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

 

30 July 2020

 

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Form F-3 (File No. 333-231902) and to be a part thereof from the date on which this report is filed, to the extent not superseded by documents or reports subsequently filed or furnished.

 

 

 

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 2020, and is being incorporated by reference into the Registration Statement with File No. 333-231902.

 

 

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 2020.

 

Statutory basis: Statutory information is set out on pages 2  to 6 . 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 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: During the half-year to 30 June 2020, the Group migrated certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail; the Group has also adopted the Sterling Overnight Index Average (SONIA) interest rate benchmark in place of LIBOR as a basis for internal funding charges; comparatives have been restated accordingly. 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 2020 to the six months ended 30 June 2019, and the balance sheet analysis compares the Group balance sheet as at 30 June 2020 to the Group balance sheet as at 31 December 2019.

 

 

FORWARD LOOKING STATEMENTS

 

This document contains certain forward looking statements within the meaning of Section 21E of the US Securities Exchange Act of 1934, as amended, and section 27A of the US Securities Act of 1933, as amended, with respect to the business, strategy, plans and/or results of Lloyds Banking Group plc together with its subsidiaries (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. Words such as ‘believes’, ‘anticipates’, ‘estimates’, ‘expects’, ‘intends’, ‘aims’, ‘potential’, ‘will’, ‘would’, ‘could’, ‘considered’, ‘likely’, ‘estimate’ and variations of these words and similar future or conditional expressions are intended to identify forward looking statements but are not the exclusive means of identifying such statements. Examples of such forward looking statements include, but are not limited to: projections or expectations of the Group’s future financial position including profit attributable to shareholders, provisions, economic profit,  dividends, capital structure, portfolios, net interest margin, capital ratios, liquidity, risk-weighted assets (RWAs), expenditures or any other financial items or ratios; litigation, regulatory and governmental investigations;  the Group’s future financial performance; the level and extent of future impairments and write-downs; statements of plans, objectives or goals of the Group or its management including in respect of statements about the future business and economic environments in the UK and elsewhere including, but not limited to, future trends in interest rates, foreign exchange rates, credit and equity market levels and demographic developments; statements about competition, regulation, disposals and consolidation or technological developments in the financial services industry; and statements of assumptions underlying such 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 (including but not limited to the coronavirus disease (COVID-19) 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 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 by Lloyds Banking Group plc with the US Securities and Exchange Commission for a discussion of certain factors and risks together with examples of forward looking statements.

 

Lloyds Banking Group may also make or disclose written and/or oral forward looking statements in reports filed with or furnished to the US Securities and Exchange Commission, Lloyds Banking Group annual reviews, half-year announcements, proxy statements, offering circulars, prospectuses, press releases and other written materials and in oral statements made by the directors, officers or employees of Lloyds Banking Group to third parties, including financial analysts.

 

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.

 

 

CONTENTS

 

	Page
Summary of results	1
Statutory information (IFRS)
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	7
Group profit reconciliations	8
Divisional highlights
Retail	9
Commercial Banking	11
Insurance and Wealth	13
Central items	15
Risk management
Principal risks and uncertainties	16
Credit risk portfolio	18
Funding and liquidity management	31
Capital management	35
Statutory information
Condensed consolidated half-year financial statements
Consolidated income statement	46
Consolidated statement of comprehensive income	47
Consolidated balance sheet	48
Consolidated statement of changes in equity	50
Consolidated cash flow statement	53
Notes	54

 

 

SUMMARY OF RESULTS

 

		Half-year to 30 June 2020		Half-year to 30 June 2019		Change since 30 June 2019		Half-year to 31 Dec 2019
		£m		£m		%		£m
Statutory results (IFRS)
Total income, net of insurance claims		7,895		9,131		(14	)	9,228
Total operating expenses		(4,668	)	(5,655	)	17		(7,015	)
Trading surplus		3,227		3,476		(7	)	2,213
Impairment		(3,829	)	(579	)			(717	)
(Loss) profit before tax		(602	)	2,897				1,496
(Loss) profit attributable to ordinary shareholders		(234	)	1,942				517
Basic (loss) earnings per share		(0.3	)p	2.7	p			0.8	p
Dividends per share		—		1.12	p			2.25	p
Underlying basis (page 7)
Underlying (loss) profit		(281	)	4,194				3,337

