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Lloyds Banking Group PLC, GB0008706128

Lloyds Banking Group PLC, GB0008706128

28.04.2021 - 09:03:26

Lloyds Banking Group PLC: Q1 2021 Interim Management Statement

?

?

?

?

HIGHLIGHTS FOR THE THREE MONTHS ENDED 31 MARCH 2021

Solid financial performance reflects business momentum and improved economic outlook

Statutory profit after tax of ?1,397 million supported by business momentum and a release of expected credit loss provisions, given the improved economic outlook. Statutory return on tangible equity of 13.9 per cent with tangible net assets per share of 52.4 pence Recovering trading surplus of ?1,748 million, a reduction of 12 per cent compared to the first three months of 2020, but an increase of 21 per cent on the final quarter of 2020 Net income of ?3.7 billion, down 7 per cent year on year (up 2 per cent on the previous quarter), with higher average interest-earning assets of ?439 billion, net interest margin of 2.49 per cent and other income of ?1.1 billion Total costs of ?1.9 billion down 2 per cent, driven by continued operating cost control and lower remediation costs Asset quality remains strong with credit experience benign. Net impairment credit of ?323 million in the quarter, driven by a ?459 million release given the UK's improved economic outlook. Management judgements in respect of coronavirus retained, now c.?1 billion including the ?400 million central overlay taken in the fourth quarter

Balance sheet and capital strength further enhanced

Capital build of 54 basis points in the quarter with CET1 ratio of 16.7 per cent, significantly ahead of the ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent and regulatory requirements of c.11 per cent Loans and advances up ?3.3 billion in the quarter to ?443.5 billion, including ?6.0 billion open mortgage book growth Customer deposits up ?11.7 billion in the quarter to ?462.4 billion with Retail current accounts up ?5.6?billion Loan to deposit ratio of 96 per cent provides a strong liquidity position and significant potential to lend into recovery

Outlook

Given the solid financial performance in the first quarter of 2021, the Group is enhancing its guidance for 2021. Based on the Group's current economic assumptions: Net interest margin now expected to be in excess of 245 basis points Operating costs to reduce to c.?7.5 billion Net asset quality ratio now expected to be below 25 basis points Risk-weighted assets in 2021 to be broadly stable on 2020 Statutory return on tangible equity now expected to be between 8 and 10 per cent, excluding c.2.5 percentage point benefit from tax rate changes Accruing dividends with intention to resume progressive and sustainable ordinary dividend policy

?

?

?

?

?

?

INCOME STATEMENT - UNDERLYING BASIS

?

Quarter ended 31 Mar 2021

?

?

Quarter ended 31 Mar 2020

?

?

Change

?

Quarter ended 31 Dec 2020

?

?

Change

?

?m

?

?

?m

?

?

%

?

?m

?

?

%

?

?

?

?

?

?

?

?

?

?

?

?

?

Net interest income

2,677?

?

?

?

2,950?

?

?

?

(9)

?

?

2,677?

?

?

?

-?

?

Other income

1,135?

?

?

?

1,226?

?

?

?

(7)

?

?

1,066?

?

?

?

6?

?

Operating lease depreciation

(148)

?

?

?

(224)

?

?

?

34?

?

?

(150)

?

?

?

1?

?

Net income

3,664?

?

?

?

3,952?

?

?

?

(7)

?

?

3,593?

?

?

?

2?

?

Operating costs

(1,851)

?

?

?

(1,877)

?

?

?

1?

?

?

(2,028)

?

?

?

9?

?

Remediation

(65)

?

?

?

(87)

?

?

?

25?

?

?

(125)

?

?

?

48?

?

Total costs

(1,916)

?

?

?

(1,964)

?

?

?

2?

?

?

(2,153)

?

?

?

11?

?

Trading surplus

1,748?

?

?

?

1,988?

?

?

?

(12)

?

?

1,440?

?

?

?

21?

?

Impairment

323?

?

?

?

(1,430)

?

?

?

?

?

(128)

?

?

?

?

Underlying profit

2,071?

?

?

?

558?

?

?

?

?

?

1,312?

?

?

?

58?

?

Restructuring

(173)

?

?

?

(63)

?

?

?

?

?

(233)

?

?

?

26?

?

Volatility and other items

-?

?

?

?

(421)

?

?

?

?

?

(202)

?

?

?

?

Payment protection insurance provision

-?

?

?

?

-?

?

?

?

?

?

(85)

?

?

?

?

Statutory profit before tax

1,898?

?

?

?

74?

?

?

?

?

?

792?

?

?

?

?

Tax (expense) credit

(501)

?

?

?

406?

?

?

?

?

?

(112)

?

?

?

?

Statutory profit after tax

1,397?

?

?

?

480?

?

?

?

?

?

680?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

Earnings per share

1.8p

?

?

0.5p

?

?

?

?

0.7p

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

Banking net interest margin

2.49%

?

?

2.79%

?

?

(30)bp

?

2.46%

?

?

3bp

Average interest-earning banking assets

?439bn

?

?

?432bn

?

?

2?

?

?

?437bn

?

