Lloyds Banking Group plc — FY 2018 Form 20-F
Reporting period: Year ended 31 December 2018; filed with the SEC on 25 February 2019. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under IFRS as issued by the IASB and reported in pounds sterling.
Business context and results
Lloyds is a UK-focused financial-services group operating through Retail, Commercial Banking, and Insurance and Wealth. It reported total assets of £797.6 billion and 64,928 full-time-equivalent employees at year-end.
| Metric (£m unless stated) | 2018 | 2017 | Change |
|---|---|---|---|
| Total income, net of insurance claims | 18,626 | 18,659 | (0.2%) |
| Net interest income | 13,396 | 10,912 | +23% |
| Operating expenses | 11,729 | 12,346 | (5%) |
| Impairment charge | 937 | 688 | +36% |
| Statutory profit before tax | 5,960 | 5,625 | +6% |
| Profit for the year | 4,400 | 3,897 | +13% |
| Profit attributable to ordinary shareholders | 3,869 | 3,392 | +14% |
| Basic earnings per share | 5.5p | 4.9p | +0.6p |
| Underlying profit before tax | 8,066 | 7,628 | +6% |
Margins, balance sheet, capital and liquidity
- Net interest margin: 2.31%, versus 1.86% in 2017. Excluding the volatile effect of amounts attributable to investors in consolidated open-ended investment companies (OEICs), net interest income rose 2% to £12.552 billion and margin was 2.16%, versus 2.11%. The reported increase therefore overstates underlying improvement.
- Cost-to-income: Statutory ratio was 63.0%, compared with 66.2%. Management reported an underlying ratio of 49.3%, or 46% excluding remediation charges.
- Loans and deposits: Customer loans were £484.9 billion, up from £472.5 billion; customer deposits were £418.1 billion, broadly unchanged. Mortgage lending was £297.5 billion. Changes in IFRS 9 classification and reverse-repurchase balances affect comparability.
- Funding and debt: Wholesale funding increased to £123.3 billion from £101.1 billion, following £21.4 billion of new term issuance. Debt securities in issue were £91.2 billion, versus £72.5 billion; subordinated liabilities were £17.7 billion, versus £17.9 billion. Term Funding Scheme drawings were £19.9 billion at year-end.
- Capital: CET1 ratio was 14.6% (14.1% at year-end 2017); total capital ratio was 22.9% (21.2%); UK leverage ratio was 5.5% (5.3%). Risk-weighted assets fell 2% to £206.4 billion.
- Liquidity: Liquidity coverage ratio was 130%, up from 127%, and LCR-eligible liquid assets were £129.4 billion. Loan-to-deposit ratio was 107%.
- Cash flow: Operating activities used £11.1 billion, versus £3.2 billion used in 2017; investing activities provided £11.9 billion and financing activities used £4.3 billion. Cash and cash equivalents fell £3.5 billion to £55.2 billion. Operating cash flow is materially affected by banking balance-sheet movements and is not directly comparable to cash flow at a non-financial company.
Material changes and unusual items
- Other income fell sharply, principally because insurance policyholder investment performance moved from gains to losses. Net trading income was a £3.9 billion loss, compared with £11.8 billion of income in 2017; related insurance claims also declined substantially, leaving total income net of claims broadly stable.
- Lower conduct and PPI charges reduced operating expenses: total regulatory provisions were £1.35 billion, down from £2.17 billion. However, expenses excluding regulatory provisions rose 2% to £10.38 billion, reflecting restructuring, digital and ring-fencing investment, and a full year of MBNA ownership.
- Impairment increased to £937 million, mainly reflecting lower releases and write-backs and a full-year MBNA charge. Management said credit quality remained strong; the gross asset-quality ratio was 0.28%, unchanged, while the net ratio rose to 0.21% from 0.18%.
- IFRS 9 and IFRS 15 were adopted from 1 January 2018; 2017 comparatives were not restated. Adoption reduced opening equity by £1.191 billion and increased opening impairment allowances by £1.276 billion. This limits year-over-year comparability.
- The Group sold its Irish mortgage portfolio, with approximately £4 billion of lending removed and a £105 million disposal loss. It completed a £1 billion share buyback during 2018.
Outlook, management commentary and risks
- Management expected UK growth in 2019–2021 to be broadly similar to 2018, assuming no major shock, while highlighting uncertainty over EU withdrawal, business investment, global trade and financial-market volatility. It expected impairments to rise in 2019 as write-backs reduce, but to remain relatively low.
- The Group planned to lend up to £18 billion to UK businesses in 2019. Its third strategic plan includes more than £3 billion of investment, with priorities in customer experience, digitisation, targeted growth and new ways of working.
- The Board recommended a 2018 final dividend of 2.14p per share, bringing the full-year ordinary dividend to 3.21p, up 5%. Subject to its planning assumption of an orderly EU withdrawal, the Group intended a buyback of up to £1.75 billion, starting in March 2019 and expected to finish by year-end. This was a stated intention, not a completed transaction.
- Key risks include UK economic and EU-exit uncertainty, credit deterioration, competition, cyber and operational resilience, conduct and regulatory matters, climate-related risks, and the transition from LIBOR to alternative reference rates. The Group reported that it exceeded the Bank of England stress-test capital and leverage hurdles after management actions and was not required to take capital action.
- Conduct exposure: The Group added £750 million to its PPI provision in 2018, bringing the total to £19.425 billion; £1.329 billion remained unutilised at year-end. The provision assumes about 13,000 complaints per week through the August 2019 deadline. Each additional 1,000 weekly complaints above that assumption was estimated to add about £85 million of charge. Other legal and regulatory provisions were charged £600 million; the unutilised balance was £861 million.
- Contingencies include ongoing regulatory investigations, LIBOR-related claims, shareholder litigation and a tax dispute. HMRC’s adverse position in the Irish loss-relief matter could, if upheld, increase current tax liabilities by about £770 million and reduce deferred tax assets by about £250 million; management disagreed with HMRC and did not expect additional tax ultimately to fall due.
- IFRS 16 was adopted on 1 January 2019 and was expected to add about £1.8 billion of right-of-use assets and lease liabilities. IFRS 17 was expected to apply from 2022 and to materially change insurance accounting.
Most important facts for investors to verify
- Underlying net interest income and margin trends, excluding OEIC effects, and the sustainability of deposit-cost and structural-hedge benefits.
- PPI complaint volumes through the August 2019 deadline, redress costs and whether the remaining provision is adequate.
- Credit performance and provisioning, particularly in unsecured lending, motor finance and commercial portfolios as economic conditions change.
- Capital and liquidity after dividends, the proposed buyback, ring-fencing requirements and evolving MREL and regulatory buffers.
- Progress and returns from the £3 billion-plus strategic investment plan, the Schroders partnership, and the proposed £1.75 billion buyback.
- Whether EU-exit, legal, regulatory, tax, cyber and climate-related risks produce costs or losses beyond disclosed provisions and estimates.
Audit: PricewaterhouseCoopers LLP issued an unqualified opinion on the IFRS financial statements and concluded that internal control over financial reporting was effective as of 31 December 2018.