 

Capital and balance sheet		At 30 June 2020			At 31 Dec 2019			Change since 31 Dec 2019
								%
Statutory
Loans and advances to customers(1)		£	440	bn	£	440	bn	—
Customer deposits(2)		£	441	bn	£	412	bn	7
Loan to deposit ratio(3)		100		%	107		%	(7.0	)pp
Common equity tier 1 ratio(4)		14.6		%	13.6		%	1.0	pp
Tier 1 capital ratio(4)		17.4		%	16.7		%	0.7	pp
Total capital ratio(4)		22.3		%	21.3		%	1.0	pp
Risk-weighted assets(4)		£	207	bn	£	203	bn	2

 

(1)         Excludes reverse repos of £61.1 billion (31 December 2019: £54.6 billion).

(2)         Excludes repos of £12.3 billion (31 December 2019: £9.5 billion).

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

(4)         Reported on the CRDIV transitional basis.

 

1

 

STATUTORY INFORMATION (IFRS)

CONSOLIDATED INCOME STATEMENT

 

		Half-year to 30 June 2020			Half-year to 30 June 2019			Half-year to 31 Dec 2019
		£ million			£ million			£ million
Interest and similar income		7,574			8,399			8,462
Interest and similar expense		(1,018	)		(3,760	)		(2,921	)
Net interest income		6,556			4,639			5,541
Fee and commission income		1,121			1,428			1,328
Fee and commission expense		(558	)		(694	)		(656	)
Net fee and commission income		563			734			672
Net trading income		(5,211	)		11,789			6,499
Insurance premium income		4,244			4,431			5,143
Other operating income		720			1,547			1,361
Other income		316			18,501			13,675
Total income		6,872			23,140			19,216
Insurance claims		1,023			(14,009	)		(9,988	)
Total income, net of insurance claims		7,895			9,131			9,228
Regulatory provisions		(177	)		(793	)		(2,102	)
Other operating expenses		(4,491	)		(4,862	)		(4,913	)
Total operating expenses		(4,668	)		(5,655	)		(7,015	)
Trading surplus		3,227			3,476			2,213
Impairment		(3,829	)		(579	)		(717	)
(Loss) profit before tax		(602	)		2,897			1,496
Tax credit (expense)		621			(672	)		(715	)
Profit for the period		19			2,225			781
(Loss) profit attributable to ordinary shareholders		(234	)		1,942			517
Profit attributable to other equity holders		234			251			215
Profit attributable to equity holders		—			2,193			732
Profit attributable to non-controlling interests		19			32			49
Profit for the period		19			2,225			781

 

2

 

SUMMARY CONSOLIDATED BALANCE SHEET

 

		At 30 June			At 31 Dec
		2020			2019
		£m			£m
Assets
Cash and balances at central banks		78,139			55,130
Financial assets at fair value through profit or loss		157,113			160,189
Derivative financial instruments		32,978			26,369
Loans and advances to banks		11,202			9,775
Loans and advances to customers		501,508			494,988
Debt securities		5,604			5,544
Financial assets at amortised cost		518,314			510,307
Financial assets at fair value through other comprehensive income		27,211			25,092
Assets arising from reinsurance contracts held		22,220			23,567
Other assets		37,019			33,239
Total assets		872,994			833,893
Liabilities
Deposits from banks		34,124			28,179
Customer deposits		453,446			421,320
Financial liabilities at fair value through profit or loss		21,474			21,486
Derivative financial instruments		28,631			25,779
Debt securities in issue		99,931			97,689
Liabilities arising from insurance and investment contracts		143,052			148,908
Subordinated liabilities		17,717			17,130
Other liabilities		25,757			25,596
Total liabilities		824,132			786,087
Shareholders’ equity		42,734			41,697
Other equity instruments		5,906			5,906
Non-controlling interests		222			203
Total equity		48,862			47,806
Total equity and liabilities		872,994			833,893

 

3

 

REVIEW OF RESULTS

 

Income statement

 

The performance of the Group has been significantly affected by the coronavirus pandemic and its impact upon the UK economy.  In the half-year to 30 June 2020 the Group reported a loss before tax of £602 million compared to a profit of £2,897 million in same period in 2019, representing a decrease of £3,499 million which was largely driven by a significantly increased impairment charge due to changes to the Group’s economic outlook as a result of the coronavirus pandemic.

