LLOYDS BANKING GROUP plc 2012 half-year results

'These half-year results show a continuation of what we delivered in the first quarter: significant balance sheet reshaping and another resilient performance against a backdrop of economic challenges and a lack of public confidence in our industry.  We are on track to deliver our strategic aims and we are making significant progress with our financial targets.  We are building a stronger and safer Group: one with a more robust balance sheet, lower exposure to risk and with lower operating costs.  This is enabling us to increase our support to UK households, businesses and communities.

 

To realise our full potential, we must deal with various issues from the past that continue to affect us.  The mandated branch divestment, Verde, is a legacy issue and I'm pleased that we have come to an agreement with The Co-operative Group plc that will establish them as an effective competitor in the UK banking market.  The deal provides certainty for our shareholders and I also believe that the Co-operative will be a good home for our customers and colleagues. Mis-sold Payment Protection Insurance policies are an industry legacy issue but by redressing those affected quickly we continue to do the right thing for our customers.  We will tackle issues from the past in a way that will, in the long run, allow us to earn back customer trust and confidence.

 

Lloyds Banking Group is a very different organisation to our main competitors.  We will continue to demonstrate that in our actions and our words.  We believe there is real competitive advantage in moving faster to become a ring fenced UK retail and commercial bank, and this will be another important step toward providing sustainable returns for our shareholders and support to our customers and communities.  By doing that we will return the bank to profitability and that will ultimately give taxpayers the opportunity to get their money back.'

 

 

 

 

António Horta-Osório

Group Chief Executive

 

 

KEY HIGHLIGHTS

FURTHER GOOD PROGRESS ON STRATEGIC INITIATIVES AND RISK REDUCTION

·     Balance sheet further strengthened: Group loan to deposit ratio reduced to 126 per cent (core: 103 per cent) and core tier 1 ratio increased to 11.3 per cent; funding position further strengthened, with wholesale funding decreasing by £37 billion in the first half; strong primary liquidity portfolio of £105 billion, covering more than twice our money market exposure of less than one year maturity of £44 billion.

·     Substantial progress in reshaping the business: non-core assets reduced £23 billion to £118 billion, ahead of expectations, and international presence reduced, having now announced disposal or exit from 10 countries.

·     Simplification savings on track: Simplification annual run-rate cost savings increased to £512 million.

·     Continued investment in core growth and new products and services: Group customer deposit growth of 6 per cent and SME net lending growth of 4 per cent year-on-year.

·     Signed heads of terms with The Co-operative Group on Verde.

·     Moody's short-term rating re-affirmed for Lloyds TSB Bank plc at P-1; long-term rating A2.

·     Management team further strengthened; appointed George Culmer, Andrew Bester and Cathy Turner.

 

RESILIENT UNDERLYING PERFORMANCE GIVEN CHALLENGING ENVIRONMENT

·     Management profit increased 6 per cent to £1,165 million.

·     Group underlying profit increased £715 million to £1,064 million, with fall in income more than offset by cost and impairment charge reductions.

·     Core underlying profit of £2,977 million, down £231 million, with benefit of lower costs and impairments mitigating the effect of lower income.

·     Group return on risk-weighted assets improved to 0.62 per cent from 0.18 per cent in the first half of 2011; core return on risk-weighted assets broadly stable at 2.48 per cent (from 2.50 per cent in the first half of 2011).

·     Group banking net interest margin of 1.93 per cent, down 19 basis points compared to the first half of 2011, mainly reflecting higher wholesale funding costs; resilient core banking net interest margin of 2.32 per cent, down 11 basis points.

·     Group total costs down 6 per cent with increased investment and inflation more than offset by Simplification savings.

·     Group impairment charge reduced 42 per cent, ahead of expectations, with further asset quality improvements, in spite of the difficult environment.

·     Statutory loss before tax of £439 million, including a further provision relating to costs of customer contact and redress on legacy Payment Protection Insurance business of £700 million in the second quarter, following an additional £375 million provision in the first quarter.

 

OUTLOOK AND GUIDANCE

·     On track to meet 2012 financial guidance, including for full year banking net interest margin to fall year-on-year by approximately the same amount in 2012 as in 2011.  Assuming current economic trends continue, expect the 2012 impairment charge to be lower than previous guidance.

·     Expect achievement of long-term Group loan to deposit ratio target of 120 per cent by end Q1 2013.

·     Now expect non-core assets to reduce to below £70 billion by the end of 2014; non-core reporting to cease at that time.

·     Increasing clarity on regulatory framework to provide greater certainty to operating environment and recent changes supportive of economic growth; working to accelerate adoption of ring-fence given aligned business model.

 

·     Believe that we can create competitive advantages through a lower risk premium and best-in-class efficiencies and therefore remain confident that our medium-term financial targets are achievable over time.

SUMMARY OF RESULTS

 

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Management basis (note 1, page 84)
Total underlying income, net of insurance claims		9,246		11,103		(17)		9,943
Total costs		(5,025)		(5,332)		6		(5,289)
Impairment		(3,157)		(5,422)		42		(4,365)
Underlying profit		1,064		349				289
Management profit		1,165		1,104		6		1,581
Banking net interest margin1		1.93%		2.12%				2.01%
Average interest-earning banking assets		£553.2bn		£596.5bn		(7)		£574.4bn
Cost:income ratio2		54.3%		48.0%				53.2%
Impairment as a % of average advances3		1.10%		1.77%				1.46%
Return on risk-weighted assets4		0.62%		0.18%				0.16%
Management basis - core
Total underlying income, net of insurance claims		8,602		9,704		(11)		9,061
Total costs		(4,647)		(4,860)		4		(4,822)
Impairment		(978)		(1,636)		40		(1,251)
Underlying profit		2,977		3,208		(7)		2,988
Management profit		2,715		2,866		(5)		3,483
Banking net interest margin1		2.32%		2.43%				2.40%
Average interest-earning banking assets		£426.5bn		£445.9bn		(4)		£431.6bn
Cost:income ratio2		54.0%		50.1%				53.2%
Impairment as a % of average advances3		0.44%		0.72%				0.56%
Return on risk-weighted assets4		2.48%		2.50%				2.40%
Statutory results
Statutory loss before tax		(439)		(3,251)				(291)
Statutory loss per share		(1.0)p		(3.4)p				(0.7)p

 

1	The calculation basis for banking net interest margins is set out in note 2 on page 87.
2	Total costs divided by total underlying income net of insurance claims.
3	Impairment on loans and advances to customers divided by average loans and advances to customers, excluding reverse repurchase transactions, gross of allowance for impairment losses.
4	Underlying profit (annualised on day count basis) divided by average risk-weighted assets.

 

SUMMARY OF RESULTS (continued)

 

Capital and balance sheet		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011  %
Statutory
Loans and advances to customers1		£534.4bn		£565.6bn		(6)
Customer deposits2		£423.2bn		£413.9bn		2
Loans and advances excluding reverse repos		£528.6bn		£548.8bn		(4)
Customer deposits excluding repos		£419.1bn		£405.9bn		3
Loan to deposit ratio3		126%		135%
Funded assets		£555.8bn		£587.7bn		(5)
Wholesale funding		£213.8bn		£251.2bn		(15)
Wholesale funding >1 year maturity		£140.5bn		£137.9bn		2
Wholesale funding <1 year maturity		£73.3bn		£113.3bn		(35)
Primary liquid assets		£105.0bn		£94.8bn		11
Risk-weighted assets		£332.5bn		£352.3bn		(6)
Core tier 1 capital ratio		11.3%		10.8%
Net tangible assets per share		57.4p		58.6p
Leverage ratio		18 times		17 times
Core
Loans and advances to customers excluding reverse repos		£428.5bn		£437.0bn		(2)
Customer deposits excluding repos		£415.9bn		£401.5bn		4
Loan to deposit ratio3		103%		109%
Risk-weighted assets		£239.1bn		£243.5bn		(2)
Non-core
Total non-core assets		£117.5bn		£140.7bn		(16)
Risk-weighted assets		£93.4bn		£108.8bn		(14)

 

1	Includes reverse repos of £5.8 billion (31 December 2011: £16.8 billion).
2	Includes repos of £4.1 billion (31 December 2011: £8.0 billion).
3	Loans and advances to customers (excluding reverse repos) divided by customer deposits (excluding repos).

GROUP CHIEF EXECUTIVE'S STATEMENT

 

In the first half of the year, we delivered a resilient underlying performance in a challenging environment, with higher Group underlying profits and returns, and continued to make good progress on our strategy to be the best bank for customers, focused on our strong UK retail and commercial franchises. 

 

We continued to strengthen our balance sheet, while reshaping the business through reducing non-core assets, delivering increased savings from our Simplification programme, and continuing to invest in growing our core business. 

