Company Announcements

Lloyds Bank half-year news release

Source: RNS
RNS Number : 9304G
Lloyds Bank PLC
29 July 2021
 

 

 

 

 

 

 

 

Lloyds Bank plc

2021 Half-Year Results

29 July 2021

 

 

 

 

 

 

 

 

 

Member of the Lloyds Banking Group

 

CONTENTS

 

Page 

Review of performance

1

 

 

Risk management

 

Principal risks and uncertainties

4

Credit risk portfolio

7

Funding and liquidity management

21

Capital management

25

 

 

Statutory information

 

Condensed consolidated interim financial statements

33

Consolidated income statement

34

Consolidated statement of comprehensive income

35

Consolidated balance sheet

36

Consolidated statement of changes in equity

38

Consolidated cash flow statement

41

Notes to the condensed consolidated half-year financial statements

42

 

 

Statement of directors' responsibilities

84

Independent review report to Lloyds Bank plc

85

Forward looking statements

87

Contacts

89

 

 

REVIEW OF PERFORMANCE

Principal activities

Lloyds Bank plc (the Bank) and its subsidiary undertakings (the Group) provide a wide range of banking and financial services through branches and offices in the UK and in certain locations overseas. The Group's revenue is earned through interest and fees on a broad range of financial services products including current accounts, savings, mortgages, credit cards, motor finance and unsecured loans to personal and business banking customers; and lending, transactional banking, working capital management, risk management and debt capital markets services to commercial customers.

Income statement

In the half-year to 30 June 2021, the Group recorded a profit before tax of £3,420 million compared to a loss of £290 million in the same period in 2020, representing an increase of £3,710 million largely reflecting the improved economic outlook for the UK in the first six months of 2021 compared to the deterioration assumed in 2020. Profit after tax was £3,708 million.

Total income decreased by £459 million, or 6 per cent, to £7,307 million in the half-year to 30 June 2021 compared to £7,766 million in the first six months of 2020; there was a decrease of £238 million in net interest income and £221 million in other income.

Net interest income was down £238 million, or 4 per cent, to £5,376 million compared to £5,614 million in the first six months of 2020. The net interest margin reduced reflecting the lower rate environment and change in asset mix. Average interest-earning assets increased driven by growth in the open mortgage book and the impact of government supported loan schemes, partially offset by lower balances in unsecured personal loans, credit cards and motor finance, as well as the effects of the continued optimisation of the Corporate and Institutional book within Commercial Banking.

Other income was £221 million lower at £1,931 million in the six months to 30 June 2021 compared to £2,152 million in the same period last year. Net fee and commission income was £57 million higher, with increases in card and other transaction-based income streams, reflecting improved levels of customer activity following the easing of restrictions relating to the pandemic, and increased commercial banking fees. However, other operating income decreased by £213 million due to lower levels of operating lease rental income as a result of the reduced Lex Autolease vehicle fleet size and lower gains on the disposal of financial assets at fair value through other comprehensive income.

Total operating expenses increased by £133 million to £4,564 million compared to £4,431 million in the first six months of 2020, mainly due to an increase in regulatory provision charges. There was a decrease of £19 million in operating costs reflecting a reduction in depreciation of tangible fixed assets due to the reduced Lex Autolease vehicle fleet size as well as gains on disposal of operating lease assets partially offset by higher restructuring costs, primarily technology research and development costs and severance, as well as slightly higher property transformation costs. Staff costs were 5 per cent higher at £1,868 million compared to £1,773 million in the first six months of 2020, in part reflecting higher charges for variable remuneration and the increase in severance costs.

The charge in respect of regulatory provisions was £152 million higher at £310 million and related to pre-existing programmes. With respect to HBOS Reading, £150 million was incurred in the first half of 2021, including operational costs to provide for the likelihood of activities spanning across 2022 as well as the outcome to date of decisions from the independent panel re-review on direct and consequential losses. Further significant charges over 2021/2022 could be required as more panel decisions are published, but it is not possible to reliably estimate the potential impact or timings at this stage.

There was a net release of expected credit loss allowances (ECLs) in the first six months of 2021 of £677 million, compared to a charge of £3,625 million in the first six months of 2020, largely reflecting the improved UK economic outlook. Credit performance remains strong, with low levels of new to arrears.

 

REVIEW OF PERFORMANCE (continued)

The ECL allowance in respect of loans and advances to customers remains high by historical standards at £4,646 million, a coverage ratio of 1.0 per cent. This is consistent with the Group's updated macroeconomic projections and assumes that a large proportion of these additional expected losses will crystallise over the next 12 months. This is expected to emerge as support measures subside and unemployment increases, with the base case predicting a peak of 6.6 per cent in the fourth quarter of 2021. The ECL allowance continues to reflect a probability-weighted view of future economic scenarios with a 30 per cent weighting of base case, upside and downside and a 10 per cent weighting of the severe downside. The improvement in unemployment and asset price outlook in 2021 within the base case is reflected in all scenarios, which have improved significantly since the year end.

The Group has retained the judgemental overlays applied at year end and has continued to offset modelled releases not deemed reflective of underlying risk. The Group's £400 million central overlay has been maintained. It was added at the year end in recognition of the significant uncertainty with regard to the efficacy of coronavirus vaccines, the vaccination rollout, potential virus mutations and economic performance post lockdown restrictions and Government support. Although the base case outlook has improved throughout the first half of the year, the Group still considers that these risks remain and that the conditioning assumptions for the improved base case and associated scenarios do not capture these unprecedented risks.

The Group recognised a tax credit of £288 million in the period compared to a credit of £594 million in the first six months of 2020. In March 2021, the UK Government announced its intention to increase the rate of corporation tax from 19 per cent to 25 per cent with effect from 1 April 2023 and this was substantively enacted on 24 May 2021. As a result of this change in tax rate, the Group has recognised a £1,189 million deferred tax credit in the income statement and a £184 million debit within other comprehensive income, increasing the Group's net deferred tax asset by £1,005 million.

Balance sheet

Total assets were £9,683 million higher at £609,622 million at 30 June 2021 compared to £599,939 million at 31 December 2020. There was an increase in cash and balances at central banks which were £8,805 million higher at £58,693 million reflecting increased liquidity holdings. Financial assets at amortised cost increased by £2,208 million, to £494,174 million at 30 June 2021 compared to £491,966 million at 31 December 2020. Excluding reverse repurchase agreements, loans and advances to customers, net of impairment allowances, were £6,766 million higher as increases in the open mortgage book and other retail balances were only partially offset by reductions in the closed mortgage book, motor finance and larger corporate lending; however bank and customer reverse repurchase agreement balances decreased by £4,327 million compared to 31 December 2020. Derivative assets were £1,905 million lower at £6,436 million compared to £8,341 million at 31 December 2020, reflecting reduced volumes and movements in interest and exchange rates over the first six months of 2021.

Total liabilities were £8,071 million higher at £566,892 million compared to £558,821 million at 31 December 2020. Customer deposits increased by £22,896 million, or 5 per cent, to £457,465 million compared to £434,569 million at 31 December 2020, as a result of growth in retail current and savings accounts and commercial deposits. This increase was partly offset by a reduction in deposits from banks which were £8,968 million lower at £16,029 million, reflecting the reduced need for wholesale funding following the further growth in customer deposits, and in derivative liabilities which were £2,887 million lower.

Shareholders' equity increased £1,890 million to £36,995 million; profit for the period was partly offset by movements in the cash flow hedging reserve and dividends paid of £1,000 million.

 

REVIEW OF PERFORMANCE (continued)

Capital

The Group's Common equity tier 1 capital ratio has increased from 15.5 per cent at 31 December 2020 to 16.1 per cent at 30 June 2021, primarily as a result of profit for the period and a reduction in risk-weighted assets, partially offset by the foreseeable dividend accrual and pension contributions. The tier 1 capital ratio reduced from 19.8 per cent at 31 December 2020 to 19.1 per cent at 30 June 2021 and the total capital ratio reduced from 23.5 per cent at 31 December 2020 to 22.9 per cent at 30 June 2021, largely reflecting the annual reduction in transitional limits applied to legacy tier 1 and tier 2 capital instruments in addition to the derecognition of called AT1 instruments, offset in part by the issuance of new AT1 and tier 2 instruments, the increase in common equity tier 1 capital and the reduction in risk-weighted assets.

Risk-weighted assets reduced by £3.7 billion to £167.2 billion at 30 June 2021 compared to £170.9 billion at 31 December 2020, primarily driven by continued optimisation activity undertaken in Commercial Banking, partially offset by limited impacts from credit deterioration, the latter in part due to the mitigating impact of house price increases.

The Group's UK leverage ratio of 5.3 per cent at 30 June 2021 has reduced from 5.5 per cent at 31 December 2020.

 

 

 

 

 

 

 

RISK MANAGEMENT

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

The significant risks faced by the Group are detailed below. There has been no change to the definition of these risks from those disclosed in the Group's 2020 Annual Report and Accounts.

The external risks faced by the Group may also impact the success of delivering against the Group's long-term strategic objectives. They include, but are not limited to the coronavirus pandemic, global macro-economic conditions and regulatory developments.

The coronavirus pandemic has had an impact on all risk types and continues to be a major area of focus. The Group responded quickly to the challenges faced, putting in place risk mitigation strategies and refining investment and strategic plans. Transition planning remains a key focus in ensuring that the Group continues to protect colleagues and services to customers as the situation continues to evolve and in ensuring that the lessons learned from the pandemic are embedded into future working practices.

Lloyds Banking Group is participating in the 2021 Bank of England Biennial Exploratory Scenario on Climate (CBES) for submission in October. The scope is to consider credit losses under three different temperature scenarios over a thirty year horizon, and the strategic actions Lloyds Banking Group could take to mitigate Climate Risk. The CBES may be used to inform FPC and PRA supervision and will not be used to set capital requirements.

The Group's principal risks and uncertainties are reviewed and reported regularly to the Board in alignment with Lloyds Banking Group's Enterprise Risk Management Framework.

Climate - The risk that the Group experiences losses and/or reputational damage as a result of climate change, either directly or through its customers. These losses may be realised from physical events, the required adaptation in transitioning to a low carbon economy, or as a consequence of the responses to managing these changes.

Market - The risk that the Group's capital or earnings profile is affected by adverse market rates or prices, in particular interest rates and credit spreads in the Banking business and credit spreads in the Group's defined benefit pension schemes.

Credit - The risk that parties with whom the Group has contracted fail to meet their financial obligations (both on and off- balance sheet).

Funding and liquidity - Funding risk is defined as the risk that the Group does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient. Liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost.

Capital - The risk that the Group has a sub-optimal quantity or quality of capital or that capital is inefficiently deployed across the Group.

Change/execution - The risk that, in delivering its change agenda, the Group fails to ensure compliance with laws and regulation, maintain effective customer service and availability and/or operation within the Group's risk appetite.

Conduct - The risk of customer detriment across the customer lifecycle including: failures in product management, distribution and servicing activities; from other risks materialising, or other activities which could undermine the integrity of the market or distort competition, leading to unfair customer outcomes, regulatory censure, reputational damage or financial loss.

Data - The risk of the Group failing to effectively govern, manage and control its data (including data processed by third party suppliers), leading to unethical decisions, poor customer outcomes, loss of value to the Group and mistrust.

Governance - The risk that the Group's organisational infrastructure fails to provide robust oversight of decision-making and the control mechanisms to ensure strategies and management instructions are implemented effectively.

PRINCIPAL RISKS AND UNCERTAINTIES (continued)

People - The risk that the Group fails to provide an appropriate colleague and customer-centric culture, supported by robust reward and wellbeing policies and processes, effective leadership to manage colleague resources, effective talent and succession management and robust control to ensure all colleague-related requirements are met.

Operational resilience - The risk that the Group fails to design resilience into business operations, underlying infrastructure and controls (people, process, technology) so that it is able to withstand external or internal events which could impact the continuation of operations and fails to respond in a way which meets customer and stakeholder expectations and needs when the continuity of operations is compromised.

Operational - The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Model - The risk of financial loss, regulatory censure, reputational damage or customer detriment, as a result of deficiencies in the development, application or ongoing operation of models and rating systems.

Regulatory and legal - The risk of financial penalties, regulatory censure, criminal or civil enforcement action or customer detriment as a result of failure to identify, assess, correctly interpret, comply with, or manage regulatory and/or legal requirements.

Strategic - The risk which results from:

•     Incorrect assumptions about internal or external operating environments

•     Failure to respond or the inappropriate strategic response to material changes in the external or internal operating environments

•     Failure to understand the potential impact of strategic responses and business plans on existing risk types

 

 

CREDIT RISK PORTFOLIO

Overview

The Group has continued to actively support its customers throughout the pandemic with a range of flexible options and payment holidays across major products, as well as lending through the various UK Government support schemes.

The macroeconomic outlook has improved and as the UK shows signs of exiting the crisis, the Group's focus is now on supporting its customers to recover.

The Group's lending portfolios were well positioned entering the crisis and we retain a prudent approach to credit risk appetite and risk management, with robust LTVs in our secured portfolios. Considering the external environment, flows of assets into arrears, defaults and write-off have remained at low levels.

It is recognised that Government support measures mean that the true underlying risk may not be reflected in asset performance and there is an expectation of increased arrears and defaults as these various arrangements, designed to alleviate short-term financial pressure, come to an end.

The Group has participated fully in UK Government lending schemes, including the Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme, where UK Government guarantees are in place at 100 per cent and 80 per cent, respectively. Repayments under these schemes have started to become due, which will be coupled with the withdrawal of Government support schemes in the second half of 2021. The level of arrears is therefore being carefully monitored, and the Group will continue to review customer trends and indicators for early signs of distress.

The net impairment credit in the first half of 2021 was £677 million, compared to a charge of £3,625 million in the first half of 2020. The first half credit resulted from the release of expected credit loss (ECL) allowances driven by improvements to the macroeconomic outlook in the UK, combined with robust credit performance, with a low run-rate impairment charge given the continued benign credit environment.

