6 
  Other                                        0.5      5.2     42.9      3.4 
                                           -------  -------  -------  ------- 
Commercial Banking                             0.5      5.2     38.2      2.7 
Insurance and Wealth                           1.3      7.7     15.7      2.5 
Central items                                  0.7        -     85.7      0.7 
                                           -------  -------  -------  ------- 
Total ECL allowances (drawn and 
 undrawn) as a 
 % of loans and advances to customers          0.4      4.5     28.6      1.4 
                                           -------  -------  -------  ------- 
 

(1) Retail balances exclude the impact of the HBOS and MBNA acquisition related adjustments.

(2) Includes reverse repos of GBP58.6 billion.

(3) UK Motor Finance ECL for Stages 1 and 2 include GBP192 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

(4) Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of GBP67 million, Loans and overdrafts of GBP78 million, Retail other of GBP34 million, SME of GBP132 million and Commercial Banking other of GBP6 million.

CREDIT RISK PORTFOLIO (continued)

Group Stage 2 loans and advances to customers - statutory basis

 
                          Up to date 
               -------------------------------- 
                                                    1-30 days      Over 30 days 
                PD movements       Other(1)        past due(2)        past due           Total 
               --------------- 
                 Gross            Gross            Gross            Gross            Gross 
               lending  ECL(3)  lending  ECL(3)  lending  ECL(3)  lending  ECL(3)  lending    ECL(3) 
At 30 June 
 2021             GBPm    GBPm     GBPm    GBPm     GBPm    GBPm     GBPm    GBPm     GBPm      GBPm 
 
  UK 
   Mortgages    23,034     191    3,630     122    1,491      32    1,615      66   29,770     411 
  Credit 
   cards         2,640     356      189      68       77      22       30      16    2,936     462 
  Loans and 
   overdrafts      854     162      396      54      127      43       36      18    1,413     277 
  UK Motor 
   Finance         966      47    1,148      39      122      29       36      14    2,272     129 
  Other            494      58      586      33       64       9       59       5    1,203     105 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
Retail          27,988     814    5,949     316    1,881     135    1,776     119   37,594   1,384 
  SME            2,866     118      178       6       24       2       71       3    3,139     129 
  Other          5,028     281       89       1       56       3       92       1    5,265     286 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
Commercial 
 Banking         7,894     399      267       7       80       5      163       4    8,404     415 
Insurance 
 and Wealth         17       -       18       1        -       -        1       -       36       1 
Central items        -       -        -       -        -       -        -       -        -       - 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
Total           35,899   1,213    6,234     324    1,961     140    1,940     123   46,034   1,800 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
 
At 31 December 2020 
  UK 
   Mortgages    22,569     215    3,078     131    1,648      43    1,723      79   29,018     468 
  Credit 
   cards         2,924     408      220      76       93      27       36      19    3,273     530 
  Loans and 
   overdrafts      959     209      388      68      126      45       46      22    1,519     344 
  UK Motor 
   Finance         724      62    1,321      55      132      37       39      17    2,216     171 
  Other            512      56      651      44       69      14       72      10    1,304     124 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
Retail          27,688     950    5,658     374    2,068     166    1,916     147   37,330   1,637 
  SME            4,229     219      150       6       40       5       81       4    4,500     234 
  Other          9,505     501       97       3       37       2      177       1    9,816     507 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
Commercial 
 Banking        13,734     720      247       9       77       7      258       5   14,316     741 
Insurance 
 and Wealth          1       -       12       1        -       -        -       -       13       1 
Central items        -       -        -       -        -       -        -       -        -       - 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
Total           41,423   1,670    5,917     384    2,145     173    2,174     152   51,659   2,379 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
 

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

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

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

CREDIT RISK PORTFOLIO (continued)

Group Stage 2 loans and advances to customers - underlying basis

 
                          Up to date 
               -------------------------------- 
                                                    1-30 days      Over 30 days 
                PD movements       Other(1)        past due(2)        past due           Total 
               --------------- 
                 Gross            Gross            Gross            Gross            Gross 
               lending  ECL(3)  lending  ECL(3)  lending  ECL(3)  lending  ECL(3)  lending    ECL(3) 
At 30 June 
 2021             GBPm    GBPm     GBPm    GBPm     GBPm    GBPm     GBPm    GBPm     GBPm      GBPm 
 
  UK 
   Mortgages    27,971     305    4,606     172    2,540      69    2,753     134   37,870     680 
  Credit 
   cards         2,636     366      188      69       77      23       30      16    2,931     474 
  Loans and 
   overdrafts      854     162      396      54      127      43       36      18    1,413     277 
  UK Motor 
   Finance         966      47    1,148      39      122      29       36      14    2,272     129 
  Other            494      58      586      33       64       9       59       5    1,203     105 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
Retail          32,921     938    6,924     367    2,930     173    2,914     187   45,689   1,665 
  SME            2,866     118      178       6       24       2       71       3    3,139     129 
  Other          5,028     281       89       1       56       3       92       1    5,265     286 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
Commercial 
 Banking         7,894     399      267       7       80       5      163       4    8,404     415 
Insurance 
 and Wealth         17       -       18       1        -       -        1       -       36       1 
Central items        -       -        -       -        -       -        -       -        -       - 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
Total           40,832   1,337    7,209     375    3,010     178    3,078     191   54,129   2,081 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
 
At 31 December 2020 
  UK 
   Mortgages    28,049     354    4,067     189    2,663      82    3,103     173   37,882     798 
  Credit 
   cards         2,916     422      220      78       92      28       36      20    3,264     548 
  Loans and 
   overdrafts      959     209      388      68      126      45       46      22    1,519     344 
  UK Motor 
   Finance         724      62    1,321      55      132      37       39      17    2,216     171 
  Other            512      56      651      44       69      14       72      10    1,304     124 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
Retail          33,160   1,103    6,647     434    3,082     206    3,296     242   46,185   1,985 
  SME            4,229     219      150       6       40       5       81       4    4,500     234 
  Other          9,505     501       97       3       37       2      177       1    9,816     507 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
Commercial 
 Banking        13,734     720      247       9       77       7      258       5   14,316     741 
Insurance 
 and Wealth          1       -       12       1        -       -        -       -       13       1 
Central items        -       -        -       -        -       -        -       -        -       - 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
Total           46,895   1,823    6,906     444    3,159     213    3,554     247   60,514   2,727 
               -------  ------  -------  ------  -------  ------  -------  ------  -------  ------ 
 

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

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

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

CREDIT RISK PORTFOLIO (continued)

ECL sensitivity to economic assumptions

The measurement of ECL reflects an unbiased probability-weighted range of possible future economic outcomes. The Group achieves this by generating four economic scenarios to reflect the range of outcomes; the central scenario reflects the Group's base case assumptions used for medium-term planning purposes, an upside and a downside scenario are also selected together with a severe downside scenario. The base case, upside and downside scenarios carry a 30 per cent weighting; the severe downside is weighted at 10 per cent. These assumptions can be found in note 2 on page 79 onwards.

The table below shows the Group's ECL for the upside, base case, downside and severe downside scenarios. The stage allocation for an asset is based on the overall scenario probability-weighted PD and hence the Stage 2 allocation is constant across all the scenarios. ECL applied through individual assessments and post-model adjustments is reported flat against each economic scenario, reflecting the basis on which they are evaluated.