 

We also continued to take action to resolve our legacy issues and during the half year announced that we had agreed non-binding heads of terms for the sale to The Co-operative Group plc of the mandated retail and commercial divestment known as Verde, and further increased our provision in relation to the costs of Payment Protection Insurance (PPI) contact and redress.

 

We further strengthened the Group's senior management team to deliver our strategic objectives and the next phase of the Group's transformation with three appointments to key roles, welcoming George Culmer as Group Finance Director, Cathy Turner as Chief Administrative Officer, and Andrew Bester as Chief Executive, Wholesale.

 

Results overview

We made further good progress on strengthening our balance sheet and reducing risk, and delivered a resilient underlying performance in a challenging environment.  Group returns improved with Group underlying pre-tax return on risk-weighted assets increasing to 0.62 per cent from 0.18 per cent in the first half of 2011, while core returns were broadly stable at 2.48 per cent (from 2.50 per cent in the same period in 2011).

 

The continued good progress we made on the balance sheet was reflected in the further improvement in key balance sheet ratios, in a further substantial reduction in non-core assets, and in our strong liquidity and funding position.  Our core tier 1 ratio improved to 11.3 per cent from 10.8 per cent at 31 December 2011.  The Group loan to deposit ratio reduced to 126 per cent from 135 per cent at 31 December 2011, and in the core business fell to 103 per cent from 109 per cent at 31 December 2011.

 

We further reduced risk through achieving a substantial £23 billion reduction of non-core assets to £118 billion, maintained a strong liquidity position, including £105 billion of primary liquid assets, and continued to strengthen our funding position, by reducing wholesale funding by £37 billion, completing our 2012 funding programme and by delivering further growth in customer deposits (excluding repos) of 3 per cent in the half year (6 per cent over the last year) through our multi-brand strategy.

 

The substantial progress we are making in reducing risk and delivering on our strategic initiatives was reflected in the outcome of Moody's Investors Service (Moody's) rating review of Lloyds TSB Bank plc, which was part of a rating review across 114 financial institutions.  Moody's confirmed that Lloyds TSB Bank plc's short-term Prime-1 rating remained unchanged, while the longer-term senior debt and deposit ratings were lowered by only one notch to A2 from A1.

 

Group underlying profit increased by £715 million to £1,064 million, due to the benefits of the actions we have taken to reduce costs and the impairment charge, which offset a reduction in underlying income.  When compared to the first half of 2011, Group total costs fell 6 per cent, principally driven by further savings from our Simplification programme, and impairment reduced 42 per cent, from the continued application of our prudent risk appetite and strong risk management controls resulting in improved portfolio and new business quality.  Underlying income, net of insurance claims, reduced by 17 per cent compared to the same period in 2011, driven mainly by further non-core asset reductions and subdued demand for new lending, and by a lower banking net interest margin, which declined as expected by 19 basis points to 1.93 per cent mainly as a result of higher wholesale funding costs.

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

 

Our core business delivered a resilient underlying performance given the challenging environment, with return on risk-weighted assets broadly stable at 2.48 per cent.  Underlying profit was down 7 per cent to £2,977 million, as a result of underlying income falling 11 per cent to £8,602 million, with core margin reducing by 11 basis points to 2.32 per cent, and subdued demand resulting in core loans and advances declining by 2 per cent compared to the first half of 2011.  These effects were only partly offset by a substantial reduction of 40 per cent in the impairment charge and a 4 per cent reduction in total costs.

 

Our statutory results included a further provision for contact and redress in relation to legacy PPI business totalling £1,075 million in the half year as a result of an increase in the volume of complaints being received, and the costs of our Simplification programme and the Verde disposal of £513 million.  As a result, the Group reported a loss before tax of £439 million in the half year.

 

Further good progress on strategic initiatives

In addition to further strengthening our balance sheet, we continued to make further good progress in the first half of 2012 on the execution of the other elements of our strategic plan to be the best bank for our customers.

 

In reshaping our business portfolio, the rigorous controls we have put in place over the risk profile of all new business have delivered improving credit quality trends across the Group.  This helped to achieve a further reduction in the impairment charge across all divisions when compared to the first half of 2011 and therefore a reduction in the Group charge of 42 per cent to £3,157 million.

 

As well as further reducing our non-core assets, we have made further good progress in reducing our international presence, having now announced the disposal or exit from 10 countries.  In addition, during the first half of 2012 we have announced a reduced presence in a further three locations.

 

The improving quality of our portfolios and their decreasing risk profile, has also been reflected in a 6 per cent decrease in risk-weighted assets when compared to December 2011.

 

Our Simplification programme is now well under way and is showing strong momentum in streamlining operations and processes, delayering management structures, consolidating supplier relationships and increasing efficiency.  As a result we increased the annual run-rate cost savings achieved under the programme by £270 million in the first half, bringing the annual run-rate at the end of June 2012 to £512 million.  We remain on track to deliver annual run-rate cost savings of £1.9 billion by the end of 2014.

 

Our customers are also benefiting from simpler processes and products, and these benefits are in turn helping to improve customer advocacy and customer acquisition and retention.  Notable examples include our current account switching service, which has been awarded a 4 star rating by Defaqto, our new digital technologies in Retail and in Wholesale, and the pilot of our new lending process in Commercial which has halved the time to fulfil lending for our SME customers.

 

We have continued to invest to grow our core customer businesses using a proportion of the savings realised from our Simplification programme.  While the overall environment remains subdued, we have continued to strengthen our franchise and deepen our customer relationships through the launch of new products and services.

 

In Retail, we have capitalised on our multi-brand strategy by further developing our key relationship brands, Halifax, Lloyds TSB and Bank of Scotland, with new products launched, and over 200 Lloyds TSB branches now refurbished.  Notable product and service successes have included the Halifax Savers' Prize Draw with over 900,000 customer registrations received, our internet banking service which now has nine million active users, and our mobile banking apps which now have two and a half million active users.

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

 

In Wholesale, we have made the strongest improvement of any UK bank in relationship quality with our customers over the last 12 months (as reported by Greenwich Associates), driven by improving coverage and product capabilities, although we started from a low baseline.  These product capabilities include our Arena platform, for which over 2,000 customers have now signed up, and our capital markets franchise which has increased its league table positions and enhanced its market shares in Corporate Sterling and Corporate Euro (Investment Grade) debt capital markets.

 

In Commercial, our commitment to support our SME customers through developing an integrated SME proposition resulted in a year-on-year increase in core loans and advances to customers of 4 per cent (as described in more detail below), and in June we launched the Guardian 'Small Business Network' to encourage start-up businesses, and provide access to expertise on exporting to new markets, improving cash flow management and winning new business.

 

Insurance is focusing on simplifying service and claims processes and has implemented a new organisational design allowing greater flexibility in responding to the changing market place to ensure it is better placed to serve customer needs ahead of the Retail Distribution Review (RDR) coming into effect from 1 January 2013.  Insurance is supporting the Group strategic initiative to build lasting relationships with our bancassurance customers through the introduction of new advice models, enhanced products and access to new direct channels, and has further enhanced its Protection for Life plan through the addition of the new Essential Earnings Cover (EEC) products.

 

In Wealth, Asset Finance and International, significant investment is being made in developing compelling propositions for affluent and high net worth customers, a key growth opportunity.  In the first half, we saw a 3 per cent increase in customer numbers in the affluent proposition in the UK franchise, while we are further improving customer experience by simplifying customer processes.

 

Further details on the progress we have made against our strategic initiatives in each business are given in each of the divisional reviews.

 

Supporting our customers and helping the UK prosper

We continue to actively support sustainable growth in the UK economy through the focused range of products and services we provide to our business and personal customers, as well as through partnerships we have built with industry and Government.

 

In support of the SME sector, the Group is on track to exceed its SME Charter commitment of £12 billion of lending in 2012 through the core Commercial business, and has now increased this commitment by £1 billion given the benefit of the UK Government's Funding for Lending Scheme.  This will be supported by at least 200 customer networking events which we expect to be a key platform for recruitment and customer support.  Commercial's core net lending balance growth of 4 per cent compares favourably with the continued contraction of SME lending across the industry reported by the Bank of England.

 

Commercial encourages enterprise by helping people start in business and has supported over 64,000 start-up businesses already in 2012 making a total of over 292,000 towards our three year commitment to help 300,000 businesses.  More than 300 members of Lloyds Banking Group's staff are now trained as mentors to businesses from pre-start up to growth, and social enterprises.

