Lloyds Banking Group plc (LON:LLOY) together with its subsidiaries released results for the year ended 31 December 2018.
RESULTS FOR THE FULL YEAR
‘2018 has been a year of strong strategic and financial delivery, as we build on our unique capabilities to transform the Group to succeed in a digital world. We have made significant progress against the priorities we set out at the start of the year when we launched the third stage of our strategic plan, which is supported by investment of more than £3 billion over the plan period. We have also delivered another year of increased statutory profits and returns along with strong capital build and, as a result, have been able to recommend an increased dividend and share buyback to our investors.
Over 2018 the UK economy has proven itself to be resilient with record employment and continued GDP growth. Although the near term outlook for the UK economy remains uncertain, our strategy continues to deliver for our customers. I remain confident that with our unique business model and market leading efficiency we can continue to increase investment in customer propositions and grow our leading digital bank, whilst at the same time delivering strong financial performance and market leading returns.
Our strategy is framed by our purpose of Helping Britain Prosper, being the bank with the largest retail and commercial presence throughout the country. In 2018 we continued to grow our lending balances to SMEs and Mid Market businesses by £3 billion; we have helped one in five first time buyers by lending £12 billion, we have provided digital skills training to more than 700,000 people, SMEs and charities alongside further investment in apprenticeship schemes and were again the UK’s largest corporate tax payer.’
António Horta-Osório
Group Chief Executive
Significant business progress with strong start to the Group’s latest strategic plan
· Strong start to the next phase of our strategy with increased strategic investment
· Achievements during the year include the launch of Open Banking, Single Customer View, Lloyds Bank Corporate Markets, the wealth management partnership with Schroders and enhanced customer propositions
· The Group will continue to Help Britain Prosper whilst delivering strong and sustainable returns for shareholders
Strong and sustainable financial performance with continued growth in profit and returns
· Statutory profit after tax of £4.4 billion up 24 per cent with a 6 per cent increase in underlying profit to £8.1 billion
· Total ordinary dividend of 3.21 pence per share, up 5 per cent on 2017, and a proposed share buyback of up to £1.75 billion representing a total capital return of up to £4.0 billion (2017: £3.2 billion), increase of up to 26 per cent
· Net income of £17.8 billion, 2 per cent higher, with net interest margin higher at 2.93 per cent
· Operating costs down on prior year despite increased investment; cost:income ratio further improved to 49.3 per cent with positive jaws of 5 per cent
· Credit quality remains strong with no deterioration in credit risk; gross asset quality ratio remains stable at 28 basis points, in line with full year 2017 and 2016
· Return on tangible equity increased to 11.7 per cent and earnings per share of 5.5 pence up 27 per cent
· Balance sheet strength maintained with capital build of 210 basis points in the year and CET 1 ratio of 13.9 per cent after dividends and share buybacks
· Tangible net assets per share of 53.0 pence, up 1.3 pence after the payment of dividends in the year
Guidance demonstrates confidence in continued strong performance
· Continue to expect increased statutory return on tangible equity of 14 to 15 per cent in 2019 with strong underlying profit and lower below the line charges driving statutory profit growth
· Ongoing capital build of 170 to 200 basis points per annum
· Net interest margin of c.2.90 per cent in 2019 and, as previously guided, resilient through the plan period
· Operating costs now expected to be less than £8 billion in 2019; a year ahead of original target, cost:income ratio still expected to fall every year and be in the low 40s exiting 2020 including remediation
· Net asset quality ratio expected to be less than 30 basis points in 2019 and through the plan period
Financial performance
Statutory profit after tax of £4.4 billion was 24 per cent higher than 2017 and earnings per share at 5.5 pence per share was 27 per cent higher. This was driven by improved underlying profit including lower remediation charges and we continue to narrow the gap between underlying and statutory profit, a trend we expect to continue as statutory profits increase further. As a result of this performance the Group has delivered a further increase to our return on tangible equity, which is now a market leading 11.7 per cent. Underlying profit of £8.1 billion increased 6 per cent, reflecting growth in income and lower costs, partly offset by the expected increase in the impairment charge. Our relentless focus on cost efficiency led to a reduction in operating costs despite increased strategic investment, and our cost:income ratio improved further to 49.3 per cent. Asset quality remains strong with the Group’s gross asset quality ratio remaining flat at 28 basis points, while the net asset quality ratio increased to 21 basis points, from 18 basis points, driven by expected lower releases and write-backs.
The Group’s loans and advances were stable at £444 billion with growth in targeted segments including SME, Mid Markets and consumer lending offset by the sale of the £4 billion Irish mortgage portfolio in the first half of 2018. The Group’s capital position remains strong with a pro forma CET1 ratio of 13.9 per cent after allowing for ordinary dividends and the share buyback.
Given the Group’s capital build of 210 basis points in the year, the Board has recommended a final ordinary dividend of 2.14 pence per share, bringing the total ordinary dividend for the year to 3.21 pence per share. This represents an increase of 5 per cent on 2017 and is in line with our progressive and sustainable ordinary dividend policy. In addition, the Board has announced its intention to implement a share buyback programme of up to £1.75 billion, equivalent to 2.46 pence per share, up 76 per cent from last year.
Strategic progress
In February 2018, we launched the third stage of our strategic plan with an increased strategic investment of more than £3 billion over the three year plan period, building on our unique competitive advantages, to transform the Group to succeed in a digital world. Over the first year of the plan we have delivered significant progress against our strategic priorities.