 

Total income, net of insurance claims, fell by £1,236 million, or 14 per cent, to £7,895 million in the half-year to 30 June 2020 compared to £9,131 million in the first six months of 2019 reflecting an increase of £1,917 million in net interest income more than offset by a decrease of £3,153 million in other income, net of insurance claims.

 

Net interest income was £6,556 million, an increase of £1,917 million compared to £4,639 million in the half-year to 30 June 2019.  During the first half of the year 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 £1,321 million in the half-year to 30 June 2019 to a credit of £1,142 million in the half-year to 30 June 2020. This credit reflects significant falls in the value of the underlying investments; in the half-year to 30 June 2020 the FTSE All Share TR index fell by 17.5 per cent.  The losses on the investments held by the OEICs are recognised within other income and there is no impact on profit attributable to ordinary shareholders.

 

Excluding amounts relating to OEICs, net interest income was down £546 million, or 9 per cent, to £5,414 million compared to £5,960 million in the first six months of 2019. The net interest margin reduced as a result of the lower rate environment, actions taken to support customers, including free overdrafts, and a change in asset mix partly as a result of reduced levels of customer demand during the coronavirus pandemic.  Average interest-earning assets were broadly stable with growth due to government-backed lending to support corporate customers through the coronavirus crisis partly offset by lower balances in the closed mortgage book and in credit cards, as well as the impact of balance sheet optimisation within Commercial Banking in the second half of 2019.

 

Other income decreased by £18,185 million to £316 million in the half-year to 30 June 2020 largely due to a £17,000 million reduction in net trading income driven by significant falls in the value of policyholder investments within the Group’s insurance business in difficult market conditions; there was an equivalent reduction in insurance claims expense which in the six months to 30 June 2020 was a credit of £1,023 million. Of the remaining reduction, net fee and commission income was £171 million lower at £563 million in the half-year to 30 June 2020 compared to £734 million in the same period in 2019 due to reduced current account, card and other transaction based income streams, following the introduction of coronavirus-related lockdown restrictions and correspondingly lower levels of customer activity.  Fee income was also lower following the transfer of businesses to the Group’s wealth management joint venture during 2019.  Other operating income was £827 million lower at £720 million compared to £1,547 million in the half-year to 30 June 2019; this reflects a decrease of £738 million in income from the value of in-force insurance business and lower levels of operating lease rental income.

 

Total operating expenses decreased by £987 million to £4,668 million compared to £5,655 million in the first half of 2019; reflecting a decrease of £616 million in the charge in respect of regulatory provisions and a decrease of £371 million in other operating costs. The regulatory provisions charge was £177 million compared to £793 million in the half-year to 30 June 2019.  The charge in 2019 included £650 million relating to payment protection insurance (PPI); no further provision was made in the half-year to 30 June 2020. Good progress has been made with the review of PPI information requests received and the conversion rate remains low and consistent with the provision assumption of around 10 per cent, albeit operations have been impacted by the coronavirus pandemic in the second quarter. The unutilised provision at 30 June 2020 was £745 million.

 

Other operating costs were lower, despite continued investment in the Group’s digital proposition and bearing coronavirus-related costs, as a result of continued cost discipline, efficiencies gained through digitalisation and other process improvements, lower bonus accruals and a lower level of restructuring costs driven by the completion of MBNA integration

 

4

 

and lower severance costs relating to the Group’s strategic investment plans.  Other operating costs in the first half of 2019 also included a charge for the cost of exiting the Standard Life Aberdeen investment management agreement.

 

The Group’s impairment charge was £3,250 million higher at £3,829 million in the half-year to 30 June 2020 compared to £579 million in the same period last year, with the increase primarily driven by updates to the Group’s economic outlook following the coronavirus outbreak. Impairment provisions reflect the net impact of economic scenarios and Government support programmes with the increase on prior year of more than £3 billion building additional balance sheet resilience. Observed credit quality remains robust with arrears and defaults remaining low. The Group recognises that this is likely to be influenced by the temporary support provided, including payment holidays and furlough arrangements. The expected credit loss (ECL) allowance as at 30 June 2020 assumes additional losses will emerge as the support subsides. The Group’s ECL allowance held against customer lending totalled £5,986 million at 30 June 2020 compared to £3,259 million at 31 December 2019, representing a coverage ratio of 1.3 per cent.

