Lloyds Banking Group(LYG) - 2024 Q1 - Quarterly Report

Report Overview and Highlights This section provides the CEO's perspective on Q1 2024 performance and key financial highlights, including profit, return on equity, and balance sheet metrics CEO Statement CEO Charlie Nunn reports Q1 2024 performance met expectations, demonstrating solid net income, cost discipline, and strong asset quality, reinforcing confidence in strategic ambitions and future guidance - The Group's performance in Q1 2024 is aligned with expectations, demonstrating solid net income, disciplined cost management, and robust asset quality[3] - This performance strengthens confidence in achieving strategic ambitions and meeting the 2024 and 2026 guidance, while continuing to support customers[3][4] Q1 2024 Financial Highlights Q1 2024 statutory profit after tax was £1.2 billion (down 26%), driven by lower net income and higher costs, partially offset by reduced impairment, resulting in 13.3% RoTE and a 13.9% CET1 ratio Q1 2024 Key Performance Indicators | Metric | Q1 2024 | Q1 2023 | Change | | :--- | :--- | :--- | :--- | | Statutory Profit After Tax (£ billion) | £1.2 billion | £1.6 billion | -26% | | Return on Tangible Equity (%) | 13.3% | 19.1% | -5.8pp | | Underlying Net Interest Income (£ billion) | £3.2 billion | £3.5 billion | -10% | | Banking Net Interest Margin (%) | 2.95% | 3.22% | -27bp | | Operating Costs (£ billion) | £2.4 billion | £2.2 billion | +11% | | Underlying Impairment Charge (£ million) | £57 million | £243 million | -77% | | CET1 Ratio (%) | 13.9% | 14.1% | -0.2pp | - Loans and advances to customers decreased slightly to £448.5 billion, primarily due to expected reductions in UK mortgage balances[5] - Customer deposits decreased by £2.2 billion to £469.2 billion, as growth in Retail was more than offset by a reduction in Commercial Banking[9] - The Group agreed to sell its in-force bulk annuity portfolio to Rothesay Life plc to focus on strategically important business lines[6] Financial Results and Guidance This section outlines the Group's reaffirmed full-year 2024 financial guidance and presents detailed summary tables of Q1 2024 performance and key ratios 2024 Guidance The Group reaffirms 2024 guidance: banking net interest margin over 2.90%, operating costs around £9.3 billion plus a £0.1 billion levy, asset quality ratio below 30 basis points, and return on tangible equity around 13% 2024 Full-Year Guidance | Metric | 2024 Guidance | | :--- | :--- | | Banking Net Interest Margin (basis points) | > 290 basis points | | Operating Costs (£ billion) | c.£9.3 billion + c.£0.1bn levy | | Asset Quality Ratio (basis points) | < 30 basis points | | Return on Tangible Equity (%) | c.13 per cent | | Capital Generation (basis points) | c.175 basis points | | Risk-weighted Assets (£ billion) | £220 billion - £225 billion | | CET1 Ratio Target (%) | Pay down to c.13.5% | Summary Financial Tables Detailed Q1 2024 financial tables show underlying net interest income at £3,184 million and statutory profit before tax at £1,628 million, with the cost:income ratio increasing to 57.2% from 47.1% in Q1 2023 Q1 2024 Financial Summary (£ million) | Metric | Q1 2024 (£ million) | Q1 2023 (£ million) | YoY Change (%) | Q4 2023 (£ million) | QoQ Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Underlying net interest income | 3,184 | 3,535 | (10) | 3,317 | (4) | | Net income | 4,241 | 4,652 | (9) | 4,232 | - | | Total costs | (2,427) | (2,189) | (11) | (3,027) | 20 | | Underlying profit | 1,757 | 2,220 | (21) | 1,746 | 1 | | Statutory profit before tax | 1,628 | 2,260 | (28) | 1,775 | (8) | | Statutory profit after tax | 1,215 | 1,641 | (26) | 1,234 | (2) | Key Ratios and Balance Sheet Items | Metric | At 31 Mar 2024 | At 31 Mar 2023 | At 31 Dec 2023 | | :--- | :--- | :--- | :--- | | Banking net interest margin (%) | 2.95% | 3.22% | 2.98% | | Cost:income ratio (%) | 57.2% | 47.1% | 71.5% | | Return on tangible equity (%) | 13.3% | 19.1% | 13.9% | | Loans and advances to customers (£ billion) | £448.5bn | £452.3bn | £449.7bn | | Customer deposits (£ billion) | £469.2bn | £473.1bn | £471.4bn | | CET1 ratio (%) | 13.9% | 14.1% | 14.6% | Detailed Performance Review This section provides a detailed analysis of the Group's profitability, net interest income, other income, operating lease depreciation, and cost management for the period Profitability and Net Income Q1 2024 statutory profit before tax decreased 28% to £1,628 million, primarily due to lower net interest income and higher operating expenses, partially offset by reduced impairment, with total net income down 9% - Statutory profit before tax fell 28% YoY to £1,628 million, while statutory profit after tax was £1,215 million[25] - Underlying profit