As a result, the Group's ECL allowance on loans and advances to customers reduced in the period from £6,127 million to £4,994 million, largely resulting from improvements to the economic outlook, including the impact of the extension of the Government's Coronavirus Job Retention Scheme in the first quarter of 2021. Reductions in Commercial Banking ECL allowances also reflect improved customer outcomes on restructuring cases, reduction in Stage 2 exposures and lower flows to default.

Stage 2 loans and advances to customers reduced from £51,280 million to £45,938 million, and as a percentage of total lending reduced by 1.1 percentage points to 9.5 per cent (31 December 2020: 10.6 per cent), predominantly reflecting the improvement in the Group's forward looking macroeconomic assumptions. Of these, 91.5 per cent are up to date (31 December 2020: 91.6 per cent). Stage 2 coverage reduced to 3.9 per cent (31 December 2020: 4.6 per cent).

Stage 3 loans and advances reduced in the period to £6,142 million (31 December 2020: £6,443 million), and as a percentage of total lending remained flat at 1.3 per cent (31 December 2020: 1.3 per cent). Stage 3 coverage reduced by 3.3 percentage points to 29.1 per cent (31 December 2020: 32.4 per cent) largely driven by a small number of single name releases in Commercial Banking, including on coronavirus impacted restructuring cases and favourable asset price inflation benefiting the UK Mortgages and UK Motor Finance portfolios in the Retail division.

Prudent risk appetite and risk management

•     The Group continues to take a prudent approach to credit risk and a through-the-cycle credit risk appetite, whilst working closely with customers to help them through and recover from the crisis

•     Sector and asset class concentrations within the portfolios are closely monitored and controlled, with mitigating actions taken where appropriate. Sector and product caps limit exposure to certain higher risk and vulnerable sectors and asset classes

•     The Group's effective risk management seeks to ensure early identification and management of customers and counterparties who may be showing signs of distress

•     As the UK starts to exit the crisis, the Group will continue to work closely with its customers to ensure they receive the appropriate level of support, including where repayments under the UK Government scheme lending fall due

CREDIT RISK PORTFOLIO (continued)

Impairment charge by division

 

Half-year

to 30 June 2021

 

 

Half-year

to 30 June

2020

 

 

Change

 

Half-year

to 31 Dec

2020

 

 

Change

 

 

 

 

 

 

 

 

£m

 

 

£m

 

 

%

 

£m

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

UK Mortgages

(175)

 

 

603

 

 

 

 

(125)

 

 

(40)

 

Credit cards

67

 

 

656

 

 

90 

 

 

144

 

 

53 

 

Loans and overdrafts

58

 

 

462

 

 

87 

 

 

277

 

 

79 

 

UK Motor Finance

(40)

 

 

241

 

 

 

 

(15)

 

 

 

Other

1

 

 

133

 

 

 

 

8

 

 

88 

 

Retail

(89)

 

 

2,095

 

 

 

 

289

 

 

 

Commercial Banking

(585)

 

 

1,328

 

 

 

 

(48)

 

 

 

Central Items

(3)

 

 

202

 

 

 

 

194

 

 

 

Total impairment (credit) charge

(677)

 

 

3,625

 

 

 

 

435

 

 

 

Group total expected credit loss allowance

 

At 30 June 2021

 

 

At 31 Dec 2020

 

 

£m

 

 

£m

 

 

 

 

 

 

 

Customer related balances

 

 

 

 

 

Drawn

4,646 

 

 

 

5,701 

 

 

Undrawn

348 

 

 

 

426 

 

 

 

4,994 

 

 

 

6,127 

 

 

Other assets

 

 

 

 

 

Total ECL allowance

4,997 

 

 

 

6,132 

 

 

 

Movements in Group total expected credit loss allowance

 

ECL at 30

June 2021

 

 

Net ECL

increase

 

 

Write-offs

and other

 

 

Income

statement

charge (credit)

 

 

ECL at 31

Dec 2020

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UK Mortgages

905 

 

 

 

(122)

 

 

 

53 

 

 

 

(175)

 

 

 

1,027 

 

 

Credit cards

802 

 

 

 

(121)

 

 

 

(188)

 

 

 

67 

 

 

 

923 

 

 

Loans and overdrafts

606 

 

 

 

(109)

 

 

 

(167)

 

 

 

58 

 

 

 

715 

 

 

UK Motor Finance

434 

 

 

 

(67)

 

 

 

(27)

 

 

 

(40)

 

 

 

501 

 

 

Other

211 

 

 

 

(18)

 

 

 

(19)

 

 

 

 

 

 

229 

 

 

Retail

2,958 

 

 

 

(437)

 

 

 

(348)

 

 

 

(89)

 

 

 

3,395 

 

 

Commercial Banking

1,618 

 

 

 

(697)

 

 

 

(112)

 

 

 

(585)

 

 

 

2,315 

 

 

Central Items

421 

 

 

 

(1)

 

 

 

 

 

 

(3)

 

 

 

422 

 

 

Total1

4,997 

 

 

 

(1,135)

 

 

 

(458)

 

 

 

(677)

 

 

 

6,132 

 

 

1        Total ECL includes £3 million relating to other non customer-related assets (31 December 2020: £5 million).

CREDIT RISK PORTFOLIO (continued)

Group loans and advances to customers and expected credit loss allowances

 

Stage 1

 

Stage 2

 

Stage 3

 

POCI

 

Total

 

Stage 2

as % of

total

 

Stage 3

as % of

total

At 30 June 2021

£m

 

£m

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers

 

 

 

 

 

 

 

 

 

 

 

 

 

UK Mortgages

262,541 

 

 

29,770 

 

 

1,924 

 

 

11,886 

 

 

306,121 

 

 

9.7 

 

 

0.6 

 

Credit cards

10,956 

 

 

2,936 

 

 

323 

 

 

 

 

14,215 

 

 

20.7 

 

 

2.3 

 

Loans and overdrafts

7,782 

 

 

1,413 

 

 

312 

 

 

 

 

9,507 

 

 

14.9 

 

 

3.3 

 

UK Motor Finance

12,347 

 

 

2,272 

 

 

233 

 

 

 

 

14,852 

 

 

15.3 

 

 

1.6 

 

Other

18,074 

 

 

1,203 

 

 

244 

 

 

 

 

19,521 

 

 

6.2 

 

 

1.2 

 

Retail

311,700 

 

 

37,594 

 

 

3,036 

 

 

11,886 

 

 

364,216 

 

 

10.3 

 

 

0.8 

 

SME

27,952 

 

 

3,139 

 

 

863 

 

 

 

 

31,954 

 

 

9.8 

 

 

2.7 

 

Other

31,615 

 

 

5,169 

 

 

2,181 

 

 

 

 

38,965 

 

 

13.3 

 

 

5.6 

 

Commercial Banking

59,567 

 

 

8,308 

 

 

3,044 

 

 

 

 

70,919 

 

 

11.7 

 

 

4.3 

 

Central items1

50,755 

 

 

36 

 

 

62 

 

 

 

 

50,853 

 

 

0.1 

 

 

0.1 

 

Total gross lending

422,022 

 

 

45,938 

 

 

6,142 

 

 

11,886 

 

 

485,988 

 

 

9.5 

 

 

1.3 

 

ECL allowance on drawn balances

(1,173)

 

 

(1,616)

 

 

(1,667)

 

 

(190)

 

 

(4,646)

 

 

 

 

 

Net balance sheet carrying value

420,849 

 

 

44,322 

 

 

4,475 

 

 

11,696 

 

 

481,342 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Group ECL allowance (drawn and undrawn)

 

 

 

 

 

 

 

 

 

 

 

 

UK Mortgages

129 

 

 

411 

 

 

175 

 

 

190 

 

 

905 

 

 

45.4 

 

 

19.3 

 

Credit cards

200 

 

 

462 

 

 

140 

 

 

 

 

802 

 

 

57.6 

 

 

17.5 

 

Loans and overdrafts

178 

 

 

277 

 

 

151 

 

 

 

 

606 

 

 

45.7 

 

 

24.9 

 

UK Motor Finance2

154 

 

 

129 

 

 

151 

 

 

 

 

434 

 

 

29.7 

 

 

34.8 

 

Other

51 

 

 

105 

 

 

55 

 

 

 

 

211 

 

 

49.8 

 

 

26.1 

 

Retail

712 

 

 

1,384 

 

 

672 

 

 

190 

 

 

2,958 

 

 

46.8 

 

 

22.7 

 

SME

106 

 

 

129 

 

 

112 

 

 

 

 

347 

 

 

37.2 

 

 

32.3 

 

Other

108 

 

 

280 

 

 

881 

 

 

 

 

1,269 

 

 

22.1 

 

 

69.4 

 

Commercial Banking

214 

 

 

409 

 

 

993 

 

 

 

 

1,616 

 

 

25.3 

 

 

61.4 

 

Central items

409 

 

 

 

 

10 

 

 

 

 

420 

 

 

0.2 

 

 

2.4 

 

Total ECL allowance (drawn and undrawn)

1,335 

 

 

1,794 

 

 

1,675 

 

 

190 

 

 

4,994 

 

 

35.9 

 

 

33.5 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Group ECL allowances (drawn and undrawn) as a % of loans and advances to customers3

 

 

 

 

 

 

 

 

 

 

 

 

UK Mortgages

 

 

1.4 

 

 

9.1 

 

 

1.6 

 

 

0.3 

 

 

 

 

 

Credit cards

1.8 

 

 

15.7 

 

 

55.3 

 

 

 

 

5.7 

 

 

 

 

 

Loans and overdrafts

2.3 

 

 

19.6 

 

 

62.4 

 

 

 

 

6.4 

 

 

 

 

 

UK Motor Finance

1.2 

 

 

5.7 

 

 

64.8 

 

 

 

 

2.9 

 

 

 

 

 

Other

0.3 

 

 

8.7 

 

 

41.4 

 

 

 

 

1.1 

 

 

 

 

 

Retail

0.2 

 

 

3.7 

 

 

24.1 

 

 

1.6 

 

 

0.8 

 

 

 

 

 

SME

0.4 

 

 

4.1 

 

 

15.2 

 

 

 

 

1.1 

 

 

 

 

 

Other

0.3 

 

 

5.4 

 

 

40.5 

 

 

 

 

3.3 

 

 

 

 

 

Commercial Banking

0.4 

 

 

4.9 

 

 

34.1 

 

 

 

 

2.3 

 

 

 

 

 

Central items

0.8 

 

 

2.8 

 

 

16.1 

 

 

 

 

0.8 

 

 

 

 

 

Total ECL allowances (drawn and

undrawn) as a % of loans and advances

to customers

0.3 

 

 

3.9 

 

 

29.1 

 

 

1.6 

 

 

1.0 

 

 

 

 

 

1        Includes reverse repos of £48.9 billion.

2        UK Motor Finance for Stages 1 and 2 include £136 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

3        Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of £70 million, Loans and overdrafts of £70 million, Retail other of £111 million, SME of £124 million and Commercial Banking other of £5 million.

CREDIT RISK PORTFOLIO (continued)

Group loans and advances to customers and expected credit loss allowances (continued)

 

Stage 1

 

Stage 2

 

Stage 3

 

POCI

 

Total

 

Stage 2

as % of

total

 

Stage 3

as % of

total

At 31 December 2020

£m

 

£m

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers

 

 

 

 

 

 

 

 

 

 

 

 

 

UK Mortgages

251,418 

 

 

29,018 

 

 

1,859 

 

 

12,511 

 

 

294,806 

 

 

9.8 

 

 

0.6 

 

Credit cards

11,496 

 

 

3,273 

 

 

340 

 

 

 

 

15,109 

 

 

21.7 

 

 

2.3 

 

Loans and overdrafts

7,710 

 

 

1,519 

 

 

307 

 

 

 

 

9,536 

 

 

15.9 

 

 

3.2 

 

UK Motor Finance

12,786 

 

 

2,216 

 

 

199 

 

 

 

 

15,201 

 

 

14.6 

 

 

1.3 

 

Other

17,879 

 

 

1,304 

 

 

184 

 

 

 

 

19,367 

 

 

6.7 

 

 

1.0 

 

Retail

301,289 

 

 

37,330 

 

 

2,889 

 

 

12,511 

 

 

354,019 

 

 

10.5 

 

 

0.8 

 

SME

27,015 

 

 

4,500 

 

 

791 

 

 

 

 

32,306 

 

 

13.9 

 

 

2.4 

 

Other

29,882 

 

 

9,438 

 

 

2,694 

 

 

 

 

42,014 

 

 

22.5 

 

 

6.4 

 

Commercial Banking

56,897 

 

 

13,938 

 

 

3,485 

 

 

 

 

74,320 

 

 

18.8 

 

 

4.7 

 

Central items1

57,422 

 

 

12 

 

 

69 

 

 

 

 

57,503 

 

 

 

 

0.1 

 

Total gross lending

415,608 

 

 

51,280 

 

 

6,443 

 

 

12,511 

 

 

485,842 

 

 

10.6 

 

 

1.3 

 

ECL allowance on drawn balances

(1,347)

 

 

(2,125)

 

 

(1,968)

 

 

(261)

 

 

(5,701)

 

 

 

 

 

Net balance sheet carrying value

414,261 

 

 

49,155 

 

 

4,475 

 

 

12,250 

 

 

480,141 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Group ECL allowance (drawn and undrawn)

 

 

 

 

 

 

 

 

 

 

 

 

UK Mortgages

107 

 

 

468 

 

 

191 

 

 

261 

 

 

1,027 

 

 

45.6 

 

 

18.6 

 

Credit cards

240 

 

 

530 

 

 

153 

 

 

 

 

923 

 

 

57.4 

 

 

16.6 

 

Loans and overdrafts

224 

 

 

