Lloyds Banking Group Plc - Q1 2017 Interim Management Statement Summary
Business Context and Reporting Period
This Form 6-K filing reports the Q1 2017 Interim Management Statement for Lloyds Banking Group Plc, covering the three months ended 31 March 2017. The Group operates a differentiated, UK-focused business model emphasizing simplicity, efficiency, and low risk. The UK government's shareholding has fallen below 2 per cent.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Q4 2016 |
|---|---|---|---|
| Underlying Profit | £2.1 billion | £2.05 billion | £1.79 billion |
| Statutory Profit Before Tax | £1.3 billion | £0.65 billion | £0.97 billion |
| Profit for the Period | £890 million | £531 million | £438 million |
| Underlying Return on Tangible Equity | 15.1% | 15.0% | 12.8% |
| Statutory Return on Tangible Equity | 8.8% | 5.7% | 4.7% |
| Net Interest Margin (Banking) | 2.80% | 2.74% | 2.68% |
| Cost:Income Ratio | 47.1% | 47.4% | 51.7% |
| Asset Quality Ratio | 12 bps | 14 bps | 17 bps |
| CET1 Ratio (Pre-dividend) | 14.5% | N/A | 13.8% |
| Tangible Net Assets per Share | 56.5p | N/A | 54.8p |
Balance Sheet Highlights: Total assets stood at £817 billion. Loans and advances to customers were £445 billion, while customer deposits were £415 billion. The loan-to-deposit ratio was 107%.
Material Changes vs. Prior Period
- Profitability Surge: Statutory profit before tax nearly doubled to £1.3 billion compared to Q1 2016, driven by strong underlying performance and a significant reduction in "below the line" items.
- Conduct Provisions: The Group recorded £350 million in Payment Protection Insurance (PPI) provisions following a revised FCA policy statement and £200 million in other conduct provisions (including £100 million for HBOS Reading fraud victims).
- Cost Efficiency: Operating costs decreased by 1% year-on-year to £1.97 billion, aided by the Simplification programme which has delivered £1.1 billion in annual run-rate savings.
- Capital Generation: The Group generated 0.7 percentage points of CET1 capital in the quarter, improving the ratio to 14.3% (post-dividend accrual).
Guidance, Outlook, and Risks
Outlook and Guidance:
- The Group remains on track to deliver 2017 financial targets and maintain longer-term guidance.
- Net Interest Margin: Expected to be close to 2.80% for the full year (excluding MBNA).
- Asset Quality: Expected to remain inside the 25 basis points guidance for the year (excluding MBNA).
- Capital Generation: Expected to be at the top end of the 170-200 basis points ongoing guidance range for 2017.
- Cost:Income Ratio: Targeting around 45% exiting 2019.
- ROTE: Expecting a statutory return on tangible equity of 13.5% to 15.0% in 2019.
Risks and Contingencies:
- Regulatory/Conduct: Ongoing exposure to PPI redress volumes and other conduct matters.
- Macro Environment: Risks related to the UK exit from the EU (Brexit), interest rate fluctuations, and general economic conditions.
- Operational: Cyber security risks and the impact of technological changes.
Key Facts for Investor Verification
- Statutory vs. Underlying: Verify the reconciliation between statutory profit (£1.3bn) and underlying profit (£2.1bn), noting the impact of the £550 million in conduct provisions and the absence of the £790 million Enhanced Capital Notes charge seen in Q1 2016.
- PPI Provision Impact: Confirm the £350 million PPI provision reflects the FCA's revised policy on Plevin cases and the extended time bar to August 2019.
- Capital Ratios: Note that CET1 ratios are reported pre-dividend accrual (14.5%) and post-dividend accrual (14.3%); verify the impact of the Insurance business dividend paid in February 2017 on comparative figures.
- Mortgage Portfolio: Monitor the stabilization of open book mortgage balances, which are expected to grow to close the year in line with 31 December 2016 levels.
- MBNA Acquisition: Review liquidity actions taken in anticipation of the MBNA acquisition, which contributed to an increase in liquid assets.