Lloyds Banking Group plc — 2020 Form 20-F
Reporting period: Fiscal year ended 31 December 2020; filed 26 February 2021. This is an annual report, not a standalone fourth-quarter filing. The Group is a UK-focused financial services provider operating across Retail, Commercial Banking, and Insurance and Wealth. Financial statements are prepared under IFRS as issued by the IASB, in pounds sterling.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total income, net of insurance claims | £15.1bn | £18.4bn |
| Net interest income | £10.7bn | £10.2bn |
| Operating expenses | £9.7bn | £12.7bn |
| Impairment charge | £4.2bn | £1.3bn |
| Statutory profit before tax | £1.2bn | £4.4bn |
| Profit after tax | £1.4bn | £3.0bn |
| Profit attributable to ordinary shareholders | £865m | £2.5bn |
| Net interest margin | 1.73% | 1.71% |
| Cost:income ratio | 64.4% | 69.0% |
Underlying profit before tax, a non-GAAP measure, fell to £2.2bn from £7.5bn. Reported net interest income rose 6%, but excluding the unusually favourable change in amounts attributable to investors in consolidated OEICs, it fell 12%; on the same adjusted basis, net interest margin was 1.70% versus 2.02%.
The £2.9bn reduction in operating expenses was mainly due to lower conduct and PPI charges. Excluding regulatory provisions, expenses decreased 5% to £9.3bn. The £2.9bn increase in impairment reflected the deteriorated economic outlook and expected credit losses associated with the pandemic.
- Cash flow: Net cash from operating activities was £27.2bn, compared with £11.3bn in 2019; cash and cash equivalents at year end were £75.5bn versus £57.8bn. Deposit and other balance-sheet movements materially affect these cash-flow figures.
- Balance sheet: Total assets were £871.3bn, up 4%. Customer deposits rose 9% to £460.1bn; loans and advances to customers were £498.8bn versus £495.0bn. Excluding reverse repos, customer lending was broadly flat at £440.2bn.
- Funding and liquidity: Loan-to-deposit ratio fell to 98% from 107%; liquidity coverage ratio was 136% versus 137%. Wholesale funding declined to £109.4bn from £124.2bn.
- Capital: Year-end CET1 ratio was 16.2% after the ordinary dividend accrual; total capital ratio was 23.3% and MREL ratio 36.4%. The CET1 ratio was 15.0% excluding IFRS 9 transitional relief and 15.7% excluding the benefit from revised software-asset capital treatment. The leverage ratio was reported at 5.8% after dividends; the filing presents different comparison bases, so verify the applicable basis.
- Dividends: No interim ordinary dividend was paid in 2020. A final dividend of 0.57p per share was recommended, subject to approval. The previously proposed 2019 final dividend was cancelled at the PRA’s request.
Material changes versus 2019
- Statutory profit before tax fell 72%, while underlying profit before tax fell about 71%.
- Other income, net of insurance claims, declined amid market-related movements in policyholder investments, lower customer activity and fewer bulk annuity transactions. Insurance claims expense also fell, partly offsetting lower trading income.
- The impairment charge more than tripled; the total expected credit loss allowance increased to £6.2bn from £3.4bn. Stage 2 lending rose to 10.2% of gross lending from 5.7%.
- Customer deposits increased substantially as households spent less and businesses accumulated liquidity. Cash and central-bank balances rose to £73.3bn from £55.1bn.
- Operating expenses fell largely because PPI and other conduct-related charges were lower; the cost:income ratio improved despite weaker income.
Outlook, commentary and risks
Management forecast UK GDP growth of 3% in 2021 and 6% in 2022, while noting substantial uncertainty. The Group expected unemployment to peak at about 8% in the second half of 2021 and average house prices to fall 4% in 2021; it expected UK output to recover to its pre-pandemic level during 2024. These estimates depend on vaccine effectiveness and rollout, restrictions, government support and the wider economic recovery.
The Group’s 2021 strategic review, “Helping Britain Recover,” prioritises deeper relationships with personal customers, a stronger digital proposition for businesses, technology modernisation, payments, data capabilities and efficiency. Management also stated its intention, subject to regulatory guidance and conditions, to grow the ordinary dividend from the 2020 level in 2021.
- Credit and pandemic risk: Payment holidays and government-backed lending supported customers but may mask underlying credit deterioration. Management expected arrears, defaults and business failures to rise as support unwinds. A £400m central uncertainty overlay was included in ECL allowances.
- Legal and conduct matters: The Group’s cumulative PPI provision, excluding MBNA, was £22.0bn; £201m remained unutilised at year end. Other legal and regulatory provisions included a £379m charge in 2020 and an unutilised balance of £380m. Further costs from the HBOS Reading reviews are possible, but their amount was not estimable.
- Tax contingency: If HMRC prevails in a dispute over group relief for losses in a former Irish subsidiary, management estimated current tax liabilities could rise by approximately £810m and the deferred tax asset fall by approximately £270m. The Group is appealing and said it does not expect additional tax to be due.
- Other risks: UK economic weakness, persistently low or negative rates, Brexit-related legal and regulatory uncertainty, competition, cyber and operational resilience, climate risk, and regulatory changes to capital treatment may affect results and capital.
- Unusual items and estimates: The 2020 tax credit included a £350m deferred-tax remeasurement benefit after the UK retained a 19% corporation tax rate. Significant judgement is required in ECL, insurance valuations, pension assumptions and fair values. The auditor identified these as critical audit matters; it issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Assess the adequacy of the £6.2bn ECL allowance, the £400m uncertainty overlay, and the effect of support measures ending on defaults and recoveries.
- Reconcile reported and adjusted net interest income and margin, including the OEIC-related effect, and evaluate sensitivity to rates and customer deposit behaviour.
- Confirm CET1, leverage and MREL ratios on comparable bases, including IFRS 9 relief and the software-asset treatment under regulatory review.
- Track deposit stability, wholesale funding needs after TFSME support, liquidity metrics and the planned £1.1bn pension contributions in 2021.
- Monitor the final dividend, future distribution limits, PPI close-out, HBOS Reading costs, German insurance claims and the HMRC tax appeal.
- Compare the economic forecasts and strategic commitments with subsequent UK outcomes and the Group’s reported delivery.