Business Context and Reporting Period
This Form 6-K filing by Lloyds Banking Group Plc, dated November 3, 2009, presents an Interim Management Statement covering the third quarter and the nine-month period ended September 30, 2009. The Group operates in a challenging but stabilizing economic environment, focusing on the integration of the enlarged Group following the HBOS acquisition.
Key Financial Metrics
- Revenue: The Group delivered good revenue growth in Q3 2009, with strong performance in core relationship businesses. Wholesale revenue remained strong in the first nine months, though growth slowed in Q3.
- Margins: The banking net interest margin stabilized in Q3 2009, remaining flat compared to the first half of the year. Asset repricing offset lower deposit margins and higher funding costs.
- Costs: Group costs for the nine months to September 30, 2009, were 2% lower than the equivalent prior period. Integration synergies realized in the first nine months totaled £250 million, with an expected annual run-rate of £750 million by year-end.
- Impairments: Total impairment losses for the first nine months of 2009 were £18.6 billion (compared to £13.4 billion in H1 2009). The run-rate of impairments slowed in Q3.
- Liquidity and Funding: Customer deposits (excluding repo) increased to £373 billion at September 30, 2009. The loan-to-deposit ratio improved by 2 percentage points. The Group maintained a liquid asset portfolio of over £75 billion in high-quality government debt and cash.
- Profitability: The Group expects to report a loss before tax for 2009, excluding the impact of £11.2 billion credit relating to negative goodwill.
Material Changes Versus Prior Period
- Impairment Run-Rate: While year-to-date impairments rose significantly compared to 2008 due to commercial real estate declines and rising unemployment, the run-rate of impairments decreased in Q3 compared to H1 2009.
- Cost Synergies: The Group achieved £50 million higher run-rate cost synergies than previously announced, raising the 2009 target to £450 million.
- Insurance Sales: New business sales in life, pensions, and investments were 27% lower in the first nine months of 2009 compared to the same period in 2008.
- Wholesale Impairments: Wholesale impairment losses in Q3 were £3.2 billion, a significant reduction from £9.7 billion in H1 2009.
Guidance, Outlook, and Risks
- Outlook: Management expects impairments to fall significantly in the second half of 2009 compared to the first half. The 2010 impairment charge is expected to be significantly lower than 2009.
- Price Forecasts: Residential house prices are expected to be flat in 2009 and 2010. Commercial real estate prices are expected to fall 15% in 2009 and be flat in 2010.
- Regional Risks: Ongoing concerns regarding the Irish economy persist, with high impairment levels expected to continue in 2009 and 2010, particularly in the Irish commercial real estate portfolio.
- Insurance Volatility: The Group experienced positive investment market volatility of £0.7 billion in Q3 2009, resulting in a net positive volatility of £0.2 billion for the nine-month period.
- State Aid: The Group remains confident in delivering over £1.5 billion in run-rate synergies by the end of 2011, despite potential business impacts from State Aid remedies required by the European Commission.
Key Facts for Investor Verification
- Confirmation that the Q3 impairment run-rate reduction is sustainable and will lead to a significantly lower H2 2009 charge.
- Verification of the £750 million annual run-rate synergy target achievement by year-end.
- Monitoring of the Irish commercial real estate portfolio exposure and associated impairment provisions.
- Assessment of the impact of rising unemployment on the unsecured lending portfolio, which saw £2.5 billion in impairment losses in the first nine months.
- Validation of the £75 billion liquidity buffer against regulatory requirements and market conditions.