?

1?

?

Cost:income ratio

52.3%

?

?

49.7%

?

?

2.6pp

?

59.9%

?

?

(7.6)pp

Asset quality ratio

(0.29)%

?

?

1.30%

?

?

(159)bp

?

0.11%

?

?

(40)bp

Return on tangible equity

13.9%

?

?

3.7%

?

?

10.2pp

?

5.9%

?

?

8.0pp

?

?

KEY BALANCE SHEET METRICS

?

At 31 Mar 2021

?

At 31 Mar 2020

?

Change

%

?

At 31 Dec 2020

?

Change

%

?

?

?

?

?

?

?

?

?

?

Loans and advances to customers1

?444bn

?

?443bn

?

-?

?

?

?440bn

?

1?

?

Customer deposits2

?462bn

?

?428bn

?

8?

?

?

?451bn

?

3?

?

Loan to deposit ratio

96%

?

103%

?

(7)pp

?

98%

?

(2)pp

CET1 ratio3

16.7%

?

14.2%

?

2.5pp

?

16.2%

?

0.5pp

CET1 ratio pre IFRS 9 transitional relief3,4

15.8%

?

13.9%

?

1.9pp

?

15.0%

?

0.8pp

Transitional MREL ratio3

36.1%

?

34.5%

?

1.6pp

?

36.4%

?

(0.3)pp

UK leverage ratio3

6.0%

?

5.3%

?

0.7pp

?

5.8%

?

0.2pp

Risk-weighted assets

?199bn

?

?209bn

?

(5)

?

?

?203bn

?

(2)

?

Wholesale funding

?106bn

?

?126bn

?

(16)

?

?

?109bn

?

(4)

?

Liquidity coverage ratio (12 month average)

134%

?

138%

?

(4)pp

?

136%

?

(2)pp

Tangible net assets per share

52.4p

?

57.4p

?

(5.0)p

?

52.3p

?

0.1p

Excludes reverse repos of ?52.8 billion (31 March 2020: ?55.2 billion; 31 December 2020: ?58.6 billion). Excludes repos of ?8.5 billion (31 March 2020: ?9.4 billion; 31 December 2020: ?9.4 billion). Incorporating profits for the period that remain subject to formal verification in accordance with the Capital Requirements Regulation. CET1 ratio pre IFRS 9 transitional relief reflects the full impact of IFRS 9, prior to the application of transitional arrangements for capital that provide relief for the impact of IFRS 9. ?

QUARTERLY INFORMATION

?

Quarter ended 31 Mar 2021

?

?

Quarter ended 31 Dec 2020

?

?

Quarter ended 30 Sep 2020

?

?

Quarter ended 30 Jun 2020

?

?

Quarter ended 31 Mar 2020

?

?

?m

?

?

?m

?

?

?m

?

?

?m

?

?

?m

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

Net interest income

2,677?

?

?

?

2,677?

?

?

?

2,618?

?

?

?

2,528?

?

?

?

2,950?

?

?

Other income

1,135?

?

?

?

1,066?

?

?

?

988?

?

?

?

1,235?

?

?

?

1,226?

?

?

Operating lease depreciation

(148)

?

?

?

(150)

?

?

?

(208)

?

?

?

(302)

?

?

?

(224)

?

?

Net income

3,664?

?

?

?

3,593?

?

?

?

3,398?

?

?

?

3,461?

?

?

?

3,952?

?

?

Operating costs

(1,851)

?

?

?

(2,028)

?

?

?

(1,858)

?

?

?

(1,822)

?

?

?

(1,877)

?

?

Remediation

(65)

?

?

?

(125)

?

?

?

(77)

?

?

?

(90)

?

?

?

(87)

?

?

Total costs

(1,916)

?

?

?

(2,153)

?

?

?

(1,935)

?

?

?

(1,912)

?

?

?

(1,964)

?

?

Trading surplus

1,748?

?

?

?

1,440?

?

?

?

1,463?

?

?

?

1,549?

?

?

?

1,988?

?

?

Impairment

323?

?

?

?

(128)

?

?

?

(301)

?

?

?

(2,388)

?

?

?

(1,430)

?

?

Underlying profit (loss)

2,071?

?

?

?

1,312?

?

?

?

1,162?

?

?

?

(839)

?

?

?

558?

?

?

Restructuring

(173)

?

?

?

(233)

?

?

?

(155)

?

?

?

(70)

?

?

?

(63)

?

?

Volatility and other items

-?

?

?

?

(202)

?

?

?

29?

?

?

?

233?

?

?

?

(421)

?

?

Payment protection insurance provision

-?

?

?

?

(85)

?

?

?

-?

?

?

?

-?

?

?

?

-?

?

?

Statutory profit (loss) before tax

1,898?

?

?

?

792?

?

?

?

1,036?

?

?

?

(676)

?

?

?

74?

?

?

Tax (expense) credit

(501)

?

?

?

(112)

?

?

?

(348)

?

?

?

215?

?

?

?

406?

?

?

Statutory profit (loss) after tax

1,397?

?

?

?

680?

?

?

