Business Context and Reporting Period
Company: Lloyds Banking Group plc
Filing Type: Form 6-K (Interim Management Statement)
Reporting Period: Three months ended 31 March 2019 (Q1 2019)
Release Date: 2 May 2019
The Group reported strong business performance with continued strategic progress, including the completion of the MBNA migration ahead of schedule and accelerated investment in digitization. Management reaffirmed financial targets despite ongoing Brexit uncertainty.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Q4 2018 |
|---|---|---|---|
| Statutory Profit After Tax | £1.2 billion | £1.171 billion | £766 million |
| Underlying Profit | £2.168 billion | £2.004 billion | £1.763 billion |
| Net Income | £4.420 billion | £4.330 billion | £4.345 billion |
| Total Costs | £1.977 billion | £2.068 billion | £2.385 billion |
| Cost:Income Ratio | 44.7% | 47.8% | 54.9% |
| Net Interest Margin | 2.91% | 2.93% | 2.92% |
| Return on Tangible Equity (ROTE) | 12.5% | 12.3% | 7.8% |
| Underlying ROTE | 17.0% | 15.4% | 13.6% |
| Earnings Per Share | 1.49 pence | 1.47 pence | 0.88 pence |
| CET1 Ratio (Pre-dividend) | 14.2% | 14.4% | 13.9% |
| Loans and Advances | £441 billion | £445 billion | £444 billion |
| Customer Deposits | £417 billion | £413 billion | £416 billion |
Material Changes vs. Prior Period
- Profit Growth: Statutory profit after tax increased 2% year-over-year (YoY), while underlying profit rose 8% YoY, driven by higher net income and lower operating costs.
- Cost Efficiency: Total costs decreased 4% YoY. The cost:income ratio improved to 44.7% (down 3.1 percentage points YoY), aided by lower remediation charges and operating costs.
- Income Mix: Net interest income fell 3% YoY due to a slight margin compression and lower average assets, but was offset by a 7% increase in other income (including a £136m benefit from investment management changes and a £50m Vocalink earn-out).
- Balance Sheet: Loans decreased 1% YoY, primarily due to a £4.9bn reduction in mortgages, partially offset by growth in SME and UK Motor Finance. Deposits increased 1% YoY.
- Capital: CET1 ratio increased 31 basis points in the quarter to 14.2% (pre-dividend), despite an 11 basis point one-off reduction from the implementation of IFRS 16.
Guidance, Outlook, and Risks
Management Commentary and Guidance
Management reaffirmed all financial targets for 2019 and the longer term:
- Net Interest Margin: Expected to remain resilient at approximately 2.90% in 2019.
- Operating Costs: Targeted to be less than £8 billion in 2019.
- Cost:Income Ratio: Expected to fall annually, reaching the low 40s by the end of 2020.
- Asset Quality: Net asset quality ratio expected to remain below 30 basis points.
- ROTE: Targeted at 14% to 15% for 2019.
- Capital Build: Ongoing build of 170 to 200 basis points per annum.
The Board reduced its view of the required capital level from 13% to 12.5% (plus a 1% management buffer) following a reduction in the Systemic Risk Buffer confirmed by the PRA.
Risks and Contingencies
- Regulatory Charges: An estimated charge was taken for exiting the Standard Life Aberdeen investment management agreement. A £100 million provision was added for Payment Protection Insurance (PPI) due to higher gross complaint volumes.
- Accounting Changes: Implementation of IFRS 16 (Leases) resulted in a £1.7 billion right-of-use asset and £1.8 billion lease liability recognition, impacting risk-weighted assets and margins.
- Macroeconomic Risks: Management highlighted persistent Brexit uncertainty and potential economic impacts as key risks.
Investor Verification Checklist
- IFRS 16 Impact: Verify the specific impact of the new lease accounting standard on future operating costs and risk-weighted assets beyond the initial quarter.
- PPI Provisions: Monitor the trajectory of Payment Protection Insurance complaint volumes and associated provisioning costs, which increased to £100 million in Q1.
- Mortgage Book Dynamics: Confirm the sustainability of the open mortgage book reduction strategy and its impact on net interest income.
- Capital Requirements: Validate the Board's revised capital requirement view (12.5% + buffer) against future regulatory stress tests and the confirmed Systemic Risk Buffer.
- Strategic Investments: Track the ROI on the £1.2 billion strategic investment (GSR3) and the performance of the new Schroders Personal Wealth joint venture.