decreased by 21% YoY to £1,757 million, impacted by lower net interest income and higher operating costs[26] - Net income of £4,241 million was down 9% YoY, driven by lower net interest income and higher operating lease depreciation[27] Net Interest Income and Margin Underlying net interest income dropped 10% YoY to £3,184 million, driven by a 2.95% banking net interest margin (down from 3.22%), reflecting deposit churn and mortgage margin compression, partially offset by structural hedge income - Underlying net interest income fell 10% YoY due to a banking net interest margin decline to 2.95%, caused by deposit churn and asset margin compression, especially in mortgages[28] - The sterling structural hedge balance was £244 billion and generated approximately £1.0 billion of income in Q1 2024. The Group expects the hedge to deliver approximately £0.7 billion more in earnings in 2024 compared to 2023[30] - The Group maintains its 2024 guidance for a banking net interest margin of greater than 290 basis points[29] Other Income and Operating Lease Depreciation Underlying other income grew 7% YoY to £1,340 million, driven by 17% Retail growth (Tusker acquisition) and approximately 4% Commercial Banking growth, while operating lease depreciation increased to £283 million due to Tusker and fleet growth - Underlying other income rose 7% YoY to £1,340 million, with Retail up 17% (partly from the Tusker acquisition) and Commercial Banking up approximately 4% (from capital markets)[31] - Operating lease depreciation increased to £283 million from £140 million in Q1 2023, due to the Tusker acquisition, fleet growth, and lower used car prices[33] - The Group saw positive organic growth in Insurance, Pensions and Investments, and Wealth, with £1.4 billion in net new money for open book assets under administration (AuA)[32] Costs and Remediation Total costs, including remediation, rose 11% to £2,427 million, driven by a new approximately £0.1 billion Bank of England levy and higher severance charges, with operating costs up 6% excluding the levy, and minimal £25 million remediation costs - Operating costs increased 11% to £2.4 billion, including a new approximately £0.1 billion Bank of England levy and £0.1 billion higher severance charges. Excluding the levy, costs were up 6%[34] - The cost:income ratio for Q1 was 57.2%, up from 47.1% in the prior year[34] - Remediation costs were £25 million for pre-existing programmes. No further charge was taken for the FCA's motor finance commission review, with an update expected from the FCA in September[35] Balance Sheet and Capital Position This section analyzes the Group's balance sheet, including loans, deposits, and liquidity, alongside its capital management strategies and CET1 ratio Balance Sheet Analysis As of March 31, 2024, loans to customers decreased slightly to £448.5 billion (mainly UK mortgages), and customer deposits fell by £2.2 billion to £469.2 billion (Commercial Banking reduction), maintaining a stable 96% loan-to-deposit ratio Balance Sheet Breakdown (£ billion) | Item | At 31 Mar 2024 (£ billion) | At 31 Dec 2023 (£ billion) | Change (%) | | :--- | :--- | :--- | :--- | | Loans and advances to customers | 448.5 | 449.7 | - | | UK mortgages | 304.6 | 306.2 | (1) | | Small and Medium Businesses | 32.2 | 33.0 | (2) | | Customer deposits | 469.2 | 471.4 | - | | Retail current accounts | 103.1 | 102.7 | - | | Retail savings accounts | 196.4 | 194.8 | 1 | | Commercial Banking | 159.3 | 162.8 | (2) | | Total assets | 889.6 | 881.5 | 1 | | Total equity | 47.8 | 47.4 | 1 | - The loan to deposit ratio was 96%, stable compared to year-end 2023, indicating a robust funding and liquidity position[46] - The Group maintains a strong liquidity position with a liquidity coverage ratio of 143% and a net stable funding ratio of 130%[46] Capital Management The Group's CET1 capital ratio improved to 13.9% (from 13.7% YE23), with 40 basis points capital generation despite regulatory headwinds; RWAs increased to £222.8 billion, and the Group targets a CET1 ratio of approximately 13.5% by year-end 2024 Q1 2024 Capital Generation | Item | Basis Points (bps) | | :--- | :--- | | Pro forma CET1 ratio as at 31 Dec 2023 | 13.7% | | Banking build | 57 | | Risk-weighted assets | (24) | | Other movements | 13 | | Capital generation (pre-headwinds) | 46 | | Regulatory headwinds | (6) | | Capital generation (post-headwinds) | 40 | | Ordinary dividend | (22) | | CET1 ratio as at 31 Mar 2024 | 13.9% | - Risk-weighted assets increased by £3.7 billion to £222.8 billion, including a temporary approximately £1.5 billion increase expected to reverse in Q2[47][48] - The Board's ongoing CET1 capital target is approximately 13.0%, and it expects to pay down to approximately 