?

688?

?

?

?

(461)

?

?

?

480?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

Banking net interest margin

2.49%

?

?

2.46%

?

?

2.42%

?

?

2.40%

?

?

2.79%

?

Average interest-earning banking assets

?439bn

?

?

?437bn

?

?

?436bn

?

?

?435bn

?

?

?432bn

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

Cost:income ratio

52.3%

?

?

59.9%

?

?

56.9%

?

?

55.2%

?

?

49.7%

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

Asset quality ratio

(0.29)%

?

?

0.11%

?

?

0.27%

?

?

2.16%

?

?

1.30%

?

Gross asset quality ratio

(0.18)%

?

?

0.16%

?

?

0.28%

?

?

2.19%

?

?

1.35%

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

Return on tangible equity1

13.9%

?

?

5.9%

?

?

6.0%

?

?

(6.1)%

?

?

3.7%

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

Loans and advances to customers2

?444bn

?

?

?440bn

?

?

?439bn

?

?

?440bn

?

?

?443bn

?

Customer deposits3

?462bn

?

?

?451bn

?

?

?447bn

?

?

?441bn

?

?

?428bn

?

Loan to deposit ratio

96%

?

?

98%

?

?

98%

?

?

100%

?

?

103%

?

Risk-weighted assets

?199bn

?

?

?203bn

?

?

?205bn

?

?

?207bn

?

?

?209bn

?

Tangible net assets per share

52.4p

?

?

52.3p

?

?

52.2p

?

?

51.6p

?

?

57.4p

?

Revised basis, calculation shown on page 10. Excludes reverse repos. Excludes repos.

?

?

BALANCE SHEET ANALYSIS

?

At 31 Mar 2021

?

At 31 Mar 2020

?

Change

?

At 31 Dec 2020

?

Change

?

?bn

?

?bn

?

%

?

?bn

?

%

?

?

?

?

?

?

?

?

?

?

Loans and advances to customers

?

?

?

?

?

?

?

?

?

Open mortgage book

283.3?

?

?

268.1?

?

?

6?

?

?

277.3?

?

?

2?

?

Closed mortgage book

15.9?

?

?

17.9?

?

?

(11)

?

?

16.5?

?

?

(4)

?

Credit cards

13.5?

?

?

16.7?

?

?

(19)

?

?

14.3?

?

?

(6)

?

UK Retail unsecured loans

7.8?

?

?

8.6?

?

?

(9)

?

?

8.0?

?

?

(3)

?

UK Motor Finance

14.9?

?

?

15.8?

?

?

(6)

?

?

14.7?

?

?

1?

?

Overdrafts

0.9?

?

?

1.2?

?

?

(25)

?

?

0.9?

?

?

-?

?

Retail other1

10.3?

?

?

9.3?

?

?

11?

?

?

10.4?

?

?

(1)

?

SME2

41.1?

?

?

32.0?

?

?

28?

?

?

40.6?

?

?

1?

?

Mid Corporates

4.0?

?

?

4.7?

?

?

(15)

?

?

4.1?

?

?

(2)

?

Corporate and Institutional

45.6?

?

?

60.9?

?

?

(25)

?

?

46.0?

?

?

(1)

?

Commercial Banking other

4.1?

?

?

4.9?

?

?

(16)

?

?

4.3?

?

?

(5)

?

Wealth

1.0?

?

?

0.9?

?

?

11?

?

?

0.9?

?

?

11?

?

Central items

1.1?

?

?

2.1?

?

?

(48)

?

?

2.2?

?

?

(50)

?

Loans and advances to customers3

443.5?

?

?

443.1?

?

?

-?

?

?

440.2?

?

?

1?

?

?

?

?

?

?

?

?

?

?

?

Customer deposits

?

?

?

?

?

?

?

?

?

Retail current accounts

103.0?

?

?

79.9?

?

?

29?

?

?

97.4?

?

?

6?

?

Commercial current accounts2,4

47.2?

?

?

34.5?

?

?

37?

?

?

47.6?

?

?

(1)

?

Retail relationship savings accounts

158.2?

?

?

144.1?

?

?

10?

?

?

154.1?

?

?

3?

?

Retail tactical savings accounts

13.8?

?

?

12.7?

?

?

9?

?

?

14.0?

?

?

(1)

?

Commercial deposits2,5

125.5?

?

?

142.5?

?

?

(12)

?

?

122.7?

?

?

2?

?

Wealth

14.1?

?

?

13.3?

?

?

6?

?

?

14.1?

?

?

-?

?

Central items

0.6?

?

?

1.4?

?

?

(57)

?

?

0.8?

?

?

(25)

?

Total customer deposits6

462.4?

?

?

428.4?

?

?

8?

?

?

450.7?

?

?

3?

?

?

?

?

?

?

?

?

?

?

?

Total assets

869.5?

?

?

861.7?

?

?

1?

?

?

871.3?

?

?

-?

?

Total liabilities

820.0?

?

?

809.0?

?

?

1?

?

?

821.9?

?

?

-?

?

?

?

?

?

?

?

?

?

?

?