 

For our Retail customers, we are committed to supporting the UK housing market and first-time buyers in particular.  Our new mortgage lending continued to be focused on home purchase with over 70 per cent of lending being for house purchase rather than re-mortgaging.  Retail remains the UK's largest lender to first-time buyers, helping over 25,000 customers buy their first home in the first half of 2012, supported by a number of propositions including NewBuy, stamp duty and local lend-a-hand schemes.

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

 

Further reducing customer complaints

We have committed to reduce banking complaints per 1,000 accounts to 1.3 by the end of 2012, and are making good progress towards our complaint reduction target, having achieved 1.4 complaints per 1,000 accounts in the half year.  We achieved an 18 per cent reduction in our FSA reportable complaints (excluding PPI) compared to the first half of 2011, and reduced our banking complaints by 21 per cent in the same period.  This has been achieved primarily through implementation of initiatives to remove the causes of complaints, including ensuring that our telephone banking teams now have the ability to see all details of earmarked transactions on a customer's account.  We have also made it easier for our customers to complain by launching a new online complaint form for our three major brands.  We expect to continue to improve the customer experience in the second half of 2012 and achieve our complaint reduction target of 1.3 banking complaints per 1,000 accounts by the end of the year.

 

Awards for our products and services

We received a number of external awards in the first half recognising our products and services, and the support we provide to our customers.

 

We were awarded 'Bank of the Year' for the eighth consecutive year at the FDs' Excellence Awards (in association with the Institute of Chartered Accountants in England and Wales and supported by the CBI), underlining the strength of our relationships with, and the support we give to, our business customers.

 

The improvements we are making in our products for business customers were also recognised, inter alia, at the Euroweek Bond Awards 2012, where we won the 'Most Improved Corporate Debt Capital Markets Team' award, and at the Business Moneyfacts Awards 2012, where Arena won the 'Best Innovation in the SME Finance Sector' award, while Scottish Widows was awarded 'Best Group Pension Provider' in the Corporate Adviser awards and 'Best Personal Pensions Provider' in the Professional Adviser Awards.

 

Heads of terms signed on EC mandated retail business disposal (Project Verde)

After the half year end, we announced that we had agreed non-binding heads of terms with The Co-operative Group plc for the mandated retail and commercial divestment known as Verde, providing greater certainty for our customers and for our shareholders, and allowing us to share in the future financial performance of the Co-operative Group's combined banking business which will be an effective challenger in the market with a strong customer focus.

 

We will continue to work with the Co-operative to agree a sale and purchase agreement, with completion of the divestment expected by the end of November 2013, and, having had constructive discussions on the transaction with the relevant governmental and regulatory bodies, we will now seek formal approval for the terms of the divestment.

 

Further detail on the Verde business and the heads of terms are given in the Group Finance Director's review on page 25 of this announcement.

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

 

Payment Protection Insurance (PPI) provision

During 2012 there has been an increase in the volume of complaints being received in relation to legacy PPI business.  As a result, the Group increased its provision by a further £700 million during the second quarter of 2012, following a £375 million increase in the first quarter, to cover the anticipated redress in relation to these increased volumes.  This increases the total estimated cost of redress to £4,275 million.

 

There are still a number of uncertainties as to the eventual costs from any such contact and redress given the inherent difficulties of assessing the impact of the detailed implementation of the Policy Statement for all PPI complaints, uncertainties around the ultimate emergence period for complaints, the availability of supporting evidence and the activities of claims management companies, all of which will significantly affect complaints volumes, uphold rates and redress costs.  Further detail is given in note 21 on page 175.

 

Equity dividends

We remain committed to recommencing progressive dividend payments, when the financial position of the Group and market conditions permit, and after regulatory capital requirements are defined and prudently met.

 

Our capital position continues to strengthen, with our core tier 1 capital ratio increased by 0.5 per cent in the first half to 11.3 per cent, and by 0.6 per cent to an indicative 7.7 per cent on a fully loaded Basel 3 basis, while our total capital increased by 1.0 per cent to 16.6 per cent.

 

Outlook

As outlined at our 2011 full year results, we continue to believe that, while the outlook for the UK economy remains subdued and also vulnerable to developments in the Eurozone, the most likely scenario is for a relatively flat economy in the second half of this year with a progressive recovery in 2013.  As a result, our assumptions for UK base rates, inflation and property prices remain broadly unchanged.

 

Our operating model positions us well to deliver in the new external environment.  Our strategy is enabling us to deliver improved Group underlying results and resilient returns in our core business, even in this challenging environment.  We have built a solid foundation for growth, with a strengthened balance sheet, reduced risk, improved efficiency and lower costs.  This is now providing us with greater commercial flexibility and increases our options for growth.  We also expect that recent regulatory changes, such as a growth agenda, and the Funding for Lending scheme, will help us support economic growth and we believe that we are well positioned for the changes expected from the banking reform White Paper, given our capital strength and the alignment of our business model with the White Paper's ring-fencing goals.

 

In the remainder of 2012, therefore, we expect a continued resilient underlying business performance and remain on track to meet the 2012 financial guidance we set out in our full year 2011 results in February, including for banking net interest margin to fall year-on-year by approximately the same amount in 2012 as in 2011.  Moreover, following a better than expected performance in the first half, and assuming current economic trends continue, we now anticipate that our 2012 impairment charge will be lower than our previous guidance in spite of decreasing non-core assets by more than originally anticipated.  We are also targeting achievement of a long-term loan to deposit ratio of 120 per cent by end Q1 2013, and now expect our non-core assets to reduce to below £70 billion by the end of 2014, with non-core reporting to cease at that time.

 

We believe that we can create competitive advantages through attaining a lower risk premium and best-in-class efficiency and therefore we remain confident that our medium-term financial targets are achievable over time, and that we are well positioned to realise the Group's full potential for growth from our strategy of being a simple, customer-focused UK retail and commercial bank.

 

 

António Horta-Osório

Group Chief Executive

MANAGEMENT BASIS INFORMATION

 

The analysis and commentary set out on pages 11 to 89 is presented on a management basis as defined on the inside front cover.  Within the management income statement the profit or loss arising from asset sales, volatile items, liability management actions and fair value unwind are each shown on one line.  The accelerated unwind of fair value resulting from asset sales is included within the asset sales line.  Comparatives have been restated accordingly.

 

	Page
Consolidated income statement	11
Management basis consolidated core and non-core income statements	12
Summary consolidated balance sheet	13
Group Finance Director's review of financial performance	14
Management basis segmental analysis	26
Divisional performance
Retail	29
Wholesale	35
Commercial	43
Wealth, Asset Finance and International	49
Insurance	61
Group Operations	69
Central items	71
Core and non-core business analysis	72
Quarterly management basis information	81
Additional information on a management basis	84
Basis of preparation of management basis information	84
Banking net interest margin	87
Volatility arising in insurance businesses	88
Number of employees (full-time equivalent)	89

 

CONSOLIDATED INCOME STATEMENT

 

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Half-year  to 31 Dec  2011
		£ million		£ million		£ million
Net interest income		5,215		6,355		5,855
Other income		4,264		4,946		4,233
Insurance claims		(233)		(198)		(145)
Total underlying income, net of insurance claims		9,246		11,103		9,943
Total costs		(5,025)		(5,332)		(5,289)
Impairment		(3,157)		(5,422)		(4,365)
Underlying profit		1,064		349		289
Effects of asset sales, volatile items and liability management		(56)		(264)		1,105
Fair value unwind		157		1,019		187
Management profit		1,165		1,104		1,581
Volatility arising in insurance businesses		(24)		(177)		(661)
Simplification, EC mandated retail business disposal costs and Integration		(513)		(689)		(763)
Payment protection insurance provision		(1,075)		(3,200)		-
Past service pensions credit		250		-		-
Amortisation of purchased intangibles		(242)		(289)		(273)
Provision in relation to German insurance business litigation		-		-		(175)
Loss before tax - statutory		(439)		(3,251)		(291)
Taxation		(202)		973		(145)
Loss for the period		(641)		(2,278)		(436)
Loss per share		(1.0)p		(3.4)p		(0.7)p

 

 

 

MANAGEMENT BASIS CONSOLIDATED Core and non-core INCOME STATEMENTS

 

Core		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Half-year  to 31 Dec  2011
		£ million		£ million		£ million
Net interest income		4,948		5,536		5,357
Other income		3,887		4,366		3,849
Insurance claims		(233)		(198)		(145)
Total underlying income, net of insurance claims		8,602		9,704		9,061
Total costs		(4,647)		(4,860)		(4,822)
Impairment		(978)		(1,636)		(1,251)
Underlying profit		2,977		3,208		2,988
Effects of asset sales, volatile items and liability management		-		(245)		1,026
Fair value unwind		(262)		(97)		(531)
Management profit		2,715		2,866		3,483
Banking net interest margin		2.32%		2.43%		2.40%
Cost:income ratio		54.0%		50.1%		53.2%
Impairment as a % of average advances		0.44%		0.72%		0.56%
Return on risk-weighted assets		2.48%		2.50%		2.40%
Non-core
Net interest income		267		819		498
Other income		377		580		384
Insurance claims		-		-		-
Total underlying income, net of insurance claims		644		1,399		882
Total costs		(378)		(472)		(467)
Impairment		(2,179)		(3,786)		(3,114)
Underlying loss		(1,913)		(2,859)		(2,699)
Effects of asset sales, volatile items and liability management		(56)		(19)		79
Fair value unwind		419		1,116		718
Management loss		(1,550)		(1,762)		(1,902)
Banking net interest margin		0.60%		1.20%		0.81%
Impairment as a % of average advances		3.33%		4.87%		4.32%

 

The basis of preparation of the core and non-core income statements is set out on the inside front cover.