344 

 

 

147 

 

 

 

 

715 

 

 

48.1 

 

 

20.6 

 

UK Motor Finance2

197 

 

 

171 

 

 

133 

 

 

 

 

501 

 

 

34.1 

 

 

26.5 

 

Other

46 

 

 

124 

 

 

59 

 

 

 

 

229 

 

 

54.1 

 

 

25.8 

 

Retail

814 

 

 

1,637 

 

 

683 

 

 

261 

 

 

3,395 

 

 

48.2 

 

 

20.1 

 

SME

142 

 

 

234 

 

 

126 

 

 

 

 

502 

 

 

46.6 

 

 

25.1 

 

Other

172 

 

 

475 

 

 

1,161 

 

 

 

 

1,808 

 

 

26.3 

 

 

64.2 

 

Commercial Banking

314 

 

 

709 

 

 

1,287 

 

 

 

 

2,310 

 

 

30.7 

 

 

55.7 

 

Central items

410 

 

 

 

 

12 

 

 

 

 

422 

 

 

 

 

2.8 

 

Total ECL allowance (drawn and undrawn)

1,538 

 

 

2,346 

 

 

1,982 

 

 

261 

 

 

6,127 

 

 

38.3 

 

 

32.3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Group ECL allowances (drawn and undrawn) as a

% of loans and advances to customers3

 

 

 

 

 

 

 

 

 

 

 

 

UK Mortgages

 

 

1.6 

 

 

10.3 

 

 

2.1 

 

 

0.3 

 

 

 

 

 

Credit cards

2.1 

 

 

16.2 

 

 

56.0 

 

 

 

 

6.1 

 

 

 

 

 

Loans and overdrafts

2.9 

 

 

22.6 

 

 

64.2 

 

 

 

 

7.6 

 

 

 

 

 

UK Motor Finance

1.5 

 

 

7.7 

 

 

66.8 

 

 

 

 

3.3 

 

 

 

 

 

Other

0.3 

 

 

9.5 

 

 

39.3 

 

 

 

 

1.2 

 

 

 

 

 

Retail

0.3 

 

 

4.4 

 

 

25.2 

 

 

2.1 

 

 

1.0 

 

 

 

 

 

SME

0.5 

 

 

5.2 

 

 

19.1 

 

 

 

 

1.6 

 

 

 

 

 

Other

0.6 

 

 

5.0 

 

 

43.2 

 

 

 

 

4.3 

 

 

 

 

 

Commercial Banking

0.6 

 

 

5.1 

 

 

38.5 

 

 

 

 

3.1 

 

 

 

 

 

Central items

0.7 

 

 

 

 

17.4 

 

 

 

 

0.7 

 

 

 

 

 

Total ECL allowances (drawn and undrawn) as a percentage of loans and advances to customers

0.4 

 

 

4.6 

 

 

32.4 

 

 

2.1 

 

 

1.3 

 

 

 

 

 

1        Includes reverse repos of £54.4 billion.

2        UK Motor Finance for Stages 1 and 2 include £192 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

3        Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of £67 million, Loans and overdrafts of £78 million, Retail other of £34 million, SME of £132 million and Commercial Banking other of £6 million.

CREDIT RISK PORTFOLIO (continued)

Group Stage 2 loans and advances to customers

 

Up to date

 

1-30 days

past due2

 

Over 30 days

past due

 

Total

 

PD movements

 

Other1

 

 

 

 

Gross

lending

 

ECL3

 

Gross

lending

 

ECL3

 

Gross

lending

 

ECL3

 

Gross

lending

 

ECL3

 

Gross

lending

 

ECL3

At 30 June 2021

£m

 

£m

 

£m

 

£m

 

£m

 

£m

 

£m

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UK Mortgages

23,034 

 

 

191 

 

 

3,630 

 

 

122 

 

 

1,491 

 

 

32 

 

 

1,615 

 

 

66 

 

 

29,770 

 

 

411 

 

Credit cards

2,640 

 

 

356 

 

 

189 

 

 

68 

 

 

77 

 

 

22 

 

 

30 

 

 

16 

 

 

2,936 

 

 

462 

 

Loans and overdrafts

854 

 

 

162 

 

 

396 

 

 

54 

 

 

127 

 

 

43 

 

 

36 

 

 

18 

 

 

1,413 

 

 

277 

 

UK Motor Finance

966 

 

 

47 

 

 

1,148 

 

 

39 

 

 

122 

 

 

29 

 

 

36 

 

 

14 

 

 

2,272 

 

 

129 

 

Other

494 

 

 

58 

 

 

586 

 

 

33 

 

 

64 

 

 

 

 

59 

 

 

 

 

1,203 

 

 

105 

 

Retail

27,988 

 

 

814 

 

 

5,949 

 

 

316 

 

 

1,881 

 

 

135 

 

 

1,776 

 

 

119 

 

 

37,594 

 

 

1,384 

 

SME

2,866 

 

 

118 

 

 

178 

 

 

 

 

24 

 

 

 

 

71 

 

 

 

 

3,139 

 

 

129 

 

Other

4,953 

 

 

275 

 

 

72 

 

 

 

 

49 

 

 

 

 

95 

 

 

 

 

5,169 

 

 

280 

 

Commercial Banking

7,819 

 

 

393 

 

 

250 

 

 

 

 

73 

 

 

 

 

166 

 

 

 

 

8,308 

 

 

409 

 

Central items

17 

 

 

 

 

18 

 

 

 

 

 

 

 

 

 

 

 

 

36 

 

 

 

Total

35,824 

 

 

1,207 

 

 

6,217 

 

 

325 

 

 

1,954 

 

 

139 

 

 

1,943 

 

 

123 

 

 

45,938 

 

 

1,794 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UK Mortgages

22,569 

 

 

215 

 

 

3,078 

 

 

131 

 

 

1,648 

 

 

43 

 

 

1,723 

 

 

79 

 

 

29,018 

 

 

468 

 

Credit cards

2,924 

 

 

408 

 

 

220 

 

 

76 

 

 

93 

 

 

27 

 

 

36 

 

 

19 

 

 

3,273 

 

 

530 

 

Loans and overdrafts

959 

 

 

209 

 

 

388 

 

 

68 

 

 

126 

 

 

45 

 

 

46 

 

 

22 

 

 

1,519 

 

 

344 

 

UK Motor Finance

724 

 

 

62 

 

 

1,321 

 

 

55 

 

 

132 

 

 

37 

 

 

39 

 

 

17 

 

 

2,216 

 

 

171 

 

Other

512 

 

 

56 

 

 

651 

 

 

44 

 

 

69 

 

 

14 

 

 

72 

 

 

10 

 

 

1,304 

 

 

124 

 

Retail

27,688 

 

 

950 

 

 

5,658 

 

 

374 

 

 

2,068 

 

 

166 

 

 

1,916 

 

 

147 

 

 

37,330 

 

 

1,637 

 

SME

4,229 

 

 

219 

 

 

150 

 

 

 

 

40 

 

 

 

 

81 

 

 

 

 

4,500 

 

 

234 

 

Other

9,151 

 

 

469 

 

 

83 

 

 

 

 

28 

 

 

 

 

176 

 

 

 

 

9,438 

 

 

475 

 

Commercial Banking

13,380 

 

 

688 

 

 

233 

 

 

 

 

68 

 

 

 

 

257 

 

 

 

 

13,938 

 

 

709 

 

Central items

 

 

 

 

11 

 

 

 

 

 

 

 

 

 

 

 

 

12 

 

 

 

Total

41,069 

 

 

1,638 

 

 

5,902 

 

 

383 

 

 

2,136 

 

 

173 

 

 

2,173 

 

 

152 

 

 

51,280 

 

 

2,346 

 

1        Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments.

2        Includes assets that have triggered PD movements, or other rules, given that being 1-29 days in arrears in and of itself is not a Stage 2 trigger.

3        Expected credit loss allowances on loans and advances to customers (drawn and undrawn).

CREDIT RISK PORTFOLIO (continued)

ECL sensitivity to economic assumptions

The measurement of ECL reflects an unbiased probability-weighted range of possible future economic outcomes. The Group achieves this by generating four economic scenarios to reflect the range of outcomes; the central scenario reflects the Group's base case assumptions used for medium-term planning purposes, an upside and a downside scenario are also selected together with a severe downside scenario. The base case, upside and downside scenarios carry a 30 per cent weighting; the severe downside is weighted at 10 per cent. These assumptions can be found in note 2 on page 39 onwards.

The table below shows the Group's ECL for the upside, base case, downside and severe downside scenarios. The stage allocation for an asset is based on the overall scenario probability-weighted PD and hence the Stage 2 allocation is constant across all the scenarios. ECL applied through individual assessments and post-model adjustments is reported flat against each economic scenario, reflecting the basis on which they are evaluated.

Probability-

weighted

 

 

Upside

 

 

Base case

 

 

Downside

 

 

Severe

downside

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UK Mortgages

905 

 

 

 

544 

 

 

 

684 

 

 

 

1,100 

 

 

 

2,064 

 

 

Other Retail

2,053 

 

 

 

1,896 

 

 

 

2,009 

 

 

 

2,152 

 

 

 

2,355 

 

 

Commercial Banking

1,618 

 

 

 

1,369 

 

 

 

1,497 

 

 

 

1,763 

 

 

 

2,296 

 

 

Other

421 

 

 

 

419 

 

 

 

421 

 

 

 

421 

 

 

 

425 

 

 

At 30 June 2021

4,997 

 

 

 

4,228 

 

 

 

4,611 

 

 

 

5,436 

 

 

 

7,140 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UK Mortgages

1,027 

 

 

 

614 

 

 

 

803 

 

 

 

1,237 

 

 

 

2,306 

 

 

Other Retail

2,368 

 

 

 

2,181 

 

 

 

2,310 

 

 

 

2,487 

 

 

 

2,745 

 

 

Commercial Banking

2,315 

 

 

 

1,853 

 

 

 

2,102 

 

 

 

2,575 

 

 

 

3,554 

 

 

Other

422 

 

 

 

420 

 

 

 

422 

 

 

 

422 

 

 

 

428 

 

 

At 31 December 2020

6,132 

 

 

 

5,068 

 

 

 

5,637 

 

 

 

6,721 

 

 

 

9,033 

 

 

CREDIT RISK PORTFOLIO (continued)

Retail

•        The Retail portfolio has remained robust and well positioned throughout the coronavirus pandemic. Risk management has been enhanced since the last financial crisis, with strong affordability and indebtedness controls for both new and existing lending and a prudent risk appetite approach. This is evident in the significant improvement in credit quality and low arrears rates

•        The Group has actively supported its Retail customers during the pandemic, through a range of propositions, such as payment holidays, while personal current account customers have had access to up to £500 interest free arranged overdrafts

•        Nearly 1.3 million payment holidays, on £65.1 billion of lending, have been granted on Retail products during the pandemic, with c.7,000 remaining live. Over 93 per cent of expired payment holidays have now resumed payments, while 6 per cent are either in arrears or have been charged off

•        The Group has taken targeted steps across the Retail product offering to implement tighter credit quality controls on key risk indicators such as indebtedness and credit scores to ensure that customers and the bank are protected

•        Arrears rates across the portfolios remain low despite expiry of almost all payment holidays

•        Although the macroeconomic outlook has improved, customers have been significantly impacted by the pandemic and credit performance is expected to worsen in coming months, consistent with the Group's economic assumptions, as the Government support measures come to an end and unemployment rises

•        The Retail impairment credit in the first half of 2021 was £89 million, compared to a charge of £2,095 million in the first half of 2020. This significant decrease resulted from a release of expected credit loss (ECL) allowances driven by the UK's improved macroeconomic outlook combined with a robust observed credit performance, with charges relating to flows to arrears and default remaining low despite expiry of almost all payment holidays. This impact compares favourably to the substantial impairment charge to account for the deterioration in the macroeconomic outlook over the first half of 2020

•        Existing IFRS 9 staging rules and triggers have been maintained across Retail from year end 2020 with the exception of minor changes to the Loans and Overdrafts portfolio to tighten criteria and align to the Credit cards portfolio. Transfers between stages have been primarily driven by credit risk rating movements and the estimated impact of the economic factors on a customer's forward looking default risk

•        Total Retail ECL allowance as a percentage of drawn loans and advances (coverage) has reduced slightly to 0.8 per cent (31 December 2020: 1.0 per cent) following the updates in the Group's economic forecast. As at 30 June 2021, 46.8 per cent of total Retail ECL is reflected within Stage 2 under IFRS 9, representing cases which have observed a Significant Increase in Credit Risk since origination (SICR)

•        Stage 2 loans and advances now comprise 10.3 per cent of the Retail portfolio (31 December 2020: 10.5 per cent), of which 90.3 per cent are up to date performing loans. Stage 2 ECL coverage has also decreased to 3.7 per cent (31 December 2020: 4.4 per cent) reflecting the improved macroeconomic outlook

•        Stage 3 loans and advances have remained flat at 0.8 per cent of total loans and advances (31 December 2020: 0.8 per cent), Stage 3 ECL coverage decreased to 24.1 per cent (31 December 2020: 25.2 per cent) due to favourable asset price inflation (both observed and forecast), benefiting the UK Mortgages and UK Motor Finance portfolios in particular

 

CREDIT RISK PORTFOLIO (continued)

Portfolios

UK Mortgages

•        The UK Mortgages portfolio is well positioned with low arrears and a low loan-to-value (LTV) profile. The Group has actively improved the quality of the portfolio over recent years using robust affordability and credit controls, whilst the balances of higher risk portfolios originated prior to 2008 have continued to reduce

•        Whilst the housing market has remained resilient through the pandemic with continued strong customer demand, the Group has taken action to protect credit quality and participates in the Government guarantee scheme for greater than 90 per cent LTVs, which provides risk mitigation at the highest exposures

