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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

31 July 2019

 

Commission File number 001-15246

 

LLOYDS BANKING GROUP plc

(Translation of registrant’s name into English)

 

25 Gresham Street
London
EC2V 7HN
United Kingdom

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F x     Form 40-F  o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b) (1) o.

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b) (7) o.

 

This report on Form 6-K shall be deemed incorporated by reference into the Company’s Registration Statement on Form F-3 (File No. 333-231902) and to be a part thereof from the date on which this report is filed, to the extent not superseded by documents or reports subsequently filed or furnished.

 

 

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EXPLANATORY NOTE

 

This report on Form 6-K contains the interim report of Lloyds Banking Group plc, which includes the unaudited consolidated interim results for the half-year ended 30 June 2019, and is being incorporated by reference into the Registration Statement with File No. 333-231902.

 

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BASIS OF PRESENTATION

 

This report covers the results of Lloyds Banking Group plc (the Company) together with its subsidiaries (the Group) for the half-year ended 30 June 2019.

 

IFRS 16 and IAS 12 (further information in note 1 on page 50): The Group adopted IFRS 16 Leases from 1 January 2019 and as permitted elected to apply the standard retrospectively with the cumulative effect of initial application being recognised at that date; comparative information has not been restated. The Group has implemented the amendments to IAS 12 Income Taxes with effect from 1 January 2019 and as a result tax relief on distributions on other equity instruments, previously recognised in equity, is now reported within tax expense. Comparatives have been restated.

 

Statutory basis: Statutory information is set out on pages 2  to 5 . However, a number of factors have had a significant effect on the comparability of the Group’s financial position and results. Accordingly, the results are also presented on an underlying basis.

 

Underlying basis: These results are adjusted for certain items which are listed below, to allow a comparison of the Group’s underlying performance.

 

·                  restructuring, including severance related costs, the rationalisation of the non-branch property portfolio, the establishment of the Schroders strategic partnership, the integration of MBNA and Zurich’s UK workplace pensions and savings business;

·                  volatility and other items, which includes the effects of certain asset sales, the volatility relating to the Group’s hedging arrangements and that arising in the insurance businesses, insurance gross up, the unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets;

·                  payment protection insurance provisions.

 

Segment information: The segment results have been restated to reflect the transfer of the Cardnet business from Retail into Commercial Banking and certain equities business from Commercial Banking into Central items. The underlying profit and statutory results at Group level are unchanged as a result of these restatements.

 

Unless otherwise stated, income statement commentaries throughout this document compare the six months ended 30 June 2019 to the six months ended 30 June 2018, and the balance sheet analysis compares the Group balance sheet as at 30 June 2019 to the Group balance sheet as at 31 December 2018.

 

Condensed consolidating financial information: This report on Form 6-K contains the interim report of Lloyds Banking Group plc, which includes the unaudited consolidated interim results as at and for the half-year ended 30 June 2019, and is being incorporated by reference into the Registration Statement with File No. 333-231902.  Lloyds Bank plc is a wholly-owned subsidiary of Lloyds Banking Group plc and intends to offer and sell certain securities in the US from time to time utilising a registration statement on Form F-3 to be filed with the SEC. In accordance with Rule 3-10 of Regulation S-X, separate interim financial statements for Lloyds Bank plc as at and for the half-year ended 30 June 2019 will be furnished with the SEC in connection with the registration statement filing. Accordingly, this report on Form 6-K for the half-year ended 30 June 2019 does not include, and future Lloyds Banking Group plc reports are not expected to include, condensed consolidating interim financial information for Lloyds Bank plc.

 

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FORWARD LOOKING STATEMENTS

 

