Business Context and Reporting Period
This Form 6-K filing presents the preliminary annual results for Lloyds Banking Group plc for the year ended 31 December 2013, announced on 13 February 2014. The results are presented on both a statutory basis and an underlying basis, with the latter excluding acquisition-related items, volatile insurance items, and legacy costs to reflect core business performance. The Group continues its strategic transformation to become a low-risk, efficient retail and commercial bank focused on the UK market, having reduced its international footprint to nine countries.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Underlying Profit | £6,166 million | £2,565 million | +140% |
| Statutory Profit Before Tax | £415 million | (£606 million) loss | Turnaround |
| Total Underlying Income | £18,805 million | £18,386 million | +2% |
| Total Costs | £9,635 million | £10,124 million | -5% |
| Impairment Charge | £3,004 million | £5,697 million | -47% |
| Banking Net Interest Margin | 2.12% | 1.93% | +19 bps |
| Return on Risk-Weighted Assets (Underlying) | 2.14% | 0.77% | +137 bps |
| Pro Forma Fully Loaded CET1 Ratio | 10.3% | 8.1% | +2.2 pp |
| Core Tier 1 Capital Ratio | 14.0% | 12.0% | +2.0 pp |
| Loan to Deposit Ratio | 113% | 121% | -8 pp |
| Non-Core Assets | £63.5 billion | £98.4 billion | -35% |
Material Changes vs. Prior Period
- Profitability Surge: Underlying profit more than doubled, driven by a 24% increase in core underlying profit (£7.57 billion) and a 60% reduction in non-core losses. Statutory results moved from a loss to a profit, despite significant legacy charges.
- Legacy Provisions: A total of £3.455 billion was charged for legacy items, primarily a £3.05 billion provision for Payment Protection Insurance (PPI) and £130 million for interest rate hedging products. This was lower than the £4.225 billion charged in 2012.
- Asset Quality: The impairment charge fell significantly due to improved credit quality in the core portfolio and the reduction of non-core assets. The asset quality ratio improved to 0.57% from 1.02%.
- Balance Sheet Strengthening: Non-core assets were reduced by £34.9 billion, releasing approximately £2.6 billion of capital. The Group repaid all remaining Long Term Refinancing Operation (LTRO) funding from the European Central Bank.
- Cost Reduction: Total costs decreased by 5% to £9.6 billion, aided by the Simplification programme which delivered £1.46 billion in annual run-rate savings.
Guidance, Outlook, and Risks
- Dividend Restart: The Board expects to apply to the Prudential Regulatory Authority (PRA) in the second half of 2014 to restart dividend payments at a modest level, with a medium-term target of a 50% payout ratio of sustainable earnings.
- 2014 Guidance:
- Net interest margin expected to stabilize around 2.29% (Q4 2013 level).
- Costs expected to be around £9 billion (excluding TSB running costs).
- Impairment charge expected to reduce to around 50 basis points of average advances.
- Non-core assets expected to reduce to c.£23 billion by end of 2014.
- Capital Generation: The Group expects to generate fully loaded CET1 capital of around 2.5 percentage points over the next two years prior to dividends.
- Risks and Contingencies:
- PPI: Significant uncertainty remains regarding future complaint volumes, uphold rates, and the outcome of the FCA investigation. A further provision of £1.8 billion was taken in Q4 2013 based on revised forecasts.
- Regulatory: Ongoing investigations into interest rate hedging products, LIBOR, and foreign exchange rates. The Group has made provisions for these matters but notes potential for further costs.
- State Aid: The UK Government holds a 32.7% stake. The Group is progressing the divestment of TSB to meet EC State aid obligations.
Key Facts for Investor Verification
- PPI Provision Adequacy: Verify the assumptions behind the £9.825 billion total PPI provision, specifically the forecast of 550,000 future complaints and the 83% future uphold rate.
- Non-Core Asset Run-off: Monitor the pace of non-core asset reduction against the target of £23 billion by end-2014 and the associated capital accretion.
- Dividend Approval: Confirm the timing and regulatory approval for the restart of dividends in H2 2014.
- TSB Divestment: Track the progress of the TSB Initial Public Offering (IPO) and the associated costs, which are currently estimated at £200 million for 2014.
- Core Loan Growth: Verify the sustainability of core loan growth, particularly in SMEs and mortgages, against the backdrop of the UK economic recovery.