•        Total loans and advances increased to £306.1 billion (31 December 2020: £294.8 billion), with a small reduction in average LTV to 43.1 per cent (31 December 2020: 43.5 per cent). The proportion of balances with an LTV greater than 90 per cent decreased to 0.4 per cent (31 December 2020: 0.6 per cent). The average LTV of new business decreased to 63.1 per cent (31 December 2020: 63.9 per cent)

•        There was a net impairment credit of £175 million for the first half of 2021 compared to a charge of £603 million for the first half of 2020, reflecting improvements to the UK's macroeconomic outlook and in particular resilient house prices. Total ECL coverage remains flat at 0.3 per cent (31 December 2020: 0.3 per cent)

•        Stage 2 loans and advances decreased to 9.7 per cent of the portfolio (31 December 2020: 9.8 per cent), and Stage 2 ECL coverage has reduced to 1.4 per cent (31 December 2020: 1.6 per cent). These impacts also reflect improvements in the UK's macroeconomic outlook, with a reduction in balances transferred into Stage 2 based on the forward looking view of their credit performance, in addition to favourable experience and house price assumptions

•        Stage 3 ECL coverage decreased to 9.1 per cent (31 December 2020: 10.3 per cent) again due to favourable house price assumptions (both observed and forecast)

Credit cards

•        Credit card balances decreased to £14.2 billion (31 December 2020: £15.1 billion) due to reduced levels of customer spending

•        The credit card portfolio is a prime book which has performed well in recent years, with lower arrears rates compared to the High Street Bank peer group

•        The impairment charge was £67 million for the first half of 2021 compared to a charge of £656 million for the first half of 2020, with overall ECL coverage decreasing to 5.7 per cent (31 December 2020: 6.1 per cent). These decreases are due to lower than anticipated arrears emergence, in conjunction with the improved outlook within the Group's economic forecast

•        Stage 2 loans and advances have reduced to 20.7 per cent of the portfolio (31 December 2020: 21.7 per cent) and Stage 2 ECL coverage has reduced to 15.7 per cent (31 December 2020: 16.2 per cent). These impacts reflect improvements in the UK's macroeconomic outlook, most notably the more favourable unemployment forecast

•        Stage 3 ECL coverage decreased to 55.3 per cent (31 December 2020: 56.0 per cent) due to a slight improvement in the mix of customers within Stage 3

Loans and overdrafts

•        Loans and advances for personal current account and the personal loans portfolios held flat at £9.5 billion (31 December 2020: £9.5 billion) with some early signs of recovery in customer spend and demand for credit

•        The impairment charge was £58 million for the first half of 2021, compared to £462 million for the first half of 2020. This decrease is again partly due to the improved outlook within the Group's macroeconomic forecasts in addition to lower than anticipated arrears emergence, reducing both Stage 2 ECL coverage to 19.6 per cent (31 December 2020: 22.6 per cent) and overall ECL coverage to 6.4 per cent (31 December 2020: 7.6 per cent)

 

CREDIT RISK PORTFOLIO (continued)

UK Motor Finance

•        The UK Motor Finance portfolio decreased to £14.9 billion (31 December 2020: £15.2 billion) due to reduced market activity and new car supply issues as a result of the pandemic

•        There was a net impairment credit of £40 million for the first half of 2021 compared to a charge of £241 million for the first half of 2020, reflecting improvements to the UK's macroeconomic outlook and in particular higher than expected used car prices. Overall ECL coverage has decreased to 2.9 per cent (31 December 2020: 3.3 per cent)

•        Updates to Residual Value (RV) and Voluntary Termination (VT) risk held against Personal Contract Purchase (PCP) and Hire Purchase (HP) lending are included within the impairment charge. The improved macroeconomic outlook, supported by better than expected disposal experience, resulted in a net impairment credit of £41 million for RV and VT risk in the first half of 2021

•        Stage 2 ECL coverage decreased to 5.7 per cent (31 December 2020: 7.7 per cent) and Stage 3 ECL coverage decreased to 64.8 per cent (31 December 2020: 66.8 per cent) due to the impact from updates to the Group's outlook on used car prices

Other

•        Other loans and advances increased to £19.5 billion (31 December 2020: £19.4 billion)

•        The impairment charge was £1 million for 2021 compared to £133 million for the first half of 2020, primarily due to the improved outlook within the Group's economic forecasts

 

Retail UK Mortgages loans and advances to customers

 

At 30 June 20211

 

At 31 Dec 20201

 

£m

 

£m

 

 

 

 

Mainstream

245,147 

 

 

234,273 

 

Buy-to-let

50,907 

 

 

49,634 

 

Specialist

10,067 

 

 

10,899 

 

Total

306,121 

 

 

294,806 

 

1        Balances include the impact of HBOS related acquisition adjustments.

 

CREDIT RISK PORTFOLIO (continued)

Commercial Banking

•        Commercial Banking has actively supported its customers throughout the crisis, through a range of propositions, including capital repayment holidays, working capital line increases and financial covenant waivers, as well as supporting small businesses and corporates through full use of UK Government schemes

•        Although the macroeconomic outlook has improved, the pandemic has resulted in widespread industry disruption, with some sectors such as travel, transportation, non-essential retail, leisure and hospitality particularly impacted. However, as a proportion of the Group's overall lending, exposure to these sectors remains limited

•        The Group still expects recovery to be slower in a few of the impacted sectors and anticipates longer term structural changes in these, and a number of other sectors. Sector and credit risk appetite continue to be proactively managed to ensure the Group is protected and clients are supported in the right way

•        Observed credit quality has been broadly stable in the first half of 2021, noting that this is likely to be influenced by the significant temporary support provided by the UK Government in light of the pandemic, which has had the potential to distort the underlying credit risk profile, particularly in the predominantly secured SME portfolio

•        Commercial Banking has continued to support its more vulnerable clients early through focused risk management via the Group's Watchlist and Business Support framework

•        The Group does anticipate a negative impact from the withdrawal of UK Government support measures in the second half of 2021. This may also be seen as repayments under UK Government support schemes start to become due, with an increase in arrears and defaults expected, consistent with macroeconomic expectations. It is anticipated that these will be protracted over a number of years, given the flexible payment deferral options available under the various UK Government lending schemes. The level of arrears is therefore being carefully monitored with early risk mitigation activities taken as appropriate

•        Although significant uncertainties remain, the Group will continue to balance prudent risk appetite with ensuring support for financially viable clients on their road to recovery

Impairments

•        There was a net impairment credit of £585 million in the first half of 2021, compared to a charge of £1,328 million in the first half of 2020. The credit was driven by the release of expected credit loss (ECL) allowances resulting from improvements to the UK's macroeconomic outlook; improved restructuring outcomes on cases managed within the Business Support Unit (BSU) and other Stage 3 releases; lower balance sheet and credit quality improvement, including in Stage 2 exposures; and low levels of gross charges from cases flowing into default. As a result, ECL allowances reduced by £694 million to £1,616 million at 30 June 2021 (31 December 2020: £2,310 million)

•        The Group recognises that credit quality has been partly supported by the temporary measures provided by the UK Government schemes and the ECL provision at 30 June 2021 assumes additional losses will emerge as the support subsides and structural change emerges in some sectors

•        Stage 2 loans and advances reduced by £5,630 million to £8,308 million (31 December 2020: £13,938 million), largely driven by the improvement in the Group's forward looking economic assumptions, with 97.1 per cent of Stage 2 balances being current and up to date. As a result, Stage 2 loans as a proportion of total loans and advances to customers reduced to 11.7 per cent (31 December 2020: 18.8 per cent). Stage 2 ECL coverage was lower at 4.9 per cent (31 December 2020: 5.1 per cent) with the reduction in coverage a direct result of the forward look multiple economic scenarios

•        Stage 3 loans and advances reduced to £3,044 million (31 December 2020: £3,485 million) and as a proportion of total loans and advances to customers, reduced to 4.3 per cent (31 December 2020: 4.7 per cent). SME flows to Stage 3 remain suppressed and non-SME flows were offset by repayments and write-offs. Stage 3 ECL coverage reduced to 34.1 per cent (31 December 2020: 38.5 per cent) predominantly driven by the release of provisions on a small number of cases in Business Support, including coronavirus impacted restructuring cases

 

CREDIT RISK PORTFOLIO (continued)

Commercial Banking UK Direct Real Estate

•        Commercial Banking UK Direct Real Estate gross lending stood at £11.6 billion at 30 June 2021 (net of exposures subject to protection through Significant Risk Transfer (SRT) securitisations). The Group has a further £0.8 billion of UK Direct Real Estate exposure in Business Banking within the Retail division

•        The Group classifies Direct Real Estate as exposure which is directly supported by cash flows from property activities (as opposed to trading activities, such as hotels, care homes and housebuilders). Exposures of £5.2 billion to social housing providers are also excluded

•        Recognising this is a cyclical sector, caps are in place to control origination and exposure, including a number of asset type categories. Focus remains on the UK market and business propositions have been written in line with a prudent, through-the-cycle risk appetite with conservative LTVs, strong quality of income and proven management teams

•        Overall performance has remained resilient. Watchlist numbers increased through Q1 but have now stabilised. Transfers to BSU have been limited and the BSU CRE portfolio is largely concentrated in the retail/shopping centres sub sector, although this is reducing and remains modest in the context of the overall BSU portfolio. Overall rent collection has been impacted by the coronavirus pandemic, particularly in the retail and leisure space given the impact of lockdowns, though the office sub sector has been resilient. Despite these challenges the portfolio is well positioned and proactively managed with appropriate risk mitigants in place

-        Exposures over £1 million continue to be heavily weighted towards investment real estate (c.90 per cent) over development. Of these investment exposures, over 76 per cent have an LTV of less than 60 per cent, with an average LTV of 49 per cent

-        c.90 per cent of exposures greater than £5 million have an interest cover ratio of greater than 2.0 times and in SME, LTV at origination has been typically limited to c.55 per cent, given prudent repayment cover criteria (including a notional base rate stress)

-        Approximately 60 per cent of exposures over £1 million relate to commercial real estate (with no speculative development lending) with the remainder related to residential real estate. The underlying sub-sector split is diversified with c.13.5 per cent of exposures secured by Retail assets and appetite tightened since 2018

-        The Office portfolio is focused on prime locations with strong sponsors and low LTVs, as well as no speculative commercial development. Commercial risk appetite continues to be proactively managed with appropriate risk mitigation tightening seen in the first half of 2021

-        Use of SRT securitisations also acts as a risk mitigant in this portfolio, with run off of these carefully managed and tracked

-        Both investment and development lending is subject to specific credit risk appetite criteria. Development lending criteria include maximum loan to gross development value and maximum loan to cost, with funding typically only released against completed work, as confirmed by the Group's monitoring quantity surveyor

 

 

 

 

 

 

 

 

CREDIT RISK PORTFOLIO (continued)

Commercial Banking lending in key coronavirus-impacted sectors1

 

At 30 June 2021

 

At 31 December 2020

 

Drawn

 

Undrawn

 

Drawn and undrawn

 

Drawn as a % of loans and advances

 

Drawn

 

Undrawn

 

Drawn and undrawn

 

Drawn as a % of loans and advances

£bn

 

£bn

 

£bn

 

%

 

£bn

 

£bn

 

£bn

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail non-food

2.1 

 

 

1.4

 

3.5

 

0.4 

 

 

2.1

 

1.5 

 

 

3.6

 

0.4 

 

Automotive dealerships2

1.3 

 

 

2.1

 

3.4

 

0.3 

 

 

1.7 

 

 

2.0 

 

 

3.7

 

0.4 

 

Construction

0.8 

 

 

1.5

 

2.3

 

0.2 

 

 

0.8 

 

 

1.6 

 

 

2.4

 

0.2 

 

Passenger transport

1.4 

 

 

0.7

 

2.1

 

0.3 

 

 

1.1 

 

 

1.0 

 

 

2.1

 

0.2 

 

Hotels

1.5 

 

 

0.3

 

1.8

 

0.3 

 

 

1.8 

 

 

0.3 

 

 

2.1

 

0.4 

 

Leisure

0.6 

 

 

0.6

 

1.2

 

0.1 

 

 

0.6 

 

 

0.7 

 

 

1.3

 

0.1 

 

Restaurants and bars

0.5 

 

 

0.3

 

0.8

 

0.1 

 

 

0.6 

 

 

0.3 

 

 

0.9

 

0.1 

 

Total

8.2 

 

 

6.9

 

15.1

 

1.7 

 

 

8.7 

 

 

7.4 

 

 

16.1

 

1.8 

 

1        Lending classified using ONS Standard Industrial Classification codes at legal entity level; drawn balances exclude c.£1 billion lending under the Coronavirus Business Interruption Loan Scheme and the Bounce Back Loan Scheme. Oil and Gas has been removed as a key coronavirus-impacted sector.

2        Automotive dealerships includes Black Horse Motor Wholesale lending (within the Retail Division).

      

 

FUNDING AND LIQUIDITY MANAGEMENT

The Group has maintained its strong funding and liquidity position with a loan to deposit ratio of 96 per cent as at 30 June 2021. Customer deposits continued to increase over the period as customer spending remained subdued. This increased the Group's cash reserves held at the Bank of England and allowed the Group to repay £5 billion of the Term Funding Scheme with additional incentives for SMEs (TFSME) taking the total outstanding amount to £8.7 billion as at 30 June 2021.

The Group's liquid assets continue to exceed the regulatory minimum and internal risk appetite, with a liquidity coverage ratio (LCR) of 122 per cent (based on a monthly rolling average over the previous 12 months) as at 30 June 2021.

The Group continues to expect limited term funding needs over the course of the second half of the year given the on-going availability of customer deposits and TFSME, both of which are more cost effective sources of funding for the Group. Overall, wholesale funding totalled £74.8 billion as at 30 June 2021.

