Business Context and Reporting Period
This Form 6-K filing by Lloyds Banking Group Plc reports unaudited consolidated interim results for the three-month period ended 31 March 2011. The report highlights significant progress in reducing the Group's risk profile, including asset reductions ahead of expectations and a substantial decrease in reliance on government and central bank liquidity support. The results are presented on both a statutory (IFRS) basis and a "combined businesses" basis to provide meaningful comparatives by excluding acquisition-related fair value adjustments and specific one-off items.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Q4 2010 |
|---|---|---|---|
| Statutory Profit/(Loss) Before Tax | (£270 million) | £721 million | (£4,886 million) |
| Combined Businesses Profit Before Tax | £284 million | £1,104 million | (£276 million) |
| Total Income (Statutory) | £7,639 million | £12,343 million | £12,920 million |
| Net Interest Income (Statutory) | £2,892 million | £3,029 million | £3,150 million |
| Impairment Charges (Statutory) | £2,183 million | £1,911 million | £3,218 million |
| Impairment Charges (Combined) | £2,608 million | £2,415 million | £3,755 million |
| Core Tier 1 Capital Ratio | 10.0% | N/A | 9.6% |
| Risk-Weighted Assets | £390.9 billion | N/A | £406.4 billion |
| Customer Deposits | £398.9 billion | N/A | £393.6 billion |
| Government/Central Bank Funding | £70.4 billion | N/A | £96.6 billion |
Material Changes vs. Prior Period
- Profitability: Statutory results swung from a profit of £721 million in Q1 2010 to a loss of £270 million in Q1 2011. On a combined businesses basis, profit before tax fell from £1,104 million to £284 million, driven by lower net interest margins and higher impairment charges.
- Revenue: Total statutory income decreased by 38% year-on-year to £7,639 million. Net trading income dropped significantly by £4,499 million due to market conditions affecting insurance businesses. Underlying income on a combined basis fell 13% to £5,203 million.
- Impairment: Statutory impairment charges increased by £272 million year-on-year. Combined businesses impairment rose to £2,608 million, approximately £500 million above initial expectations, primarily due to a £1,144 million charge in Ireland reflecting further deterioration in the local economy and commercial real estate prices.
- Balance Sheet: Total assets decreased by 1% to £982.5 billion. Loans to customers fell by £7.2 billion, while customer deposits grew by £5.2 billion. Government and central bank funding support was reduced by £26.2 billion in the quarter alone.
- Capital: The Core Tier 1 ratio improved to 10.0% from 9.6% in Q4 2010, supported by a £15.4 billion reduction in risk-weighted assets, partially offset by the statutory loss.
Guidance, Outlook, and Risks
- Outlook: Management expects net interest margins to remain under pressure due to increased wholesale funding costs and competitive deposit markets for the remainder of the year. Costs for the full year are expected to be broadly flat compared to 2010, with integration savings offset by regulatory and investment costs.
- Integration: The Group is on track to deliver £2 billion of run-rate cost synergies by year-end, having achieved £1,570 million in annual run-rate savings as of March 2011.
- Regulatory and Legal Risks:
- PPI Provision: A £3,200 million provision for Payment Protection Insurance (PPI) redress was recognized in the prior year (2010) following a High Court judgment. Uncertainties remain regarding the ultimate volume of complaints and redress costs.
- Divestiture: The Group is accelerating the disposal of at least 600 UK branches and associated assets to meet EU State Aid commitments. Costs related to this disposal are excluded from combined businesses results.
- Bank Levy: The Group expects the full-year cost of the Bank Levy to be approximately £260 million.
- Asset Quality: Impaired loans increased to £66.3 billion (11% of advances), driven largely by the Irish portfolio where 60% of the book is now impaired. The Group is allowing for a further 10% fall in Irish commercial real estate prices.
Key Facts for Investor Verification
- Capital Adequacy: Verify the sustainability of the 10.0% Core Tier 1 ratio given the statutory loss and ongoing asset quality pressures in Ireland.
- PPI Exposure: Assess the adequacy of the £3,200 million PPI provision made in 2010 against emerging complaint volumes and redress costs.
- Asset Disposal Progress: Monitor the execution and costs associated with the accelerated disposal of 600 branches and the sale of treasury assets (£10.7 billion sold in Q1).
- Irish Portfolio: Review the specific exposure and provisioning levels for the Irish commercial real estate portfolio, which accounted for the majority of the unexpected impairment charge.
- Funding Mix: Confirm the continued reduction in reliance on government funding (now £70.4 billion) and the stability of the loan-to-deposit ratio (148%).