Ordinary shareholders' equity

43.4?

?

?

46.6?

?

?

(7)

?

?

43.3?

?

?

-?

?

Other equity instruments

5.9?

?

?

5.9?

?

?

-?

?

?

5.9?

?

?

-?

?

Non-controlling interests

0.2?

?

?

0.2?

?

?

-?

?

?

0.2?

?

?

-?

?

Total equity

49.5?

?

?

52.7?

?

?

(6)

?

?

49.4?

?

?

-?

?

?

?

?

?

?

?

?

?

?

?

Ordinary shares in issue, excluding own shares

70,936m

?

70,411m

?

1?

?

?

70,812m

?

-?

?

Primarily Europe. Includes Retail Business Banking. Excludes reverse repos. Primarily non interest-bearing Commercial Banking current accounts. Primarily Commercial Banking interest-bearing accounts. Excludes repos. ?

REVIEW OF PERFORMANCE

Solid financial performance reflects business momentum and improved economic outlook

The Group's statutory profit before tax for the first quarter of 2021 was ?1,898 million, benefiting from solid business momentum and a net impairment credit as a result of the UK's improved economic outlook. Underlying profit was ?2,071?million, compared to ?558?million in the first three months of 2020, reflecting both the improved impairment outcome and lower total costs, partially offset by lower net income. Trading surplus is recovering at ?1,748 million, down 12 per cent compared to the first three months of 2020, but up 21?per cent on the fourth quarter of 2020. Net income Net interest income of ?2,677 million was down 9 per cent year on year, impacted by a reduced banking net interest margin of 2.49?per cent, reflecting the lower rate environment. The Group's banking net interest margin was up 3 basis points compared to the fourth quarter of 2020 reflecting the continued optimisation of the Corporate and Institutional book within Commercial Banking, strong customer deposit inflows and funding and capital benefits following the liability management exercise in the fourth quarter of 2020. Relative to the fourth quarter of 2020, lower structural hedge net interest income was largely offset by growth in mortgage volumes at attractive margins.

Average interest-earning banking assets were up 2 per cent compared to the first quarter of 2020 at ?439 billion, driven by growth in the open mortgage book and an increase in government-backed lending. This was partially offset by lower balances in credit cards, motor finance and unsecured personal loans, as well as the effects of the continued optimisation of the Corporate and Institutional book within Commercial Banking. Low single-digit percentage growth in average interest-earning assets is now expected in 2021.

The Group manages the risk to its earnings and capital from movements in interest rates centrally by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 31 March 2021 the Group's structural hedge had an approved capacity of ?210 billion (in-line with year-end 2020), a nominal balance of ?207 billion (31 December 2020: ?186 billion) which has increased towards approved capacity and a weighted-average duration of around three-and-a-half years (31 December 2020: around two-and-a-half years). The Group generated ?0.5 billion (on a 3 month LIBOR basis) of gross income from the structural hedge balances in the first quarter of 2021 (first quarter of 2020: ?0.7 billion, fourth quarter of 2020:??0.5?billion) with emerging benefits from higher market rates seen in the quarter. Following the end of the quarter, the Group's approved structural hedge capacity has been increased to ?225 billion, capturing part of the liability growth since the beginning of 2020 and reflecting the Group's continued success in attracting current account balances over the last year.

The Group now expects the net interest margin for 2021 to be in excess of 245 basis points.

Other income of ?1,135 million was 7 per cent lower than in the first quarter of 2020 reflecting lower levels of customer activity and new business as a consequence of the coronavirus pandemic, particularly within Retail and Insurance and Wealth. This was in part mitigated by strong performance in the Group's equity investment businesses. In aggregate the Group's other income was up 6?per cent relative to the fourth quarter of 2020, when the Group took a charge in Insurance and Wealth for the annual basis review.

Operating lease depreciation reduced to ?148 million (three months to 31 March 2020: ?224 million) as a result of the continued impact of a smaller Lex fleet size, combined with a benefit from the more resilient used car price outlook of c.?30?million. Total costs Total costs of ?1,916 million were 2 per cent lower than in the first three months of 2020, driven by continued control of operating costs, down 1 per cent at ?1,851 million whilst continuing to prioritise investment in the business.

The Group continues to expect operating costs for 2021 to reduce to c.?7.5 billion including net coronavirus-related costs and compensation headwinds.

?

?

REVIEW OF PERFORMANCE (continued)

Remediation charges of ?65 million (three months to 31?March 2020: ?87 million) were related to pre-existing programmes. As highlighted in the 2020 results, in relation to HBOS Reading, decisions from the independent panel re-review on direct and consequential losses will start to be issued during 2021. This is likely to result in further charges but it is not possible to estimate the potential impact at this stage. Impairment The impairment charge in the quarter was a net credit of ?323 million, compared to a charge of ?1,430 million in the first quarter of 2020. The net credit in the quarter was driven by continued strong asset quality with a low charge of ?209?million given the continued benign credit environment and a ?459 million release of expected credit loss (ECL) allowances resulting from improvements to the UK's economic outlook. The Group has retained the judgemental overlays applied at year end and has continued to offset modelled releases not deemed reflective of underlying risk. Management judgements in respect of coronavirus of c.?1 billion (31 December 2020: c.?0.9 billion) include a central ?400 million overlay (31 December 2020: ?400 million), as well as c.?600 million of judgements within the underlying portfolios (31?December 2020: c.?500 million).