 

The Group’s ECL allowance continues to reflect a probability weighted view of future economic scenarios including a 30 per cent weighting of base case, upside and downside and a 10 per cent weighting of severe downside, although all scenarios have deteriorated significantly since the year end. The base case upon which these scenarios are built assumes unemployment rate reaches 9.0 per cent in the fourth quarter of 2020 and more sustained reductions in asset prices. Given the weightings attached to scenarios, the ECL represents an uplift of £510 million from the base case ECL.

 

Judgement has been applied to the model-generated severe downside scenario to recognise the greater levels of uncertainty in the short-term economic outlook and therefore a greater severity of potential adverse shocks from the base case. In this scenario, this results in a peak unemployment rate of 12.5 per cent in the second quarter of 2021 and a GDP drop of 17.2 per cent in 2020. The impact of this adjustment has been estimated at portfolio level but outside the core IFRS 9 process and as such is reflected as a central overlay of £200 million, reflecting an estimated £2 billion higher ECL provision within the severe downside scenario.

 

Overall the Group’s loan portfolio continues to be well positioned, reflecting a prudent, through the cycle approach to credit risk and high levels of security. The Retail portfolio is heavily weighted to mortgage lending where improved loan to values provide security against potential risks. The prime consumer finance portfolio also benefits from high quality growth and the Group’s prudent risk appetite. The commercial portfolio reflects a diverse client base with limited exposure to the most vulnerable sectors affected by the coronavirus outbreak. Within Commercial, the Group’s management of concentration risk includes single name and country limits as well as controls over the overall exposure to certain higher risk and vulnerable sectors and asset classes.

 

There was a tax credit of £621 million in the half-year to 30 June 2020 compared to a charge of £672 million in the half-year to 30 June 2019 reflecting the loss before tax in 2020 and a credit of £354 million arising on remeasurement of the Group’s deferred tax balances following the UK Government’s decision to maintain the corporation tax rate at 19 per cent, which was substantively enacted on 17 March 2020.

 

Profit for the period, after tax, was £19 million compared to £2,225 million in the half-year to 30 June 2019.

 

Balance sheet and capital

 

Total assets were £39,101 million, or 5 per cent, higher at £872,994 million at 30 June 2020 compared to £833,893 million at 31 December 2019 as holdings of liquid assets increased. Cash and balances at central banks were £23,009 million higher at £78,139 million reflecting increased liquidity holdings. Financial assets at amortised cost increased by £8,007 million, or 2 per cent, to £518,314 million at 30 June 2020 compared to £510,307 million at 31 December 2019, mainly as a result of a £6,465 million increase in customer reverse repurchase agreement balances, as advantage was taken of attractive rates.  Other loans and advances to customers, net of impairment allowances, were broadly flat as increased corporate and SME lending, reflecting take-up of Government support schemes, was offset by reductions in the mortgage book along with reductions in credit card balances, where customer activity reduced during the first half of the year, and increased impairment allowances.  Derivative assets were £6,609 million higher at £32,978 million compared to £26,369 million at 31 December 2019, reflecting movements in both interest rates and exchange rates, particularly the US dollar and Euro, over the first half of 2020. These movements have been partly offset by a reduction in financial assets at

 

5

 

fair value through profit or loss which were £3,076 million, or 2 per cent, lower at £157,113 million at 30 June 2020 compared to £160,189 million at 31 December 2019 with decreases in policyholder investments within the insurance business reflecting market losses in the half-year.