 
               Probability-                                  Severe 
                   weighted  Upside  Base case  Downside   downside 
Statutory basis        GBPm    GBPm       GBPm      GBPm       GBPm 
 
UK Mortgages            905     544        684     1,100      2,064 
Other Retail          2,053   1,896      2,009     2,152      2,355 
Commercial Banking    1,650   1,395      1,527     1,799      2,340 
Other                   450     448        450       450        454 
                      -----  ------  ---------  --------  --------- 
At 30 June 2021       5,058   4,283      4,670     5,501      7,213 
                      -----  ------  ---------  --------  --------- 
 
UK Mortgages          1,027     614        804     1,237      2,306 
Other Retail          2,368   2,181      2,310     2,487      2,745 
Commercial Banking    2,402   1,910      2,177     2,681      3,718 
Other                   450     448        450       450        456 
                      -----  ------  ---------  --------  --------- 
At 31 December 2020   6,247   5,153      5,741     6,855      9,225 
                      -----  ------  ---------  --------  --------- 
 
 
               Probability-                                  Severe 
                   weighted  Upside  Base case  Downside   downside 
Underlying basis       GBPm    GBPm       GBPm      GBPm       GBPm 
 
UK Mortgages          1,406   1,045      1,185     1,601      2,565 
Other Retail          2,076   1,919      2,032     2,175      2,378 
Commercial Banking    1,650   1,395      1,527     1,799      2,340 
Other                   450     448        450       450        454 
                      -----  ------  ---------  --------  --------- 
At 30 June 2021       5,582   4,807      5,194     6,025      7,737 
                      -----  ------  ---------  --------  --------- 
 
UK Mortgages          1,605   1,192      1,382     1,815      2,884 
Other Retail          2,403   2,216      2,345     2,522      2,780 
Commercial Banking    2,402   1,910      2,177     2,681      3,718 
Other                   450     448        450       450        456 
                      -----  ------  ---------  --------  --------- 
At 31 December 2020   6,860   5,766      6,354     7,468      9,838 
                      -----  ------  ---------  --------  --------- 
 

CREDIT RISK PORTFOLIO (continued)

Retail

(--) The Retail portfolio has remained robust and well positioned throughout the coronavirus pandemic. Risk management has been enhanced since the last financial crisis, with strong affordability and indebtedness controls for both new and existing lending and a prudent risk appetite approach. This is evident in the significant improvement in credit quality and low arrears rates

(--) The Group has actively supported its Retail customers during the pandemic, through a range of propositions, such as payment holidays, while personal current account customers have had access to up to GBP500 interest free arranged overdrafts

(--) Nearly 1.3 million payment holidays, on GBP65.1 billion of lending, have been granted on Retail products during the pandemic, with c.7,000 remaining live. Over 93 per cent of expired payment holidays have now resumed payments, while 6 per cent are either in arrears or have been charged off

(--) The Group has taken targeted steps across the Retail product offering to implement tighter credit quality controls on key risk indicators such as indebtedness and credit scores to ensure that customers and the bank are protected

(--) Arrears rates across the portfolios remain low despite expiry of almost all payment holidays

(--) Although the macroeconomic outlook has improved, customers have been significantly impacted by the pandemic and credit performance is expected to worsen in coming months, consistent with the Group's economic assumptions, as the Government support measures come to an end and unemployment rises

(--) The Retail impairment credit in the first half of 2021 was GBP17 million, compared to a charge of GBP2,095 million in the first half of 2020. This significant decrease resulted from a GBP544 million release of expected credit loss (ECL) allowances driven by the UK's improved macroeconomic outlook, combined with a robust observed credit performance, with charges relating to flows to arrears and default remaining low despite expiry of almost all payment holidays. This impact compares favourably to the GBP1,517 million impairment charge to account for the deterioration in the macroeconomic outlook over the first half of 2020

(--) Existing IFRS 9 staging rules and triggers have been maintained across Retail from year end 2020 with the exception of minor changes to the Loans and Overdrafts portfolio to tighten criteria and align to the Credit cards portfolio. Transfers between stages have been primarily driven by credit risk rating movements and the estimated impact of the economic factors on a customer's forward looking default risk

(--) Total Retail ECL allowance as a percentage of drawn loans and advances (coverage) has reduced slightly to 1.0 per cent (31 December 2020: 1.1 per cent) following the updates in the Group's economic forecast. As at 30 June 2021, 47.8 per cent of total Retail ECL is reflected within Stage 2 under IFRS 9, representing cases which have observed a Significant Increase in Credit Risk since origination (SICR)

(--) Stage 2 loans and advances now comprise 12.5 per cent of the Retail portfolio (31 December 2020: 13.0 per cent), of which 87.2 per cent are up to date performing loans. Stage 2 ECL coverage has also decreased to 3.6 per cent (31 December 2020: 4.3 per cent) reflecting the improved macroeconomic outlook

(--) Stage 3 loans and advances have remained flat at 1.5 per cent of total loans and advances (31 December 2020: 1.5 per cent), Stage 3 ECL coverage decreased to 21.0 per cent (31 December 2020: 22.5 per cent) due to favourable asset price inflation (both observed and forecast), benefiting the UK Mortgages and UK Motor Finance portfolios in particular

CREDIT RISK PORTFOLIO (continued)

Portfolios

UK Mortgages

(--) The UK Mortgages portfolio is well positioned with low arrears and a low loan-to-value (LTV) profile. The Group has actively improved the quality of the portfolio over recent years using robust affordability and credit controls, whilst the balances of higher risk portfolios originated prior to 2008 have continued to reduce

(--) Whilst the housing market has remained resilient through the pandemic with continued strong customer demand, the Group has taken action to protect credit quality and participates in the Government guarantee scheme for greater than 90 per cent LTVs, which provides risk mitigation at the highest exposures

(--) Total loans and advances increased to GBP306.6 billion (31 December 2020: GBP295.4 billion), with a small reduction in average LTV to 43.1 per cent (31 December 2020: 43.5 per cent). The proportion of balances with an LTV greater than 90 per cent decreased to 0.4 per cent (31 December 2020: 0.6 per cent). The average LTV of new business decreased to 63.1 per cent (31 December 2020: 63.9 per cent)

(--) There was a net impairment credit of GBP175 million for the first half of 2021 compared to a charge of GBP603 million for the first half of 2020, reflecting improvements to the UK's macroeconomic outlook and in particular resilient house prices. Total ECL coverage remains flat at 0.5 per cent (31 December 2020: 0.5 per cent)

(--) Stage 2 loans and advances decreased to 12.4 per cent of the portfolio (31 December 2020: 12.8 per cent), and Stage 2 ECL coverage has reduced to 1.8 per cent (31 December 2020: 2.1 per cent). These impacts also reflect improvements in the UK's macroeconomic outlook, with a reduction in balances transferred into Stage 2 based on the forward looking view of their credit performance, in addition to favourable experience and house price assumptions

(--) Stage 3 ECL coverage decreased to 13.7 per cent (31 December 2020: 15.6 per cent) again due to favourable house price assumptions (both observed and forecast)

Credit cards

(--) Credit card balances decreased to GBP14.2 billion (31 December 2020: GBP15.1 billion) due to reduced levels of customer spending

(--) The credit card portfolio is a prime book which has performed well in recent years, with lower arrears rates compared to the High Street Bank peer group

(--) The impairment charge was GBP67 million for the first half of 2021 compared to a charge of GBP656 million for the first half of 2020, with overall ECL coverage decreasing to 5.8 per cent (31 December 2020: 6.4 per cent). These decreases are due to lower than anticipated arrears emergence, in conjunction with the improved outlook within the Group's economic forecast

(--) Stage 2 loans and advances have reduced to 20.7 per cent of the portfolio (31 December 2020: 21.7 per cent) and Stage 2 ECL coverage has reduced to 16.2 per cent (31 December 2020: 16.8 per cent). These impacts reflect improvements in the UK's macroeconomic outlook, most notably the more favourable unemployment forecast

(--) Stage 3 ECL coverage decreased to 57.5 per cent (31 December 2020: 58.8 per cent) due to a slight improvement in the mix of customers within Stage 3

Loans and overdrafts

(--) Loans and advances for personal current account and the personal loans portfolios held flat at GBP9.5 billion (31 December 2020: GBP9.5 billion) with some early signs of recovery in customer spend and demand for credit

(--) The impairment charge was GBP130 million for the first half of 2021, compared to GBP462 million for the first half of 2020. This decrease is again partly due to the improved outlook within the Group's macroeconomic forecasts in addition to lower than anticipated arrears emergence, reducing both Stage 2 ECL coverage to 19.6 per cent (31 December 2020: 22.6 per cent) and overall ECL coverage to 6.4 per cent (31 December 2020: 7.6 per cent)

CREDIT RISK PORTFOLIO (continued)

UK Motor Finance

(--) The UK Motor Finance portfolio decreased to GBP14.9 billion (31 December 2020: GBP15.2 billion) due to reduced market activity and new car supply issues as a result of the pandemic

(--) There was a net impairment credit of GBP40 million for the first half of 2021 compared to a charge of GBP241 million for the first half of 2020, reflecting improvements to the UK's macroeconomic outlook and in particular higher than expected used car prices. Overall ECL coverage has decreased to 2.9 per cent (31 December 2020: 3.3 per cent)

(--) Updates to Residual Value (RV) and Voluntary Termination (VT) risk held against Personal Contract Purchase (PCP) and Hire Purchase (HP) lending are included within the impairment charge. The improved macroeconomic outlook, supported by better than expected disposal experience, resulted in a net impairment credit of GBP41 million for RV and VT risk in the first half of 2021

(--) Stage 2 ECL coverage decreased to 5.7 per cent (31 December 2020: 7.7 per cent) and Stage 3 ECL coverage decreased to 64.8 per cent (31 December 2020: 66.8 per cent) due to the impact from updates to the Group's outlook on used car prices

Other

(--) Other loans and advances increased to GBP19.5 billion (31 December 2020: GBP19.4 billion)

(--) The impairment charge was GBP1 million for 2021 compared to GBP133 million for the first half of 2020, primarily due to the improved outlook within the Group's economic forecasts

CREDIT RISK PORTFOLIO (continued)

Retail UK Mortgages loans and advances to customers - statutory basis

 
                     At 30           At 31 
              June 2021(1)     Dec 2020(1) 
                      GBPm            GBPm 
 
Mainstream         245,147       234,273 
Buy-to-let          50,907        49,634 
Specialist          10,067        10,899 
             -------------  ------------ 
Total              306,121       294,806 
             -------------  ------------ 
 

(1) Balances include the impact of HBOS related acquisition adjustments.

