Business Context and Reporting Period
This Form 6-K filing by Lloyds Banking Group Plc reports the full-year results for the period ended 31 December 2010, announced on 25 February 2011. The Group returned to profitability on a "combined businesses" basis, a non-GAAP measure designed to provide meaningful comparability by adjusting for the 2009 acquisition of HBOS and excluding one-off items. The reporting period reflects a year of significant progress in reducing risk, integrating the HBOS acquisition, and strengthening the balance sheet amidst a modest UK economic recovery.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Profit Before Tax (Combined Businesses) | £2,212 million | (£6,300 million) | Return to Profit |
| Profit Before Tax (Statutory) | £281 million | £1,042 million | (73)% |
| Loss Attributable to Equity Shareholders | (£320 million) | £2,827 million | N/A |
| Underlying Total Income | £23,641 million | £22,893 million | +3% |
| Operating Expenses | £10,928 million | £11,609 million | (6)% |
| Impairment Charge | £13,181 million | £23,988 million | (45)% |
| Banking Net Interest Margin | 2.10% | 1.77% | +33 bps |
| Underlying Cost:Income Ratio | 46.2% | 50.7% | -4.5 pts |
| Core Tier 1 Capital Ratio | 10.2% | 8.1% | +2.1 pts |
| Risk-Weighted Assets | £406.4 billion | £493.3 billion | (18)% |
| Loan to Deposit Ratio | 154% | 169% | -15 pts |
Material Changes vs. Prior Period
- Profitability: The Group returned to profitability on a combined businesses basis (£2.2 billion profit) compared to a £6.3 billion loss in 2009. Statutory profit decreased to £281 million from £1.042 billion, primarily because the 2009 figure included an £11.2 billion negative goodwill gain from the HBOS acquisition, which was absent in 2010.
- Impairment Reduction: The impairment charge fell significantly by 45% to £13.2 billion. This was driven by substantial improvements in the Retail and Wholesale divisions, partially offset by increased impairments in the Wealth and International division due to economic deterioration in Ireland and Australia.
- Cost Efficiency: Operating expenses decreased by 6% to £10.9 billion, driven by integration synergies. The underlying cost:income ratio improved to 46.2%.
- Balance Sheet Reduction: The Group reduced non-core assets by £105 billion cumulatively, with a target of £200 billion over three years. Risk-weighted assets fell by 18% to £406.4 billion.
- Liquidity: Reliance on government and central bank facilities was reduced by £61 billion to £97 billion. Wholesale term issuance reached £50 billion.
Guidance, Outlook, and Risks
- Outlook: Management maintains strong medium-term prospects despite 2011 headwinds. They do not expect further net interest margin progression in 2011. Costs are expected to be broadly flat in 2011, with a medium-term target cost:income ratio of approximately 40% (excluding the new Bank Levy).
- Impairment Outlook: The Group expects a modest reduction in the overall impairment charge in 2011, though the pace of improvement is expected to slow compared to 2010. Retail secured impairments may increase slightly due to falling house prices, while Wholesale impairments are expected to decrease.
- Integration: The Group is on track to deliver £2 billion of annual run-rate cost synergies by the end of 2011, having achieved £1.4 billion by year-end 2010.
- Key Risks:
- European Sovereign Risk: Continued deterioration in Ireland and potential contagion in the Eurozone.
- Regulatory: Uncertainty regarding the Financial Services Authority's (FSA) Payment Protection Insurance (PPI) complaints handling policy and the outcome of the judicial review. Potential costs from the EU mandated disposal of retail assets.
- Economic: A "double-dip" recession in the UK, rising unemployment, and falling property prices.
- Capital: Impact of Basel III reforms, which could reduce the Core Tier 1 ratio by approximately 1.2% in 2013 without mitigating actions.
Investor Verification Checklist
- Statutory vs. Combined Basis: Verify the reconciliation between the statutory loss of £320 million and the combined businesses profit of £2.2 billion, noting the exclusion of integration costs (£1.65 billion) and the inclusion of fair value unwinds.
- Irish Exposure: Review the specific impairment charges in Ireland (£4.3 billion) and the coverage ratio of 53.7% against the backdrop of the EU-IMF bailout.
- PPI Contingency: Assess the potential financial impact of the FSA's PPI complaints policy, for which no provision has been made in the current accounts pending the outcome of legal challenges.
- Balance Sheet Run-off: Confirm progress on the £200 billion non-core asset reduction target and the timeline for eliminating reliance on government funding facilities (targeted by end of 2012).
- Capital Adequacy: Evaluate the Core Tier 1 ratio of 10.2% against future Basel III requirements and the impact of the insurance subsidiary capital restructuring.