 

Non-core portfolios consist of non-relationship assets and liabilities together with assets and liabilities which are outside the Group's current risk appetite.

 

 

SUMMARY CONSOLIDATED BALANCE SHEET

 

		As at  30 June  2012		As at  31 Dec  2011
Assets		£ million		£ million
Cash and balances at central banks		87,590		60,722
Trading and other financial assets at fair value through profit or loss		145,626		139,510
Derivative financial instruments		58,347		66,013
Loans and receivables:
Loans and advances to customers		534,445		565,638
Loans and advances to banks		31,779		32,606
Debt securities		6,429		12,470
		572,653		610,714
Available-for-sale financial assets		32,810		37,406
Held-to-maturity investments		10,933		8,098
Other assets		53,412		48,083
Total assets		961,371		970,546

 

 

 

 

 

Liabilities
Deposits from banks		44,895		39,810
Customer deposits		423,238		413,906
Trading and other financial liabilities at fair value through profit or loss		37,424		24,955
Derivative financial instruments		50,153		58,212
Debt securities in issue		150,513		185,059
Liabilities arising from insurance and investment contracts		131,199		128,927
Subordinated liabilities		34,752		35,089
Other liabilities		42,568		37,994
Total liabilities		914,742		923,952
Total equity		46,629		46,594

 

 

GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE

 

Overview

In the first half of 2012, we made further good progress in strengthening our balance sheet and reducing risk, increased Group underlying profit, and delivered a resilient performance in the core business.  Our non-core business performance reflected the substantial asset reductions achieved in the half, while our statutory results were affected by further provisions for contact and redress costs in relation to legacy Payment Protection Insurance (PPI) business.

 

Balance sheet strengthened and risk further reduced

In line with our strategy, we made further good progress in strengthening our balance sheet and reducing risk by significantly reducing non-core assets by £23.2 billion to £117.5 billion, strengthening our core tier 1 capital ratio by 0.5 per cent to 11.3 per cent and increasing our primary liquidity portfolio to £105.0 billion.  The non-core asset reduction and further deposit growth of 3 per cent (excluding repos) in the half year (6 per cent year-on-year) have allowed us to further improve our funding position, with total wholesale funding reduced to £213.8 billion from £251.2 billion at the end of 2011, with funding with a maturity of less than one year representing less than 35 per cent of total wholesale funding, and money market funding with a maturity of less than one year representing 21 per cent.  We have also completed our 2012 term funding programme and have improved the maturity profile of our wholesale funding, such that 65.7 per cent of our wholesale funding now has a maturity of more than one year.  As part of reducing risk within the business, we have also made further progress towards addressing a number of legacy issues, including the Verde divestiture and PPI.

 

Improved Group underlying profitability

The Group delivered an underlying profit of £1,064 million, an increase of £715 million when compared to the first half of 2011.  This increase was primarily driven by a 6 per cent reduction in costs, mostly from Simplification savings, and substantially lower impairment (down 42 per cent, reflecting further asset quality improvements overall and our strong credit risk management approach and close management of the quality of new business), more than offsetting the 17 per cent fall in underlying income.

 

Resilient core business performance

The core business delivered a resilient performance.  Underlying profit was £2,977 million, with the core return on risk-weighted assets broadly stable at 2.48 per cent.  The movement of £231 million in underlying profit was driven mainly by a reduction incore underlying income of 11 per cent, reflecting subdued lending demand and continued customer deleveraging, partially mitigated by a further reduction in costs and the impairment charge.  Net interest margin declined by 11 basis points year-on-year, and 8 basis points in the first half of 2012.  This was mainly as a result of higher wholesale funding costs, mitigated by an improved funding mix, with the core loan to deposit ratio further reduced to 103 per cent, and the benefits of asset repricing.  The 4 per cent reduction in costs was principally as a result of Simplification savings, while the 40 per cent decrease in the impairment charge was driven by continued improvement in the quality of our portfolios.

 

Non-core results reflect asset reductions

The non-core loss of £1,913 million reflects the substantial reduction in non-core assets of £44.9 billion achieved since June 2011, and the impact of higher wholesale funding costs on net interest margin which fell by 60 basis points to 0.60 per cent given that the non-core portfolio is almost entirely wholesale funded.

 

Management and statutory results

Management profit, which incorporates the effects of asset sales, volatile items and liability management along with fair value unwind was £1,165 million in the first half of 2012, an increase of £61 million when compared to the first half of 2011.  Statutory loss before tax was £439 million in the first half of 2012, reflecting amongst other things, provisions in relation to legacy PPI business totalling £1,075 million and charges totalling £513 million, of which £274 million related to Simplification and £239 million to costs of the EC mandated retail business disposal.  Further detail on the reconciliation to management and statutory results is included on page 24.

 

 

 

GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Balance sheet

 

Improved capital ratios and further progress on balance sheet reduction

Our core tier 1 capital ratio increased to 11.3 per cent at the end of June 2012 (30 June 2011: 10.1 per cent), principally driven by a reduction in risk-weighted assets of £50.8 billion since 30 June 2011.  The total capital ratio improved to 16.6 per cent (30 June 2011: 15.0 per cent).

 

		As at  30 June  2012		As at  30 June  2011		Change  %		As at  31 Dec  2011		Change  %
Funded assets		£555.8bn		£612.0bn		(9)		£587.7bn		(5)
Risk-weighted assets		£332.5bn		£383.3bn		(13)		£352.3bn		(6)
Non-core assets		£117.5bn		£162.4bn		(28)		£140.7bn		(16)
Non-core risk-weighted assets		£93.4bn		£128.7bn		(27)		£108.8bn		(14)
Core tier 1 capital ratio		11.3%		10.1%				10.8%
Tier 1 capital ratio		13.0%		11.6%				12.5%
Total capital ratio		16.6%		15.0%				15.6%

 

Risk-weighted assets reduced by 6 per cent to £332.5 billion in the first half of 2012, driven by the reduction in our non-core asset portfolio, subdued demand for new lending, and continued improvements to the overall quality of our portfolios, partially offset by the application of revised regulatory rules relating to the Group's private equity (including venture capital) investments which are now risk-weighted rather than being deducted from total capital.  The removal of this deduction from total capital contributes to the improvement in the total capital ratio.

 

Total Group funded assets decreased to £555.8 billion from £612.0 billion at 30 June 2011, primarily driven by the reduction in our non-core asset portfolio, and continued customer deleveraging resulting from subdued demand in core lending markets.

 

The fall in non-core risk-weighted assets over the last year is in line with the asset reductions achieved and reflects the substantial decrease in risk we have achieved over this period.

 

We are pleased with the progress made on our balance sheet reduction plans, given challenging market conditions.  In the first half of 2012, we achieved a substantial reduction in the non-core portfolio of £23.2 billion, resulting in the portfolio at 30 June 2012 amounting to £117.5 billion.  This included reductions of £10.6 billion in treasury assets, £2.5 billion in UK commercial real estate and £5.2 billion in International assets of which £2.0 billion was in Ireland and £1.3 billion in Australasia.

 

 

GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Further strengthening our liquidity and funding position

The Group further enhanced its funding and liquidity position in the first half of 2012.  We saw continued growth in customer deposits (excluding repos), which increased by 3 per cent, reflecting good growth in both our Retail and Wealth, Asset Finance and International divisions.  Customer deposits (excluding repos) have grown by 6 per cent since 30 June 2011.

 

The Group has also made excellent progress in the first half of 2012 with respect to our term wholesale funding objectives with £19.5 billion of wholesale term issuance.  Adding this to the £1.7 billion of pre-funding in 2011 and the £4.7 billion benefit from 2011 liability management exercises, we have (as communicated in the Group's Q1 IMS) now completed our 2012 wholesale term issuance plan.  Looking ahead to 2013 we expect the Group's public term funding requirement to be less than £10 billion.

