Lloyds Banking Group Plc - Q1 2012 Interim Results Summary
Business Context and Reporting Period
This Form 6-K reports the unaudited statutory and combined businesses results for Lloyds Banking Group Plc for the three months ended 31 March 2012. The Group continues to execute a strategic plan focused on strengthening the balance sheet, reducing risk, and simplifying operations amidst a subdued UK economic environment. Results are presented on a "combined businesses" basis to exclude acquisition-related amortization, volatile items, and specific one-off costs, providing a clearer view of core performance.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Statutory Profit Before Tax | £288 million | (£3,470 million) | Significant improvement |
| Combined Businesses Profit Before Tax | £628 million | £284 million | +121% |
| Core Underlying Profit Before Tax | £1,603 million | £1,636 million | -2% |
| Total Income (Combined) | £4,491 million | £4,805 million | -7% |
| Total Costs (Combined) | £2,564 million | £2,751 million | -7% |
| Impairment Charge | £1,657 million | £2,608 million | -36% |
| Core Tier 1 Capital Ratio | 11.0% | 10.0% | +100 bps |
| Loan to Deposit Ratio | 130% | 148% | -18 pts |
| Non-Core Assets | £128.3 billion | £172.9 billion | -26% |
| Wholesale Funding | £231.3 billion | £303.1 billion | -24% |
Material Changes vs. Prior Period
- Profitability: Statutory results improved from a significant loss in Q1 2011 (driven by a £3.2 billion PPI provision) to a profit of £288 million. Combined businesses profit before tax more than doubled to £628 million.
- Impairment: The impairment charge fell 36% year-on-year to £1.657 billion, driven by lower charges in Wealth and International (specifically Ireland and Australasia) and Retail unsecured portfolios.
- Balance Sheet: Non-core assets were reduced by £12.4 billion in the quarter alone, totaling a £65.4 billion reduction since the start of 2011. Risk-weighted assets decreased by 12% year-on-year.
- Funding: Wholesale funding decreased by 24% year-on-year. The maturity profile improved, with 60% of wholesale funding now having a maturity greater than one year.
- Capital: The Core Tier 1 capital ratio increased to 11.0%, up 20 basis points from the previous quarter and 100 basis points from Q1 2011.
Guidance, Outlook, and Risks
- Guidance Updates: Management increased the 2012 non-core asset reduction guidance to at least £30 billion (previously £25 billion) and expects to reach the 2014 target in 2013. The long-term Group loan to deposit ratio target is now 120%, expected to be achieved within 12 months.
- Outlook: Full year 2012 guidance remains unchanged, anticipating a similar percentage reduction in impairment as seen in 2011. Management remains confident in delivering medium-term financial targets despite economic headwinds.
- Risks and Contingencies:
- PPI Provision: An additional £375 million provision was made for Payment Protection Insurance redress due to increased complaint volumes, bringing the total estimated cost to £3.575 billion.
- Eurozone Exposure: Direct sovereign exposure to selected Eurozone countries (Greece, Ireland, Italy, Portugal, Spain) totals £28 million. Total exposure to these countries (including banks and corporates) is £22.987 billion.
- Project Verde: Discussions regarding the EC-mandated retail business disposal are ongoing with the Co-operative Group, but exclusivity has ended. An IPO option is being considered as an alternative.
Key Facts for Investor Verification
- Core Resilience: Verify the stability of the core underlying profit (£1.603 billion) which declined only 2% year-on-year despite a 11% drop in core underlying income, highlighting the impact of cost savings and lower impairments.
- Balance Sheet Reduction: Confirm the pace of non-core asset run-off (£12.4 billion in Q1) against the revised £30 billion annual target.
- Liquidity Position: Note the strong primary liquidity portfolio of £106.4 billion, covering 187% of money market funding positions.
- PPI Liability: Monitor the total PPI provision of £3.575 billion and the potential for further adjustments as complaint volumes evolve.
- Capital Adequacy: Verify the Core Tier 1 ratio of 11.0% against regulatory requirements and the impact of the removal of private equity deductions from total capital.