Mortgages greater than three months in arrears, excluding repossessions - underlying basis

 
                                   Total mortgage                           Total mortgage 
              Number of cases         accounts       Value of loans(1)          balances 
             ------------------  ------------------  ------------------  --------------------- 
                At 30               At 30               At 30               At 30 
                 June     At 31      June     At 31      June     At 31      June        At 31 
                 2021  Dec 2020      2021  Dec 2020      2021  Dec 2020      2021     Dec 2020 
                Cases     Cases         %         %      GBPm      GBPm         %            % 
 
Mainstream     23,967    25,014       1.3       1.4     2,728     2,777       1.1        1.2 
Buy-to-let      4,377     4,598       1.0       1.1       568       602       1.1        1.2 
Specialist      5,983     6,294       7.6       7.6     1,002     1,056       9.8        9.6 
             --------  --------  --------  --------  --------  --------  --------  --------- 
Total          34,327    35,906       1.5       1.5     4,298     4,435       1.4        1.5 
             --------  --------  --------  --------  --------  --------  --------  --------- 
 

(1) Value of loans represents total gross book value of mortgages more than three months in arrears; the balances exclude the impact of HBOS acquisition adjustments.

The stock of repossessions decreased to 257 cases at 30 June 2021 compared to 343 cases at 31 December 2020.

CREDIT RISK PORTFOLIO (continued)

Period end and average LTVs across the Retail mortgage portfolios - underlying basis

 
                                  Mainstream    Buy-to-let    Specialist    Total 
At 30 June 2021                            %             %             %        % 
 
Less than 60%                           55.4          65.6          75.5     57.8 
60% to 70%                              18.9          25.0          14.9     19.8 
70% to 80%                              18.5           8.7           5.0     16.4 
80% to 90%                               6.8           0.4           1.5      5.6 
90% to 100%                              0.2           0.1           1.0      0.2 
Greater than 100%                        0.2           0.2           2.1      0.2 
                                  ----------    ----------    ----------    ----- 
Total                                  100.0         100.0         100.0    100.0 
                                  ----------    ----------    ----------    ----- 
Average loan to value(1) : 
  Stock of residential mortgages        42.2          48.8          39.2     43.1 
  New residential lending               63.6          60.2           n/a     63.1 
 
 
At 31 December 2020 
Less than 60%                      53.8     61.5     70.1     55.8 
60% to 70%                         18.3     25.0     16.1     19.3 
70% to 80%                         17.8     12.1      8.0     16.5 
80% to 90%                          9.6      0.9      2.3      7.8 
90% to 100%                         0.3      0.2      1.0      0.3 
Greater than 100%                   0.2      0.3      2.5      0.3 
                                  -----    -----    -----    ----- 
Total                             100.0    100.0    100.0    100.0 
                                  -----    -----    -----    ----- 
Average loan to value(1) : 
  Stock of residential mortgages   42.5     49.7     40.9     43.5 
  New residential lending          65.1     58.2      n/a     63.9 
 

(1) Average loan to value is calculated as total loans and advances as a percentage of the total indexed collateral of these loans and advances; the balances exclude the impact of HBOS acquisition adjustments.

CREDIT RISK PORTFOLIO (continued)

Commercial Banking

(--) Commercial Banking has actively supported its customers throughout the crisis, through a range of propositions, including capital repayment holidays, working capital line increases and financial covenant waivers, as well as supporting small businesses and corporates through full use of UK Government schemes

(--) Although the macroeconomic outlook has improved, the pandemic has resulted in widespread industry disruption, with some sectors such as travel, transportation, non-essential retail, leisure and hospitality particularly impacted. However, as a proportion of the Group's overall lending, exposure to these sectors remains limited

(--) The Group still expects recovery to be slower in a few of the impacted sectors and anticipates longer term structural changes in these, and a number of other sectors. Sector and credit risk appetite continue to be proactively managed to ensure the Group is protected and clients are supported in the right way

(--) Observed credit quality has been broadly stable in the first half of 2021, noting that this is likely to be influenced by the significant temporary support provided by the UK Government in light of the pandemic, which has had the potential to distort the underlying credit risk profile, particularly in the predominantly secured SME portfolio

(--) Commercial Banking has continued to support its more vulnerable clients early through focused risk management via the Group's Watchlist and Business Support framework

(--) The Group does anticipate a negative impact from the withdrawal of UK Government support measures in the second half of 2021. This may also be seen as repayments under UK Government support schemes start to become due, with an increase in arrears and defaults expected, consistent with macroeconomic expectations. It is anticipated that these will be protracted over a number of years, given the flexible payment deferral options available under the various UK Government lending schemes. The level of arrears is therefore being carefully monitored with early risk mitigation activities taken as appropriate

(--) Although significant uncertainties remain, the Group will continue to balance prudent risk appetite with ensuring support for financially viable clients on their road to recovery

Impairments

(--) There was a net impairment credit of GBP636 million in the first half of 2021, compared to a charge of GBP1,519 million in the first half of 2020. The credit was driven by the GBP293 million release of expected credit loss (ECL) allowances resulting from improvements to the UK's macroeconomic outlook; improved restructuring outcomes on cases managed within the Business Support Unit and other Stage 3 releases; lower balance sheet and credit quality improvements, including in Stage 2 exposures; and low levels of gross charges from cases flowing into default. As a result, ECL allowances reduced by GBP748 million to GBP1,647 million at 30 June 2021 (31 December 2020: GBP2,395 million)

(--) The Group recognises that credit quality has been partly supported by the temporary measures provided by the UK Government schemes and the ECL provision at 30 June 2021 assumes additional losses will emerge as the support subsides and structural change emerges in some sectors

(--) Stage 2 loans and advances reduced by GBP5,912 million to GBP8,404 million (31 December 2020: GBP14,316 million), largely driven by the improvement in the Group's forward looking economic assumptions, with 97.1 per cent of Stage 2 balances being current and up to date. As a result, Stage 2 loans as a proportion of total loans and advances to customers reduced to 9.8 per cent (31 December 2020: 16.2 per cent). Stage 2 ECL coverage was lower at 4.9 per cent (31 December 2020: 5.2 per cent) with the reduction in coverage a direct result of the forward look multiple economic scenarios

(--) Stage 3 loans and advances reduced to GBP3,078 million (31 December 2020: GBP3,524 million) and as a proportion of total loans and advances to customers, reduced to 3.6 per cent (31 December 2020: 4.0 per cent). SME flows to Stage 3 remain suppressed and non-SME flows were offset by repayments and write-offs. Stage 3 ECL coverage reduced to 33.7 per cent (31 December 2020: 38.2 per cent) predominantly driven by the release of provisions on a small number of cases in Business Support, including coronavirus impacted restructuring cases

CREDIT RISK PORTFOLIO (continued)

Commercial Banking UK Direct Real Estate

(--) Commercial Banking UK Direct Real Estate gross lending stood at GBP12.1 billion at 30 June 2021 (net of exposures subject to protection through Significant Risk Transfer (SRT) securitisations). The Group has a further GBP0.8 billion of UK Direct Real Estate exposure in Business Banking within the Retail division

(--) The Group classifies Direct Real Estate as exposure which is directly supported by cash flows from property activities (as opposed to trading activities, such as hotels, care homes and housebuilders). Exposures of GBP5.7 billion to social housing providers are also excluded

(--) Recognising this is a cyclical sector, caps are in place to control origination and exposure, including a number of asset type categories. Focus remains on the UK market and business propositions have been written in line with a prudent, through-the-cycle risk appetite with conservative LTVs, strong quality of income and proven management teams

