Lloyds Banking Group plc — 2019 Form 20-F
Reporting period: Fiscal year ended 31 December 2019; filed 25 February 2020. Although the request labels this “2019 Q4,” the filing reports full-year results, not standalone fourth-quarter results. Amounts are in pounds sterling unless stated otherwise. Financial statements are prepared under IFRS as issued by the IASB.
Business context and reporting period
Lloyds is a UK-focused financial services group, principally operating through Retail, Commercial Banking, and Insurance and Wealth. At year-end, it had £833.9 billion of assets and 63,069 employees. The 2019 comparison with 2018 includes accounting and presentation changes; IFRS 16 was adopted from 1 January 2019 without restating comparatives, and segment comparatives were restated for transfers between divisions.
Key financial metrics
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Total income, net of insurance claims | £18.359bn | £18.626bn | Down 1% |
| Net interest income | £10.180bn | £13.396bn | Down 24%; after adjusting for amounts attributable to investors in consolidated OEICs, down 4% to £12.002bn |
| Net interest margin | 1.71% | 2.31% | Adjusted for OEIC investor amounts: 2.02% vs. 2.16% |
| Operating expenses | £12.670bn | £11.729bn | Up 8%, mainly due to higher conduct provisions; excluding conduct charges, expenses fell 6% |
| Impairment charge | £1.296bn | £0.937bn | Up 38%; driven primarily by two Commercial Banking corporate cases and weaker used-car prices |
| Statutory profit before tax | £4.393bn | £5.960bn | Down 26% |
| Underlying profit before tax | £7.531bn | £8.066bn | Down 7%; non-GAAP measure |
| Profit for the year / ordinary shareholders | £3.006bn / £2.459bn | £4.506bn / £3.975bn | Down 33% / 38% |
| Basic earnings per share | 3.5p | 5.5p | Down 36% |
| Cost:income ratio | 69.0% | 63.0% | Statutory basis; underlying performance measure was 48.5% in management’s remuneration disclosure |
| Operating cash flow | £11.281bn | (£11.107bn) | Cash flow statement measure, with material movements in operating assets and liabilities |
| Cash and cash equivalents at year-end | £57.811bn | £55.224bn | Up £2.587bn during 2019 |
| Total assets / total equity | £833.893bn / £47.806bn | £797.598bn / £50.199bn | Assets up 5%; equity down 5% |
| Customer deposits / debt securities in issue / subordinated liabilities | £421.320bn / £97.689bn / £17.130bn | £418.066bn / £91.168bn / £17.656bn | Deposits up 1%; debt securities up following new issuance |
| CET1 / Tier 1 / total capital ratios | 13.6% / 16.7% / 21.3% | 14.6% / 18.2% / 22.9% | Ratios declined, with buybacks, dividends and pension remeasurements among the drivers |
| UK leverage ratio / risk-weighted assets | 5.1% / £203.431bn | 5.5% / £206.366bn | Risk-weighted assets down 1% |
| Liquidity coverage ratio / loan-to-deposit ratio | 137% / 107% | Not stated on a directly comparable basis / 107% | LCR is a rolling 12-month average; £118.3bn of LCR-eligible liquid assets at year-end |
Material changes versus 2018
- Statutory profit before tax fell £1.567bn. Net income after insurance claims was broadly stable, but operating costs and impairment increased.
- Reported net interest income was significantly affected by consolidated OEIC investor amounts: 2019 included a £1.822bn charge versus a £0.844bn credit in 2018. Underlying margin pressure, particularly in mortgages, remained after adjustment.
- Other income included much higher insurance investment gains in 2019 than in 2018, offset by higher insurance claims. Insurance claims rose to £23.997bn from £3.465bn, largely reflecting policyholder investment movements in the insurance business; these figures should be read together, not as a standalone claims trend.
- Conduct-related operating charges rose to £2.895bn from £1.350bn, including a £2.450bn PPI provision charge. Excluding conduct charges, operating expenses fell to £9.775bn from £10.379bn.