 

		As at  30 June  2012		As at  30 June  2011		Change  %		As at  31 Dec  2011		Change  %
Customer deposits1		£419.1bn		£394.9bn		6		£405.9bn		3
Wholesale funding		£213.8bn		£295.6bn		(28)		£251.2bn		(15)
Wholesale funding <1 year maturity		£73.3bn		£151.7bn		(52)		£113.3bn		(35)
Of which money market funding <1 year maturity		£44.4bn		£92.9bn		(52)		£69.1bn		(36)
Loan to deposit ratio2		126%		144%				135%
Core business loan to deposit ratio2		103%		114%				109%
Government facilities		£4.9bn		£37.1bn		(87)		£23.5bn		(79)
Wholesale funding >1 year maturity		66%		49%				55%
Primary liquid assets		£105.0bn		£100.9bn		4		£94.8bn		11

 

1	Excluding repos of £4.1 billion (30 June 2011: £5.0 billion, 31 December 2011: £8.0 billion).
2	Excluding repos and reverse repos.

 

Wholesale funding reduced by 28 per cent since 30 June 2011 to £213.8 billion.  The combination of customer deposit growth, the successful Q1 term issuance programme and the reduction in funded assets has allowed us to aggressively reduce the Group's short-term money-market funding and further improve the maturity profile of wholesale funding.  At 30 June 2012, 66 per cent of wholesale funding had a maturity date greater than one year, compared to 49 per cent at 30 June 2011.

 

By the end of the first half, our Group loan to deposit ratio, excluding repos and reverse repos, had improved to 126 per cent.  Our core loan to deposit ratio also improved to 103 per cent from 109 per cent at 31 December 2011.  We are now targeting a long-term Group loan to deposit ratio of 120 per cent and assuming a continuation of current market conditions we expect to achieve this target by the end of March 2013.

 

The Group continued to make repayments under the legacy Credit Guarantee Scheme, achieving a reduction of £18.6 billion in the first half and leaving only £4.9 billion outstanding at the end of June.  The remaining debt will mature during the second half of 2012.

 

In the first quarter, the Group drew €13.5 billion (the Sterling equivalent of which at the date of drawdown was £11.2 billion) under the European Central Bank's Long-Term Refinancing Operation for an initial term of three years, to part fund a pool of non-core euro denominated assets.

 

 

GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

The Group also continues to maintain a strong liquidity position.  Our primary liquid assets portfolio at the half year end was £105.0 billion, an increase of £4.1 billion since 30 June 2011.  This represents approximately 223 per cent of our money market funding positions at end June 2012 and is approximately 143 per cent of all wholesale funding with a maturity of less than a year, thus providing a substantial buffer in the event of market dislocation.

 

In addition to primary liquidity holdings, the Group has significant secondary liquidity holdings of more than £100 billion eligible for use in open market operations and liquidity facilities at a number of central banks of which the Group makes use as part of its liquidity management practices.  Use of such facilities will be based on prudent liquidity management and economic considerations, having regard for external market conditions.

 

The Group welcomes the announcements made at the Mansion House in June 2012 aimed at reducing the pressure from liquidity regulation to deleverage the balance sheet.  The combination of the Extended Collateral Term Repo facility (ECTR), Funding for Lending and the potential widening of the definition of primary liquidity under FSA rules strengthens the liquidity position of the UK banking sector and provides a framework for an increased supply of credit to the UK economy.

 

Given the strong liquidity position and the reduced requirement for funding, the Group decided to tender for certain GBP, Euro and USD senior unsecured securities, to manage its overall wholesale funding level and optimise its future interest expense, whilst maintaining a prudent approach to liquidity.  The tender offers closed on 9 July 2012 with £1.4 billion accepted in the non-US tender offer and US$4.9 billion accepted in the US tender offer.

 

From 31 January 2010 the Group was prohibited under the terms of an agreement with the European Commission from paying discretionary coupons and dividends on hybrid capital securities issued by the Company and certain of its subsidiaries.  This prohibition ended on 31 January 2012.  Future coupons and dividends on hybrid capital securities will be paid subject to, and in accordance with, the terms of those securities.

 

During the period the Group issued £170 million of new ordinary shares in relation to payment of coupons in 2012 on hybrid capital securities that are non-cumulative.  This decision was taken by the Group in the context of recent macro prudential policy discussions.

 

 

 

GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Total income

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		5,215		6,355		(18)		5,855
Other income		4,264		4,946		(14)		4,233
Insurance claims		(233)		(198)		(18)		(145)
Total underlying income		9,246		11,103		(17)		9,943

 

Banking net interest margin		1.93%		2.12%				2.01%
Banking asset margin		1.10%		1.54%				1.38%
Banking liability margin		1.19%		0.97%				0.98%
Average interest-earning banking assets		£553.2bn		£596.5bn		(7)		£574.4bn

 

Total underlying income was down 17 per cent, reflecting reductions in net interest income and other income, and increased insurance claims.

 

Group net interest income decreased by 18 per cent to £5,215 million.  This fall reflects the decrease of 7 per cent in average interest-earning banking assets, as a result of subdued economic environment which affected demand for new credit and continued customer deleveraging in the core business, together with non-core asset reductions, and the reduction in net interest margin.

 

Banking net interest margin decreased 19 basis points to 1.93 per cent, principally reflecting higher wholesale funding costs and competitive deposit markets, which have more than offset the benefits of repricing certain lending portfolios, and the improved funding mix as reflected in the improvement in our loan to deposit ratio from 135 per cent at 31 December 2011 to 126 per cent at 30 June 2012.  Banking asset margin declined to 1.10 per cent as a result of higher wholesale funding costs, which were, however, mitigated by asset repricing.  The 22 basis point increase in the banking liability margin reflected the increased value of deposits to the Group, partly offset by the effects of competitive deposit markets.

 

Other income decreased by 14 per cent to £4,264 million compared with the first half of 2011.  Income from non-lending activities has fallen as a result of subdued demand and the run-off of non-core assets.  In addition the subdued economic environment has affected the level of income from funds management, and returns in the Insurance business.  However, Commercial saw an increase in business activity levels, while our Retail business benefited from sales of newly-launched protection products.

 

Insurance claims increased, principally reflecting adverse property claims in our General Insurance business as a result of weather events. 

 

 

GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Core underlying income

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		4,948		5,536		(11)		5,357
Other income		3,887		4,366		(11)		3,849
Insurance claims		(233)		(198)		(18)		(145)
Core underlying income, net of insurance claims		8,602		9,704		(11)		9,061
Banking net interest margin		2.32%		2.43%				2.40%
Average interest-earning banking assets		£426.5bn		£445.9bn		(4)		£431.6bn

 

Core net interest income fell by 11 per cent, principally reflecting subdued new lending demand and continued customer deleveraging, with average interest-earning banking assets decreasing by 4 per cent, and a lower banking net interest margin.

 

Core net interest margin fell 11 basis points, mainly reflecting higher wholesale funding costs, but was more resilient than at the Group level due to the benefits of asset repricing and improved funding mix.

 

Core other income fell 11 per cent reflecting, as in the Group as a whole, subdued demand for new lending and the effects of the economic environment, although these were partly offset by strong performances in some areas.

 

Insurance claims increased, principally reflecting adverse property claims in our General Insurance business as a result of weather events.

 

Non-core underlying income

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		267		819		(67)		498
Other income		377		580		(35)		384
Non-core underlying income		644		1,399		(54)		882
Banking net interest margin		0.60%		1.20%				0.81%
Average interest-earning banking assets		£126.7bn		£150.6bn		(16)		£142.8bn

 

The 54 per cent fall in underlying non-core income reflects the significant de-risking achieved from the targeted reduction in non-core portfolios of £44.9 billion since the end of June 2011, the further movement of assets to non-performing status, and a lower net interest margin.

 

Net interest income fell by 67 per cent as a result of the reduction in average interest earning assets of 16 per cent, and the decrease in net interest margin, primarily as a result of higher wholesale funding costs, with both of these metrics also adversely affected by a reduction in income from assets becoming newly impaired.

 

 

GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Total costs

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Core		4,647		4,860		4		4,822
Non-core		378		472		20		467
Total costs		5,025		5,332		6		5,289
Simplification savings annual run-rate		512		-				242

 

Total costs decreased by 6 per cent compared to the first half of 2011, mainly as a result of the realisation of Simplification-related savings, partly offset by inflationary pressures and investment in our core business.  In accordance with accounting requirements no accrual has been made in the first half for the UK bank levy.