(--) Overall performance has remained resilient. Watchlist numbers increased through Q1 but have now stabilised. Transfers to BSU have been limited and the BSU CRE portfolio is largely concentrated in the retail/shopping centres sub sector, although this is reducing and remains modest in the context of the overall BSU portfolio. Overall rent collection has been impacted by the coronavirus pandemic, particularly in the retail and leisure space given the impact of lockdowns, though the office sub sector has been resilient. Despite these challenges the portfolio is well positioned and proactively managed with appropriate risk mitigants in place

(-) Exposures over GBP1 million continue to be heavily weighted towards investment real estate (c.90 per cent) over development. Of these investment exposures, over 76 per cent have an LTV of less than 60 per cent, with an average LTV of 49 per cent

(-) c.90 per cent of exposures greater than GBP5 million have an interest cover ratio of greater than 2.0 times and in SME, LTV at origination has been typically limited to c.55 per cent, given prudent repayment cover criteria (including a notional base rate stress)

(-) Approximately 60 per cent of exposures over GBP1 million relate to commercial real estate (with no speculative development lending) with the remainder related to residential real estate. The underlying sub-sector split is diversified with c.13.5 per cent of exposures secured by Retail assets and appetite tightened since 2018

(-) The Office portfolio is focused on prime locations with strong sponsors and low LTVs, as well as no speculative commercial development. Commercial risk appetite continues to be proactively managed with appropriate risk mitigation tightening seen in the first half of 2021

(-) Use of SRT securitisations also acts as a risk mitigant in this portfolio, with run off of these carefully managed and tracked

(-) Both investment and development lending is subject to specific credit risk appetite criteria. Development lending criteria include maximum loan to gross development value and maximum loan to cost, with funding typically only released against completed work, as confirmed by the Group's monitoring quantity surveyor

CREDIT RISK PORTFOLIO (continued)

Commercial Banking lending in key coronavirus-impacted sectors(1)

 
                             At 30 June 2021                         At 31 December 2020 
                 ----------------------------------------  --------------------------------------- 
                                                    Drawn 
                                                     as a                                    Drawn 
                                                     % of                                     as a 
                                                    loans                     Drawn           % of 
                                       Drawn          and                       and          loans 
                 Drawn  Undrawn  and undrawn     advances  Drawn  Undrawn   undrawn   and advances 
                 GBPbn    GBPbn        GBPbn            %  GBPbn    GBPbn     GBPbn              % 
 
Retail non-food    2.1      1.4          3.5          0.4    2.1      1.7       3.8          0.4 
Automotive 
 dealerships(2)    1.3      2.1          3.4          0.2    1.8      2.0       3.8          0.4 
Construction       0.8      1.5          2.3          0.2    0.8      1.7       2.5          0.2 
Passenger 
 transport         1.4      0.7          2.1          0.3    1.1      1.1       2.2            0.2 
Hotels             1.5      0.3          1.8          0.3    1.8      0.3       2.1            0.4 
Leisure            0.6      0.6          1.2          0.1    0.6      0.7       1.3          0.1 
Restaurants 
 and bars          0.5      0.4          0.9          0.1    0.6      0.5       1.1          0.1 
                 -----  -------  -----------               -----  -------  -------- 
Total              8.2      7.0         15.2          1.6    8.8      8.0      16.8          1.7 
                 -----  -------  -----------               -----  -------  -------- 
 

(1) Lending classified using ONS Standard Industrial Classification codes at legal entity level; drawn balances exclude c.GBP1 billion lending under the Coronavirus Business Interruption Loan Scheme and the Bounce Back Loan Scheme. Oil and Gas has been removed as a key coronavirus-impacted sector.

(2) Automotive dealerships includes Black Horse Motor Wholesale lending (within the Retail Division).

FUNDING AND LIQUIDITY MANAGEMENT

The Group has maintained its strong funding and liquidity position with a loan to deposit ratio of 94 per cent as at 30 June 2021 (98 per cent as at 31 December 2020). Customer deposits continued to increase over the period as customer spending remained subdued. This increased the Group's cash reserves held at the Bank of England and allowed the Group to repay GBP5 billion of the Term Funding Scheme with additional incentives for SMEs (TFSME) taking the total outstanding amount to GBP8.7 billion as at 30 June 2021.

The Group's liquid assets continue to exceed the regulatory minimum and internal risk appetite, with a liquidity coverage ratio (LCR) of 131 per cent (based on a monthly rolling average over the previous 12 months) as at 30 June 2021 calculated on a Group consolidated basis based on the EU Delegated Act. Following the implementation of structural reform, liquidity risk is managed at a legal entity level with the Group consolidated LCR representing the composite of the Ring-Fenced Bank and Non Ring-Fenced Bank entities.

During the first half of the year, the Group continued to have access to wholesale funding across a range of currencies and markets. Year-to-date term funding issuance volumes total GBP2.1 billion which remains below the Group's normal guidance given the availability of customer deposits and TFSME, both of which are more cost effective sources of funding for the Group. The Group continues to expect limited additional term funding needs over the course of the second half of the year. Overall, wholesale funding totalled GBP103.3 billion as at 30 June 2021.

The Group's credit ratings continue to reflect the resilience of the Group's business model and the strength of the balance sheet. In May, Fitch downgraded Lloyds Banking Group plc from A+/Negative to A/Negative on a methodological adjustment reflecting the fact that Qualifying Junior Debt ratios will remain below 10 per cent of risk-weighted assets. This action led to a downgrade of the Long Term Issuer Default and Insurer Financial Strength Ratings of Scottish Widows (downgraded by one notch to A and A+ respectively). The ratings of all bank subsidiaries were affirmed. During July, Moody's finalised and updated their ratings methodology and used it to drive a number of ratings changes for UK banks, including the Senior and Subordinated ratings for Lloyds Banking Group and Subordinated ratings for Lloyds Bank, which each saw one notch upgrades. During June and July, all ratings agencies returned the Group's ratings to Stable to reflect better underlying UK economic expectations and their belief that Lloyds is well positioned to benefit from the macroeconomic recovery underway.

FUNDING AND LIQUIDITY MANAGEMENT (continued)

Group funding requirements and sources

 
                                                    At 30      At 31 
                                                June 2021   Dec 2020    Change 
                                                    GBPbn      GBPbn         % 
 
Group funding position 
Loans and advances to customers(1)                  447.7      440.2       2 
Loans and advances to banks(2)                        7.1        7.8     (9) 
Debt securities at amortised cost                     5.0        5.4     (7) 
Reverse repurchase agreements - non-trading          56.3       61.3     (8) 
Financial assets at fair value through other 
 comprehensive income                                26.2       27.6     (5) 
Cash and balances at central banks                   79.0       73.3       8 
Other assets(3)                                     258.4      255.7       1 
                                               ----------  --------- 
Total Group assets                                  879.7      871.3       1 
Less other liabilities(3)                         (232.1)    (233.6)     (1) 
                                               ----------  --------- 
Funding requirements                                647.6      637.7       2 
                                               ----------  --------- 
 
Customer deposits(4)                                474.4      450.7       5 
Wholesale funding(5)                                103.3      109.4     (6) 
Repurchase agreements - non-trading                   9.3       14.5    (36) 
Term funding scheme(6)                                8.7       13.7    (36) 
Total equity                                         51.9       49.4       5 
                                               ----------  --------- 
Funding sources                                     647.6      637.7       2 
                                               ----------  --------- 
 

(1) Excludes reverse repos of GBP52.7 billion (31 December 2020: GBP58.6 billion).

(2) Excludes GBP0.1 billion (31 December 2020: GBP0.2 billion) of loans and advances to banks within the Insurance business and GBP3.6 billion (31 December 2020: GBP2.7 billion) of reverse repurchase agreements.

(3) Other assets and other liabilities primarily include balances in the Group's Insurance business and the fair value of derivative assets and liabilities.

(4) Excludes repos of GBP7.9 billion (31 December 2020: GBP9.4 billion).

(5) The Group's definition of wholesale funding aligns with that used by other international market participants; including bank deposits, debt securities in issue and subordinated liabilities. Excludes balances relating to margins of GBP4.0 billion (31 December 2020: GBP5.3 billion).

(6) 31 December 2020 balance includes the Bank of England's Term Funding Scheme (TFS). 30 June 2021 and 31 December 2020 include the Term Funding Scheme with additional incentives for SMEs (TFSME).

