Business Context and Reporting Period
Lloyds Banking Group plc (Lloyds) reported its full-year results for the period ended 31 December 2015. The filing, a Form 6-K dated 25 February 2016, presents results on both a statutory and an underlying basis. The underlying basis excludes items management views as distorting performance comparisons, including asset sales, simplification costs, TSB disposal costs, and conduct provisions (notably Payment Protection Insurance or PPI). A significant event in 2015 was the sale of the remaining interest in TSB Banking Group plc to Banco Sabadell, resulting in TSB's deconsolidation after the first quarter.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Underlying Profit | £8.1 billion | £7.8 billion | +5% |
| Statutory Profit Before Tax | £1.6 billion | £1.8 billion | -7% |
| Statutory Profit for the Year | £956 million | £1.5 billion | -36% |
| Total Income | £17.6 billion | £17.4 billion | +1% |
| Net Interest Income | £11.5 billion | £11.0 billion | +5% |
| Operating Costs | £8.3 billion | £8.3 billion | Flat |
| Impairment Charge | £568 million | £1.1 billion | -48% |
| Cost:Income Ratio | 49.3% | 49.8% | -0.5pp |
| Underlying Return on Required Equity | 15.0% | 13.6% | +1.4pp |
| Pro Forma CET1 Ratio | 13.0% | 12.8% | +0.2pp |
| Pro Forma Leverage Ratio | 4.8% | 4.9% | -0.1pp |
Liquidity and Balance Sheet: Total assets were £806.7 billion. Customer deposits totaled £418.3 billion, and loans and advances to customers were £455.2 billion. The loan-to-deposit ratio was 109%. The Group held £123.4 billion in LCR eligible liquid assets, significantly exceeding total wholesale funding of £120 billion.
Material Changes vs. Prior Period
- Profitability: Underlying profit increased by 5% (10% excluding TSB) driven by higher net interest income, lower operating costs, and a significant reduction in impairment charges. Statutory profit declined due to a £4.0 billion PPI provision (up from £2.2 billion in 2014) and £745 million in TSB disposal costs.
- Asset Quality: The impairment charge fell 48% to £568 million. The asset quality ratio improved to 0.14% from 0.23%. Impaired loans as a percentage of closing advances dropped to 2.1% from 2.9%.
- Income Mix: Net interest income rose 5% to £11.5 billion, with the banking net interest margin improving to 2.63% from 2.40%. Other income fell 5% to £6.2 billion, largely due to run-off of legacy businesses and disposals.
- Capital: The Group generated 300 basis points of capital pre-dividend and PPI costs. The pro forma CET1 ratio increased to 13.0% after dividends, up from 12.8% in 2014.
- Dividends: The Board recommended a final ordinary dividend of 1.5 pence per share (total ordinary dividend 2.25 pence) and a special dividend of 0.5 pence per share, reflecting surplus capital.
Guidance, Outlook, and Risks
- 2016 Guidance:
- Net interest margin expected to increase to around 2.70%.
- Asset quality ratio expected to be around 20 basis points.
- Capital generation expected to be around 2 percentage points of CET1 per annum pre-dividend.
- Medium-Term Targets: The Group now expects to deliver a return on required equity of 13.5% to 15.0% in 2018 (previously 2017) and a cost:income ratio of around 45% as it exits 2019 (previously 2017), citing the lower interest rate environment and the new bank tax surcharge.
- Key Risks and Contingencies:
- PPI Provisions: A £4.0 billion provision was made, including £2.1 billion in Q4 reflecting the FCA's consultation on a time bar and the Plevin case. The Group estimates the provision covers complaints through mid-2018.
- Enhanced Capital Notes (ECNs): A Capital Disqualification Event (CDE) was determined to have occurred. The Group announced the redemption of ECNs with an estimated net loss of £0.7 billion, subject to Supreme Court appeal.
- Regulatory Environment: Risks include the implementation of the Senior Managers and Certification Regime (SM&CR), ring-fencing requirements, and potential impacts of the UK EU referendum.
Investor Verification Checklist
- PPI Provision Adequacy: Verify the assumptions regarding future complaint volumes and the impact of the FCA's proposed time bar and Plevin case on the £16.0 billion total provision.
- ECN Redemption Costs: Monitor the outcome of the Supreme Court appeal regarding the Capital Disqualification Event and the final cost of redeeming Enhanced Capital Notes.
- Dividend Sustainability: Assess the sustainability of the increased ordinary dividend and the special dividend in the context of the new 8% bank tax surcharge and lower interest rate environment.
- TSB Transition: Review the costs and operational impact of the Transitional Service Agreement with TSB following the sale.
- Capital Generation: Track the ability to generate the revised guidance of 2% CET1 capital annually pre-dividend given the revised medium-term targets.