 

Total liabilities were £38,045 million, or 5 per cent, higher at £824,132 million compared to £786,087 million at 31 December 2019. Deposits from banks were £5,945 million higher at £34,124 million as the Group drew down on available funding facilities, Customer deposits increased by £32,126 million, or 8 per cent, to £453,446 million compared to £421,320 million at 31 December 2019, as a result of growth in retail current accounts and commercial deposits.  Retail current account growth was significant, in part due to lower levels of customer spending as well as reliance on trusted brands; the growth in Commercial Banking reflects strong relationships and increased liquidity positions in uncertain market conditions. Derivative liabilities were £2,852 million higher at £28,631 million compared to £25,779 million at 31 December 2019, reflecting movements in interest rates and exchange rates over the half-year. Liabilities arising from insurance and investment contracts were £5,856 million, or 4 per cent, lower at £143,052 million compared to £148,908 million at 31 December 2019 reflecting the underlying decrease in the value of the related policyholder assets as a result of market performance in the first half of 2020.

 

Total equity increased by £1,056 million, or 2 per cent, from £47,806 million at 31 December 2019 to £48,862 million at 30 June 2020, mainly reflecting an increase in the net surplus relating to the Group’s post-retirement defined benefit schemes as credit spreads widened over the first six months of 2020 and positive movements on the Group’s cash flow hedging reserve.

 

The Group’s common equity tier 1 capital ratio was 14.6 per cent compared to 13.6 per cent at 31 December 2019. The total capital ratio increased to 22.3 per cent from 21.3 per cent at 31 December 2019 and the Group’s transitional minimum requirement for own funds and eligible liabilities (MREL), which came into force on 1 January 2020, was 36.8 per cent at 30 June 2020 compared to 32.5 per cent at 31 December 2019.

 

Risk-weighted assets increased by £3.7 billion to £207.1 billion at 30 June 2020, compared to £203.4 billion at 31 December 2019, largely attributable to the impact of credit migrations and retail model calibrations (c.£3.9 billion); regulatory changes resulting from the full implementation of the new securitisation framework (£2.3 billion) partly offset by the impact of the revised SME supporting factor (£1.4 billion); foreign currency impacts and increases in counterparty credit risk and credit valuation adjustment risk (£1.6 billion); and other various movements (£1.7 billion). These increases have been partially offset by the reduction in underlying lending balances (excluding government backed lending schemes that attract limited to no risk-weighted assets) (c.£2 billion) and optimisation activity undertaken in Commercial Banking (c.£2.4 billion).

 

The Group’s UK leverage ratio increased to 5.4 per cent.

 

Dividend

 

On 31 March, the Group announced the cancellation of its final 2019 ordinary dividend. This decision was taken by the Board at the specific request of the regulator, the Prudential Regulation Authority (PRA), and was in line with all other major UK listed banks. At that time, the Board also decided, again in line with all other major UK listed banks, that until the end of 2020 the Group will undertake no quarterly or interim dividend payments, accrual of dividends, or share buybacks on ordinary shares. This will help the Group to further serve the needs of businesses and households through the extraordinary challenges presented by the coronavirus crisis.

 

These are difficult decisions and while the Group recognises the disappointment and frustration this will cause shareholders, in particular those relying on dividends for income, this is a prudent and appropriate response to exceptional circumstances. The Board will decide on any dividend distributions or buybacks on ordinary shares in respect of 2020 at year end, in line with the approved dividend policy.

 

6

 

SEGMENTAL ANALYSIS OF PROFIT (LOSS) BEFORE TAX BY DIVISION (UNAUDITED)

 

Underlying basis

 

		Half-year to 30 June 2020		Half-year to 30 June 2019		Half-year to 31 Dec 2019
		£m		£m		£m
Retail		212		2,177		2,036
Commercial Banking		(668	)	982		772
Insurance		379		659		407
Other		(204	)	376		122
Underlying profit (loss) before tax		(281	)	4,194		3,337

 

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 61 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.

 

7

 

GROUP PROFIT RECONCILIATIONS

 

		Half-year to 30 June 2020			Half-year to 30 June 2019			Half-year to 31 Dec 2019
		£m			£m			£m
Underlying (loss) profit		(281	)		4,194			3,337
Restructuring		(133	)		(182	)		(289	)
Volatility and other items:
Market volatility and asset sales		(43	)		(296	)		422
Amortisation of purchased intangibles		(34	)		(34	)		(34	)
Fair value unwind and other		(111	)		(135	)		(140	)
		(188	)		(465	)		248
Payment protection insurance provision		—			(650	)		(1,800	)
(Loss) profit before tax — IFRS basis		(602	)		2,897			1,496

 

Restructuring costs of £133 million were down 27 per cent compared to the first half of 2019 mainly driven by the completion of MBNA integration and lower severance costs relating to the Group’s strategic investment plans. The latter was in part due to the deferral of redundancy programmes given the coronavirus pandemic.