Lloyds Bank credit ratings continue to reflect the resilience of the bank's business model and the strength of the balance sheet. During July, Moody's finalised and updated their ratings methodology and used it to drive a number of ratings changes for UK banks, including a one notch upgrade to the Subordinated issuances of Lloyds Bank. All Rating Agencies also now recognise a Stable Outlook on Lloyds Bank ratings, with S&P and Fitch returning Lloyds Bank to Stable during June and July to reflect better underlying UK economic expectations and their belief that Lloyds Bank is well positioned to benefit from the macroeconomic recovery underway.

 

FUNDING AND LIQUIDITY MANAGEMENT (continued)

Lloyds Bank Group funding requirements and sources

 

At 30 June

 

 

At 31 Dec

 

 

 

 

2021

 

 

2020

 

 

Change

 

£bn

 

 

£bn

 

 

%

 

 

 

 

 

 

 

 

Lloyds Bank Group Funding position

 

 

 

 

 

 

 

Loans and advances to customers1

432.5 

 

 

 

425.6 

 

 

 

 

Loans and advances to banks2

4.6 

 

 

 

4.3 

 

 

 

 

Debt securities at amortised cost

4.8 

 

 

 

5.1 

 

 

 

(6)

 

Reverse repurchase agreements - non-trading

51.7 

 

 

 

56.1 

 

 

 

(8)

 

Financial assets at fair value through other comprehensive income

25.8 

 

 

 

27.3 

 

 

 

(5)

 

Cash and balances at central banks

58.7 

 

 

 

49.9 

 

 

 

18 

 

Other assets3

31.5 

 

 

 

31.6 

 

 

 

 

Total Lloyds Bank Group assets

609.6 

 

 

 

599.9 

 

 

 

 

Less other liabilities3

(18.4)

 

 

 

(21.4)

 

 

 

(14)

 

Funding requirements

591.2 

 

 

 

578.5 

 

 

 

 

 

 

 

 

 

 

 

 

Customer deposits4

449.6 

 

 

 

425.2 

 

 

 

 

Wholesale funding5

74.8 

 

 

 

79.6 

 

 

 

(6)

 

Repurchase agreements - non-trading

9.3 

 

 

 

14.5 

 

 

 

(36)

 

Term funding scheme6

8.7 

 

 

 

13.7 

 

 

 

(36)

 

Deposits from fellow Lloyds Banking Group undertakings

6.1 

 

 

 

4.4 

 

 

 

39 

 

 

548.5 

 

 

 

537.4 

 

 

 

 

Total equity

42.7 

 

 

 

41.1 

 

 

 

 

Funding sources

591.2 

 

 

 

578.5 

 

 

 

 

1        Excludes reverse repos of £48.9 billion (31 December 2020: £54.4 billion).

2        Excludes £2.8 billion (31 December 2020: £1.6 billion) of reverse repurchase agreements.

3        Other assets and other liabilities include the fair value of derivative assets and liabilities.

4        Excludes repos of £7.9 billion (31 December 2020: £9.4 billion).

5        Lloyds Bank Group's definition of wholesale funding aligns with that used by other international market participants; including bank deposits, debt securities in issue and subordinated liabilities. Excludes balances relating to margins of £1.6 billion (31 December 2020: £1.8 billion).

6        31 December 2020 balance includes the Bank of England's Term Funding Scheme (TFS). 30 June 2021 and 31 December 2020 include the Term Funding Scheme with additional incentives for SMEs (TFSME).

FUNDING AND LIQUIDITY MANAGEMENT (continued)

 

Included

in funding

analysis

 

Repos

and cash

collateral

 

Items due to

fellow Lloyds

Banking Group

undertakings

 

Fair value

and other

accounting methods

 

Balance

sheet

At 30 June 2021

£bn

 

£bn

 

£bn

 

£bn

 

£bn

 

 

 

 

 

 

 

 

 

 

Deposits from banks

4.2 

 

 

11.8 

 

 

 

 

 

 

16.0 

 

Debt securities in issue

60.8 

 

 

 

 

(15.7)

 

 

10.0 

 

 

55.1 

 

Subordinated liabilities

9.8 

 

 

 

 

 

 

(0.2)

 

 

9.6 

 

Total wholesale funding

74.8 

 

 

11.8 

 

 

(15.7)

 

 

 

 

 

Customer deposits

449.6 

 

 

7.9 

 

 

 

 

 

 

457.5 

 

Total

524.4 

 

 

19.7 

 

 

(15.7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits from banks

3.9 

 

 

18.8 

 

 

 

 

2.3 

 

 

25.0 

 

Debt securities in issue

66.4 

 

 

 

 

(16.1)

 

 

9.0 

 

 

59.3 

 

Subordinated liabilities

9.3 

 

 

 

 

 

 

(0.1)

 

 

9.2 

 

Total wholesale funding

79.6 

 

 

18.8 

 

 

(16.1)

 

 

 

 

 

Customer deposits

425.2 

 

 

9.4 

 

 

 

 

 

 

434.6 

 

Total

504.8 

 

 

28.2 

 

 

(16.1)

 

 

 

 

 

Analysis of total wholesale funding by residual maturity

 

Less

than one

month

 

One to

three

months

 

Three

to six

months

 

Six

to nine

months

 

Nine

months

to one

year

 

One to

two years

 

Two to

five years

 

More than

five years

 

Total at
30 June
2021

 

Total at
31 Dec
2020

 

£bn

 

£bn

 

£bn

 

£bn

 

£bn

 

£bn

 

£bn

 

£bn

 

£bn

 

£bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposit from banks

3.2 

 

 

1.0 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.2 

 

 

3.9 

 

Debt securities in issue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

0.3 

 

 

0.1 

 

 

0.1 

 

 

 

 

 

 

 

 

 

 

0.5 

 

 

3.6 

 

Commercial paper

4.0 

 

 

4.9 

 

 

0.9 

 

 

 

 

 

 

 

 

 

 

 

 

9.8 

 

 

5.6 

 

Medium-term notes

1.7 

 

 

0.8 

 

 

1.0 

 

 

1.2 

 

 

0.9 

 

 

5.5 

 

 

11.0 

 

 

6.3 

 

 

28.4 

 

 

31.2 

 

Covered bonds

1.3 

 

 

0.7 

 

 

0.4 

 

 

1.0 

 

 

1.1 

 

 

5.5 

 

 

5.7 

 

 

3.9 

 

 

19.6 

 

 

23.1 

 

Securitisation

0.4 

 

 

0.2 

 

 

0.5 

 

 

 

 

0.2 

 

 

1.2 

 

 

 

 

 

 

2.5 

 

 

2.9 

 

 

7.4 

 

 

6.9 

 

 

2.9 

 

 

2.3 

 

 

2.2 

 

 

12.2 

 

 

16.7 

 

 

10.2 

 

 

60.8 

 

 

66.4 

 

Subordinated liabilities

 

 

1.1 

 

 

1.6 

 

 

 

 

 

 

0.2 

 

 

3.3 

 

 

3.6 

 

 

9.8 

 

 

9.3 

 

Total wholesale funding1

10.6 

 

 

9.0 

 

 

4.5 

 

 

2.3 

 

 

2.2 

 

 

12.4 

 

 

20.0 

 

 

13.8 

 

 

74.8 

 

 

79.6 

 

1        Excludes balances relating to margins of £1.6 billion (31 December 2020: £1.8 billion).

FUNDING AND LIQUIDITY MANAGEMENT (continued)

Analysis of 2021 term issuance

 

Sterling

 

US Dollar

 

Euro

 

Other

currencies

 

Total

 

£bn

 

£bn

 

£bn

 

£bn

 

£bn

 

 

 

 

 

 

 

 

 

 

Medium-term notes

 

 

1.5 

 

 

 

 

 

 

1.5 

 

Covered bonds

 

 

 

 

 

 

 

 

 

Private placements

 

 

 

 

 

 

 

 

 

Subordinated liabilities1

1.5 

 

 

1.1 

 

 

 

 

 

 

2.6 

 

Total issuance

1.5 

 

 

2.6 

 

 

 

 

 

 

4.1 

 

1        Subordinated liabilities include AT1s.

Liquidity Portfolio

At 30 June 2021, the Group had £111.7 billion of highly liquid unencumbered LCR eligible assets, based on a monthly rolling average over the previous 12 months post any liquidity haircuts (31 December 2020: £113.4 billion). These assets are available to meet cash and collateral outflows and regulatory requirements.

The Group also has a significant amount of non-LCR eligible liquid assets which are eligible for use in a range of central bank or similar facilities, including the TFSME. Future use of such facilities will be based on prudent liquidity management and economic considerations, having regard for external market conditions.

LCR eligible assets

 

Average

 

Average

 

 

 

20211

 

20202

 

Change

 

£bn

 

£bn

 

%

 

 

 

 

 

 

Level 1

 

 

 

 

 

Cash and central bank reserves

49.3 

 

 

46.5 

 

 

 

High quality government/MDB/agency bonds3

58.4 

 

 

62.6 

 

 

(7)

 

High quality covered bonds

2.7 

 

 

2.9 

 

 

(7)

 

Total

110.4 

 

 

112.0 

 

 

(1)

 

Level 24

1.3 

 

 

1.4 

 

 

(7)

 

Total LCR eligible assets

111.7 

 

 

113.4 

 

 

(1)

 

1        Based on 12 months rolling average to 30 June 2021. Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts.

2        Based on 12 months rolling average to 31 December 2020. Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts.

3        Designated multilateral development bank (MDB).

4        Includes Level 2A and Level 2B.

 

CAPITAL MANAGEMENT

Analysis of capital position

The Group's CET1 capital ratio increased from 15.5 per cent at 31 December 2020 to 16.1 per cent, primarily as a result of profits for the period (net of the impact of the impairment credit and partial release of IFRS 9 transitional relief) and a reduction in underlying risk-weighted assets, partially offset by the foreseeable dividend accrual and pension contributions.

The PRA have confirmed their intention to remove the beneficial treatment currently applied to intangible software assets and reinstate the original requirement to deduct in full. This change will be implemented on 1 January 2022 and will be expected to reduce the Group's reported CET 1 ratio by c.50bps.

The Group continues to apply the revised IFRS 9 transitional arrangements for capital which provide for temporary capital relief for the increase in accounting impairment provisions following the initial implementation of IFRS 9 ('static' relief) and subsequent relief for any increases in Stage 1 and Stage 2 expected credit losses since 1 January 2020 ('dynamic' relief). The transitional arrangements do not cover Stage 3 expected credit losses.

Excluding the IFRS 9 transitional relief and removing the current beneficial treatment applied to intangible software assets would reduce the Group's CET1 capital ratio from 16.1 per cent to 14.8 per cent, on the basis of the position at 30 June 2021.

The transitional total capital ratio reduced to 22.9 per cent (31 December 2020: 23.5 per cent) largely reflecting the annual reduction in transitional limits applied to legacy tier 1 and tier 2 instruments in addition to the derecognition of called AT1 instruments, offset in part by the issuance of new AT1 and tier 2 instruments, the increase in common equity tier 1 capital and the reduction in risk-weighted assets.

The UK leverage ratio reduced to 5.3 per cent (31 December 2020: 5.5 per cent) as a result of the reduction in fully loaded total tier 1 capital, which was partly offset by the reduction in the leverage exposure measure.

Total capital requirement

The Group's total capital requirement (TCR) as at 30 June 2021, being the aggregate of the Group's Pillar 1 and current Pillar 2A capital requirements, was £20,273 million (31 December 2020: £20,567 million).

Capital resources

An analysis of the Group's capital position as at 30 June 2021 is presented in the following section on both a transitional arrangements basis and a fully loaded basis in respect of legacy capital securities subject to current grandfathering provisions. In addition, the Group's capital position under both bases reflects the application of the separate transitional arrangements for IFRS 9.

The following table summarises the consolidated capital position of the Group.

 

CAPITAL MANAGEMENT (continued)

 

Transitional

 

Fully loaded

 

 

At 30 June 2021

 

At 31 Dec
2020

 

At 30 June 2021

 

At 31 Dec
2020

 

 

£m

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

Common equity tier 1

 

 

 

 

 

 

 

 

Shareholders' equity per balance sheet

36,995 

 

 

35,105 

 

 

36,995 

 

 

35,105 

 

 

Adjustment to retained earnings for foreseeable dividends

(700)

 

 

(1,000)

 

 

(700)

 

 

(1,000)

 

 

Adjustment to retained earnings for IFRS 9 transitional arrangements

1,260 

 

 

1,869 

 

 

1,260 

 

 

1,869 

 

 

Cash flow hedging reserve and other adjustments

(375)

 

 

(1,401)

 

 

(375)

 

 

(1,401)

 

 

 

37,180 

 

 

34,573 

 

 

37,180 

 

 

34,573 

 

 

less: deductions from common equity tier 1

 

 

 

 

 

 

 

 

Goodwill and other intangible assets

(3,180)

 

 

(2,986)

 

 

(3,180)

 

 

(2,986)

 

 

Prudent valuation adjustment

(179)

 

 

(173)

 

 

(179)

 

 

(173)

 

 

Removal of defined benefit pension surplus

(2,209)

 

 

(1,322)

 

 

(2,209)

 

 

(1,322)

 

 

Deferred tax assets

(4,652)

 

 

(3,525)

 

 

(4,652)

 

 

(3,525)

 

 

Common equity tier 1 capital1

26,960 

 

 

26,567 

 

 

26,960 

 

 

26,567 

 

 

Additional tier 1

 

 

 

 

 

 

 

 

Additional tier 1 instruments

4,949 

 

 

7,295 

 

 

4,268 

 

 

5,935 

 

 

Total tier 1 capital1

31,909 

 

 

33,862 

 

 

31,228 

 

 

32,502 

 

 

Tier 2

 

 

 

 

 

 

 

 

Tier 2 instruments

6,996 

 

 

6,825 

 

 

6,298 

 

 

5,454 

 

 

Other adjustments

(543)

 

 

(524)

 

 

(543)

 

 

(524)

 

 

Total tier 2 capital

6,453 

 

 

6,301 

 

 

5,755 

 

 

4,930 

 

 

Total capital resources1

38,362 

 

 

40,163 

 

 

36,983 

 

 

37,432 

 

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets

167,190 

 

 

170,862 

 

 

167,190 

 

 

170,862 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

16.1%

 

15.5%

 

16.1%

 

15.5%

 

Tier 1 capital ratio

19.1%

 

19.8%

 

18.7%

 

19.0%

 

Total capital ratio

22.9%

 

23.5%

 

22.1%

 

21.9%

 

1        Position at 31 December 2020 audited.

CAPITAL MANAGEMENT (continued)

Movements in capital resources

The key difference between the transitional capital calculation as at 30 June 2021 and the fully loaded equivalent is primarily related to capital securities that previously qualified as tier 1 or tier 2 capital, but that do not fully qualify under the regulation, which can be included in additional tier 1 (AT1) or tier 2 capital (as applicable) up to specified limits which reduce by 10 per cent per annum until 2022. In addition, following revisions to eligibility criteria for capital instruments under CRR II, certain instruments of the Group will cease to qualify as regulatory capital in June 2025.