13.5% by the end of 2024 before progressing towards the target by the end of 2026[50] Impairment and Credit Quality This section reviews the Group's asset quality, impairment charges, expected credit loss allowance, and underlying economic assumptions Asset Quality and Impairment Charge Asset quality remains strong, with Q1 2024 underlying impairment charge at a low £57 million (asset quality ratio of 6 basis points), significantly influenced by a £192 million credit from an improved economic outlook, particularly in house prices - Asset quality remains strong, with credit performance stable and broadly at or better than pre-pandemic levels. An improvement in new-to-arrears for UK mortgages was observed in Q1[36][37] Q1 2024 Underlying Impairment Charge Detail (£ million) | Component | Q1 2024 (£ million) | Q1 2023 (£ million) | | :--- | :--- | :--- | | Charges pre-updated MES | 249 | 322 | | Updated economic outlook (credit) | (192) | (79) | | Underlying impairment charge | 57 | 243 | | Asset quality ratio (%) | 0.06% | 0.22% | - The Group continues to expect the asset quality ratio for 2024 to be less than 30 basis points[40] Expected Credit Loss (ECL) Allowance The Group's underlying ECL allowance decreased slightly to £4.1 billion in Q1 2024, with Stage 2 assets reducing to £50.2 billion and Stage 3 assets increasing slightly to £10.6 billion, maintaining a low 0.9% total ECL allowance Loans and ECL Allowance by Stage (31 Mar 2024) | Stage | Gross Lending (£ million) | ECL Allowance (£ million) | Stage as % of Total Lending (%) | | :--- | :--- | :--- | :--- | | Stage 1 | 391,473 | 1,028 | 86.6% | | Stage 2 | 50,178 | 1,520 | 11.1% | | Stage 3 | 10,626 | 1,543 | 2.3% | | Total | 452,277 | 4,091 | 100% | - Stage 2 assets decreased to £50.2 billion (from £56.5 billion at YE23), with 90.7% of these loans remaining up to date on payments[40] - Stage 3 assets increased slightly to £10.6 billion (from £10.1 billion at YE23), with increases in UK mortgages and Commercial Banking portfolios[40] Economic Assumptions and Scenarios The Group's ECL calculations use multiple economic scenarios, with the 2024 base case anticipating slow GDP growth (0.4%), rising unemployment (4.3%), and UK Bank Rate reductions, including an adjusted severe downside scenario for key risks - The base case scenario for 2024 includes slow GDP expansion, a rise in unemployment, and UK Bank Rate reductions during the year[71] Key UK Economic Assumptions - 2024 Annual Average (%) | Scenario | GDP Growth (%) | Unemployment Rate (%) | House Price Growth (%) | UK Bank Rate (%) | CPI Inflation (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Upside | 1.1 | 3.2 | 3.7 | 5.40 | 2.3 | | Base case | 0.4 | 4.3 | 1.5 | 4.88 | 2.4 | | Downside | (0.8) | 5.5 | 0.0 | 4.29 | 2.4 | | Severe downside | (1.8) | 7.2 | (2.2) | 6.19 (adj.) | 7.5 (adj.) | - The severe downside scenario has been adjusted to reflect risks of higher CPI inflation (7.5%) and UK Bank Rate (6.19%) in 2024, considering supply shocks as a principal concern[77] Supplementary Information This section provides reconciliations for alternative performance measures and lists important upcoming dates for investors Alternative Performance Measures (APMs) This section provides reconciliations for key Alternative Performance Measures (APMs), detailing the calculation for Banking Net Interest Margin (adjusting for non-banking items) and Return on Tangible Equity (adjusting for goodwill and intangibles) Banking Net Interest Margin (NIM) Calculation | Item | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Underlying net interest income (£ million) | 3,184 | 3,535 | | Remove non-banking interest expense (£ million) | 105 | 76 | | Banking underlying net interest income (£ million) | 3,289 | 3,611 | | Average interest-earning banking assets (£ billion) | 449.1 | 454.2 | | Banking net interest margin (%) | 2.95% | 3.22% | Return on Tangible Equity (RoTE) Calculation | Item | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Profit attributable to ordinary shareholders (£ million) | 1,069 | 1,510 | | Average tangible equity (£ billion) | 32.4 | 32.0 | | Return on tangible equity (%) | 13.3% | 19.1% | Key Dates and Contacts This section lists key upcoming dates for investors, including the Annual General Meeting on May 16, 2024, the final 2023 dividend payment on May 21, 2024, and the 2024 Half-year results announcement on July 25, 2024, along with contact information Upcoming Key Dates | Event | Date | | :--- | :--- | | Annual General Meeting | 16 May 2024 | | Final 2023 Dividend Paid | 21 May 2024 | | Group Strategy Update: Business & Commercial Banking | 27 June 2024 | | 2024 Half-year Results | 25 July 2024 | | Q3 2024 Interim Management Statement | 23 October 2024 |