Lloyds Bank plc: 2023 Half-Year Results

LONDON, July 26, 2023 (GLOBE NEWSWIRE) --

Member of the Lloyds Banking Group

CONTENTS

Financial review	1
Risk management
Principal risks and uncertainties	3
Capital risk	5
Credit risk	9
Funding and liquidity risk	20
Statutory information
Condensed consolidated half-year financial statements (unaudited)	23
Consolidated income statement	24
Consolidated statement of comprehensive income	25
Consolidated balance sheet	26
Consolidated statement of changes in equity	27
Consolidated cash flow statement	30
Notes to the condensed consolidated half-year financial statements	31
Statement of directors' responsibilities	62
Independent review report to Lloyds Bank plc	63
Forward looking statements	64

FINANCIAL REVIEW

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 overseas locations. 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 and risk management services to commercial customers.

Income statement

The Group's profit before tax for the first half of 2023 was £3,530 million, 8 per cent higher than the same period in 2022, benefiting from higher total income, partly offset by operating expense and impairment charge increases. Profit after tax was £2,590 million (half-year to 30 June 2022: £2,441 million).

Total income for the first half of 2023 was £9,040 million, an increase of 12 per cent on the same period in 2022, primarily reflecting higher net interest income in the period. Net interest income of £7,009 million was up 15 per cent on the prior year, driven by stronger margins as a result of the higher rate environment and higher average interest-earning banking assets, supported by growth in the open mortgage book, Retail unsecured and European retail business.

Other income was £68 million higher at £2,031 million in the half-year to 30 June 2023 compared to £1,963 million in the same period in 2022. Net fee and commission income was broadly stable at £646 million. Net trading income was £101 million lower at £107 million in the half-year to 30 June 2023, in part reflecting the effects of the higher rate environment on the Group's derivatives. Other operating income increased to £1,278 million compared to £1,107 million in the half-year to 30 June 2022 as a result of improved Lex performance and the acquisition of Tusker.

Total operating expenses of £4,829 million were 10 per cent higher than in the prior year, given the higher planned strategic investment, new business costs and inflationary effects, partially mitigated by continued cost efficiency. In addition there was a higher operating lease depreciation charge in the six months to June 2023 reflecting the depreciation cost of higher value vehicles, the Tusker acquisition, lower gains on disposal and recent declines in battery electric used car prices.

The Group recognised remediation costs of £62 million largely in relation to pre-existing programmes (half-year to 30 June 2022: £58 million). There have been no further charges relating to HBOS Reading and the provision held continues to reflect the Group's best estimate of its full liability, albeit uncertainties remain. Following the FCA's Motor Market review, the Group continues to receive complaints and is engaging with the Financial Ombudsman Service in respect of historical motor commission arrangements. Discussions are continuing, with the remediation and financial impact, if any, remaining uncertain.

The impairment charge was £681 million compared with a £364 million charge in the half-year to 30 June 2022. The increase reflects the expected credit loss (ECL) allowance build from Stage 1 loans rolling forward into a more adverse economic outlook, as well as increased flows to default primarily in legacy variable rate UK mortgage portfolios and higher charges on existing Stage 3 clients in Commercial Banking. This increase was partly offset by a lower charge from economic outlook revisions. The Group's ECL allowance increased to £5,028 million, compared to £4,796 million at 31 December 2022 resulting from the Stage 3 increases in UK mortgages and Commercial Banking alongside low levels of write offs in the period. Asset quality remains resilient with only modest deterioration to date from a low base, with credit performance similar, or remaining favourable, to pre-pandemic experience.

The Group recognised a tax expense of £940 million in the period compared to £842 million in the first half of 2022.
FINANCIAL REVIEW (continued)

Balance sheet

Total assets were £2,598 million lower at £614,330 million at 30 June 2023 compared to £616,928 million at 31 December 2022. Cash and balances at central banks rose by £3,724 million to £75,729 million reflecting increased liquidity holdings. Financial assets at amortised cost were £8,961 million lower at £482,435 million compared to £491,396 million at 31 December 2022 with increases in debt securities of £2,709 million and loans and advances to banks of £888 million, offset by a reduction in reverse repurchase agreements of £8,729 million and loans and advances to customers of £3,982 million to £431,645 million. The reduction in loans and advances to customers was largely as a result of the exit of £2.5 billion of legacy Retail mortgage loans (including £2.1 billion in the closed mortgage book) during the first quarter. Financial assets at fair value through other comprehensive income decreased £875 million as a result of asset sales during the period. Other assets increased £2,269 million, reflecting higher settlement balances and higher operating lease assets following the acquisition of Tusker in February 2023.