 

Core total costs reduced by 4 per cent driven by the same factors as in the Group, while in the non-core business, the reduction of 20 per cent was mainly a result of the elimination of certain support costs for the non-core portfolios.

 

As at 30 June 2012, we had realised annual run-rate cost savings of £512 million from our programme to simplify the Group, an increase of £270 million since 31 December 2011 with the programme having contributed in year cost savings of £298 million.

 

The Simplification programme continues to make good progress and a strong pipeline of early deliverables has seen the successful implementation of a number of initiatives in the first half of 2012 that not only reduce costs, but also enhance customer service.  Examples include a fully re-engineered process for setting up and handling customer accounts transferred from other banks, a redesigned General Insurance claims handling process, a streamlined Commercial lending process and improvements to internet banking customer enrolment.

 

We remain on track to deliver our increased targets of £1.7 billion of savings in 2014 and £1.9 billion of annual run-rate savings by the end of 2014.

 

 

 

GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Impairment

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Core		978		1,636		40		1,251
Non-core		2,179		3,786		42		3,114
Total impairment		3,157		5,422		42		4,365

 

The Group impairment charge of £3,157 million in the first half of 2012 was 42 per cent lower than in the first half of 2011.  This was principally driven by a reduction in the non-core impairment charge, reflecting lower charges in the Group's wholesale Irish and Australasian businesses, with the core charge also reducing as a result of a continued low interest rate environment and the overall improvement in asset quality.

 

The reduction in the Group charge was ahead of our expectations, and continues to benefit from the application of our prudent risk appetite and strong risk management controls resulting in improved portfolio and new business quality, from continued low interest rates, and broadly stable UK retail property prices.  These benefits were partly offset by subdued UK economic growth, high unemployment and a weak commercial real estate market.

 

Impaired loans decreased by 12 per cent compared to December 2011 to £53 billion, representing 9 per cent of closing advances, mainly driven by reductions in Wholesale and in Wealth, Asset Finance and International.  The Group's coverage ratio increased by 2 per cent to 49 per cent.

 

Core impairment charge

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Retail		735		1,052		30		744
Wholesale		111		407		73		334
Commercial		116		160		28		136
Wealth, Asset Finance and International		16		17		6		34
Central items		-		-				3
Core impairment		978		1,636		40		1,251

 

The core impairment charge decreased by £658 million, or 40 per cent, compared to the charge in the first half of 2011.  The reduction was principally driven by the decrease in Retail as a result of reductions in the unsecured charge, and in Wholesale and Commercial, which reflected robust and proactive risk management, an appropriately impaired portfolio (against our current economic assumptions), and a low interest rate environment helping to maintain defaults at a lower level.

 

 

GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Non-core impairment charge

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Retail		23		121		81		53
Wholesale		882		1,035		15		925
Commercial		(7)		-				7
Wealth, Asset Finance and International		1,281		2,630		51		2,129
Non-core impairment		2,179		3,786		42		3,114

 

The non-core impairment charge reduced by £1,607 million, or 42 per cent compared to the charge in the first half of 2011, principally as a result of a material reduction in Wealth, Asset Finance and International reflecting lower charges in the Group's wholesale Irish and Australasian businesses. 

 

Non-core loans and advances to customers generated 76 per cent of the Group's impaired loans reflecting their higher risk profile, with a coverage ratio of 51 per cent at 30 June 2012 (30 June 2011: 47 per cent).

 

 

GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Management profit

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		£m
Underlying profit		1,064		349		289
Own debt volatility		(357)		(250)		434
Asset and bond sales1		585		88		196
Other volatile items		(452)		(102)		(820)
Liability management		168		-		1,295
Fair value unwind		157		1,019		187
Management profit		1,165		1,104		1,581

 

1	Net of associated fair value unwind of £603 million (30 June 2011: £649 million).

 

Own debt volatility includes a £205 million charge relating to the change in fair value of the small proportion of the Group's wholesale funding which was designated at fair value at inception.  This compares to a £203 million gain in the second half of 2011, and a £14 million charge in the first half of 2011.  Own debt volatility also includes a £152 million charge relating to the change in fair value of the equity conversion feature of the Enhanced Capital Notes, which principally reflects the ongoing amortisation of the value of the conversion feature over its life.

 

Asset and bond sales of £585 million comprise the loss on asset disposals, which principally comprised non-core asset reductions, and resulted in net losses on disposal of £73 million including fair value unwind benefits of £603 million, and gains on bond sales as we repositioned the available-for-sale portfolio of Government securities.

 

Other volatile items includes the change in fair value of interest rate derivatives and foreign exchange hedges in the banking book not mitigated through hedge accounting.  A charge of £529 million was included in the first half of 2012 and reflected the volatile market conditions that resulted in substantial changes in interest and foreign exchange rates in the period.  Also included was a positive net derivative valuation adjustment of £77 million, reflecting a reduction in the market implied credit risk associated with customer derivative balances.

 

Liability management gains of £168 million arose on transactions undertaken as part of the Group's management of capital, largely the exchange of certain debt securities for other debt instruments, comprising £109 million recognised in statutory net interest income and £59 million recognised in statutory other income.  There were no such gains in the first half of 2011.

 

Management profit also includes a gain of £157 million relating to an unwind of acquisition-related fair value adjustments.  The unwind of fair value relating to assets disposed in the period is included in the asset sales line.

 

 

 

GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Statutory profit

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Half-year  to 31 Dec  2011
		£ million		£ million		£ million
Management profit		1,165		1,104		1,581
Volatility arising in insurance businesses		(24)		(177)		(661)
Simplification, EC mandated retail business disposal costs, and integration costs		(513)		(689)		(763)
Payment protection insurance provision		(1,075)		(3,200)		-
Past service pensions credit		250		-		-
Amortisation of purchased intangibles		(242)		(289)		(273)
Provision in relation to German insurance business litigation		-		-		(175)
Loss before tax - statutory		(439)		(3,251)		(291)
Taxation		(202)		973		(145)
Loss for the period		(641)		(2,278)		(436)
Loss per share		(1.0)p		(3.4)p		(0.7)p

 

Volatility arising in insurance businesses

The Group's statutory result before tax is affected by insurance volatility, caused by movements in financial markets, and policyholder interests volatility, which primarily reflects the gross up of policyholder tax included in the Group tax charge.  In the first half of 2012 the Group's statutory result before tax included negative insurance and policyholder interests volatility totalling £24 million compared to negative volatility of £177 million in the first half of 2011.  Further detail is given in note 3 on page 88.

 

Simplification, EC mandated retail business disposal costs, and integration costs

The costs of the Simplification programme were £274 million in the first half of 2012.  These costs related to severance, IT and business costs of implementation.  4,555 FTE role reductions were announced in the first half of 2012 taking the total to 6,653 since the start of the programme.  Simplification of our business operations continues through reduction in management layers and increasing spans of control as well as restructuring business units.  The latter includes consolidation of back office operations sites, optimisation of our model for delivery of IT and outsourcing of our property facilities and asset management services.  Costs relating to the EC mandated business disposal in the first half of 2012 were £239 million and from inception to date total £451 million (costs in the year ended 31 December 2011: £170 million).  There were no integration costs in the first half of 2012.

 

Payment protection insurance (PPI)

The Group provided £3,200 million in 2011 in respect of the anticipated costs of contact and/or redress, including administration expenses, in relation to legacy PPI business.  During 2012 there has been an increase in the volume of complaints being received in relation to PPI, although other assumptions continue to be in line with expectations.  As a result, the Group has increased its provision by a further £1,075 million during the first half of 2012 (of which £375 million was reflected in the first quarter) to cover the anticipated redress in relation to these increased volumes.  This increases the total estimated cost of contact and redress to £4,275 million; redress payments made and expenses incurred to the end of June 2012 amounted to £2,955 million.  However, there are still a number of uncertainties as to the eventual costs from any such contact and/or redress given the inherent difficulties of assessing the impact of the detailed implementation of the Policy Statement for all PPI complaints, uncertainties around the ultimate emergence period for complaints, the availability of supporting evidence and the activities of claims management companies, all of which will significantly affect complaints volumes, uphold rates and redress costs.  Further detail is given in note 21 on page 175.

 

Past service pensions credit

Following a review of policy in respect of discretionary pension increases in relation to the Group's defined benefit pension schemes, increases in certain schemes are now linked to the Consumer Price Index rather than the Retail Price Index.  The impact of this change is a reduction in the Group's defined benefit obligation of £250 million, the benefit of which is recognised in the Group's income statement in the first half of 2012.

 

GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE (continued)

 

Taxation

The tax charge for the first half of 2012 was £202 million.  This represents a greater tax burden than the credit implied by the UK statutory rate.  This is primarily due to a policyholder tax charge of £338 million, and the £120 million effect of the UK corporation tax rate reduction to 24 per cent on the net deferred tax asset.