 

Market volatility and asset sales of £43 million included £370 million of negative insurance volatility, largely driven by falling equity markets and widening corporate bond credit spreads, partly offset by positive banking volatility of £308 million, primarily reflecting exchange rate movements. The comparatives for the first half of 2019 include a one-off charge for exiting the Standard Life Aberdeen investment management agreement.

 

Amortisation of purchased intangibles was flat at £34 million. Fair value unwind and other items reduced to £111 million (half-year to 2019: £135 million) reflecting the run down of subordinated liabilities acquired during the HBOS acquisition.

 

No further provision has been taken for PPI in the first half of 2020. Good progress has been made with the review of PPI information requests received and the conversion rate remains low and consistent with the provision assumption of around 10 per cent, albeit operations have been impacted by the coronavirus pandemic in the second quarter. The unutilised provision at 30 June 2020 was £745 million.

 

8

 

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, flexibility and propositions increasingly personalised to their needs. Retail operates a multi-brand and multi-channel strategy. It continues to simplify its business enhancing customer journeys and helping to improve service levels and reduce conduct risks, whilst working within a prudent risk appetite.

 

COVID-19 response

 

·             Flexible and sensitive treatment of customers with over 1.1 million payment holidays granted across mortgages, credit cards, unsecured loans and motor finance, whilst removing fees for missed payments

 

·             Implementation of safeguarding measures across the UK’s largest branch network to protect customers and colleagues, with around 90 per cent of branches remaining open during lockdown and ATM availability exceeding 95 per cent

 

·             Over 440,000 calls from NHS workers and over 70s customers handled through dedicated telephone lines, and partnership with ‘We Are Digital’ to support vulnerable customers get online

 

·             Over 120 million proactive letters, emails and SMS messages sent to customers outlining available support with over 600,000 proactive outbound calls to vulnerable and elderly customers

 

·             £500 interest free overdraft buffer was automatically made available to over 9 million customers

 

·             Around 19,000 colleagues able to work from home with over 12,000 laptops distributed to colleagues. Over 1,000 colleagues redeployed to coronavirus related activities to support customer based demand

 

Progress against strategic priorities

 

Leading customer experience

 

·             UK’s largest digital bank with 17 million active digital customers, with daily logins now exceeding 11 million, up 12 per cent on prior year. Digital net promoter score of 69, an all-time high, with improvement of 8 per cent in year

 

·             Supporting first time buyers with over £30 billion of lending since 2017, ahead of target with £5 billion in first half of 2020

 

·             First bank to launch confirmation of payee for online banking, helping keep customers safe against Authorised Push Payment scam ahead of industry adoption deadline, with over 20 million name checks already carried out

 

Digitising the Group

 

·             Increased cheque scanning limit to £1,000, with over 80 per cent rise in number of cheques being deposited, and increased contactless card limit to £45, contributing to additional 29 million contactless transactions since 1 April

 

Maximising Group capabilities

 

·             Launched Scottish Widows branded equity release mortgage in collaboration with Insurance & Wealth, enabling customers to use equity in their home to help their family onto housing ladder and/or supplementing retirement income

 

Financial performance

 

·             Net interest income 7 per cent lower with the continued reduction of mortgage reversionary book, lower overdraft income including the impact of £500 interest free buffer to support customers, partly offset by lower funding costs

 

·             Other income reduced 9 per cent with lower payments revenues and continued impact of a lower Lex fleet size, whilst operating lease depreciation included a charge to reflect a reassessment of residual values

 

·             Operating costs were 2 per cent lower, with efficiency savings and lower investment spend, more than offsetting an increase in costs relating to response of the coronavirus pandemic. Remediation remained broadly flat

 

·             Impairment increased significantly to £2,095 million, primarily reflecting a material deterioration in the economic outlook

 

·             Customer lending broadly flat with expected reductions in the mortgage book and lower unsecured balances as customer activity reduced, partly offset by support for business banking customers with government schemes