Total liabilities were £3,403 million lower at £574,466 million compared to £577,869 million at 31 December 2022. Customer deposits at £439,914 million have decreased by £6,258 million (1 per cent) since the end of 2022. This included decreases in Retail current account balances of £6.2 billion as a result of tax payments, higher spend and a more competitive market, including the Group's own savings offers where balances increased by £3.5 billion. Commercial Banking deposits were stable during the first half of 2023. In addition, there were decreases in deposits from banks of £1,289 million and repurchase agreements at amortised cost of £3,968 million. Offsetting these reductions, debt securities in issue increased by £7,387 million following issuances of commercial paper, and other liabilities increased £2,493 million as a result of higher settlement balances and lease liabilities.

Total equity increased from £39,059 million at 31 December 2022 to £39,864 million at 30 June 2023, as a result of profit for the period and issuance of other equity instruments partially offset by a £1.9 billion dividend paid in the period and market movements impacting the cash flow hedge reserve and pensions.

Capital

The Group's common equity tier 1 (CET1) capital ratio remained flat at 14.8 per cent at 30 June 2023 (31 December 2022: 14.8 per cent). This largely reflected profit for the period, offset by the accelerated full year payment of fixed pension deficit contributions made to the Group's three main defined benefit pension schemes, an increase in the deduction for goodwill and other intangible assets, including those related to the acquisition of Tusker in February 2023, the accrual for foreseeable ordinary dividends and an increase in risk-weighted assets.

Risk-weighted assets have increased by £3.6 billion during the first half of the year to £178.5 billion at 30 June 2023 (31 December 2022: £174.9 billion). This largely reflects the adjustment for the anticipated impact of CRD IV models taken in the second quarter. Excluding this, lending growth and a small uplift from model calibration were partly offset by capital efficient securitisation activity and other optimisation activity.

The CRD IV model updates reflect an updated impact assessment following a further iteration of model development. The models remain subject to further development and final approval by the PRA. On that basis final impacts remain uncertain and further increases could be required.

RISK MANAGEMENT

PRINCIPAL RISKS AND UNCERTAINTIES

The most important risks faced by the Group are detailed below. The external risks faced by the Group may impact the success of delivering against the Group's long-term strategic objectives. They include, but are not limited to macroeconomic uncertainty; high interest rates and high inflation which are contributing to the cost of living increases and associated implications for UK consumers and businesses.

Heightened monitoring is in place across the Group's portfolios to identify signs of affordability stress. The Group has experienced only modest deterioration in credit performance across its portfolio to date, most notably in UK mortgages where new to arrears and flows to default have increased on legacy variable rate loans. The Group continues to work with its customers to proactively support them through cost of living pressures, the impact from rising interest rates and any deterioration in broader economic conditions.

The Group remains committed to the effective implementation and embedding of Consumer Duty into its purpose, strategy and culture in order to deliver good outcomes for our customers throughout their journeys. This activity seeks to align and enhance the Group's approach to supporting all customers, including those who may be vulnerable and customers in financial difficulty.

CRD IV model changes reflecting the revised regulatory standards introduced in 2022 remain subject to approval by the PRA with the resultant risk-weighted asset and expected loss outcome dependent upon this. An adjustment to risk-weighted assets has been taken in the second quarter, to reflect the anticipated impact of CRD IV models, following a further iteration of model development. On that basis final impacts remain uncertain and further increases could be required.

There have been minor changes to the definition of these risks compared to those disclosed in the Group's 2022 Annual Report and Accounts, such as clarifying third party and outsourced arrangements. The Group continues to conduct a detailed review of its Enterprise Risk Management Framework, which may result in a reclassification of the principal risks.

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.

Capital risk - The risk that an insufficient quantity or quality of capital is held to meet regulatory requirements or to support business strategy, an inefficient level of capital is held or that capital is inefficiently deployed across the Group.

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

Climate risk - The risk that the Group experiences losses and/or reputational damage, either from the impacts of climate change and the transition to net zero, or as a result of the Group's responses to tackling climate change.

Conduct risk - 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. Customer harm or detriment is defined as consumer loss, distress or inconvenience to customers due to breaches of regulatory or internal requirements or our wider duty to act fairly and reasonably.

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

Data risk - The risk of the Group failing to effectively govern, manage and protect its data throughout its lifecycle, including data processed by third parties, or failure to drive value from data; leading to unethical decision making, poor customer outcomes, loss of value to the Group and mistrust.

Funding and liquidity risk - 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.

Market risk - 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.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)

Model risk - 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.

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

Operational resilience risk - The risk that the Group fails to design resilience into business operations including those that are outsourced, underlying infrastructure and controls (people, property, 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 customers and stakeholder expectations and needs when the continuity of operations is compromised.

People risk - 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.

Regulatory and legal risk - 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 risk - The risk which results from:

•  Incorrect assumptions about internal or external operating environments

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

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

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