Business Context and Reporting Period
This Form 6-K filing by Lloyds Banking Group plc reports unaudited consolidated interim results for the nine months ended 30 September 2023. The report incorporates the Group's interim financial review and includes significant restatements for the prior period due to the adoption of the IFRS 17 Insurance Contracts standard effective 1 January 2023.
Key Financial Metrics
| Metric | 9 Months Ended 30 Sep 2023 | 9 Months Ended 30 Sep 2022 (Restated) |
|---|---|---|
| Profit Before Tax | £5,728 million | £3,725 million |
| Profit for the Period | £4,284 million | £2,941 million |
| Basic Earnings Per Share | 5.9 pence | 3.7 pence |
| Total Income (after net finance income) | £13,902 million | £11,421 million |
| Net Interest Income | £10,111 million | £9,354 million |
| Operating Expenses | £7,331 million | £6,640 million |
| Impairment Charge | £843 million | £1,056 million |
| Total Assets | £893,086 million | £873,394 million |
| Total Equity | £45,010 million | £43,911 million |
| CET1 Capital Ratio | 14.6% | 15.1% (at 31 Dec 2022) |
| Risk-Weighted Assets (RWAs) | £217.7 billion | £210.9 billion (at 31 Dec 2022) |
Material Changes vs. Prior Period
- Profit Growth: Profit before tax increased by 54% to £5,728 million, driven by a 22% rise in total income and a lower impairment charge, partially offset by a 10% increase in operating expenses.
- Income Composition: Other income swung from a loss of £24,959 million in 2022 to a gain of £9,958 million in 2023. This £33,257 million improvement was primarily due to a £33,257 million increase in net trading income within insurance activities (reflecting improved global equity markets) and the removal of an exceptional IFRS 17 charge in the prior year.
- Expense Pressure: Operating expenses rose to £7,331 million due to strategic investments, new business costs, inflationary impacts, and higher operating lease depreciation.
- Balance Sheet: Total assets grew 2% to £893 billion. Loans and advances to customers decreased by £2.8 billion, largely due to the exit of £2.5 billion in legacy retail mortgage loans. Customer deposits fell 1% to £470 billion, driven by a £9.4 billion reduction in retail current accounts.
- Capital Position: The CET1 ratio decreased to 14.6% from 15.1% (year-end 2022) due to share buybacks, dividend payments, pension contributions, and RWA increases. The Total Capital ratio increased to 19.9%.
Outlook, Risks, and Management Commentary
- Economic Assumptions: The Group's base case assumes slow UK GDP growth, a gradual rise in unemployment (projected to reach 5.0% by Q4 2024), and declining residential and commercial property prices. A non-modelled severe downside scenario is included to account for persistent inflation and tighter monetary policy.
- Asset Quality: Credit performance remains resilient and stable, similar to pre-pandemic levels. The impairment charge decreased to £843 million, reflecting modest revisions to the economic outlook compared to the deterioration seen in late 2022.
- Regulatory and Contingencies:
- Remediation: £134 million in remediation costs were recognized, primarily for pre-existing programmes. No further charges were recorded for HBOS Reading, though uncertainties remain.
- Motor Market Review: The Group is engaging with the Financial Ombudsman Service regarding past motor commission arrangements; the financial impact remains uncertain.
- CRD IV Model Updates: Risk-weighted assets include adjustments for CRD IV model updates. Final impacts remain uncertain as models are subject to further development and PRA approval.
- Forward-Looking Risks: Key risks include geopolitical instability (Russia-Ukraine war, China-Taiwan tensions), UK political instability, inflation, interest rate volatility, and cyber security threats.
Investor Verification Checklist
- IFRS 17 Impact: Verify the magnitude of the restatement on 2022 comparatives, particularly the shift in insurance trading income and the removal of the "Value of In-Force" asset.
- Capital Adequacy: Confirm the trajectory of the CET1 ratio given the recent decline to 14.6% and the potential for further RWA increases from CRD IV model finalization.
- Loan Book Composition: Assess the impact of the £2.5 billion exit of legacy retail mortgages on future net interest income and fee revenue.
- Remediation Exposure: Monitor the status of the FCA Motor Market review and HBOS Reading provisions for potential future charges.
- Economic Sensitivity: Review the Group's ECL allowance under the "Severe Downside" scenario (£9,786 million) versus the probability-weighted scenario (£5,100 million) to gauge downside risk.