The key movements on a transitional capital basis are set out in the table below.

 

Common

equity tier 1

 

Additional

tier 1

 

Tier 2

 

Total

capital

 

£m

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

 

At 31 December 2020

26,567 

 

 

7,295 

 

 

6,301 

 

 

40,163 

 

Profit for the period

3,708 

 

 

 

 

 

 

3,708 

 

Foreseeable dividend accrual for the period1

(700)

 

 

 

 

 

 

(700)

 

IFRS 9 transitional adjustment to retained earnings

(610)

 

 

 

 

 

 

(610)

 

Pension contributions

(668)

 

 

 

 

 

 

(668)

 

Prudent valuation adjustment

(6)

 

 

 

 

 

 

(6)

 

Deferred tax asset

(1,127)

 

 

 

 

 

 

(1,127)

 

Goodwill and other intangible assets

(194)

 

 

 

 

 

 

(194)

 

Movements in other equity, subordinated liabilities, other tier 2 items and related adjustments

 

 

(2,346)

 

 

152 

 

 

(2,194)

 

Distributions on other equity instruments

(203)

 

 

 

 

 

 

(203)

 

Other movements2

193 

 

 

 

 

 

 

193 

 

At 30 June 2021

26,960 

 

 

4,949 

 

 

6,453 

 

 

38,362 

 

1        Reflects the accrual for foreseeable 2021 ordinary dividends. Excludes the reversal of the brought forward accrual for the 2020 full year ordinary dividend which has now been paid out.

2        Includes other pension movements.

CET1 capital resources have increased by £393 million during the period, primarily reflecting:

•        underlying banking profits, with the impairment credit offset by the partial unwind of IFRS 9 transitional relief

•        offset in part by pension contributions made during the period, the accrual of the foreseeable ordinary dividend and other items including the increase in deferred tax assets deducted from capital which primarily reflects the remeasurement of deferred tax assets following the announced increase in the UK corporation tax rate from 1 April 2023. The remeasurement has a limited overall capital benefit as the tax credit through profits is largely offset by the increase in the deferred tax asset deduction.

AT1 capital resources have reduced by £2,346 million during the period, primarily reflecting the annual reduction in the transitional limit applied to grandfathered tier 1 capital instruments and the net impact of the derecognition of called AT1 capital instruments and subsequent issuance of new AT1 capital instruments.

Tier 2 capital resources have increased by £152 million during the period, largely reflecting the issuance of a new tier 2 capital instrument, partially offset by the application of the reduced transitional limit applied to grandfathered tier 2 capital instruments, regulatory amortisation and the impact of movements in rates.

 

CAPITAL MANAGEMENT (continued)

Risk-weighted assets

 

At 30 June 2021

 

 

At 31 Dec
2020

 

 

£m

 

 

£m

 

 

 

 

 

 

 

Foundation Internal Ratings Based (IRB) Approach

41,359 

 

 

 

43,781 

 

 

Retail IRB Approach

66,584 

 

 

 

65,207 

 

 

Other IRB Approach

11,317 

 

 

 

11,916 

 

 

IRB Approach

119,260 

 

 

 

120,904 

 

 

Standardised (STA) Approach

19,918 

 

 

 

21,673 

 

 

Credit risk

139,178 

 

 

 

142,577 

 

 

Counterparty credit risk

1,727 

 

 

 

2,133 

 

 

Credit valuation adjustment risk

206 

 

 

 

355 

 

 

Operational risk

23,449 

 

 

 

23,307 

 

 

Market risk

186 

 

 

 

210 

 

 

Risk-weighted assets

164,746 

 

 

 

165,582 

 

 

Threshold risk-weighted assets1

2,444 

 

 

 

2,280 

 

 

Total risk-weighted assets

167,190 

 

 

 

170,862 

 

 

1        Threshold risk-weighted assets reflect the element of deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital.

Risk-weighted asset movements by driver

 

Credit risk

IRB

 

Credit risk

STA

 

Credit risk

total1

 

Counterparty

credit risk2

 

Market

risk

 

Operational

risk

 

Total

 

£m

 

£m

 

£m

 

£m

 

£m

 

£m

 

£m

Total risk-weighted assets at 31 December 2020

 

 

 

 

 

 

 

 

 

 

 

 

170,862 

 

Less threshold risk-weighted assets3

 

 

 

 

 

 

 

 

 

 

 

 

(2,280)

 

Risk-weighted assets at 31 December 2020

120,904 

 

 

21,673 

 

 

142,577 

 

 

2,488 

 

 

210 

 

 

23,307 

 

 

168,582 

 

Asset size

(2,901)

 

 

(305)

 

 

(3,206)

 

 

(347)

 

 

 

 

 

 

(3,553)

 

Asset quality

1,465 

 

 

(142)

 

 

1,323 

 

 

(196)

 

 

 

 

 

 

1,127 

 

Model updates

 

 

 

 

 

 

 

 

18 

 

 

 

 

18 

 

Methodology and policy

(40)

 

 

(1,231)

 

 

(1,271)

 

 

 

 

 

 

 

 

(1,270)

 

Acquisitions and disposals

 

 

 

 

 

 

 

 

 

 

 

 

 

Movements in risk levels (market risk only)

 

 

 

 

 

 

 

 

(43)

 

 

 

 

(43)

 

Foreign exchange movements

(168)

 

 

(77)

 

 

(245)

 

 

(12)

 

 

 

 

 

 

(257)

 

Other

 

 

 

 

 

 

 

 

 

 

142 

 

 

142 

 

Risk-weighted assets at 30 June 2021

119,260 

 

 

19,918 

 

 

139,178 

 

 

1,933 

 

 

186 

 

 

23,449 

 

 

164,746 

 

Threshold risk-weighted assets3

 

 

 

 

 

 

 

 

 

 

 

 

2,444 

 

Total risk-weighted assets at 30 June 2021

 

 

 

 

 

 

 

 

 

 

 

167,190 

 

1        Credit risk includes securitisation risk-weighted assets.

2        Counterparty credit risk includes movements in contributions to the default fund of central counterparties and movements in credit valuation adjustment risk.

3        Threshold risk-weighted assets reflect the element of deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital.

CAPITAL MANAGEMENT (continued)

The risk-weighted assets movement table provides analysis of the movement in risk-weighted assets in the period by risk type and an insight into the key drivers of the movements.

Credit risk, risk-weighted assets:

•        Asset size reduction of £3.2 billion predominantly reflects continued optimisation in Commercial Banking and lower unsecured balances partially offset by increased mortgage lending.

•        Asset quality increase of £1.3 billion reflects the limited impact of credit migration and retail model calibrations offset by the benefit of House Price Index increases

•        Methodology and policy changes reduced risk-weighted assets by £1.3 billion through securitisation activity and other optimisation activity.

Counterparty credit risk, risk-weighted assets: decreased by £0.6 billion due to movements in market rates during the period

Analysis of leverage movements

The Group's fully loaded UK leverage ratio has reduced to 5.3 per cent, driven by the impact of the reduction in the fully loaded total tier 1 capital position. This was offset in part by the reduction in the leverage exposure measure which reduced by £6.3 billion during the period, largely reflecting movements in securities financing transactions and off-balance sheet items, net of an increase in retail lending.

Following a direction received from the PRA during 2020 the Group is permitted to exclude lending under the UK Government's Bounce Back Loan Scheme (BBLS) from the leverage exposure measure.

The average UK leverage ratio was 5.5 per cent over the second quarter, reducing to 5.3 per cent towards the end of the quarter which largely reflected the reduction in fully loaded total tier 1 capital.

CAPITAL MANAGEMENT (continued)

Leverage ratio

The table below summarises the component parts of the Lloyds Bank plc leverage ratio.

 

Fully loaded

 

At 30 June 2021

 

 

At 31 Dec
2020

 

 

£m

 

 

£m

 

 

 

 

 

 

 

Total tier 1 capital for leverage ratio

 

 

 

 

 

Common equity tier 1 capital

26,960 

 

 

 

26,567 

 

 

Additional tier 1 capital

4,268 

 

 

 

5,935 

 

 

Total tier 1 capital

31,228 

 

 

 

32,502 

 

 

 

 

 

 

 

 

Exposure measure

 

 

 

 

 

Statutory balance sheet assets

 

 

 

 

 

Derivative financial instruments

6,436 

 

 

 

8,341 

 

 

Securities financing transactions

51,746 

 

 

 

56,073 

 

 

Loans and advances and other assets

551,440 

 

 

 

535,525 

 

 

Total assets

609,622 

 

 

 

599,939 

 

 

 

 

 

 

 

 

Qualifying central bank claims

(53,073)

 

 

 

(43,973)

 

 

 

 

 

 

 

 

Deconsolidation adjustments

 

 

 

 

 

Derivative financial instruments

 

 

 

16 

 

 

Securities financing transactions

 

 

 

 

 

Loans and advances and other assets

(113)

 

 

 

(139)

 

 

Total deconsolidation adjustments1

(113)

 

 

 

(123)

 

 

 

 

 

 

 

 

Derivatives adjustments

 

 

 

 

 

Adjustments for regulatory netting

(1,995)

 

 

 

(2,225)

 

 

Adjustments for cash collateral

(3,810)

 

 

 

(5,601)

 

 

Net written credit protection

22 

 

 

 

145 

 

 

Regulatory potential future exposure

5,269 

 

 

 

5,744 

 

 

Total derivatives adjustments

(514)

 

 

 

(1,937)

 

 

 

 

 

 

 

 

Securities financing transactions adjustments

833 

 

 

 

1,060 

 

 

Off-balance sheet items

48,220 

 

 

 

53,350 

 

 

Regulatory deductions and other adjustments2

(17,727)

 

 

 

(14,770)

 

 

 

 

 

 

 

 

Total exposure measure

587,248 

 

 

 

593,546 

 

 

Average exposure measure3

588,616 

 

 

 

 

 

 

 

 

 

 

 

UK leverage ratio

5.3%

 

 

5.5%

 

Average UK leverage ratio3

5.5%

 

 

 

 

1        Deconsolidation adjustments relate to the deconsolidation of certain Lloyds Bank Group entities that fall outside the scope of Lloyds Bank Group's regulatory capital consolidation.

2        Includes adjustments to exclude lending under the UK Government's Bounce Back Loan Scheme (BBLS) and the accelerated implementation for the netting of regular-way purchases and sales awaiting settlement in accordance with CRR Article 500d.

3        The average UK leverage ratio is based on the average of the month end tier 1 capital position and average exposure measure over the quarter (1 April 2021 to 30 June 2021). The average of 5.5 per cent compares to 5.6 per cent at the start and 5.3 per cent at the end of the quarter.

CAPITAL MANAGEMENT (continued)

Application of IFRS 9 on a full impact basis for capital and leverage

 

IFRS 9 full impact

 

At 30 June 2021

 

At 31 Dec 2020

 

 

 

 

Common equity tier 1 (£m)

25,628 

 

 

24,591 

 

Transitional tier 1 (£m)

30,577 

 

 

31,886 

 

Transitional total capital (£m)

38,273 

 

 

39,422 

 

Total risk-weighted assets (£m)

167,332 

 

 

171,015 

 

Common equity tier 1 ratio (%)

15.3%

 

14.4%

Transitional tier 1 ratio (%)

18.3%

 

18.6%

Transitional total capital ratio (%)

22.9%

 

23.1%

UK leverage ratio exposure measure (£m)

585,916 

 

 

591,570 

 

UK leverage ratio (%)

5.1%

 

5.2%

Lloyds Bank Group applies the full extent of the IFRS 9 transitional arrangements for capital as set out under CRR Article 473a (as amended via the CRR 'Quick Fix' revisions published in June 2020). Specifically, the Group has opted to apply both paragraphs 2 and 4 of CRR Article 473a (static and dynamic relief) and in addition to apply a 100 per cent risk weight to the consequential Standardised credit risk exposure add-back as permitted under paragraph 7a of the revisions.

As at 30 June 2021, static relief under the transitional arrangements amounted to £262 million (31 December 2020: £370 million) and dynamic relief amounted to £1,070 million (31 December 2020: £1,606 million) through CET1 capital.

Regulatory capital developments

A number of significant regulatory capital changes will implement on 1 January 2022, including the remaining UK implementation of CRR 2 (which includes the revised standardised measure of counterparty credit risk - SA-CCR) and required changes to the Group's IRB models which will predominantly impact the mortgage models as a result of changes to the definition of default, revised loss given default (LGD) parameters and a new 'hybrid' probability of default (PD) approach. In addition UK regulators are currently consulting on revisions to the UK leverage ratio framework which are also expected to apply from 1 January 2022.