The Group's ECL allowance reduced in the quarter from ?6.9 billion to ?6.2 billion, of which ?459 million resulted from improvements to the economic outlook, including the impact of the extension of the Government's Coronavirus Job Retention Scheme. Reductions in Commercial Banking ECL also reflect improved outcomes on restructuring cases, lower flows to default and recent reductions in exposures due to asset optimisation.

The ECL allowance remains high by historical standards and is consistent with the Group's updated macroeconomic projections. It assumes that a large proportion of expected losses will crystallise over the next 12 to 18 months as support measures subside and unemployment increases.

Observed credit performance has remained stable in the quarter, with the flow of assets into arrears, defaults and write-offs remaining at low levels in part due to the continued effectiveness of support schemes, including the Coronavirus Job Retention Scheme and payment holidays extended by the Group which have now largely matured. The Group has maintained judgemental ECL allowances in respect of losses assumed to have been suppressed over the last 12 months by support schemes, given that cumulative losses remain lower than would have ordinarily been anticipated.

The Group's ?400 million central overlay was added at year end in recognition of the significant uncertainty with regard to the efficacy of the vaccine, the vaccination rollout, potential virus mutations and economic performance post lockdown restrictions and Government support. Although the base case outlook has improved in the first quarter, the Group still considers these risks to remain and that the conditioning assumptions for the base case and associated scenarios around this do not necessarily capture these unprecedented risks.

Given the benefit recognised in the first quarter of the year, the full year charge is now expected to be materially lower than the guidance set out at year-end. Based on the Group's improved economic assumptions, the net asset quality ratio for 2021 is now expected to be below 25 basis points.

?

?

REVIEW OF PERFORMANCE (continued)

Impairment charge

?

Quarter ended 31 Mar 2021

?

?

Quarter ended 31 Mar 2020

?

?

Change

?

Quarter ended 31 Dec 2020

?

?

Change

?

?m

?

?

?m

?

?

%

?

?m

?

?

%

?

?

?

?

?

?

?

?

?

?

?

?

?

Charges pre-updated multiple economic scenarios1

?

?

?

?

?

?

?

?

?

?

?

?

Retail

321?

?

?

?

325?

?

?

?

1?

?

?

383?

?

?

?

16?

?

Commercial Banking

(111)

?

?

?

52?

?

?

?

?

?

41?

?

?

?

?

Other

(1)

?

?

?

(9)

?

?

?

89?

?

?

(6)

?

?

?

83?

?

?

209?

?

?

?

368?

?

?

?

43?

?

?

418?

?

?

?

50?

?

Coronavirus impacted restructuring cases2

(73)

?

?

?

218?

?

?

?

?

?

(31)

?

?

?

?

Updated economic outlook:

?

?

?

?

?

?

?

?

?

?

?

?

Retail

(240)

?

?

?

564?

?

?

?

?

?

(417)

?

?

?

42?

?

Commercial Banking

(219)

?

?

?

280?

?

?

?

?

?

(42)

?

?

?

?

Other

-?

?

?

?

-?

?

?

?

?

?

200?

?

?

?

?

?

(459)

?

?

?

844?

?

?

?

?

?

(259)

?

?

?

(77)

?

Impairment (credit) charge

(323)

?

?

?

1,430?

?

?

?

?

?

128?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

Asset quality ratio

(0.29)%

?

?

1.30%

?

?

(159)bp

?

0.11%

?

?

(40)bp

Gross asset quality ratio

(0.18)%

?

?

1.35%

?

?

(153)bp

?

0.16%

?

?

(34)bp

Charges based on economic assumptions as at 31 December 2019. Additional (releases)/charges on cases subject to restructuring at the end of 2019, where the coronavirus pandemic is considered to have had a direct effect upon the recovery strategy.

ECL allowance as a percentage of drawn balances

?

At 31 Mar

20211

?

At 31 Dec

20201

?

Change

?

?m

?

?m

?

%

?

?

?

?

?

?

Stage 2 gross loans and advances to customers

53,626?

?

?

60,514?

?

?

(11)

?

Stage 2 loans and advances to customers as % of total

10.7%

?

12.0%

?

(1.3)pp

Stage 2 ECL allowances2

2,384?

?

?

2,727?

?

?

(13)

?

Stage 2 ECL allowances2 as % of Stage 2 drawn balances

4.4%

?

4.5%

?

(0.1)pp

?

?

?

?

?

?

Stage 3 gross loans and advances to customers

8,970?

?

?

9,089?

?

?

(1)

?

Stage 3 loans and advances to customers as a % of total

1.8%

?

1.8%

?

-?

?

Stage 3 ECL allowances2

2,348?

?

?

2,508?

?

?

(6)

?