This document contains certain forward looking statements with respect to the business, strategy, plans and/or results of the Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about the Group’s or its directors’ and/or management’s beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in interest rates, inflation, exchange rates, stock markets and currencies; any impact of the transition from IBORs to alternative reference rates; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group’s credit ratings; the ability to derive cost savings and other benefits including, but without limitation as a result of any acquisitions, disposals and other strategic transactions; the ability to achieve strategic objectives; changing customer behaviour including consumer spending, saving and borrowing habits; changes to borrower or counterparty credit quality; concentration of financial exposure; management and monitoring of conduct risk; instability in the global financial markets, including Eurozone instability, instability as a result of uncertainty surrounding the exit by the UK from the European Union (EU) and as a result of such exit and the potential for other countries to exit the EU or the Eurozone and the impact of any sovereign credit rating downgrade or other sovereign financial issues; political instability including as a result of any UK general election; technological changes and risks to the security of IT and operational infrastructure, systems, data and information resulting from increased threat of cyber and other attacks; natural, pandemic and other disasters, adverse weather and similar contingencies outside the Group’s control; inadequate or failed internal or external processes or systems; acts of war, other acts of hostility, terrorist acts and responses to those acts, geopolitical, pandemic or other such events; risks relating to climate change; changes in laws, regulations, practices and accounting standards or taxation, including as a result of the exit by the UK from the EU, or a further possible referendum on Scottish independence; changes to regulatory capital or liquidity requirements and similar contingencies outside the Group’s control; the policies, decisions and actions of governmental or regulatory authorities or courts in the UK, the EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation together with any resulting impact on the future structure of the Group; the transition from IBORs to alternative reference rates; the ability to attract and retain senior management and other employees and meet its diversity objectives; actions or omissions by the Group’s directors, management or employees including industrial action; changes to the Group’s post-retirement defined benefit scheme obligations; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; the value and effectiveness of any credit protection purchased by the Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services, lending companies and digital innovators and disruptive technologies; and exposure to regulatory or competition scrutiny, legal, regulatory or competition proceedings, investigations or complaints. Please refer to the latest Annual Report on Form 20-F filed with the US Securities and Exchange Commission for a discussion of certain factors and risks together with examples of forward looking statements. Except as required by any applicable law or regulation, the forward looking statements contained in this document are made as of today’s date, and the Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this document to reflect any change in the Group’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The information, statements and opinions contained in this document do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments.

 

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CONTENTS

 

	Page
Summary of results	1
Statutory information (IFRS)	2
Consolidated income statement	2
Summary consolidated balance sheet	3
Review of results	4
Underlying basis information
Segmental analysis of profit (loss) before tax by division	6
Group profit reconciliations	7
Divisional highlights	8
Retail	8
Commercial Banking	10
Insurance and Wealth	12
Central items	14
Risk management	15
Principal risks and uncertainties	15
Credit risk portfolio	17
Funding and liquidity management	27
Capital management	32
Statutory information	41
Condensed consolidated half-year financial statements	42
Consolidated income statement	42
Consolidated statement of comprehensive income	43
Consolidated balance sheet	44
Consolidated statement of changes in equity	46
Consolidated cash flow statement	49
Notes	50

 

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SUMMARY OF RESULTS

 

		Half-year to 30 June 2019		Half-year to 30 June 2018(1)		Change since 30 June 2018		Half-year to 31 Dec 2018(1)
		£m		£m		%		£m
Statutory results (IFRS)
Total income, net of insurance claims		9,131		9,571		(5	)	9,055
Total operating expenses		(5,655	)	(5,998	)	6		(5,731	)
Trading surplus		3,476		3,573		(3	)	3,324
Impairment		(579	)	(456	)	(27	)	(481	)
Profit before tax		2,897		3,117		(7	)	2,843
Profit attributable to ordinary shareholders		1,942		2,075		(6	)	1,900
Basic earnings per share		2.7	p	2.9	p	(7	)	2.6	p
Dividends per share		1.12	p	1.07	p			2.14	p
Underlying basis (page 7)
Underlying profit		4,194		4,234				3,832

 

Capital and balance sheet		At 30 June 2019			At 31 Dec 2018			Change since 31 Dec 2018
								%
Statutory
Loans and advances to customers(2)		£	441	bn	£	444	bn	(1	)
Customer deposits(3)		£	418	bn	£	416	bn	—
Loan to deposit ratio(4)		106		%	107		%	(1	)pp
Common equity tier 1 ratio(5)		13.9		%	14.6		%	(0.7	)pp
Tier 1 capital ratio(5)		16.7		%	18.2		%	(1.5)	pp
Total capital ratio(5)		21.6		%	22.9		%	(1.3	)pp
Risk-weighted assets(5)		£	207	bn	£	206	bn	—

 

(1)         Restated to reflect changes to IAS 12, see note 1 on page 50

(2)         Excludes reverse repos of £54.1 billion (31 December 2018: £40.5 billion).

