Lloyds Banking Group Plc: 2018 Full Year Results Summary
Business Context and Reporting Period
This Form 6-K reports the full-year results for Lloyds Banking Group Plc for the period ended 31 December 2018, announced on 20 February 2019. The Group implemented IFRS 9 and IFRS 15 on 1 January 2018; comparative information for 2017 has not been restated. The results are presented on both a statutory and an underlying basis, with the latter adjusting for restructuring, volatility, and Payment Protection Insurance (PPI) provisions to reflect core performance.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Statutory Profit After Tax | £4.4 billion | £3.5 billion | +24% |
| Underlying Profit | £8.1 billion | £7.6 billion | +6% |
| Net Income | £17.8 billion | £17.5 billion | +2% |
| Net Interest Margin | 2.93% | 2.86% | +7 bps |
| Cost:Income Ratio | 49.3% | 51.8% | -2.5 pp |
| Return on Tangible Equity (ROTE) | 11.7% | 8.9% | +2.8 pp |
| Earnings Per Share (EPS) | 5.5p | 4.4p | +27% |
| CET1 Ratio (Pro Forma) | 13.9% | 13.9% | Stable |
| Loans and Advances | £444 billion | £444 billion | Stable |
| Customer Deposits | £416 billion | £416 billion | Stable |
Material Changes vs. Prior Period
- Profit Growth: Statutory profit increased by 24% driven by higher underlying profit, a significant reduction in PPI charges (down 55% to £750 million), and a lower effective tax rate (26% vs 33%).
- Cost Efficiency: Total costs decreased by 3% to £8.8 billion. The cost:income ratio improved by 2.5 percentage points, aided by a 31% reduction in remediation charges.
- Asset Quality: The gross asset quality ratio remained stable at 28 basis points. The net asset quality ratio increased slightly to 21 basis points due to lower releases and write-backs.
- Balance Sheet: Loans and advances remained flat at £444 billion, with growth in SME and Mid-Market segments offset by the sale of the Irish mortgage portfolio (£4 billion) and run-off of the closed mortgage book.
- Capital Build: The Group achieved a capital build of 210 basis points during the year.
Guidance, Outlook, and Risks
- 2019 Guidance:
- Statutory ROTE expected to increase to 14-15%.
- Capital build expected to remain at 170-200 basis points per annum.
- Net interest margin expected to be c.2.90%.
- Operating costs expected to be less than £8 billion (one year ahead of target).
- Asset quality ratio expected to be less than 30 basis points.
- Capital Return: The Board recommended a total ordinary dividend of 3.21p per share (+5%) and a share buyback of up to £1.75 billion (+75%), totaling up to £4.0 billion in capital return.
- Strategic Progress: Continued investment in digital transformation, including Open Banking and a partnership with Schroders for wealth management. The Group successfully launched its non-ring-fenced bank, Lloyds Bank Corporate Markets.
- Risks and Contingencies:
- PPI: Outstanding provision is £1.3 billion, assuming 13,000 complaints per week until the August 2019 deadline. An additional £200 million was charged in Q4.
- Conduct & Legal: Ongoing provisions for arrears handling (£793m total), packaged bank accounts (£795m total), and HBOS Reading customer review (£115m total).
- Macro: Uncertainty surrounding the UK's exit from the EU and potential economic volatility.
Key Investor Verification Points
- PPI Exposure: Verify the trajectory of complaint volumes against the 13,000/week assumption and the adequacy of the remaining £1.3 billion provision.
- Cost Trajectory: Monitor the ability to achieve operating costs below £8 billion in 2019 amidst increased strategic investment in technology.
- Capital Position: Confirm the pro forma CET1 ratio of 13.9% holds post-dividend and post-buyback, ensuring compliance with regulatory buffers.
- Asset Quality: Track the net asset quality ratio to ensure it remains below the 30 basis point guidance, particularly given the reduction in write-backs.
- Remediation Costs: Assess the sustainability of the 31% reduction in remediation charges and the timeline for further declines.