Stage 3 ECL allowances2 as % of Stage 3 drawn balances3

27.1%

?

28.6%

?

(1.5)pp

?

?

?

?

?

?

Total loans and advances to customers4

502,055?

?

?

505,129?

?

?

(1)

?

Total ECL allowance2

6,194?

?

?

6,832?

?

?

(9)

?

Total ECL allowances2 as % of drawn balances3

1.2%

?

1.4%

?

(0.2)pp

Underlying basis. Refer to basis of presentation on page 19. Expected credit loss. Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail and Commercial Banking of ?321 million (31 December 2020: ?317 million). Comparatives restated to reflect exclusion of Commercial Banking recoveries. Includes reverse repos of ?52.8 billion (31 December 2020: ?58.6 billion).

REVIEW OF PERFORMANCE (continued) Statutory profit Restructuring costs of ?173 million, up from ?63 million in the first quarter of 2020 but down from ?233 million in the fourth quarter of 2020, reflected increased severance and technology research and development costs, as well as slightly higher property transformation costs. Volatility and other items reduced to net nil in the first quarter of 2021 (three months to 31 March 2020: net loss of ?421 million) with positive insurance volatility and other gains offsetting fair value unwind and the amortisation of purchased intangibles.

Return on tangible equity for the period was 13.9 per cent (three months to 31 March 2020: 3.7 per cent) and earnings per share were 1.8 pence (three months to 31 March 2020:?0.5 pence), both reflecting the benefit of the impairment credit.

The Group recognised a tax expense of ?501 million in the period compared to a credit of ?406 million in the first three months of 2020. The prior year credit included an uplift in deferred tax assets following the announcement by the UK Government that it would maintain the corporation tax rate at 19 per cent. On 3?March 2021, the Government announced its intention to increase the rate of corporation tax from 19 per cent to 25 per cent with effect from 1 April 2023. Had this change in corporation tax rate been substantively enacted at 31 March 2021, the impact would have been to recognise a????? c.?1?billion deferred tax credit in the income statement and a c.?150 million debit within other comprehensive income, increasing the Group's net deferred tax asset by c.?850 million.

Given the improved outlook for both the net interest margin and asset quality ratio, the statutory return on tangible equity for 2021 is now expected to be between 8 and 10 per cent, excluding a c.2.5 percentage point benefit from tax rate changes. Balance sheet Loans and advances to customers were up ?3.3 billion in the quarter at ?443.5 billion, benefiting from an increase of ?6.0?billion in the open mortgage book, more than offsetting lower unsecured Retail, Corporate and Institutional, and closed mortgage book balances. Customer deposits of ?462.4 billion were up ?11.7 billion in the quarter compared to ?450.7 billion at 31 December 2020 and included a further increase in Retail current accounts of ?5.6?billion to ?103.0?billion. The Group's loan to deposit ratio of 96 per cent provides a strong liquidity position and significant potential to lend into recovery. Capital The Group's CET1 capital ratio has increased from 16.2 per cent at 31 December 2020 to 16.7 per cent, reflecting capital build in the quarter of 54 basis points, prior to the impact of the dividend accrual. Banking business capital build (pre impairments credit) of 55 basis points and underlying risk-weighted asset reductions of 31?basis points were partly offset by pension contributions and other movements of 26 basis points. The net impact of the impairments credit and partial release of IFRS 9 transitional relief during the quarter was a 6 basis points reduction which included 5 basis points relating to the phased reduction in static relief. The impact of the dividend accrual in the quarter equated to 5 basis points and is currently based upon a pro-rated amount of the 2020 full year dividend.

As previously noted the Group will update the market on interim dividend payments with the half-year results, subsequent to reviewing the PRA's update on distributions which is expected ahead of the half-year results reporting cycle for the large UK banks. In the interim the Group's dividend accrual has been made on an appropriately prudent basis (as set out above) in accordance with PRA guidance. As previously stated, the Board intends to resume its progressive and sustainable ordinary dividend policy with the dividend at a higher level than 2020.

The PRA is continuing to consult on a proposal to reverse the revised capital treatment of intangible software assets that was implemented in December 2020 via EU capital regulations. Should the PRA proceed with their proposal then the reinstatement of the original requirement to deduct these assets from capital will come into force during the year. This would lead to a c.50 basis points reduction in the Group's CET1 capital ratio (net of a reduction in associated risk-weighted assets) and based on the position at 31 March 2021 the ratio would reduce to 16.2 per cent.

?

REVIEW OF PERFORMANCE (continued)

Risk-weighted assets reduced by ?3.8 billion during the quarter, primarily driven by optimisation activity undertaken in Commercial Banking of around ?2.5?billion and foreign exchange and other market impacts of ?1.1?billion, alongside limited credit migration and balance sheet growth. The Group continues to expect 2021 risk-weighted assets to be broadly stable on 2020.

The Board's view of the ongoing level of CET1 capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties remains at c.12.5 per cent, plus a management buffer of c.1 per cent. The Group's CET1 capital regulatory requirement is currently c.11 per cent.