FUNDING AND LIQUIDITY MANAGEMENT (continued)

 
                                              Repos 
                                           and cash 
                                         collateral   Fair value 
                              Included     received    and other 
                            in funding           by   accounting    Balance 
                              analysis    Insurance      methods      sheet 
At 30 June 2021                  GBPbn        GBPbn        GBPbn      GBPbn 
 
Deposits from banks                5.9         14.6          0.2     20.7 
Debt securities in issue          84.0            -        (2.7)     81.3 
Subordinated liabilities          13.4            -          0.1     13.5 
                           -----------  ----------- 
Total wholesale funding          103.3         14.6 
Customer deposits                474.4          7.9            -    482.3 
                           -----------  ----------- 
Total                            577.7         22.5 
                           -----------  ----------- 
 
At 31 December 2020 
Deposits from banks                6.1         24.3          1.1     31.5 
Debt securities in issue          89.7            -        (2.3)     87.4 
Subordinated liabilities          13.6            -          0.7     14.3 
                           -----------  ----------- 
Total wholesale funding          109.4         24.3 
Customer deposits                450.7          9.4            -    460.1 
                           -----------  ----------- 
Total                            560.1         33.7 
                           -----------  ----------- 
 

Analysis of total wholesale funding by residual maturity

 
                                                                             Total 
                  Less     One             Six    Nine    One    Two   More     at    Total 
                  than      to   Three      to  months     to     to   than     30    at 31 
                   one   three  to six    nine  to one    two   five   five   June      Dec 
                 month  months  months  months    year  years  years  years   2021     2020 
                 GBPbn   GBPbn   GBPbn   GBPbn   GBPbn  GBPbn  GBPbn  GBPbn  GBPbn    GBPbn 
 
Deposits from 
 banks             3.3     1.4     0.6       -     0.1    0.2    0.3      -    5.9    6.1 
Debt securities 
 in issue: 
                        ------  ------  ------  ------  -----  -----  -----  -----  ------- 
Certificates 
 of deposit        0.4     0.8     1.1     1.1     0.4    0.4      -      -    4.2    8.0 
Commercial 
 paper             4.2     5.8     1.8     0.5       -      -      -      -   12.3    8.1 
Medium-term 
 notes             1.0     0.3     1.6     2.3     1.0    8.1   19.0   12.1   45.4   47.5 
Covered bonds      1.3     0.7     0.4     1.0     1.1    5.5    5.7    3.9   19.6   23.2 
Securitisation     0.4     0.2     0.5       -     0.2    1.2      -      -    2.5    2.9 
                 -----  ------  ------  ------  ------  -----  -----  -----  -----  ----- 
                   7.3     7.8     5.4     4.9     2.7   15.2   24.7   16.0   84.0   89.7 
Subordinated 
 liabilities         -       -       -       -       -    1.1    6.3    6.0   13.4   13.6 
                 -----  ------  ------  ------  ------  -----  -----  -----  -----  ----- 
Total wholesale 
 funding(1)       10.6     9.2     6.0     4.9     2.8   16.5   31.3   22.0  103.3  109.4 
                 -----  ------  ------  ------  ------  -----  -----  -----  -----  ----- 
 

(1) Excludes balances relating to margins of GBP4.0 billion (31 December 2020: GBP5.3 billion).

FUNDING AND LIQUIDITY MANAGEMENT (continued)

Analysis of 2021 term issuance

 
                                                             Other 
                           Sterling  US Dollar   Euro   currencies    Total 
                              GBPbn      GBPbn  GBPbn        GBPbn    GBPbn 
 
Medium-term notes                 -        1.5      -            -    1.5 
Covered bonds                     -          -      -            -      - 
Private placements              0.1          -      -            -    0.1 
Subordinated liabilities        0.5          -      -            -    0.5 
                           --------  ---------  -----  -----------  ----- 
Total issuance                  0.6        1.5      -            -    2.1 
                           --------  ---------  -----  -----------  ----- 
 

Liquidity Portfolio

At 30 June 2021, the banking business had GBP139.1 billion of highly liquid unencumbered LCR eligible assets, based on a monthly rolling average over the previous 12 months post any liquidity haircuts (31 December 2020: GBP141.7 billion). These assets are available to meet cash and collateral outflows and regulatory requirements. The Insurance business manages a separate liquidity portfolio to mitigate insurance liquidity risk.

The banking business also has a significant amount of non-LCR eligible liquid assets which are eligible for use in a range of central bank or similar facilities, including the TFSME. Future use of such facilities will be based on prudent liquidity management and economic considerations, having regard for external market conditions.

LCR eligible assets

 
                                               Average   Average 
                                               2021(1)   2020(2)    Change 
                                                 GBPbn     GBPbn         % 
 
Level 1 
Cash and central bank reserves                    71.7      69.3       3 
High quality government/MDB/agency bonds(3)       63.3      68.1     (7) 
High quality covered bonds                         2.8       2.9     (3) 
                                              --------  -------- 
Total                                            137.8     140.3     (2) 
Level 2(4)                                         1.3       1.4     (7) 
                                              --------  -------- 
Total LCR eligible assets                        139.1     141.7     (2) 
                                              --------  -------- 
 

(1) Based on 12 months rolling average to 30 June 2021. Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts.

(2) Based on 12 months rolling average to 31 December 2020. Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts.

(3) Designated multilateral development bank (MDB).

(4) Includes Level 2A and Level 2B.

FUNDING AND LIQUIDITY MANAGEMENT (continued)

Encumbered assets

The Board and the Group Asset and Liability Committee (GALCO) monitor and manage total balance sheet encumbrance using a number of risk appetite metrics. At 30 June 2021, the Group had GBP38.4 billion (31 December 2020: GBP46.9 billion) of externally encumbered on-balance sheet assets with counterparties other than central banks. The decrease in encumbered assets was primarily driven by securitisation and covered bond redemptions. The Group also had GBP737.3 billion (31 December 2020: GBP707.2 billion) of unencumbered on-balance sheet assets, and GBP104.0 billion (31 December 2020: GBP117.2 billion) of pre-positioned and encumbered assets held with central banks, the reduction in the latter was primarily driven by the amortisation of the asset portfolios pledged to access Bank of England funding schemes. Primarily, the Group encumbers mortgages, unsecured lending and credit card receivables through the issuance programmes and tradable securities through securities financing activity. The Group mainly positions mortgage assets at central banks.

CAPITAL MANAGEMENT

Analysis of capital position

The Group's CET1 capital ratio increased from 16.2 per cent at 31 December 2020 to 16.7 per cent (post dividend accrual), with a strong capital build of 93 basis points in the first six months of the year, prior to a reduction in the intangible software assets benefit (6 basis points) and the impact of the foreseeable ordinary dividend accrual (37 basis points). This reflected the following:

-- Banking build (pre impairment credit) of 115 basis points, in part offset by 6 basis points for the limited net impact of the impairment credit and partial release of IFRS 9 transitional relief which included 5 basis points relating to the phased reduction of static relief

-- A reduction in underlying risk-weighted assets generating an increase of 16 basis points and other movements which netted to 3 basis points

-- Offset by pension contributions of 35 basis points, reflecting the full 2021 fixed contributions for the Group's three main defined benefit pension schemes

The accrual for foreseeable ordinary dividends includes the announced interim ordinary dividend of 0.67 pence per share. The Board has confirmed its intention to reintroduce a progressive and sustainable ordinary dividend policy. A final decision on the 2021 full year dividend and the return of any surplus capital through special dividends or share buybacks will be given due consideration by the Board at year end.

The PRA have confirmed their intention to remove the beneficial treatment currently applied to intangible software assets and reinstate the original requirement to deduct these assets in full. This change will be implemented on 1 January 2022 and is expected to reduce the Group's reported CET 1 ratio by c.50bps at that time.

The Group continues to apply the revised IFRS 9 transitional arrangements for capital which provide for temporary capital relief for the increase in accounting impairment provisions following the initial implementation of IFRS 9 ('static' relief) and subsequent relief for any increases in Stage 1 and Stage 2 expected credit losses since 1 January 2020 ('dynamic' relief). The transitional arrangements do not cover Stage 3 expected credit losses. The total relief recognised at 30 June 2021 amounted to 78 basis points.

Excluding the IFRS 9 transitional relief and removing the current beneficial treatment applied to intangible software assets would reduce the Group's CET1 capital ratio from 16.7 per cent to 15.5 per cent, on the basis of the position at 30 June 2021.

The transitional total capital ratio reduced to 23.1 per cent (31 December 2020: 23.3 per cent) largely reflecting the annual reduction in transitional limits applied to legacy tier 1 and tier 2 instruments and the impact of movements in rates, partially offset by the increase in CET 1 capital, the issuance of a new tier 2 capital instrument and the reduction in risk-weighted assets.