 

EC mandated retail business disposal (Project Verde)

On 19 July 2012, we announced that we had agreed non-binding heads of terms with The Co-operative Group plc
(Co-operative) for the mandated retail and commercial divestment known as Verde.

 

Under the heads of terms, the Co-operative will pay on completion an initial consideration of £350 million, and up to an additional £400 million in present value - equivalent to around £800 million on a nominal basis - based on the performance of the Co-operative's combined banking business from completion up to 2027.  The initial consideration will be funded through the sale by Co-operative of perpetual subordinated debt, underwritten by Lloyds Banking Group.

 

We expect to deliver the Verde business with £1.5 billion of equity capital assuming a standardised capital model.  Under an Internal Ratings Based (IRB) capital model and subject to regulatory approval, the equity capital requirement is expected to be in the range of £1.2 billion to £1.4 billion.  We intend to apply for an IRB approach to be adopted prior to completion.  The Verde business will have approximately £11 billion of risk-weighted assets on a standardised basis. 

 

The completion of the divestment is currently expected to be recognised in our 2013 financial statements.  We expect that the loss on disposal will be broadly offset by lower capital requirements from a reduction in our risk-weighted assets.  The divestment is not expected to have a material effect on our future profitability.

 

Further progress made towards addressing legacy issues

We made further progress in the half towards addressing a number of legacy issues that we are committed to resolving.  These include PPI and the Verde divestiture, as already described, and we have also agreed with the FSA to carry out a thorough assessment of interest rate hedging product sales to small and medium-sized businesses.  On conclusion of this assessment, we have undertaken to provide redress to SME customers where appropriate.  However, based on our analysis to date, the total cost of this redress is not expected to be material.

 

In other areas, we have received a number of claims in the German courts relating to policies issued by Clerical Medical Investment Group Limited, principally during the late 1990s and early 2000s, and recognised a provision of £175 million in respect of this litigation in 2011.  Following a decision on 11 July 2012 by the German Federal Court of Justice to remand five cases back to their respective Courts of Appeal, there a risk that the ultimate outcome of this litigation could be more unfavourable than previously assessed.

 

We continue to co-operate with investigations by several government agencies in the UK, US and overseas into submissions made to the bodies that set various interbank offered rates.  In addition the Group has been named in private lawsuits in the US including with regard to the setting of BBA London interbank offered rates.  It is currently not possible to predict the scope and ultimate outcome of the various regulatory investigations or private lawsuits, including the timing and scale of the potential impact of any investigations and private lawsuits on the Group.

 

Further detail on these matters is contained in notes 21 and 22 on pages 175 to 179 of this announcement.

 

Conclusion

The resilient underlying returns we have delivered in our core business in the first half of the year reflect the strength of the Group's franchise, and the potential we have to capitalise on future opportunities for growth and therefore to deliver strong, stable and sustainable returns for shareholders.  In the second half of the year, our focus will remain on further strengthening the balance sheet and reducing costs and risk, while ensuring that we deliver a resilient core business performance and continue to invest behind opportunities for growth within our core business.

 

 

George Culmer

Group Finance Director

MANAGEMENT BASIS SEGMENTAL ANALYSIS

 

		Retail	Wholesale		Commercial			Wealth,  Asset  Finance  and Int'l	Insurance		Group  Operations  and  Central  items			Group
Half-year to 30 June 2012		£m		£m		£m		£m		£m		£m		£m
Net interest income		3,490		554		587		448		(37)		173		5,215
Other income		766		1,261		210		1,031		1,156		(160)		4,264
Insurance claims		-		-		-		-		(233)		-		(233)
Total underlying income, net of insurance claims		4,256		1,815		797		1,479		886		13		9,246
Total costs		(2,089)		(808)		(433)		(1,177)		(384)		(134)		(5,025)
Impairment		(758)		(993)		(109)		(1,297)		-		-		(3,157)
Underlying profit (loss)		1,409		14		255		(995)		502		(121)		1,064
Asset sales1		-		(42)		-		(31)		-		658		585
Volatile items		-		17		-		-		-		(826)		(809)
Liability management		-		-		-		-		-		168		168
Fair value unwind1		241		410		16		(38)		(21)		(451)		157
Management profit (loss)		1,650		399		271		(1,064)		481		(572)		1,165
Banking net interest margin		2.02%		1.12%		3.98%		1.45%						1.93%
Cost:income ratio		49.1%		44.5%		54.3%		79.6%		43.3%				54.3%
Impairment as a % of average advances		0.43%		1.52%		0.72%		4.31%						1.10%
Return on risk-weighted assets		2.79%		0.02%		2.03%		(3.68)%						0.62%
Key balance sheet items
As at 30 June 2012		£bn		£bn		£bn		£bn		£bn		£bn		£bn
Loans and advances to customers excluding reverse repos		347.0		108.2		29.3		43.9				0.2		528.6
Customer deposits excluding repos		254.7		81.2		33.5		49.7				-		419.1
Total customer balances		601.7		189.4		62.8		93.6				0.2		947.7
Risk-weighted assets		100.2		143.2		24.9		51.5				12.7		332.5

 

1	During the first half of the 2012, the Group has changed the presentation of the fair value unwind to include those amounts related to asset sales within that line item. Comparative figures have been restated accordingly.

 

              

MANAGEMENT BASIS SEGMENTAL ANALYSIS(continued)

 

		Retail	Wholesale		Commercial			Wealth,  Asset  Finance  and Int'l	Insurance		Group  Operations  and  Central  items			Group
Half-year to 30 June 2011		£m		£m		£m		£m		£m		£m		£m
Net interest income		3,870		969		634		642		(25)		265		6,355
Other income		846		1,387		208		1,221		1,319		(35)		4,946
Insurance claims		-		-		-		-		(198)		-		(198)
Total underlying income, net of insurance claims		4,716		2,356		842		1,863		1,096		230		11,103
Total costs		(2,221)		(816)		(471)		(1,288)		(415)		(121)		(5,332)
Impairment		(1,173)		(1,442)		(160)		(2,647)		-		-		(5,422)
Underlying profit (loss)		1,322		98		211		(2,072)		681		109		349
Asset sales1		41		(1)		-		(21)		-		69		88
Volatile items		-		61		-		-		-		(413)		(352)
Liability management		-		-		-		-		-		-		-
Fair value unwind1		544		902		26		104		(21)		(536)		1,019
Management profit (loss)		1,907		1,060		237		(1,989)		660		(771)		1,104
Banking net interest margin		2.14%		1.47%		4.27%		1.64%						2.12%
Cost:income ratio		47.1%		34.6%		55.9%		69.1%		37.9%				48.0%
Impairment as a % of average advances		0.65%		1.98%		1.07%		7.21%						1.77%
Return on risk-weighted assets		2.44%		0.11%		1.59%		(6.05)%						0.18%
Key balance sheet items
As at 30 June 2011		£bn		£bn		£bn		£bn		£bn		£bn		£bn
Loans and advances to customers excluding reverse repos		357.8		122.5		28.7		58.6				0.5		568.1
Customer deposits excluding repos		242.3		80.9		32.7		38.9				0.1		394.9
Total customer balances		600.1		203.4		61.4		97.5				0.6		963.0
Risk-weighted assets		109.6		165.8		26.8		67.2				13.9		383.3

 

1	During the first half of the 2012, the Group has changed the presentation of the fair value unwind to include those amounts related to asset sales within that line item. Comparative figures have been restated accordingly.