(3)         Excludes repos of £4.1 billion (31 December 2018: £1.8 billion).

(4)         Loans and advances to customers (excluding reverse repos) divided by customer deposits (excluding repos).

(5)         Reported on the CRDIV transitional basis.

 

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STATUTORY INFORMATION (IFRS)

CONSOLIDATED INCOME STATEMENT

 

		Half-year to 30 June 2019			Half-year to 30 June 2018(1)			Half-year to 31 Dec 2018(1)
		£ million			£ million			£ million
Interest and similar income		8,399			8,032			8,317
Interest and similar expense		(3,760	)		(2,025	)		(928	)
Net interest income		4,639			6,007			7,389
Fee and commission income		1,428			1,372			1,476
Fee and commission expense		(694	)		(674	)		(712	)
Net fee and commission income		734			698			764
Net trading income		11,789			1,522			(5,398	)
Insurance premium income		4,431			4,815			4,374
Other operating income		1,547			1,238			682
Other income		18,501			8,273			422
Total income		23,140			14,280			7,811
Insurance claims		(14,009	)		(4,709	)		1,244
Total income, net of insurance claims		9,131			9,571			9,055
Regulatory provisions		(793	)		(807	)		(543	)
Other operating expenses		(4,862	)		(5,191	)		(5,188	)
Total operating expenses		(5,655	)		(5,998	)		(5,731	)
Trading surplus		3,476			3,573			3,324
Impairment		(579	)		(456	)		(481	)
Profit before tax		2,897			3,117			2,843
Taxation		(672	)		(800	)		(654	)
Profit for the period		2,225			2,317			2,189
Profit attributable to ordinary shareholders		1,942			2,075			1,900
Profit attributable to other equity holders		251			205			228
Profit attributable to equity holders		2,193			2,280			2,128
Profit attributable to non-controlling interests		32			37			61
Profit for the period		2,225			2,317			2,189

 

(1)         Restated to reflect changes to IAS 12, see note 1 on page 50

 

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SUMMARY CONSOLIDATED BALANCE SHEET

 

		At 30 June			At 31 Dec
		2019			2018
		£m			£m
Assets
Cash and balances at central banks		57,290			54,663
Financial assets at fair value through profit or loss		155,108			158,529
Derivative financial instruments		26,148			23,595
Loans and advances to banks		8,374			6,283
Loans and advances to customers		495,138			484,858
Debt securities		5,434			5,238
Financial assets at amortised cost		508,946			496,379
Financial assets at fair value through other comprehensive income		27,078			24,815
Other assets		47,678			39,617
Total assets		822,248			797,598
Liabilities
Deposits from banks		34,777			30,320
Customer deposits		421,692			418,066
Financial liabilities at fair value through profit or loss		24,754			30,547
Derivative financial instruments		23,026			21,373
Debt securities in issue		97,815			91,168
Liabilities arising from insurance and investment contracts		122,115			112,727
Subordinated liabilities		17,809			17,656
Other liabilities		31,205			25,542
Total liabilities		773,193			747,399
Shareholders’ equity		43,448			43,434
Other equity instruments		5,406			6,491
Non-controlling interests		201			274
Total equity		49,055			50,199
Total equity and liabilities		822,248			797,598

 

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REVIEW OF RESULTS

 

Income statement

 

During the half-year to 30 June 2019, the Group recorded a profit before tax of £2,897 million, a decrease of £220 million, or 7 per cent, from £3,117 million in the equivalent period in 2018.

 

Total income, net of insurance claims, decreased by £440 million, or 5 per cent, to £9,131 million in the half-year to 30 June 2019 compared with £9,571 million in the half-year to 30 June 2018, comprising a £1,368 million decrease in net interest income partly offset by an increase of £928 million in other income, net of insurance claims.