The Group's transitional minimum requirement for own funds and eligible liabilities (MREL) ratio reduced to 36.3 per cent (31 December 2020: 36.4 per cent), largely reflecting the reductions in transitional total capital resources and other eligible liabilities, partially offset by the reduction in risk-weighted assets.

The UK leverage ratio remained at 5.8 per cent (31 December 2020: 5.8 per cent) as the reduction in the fully loaded total tier 1 capital position was offset by the reduction in the leverage exposure measure, the latter primarily reflecting movements in securities financing transactions and off-balance sheet items.

Total capital requirement

The Group's total capital requirement (TCR) as at 30 June 2021, being the aggregate of the Group's Pillar 1 and current Pillar 2A capital requirements, was GBP23,767 million (31 December 2020: GBP23,918 million).

CAPITAL MANAGEMENT (continued)

Target capital ratio

The Board's view of the ongoing level of CET1 capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties remains at c.12.5 per cent plus a management buffer of c.1 per cent. This takes into account, amongst other things:

   --     The minimum Pillar 1 CET1 capital requirement of 4.5 per cent of risk-weighted assets 

-- The Group's Pillar 2A requirement set by the PRA. The current CET1 Pillar 2A requirement is c.2.2 per cent of risk-weighted assets

   --     The capital conservation buffer (CCB) requirement of 2.5 per cent of risk-weighted assets 

-- The Group's current countercyclical capital buffer (CCYB) requirement which is around zero per cent of risk-weighted assets, predominantly reflecting the current UK countercyclical capital buffer rate of zero per cent

-- The RFB sub-group's other systemically important institution (O-SII) buffer of 2.0 per cent of risk-weighted assets, which equates to 1.7 per cent of risk-weighted assets at Group level

-- The Group's PRA Buffer, which the PRA sets after taking account of the results of any PRA stress tests and other information, as well as outputs from the Group's own internal stress tests. The PRA requires this buffer to remain confidential

   --     The desire to maintain dividends in the context of year to year earnings movements 

Capital resources

An analysis of the Group's capital position as at 30 June 2021 is presented in the following section on both a transitional arrangements basis and a fully loaded basis in respect of legacy capital securities subject to current grandfathering provisions. In addition, the Group's capital position under both bases reflects the application of the separate transitional arrangements for IFRS 9.

The following table summarises the consolidated capital position of the Group.

CAPITAL MANAGEMENT (continued)

 
                                               Transitional            Fully loaded 
                                           ---------------------  ----------------------- 
                                                At 30      At 31       At 30        At 31 
                                            June 2021   Dec 2020   June 2021     Dec 2020 
                                                 GBPm       GBPm        GBPm         GBPm 
 
Common equity tier 1 
Shareholders' equity per balance 
 sheet                                         45,761     43,278      45,761     43,278 
Adjustment to retained earnings 
 for foreseeable dividends                      (710)      (404)       (710)      (404) 
Adjustment to retained earnings 
 for IFRS 9 transitional arrangements           1,311      1,958       1,311      1,958 
Deconsolidation adjustments(1)                  2,583      2,333       2,583      2,333 
Cash flow hedging reserve and other 
 adjustments                                    (695)    (1,785)       (695)    (1,785) 
                                           ----------  ---------  ----------  --------- 
                                               48,250     45,380      48,250     45,380 
less: deductions from common equity 
 tier 1 
Goodwill and other intangible assets          (3,332)    (3,120)     (3,332)    (3,120) 
Prudent valuation adjustment                    (502)      (445)       (502)      (445) 
Removal of defined benefit pension 
 surplus                                      (2,209)    (1,322)     (2,209)    (1,322) 
Significant investments(1)                    (4,073)    (4,109)     (4,073)    (4,109) 
Deferred tax assets                           (4,609)    (3,562)     (4,609)    (3,562) 
                                           ----------  ---------  ----------  --------- 
Common equity tier 1 capital(2)                33,525     32,822      33,525     32,822 
                                           ----------  ---------  ----------  --------- 
Additional tier 1 
Other equity instruments                        5,879      5,881       5,879      5,881 
Preference shares and preferred 
 securities(3)                                  2,472      2,705           -          - 
Transitional limit and other adjustments      (1,921)    (1,604)           -          - 
                                           ----------  ---------  ----------  --------- 
                                                6,430      6,982       5,879      5,881 
less: deductions from tier 1 
Significant investments(1)                    (1,100)    (1,138)     (1,100)          - 
                                           ----------  ---------  ----------  --------- 
Total tier 1 capital(2)                        38,855     38,666      38,304     38,703 
                                           ----------  ---------  ----------  --------- 
Tier 2 
Other subordinated liabilities(3)              11,055     11,556      11,055     11,556 
Deconsolidation of instruments issued 
 by insurance entities(1)                     (1,737)    (1,892)     (1,737)    (1,892) 
Adjustments for transitional limit 
 and non-eligible instruments                     914      1,474     (1,243)    (1,346) 
Amortisation and other adjustments            (1,640)    (1,694)     (1,640)    (1,694) 
                                           ----------  ---------  ----------  --------- 
                                                8,592      9,444       6,435      6,624 
less: deductions from tier 2 
Significant investments(1)                      (966)      (942)       (966)    (2,080) 
                                           ----------  ---------  ----------  --------- 
Total capital resources(2)                     46,481     47,168      43,773     43,247 
                                           ----------  ---------  ----------  --------- 
 
Risk-weighted assets (unaudited)              200,858    202,747     200,858    202,747 
 
Common equity tier 1 capital ratio              16.7%      16.2%       16.7%        16.2% 
Tier 1 capital ratio                            19.3%      19.1%       19.1%        19.1% 
Total capital ratio                             23.1%      23.3%       21.8%        21.3% 
 

(1) For regulatory capital purposes, the Group's Insurance business is deconsolidated and replaced by the amount of the Group's investment in the business. A part of this amount is deducted from capital (via 'significant investments' in the table above) and the remaining amount is risk-weighted, forming part of threshold risk-weighted assets.

(2) Position at 31 December 2020 audited.

(3) Preference shares, preferred securities and other subordinated liabilities are reported as subordinated liabilities in the balance sheet.

CAPITAL MANAGEMENT (continued)

Movements in capital resources

The key difference between the transitional capital calculation as at 30 June 2021 and the fully loaded equivalent is primarily related to capital securities that previously qualified as tier 1 or tier 2 capital, but that do not fully qualify under the regulation, which can be included in additional tier 1 (AT1) or tier 2 capital (as applicable) up to specified limits which reduce by 10 per cent per annum until 2022. In addition, following revisions to eligibility criteria for capital instruments under CRR II, certain tier 1 capital instruments of the Group that will transition to tier 2 capital by 2022 will cease to qualify as regulatory capital in June 2025.

Following a debt restructure by the Insurance business during the period, the Group's previous holdings in certain legacy capital instruments issued by Scottish Widows Group Limited have been replaced with new instruments that are fully eligible under Solvency II requirements. These include the issue of Restricted Tier 1 (RT1) and tier 2 capital instruments to the Group which are subsequently deducted from the Group's tier 1 and tier 2 capital positions respectively on both a transitional and fully loaded basis. Remaining legacy instruments held by the Group continue to be deducted from the Group's tier 2 capital position on both a transitional and fully loaded basis.

The key movements on a transitional capital basis are set out in the table below.

 
                                           Common 
                                           equity  Additional               Total 
                                           tier 1      tier 1  Tier 2     capital 
                                             GBPm        GBPm    GBPm        GBPm 
 
At 31 December 2020                        32,822       5,844   8,502    47,168 
Banking business profits(1)                 4,025           -       -     4,025 
Foreseeable dividend accrual 
 for the period(2)                          (710)           -       -     (710) 
IFRS 9 transitional adjustment 
 to retained earnings                       (647)           -       -     (647) 
Pension contributions                       (668)           -       -     (668) 
Prudent valuation adjustment                 (57)           -       -      (57) 
Deferred tax asset                        (1,047)           -       -   (1,047) 
Goodwill and other intangible 
 assets                                     (212)           -       -     (212) 
Significant investments                        36          38    (24)        50 
Movements in other equity, subordinated 
 liabilities, other tier 2 items 
 and related adjustments                        -       (552)   (852)   (1,404) 
Distributions on other equity 
 instruments                                (213)           -       -     (213) 
Other movements(3)                            196           -       -       196 
                                          -------  ----------  ------  -------- 
At 30 June 2021                            33,525       5,330   7,626    46,481 
                                          -------  ----------  ------  -------- 
 

(1) Under the regulatory framework, profits made by Insurance are removed from CET1 capital. However, when dividends are paid to the Group by Insurance these are recognised through CET1 capital.

