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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