The transitional total capital ratio reduced to 23.0 per cent (31 December 2020: 23.3 per cent) and the transitional minimum requirement for own funds and eligible liabilities (MREL) reduced to 36.1 per cent (31 December 2020: 36.4 per cent) reflecting the impact of movements in rates and the annual reduction in transitional limits applied to legacy tier 1 and tier 2 instruments, which more than offset the increase in CET1 capital. The UK leverage ratio increased to 6.0?per?cent.

?

ADDITIONAL FINANCIAL INFORMATION

?

??????????????? Banking net interest margin and average interest-earning assets

?

Quarter ended 31 Mar 2021

?

?

Quarter ended 31 Mar 2020

?

?

?

?

?

?

?

Group net interest income - statutory basis (?m)

2,266?

?

?

?

5,185?

?

?

Insurance gross up (?m)

352?

?

?

?

(2,265)

?

?

Volatility and other items (?m)

59?

?

?

?

30?

?

?

Group net interest income - underlying basis (?m)

2,677?

?

?

?

2,950?

?

?

Non-banking net interest expense (?m)

26?

?

?

?

44?

?

?

Banking net interest income - underlying basis (?m)

2,703?

?

?

?

2,994?

?

?

?

?

?

?

?

?

Net loans and advances to customers (?bn)1

443.5?

?

?

?

443.1?

?

?

Impairment provision and fair value adjustments (?bn)

5.7?

?

?

?

4.8?

?

?

Non-banking items:

?

?

?

?

?

Fee-based loans and advances (?bn)

(4.9)

?

?

?

(7.6)

?

?

Other non-banking (?bn)

(1.8)

?

?

?

(3.1)

?

?

Gross banking loans and advances (?bn)

442.5?

?

?

?

437.2?

?

?

Averaging (?bn)

(3.1)

?

?

?

(5.6)

?

?

Average interest-earning banking assets (?bn)

439.4?

?

?

?

431.6?

?

?

?

?

?

?

?

?

Banking net interest margin (%)

2.49?

?

?

?

2.79?

?

?

Excludes reverse repos. ? ?

??????????????? Return on tangible equity

As announced at the full year results, the Group has revised its definition of return on tangible equity. Statutory profit after tax is adjusted to deduct profit attributable to non-controlling interests and other equity holders and is divided by average tangible equity.

?

Quarter ended 31 Mar 2021

?

?

Quarter ended 31 Mar 2020

?

?

?

?

?

?

?

Average ordinary shareholders' equity (?bn)

43.3?

?

?

?

44.1?

?

?

Average intangible assets (?bn)

(6.2)

?

?

?

(6.1)

?

?

Average tangible equity (?bn)

37.1?

?

?

?

38.0?

?

?

?

?

?

?

?

?

Group statutory profit after tax (?m)

1,397?

?

?

?

480?

?

?

Less profit attributable to non-controlling interests and other equity holders (?m)

(122)

?

?

?

(132)

?

?

Adjusted statutory profit after tax (?m)1

1,275?

?

?

?

348?

?

?

?

?

?

?

?

?

Return on tangible equity (%)1

13.9?

?

?

?

3.7?

?

?

Revised basis, quarter ended 31 March 2020 restated. ?

ADDITIONAL FINANCIAL INFORMATION (continued)

??????????????? Further impairment detail

The analyses which follow have been presented on an underlying basis. Refer to basis of presentation on page 19.

Impairment charge by division

?

Quarter ended 31 Mar 2021

?

?

Quarter ended 31 Mar 2020

?

?

Change

?

Quarter ended 31 Dec 2020

?

?

Change

?

?m

?

?

?m

?

?

%

?

?m

?

?

%

?

?

?

?

?

?

?

?

?

?

?

?

?

UK Mortgages

(72)

?

?

?

160?

?

?

?

?

?

(146)

?

?

?

51?

?

Credit cards

28?

?

?

?

349?

?

?

?

92?

?

?

8?

?

?

?

?

Loans and overdrafts

108?

?

?

?

225?

?

?

?

52?

?

?

146?

?

?

?

26?

?

UK Motor Finance

11?

?

?

?

76?

?

?

?

86?

?

?

(42)

?

?

?

?

Other

6?

?

?

?

79?

?

?

?

92?

?

?

-?

?

?

?

?

Retail

81?

?

?

?

889?

?

?

?

?

?

(34)

?

?

?

?

Commercial Banking

(403)

?

?

?

550?

?

?

?

?

?

(32)

?

?

?

?

Insurance and Wealth

-?

?

?

?

1?

?

?

?

?

?

(2)

?

?

?

?

Central Items

(1)

?

?

?

(10)

?

?

?

90?

?

?

196?

?

?

?

?

Total impairment charge

(323)

?

?

?

1,430?

?

?

?

?

?

128?

?

?

?

?

?

Movements in ECL by division on an underlying basis

?

ECL at 31 Mar 2021

?

?

Net ECL

increase/(decrease)

?

?

Write-offs

and other

?

?

Income

statement

charge

?

?

ECL at 31 Dec 2020

?

?

?m

?

?

?m

?

?

?m

?

?

