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 2019. The report incorporates the Group's interim report and reflects the adoption of IFRS 16 Leases and amendments to IAS 12 Income Taxes effective 1 January 2019.
Key Financial Metrics
| Metric | 9 Months Ended 30 Sept 2019 | 9 Months Ended 30 Sept 2018 |
|---|---|---|
| Profit Before Tax | £2,947 million | £4,934 million |
| Profit for the Period (After Tax) | £1,987 million | £3,740 million |
| Effective Tax Rate | 32.6% | 24.2% |
| Total Income (Net of Insurance Claims) | £13,778 million | £14,308 million |
| Net Interest Income | £7,425 million | £9,138 million |
| Total Operating Expenses | £9,881 million | £8,638 million |
| Impairment Charge | £950 million | £736 million |
| Total Assets | £858,543 million | £797,598 million (Year End 2018) |
| Total Equity | £48,127 million | £50,199 million (Year End 2018) |
| Common Equity Tier 1 (CET1) Ratio | 13.5% | 14.6% (Year End 2018) |
| UK Leverage Ratio | 4.9% | 5.5% (Year End 2018) |
Material Changes Versus Prior Period
- Profit Decline: Profit before tax decreased by £1,987 million, primarily driven by an additional £1,800 million Payment Protection Insurance (PPI) charge in the third quarter.
- Net Interest Income: Fell 19% to £7,425 million. Excluding interest expense on consolidated Open-Ended Investment Companies (OEICs), net interest income decreased by £416 million due to pressure on asset margins, partially offset by lower deposit costs.
- Other Income: Increased significantly to £26,367 million (from £13,031 million) due to market gains on policyholder investments within the insurance business.
- Insurance Claims: Rose to £20,014 million from £7,861 million, reflecting movements in liabilities arising from insurance contracts as markets performed well in 2019.
- Acquisitions: The open mortgage book grew by £6.1 billion, driven by a £3.7 billion acquisition of Tesco Bank's residential mortgage book and £2.4 billion of organic growth. The Group also acquired Zurich's UK workplace pensions and savings business.
- Capital Ratios: CET1 ratio reduced to 13.5% and the UK leverage ratio reduced to 4.9%, partly reflecting reductions in shareholders' equity due to dividends, share buybacks, and the redemption of other equity instruments.
Guidance, Outlook, and Risks
Outlook: Management states the Group made strategic progress and delivered a solid financial performance in a challenging environment. The Group will maintain a prudent approach to growth and risk, focusing on cost reduction and investment. While economic uncertainty remains, the Group considers itself well-placed to support customers.
Capital Actions: In September 2019, the Group cancelled the remaining approximately £650 million of its 2019 share buyback programme. The UK Prudential Regulation Authority (PRA) reduced the Group's Pillar 2A capital requirement from c.2.7% to c.2.6% of CET1 capital.
Risks and Contingencies: The filing highlights significant forward-looking risks including UK exit from the EU (Brexit), general economic conditions, interest rate fluctuations, cyber security threats, and regulatory changes. The impairment charge assumes an orderly exit of the UK from the EU.
Investor Verification Checklist
- Verify the impact of the £1,800 million additional PPI charge on future profitability and the status of the PPI claims deadline.
- Confirm the integration progress and financial performance of the acquired Tesco Bank mortgage book and Zurich UK workplace pensions business.
- Monitor the Group's capital ratios (CET1 and Leverage) against regulatory requirements following the reduction in equity and the cancellation of the share buyback.
- Assess the sustainability of the high "Other Income" driven by market gains on policyholder investments versus core banking income.
- Review the assumptions regarding the UK's exit from the EU used in the impairment charge calculations.