Lloyds Banking Group plc (LON:LLOY) today provided its Q1 2018 Interim Management Statement.
Strong financial performance with significant increase in profit and returns on a statutory and underlying basis
· Statutory profit before tax of £1.6 billion, 23 per cent higher, with return on tangible equity increasing to 12.3 per cent, reflecting improved underlying profit and lower below the line items
· Net income at £4.3 billion, 4 per cent higher, with net interest margin increasing to 2.93 per cent
· Cost:income ratio further improved to 47.8 per cent with positive jaws of 9 per cent
· Asset quality remains strong with an asset quality ratio of 23 basis points
· Balance sheet strength maintained with strong CET1 capital increase of 50 basis points in the quarter and CET1 ratio of 14.4 per cent pre 2018 dividend accrual1
· Tangible net assets per share higher at 52.3 pence2, driven by strong statutory profit
· Strong start to the year with no change to the financial targets for 2018
GROUP CHIEF EXECUTIVE’S STATEMENT
In the first three months of 2018 we have again delivered strong financial performance with increased profits and returns, a significantly reduced gap between underlying and statutory profit and a strong increase in capital. These results continue to demonstrate the strength of our business model. In March, following our 2017 results and dividends announcement, we commenced our share buyback programme of up to £1 billion.
The UK economy continues to be resilient, benefiting from low unemployment and continued GDP growth. Asset quality remains strong with no deterioration seen across the portfolio. We expect the economy to continue to perform along these lines during 2018.
In February we announced our ambitious strategy to transform the Group into a digitised, simple, low risk, customer focused UK financial services provider. We have made a strong start to 2018 and have begun implementing the strategic initiatives which will further digitise the Group, enhance customer propositions, maximise our capabilities as an integrated financial service provider and transform the way we work.
1 Incorporates profits for the quarter, that remain subject to formal verification in accordance with the Capital Requirements Regulation.
2 After adjusting for IFRS 9.
António Horta-Osório
Group Chief Executive
REVIEW OF PERFORMANCE
Strong financial performance with significant increase in profit and returns on a statutory and underlying basis
Statutory profit before tax was up 23 per cent at £1,602 million and profit after tax was up 29 per cent at £1,147 million, both driven by a 6 per cent increase in underlying profit to £2,004 million and lower below the line items. The statutory return on tangible equity improved 3.5 percentage points to 12.3 per cent.
Net income of £4,330 million was 4 per cent higher than the first quarter of 2017 with an 8 per cent increase in net interest income, more than offsetting a 5 per cent decrease in other income, while operating lease depreciation increased 9 per cent mainly reflecting fleet growth in Lex Autolease.
Net interest income increased by £243 million to £3,171 million, largely reflecting a 13 basis point increase in the net interest margin to 2.93 per cent driven by the benefit from MBNA and lower deposit and wholesale funding costs, more than offsetting continued asset pricing pressure. Average interest-earning assets of £437 billion were up on prior year due to targeted business growth. Other income was £1,411 million with the decrease reflecting higher weather related insurance claims, lower bulk annuity business, transaction flows in Commercial Banking and the changes to overdraft charging which took effect in November, partly offset by continued growth in the Lex Autolease business.
Operating costs at £2,008 million increased 2 per cent, reflecting MBNA. Our market leading cost:income ratio improved further to 47.8 per cent with positive jaws of 9 per cent.
Credit quality across the portfolio remains strong. The asset quality ratio increased to 23 basis points largely due to the expected lower releases and write backs, the inclusion of MBNA and the non-recurrence of debt sales realised in the first quarter of 2017. The stable gross AQR of 27 basis points includes 3 basis points for MBNA.
Restructuring of £138 million included severance costs relating to the Group’s strategic investment plans, the rationalisation of the non-branch property portfolio, implementation of the ring-fencing requirements and MBNA integration costs. The increase in the volatility and other items line largely reflects the movements in equity markets and credit spreads in the quarter. The Payment Protection Insurance charge of £90 million comprises the increased costs in relation to the completion of the requirement under the Plevin ruling to proactively contact customers who have previously had their complaints defended.
Balance sheet strength maintained with strong increase in capital
Loans and advances to customers were adjusted on adoption of IFRS 9, resulting in around £11.5 billion reduction to £444 billion primarily due to the reclassification of certain assets. After this adjustment, loans and advances to customers increased slightly in the quarter to £445 billion with continued growth in targeted segments, including £0.3 billion in SME and £0.3 billion in motor finance, while the open mortgage book of £267 billion remained in line with year end 2017. The loan to deposit ratio was slightly up at 108 per cent.
The CET1 ratio has strengthened to 14.4 per cent before dividend accrual with an increase of 50 basis points in the quarter primarily driven by strong statutory profit after tax. After accruing for dividends the CET1 ratio remains strong at 14.1 per cent. The Group remains well positioned to meet its Minimum Requirement for Own Funds and Eligible Liabilities (MREL) from 2020 and, as at 31 March 2018, had a transitional MREL ratio of 27.4 per cent. The UK leverage ratio reduced to 5.3 per cent. Tangible net assets per share increased to 52.3 pence after adjusting the December position for the implementation of IFRS 9.