(2) Reflects the accrual for foreseeable 2021 ordinary dividends. Excludes the reversal of the brought forward accrual for the 2020 full year ordinary dividend which has now been paid out.

(3) Includes other pension movements.

CET1 capital resources have increased by GBP703 million during the period, primarily reflecting:

(--) underlying banking business profits, with the impairment credit offset by the partial unwind of IFRS 9 transitional relief

(--) offset in part by pension contributions made during the period, the accrual of the foreseeable ordinary dividend and other items including the increase in deferred tax assets deducted from capital which primarily reflects the remeasurement of deferred tax assets following the announced increase in the UK corporation tax rate from 1 April 2023. The remeasurement has a limited overall capital benefit as the tax credit through banking profits is largely offset by the increase in the deferred tax asset deduction.

AT1 capital resources have reduced by GBP514 million during the period, primarily reflecting the annual reduction in the transitional limit applied to grandfathered AT1 capital instruments.

CAPITAL MANAGEMENT (continued)

Tier 2 capital resources have reduced by GBP876 million during the period, largely reflecting the application of the reduced transitional limit applied to grandfathered tier 2 capital instruments, the impact of movements in rates and regulatory amortisation, partially offset by the issuance of a new tier 2 capital instrument.

Minimum requirement for own funds and eligible liabilities (MREL)

The Group is not classified as a global systemically important bank (G-SIB) but is subject to the Bank of England's MREL statement of policy (MREL SoP) and must therefore maintain a minimum level of MREL resources.

Applying the MREL SoP to current minimum capital requirements, the Group's MREL from 1 January 2020, excluding regulatory capital and leverage buffers, is the higher of 2 times Pillar 1 plus Pillar 2A, equivalent to 19.8 per cent of risk-weighted assets, or 6.5 per cent of the UK leverage ratio exposure measure.

From 1 January 2022 the Group's indicative MREL, excluding regulatory capital and leverage buffers, will increase to the higher of 2 times Pillar 1 plus 2 times Pillar 2A, equivalent to 23.7 per cent of risk-weighted assets, or 6.5 per cent of the UK leverage ratio exposure measure.

In addition, CET1 capital cannot be used to meet both MREL and capital or leverage buffers.

The Bank of England is undertaking a review of the current MREL framework and has recently published a consultation paper on proposed changes which it intends to implement by the end of the year. There is no proposed change to the end-state requirements that will apply from 1 January 2022.

An analysis of the Group's current transitional MREL resources is provided in the table below.

 
                                                          Transitional(1) 
                                                      ----------------------- 
                                                           At 30      At 31 
                                                       June 2021   Dec 2020 
                                                            GBPm       GBPm 
 
Total capital resources (transitional basis)              46,481     47,168 
Ineligible AT1 and tier 2 instruments(2)                   (235)      (582) 
Amortised portion of eligible tier 2 instruments 
 issued by Lloyds Banking Group plc                          420        194 
Other eligible liabilities issued by Lloyds Banking 
 Group plc(3)                                             26,180     26,946 
                                                      ----------  --------- 
Total MREL resources(1)                                   72,846     73,726 
                                                      ----------  --------- 
 
Risk-weighted assets                                     200,858    202,747 
 
MREL ratio                                                 36.3%      36.4% 
 
Leverage exposure measure                                658,689    666,070 
 
MREL leverage ratio                                        11.1%      11.1% 
 

(1) Until 2022, externally issued regulatory capital in operating entities can count towards the Group's MREL resources to the extent that such capital would count towards the Group's consolidated capital resources.

(2) Instruments with less than or equal to one year to maturity or governed under non-UK law without a contractual bail-in clause.

(3) Includes senior unsecured debt.

During the first half of 2021, the Group issued externally GBP1.4 billion (sterling equivalent at point of issuance) of senior unsecured debt from Lloyds Banking Group plc which, while not included in total capital, is eligible to meet MREL.

Total MREL resources reduced by GBP880 million during the period, largely as a result of the reduction in total capital resources and a reduction in other eligible liabilities, the latter reflecting the impact of movements in rates and the removal of a senior unsecured debt instrument with less than one year to maturity, partially offset by the issuance of the GBP1.4 billion of senior unsecured debt.

CAPITAL MANAGEMENT (continued)

Risk-weighted assets

 
                                                                    At 30      At 31 
                                                                June 2021   Dec 2020 
                                                                     GBPm       GBPm 
Foundation Internal Ratings Based (IRB) Approach                   48,137     50,435 
Retail IRB Approach                                                66,602     65,225 
Other IRB Approach                                                 16,986     17,747 
                                                               ----------  --------- 
IRB Approach                                                      131,725    133,407 
Standardised (STA) Approach                                        21,787     23,596 
                                                               ----------  --------- 
Credit risk                                                       153,512    157,003 
Counterparty credit risk                                            4,999      5,630 
Contributions to the default funds of central counterparties          423        436 
Credit valuation adjustment risk                                      526        679 
Operational risk                                                   24,573     24,865 
Market risk                                                         4,516      2,207 
                                                               ----------  --------- 
Risk-weighted assets                                              188,549    190,820 
Threshold risk-weighted assets(1)                                  12,309     11,927 
                                                               ----------  --------- 
Total risk-weighted assets                                        200,858    202,747 
                                                               ----------  --------- 
 

(1) Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital. Significant investments primarily arise from investment in the Group's Insurance business.

Risk-weighted asset movements by driver

 
                      Credit   Credit     Credit  Counterparty 
                        risk     risk       risk        credit  Market  Operational 
                         IRB      STA   total(1)       risk(2)    risk         risk       Total 
                        GBPm     GBPm       GBPm          GBPm    GBPm         GBPm        GBPm 
Total risk-weighted 
 assets at 31 
 December 
 2020                                                                                 202,747 
Less threshold 
 risk-weighted 
 assets(3)                                                                           (11,927) 
                                                                                     -------- 
Risk-weighted 
 assets 
 at 31 December 
 2020                133,407   23,596    157,003         6,745   2,207       24,865   190,820 
Asset size           (3,178)    (375)    (3,553)         (569)       -            -   (4,122) 
Asset quality          1,816    (110)      1,706         (193)       -            -     1,513 
Model updates              -        -          -             -     533            -       533 
Methodology and 
 policy                 (42)  (1,243)    (1,285)             -       -            -   (1,285) 
Acquisitions and 
disposals                  -        -          -             -       -            -         - 
Movements in risk 
 levels 
 (market risk only)        -        -          -             -      51            -        51 
Foreign exchange 
 movements             (278)     (81)      (359)          (35)       -            -     (394) 
Other                      -        -          -             -   1,725        (292)     1,433 
                     -------  -------  ---------  ------------  ------  -----------  -------- 
Risk-weighted 
 assets 
 at 30 June 2021     131,725   21,787    153,512         5,948   4,516       24,573   188,549 
                     -------  -------  ---------  ------------  ------  ----------- 
Threshold 
 risk-weighted 
 assets (3)                                                                            12,309 
                                                                                     -------- 
Total risk-weighted assets 
 at 30 June 2021                                                                      200,858 
                                                                                     -------- 
 

(1) Credit risk includes securitisation risk-weighted assets.

(2) Counterparty credit risk includes movements in contributions to the default fund of central counterparties and movements in credit valuation adjustment risk.

(3) Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital. Significant investments primarily arise from investments in the Group's Insurance business.

CAPITAL MANAGEMENT (continued)

The risk-weighted assets movement table provides analysis of the movement in risk-weighted assets in the period by risk type and an insight into the key drivers of the movements.

Credit risk, risk-weighted assets:

(--) Asset size reduction of GBP3.6 billion predominantly reflects continued optimisation in Commercial Banking and lower unsecured balances, partially offset by increased mortgage lending

(--) Asset quality increase of GBP1.7 billion reflects the impact of credit migration and retail model calibrations, offset by the benefit of House Price Index increases

(--) Methodology and policy changes reduced risk-weighted assets by GBP1.3 billion through securitisation activity and other optimisation activity

Counterparty credit risk, risk-weighted assets: reduced by GBP0.8 billion predominantly due to movements in market rates during the period

Market risk, risk-weighted assets: the increase of GBP2.3 billion is largely temporary and due to IBOR cessation activities.