Leading customer experience
We continue to believe that a multi-brand, multi-channel strategy is the best approach to meet customers’ evolving needs. We are the UK’s largest digital bank, with 15.7 million digitally active customers, and in 2018 have launched API-enabled Open Banking aggregation functionality as well as enhanced security and anti-fraud features. Although we continue to see increased use of digital channels, which now accounts for 74 per cent of our sales, we remain committed to maintaining the UK’s largest branch network, with one out of five branches in the country, whilst tailoring it to meet customers’ complex needs more effectively. In the year we opened our flagship Halifax branch, increased our mobile branch fleet to 44 and extended our remote advice coverage to 270 branches. We are also delivering increasingly targeted customer propositions, having recently launched our new Lend a Hand mortgage. The success of our multi-channel, multi-brand approach is reflected in our net promoter score which increased to 62 in the year and is up c.50 per cent from 2011.
Digitising the Group
We have increased investment in technology which now represents 16 per cent of operating costs, with over two-thirds relating to enhancing existing capabilities and creating new ones. This has driven operational efficiencies and improved the experience of customers and colleagues. We are adopting new technologies, introducing machine learning and creating approximately 780,000 hours of additional colleague capacity through the use of robotics for simple repetitive tasks. We have also made targeted investments in public and private cloud solutions, which will deliver more efficient and scalable infrastructure going forward, whilst collaborating with fintechs to accelerate the digital transformation of the business, as part of our broader innovation strategy.
Maximising the Group’s capabilities
In 2018 we launched Single Customer View; a unique capability already enabling over 3 million customers to view in one place the pension and insurance products they hold with the Group alongside their banking products. We have expanded our workplace pensions and savings offering to over 2 million customers and have seen net inflows of £13 billion into our financial planning and retirement propositions. We have also strengthened our client relationship model and improved online functionality for Commercial Banking clients. Our Schroders partnership announced in October is a key part of our strategy to accelerate growth in Wealth by leveraging our multi-channel customer reach and Schroders’ investment expertise, with the aim of becoming a top three UK financial planning business within five years.
Transforming ways of working
We recognise that our colleagues are critical to the success of our transformation and are therefore making our biggest ever investment in our people. In 2018 we have increased training hours by over 50 per cent, including more than 1 million hours dedicated to developing skills of the future. We have also introduced more modern collaborative working environments, simplified people processes by replacing several HR systems with a single platform and developed a new performance management system ‘Your Best’, which launched in January 2019. We are also transforming the way in which change is delivered with 15 per cent of teams now using Agile methodologies.
Helping Britain Prosper Plan
The Group’s success is intertwined with the UK’s prosperity and we acknowledge we have a responsibility to help address the economic, social and environmental challenges the country faces. We do this through our Helping Britain Prosper Plan, which was simplified and updated in 2018 to support our three year strategy and focus on metrics that have the most impact on people, businesses and communities.
During 2018 we lent over £12 billion to first time buyers and increased lending to SME and Mid Market businesses by £3 billion to Help Britain Prosper and have committed to lending up to £18 billion in 2019 to businesses as part of our continued support for the UK economy. We have also provided digital skills training for more than 700,000 individuals, SMEs and charities, and supported over 3,000 charities through our independent charitable Foundations.
In 2018, the Group became the first FTSE 100 company to set a public target to increase representation of Black, Asian and Minority Ethnic (BAME) colleagues, committing to 8 per cent of senior management and to 10 per cent of the total workforce by 2020. At the end of the year 6.4 per cent of senior management and 9.5 per cent of all colleagues were from BAME backgrounds.
In recognition of the importance the Group places on helping the UK transition to a low carbon economy, in 2019 we have included a specific sustainability metric in our Plan. This signals our commitment and is supported by a detailed sustainability strategy.
Outlook
Over 2018 the UK economy has proven itself to be resilient with record employment and continued GDP growth. Whilst the near term outlook for the UK economy remains unclear, we continue to believe that our simple, low risk business model will deliver strong financial performance and market leading returns with a resilient net interest margin, lower operating costs enabling increased investment, strong asset quality and lower remediation costs. Our guidance demonstrates our confidence in the business model and the future prospects of the Group:
· We are already delivering a market leading return on tangible equity and expect further improvement in 2019 to 14 to 15 per cent
· Capital build is expected to remain strong at 170 to 200 basis points per year with the Board’s view of our CET1 capital requirement remaining at around 13 per cent plus a management buffer of around 1 per cent. As a result we continue to expect to deliver progressive and sustainable ordinary dividends whilst maintaining the flexibility to return surplus capital to shareholders
· Our net interest margin is expected to be c.2.90 per cent in 2019 and, as previously guided, remain resilient through the plan period
· Our market leading efficiency continues to be a competitive advantage and we now expect operating costs to be less than £8 billion in 2019, a year ahead of the original target. We also continue to expect a cost:income ratio, including remediation costs, in the low 40s as we exit 2020, with improvements in this ratio every year
· Credit quality remains strong and, given our low risk business model and the significant portfolio improvements in recent years, we expect an asset quality ratio of less than 30 basis points in 2019 and the rest of the plan period
Summary
Framed by our purpose to Help Britain Prosper, the Group has again delivered a strong customer experience and financial performance in 2018 whilst making significant progress in building new capabilities to transform the Group to succeed in a digital world. While the year ahead will bring its own challenges, given the ongoing economic and political uncertainty, I continue to believe that our simple, low risk business model is the right one. Our current strategic plan for 2018 to 2020, with continued strong investment, will further improve customer propositions and grow our leading digital bank as part of our multi-channel strategy, while continuing to provide leading and sustainable returns to our shareholders.
