Business Context and Reporting Period
This Form 6-K filing by Lloyds Banking Group Plc covers the unaudited consolidated interim results for the nine months ended 30 September 2018. The report was filed on 25 October 2018. The Group implemented IFRS 9 and IFRS 15 on 1 January 2018; comparative information for previous periods has not been restated. The filing incorporates the interim report into the company's Registration Statement on Form F-3.
Key Financial Metrics
| Metric | Nine Months Ended 30 Sept 2018 | Nine Months Ended 30 Sept 2017 |
|---|---|---|
| Profit Before Tax | £4,934 million | £4,845 million |
| Profit for the Period | £3,664 million | £3,459 million |
| Profit Attributable to Ordinary Shareholders | £3,272 million | £3,102 million |
| Earnings Per Share | 4.7p | 3.9p |
| Total Income (net of insurance claims) | £14,308 million | £14,000 million |
| Net Interest Income | £9,138 million | £8,206 million |
| Other Income (net of insurance claims) | £5,170 million | £5,794 million |
| Operating Expenses | £8,638 million | £8,701 million |
| Impairment Losses | £736 million | £454 million |
Balance Sheet and Capital (as of 30 Sept 2018 vs 31 Dec 2017):
- Total Assets: £829,228 million (up 2% from £812,109 million).
- Loans and Advances to Customers: £482,509 million (up £21,493 million).
- Customer Deposits: £425,826 million (up £7,702 million).
- Debt Securities in Issue: £92,331 million (up £19,881 million).
- CET1 Capital Ratio: 15.5% before dividend accrual (up 162 basis points); 14.6% after dividend accrual.
- Risk-Weighted Assets (RWAs): £206,884 million (down from £210,919 million).
- Transitional MREL Ratio: 31.0% of RWAs.
- UK Leverage Ratio: 5.3%.
Material Changes vs. Prior Period
- Profit Growth: Profit before tax increased by £89 million (2%) driven by higher net interest income and lower operating expenses, partially offset by higher impairment losses.
- Net Interest Income: Increased by £932 million (11%). A significant portion of this increase is due to a reduction in expenses payable to unit holders in Open-Ended Investment Companies (OEICs), falling from £920 million to £260 million due to subdued investment performance. Excluding OEIC unit holder amounts, net interest income rose 3% due to lower deposit costs.
- Other Income: Decreased by £624 million, primarily due to reduced gains on trading income from policyholder assets in the insurance business and a £193 million reduction in net fee and commission income (impacted by overdraft charging changes).
- Operating Expenses: Decreased by £63 million (1%). This reflects underlying cost efficiencies and lower conduct charges (£916 million vs £1,240 million), offset by costs related to the acquisition of MBNA and restructuring.
- Impairment Losses: Increased by £282 million to £736 million, reflecting lower write-backs and the impact of the MBNA acquisition. Management noted credit quality remains strong with no deterioration in credit risk.
- Balance Sheet: Loans grew due to increased reverse repurchase agreements and growth in SME and motor finance, offset by the sale of the Irish residential mortgage portfolio. Debt securities increased to maintain funding levels and meet regulatory requirements.
Outlook, Risks, and Management Commentary
Management Commentary: The Group reported a strengthening of the CET1 capital ratio to 15.5% (pre-dividend), primarily driven by retained profit. The Group remains well-positioned to meet its Minimum Requirement for Own Funds and Eligible Liabilities (MREL) from 2020. The open mortgage book is in line with the start of the year.
Risks and Contingencies: The filing includes extensive forward-looking statements subject to risks including:
- General economic conditions in the UK and internationally, including the impact of the UK's exit from the European Union (Brexit).
- Fluctuations in interest rates, inflation, exchange rates, and stock markets.
- Regulatory changes, including capital and liquidity requirements.
- Credit quality changes, cyber security threats, and operational risks.
- Future impairment charges or write-downs.
Unusual Items: The filing notes a historical discrepancy between UK and US results regarding PPI charges in 2016/2017, though the Group has reported the same net assets in both jurisdictions since 31 March 2017.
Key Facts for Investor Verification
- OEIC Impact: Verify the sustainability of the £660 million reduction in OEIC unit holder expenses, which significantly boosted net interest income but is tied to market performance.
- Impairment Trends: Monitor the increase in impairment losses (£736 million) to ensure credit quality remains stable despite the rise, particularly following the MBNA acquisition.
- Conduct Charges: Track the reduction in conduct charges (£916 million) to confirm the trend of lower regulatory costs continues.
- Capital Ratios: Confirm the CET1 ratio of 15.5% and MREL ratio of 31.0% against future regulatory requirements and dividend payout plans.
- IFRS 9 Transition: Note that comparative figures are not restated for IFRS 9, which may affect year-over-year trend analysis for certain asset classifications.