 

9

 

·             Customer deposits increased by 8 per cent from growth in current accounts and relationship savings given lower spend activity and increased Bounce Back Loan driven deposits. Low margin tactical savings continued to decrease

 

·             Risk-weighted assets increased 1 per cent driven by impacts of risk profile changes partly offset by lower balances

 

Retail performance summary

 

		Half-year				Half-year						Half-year
		to 30 June				to 30 June						to 31 Dec
		2020				2019(1)				Change		2019(1)				Change
		£m				£m				%		£m				%
Net interest income		4,233				4,561				(7	)	4,623				(8	)
Other income		919				1,009				(9	)	1,010				(9	)
Operating lease depreciation		(518		)		(461		)		(12	)	(485		)		(7	)
Net income		4,634				5,109				(9	)	5,148				(10	)
Operating costs		(2,277		)		(2,328		)		2		(2,440		)		7
Remediation		(50		)		(48		)		(4	)	(190		)		74
Total costs		(2,327		)		(2,376		)		2		(2,630		)		12
Trading surplus		2,307				2,733				(16	)	2,518				8
Impairment		(2,095		)		(556		)				(482		)
Underlying profit		212				2,177				(90	)	2,036				(90	)
Banking net interest margin		2.59		%		2.79		%		(20	)bp	2.76		%		(17	)bp
Average interest-earning banking assets		£	342.3	bn		£	340.1	bn		1		£	343.7	bn		—
Asset quality ratio		1.23		%		0.33		%		90	bp	0.28		%		95	bp
Return on risk-weighted assets		0.43		%		4.64		%		(421	)bp	4.14		%		(371	)bp

 

		At 30 June		At 30 June				At 31 Dec
		2020		2019(1)		Change		2019(1)
		£bn		£bn		%		£bn		%
Open mortgage book		267.1		264.9		1		270.1		(1	)
Closed mortgage book		17.5		19.8		(12	)	18.5		(5	)
Credit cards		15.2		17.7		(14	)	17.7		(14	)
UK unsecured loans		8.2		8.2		—		8.4		(2	)
UK motor finance		15.3		15.5		(1	)	15.6		(2	)
Business Banking		7.0		2.1				2.0
Overdrafts		1.0		1.2		(17	)	1.3		(23	)
Other(2)		9.7		9.0		8		9.0		8
Loans and advances to customers		341.0		338.4		1		342.6		—
Operating lease assets		4.1		4.5		(9	)	4.3		(5	)
Total customer assets		345.1		342.9		1		346.9		(1	)
Current Accounts		87.5		76.0		15		76.9		14
Relationship savings(3)		172.0		162.2		6		163.0		6
Tactical savings		12.7		15.3		(17	)	13.3		(5	)
Customer deposits		272.2		253.5		7		253.2		8
Risk-weighted assets		99.4		95.8		4		98.4		1

 

(1)         Restated to reflect migration of certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail. Also restated to reflect the Group’s adoption of the Sterling Overnight Index Average (SONIA).

(2)         Includes Europe and run-off.

(3)         Includes Business Banking.

 

10

 

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. 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.

 

COVID-19 response

 

·             Actively supported clients with over £9 billion of government backed lending, c.33,000 capital repayment holidays, c.20,000 fee-free overdrafts as part of the £2 billion COVID-19 fund to support clients with turnover of up to £100 million

 

·             Registered as a commercial paper dealer to provide clients with access to the Covid Corporate Financing Facility

 

·             Implemented an extensive Client Outreach Programme across SME & Mid Corporates in response to the COVID-19 crisis, reaching c.60,000 businesses impacted by the pandemic

 

·             SME mentoring service launched in partnership with Be The Business to support help clients recover from the pandemic

 

·             Increased deployment of robotics to automate the loan application process for Bounce Back Loans, allowing the majority of clients to receive funds within 24 hours

 

·             Upgraded the Business Banking Online Lending Tool to accommodate the Government’s COVID-19 lending schemes, enabling faster decision making and freeing up Relationship Manager time to help customers

 

·             Redeployed a significant number of colleagues across operational teams to manage client demand and strengthen critical processes during the pandemic

 

Progress against strategic priorities

 

Leading customer experience

 