 

Net interest income was £4,639 million in the half-year to 30 June 2019; a decrease of £1,368 million, or 23 per cent, compared to £6,007 million in the half-year to 30 June 2018. There was a significant change in the amounts payable to unit holders in those Open-Ended Investment Companies (OEICs) included in the consolidated results of the Group from an expense of £212 million in the half-year to 30 June 2018 to an expense of £1,321 million in the half-year to 30 June 2019. This movement reflects the relatively buoyant investment performance in the period, compared to the first half of 2018, with the FTSE All-Share Index up 13.0 per cent, compared to a reduction of 0.5 per cent and returns on sterling corporate debt securities of 7.5 per cent compared to falls of 1.8 per cent; the change in population of consolidated OEICs in 2019 did not have a significant impact, contributing a net increase of £38 million attributable to third party investors. Excluding the amounts attributable to OEIC unit holders, net interest income fell by £259 million, or 4 per cent, as a result of both a lower net interest margin, with lower deposit costs and the benefit of increased current account balances offset by continued pressure on asset margins, and decreased average interest-earning assets as growth in targeted segments, in particular small and medium-sized enterprises (SMEs) and UK Motor Finance, was offset by reduced mortgage balances in the closed book and the impact of the sale of the Irish mortgage portfolio.

 

Other income net of insurance claims was £928 million higher. Other income was £10,228 million higher at £18,501 million in the half-year to 30 June 2019 compared to £8,273 million in the half-year to 30 June 2018 due to an increase in net trading income of £10,267 million. Net trading income was £11,789 million in the half-year to 30 June 2019, compared to £1,522 million in the half-year to 30 June 2018 due to increased gains on policyholder assets held by the insurance business, as a result of significantly improved market performance. There was an increase of £36 million in net fee and commission income. Insurance premium income was £384 million, or 8 per cent, lower at £4,431 million compared to £4,815 million in the half-year to 30 June 2018 as a result of a lower level of bulk annuity deals, with an offsetting impact within insurance claims expense. Other operating income was £309 million higher at £1,547 million in the half-year to 30 June 2019 compared to £1,238 million in the half-year to 30 June 2018; there was an increase of £379 million in the change in value of in-force insurance business, as a result of favourable economic variance and model assumption changes, and the Group recognised a gain of £50 million in the half-year to 30 June 2019 relating to the disposal of its investment in Vocalink in 2017. These increases were partly offset by some reductions in operating lease rental income as a result of reduced fleet size in Lex Autolease and in gains on disposal of financial assets held at fair value through other comprehensive income.

 

Insurance claims expense increased by £9,300 million to £14,009 million in the half-year to 30 June 2019 compared to £4,709 million in the half-year to 30 June 2018 reflecting the improved investment performance from policyholder assets reported in other income.

 

Operating expenses decreased by £343 million, or 6 per cent, to £5,655 million in the half-year to 30 June 2019 compared with £5,998 million in the half-year to 30 June 2018, as a result of a £14 million reduction in regulatory provisions and a £329 million reduction in other operating expenses. Regulatory provisions in the half-year to 30 June 2019 totalled £793 million compared to £807 million in the half-year to 30 June 2018 and include a Payment Protection Insurance charge of £650 million, largely driven by expected higher total volume of complaints and associated administration costs given the significant increase in PPI Information Requests received in the second quarter. Other operating expenses reduced by £329 million as underlying cost savings and a lower level of restructuring costs following the completion of the ring-fencing programme and the integration of MBNA were only partly offset by a charge for the cost of exiting the Standard Life Aberdeen investment management agreement.

 

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Impairment losses increased by £123 million, or 27 per cent, to £579 million in the half-year to 30 June 2019 compared with £456 million in the half-year to 30 June 2018, with the charge in respect of loans and advances to customers increasing by £128 million, or 27 per cent, to £598 million from £470 million in the half-year to 30 June 2018. The increase was driven by a number of factors including aligning credit card provisioning methodologies, lower cash recoveries following debt sales, slightly weaker used car prices and charges in respect of two corporate cases in Commercial Banking.

 

Balance sheet and capital

 

Total assets were £24,650 million, or 3 per cent, higher at £822,248 million at 30 June 2019 compared to £797,598 million at 31 December 2018. Cash and balances at central banks were £2,627 million, or 5 per cent, higher at £57,290 million compared to £54,663 million at 31 December 2018 as the Group placed surplus liquidity. Loans and advances to customers increased in the half-year to 30 June 2019 by £10,280 million, or 2 per cent, to £495,138 million, compared to £484,858 million at 31 December 2018, mainly as a result of an increase of £13,680 million in reverse repurchase agreement balances, as returns are relatively attractive and due to restructuring of some activities following ring-fencing; growth in lending to targeted segments, including SMEs and UK Motor Finance, was offset by a reduction in mortgage balances. Other assets were £5,642 million higher at £18,168 million compared to £12,526 million at 31 December 2018 as a result of increased settlement balances and there was an increase of £1,346 million in property, plant and equipment reflecting the right-of-use asset established on adoption of IFRS 16. However, Financial assets at fair value through profit or loss were £3,421 million, or 2 per cent, lower at £155,108 million compared to £158,529 million at 31 December 2018 as an increase of £8,369 million in policyholder investments within the Insurance business, reflecting market gains in the period, was more than offset by the run-off of reverse repo holdings in the trading book following ring-fencing.