?m

?

?

?m

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

UK Mortgages

1,518?

?

?

?

(87)

?

?

?

(15)

?

?

?

(72)

?

?

?

1,605?

?

?

Credit cards

894?

?

?

?

(64)

?

?

?

(92)

?

?

?

28?

?

?

?

958?

?

?

Loans and overdrafts

707?

?

?

?

(8)

?

?

?

(116)

?

?

?

108?

?

?

?

715?

?

?

UK Motor Finance

503?

?

?

?

2?

?

?

?

(9)

?

?

?

11?

?

?

?

501?

?

?

Other

221?

?

?

?

(8)

?

?

?

(14)

?

?

?

6?

?

?

?

229?

?

?

Retail

3,843?

?

?

?

(165)

?

?

?

(246)

?

?

?

81?

?

?

?

4,008?

?

?

Commercial Banking

1,932?

?

?

?

(470)

?

?

?

(67)

?

?

?

(403)

?

?

?

2,402?

?

?

Other

451?

?

?

?

1?

?

?

?

2?

?

?

?

(1)

?

?

?

450?

?

?

Total1

6,226?

?

?

?

(634)

?

?

?

(311)

?

?

?

(323)

?

?

?

6,860?

?

?

Total ECL includes ?32 million relating to other non customer-related assets (31 December 2020: ?28 million).

ADDITIONAL FINANCIAL INFORMATION (continued)

Group loans and advances to customers and expected credit loss allowances - underlying basis

?

Stage 1

?

?

Stage 2

?

?

Stage 3

?

?

Total

?

?

Stage 2

as % of

total

?

?

Stage 3

as % of

total

?

At 31 March 2021

?m

?

?

?m

?

?

?m

?

?

?m

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

Loans and advances to customers

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

UK Mortgages

260,458?

?

?

?

35,838?

?

?

?

4,428?

?

?

?

300,724?

?

?

?

11.9?

?

?

?

1.5?

?

?

Credit cards

10,632?

?

?

?

3,189?

?

?

?

352?

?

?

?

14,173?

?

?

?

22.5?

?

?

?

2.5?

?

?

Loans and overdrafts

7,652?

?

?

?

1,439?

?

?

?

324?

?

?

?

9,415?

?

?

?

15.3?

?

?

?

3.4?

?

?

UK Motor Finance

12,947?

?

?

?

2,256?

?

?

?

232?

?

?

?

15,435?

?

?

?

14.6?

?

?

?

1.5?

?

?

Other

18,170?

?

?

?

1,218?

?

?

?

182?

?

?

?

19,570?

?

?

?

6.2?

?

?

?

0.9?

?

?

Retail1

309,859?

?

?

?

43,940?

?

?

?

5,518?

?

?

?

359,317?

?

?

?

12.2?

?

?

?

1.5?

?

?

SME

28,063?

?

?

?

3,322?

?

?

?

860?

?

?

?

32,245?

?

?

?

10.3?

?

?

?

2.7?

?

?

Other

46,297?

?

?

?

6,331?

?

?

?

2,526?

?

?

?

55,154?

?

?

?

11.5?

?

?

?

4.6?

?

?

Commercial Banking

74,360?

?

?

?

9,653?

?

?

?

3,386?

?

?

?

87,399?

?

?

?

11.0?

?

?

?

3.9?

?

?

Insurance and Wealth

856?

?

?

?

33?

?

?

?

59?

?

?

?

948?

?

?

?

3.5?

?

?

?

6.2?

?

?

Central items2

54,384?

?

?

?

-?

?

?

?

7?

?

?

?

54,391?

?

?

?

-?

?

?

?

-?

?

?

Total gross lending

439,459?

?

?

?

53,626?

?

?

?

8,970?

?

?

?

502,055?

?

?

?

10.7?

?

?

?

1.8?

?

?

ECL allowance on drawn balances

(1,273)

?

?

?

(2,186)

?

?

?

(2,340)

?

?

?

(5,799)

?

?

?

?

?

?

?

?

Net balance sheet carrying value

438,186?

?

?

?

51,440?

?

?

?

6,630?

?

?

?

496,256?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

Group ECL allowance (drawn and undrawn)

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

?

UK Mortgages

100?

?

?

?

751?

?

?

?

667?

?

?

?

1,518?

?

?

?

49.5?

?

?

?

43.9?

?

?

Credit cards

190?

?

?

?

532?

?

?

?

172?

?

?

?

894?

?

?

?

59.5?

?

?

?

19.2?

?

?

Loans and overdrafts

210?

?

?

?

334?

?

?

?

163?

?

?

?

707?

?

?

?

47.2?

?

?

?

23.1?

?

?

UK Motor Finance3

177?

?

?

?

171?

?

?

?

155?

?

?

?

503?

?

?

?

34.0?

?

?

?

30.8?

?

?

Other

51?

?

?

?

117?

?

?

?

53?

?

?

?

221?

?

?

?

52.9?

?

?

?

24.0?

?

?

Retail1

728?

?

?

?

1,905?

?

?

?

1,210?

?

?

@ dgap.de