·             Launched the Business Finance Assistant pilot, an accounting and business insight tool for SMEs, in collaboration with Fintech partner OneUp, helping clients to save time on financial administration and manage finances more effectively

 

·             Launched a new Green Buildings Tool to inform customers of measures to make their properties more energy efficient

 

Digitising the Group

 

·             Over £350 million of payments per month processed through the payables API, a 30-fold increase since the start of the year, allowing clients to send Faster Payments directly from their systems without human intervention

 

·             Increased the online cheque deposit limit from £1,000 to £2,000, a 40 per cent increase in cheques processed

 

Maximising Group capabilities

 

·             Exceeded the Group’s target to provide £6 billion of additional net lending to start-up, SME and Mid Market clients by year end 2020 and on track to meet the committed £18 billion gross new lending to UK businesses for 2020

 

·             Completed the Bank’s first UK Export Finance backed Export Development Guarantee transaction

 

Financial performance

 

·             Net interest income of £1,222 million was down 16 per cent on prior year, reflecting competitive asset markets, lower income on deposits following the bank base rate reduction and ongoing business optimisation

 

·             Other income decreased by 10 per cent to £658 million primarily driven by lower transaction banking income due to the coronavirus-related trading restrictions, with markets income resilient

 

·             Operating costs were 12 per cent lower reflecting continued investment in efficiency initiatives

 

·             Impairments increased significantly to £1,519 million, largely driven by the updated economic outlook, as well as a small number of single name charges

 

·             Customer lending increased by 1 per cent to £96 billion driven by the increased government backed lending in SME

 

·             Customer deposits grew by 7 per cent to £155 billion, significantly exceeding lending growth, as customers increased their liquidity positions in uncertain market conditions

 

11

 

·             Risk-weighted assets increased 1 per cent to £78 billion driven by the implementation of the new securitisation framework, credit migrations and exchange rates, offset by the revised SME supporting factor and on-going optimisation

 

Commercial Banking performance summary

 

		Half-year				Half-year						Half-year
		to 30 June				to 30 June						to 31 Dec
		2020				2019(1)				Change		2019(1)				Change
		£m				£m				%		£m				%
Net interest income		1,222				1,449				(16	)	1,443				(15	)
Other income		658				731				(10	)	686				(4	)
Operating lease depreciation		(8		)		(12		)		33		(9		)		11
Net income		1,872				2,168				(14	)	2,120				(12	)
Operating costs		(906		)		(1,031		)		12		(1,042		)		13
Remediation		(115		)		(90		)		(28	)	(65		)		(77	)
Total costs		(1,021		)		(1,121		)		9		(1,107		)		8
Trading surplus		851				1,047				(19	)	1,013				16
Impairment		(1,519		)		(65		)				(241		)
Underlying (loss) / profit		(668		)		982						772
Banking net interest margin		2.92		%		3.24		%		(32	)bp	3.20		%		(28	)bp
Average interest-earning banking assets		£	90.0	bn		£	92.3	bn		(2	)	£	91.5	bn		(2	)
Asset quality ratio		3.12		%		0.13		%		299	bp	0.46		%		266	bp
Return on risk-weighted assets		(1.70		)%		2.33		%		(403	)bp	1.89		%		(359	)bp

 

		At 30 June		At 30 June				At 31 Dec
		2020		2019(1)		Change		2019(1)		Change
		£bn		£bn		%		£bn		%
SME		31.4		30.2		4		30.1		4
Mid Corporates		4.6		5.5		(16	)	5.3		(13	)
Corporate and Institutional		55.0		59.8		(8	)	54.6		1
Other		5.0		4.3		16		5.2		(4	)
Loans and advances to customers		96.0		99.8		(4	)	95.2		1
SME including Retail Business Banking		38.4		32.3		19		32.1		20
Customer deposits		154.5		149.5		3		144.0		7
Current accounts including Retail Business Banking		44.2		34.0		30		34.9		27
Other deposits including Retail Business Banking		133.8		133.2		—		127.6		5
Risk-weighted assets		78.4		83.0		(6	)	77.4		1

 

(1)         Restated to reflect migration of certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail. Also restated to reflect the Group’s adoption of the Sterling Overnight Index Average (SONIA).

 

12