 

Total liabilities were £25,794 million, or 3 per cent, higher at £773,193 million compared to £747,399 million at 31 December 2018. Deposits from banks were £4,457 million, or 15 per cent, higher at £34,777 million compared to £30,320 million at 31 December 2018, in part reflecting increased holdings of repos for liquidity purposes. Customer deposits were £3,626 million, or 1 per cent, higher at £421,692 million at 30 June 2019 compared to £418,066 million at 31 December 2018 as a result of increased holdings of repos and growth in Retail current accounts and Commercial deposits which has more than offset reduced Retail savings balances. Liabilities arising from insurance contracts and participating investment contracts were £8,535 million, or 9 per cent, higher at £107,409 million, compared to £98,874 million at 31 December 2018 due to new business and market gains on policyholder investments. Other liabilities were £6,491 million higher at £26,124 million compared to £19,633 million at 31 December 2018 as a result of increased settlement balances and the lease liability arising on adoption of IFRS 16.

 

Total equity was £1,144 million, or 2 per cent, lower at £49,055 million compared to £50,199 million at 31 December 2018 as the profit for the period has been more than offset by dividends paid, the impact of the Group’s share buyback programme and a redemption of AT1 securities.

 

The Group’s common equity tier 1 (CET 1) capital ratio reduced to 13.9 per cent at 30 June 2019 (31 December 2018: 14.6 per cent) reflecting the accrual for foreseeable dividends in respect of the first half of 2019, share buybacks completed during the period and the accrual for the remaining buyback under the programme announced as part of the 2018 year end results, and movements related to other capital items including pensions, deferred tax and intangible assets. This was partially offset by profit generation and the receipt of the dividend paid by the Insurance business in February 2019. The transitional tier 1 capital ratio reduced to 16.7 per cent (31 December 2018: 18.2 per cent) primarily reflecting the reduction in common equity tier 1 capital, a redemption during the period and the transitional limit applied to grandfathered AT1 capital instruments, offset in part by the issuance of a new capital instrument. The total transitional capital ratio reduced to 21.6 per cent (31 December 2018: 22.9 per cent), largely reflecting the reduction in tier 1 capital and the amortisation of dated tier 2 instruments.

 

Risk-weighted assets increased by £154 million to £206,520 million at 30 June 2019, compared to £206,366 million at 31 December 2018, largely reflecting model changes within the mortgage portfolios and the introduction of IFRS 16, partially offset by securitisation activity and continued active portfolio management.

 

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SEGMENTAL ANALYSIS OF PROFIT BEFORE TAX BY DIVISION (UNAUDITED)

 

Underlying basis

 

		Half-year to 30 June 2019		Half-year to 30 June 2018		Half-year to 31 Dec 2018
		£m		£m		£m
Retail		1,983		2,134		2,077
Commercial Banking		992		1,181		1,002
Insurance		677		480		447
Other		542		439		306
Underlying profit before tax		4,194		4,234		3,832

 

The Group Executive Committee (GEC), which is the chief operating decision maker for the Group, reviews the Group’s internal reporting based around these segments (which reflect the Group’s organisational and management structures) in order to assess the Group’s performance and allocate resources; this reporting is on an underlying profit before tax basis. The GEC believes that this basis better represents the performance of the Group. IFRS 8 Operating Segments requires that the Group present its segmental profit before tax on the basis reviewed by the chief operating decision maker that is most consistent with the measurement principles used in measuring the Group’s statutory profit before tax. Accordingly, the Group presents its segmental underlying basis profit before tax in note 2 on page 53 of its financial statements in compliance with IFRS 8 Operating Segments.