- Customer lending was £494.988bn net of allowances, versus £484.858bn. The increase included higher reverse-repurchase balances; excluding those balances, management reported customer lending down 1% to £440.388bn. The Group acquired Tesco Bank’s UK mortgage portfolio and completed the Zurich workplace pensions and savings acquisition.
- The Group completed a £1.095bn share buyback. Its CET1 ratio declined to 13.6% from 14.6%; shareholders’ equity also fell, including due to pension remeasurement and distributions.
Outlook, management commentary and material risks
- Management expected UK GDP growth of about 1.5% annually in 2020–2022, assuming no sudden shocks, and described the Group as positioned to support customers through subdued growth and low rates. These were expectations, not formal earnings guidance; the filing identifies EU trade negotiations, global trade tensions, geopolitical instability and the then-emerging coronavirus outbreak as risks to the outlook.
- Management’s stated ongoing CET1 requirement was approximately 12.5% plus a management buffer of about 1%. The UK countercyclical capital buffer was scheduled to rise from 1% to 2% from December 2020, subject to regulatory developments.
- The Group planned to invest more than £3bn in strategic initiatives over its plan period, focused on customer experience, digitisation, capabilities and ways of working. It reported that 75% of products were originated digitally and that its digital bank had 16.4m customers.
- The Board recommended a 2019 final ordinary dividend of 2.25p per share, in addition to the 1.12p interim dividend; total 2019 ordinary dividends were 3.37p per share, up 5%. Quarterly dividends were planned to begin in 2020, subject to performance and approvals. The filing states a progressive and sustainable ordinary dividend policy, not a guarantee of future distributions.
- Credit quality was described as strong, but the net asset quality ratio increased to 29 basis points from 21 basis points. Stage 2 loans increased to 5.7% of total loans from 5.2%; Stage 3 remained 1.2%, while Stage 3 allowance coverage fell to 25.0% from 28.4%.
- Principal risks include UK macroeconomic and interest-rate conditions, credit losses and property values, conduct and regulatory matters, operational resilience, cybercrime, data governance, execution of transformation, competition, climate-related risks, funding and liquidity, and the UK’s future relationship with the EU.
- The cumulative PPI provision was reported as £21.875bn, with a further £2.450bn charged in 2019. The filing says every 1 percentage-point increase in the PIR conversion rate could add about £100m. The separate disclosures of the unutilised PPI provision and year-end provision balance use different descriptions and should be reconciled.
- Other notable matters include a £445m 2019 charge for legal and regulatory matters; a £45.5m FCA fine relating to HBOS Reading; a potential HMRC exposure estimated at about £800m of current tax liabilities plus a £250m deferred-tax-asset reduction, which the Group disputes; and an FCA investigation into mortgage arrears handling for which liability could not be reliably estimated.
- The filing states that the 2019 financial statements received an unmodified audit opinion and that internal control over financial reporting was effective. The auditor identified critical audit matters involving expected credit losses, PPI, insurance actuarial assumptions, defined-benefit obligations and Level 3 financial instrument valuation.
Most important facts an investor should verify
- Reconcile statutory and underlying profit, especially the treatment of OEIC investor amounts, insurance volatility, PPI, restructuring and other excluded items.
- Review the PPI provision assumptions, remaining complaints and PIR conversion experience, and reconcile the £21.875bn cumulative provision with the year-end provision balances disclosed in the filing.
- Assess capital headroom after dividends, buybacks and the planned regulatory buffer changes; verify the Group’s adjusted versus reported capital ratios and MREL position.
- Examine credit quality trends by portfolio, particularly Commercial Banking’s two material cases, Stage 2 migration, Stage 3 coverage and motor-finance residual-value provisions.
- Verify the sustainability of net interest income and margins under continued mortgage competition and low interest rates, and the extent to which insurance investment gains are repeatable.
- Check liquidity measures and funding maturities, including the 137% LCR, £118.3bn liquid-asset buffer, wholesale funding profile and repayment of central-bank funding schemes.