Business Context and Reporting Period
This Form 6-K filing by Lloyds Banking Group Plc, dated June 30, 2011, announces the outcome of a strategic review led by Group Chief Executive António Horta-Osório. The filing outlines a new UK-focused strategy designed to simplify the organization, reduce costs, and strengthen the balance sheet following the integration of HBOS. The review sets financial targets for delivery by the end of 2014 and provides updated guidance for the 2011 fiscal year.
Key Financial Metrics and Targets
The filing details specific financial targets for 2014 and current expectations for 2011, alongside recent balance sheet improvements.
- Liquidity and Debt: Government and central bank facilities were reduced from £97 billion (Dec 31, 2010) to £37 billion (June 30, 2011). The Group targets a loan-to-deposit ratio of 130% or below by 2014.
- Costs and Savings: The Group aims for £1.5 billion in annual cost savings by 2014 (run-rate of £1.7 billion) through a simplification program, in addition to £2 billion in integration savings expected by end-2011. Total operating expenses are expected to be approximately £10 billion in 2014.
- Profitability Targets (2014):
- Cost:income ratio: 42% to 44% (39% to 41% adjusted).
- Net interest margin: 2.15% to 2.30%.
- Statutory return on equity: 12.5% to 14.5%.
- Core tier 1 capital ratio: Prudently in excess of 10% by 2013.
- Asset Quality: Target asset quality ratio of 50 to 60 basis points by 2014.
- Non-Core Assets: Target reduction to ≤£90 billion by 2014, accounting for ≤£65 billion of risk-weighted assets.
Material Changes and Strategic Actions
Since March 2011, the Group has implemented rapid structural and strategic changes:
- Organizational Restructuring: A new, flatter organization has been established with a reduction of 15,000 roles planned. Leadership teams for Lloyds TSB, Halifax, and Commercial banking now report directly to the CEO.
- Project Verde: The EU-mandated divestiture of 632 branches (TSB and IF brands) serving 5.5 million customers has been accelerated. An information memorandum was issued in June 2011, with a transaction completion expected by end-2013.
- Provisions: A provision of £3.2 billion was made for Payment Protection Insurance (PPI) complaints.
- Investment Strategy: The Group plans to invest £2 billion between 2011 and 2014 to grow the core customer franchise, resulting in an annual income statement charge of approximately £500 million by 2014.
- International Footprint: The Group intends to streamline its international presence from 30 countries to less than half that number by 2014.
Guidance, Outlook, and Risks
2011 Guidance: Expectations remain broadly unchanged from the Q1 2011 statement, with the following specific outlooks:
- Margin: Net interest margin expected to be just above 2% for the full year 2011.
- Income: Core income expected to be slightly down due to margin pressures and balance sheet reduction; non-core reductions will further reduce income.
- Costs: A slight decline in costs expected in 2011 due to simplification actions.
- Impairments: Expected to reduce in 2011 based on current economic assumptions for the UK and Ireland.
Dividends: The Group commits to recommencing progressive dividend payments after EU restrictions expire, subject to financial position, market conditions, and regulatory capital requirements.
Risks and Contingencies: The filing highlights risks including UK and global economic conditions, the ability to access funding, regulatory changes (Basel 3, Solvency II), and the potential for future impairment charges. The Group notes that forward-looking statements involve uncertainty regarding the integration of HBOS and the successful disposal of non-core assets.
Key Facts for Investor Verification
- Verification of the £3.2 billion PPI provision and its impact on future earnings.
- Progress on the "Project Verde" divestiture, including the timeline for identifying a purchaser and the final sale price.
- Confirmation of the reduction in government and central bank facilities to £37 billion and the repayment schedule for the remaining balance.
- Execution of the 15,000 role reduction and the associated £2.3 billion cost of the simplification program.
- Monitoring of the core tier 1 capital ratio to ensure it remains above 10% as Basel 3 implementation commences in 2013.