 

The aggregate total of the underlying basis segmental results constitutes a non-GAAP measure as defined in the United States Securities and Exchange Commission’s Regulation G. Management uses the aggregate underlying profit before tax, a non-GAAP measure, as a measure of performance and believes that it provides important information for investors because they are comparable representations of the Group’s performance. Profit before tax is the comparable GAAP measure to aggregate underlying profit before tax; the following table sets out the reconciliation of this non-GAAP measure to its comparable GAAP measure.

 

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GROUP PROFIT RECONCILIATIONS

 

		Half-year to 30 June 2019			Half-year to 30 June 2018			Half-year to 31 Dec 2018
		£m			£m			£m
Underlying profit		4,194			4,234			3,832
Restructuring		(182	)		(377	)		(502	)
Volatility and other items
Market volatility and asset sales		(296	)		34			(84	)
Amortisation of purchased intangibles		(34	)		(53	)		(55	)
Fair value unwind and other		(135	)		(171	)		(148	)
		(465	)		(190	)		(287	)
Payment protection insurance provision		(650	)		(550	)		(200	)
Profit before tax — IFRS basis		2,897			3,117			2,843

 

Restructuring costs were £182 million, primarily reflecting the completion of the migration of MBNA in the first quarter of 2019, severance costs relating to the Group’s strategic investment plans and the rationalisation of the non-branch property portfolio. Costs were significantly lower than the previous year due to the completion of the ring-fencing programme and the completion of MBNA integration.

 

Market volatility and asset sales of £296 million included adverse movements in banking volatility and a charge for exiting the Standard Life Aberdeen investment management agreement.

 

The reduction in amortisation of purchased intangibles to £34 million (half-year to 30 June 2018: £53 million) was driven by a number of intangible assets fully amortising in 2018. Fair value unwind and other items reduced to £135 million (half-year to 30 June 2018: £171 million) reflecting the run down of the subordinated liabilities acquired during the HBOS acquisition.

 

The PPI provision charge of £650 million included an additional £550 million charged in the second quarter. The additional charge in the quarter is largely driven by the significant increase in PPI information requests received in the second quarter onwards, which is likely to lead to higher total complaints and associated administration costs. The outstanding balance sheet provision at 30 June 2019 was £1.1 billion and assumes total expected complaint volumes increasing from 5.6 million to 5.8 million.

 

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DIVISIONAL RESULTS

RETAIL

 

Retail offers a broad range of financial service products to personal and business banking customers, including current accounts, savings, mortgages, credit cards, unsecured loans, motor finance and leasing solutions. Its aim is to be the best bank for customers in the UK, by building deep and enduring relationships that deliver value, and by providing customers with choice and flexibility, with propositions increasingly personalised to their needs. Retail operates a multi-brand and multi-channel strategy. It continues to simplify its business and provide more transparent products, helping to improve service levels and reduce conduct risks, whilst working within a prudent risk appetite.

 

Progress against strategic priorities

 

Leading customer experience

 

·             UK’s largest digital bank with 15.9 million active digital customers; 9.8 million mobile banking app customers and 75 per cent of new products now originate digitally, whilst also maintaining the UK’s largest branch network

·             First to market in extending open banking functionality, to both savings products and credit cards

·             Launched the Lloyds ‘M Word’ campaign to support customers being more confident and comfortable talking about money, along with a refreshed Halifax brand

·             Supporting customers in branches with around 50 per cent of customer facing time spent on complex financial needs, resulting in the relationship new mortgage market share improving by 3 percentage points since start of 2018

 

Digitising the Group

 

·             Continued to significantly enhance the mobile app experience for customers by introducing:

·                  Virtual Assistant available any time resolving over 25 per cent of messaging queries

·                  Upcoming payments helping customers budget better, with over 40 million views since launch

·                  Self-service capability to update address, providing flexibility and control

·                  Relaunched Save the Change so more customers can establish a savings habit linked to everyday transactions

·             Voice ID now the most popular form of security for telephone banking with over 12 million verifications since launch

·             Rolled out Black Horse Finance Online, a new point of sale technology platform around 4,000 motor retailers

 

Maximising the Group’s capabilities

 

·             MBNA integration completed ahead of schedule with migration of over 8 million customer accounts

·             Launched an electric vehicle fund initiative through Lex Autolease to support lower UK emissions

 

Transforming ways of working

 