A consultation on the UK implementation of the remaining final Basel III reforms (also referred to as Basel 3.1), which include significant revisions to the credit risk, CVA and operational risk frameworks and will lead to the phased introduction of a risk-weighted assets output floor, is expected to be published by UK regulators in Q4 2021. The final rules are currently expected to apply from 1 January 2023, with the output floor expected to be phased in over several years.

Half-year Pillar 3 disclosures

The Group will publish a condensed set of half-year Pillar 3 disclosures in mid-August. A copy of the disclosures will be available to view at: https://www.lloydsbankinggroup.com/investors/financial-downloads.html

 

STATUTORY INFORMATION

 

 

Page

Condensed consolidated half-year financial statements (unaudited)

 

Consolidated income statement

34

Consolidated statement of comprehensive income

35

Consolidated balance sheet

36

Consolidated statement of changes in equity

38

Consolidated cash flow statement

41

 

 

 

Notes

 

1

Accounting policies

42

2

Critical accounting judgements and estimates

43

3

Segmental analysis

53

4

Net fee and commission income

55

5

Operating expenses

55

6

Impairment

56

7

Tax expense

58

8

Financial assets at fair value through profit or loss

58

9

Financial assets at amortised cost

59

10

Debt securities in issue

65

11

Retirement benefit obligations

66

12

Other provisions

67

13

Related party transactions

69

14

Contingent liabilities, commitments and guarantees

70

15

Fair values of financial assets and liabilities

73

16

Credit quality of loans and advances to banks and customers

79

17

Dividends on ordinary shares

82

18

Ultimate parent undertaking

82

19

Other information

83

 

 

CONSOLIDATED INCOME STATEMENT (UNAUDITED)

 

 

 

Half-year

to 30 June

2021

 

 

Half-year

to 30 June

2020

 

 

Note

 

£m

 

 

£m

 

 

 

 

 

 

 

 

 

Interest income

 

 

6,397 

 

 

 

7,295 

 

 

Interest expense

 

 

(1,021)

 

 

 

(1,681)

 

 

Net interest income

 

 

5,376 

 

 

 

5,614 

 

 

Fee and commission income

 

 

1,070 

 

 

 

954 

 

 

Fee and commission expense

 

 

(480)

 

 

 

(421)

 

 

Net fee and commission income

4

 

590 

 

 

 

533 

 

 

Net trading income

 

 

303 

 

 

 

368 

 

 

Other operating income

 

 

1,038 

 

 

 

1,251 

 

 

Other income

 

 

1,931 

 

 

 

2,152 

 

 

Total income

 

 

7,307 

 

 

 

7,766 

 

 

Operating expenses

5

 

(4,564)

 

 

 

(4,431)

 

 

Impairment

6

 

677 

 

 

 

(3,625)

 

 

Profit (loss) before tax

 

 

3,420 

 

 

 

(290)

 

 

Tax credit

7

 

288 

 

 

 

594 

 

 

Profit for the period

 

 

3,708 

 

 

 

304 

 

 

 

 

 

 

 

 

 

 

Profit attributable to ordinary shareholders

 

 

3,489 

 

 

 

86 

 

 

Profit attributable to other equity holders

 

 

203 

 

 

 

204 

 

 

Profit attributable to equity holders

 

 

3,692 

 

 

 

290 

 

 

Profit attributable to non-controlling interests

 

 

16 

 

 

 

14 

 

 

Profit for the period

 

 

3,708 

 

 

 

304 

 

 

The accompanying notes are an integral part of the condensed consolidated half-year financial statements.

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 

Half-year

to 30 June

2021

 

 

Half-year

to 30 June

2020

 

 

£m

 

 

£m

 

 

 

 

 

 

 

Profit for the period

3,708 

 

 

 

304 

 

 

Other comprehensive income

 

 

 

 

 

Items that will not subsequently be reclassified to profit or loss:

 

 

 

 

 

Post-retirement defined benefit scheme remeasurements:

 

 

 

 

 

Remeasurements before tax

604 

 

 

 

668 

 

 

Tax

(323)

 

 

 

(154)

 

 

 

281 

 

 

 

514 

 

 

Movements in revaluation reserve in respect of equity shares held at fair value through other comprehensive income:

 

 

 

 

 

Change in fair value

 

 

 

 

 

Tax

 

 

 

 

 

 

 

 

 

 

 

Gains and losses attributable to own credit risk:

 

 

 

 

 

Losses before tax

(48)

 

 

 

(3)

 

 

Tax

22 

 

 

 

 

 

 

(26)

 

 

 

(2)

 

 

Items that may subsequently be reclassified to profit or loss:

 

 

 

 

 

Movements in revaluation reserve in respect of debt securities held at fair value through other comprehensive income:

 

 

 

 

 

Change in fair value

41 

 

 

 

(16)

 

 

Income statement transfers in respect of disposals

59 

 

 

 

(137)

 

 

Income statement transfers in respect of impairment

(2)

 

 

 

 

 

Tax

(12)

 

 

 

41 

 

 

 

86 

 

 

 

(106)

 

 

Movements in cash flow hedging reserve:

 

 

 

 

 

Effective portion of changes in fair value taken to other comprehensive income

(1,074)

 

 

 

682 

 

 

Net income statement transfers

(275)

 

 

 

(480)

 

 

Tax

349 

 

 

 

(91)

 

 

 

(1,000)

 

 

 

111 

 

 

Movements in foreign currency translation reserve:

 

 

 

 

 

Currency translation differences (tax: £nil)

(7)

 

 

 

 

 

Transfers to income statement (tax: £nil)

 

 

 

 

 

 

(7)

 

 

 

 

 

Other comprehensive income for the period, net of tax

(665)

 

 

 

517 

 

 

Total comprehensive income for the period

3,043 

 

 

 

821 

 

 

 

 

 

 

 

 

Total comprehensive income attributable to ordinary shareholders

2,824 

 

 

 

603 

 

 

Total comprehensive income attributable to other equity holders

203 

 

 

 

204 

 

 

Total comprehensive income attributable to equity holders

3,027 

 

 

 

807 

 

 

Total comprehensive income attributable to non-controlling interests

16 

 

 

 

14 

 

 

Total comprehensive income for the period

3,043 

 

 

 

821 

 

 

 

 

CONSOLIDATED BALANCE SHEET

 

 

 

At

30 June

2021

 

 

At

31 Dec

2020

 

 

 

 

(unaudited)

 

 

(audited)

 

 

Note

 

£m

 

 

£m

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and balances at central banks

 

 

58,693 

 

 

 

49,888 

 

 

Items in the course of collection from banks

 

 

163 

 

 

 

300 

 

 

Financial assets at fair value through profit or loss

8

 

1,292 

 

 

 

1,674 

 

 

Derivative financial instruments

 

 

6,436 

 

 

 

8,341 

 

 

Loans and advances to banks

 

 

7,353 

 

 

 

5,950 

 

 

Loans and advances to customers

 

 

481,342 

 

 

 

480,141 

 

 

Debt securities

 

 

4,787 

 

 

 

5,137 

 

 

Due from fellow Lloyds Banking Group undertakings

 

 

692 

 

 

 

738 

 

 

Financial assets at amortised cost

9

 

494,174 

 

 

 

491,966 

 

 

Financial assets at fair value through other comprehensive income

 

 

25,840 

 

 

 

27,260 

 

 

Goodwill

 

 

470 

 

 

 

470 

 

 

Other intangible assets

 

 

4,252 

 

 

 

4,112 

 

 

Property, plant and equipment

 

 

8,065 

 

 

 

8,317 

 

 

Current tax recoverable

 

 

763 

 

 

 

537 

 

 

Deferred tax assets

 

 

4,257 

 

 

 

3,468 

 

 

Retirement benefit assets

11

 

3,134 

 

 

 

1,714 

 

 

Other assets

 

 

2,083 

 

 

 

1,892 

 

 

Total assets

 

 

609,622 

 

 

 

599,939 

 

 

CONSOLIDATED BALANCE SHEET (continued)

 

 

 

At

30 June

2021

 

 

At

31 Dec

2020

 

 

 

 

(unaudited)

 

 

(audited)

 

Equity and liabilities

Note

 

£m

 

 

£m

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits from banks

 

 

16,029 

 

 

 

24,997 

 

 

Customer deposits

 

 

457,465 

 

 

 

434,569 

 

 

Due to fellow Lloyds Banking Group undertakings

 

 

7,169 

 

 

 

6,875 

 

 

Items in course of transmission to banks

 

 

319 

 

 

 

302 

 

 

Financial liabilities at fair value through profit or loss

 

 

6,857 

 

 

 

6,831 

 

 

Derivative financial instruments

 

 

5,341 

 

 

 

8,228 

 

 

Notes in circulation

 

 

1,368 

 

 

 

1,305 

 

 

Debt securities in issue

10

 

55,120 

 

 

 

59,293 

 

 

Other liabilities

 

 

5,891 

 

 

 

5,181 

 

 

Retirement benefit obligations

11

 

234 

 

 

 

245 

 

 

Current tax liabilities

 

 

 

 

 

31 

 

 

Other provisions

12

 

1,499 

 

 

 

1,722 

 

 

Subordinated liabilities

 

 

9,600 

 

 

 

9,242 

 

 

Total liabilities

 

 

566,892 

 

 

 

558,821 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Share capital

 

 

1,574 

 

 

 

1,574 

 

 

Share premium account

 

 

600 

 

 

 

600 

 

 

Other reserves

 

 

6,260 

 

 

 

7,181 

 

 

Retained profits

 

 

28,561 

 

 

 

25,750 

 

 

Ordinary shareholders' equity

 

 

36,995 

 

 

 

35,105 

 

 

Other equity instruments

 

 

5,644 

 

 

 

5,935 

 

 

Total equity excluding non-controlling interests

 

 

42,639 

 

 

 

41,040 

 

 

Non-controlling interests

 

 

91 

 

 

 

78 

 

 

Total equity

 

 

42,730 

 

 

 

41,118 

 

 

Total equity and liabilities

 

 

609,622 

 

 

 

599,939 

 

 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

 

Attributable to ordinary shareholders

 

 

 

 

 

 

 

 

 

 

Share

capital and

premium

 

 

Other

reserves

 

 

Retained

profits

 

 

Total

 

 

Other

equity

instruments

 

 

Non-

controlling

interests

 

 

Total

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January 2021

2,174 

 

 

 

7,181 

 

 

 

25,750 

 

 

 

35,105 

 

 

 

5,935 

 

 

 

78 

 

 

 

41,118 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the period

 

 

 

 

 

 

3,489 

 

 

 

3,489 

 

 

 

203 

 

 

 

16 

 

 

 

3,708 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Post-retirement defined benefit scheme remeasurements, net of tax

 

 

 

 

 

 

281 

 

 

 

281 

 

 

 

 

 

 

 

 

 

281 

 

 

Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

86 

 

 

 

 

 

 

86 

 

 

 

 

 

 

 

 

 

86 

 

 

Equity shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains and losses attributable to own credit risk, net of tax

 

 

 

 

 

 

(26)

 

 

 

(26)

 

 

 

 

 

 

 

 

 

(26)

 

 

Movements in cash flow hedging reserve, net of tax

 

 

 

(1,000)

 

 

 

 

 

 

(1,000)

 

 

 

 

 

 

 

 

 

(1,000)

 

 

Movements in foreign currency translation reserve, net of tax

 

 

 

(7)

 

 

 

 

 

 

(7)

 

 

 

 

 

 

 

 

 

(7)

 

 

Total other comprehensive income

 

 

 

(920)

 

 

 

255 

 

 

 

(665)

 

 

 

 

 

 

 

 

 

(665)

 

 

Total comprehensive income1

 

 

 

(920)

 

 

 

3,744 

 

 

 

2,824 

 

 

 

203 

 

 

 

16 

 

 

 

3,043 

 

 

Transactions with owners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

(1,000)

 

 

 

(1,000)

 

 

 

 

 

 

(3)

 

 

 

(1,003)

 

 

Distributions on other equity instruments

 

 

 

 

 

 

 

 

 

 

 

 

(203)

 

 

 

 

 

 

(203)

 

 

Issue of other equity instruments

 

 

 

 

 

 

(1)

 

 

 

(1)

 

 

 

1,550 

 

 

 

 

 

 

1,549 

 

 

Redemptions of other equity instruments

 

 

 

 

 

 

(9)

 

 

 

(9)

 

 

 

(1,841)

 

 

 

 

 

 

(1,850)

 

 

Capital contributions received

 

 

 

 

 

 

78 

 

 

 

78 

 

 

 

 

 

 

 

 

 

78 

 

 

Return of capital contributions

 

 

 

 

 

 

(2)

 

 

 

(2)

 

 

 

 

 

 

 

 

 

(2)

 

 

Changes in non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total transactions with owners

 

 

 

 

 

 

(934)

 

 

 

(934)

 

 

 

(494)

 

 

 

(3)

 

 

 

(1,431)

 

 

Realised gains and losses on equity shares held at fair value through other comprehensive income

 

 

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June 20212

2,174 

 

 

 

6,260 

 

 

 

28,561 

 

 

 

36,995 

 

 

 

5,644 

 

 

 

91 

 

 

 

42,730 

 

 

1        Total comprehensive income attributable to owners of the parent was £3,027 million.

2        Total equity attributable to owners of the parent was £42,639 million.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (continued)

 

Attributable to ordinary shareholders

 

 

 

 

 

 

 

 

 

 

Share

capital and

premium

 

 

Other

reserves

 

 

Retained

profits

 

 

Total

 

 

Other

equity

instruments

 

 

Non-

controlling

interests

 

 

Total

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January 2020

2,174 

 

 

 

7,250 

 

 

 

24,549 

 

 

 

33,973 

 

 

 

4,865 

 

 

 

61 

 

 

 

38,899 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the period

 

 

 

 

 

 

86 

 

 

 

86 

 

 

 

204 

 

 

 

14 

 

 

 

304 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Post-retirement defined benefit scheme remeasurements, net of tax