Leverage ratio

The Group is currently subject to the following minimum requirements under the UK Leverage Ratio Framework:

(--) a minimum leverage ratio requirement of 3.25 per cent of the total leverage exposure measure

(--) a countercyclical leverage buffer (CCLB) which is currently zero per cent of the total leverage exposure measure, reflecting the current UK countercyclical capital buffer rate of zero per cent

(--) an additional leverage ratio buffer (ALRB) of 0.7 per cent of the total leverage exposure measure applies to the RFB sub-group, which equates to 0.6 per cent at Group level

At least 75 per cent of the 3.25 per cent minimum leverage ratio requirement as well as 100 per cent of all regulatory leverage buffers must be met with CET1 capital.

Analysis of leverage movements

The Group's fully loaded UK leverage ratio has remained at 5.8 per cent, with the impact of the reduction in the fully loaded total tier 1 capital position offset by the reduction in the exposure measure which reduced by GBP7.4 billion during the period, largely reflecting movements in securities financing transactions and off-balance sheet items.

Following a direction received from the PRA during 2020 the Group is permitted to exclude lending under the UK Government's Bounce Back Loan Scheme (BBLS) from the leverage exposure measure.

The derivatives exposure measure, representing derivative financial instruments per the balance sheet net of deconsolidation and derivatives adjustments, increased by GBP1.6 billion during the period, largely reflecting market movements and an increase in the regulatory potential future exposure.

The securities financing transactions (SFT) exposure measure, representing SFT assets per the balance sheet net of deconsolidation and other SFT adjustments, reduced by GBP6.0 billion during the period, largely reflecting a reduction in trades.

Off balance sheet items reduced by GBP5.3 billion during the period, reflecting reductions in both corporate facilities and residential mortgage offers placed.

The average UK leverage ratio was 5.9 per cent over the second quarter, reducing to 5.8 per cent towards the end of the quarter which largely reflected the reduction in fully loaded total tier 1 capital following the increase in the significant investments deduction from tier 1 capital as a result of the issuance of Solvency II eligible Restricted Tier 1 capital instruments from Insurance to the Group.

CAPITAL MANAGEMENT (continued)

The table below summarises the component parts of the Group's leverage ratio.

 
                                                       Fully loaded 
                                                  ----------------------- 
                                                       At 30      At 31 
                                                   June 2021   Dec 2020 
                                                        GBPm       GBPm 
 
Total tier 1 capital for leverage ratio 
Common equity tier 1 capital                          33,525     32,822 
Additional tier 1 capital                              4,779      5,881 
                                                  ----------  --------- 
Total tier 1 capital                                  38,304     38,703 
                                                  ----------  --------- 
 
Exposure measure 
Statutory balance sheet assets 
Derivative financial instruments                      22,193     29,613 
Securities financing transactions                     68,674     74,322 
Loans and advances and other assets                  788,820    767,334 
                                                  ----------  --------- 
Total assets                                         879,687    871,269 
                                                  ----------  --------- 
 
Qualifying central bank claims                      (73,140)   (67,093) 
 
Deconsolidation adjustments(1) 
Derivative financial instruments                       (622)    (1,549) 
Securities financing transactions                          -          - 
Loans and advances and other assets                (180,198)  (171,183) 
                                                  ----------  --------- 
Total deconsolidation adjustments                  (180,820)  (172,732) 
                                                  ----------  --------- 
 
Derivatives adjustments 
Adjustments for regulatory netting                   (8,851)   (12,444) 
Adjustments for cash collateral                      (8,694)   (12,679) 
Net written credit protection                            282        455 
Regulatory potential future exposure                  13,216     12,535 
                                                  ----------  --------- 
Total derivatives adjustments                        (4,047)   (12,133) 
                                                  ----------  --------- 
 
Securities financing transactions adjustments          1,319      1,713 
Off-balance sheet items                               55,535     60,882 
Regulatory deductions and other adjustments (2)     (19,845)   (15,836) 
 
Total exposure measure                               658,689    666,070 
                                                  ----------  --------- 
Average exposure measure (3)                         656,938 
 
UK leverage ratio                                       5.8%       5.8% 
Average UK leverage ratio (3)                           5.9% 
 

(1) Deconsolidation adjustments relate to the deconsolidation of certain Group entities that fall outside the scope of the Group's regulatory capital consolidation, primarily the Group's Insurance business.

(2) Includes adjustments to exclude lending under the UK Government's Bounce Back Loan Scheme (BBLS) and the netting of regular-way purchases and sales awaiting settlement in accordance with CRR Article 500d.

(3) The average UK leverage ratio is based on the average of the month end tier 1 capital position and average exposure measure over the quarter (1 April 2021 to 30 June 2021). The average of 5.9 per cent compares to 6.0 per cent at the start and 5.8 per cent at the end of the quarter.

CAPITAL MANAGEMENT (continued)

Application of IFRS 9 on a full impact basis for capital and leverage

 
                                               IFRS 9 full impact 
                                            ------------------------ 
                                                  At 30        At 31 
                                              June 2021     Dec 2020 
 
Common equity tier 1 (GBPm)                      31,855     30,341 
Transitional tier 1 (GBPm)                       37,185     36,185 
Transitional total capital (GBPm)                46,153     46,052 
Total risk-weighted assets (GBPm)               200,234    201,800 
Common equity tier 1 ratio (%)                    15.9%        15.0% 
Transitional tier 1 ratio (%)                     18.6%        17.9% 
Transitional total capital ratio (%)              23.0%        22.8% 
UK leverage ratio exposure measure (GBPm)       657,019    663,590 
UK leverage ratio (%)                              5.6%         5.5% 
 

The Group applies the full extent of the IFRS 9 transitional arrangements for capital as set out under CRR Article 473a (as amended via the CRR 'Quick Fix' revisions published in June 2020). Specifically, the Group has opted to apply both paragraphs 2 and 4 of CRR Article 473a (static and dynamic relief) and in addition to apply a 100 per cent risk weight to the consequential Standardised credit risk exposure add-back as permitted under paragraph 7a of the revisions.

As at 30 June 2021, static relief under the transitional arrangements amounted to GBP438 million (31 December 2020: GBP616 million) and dynamic relief amounted to GBP1,232 million (31 December 2020: GBP1,865 million) through CET1 capital.

Stress testing

The Group undertakes a wide-ranging programme of stress testing, providing a comprehensive view of the potential impacts arising from the risks to which the Group and its key legal entities are exposed. One of the most important uses of stress testing is to assess the resilience of the operational and strategic plans of the Group and its legal entities to adverse economic conditions and other key vulnerabilities. As part of this programme, the Group conducts a macroeconomic stress test of the Group four year operating plan in the second half of the year to assess whether the Group's capital position is resilient to a further severe economic shock over and above the stress in the current economic environment.

The Group also participates in stress tests run by the Bank of England. The Bank of England published the industry level results of this year's stress test in the July 2021 Financial Stability Report, which showed that the industry is resilient to a severe economic shock and validates their analysis conducted during 2020 that banks can lend to households and businesses, even in very challenging scenarios. This aligns to the Group's view of its strength and resilience as it continues with its commitment to meet the needs of customers.

The Climate Biennial Exploratory Scenario (CBES) launched in June 2021 and activity is underway. The Group is investing significant resource in preparation and execution, in particular in acquiring climate related data and will leverage the experience gained through that exercise to further embed climate risk into risk management and stress testing activities.

CAPITAL MANAGEMENT (continued)

Regulatory capital developments

A number of significant regulatory capital changes will implement on 1 January 2022, including the remaining UK implementation of CRR 2 (which includes the revised standardised measure of counterparty credit risk - SA-CCR) and required changes to the Group's IRB models which will predominantly impact the mortgage models as a result of changes to the definition of default, revised loss given default (LGD) parameters and a new 'hybrid' probability of default (PD) approach. In addition UK regulators are currently consulting on revisions to the UK leverage ratio framework which are also expected to apply from 1 January 2022.

A consultation on the UK implementation of the remaining final Basel III reforms (also referred to as Basel 3.1), which include significant revisions to the credit risk, CVA and operational risk frameworks and will lead to the phased introduction of a risk-weighted assets output floor, is expected to be published by UK regulators in Q4 2021. The final rules are currently expected to apply from 1 January 2023, with the output floor expected to be phased in over several years.

Half-year Pillar 3 disclosures

The Group will publish a condensed set of half-year Pillar 3 disclosures in mid-August. A copy of the disclosures will be available to view at: https://www.lloydsbankinggroup.com/investors/financial-downloads.html

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END

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