·             Launched a pilot with local shops to boost the number of retailers offering cashback to support access to cash

·             Invested around 24,000 training hours in colleagues to support customers with fraud and disputes

 

Financial performance

 

·             Underlying profit of £1,983 million decreased 7 per cent

·             Net interest income was 3 per cent lower, reflecting a 5 basis point reduction in net interest margin with continued mortgage competition pressure partly offset by lower funding costs

·             Other income reduced 4 per cent with lower Lex fleet size, with an associated benefit in operating lease depreciation

·             Operating costs reduced 3 per cent, as efficiency savings more than offset increased investment in the business

·             Impairment increased 21 per cent as a result of some weakening in used car prices, alignment of credit card methodologies and lower cash recoveries following prior year debt sales

·             Customer lending was broadly flat with growth in Black Horse and unsecured loans being offset by mortgages. Open mortgage balances grew by £0.8 billion in the second quarter of 2019

·             Customer deposits include improved current account mix, stable relationship balances and reduced tactical savings

·             Risk-weighted assets increased by 4 per cent mainly driven by model refinements within mortgages

 

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Retail performance summary

 

		Half-year				Half-year						Half-year
		to 30 June				to 30 June						to 31 Dec
		2019				2018(1)				Change		2018(1)				Change
		£m				£m				%		£m				%
Net interest income		4,366				4,511				(3	)	4,549				(4	)
Other income		1,007				1,052				(4	)	1,045				(4	)
Operating lease depreciation		(461		)		(477		)		3		(444		)		(4	)
Net income		4,912				5,086				(3	)	5,150				(5	)
Operating costs		(2,325		)		(2,401		)		3		(2,496		)		7
Remediation		(48		)		(91		)		47		(176		)		73
Total costs		(2,373		)		(2,492		)		5		(2,672		)		11
Impairment		(556		)		(460		)		(21	)	(401		)		(39	)
Underlying profit		1,983				2,134				(7	)	2,077				(5	)
Banking net interest margin		2.64		%		2.69		%		(5	)bp	2.66		%		(2	)bp
Average interest-earning banking assets		£	339.8	bn		£	342.0	bn		(1	)	£	342.6	bn		(1	)
Asset quality ratio		0.33		%		0.27		%		6	bp	0.23		%		10	bp
Return on risk-weighted assets		4.23		%		4.71		%		(48	)bp	4.43		%		(20	)bp

 

		At 30 June		At 30 June				At 31 Dec
		2019		2018		Change		2018		Change
		£bn		£bn		%		£bn		%
Open mortgage book		264.9		267.1		(1	)	266.6		(1	)
Closed mortgage book		19.8		22.2		(11	)	21.2		(7	)
Credit cards		17.7		18.5		(4	)	18.1		(2	)
UK unsecured loans		8.2		7.8		5		7.9		4
UK Motor Finance		15.5		13.9		12		14.6		6
Business Banking		1.8		1.9		(5	)	1.8		—
Overdrafts		1.2		1.2		—		1.3		(8	)
Other(2)		9.0		8.2		10		8.6		5
Loans and advances to customers		338.1		340.8		(1	)	340.1		(1	)
Operating lease assets		4.5		4.7		(4	)	4.7		(4	)
Total customer assets		342.6		345.5		(1	)	344.8		(1	)
Relationship balances(3)		236.3		235.3		—		235.3		—
Tactical balance(3)		16.1		19.3		(17	)	17.5		(8	)
Customer deposits		252.4		254.6		(1	)	252.8		—
Risk-weighted assets		95.8		92.4		4		93.5		2

 

(1)         Prior periods restated. See basis of presentation.

(2)         Includes Europe and run-off.

(3)         Prior period restated to show European deposits as tactical balances.

 

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Table of Contents

 

COMMERCIAL BANKING

 

Commercial Banking has a client-led, low risk, capital efficient strategy, and is committed to supporting UK-based clients and international clients with a link to the UK. Through its segmented client coverage model, it provides clients with a range of products and services such as lending, transaction banking, working capital management, risk management and debt capital markets services. Continued investment in capabilities and digital propositions enables the delivery of a leading customer experience, supported by increasingly productive relationship managers, with more time spent on value-adding activity.