 

 

 

 

 

 

514 

 

 

 

514 

 

 

 

 

 

 

 

 

 

514 

 

 

Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

(106)

 

 

 

 

 

 

(106)

 

 

 

 

 

 

 

 

 

(106)

 

 

Equity shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains and losses attributable to own credit risk, net of tax

 

 

 

 

 

 

(2)

 

 

 

(2)

 

 

 

 

 

 

 

 

 

(2)

 

 

Movements in cash flow hedging reserve, net of tax

 

 

 

111 

 

 

 

 

 

 

111 

 

 

 

 

 

 

 

 

 

111 

 

 

Movements in foreign currency translation reserve, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

 

 

 

 

512 

 

 

 

517 

 

 

 

 

 

 

 

 

 

517 

 

 

Total comprehensive income1

 

 

 

 

 

 

598 

 

 

 

603 

 

 

 

204 

 

 

 

14 

 

 

 

821 

 

 

Transactions with owners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions on other equity instruments

 

 

 

 

 

 

 

 

 

 

 

 

(204)

 

 

 

 

 

 

(204)

 

 

Issue of other equity instruments

 

 

 

 

 

 

 

 

 

 

 

 

1,070 

 

 

 

 

 

 

1,070 

 

 

Capital contributions received

 

 

 

 

 

 

61 

 

 

 

61 

 

 

 

 

 

 

 

 

 

61 

 

 

Return of capital contributions

 

 

 

 

 

 

(2)

 

 

 

(2)

 

 

 

 

 

 

 

 

 

(2)

 

 

Changes in non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total transactions with owners

 

 

 

 

 

 

59 

 

 

 

59 

 

 

 

866 

 

 

 

 

 

 

925 

 

 

Realised gains and losses on equity shares held at fair value through other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June 20202

2,174 

 

 

 

7,255 

 

 

 

25,206 

 

 

 

34,635 

 

 

 

5,935 

 

 

 

75 

 

 

 

40,645 

 

 

1        Total comprehensive income attributable to owners of the parent was £807 million.

2        Total equity attributable to owners of the parent was £40,570 million.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (continued)

 

Attributable to ordinary shareholders

 

 

 

 

 

 

 

 

 

 

Share

capital and

premium

 

 

Other

reserves

 

 

Retained

profits

 

 

Total

 

 

Other

equity

instruments

 

 

Non-

controlling

interests

 

 

Total

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 July 2020

2,174 

 

 

 

7,255 

 

 

 

25,206 

 

 

 

34,635 

 

 

 

5,935 

 

 

 

75 

 

 

 

40,645 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the period

 

 

 

 

 

 

937 

 

 

 

937 

 

 

 

213 

 

 

 

12 

 

 

 

1,162 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Post-retirement defined benefit scheme remeasurements, net of tax

 

 

 

 

 

 

(401)

 

 

 

(401)

 

 

 

 

 

 

 

 

 

(401)

 

 

Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

86 

 

 

 

 

 

 

86 

 

 

 

 

 

 

 

 

 

86 

 

 

Equity shares

 

 

 

(16)

 

 

 

 

 

 

(16)

 

 

 

 

 

 

 

 

 

(16)

 

 

Gains and losses attributable to own credit risk, net of tax

 

 

 

 

 

 

(53)

 

 

 

(53)

 

 

 

 

 

 

 

 

 

(53)

 

 

Movements in cash flow hedging reserve, net of tax

 

 

 

(160)

 

 

 

 

 

 

(160)

 

 

 

 

 

 

 

 

 

(160)

 

 

Movements in foreign currency translation reserve, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

 

(90)

 

 

 

(454)

 

 

 

(544)

 

 

 

 

 

 

 

 

 

(544)

 

 

Total comprehensive income1

 

 

 

(90)

 

 

 

483 

 

 

 

393 

 

 

 

213 

 

 

 

12 

 

 

 

618 

 

 

Transactions with owners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7)

 

 

 

(7)

 

 

Distributions on other equity instruments

 

 

 

 

 

 

 

 

 

 

 

 

(213)

 

 

 

 

 

 

(213)

 

 

Issue of other equity instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital contributions received

 

 

 

 

 

 

79 

 

 

 

79 

 

 

 

 

 

 

 

 

 

79 

 

 

Return of capital contributions

 

 

 

 

 

 

(2)

 

 

 

(2)

 

 

 

 

 

 

 

 

 

(2)

 

 

Changes in non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

 

 

 

(2)

 

 

Total transactions with owners

 

 

 

 

 

 

77 

 

 

 

77 

 

 

 

(213)

 

 

 

(9)

 

 

 

(145)

 

 

Realised gains and losses on equity shares held at fair value through other comprehensive income

 

 

 

16 

 

 

 

(16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 20202

2,174 

 

 

 

7,181 

 

 

 

25,750 

 

 

 

35,105 

 

 

 

5,935 

 

 

 

78 

 

 

 

41,118 

 

 

1        Total comprehensive income attributable to owners of the parent was £606 million.

2        Total equity attributable to owners of the parent was £41,040 million.

1       

 

CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

 

Half-year

to 30 June

2021

 

 

Half-year

to 30 June

2020

 

 

£m

 

 

£m

 

 

 

 

 

 

 

Profit (loss) before tax

3,420 

 

 

 

(290)

 

 

Adjustments for:

 

 

 

 

 

Change in operating assets

1,360 

 

 

 

(11,743)

 

 

Change in operating liabilities

6,422 

 

 

 

23,967 

 

 

Non-cash and other items

(1,068)

 

 

 

3,221 

 

 

Tax paid

(646)

 

 

 

(648)

 

 

Net cash provided by operating activities

9,488 

 

 

 

14,507 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchase of financial assets

(5,411)

 

 

 

(7,029)

 

 

Proceeds from sale and maturity of financial assets

6,335 

 

 

 

5,132 

 

 

Purchase of fixed assets

(1,509)

 

 

 

(1,301)

 

 

Proceeds from sale of fixed assets

542 

 

 

 

413 

 

 

Net cash used in investing activities

(43)

 

 

 

(2,785)

 

 

Cash flows from financing activities

 

 

 

 

 

Dividends paid to ordinary shareholders

(1,000)

 

 

 

 

 

Distributions on other equity instruments

(203)

 

 

 

(204)

 

 

Dividends paid to non-controlling interests

(3)

 

 

 

 

 

Return of capital contributions

(2)

 

 

 

(2)

 

 

Interest paid on subordinated liabilities

(310)

 

 

 

(514)

 

 

Proceeds from issue of subordinated liabilities

1,086 

 

 

 

281 

 

 

Proceeds from issue of other equity instruments

1,549 

 

 

 

1,070 

 

 

Repayment of subordinated liabilities

(471)

 

 

 

(1,769)

 

 

Redemptions of other equity instruments

(1,850)

 

 

 

 

 

Borrowings from parent company

2,459 

 

 

 

2,270 

 

 

Repayments to parent company

(850)

 

 

 

(136)

 

 

Interest paid on borrowing from parent company

(127)

 

 

 

(103)

 

 

Net cash provided by financing activities

278 

 

 

 

893 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

 

Change in cash and cash equivalents

9,723 

 

 

 

12,617 

 

 

Cash and cash equivalents at beginning of period

48,966 

 

 

 

38,614 

 

 

Cash and cash equivalents at end of period

58,689 

 

 

 

51,231 

 

 

Cash and cash equivalents comprise cash and non-mandatory balances with central banks and amounts due from banks with a maturity of less than three months.

 

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS

 

Note 1: Accounting policies

These condensed consolidated half-year financial statements as at and for the period to 30 June 2021 have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority (FCA) and with International Accounting Standard 34 (IAS 34), Interim Financial Reporting as adopted by the United Kingdom and comprise the results of Lloyds Bank plc (the Bank) together with its subsidiaries (the Group). They do not include all of the information required for full annual financial statements and should be read in conjunction with the Group's consolidated financial statements as at and for the year ended 31 December 2020 which complied with international accounting standards in conformity with the requirements of the Companies Act 2006, were prepared in accordance with International Financial Reporting Standards (IFRS) and were compliant with IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. Copies of the 2020 Annual Report and Accounts are available on the Group's website and are available upon request from Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN.

The directors consider that it is appropriate to continue to adopt the going concern basis in preparing the condensed consolidated half-year financial statements. In reaching this assessment, the directors have taken into account the continuing uncertainties affecting the UK economy post-pandemic and their potential effects upon the Group's performance and projected funding and capital position; the impact of further stress scenarios has also been considered. On this basis, the directors are satisfied that the Group will maintain adequate levels of funding and capital for the foreseeable future.

Changes in accounting policy

The Group adopted the Interest Rate Benchmark Reform Phase 2 amendments from 1 January 2021. These amendments require that changes to expected future cash flows that both arise as a direct result of IBOR Reform and are economically equivalent to the previous cash flows are accounted for as a change to the effective interest rate with no adjustment to the asset or liability's carrying amount; no immediate gain or loss is recognised. The new requirements also provide relief from the requirement to discontinue hedge accounting as a result of amending hedge documentation if the changes are required solely as a result of the IBOR Reform. The amendments do not have a material impact on the Group's comparatives, which have not been restated.

Except for the change above, the Group's accounting policies are consistent with those applied by the Group in its 2020 Annual Report and Accounts and there have been no changes in the Group's methods of computation.

Future accounting developments

The IASB has issued a number of minor amendments to IFRSs effective 1 January 2022 and in later years (including IFRS 9 Financial Instruments and IAS 37 Provisions, Contingent Liabilities and Contingent Assets). These amendments are not expected to have a significant impact on the Group.

 

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)

Note 2: Critical accounting judgements and estimates

The preparation of the Group's financial statements requires management to make judgements, estimates and assumptions that impact the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may include amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group's significant judgements, estimates and assumptions are unchanged compared to those applied at 31 December 2020, except as detailed below.

Allowance for expected credit losses

The Group recognises an allowance for expected credit losses (ECLs) for loans and advances to customers and banks, other financial assets held at amortised cost, financial assets measured at fair value through other comprehensive income and certain loan commitment and financial guarantee contracts. At 30 June 2021 the Group's expected credit loss allowance was £4,997 million (31 December 2020: £6,132 million), of which £4,649 million (31 December 2020: £5,706 million) was in respect of drawn balances.

The calculation of the Group's expected credit loss allowances and provisions against loan commitments and guarantees under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. These are set out in detail in the Group's 2020 Annual Report and Accounts. The principal changes made in the period ended 30 June 2021 are as follows:

Base Case and Economic Assumptions

The Group's base case economic scenario has been revised in light of the continuing impact of the coronavirus pandemic in the UK and globally. The scenario reflects judgements of the net effect of government-mandated restrictions on economic activity, large-scale government interventions and behavioural changes by households and businesses that may persist beyond the rollout of coronavirus vaccination programmes.

As large-scale vaccination efforts compete with the emergence of new viral strains in the UK and globally, there remains considerable uncertainty about the pace and eventual extent of the post-pandemic recovery. The Group's updated base case scenario builds in three key conditioning assumptions. First, that rising infections in the UK's third COVID-19 wave do not lead to a re-imposition of restrictions. Second, that the rollout of vaccination programmes among the UK's trading partners will reinforce an improving global backdrop. Third, that domestic policy measures remain accommodative, with monetary policy looking through a transient rise in inflation.

Conditioned on these assumptions and taking note of improvements in economic indicators in the second quarter, the Group's base case outlook continues to assume a rise in the unemployment rate as furlough support ends alongside a deceleration in residential and commercial property price growth. Risks around this base case economic view lie in both directions and are partly captured by the alternative economic scenarios generated. But uncertainties relating to the key conditioning assumptions, including epidemiological developments, the efficacy of vaccine rollouts against emergent strains and the response of the economy in those circumstances are not specifically captured by these scenarios. These specific risks have been recognised outside the modelled scenarios with a central adjustment.

The Group has incorporated the latest available information at the reporting date in defining its base case scenario and generating alternative economic scenarios. The scenarios include forecasts for key variables in the second quarter of 2021, for which actuals may have since emerged prior to publication.

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)

Note 2: Critical accounting judgements and estimates (continued)

Base case scenario by quarter1

 

First

quarter

2021

Second

quarter

2021

Third

quarter

2021

Fourth

quarter

2021

First

quarter

2022

Second

quarter

2022

Third

quarter

2022

Fourth

quarter

2022

At 30 June 2021

%

%

%

%

%

%

%

%

 

 

 

 

 

 

 

 

 

Gross domestic product

(1.5)

 

4.3 

 

(0.3)

 

3.2 

 

1.5 

 

0.5 

 

0.4 

 

0.4 

 

UK Bank Rate

0.10 

 

0.10 

 

0.10 

 

0.10 

 

0.10 

 

0.10 

 

0.10 

 

0.10 

 

Unemployment rate

4.8 

 

5.0 

 

5.4 

 

6.6 

 

6.4 

 

6.2 

 

6.1 

 

5.9 

 

House price growth

6.5 

 

10.5 

 

6.8 

 

5.6 

 

5.0 

 

1.7 

 

0.3 

 

0.1 

 

Commercial real estate price growth

(2.9)

 

1.3 

 

1.5 

 

0.4 

 

(0.3)

 

(0.5)

 

0.4 

 

1.0 

 

 

 

 

 

 

 

 

 

 

 

First

quarter

2020

Second

quarter

2020

Third

quarter

2020

Fourth

quarter

2020

First

quarter

2021

Second

quarter

2021

Third

quarter

2021

Fourth

quarter

2021

At 31 December 2020

%

%

%

%

%

%

%

%

 

 

 

 

 

 

 

 

 

Gross domestic product

(3.0)

 

(18.8)

 

16.0 

 

(1.9)

 

(3.8)

 

5.6 

 

3.6 

 

1.5 

 

UK Bank Rate

0.10 

 

0.10 

 

0.10