 

Progress against strategic priorities

 

Leading customer experience

 

·             Co-piloted shared business banking hubs alongside major UK peers, improving accessibility for corporate clients through longer opening hours and ability to conduct transactions through a shared facility

·             Awarded ‘Business Bank of the Year’ at the FDs’ Excellence Awards for the 15th consecutive year

 

Digitising the Group

 

·             Delivered the first release of our new cash management and payments platform, allowing clients to benefit from a multi-channel experience when making and receiving payments, supporting continued development of API enabled client propositions

·             Improved our eTrading capability, enabling clients in LBCM to undertake FX trades electronically 24 hours per day across multiple geographies and in turn allowing us to support larger clients in automating their businesses

 

Maximising the Group’s capabilities

 

·             Contributed over £10 billion of gross new lending to businesses in the first half of the year, and on course to meet our commitment to lend up to £18 billion to UK businesses in 2019

·             On track to meet our target of £6 billion additional net lending to start-up, SME and Mid Market clients by the end of 2020

·             On course to meet our sustainability targets of supporting energy efficiency improvements for a further one million square feet of commercial real estate in 2019 and renewable energy projects capable of powering 3.5 million homes by 2020

 

Transforming ways of working

 

·             Launched the SME Business Lending Tool, freeing up additional relationship manager time to allow for increased engagement with clients, as well as increasing productivity and simplifying the lending journey

·             Over 450 relationship managers trained on climate change and sustainability related risks and opportunities in collaboration with Cambridge Institute for Sustainable Leadership

 

Financial performance

 

·                  Net interest income of £1,460 million reduced 3 per cent largely reflecting ongoing asset margin pressure

·                  Other income of £733 million was 13 per cent lower than the first half of 2018, driven by lower levels of client activity, particularly in the markets business

·                  Operating costs of £1,034 million reduced 4 per cent, as increased investment in the business was more than offset by efficiency savings

·                  Asset quality ratio of 13 basis points is 16 basis points higher, largely driven by provision increases on two individual corporate cases

·                  Return on risk-weighted assets of 2.35 per cent, was 39 basis points lower driven by lower underlying profit, partly offset by a reduction in risk-weighted assets of 4 per cent as a result of ongoing optimisation

·                  Continued lending growth in SME with balances up 2 per cent

·                  Increased customer deposits at £150.6 billion, reflecting continued success in attracting high quality deposit balances in a competitive market

 

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Commercial Banking performance summary

 

		Half-year				Half-year						Half-year
		to 30 June				to 30 June						to 31 Dec
		2019				2018(1)				Change		2018(1)				Change
		£m				£m				%		£m				%
Net interest income		1,460				1,501				(3	)	1,512				(3	)
Other income		733				842				(13	)	828				(11	)
Operating lease depreciation		(12		)		(20		)		40		(15		)		20
Net income		2,181				2,323				(6	)	2,325				(6	)
Operating costs		(1,034		)		(1,073		)		4		(1,118		)		8
Remediation		(90		)		(75		)		(20	)	(128		)		30
Total costs		(1,124		)		(1,148		)		2		(1,246		)		10
Impairment		(65		)		6						(77		)		16
Underlying profit		992				1,181				(16	)	1,002				(1	)
Banking net interest margin		3.15		%		3.32		%		(17	)bp	3.22		%		(7	)bp
Average interest-earning banking assets		£	92.6	bn		£	90.3	bn		3		£	92.1	bn		1
Asset quality ratio		0.13		%		(0.03		)%		16	bp	0.16		%		(3	)bp
Return on risk-weighted assets		2.35		%		2.74		%		(39	)bp	2.30		%		5	bp

 

		At 30 June		At 30 June				At 31 Dec
		2019		2018		Change		2018		Change
		£bn		£bn		%		£bn		%
SME		30.5		29.6		3		30.0		2
Mid Markets		30.6		30.1		2		31.7		(3	)
Global Corporates and Financial Institutions		34.7		32.7		6		34.4		1
Other		4.3		4.9		(12	)	4.3		—
Loans and advances to customers		100.1		97.3		3		100.4		—
SME including Retail Business Banking		32.3		31.5		3		31.8		2
Customer deposits		150.6		148.5		1		148.6		1
Risk-weighted assets		83.0		86.7		(4	)	86.5		(4	)

 

(1)         Prior periods restated. See basis of presentation.

 

11