 

 

 

 

MANAGEMENT BASIS SEGMENTAL ANALYSIS (continued)

 

		Retail	Wholesale		Commercial			Wealth,  Asset  Finance  and Int'l	Insurance		Group  Operations  and  Central  items			Group
Half-year to 31 Dec 2011		£m		£m		£m		£m		£m		£m		£m
Net interest income		3,627		791		617		542		(42)		320		5,855
Other income		814		899		218		1,103		1,368		(169)		4,233
Insurance claims		-		-		-		-		(145)		-		(145)
Total underlying income, net of insurance claims		4,441		1,690		835		1,645		1,181		151		9,943
Total costs		(2,217)		(718)		(477)		(1,244)		(397)		(236)		(5,289)
Impairment		(797)		(1,259)		(143)		(2,163)		-		(3)		(4,365)
Underlying profit (loss)		1,427		(287)		215		(1,762)		784		(88)		289
Asset sales1		7		62		-		-		-		127		196
Volatile items		-		(797)		-		-		-		411		(386)
Liability management		-		-		-		-		-		1,295		1,295
Fair value unwind1		295		535		27		90		(22)		(738)		187
Management profit (loss)		1,729		(487)		242		(1,672)		762		1,007		1,581
Banking net interest margin		2.04%		1.29%		4.15%		1.52%						2.01%
Cost:income ratio		49.9%		42.5%		57.1%		75.6%		33.6%				53.2%
Impairment as a % of average advances		0.44%		1.87%		1.04%		6.28%						1.46%
Return on risk-weighted assets		2.68%		(0.36)%		1.65%		(5.89)%						0.16%
Key balance sheet items
As at 31 December 2011		£bn		£bn		£bn		£bn		£bn		£bn		£bn
Loans and advances to customers excluding reverse repos		352.8		116.9		28.8		50.2				0.1		548.8
Customer deposits excluding repos		247.1		84.3		32.1		42.0				0.4		405.9
Total customer balances		599.9		201.2		60.9		92.2				0.5		954.7
Risk-weighted assets		103.2		154.4		25.4		56.7				12.6		352.3

 

1	During the first half of the 2012, the Group has changed the presentation of the fair value unwind to include those amounts related to asset sales within that line item. Comparative figures have been restated accordingly.

 

 

 

DIVISIONAL PERFORMANCE

 

RETAIL

 

Key highlights

·     Underlying profit increased by 7 per cent, to £1,409 million compared to the first half of 2011, and the return on risk-weighted assets remained strong at 2.79 per cent despite the challenging operating environment.

·     Total underlying income fell by 10 per cent, to £4,256 million, driven by reduced demand for lending, increased funding costs and prior de-risking of the balance sheet.  Whilst the prior de-risking has suppressed income growth, importantly, it has also supported an offsetting reduction in impairment charges.  The net interest margin declined to 2.02 per cent, with its reduction slowing in the first half as the rate of funding cost increases moderated.

·     Total costs declined by 6 per cent, to £2,089 million, as a result of strong cost control and the benefits from the Simplification programme.  This was partially offset by ongoing cost inflation and investment in the business for future growth.  Organisation structure changes, sourcing efficiencies and process simplification all made a contribution to the reduction in costs.

·     The impairment charge reduced by 35 per cent, to £758 million, as Retail continues to benefit from previous credit management which has more than offset the impact of the subdued economic environment.  This has been supported by a continued sustainable approach to risk, effective portfolio management, and a focus on lending to existing customers.

·     Loans and advances to customers excluding reverse repos decreased by 2 per cent, compared with December 2011, driven by reduced customer demand for new credit, existing customers continuing to reduce their personal indebtedness, non-core lending run-off and Retail maintaining a sustainable approach to risk.  The reduction in lending to customers was in part due to the repayment of unsecured debt where balances reduced by 5 per cent.  Secured balances reduced by £4.7 billion, or 1 per cent, of which £0.7 billion was a reduction in non-core mortgage balances.  Risk-weighted assets fell 3 per cent largely driven by lower lending balances.

·     Customer deposits excluding repos increased by 3 per cent, compared with December 2011, against a market that experienced modest growth.  The solid performance reflected the compelling multi-brand customer proposition Retail has developed.  This strong deposit growth, in addition to the issuance of debt securities backed by Retail assets, provided ongoing support to the Group funding position.

·     In delivering its strategic objectives, Retail remains focused on building a strong platform for growth when economic conditions improve, based on delivering deeper customer relationships.  This is driven by investment in Simplification, our multi-brand strategy, new products, multiple channels, and in building the skills and capabilities of all colleagues.  Retail has particularly focused on delivering new digital technologies, such as the rapidly growing mobile banking channel.  The Simplification programme is an important enabler of our investment in growth and Retail has continued to make good headway with simplifying its processes and improving the efficiency of IT systems.

 

RETAIL (continued)

 

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		3,490		3,870		(10)		3,627
Other income		766		846		(9)		814
Total underlying income		4,256		4,716		(10)		4,441
Total costs		(2,089)		(2,221)		6		(2,217)
Impairment		(758)		(1,173)		35		(797)
Underlying profit		1,409		1,322		7		1,427
Banking net interest margin		2.02%		2.14%				2.04%
Cost:income ratio		49.1%		47.1%				49.9%
Impairment as a % of average advances		0.43%		0.65%				0.44%
Return on risk-weighted assets		2.79%		2.44%				2.68%

 

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet items		£bn		£bn		%
Loans and advances to customers excluding reverse repos:
Secured		324.4		329.1		(1)
Unsecured		22.6		23.7		(5)
		347.0		352.8		(2)
Customer deposits excluding repos:
Savings		212.8		206.3		3
Current accounts		41.9		40.8		3
		254.7		247.1		3
Total customer balances		601.7		599.9
Risk-weighted assets		100.2		103.2		(3)

 

 

 

RETAIL (continued)

 

Core		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		3,464		3,688		(6)		3,558
Other income		757		836		(9)		802
Total underlying income		4,221		4,524		(7)		4,360
Total costs		(2,086)		(2,218)		6		(2,214)
Impairment		(735)		(1,052)		30		(744)
Underlying profit		1,400		1,254		12		1,402
Banking net interest margin		2.17%		2.23%				2.18%
Cost:income ratio		49.4%		49.0%				50.8%
Impairment as a % of average advances		0.45%		0.63%				0.45%
Return on risk-weighted assets		3.09%		2.58%				2.93%

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		320.1		325.1		(2)
Customer deposits excluding repos		254.7		247.1		3
Total customer balances		574.8		572.2
Risk-weighted assets		90.4		92.6		(2)

 

Non-core		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		26		182		(86)		69
Other income		9		10		(10)		12
Total underlying income		35		192		(82)		81
Total costs		(3)		(3)				(3)
Impairment		(23)		(121)		81		(53)
Underlying profit		9		68		(87)		25
Banking net interest margin		0.19%		1.19%				0.46%
Impairment as a % of average advances		0.17%		0.81%				0.36%

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		26.9		27.7		(3)
Customer deposits excluding repos		-		-
Total customer balances		26.9		27.7		(3)
Risk-weighted assets		9.8		10.6		(8)

 

RETAIL (continued)

 

Strategic focus

Retail's goal is to be the UK's best bank for customers.  We will achieve this by building deep and enduring relationships with our customers that will deliver real value to them, and by continuing to support the UK economy.  We will increase our engagement with our customers by delivering greater choice and flexibility through our multiple brands and channels.  At the same time we will simplify the business to increase our agility and enable us to respond quicker to customers' needs, and so deliver an improved customer experience.  By further developing our customer insight and gaining a deeper understanding of our customers, we will better align our products and services to our customers' requirements.  This will increase customer advocacy and we are confident it will also lead to lower customer acquisition costs, greater share of wallet and improved customer retention. 

 

Progress against strategic initiatives

 

Reshaping the business and strengthening our balance sheet

Retail is building a business that is driven by customers' needs.  Our current focus is on ensuring our product and service developments are supporting sustainable growth while at the same time maintaining an appropriate risk appetite.

 

Our drive to build a strong business which effectively supports the UK economy has been helped by recent developments to our mortgage proposition, particularly those supporting first time buyers getting onto the property ladder.  We helped those customers affected by the end of the stamp duty exemption by extending our offer to pay 50 per cent of home mover's duty fee.  This meant we supported one in four first time buyers with their home purchase in the first half of 2012.  As the leading new-build property mortgage lender, we have launched the NewBuy mortgage proposition to support the Government led initiative, aiming to assist customers with limited deposits to buy a 'new build' home.  

 

In order to deliver a solid platform for growth it is critical that we have a strong and stable source of funding.  We have been investing in our savings business to ensure we have differentiated products across our brands that appeal to our customers.  This range includes the Savers' Prize Draw which we launched in Halifax in October last year.  This has proved very popular with both new and existing Halifax customers, and we have received over 900,000 registrations to date.  We have paid out upwards of £3.5 million in total to more than 6,000 customers who have maintained the minimum qualifying balance of £5,000.  This has helped support both new balance growth, existing customer retention and increased customer advocacy.

 

Simplifying the Bank

We are taking decisive steps towards becoming a simpler organisation, and Retail is making good progress in this area.  We are getting smarter and more efficient by becoming simpler and delivering improvements which enable us to take decisions quicker and provide a more effective service to our customers.  Our recent integration programme delivered a single banking platform across the vast majority of our brands and channels.  We are investing further in our infrastructure to ensure our systems support the future growth of the business and continue to expand our capabilities.  In the Lloyds TSB branch network we have rolled out over 300 Immediate Deposit Machines which have already seen 1.3 million transactions migrate from the counter.

 

We have received recognition for our innovative products so far this year, notably Halifax and Bank of Scotland were highly commended as best current account provider by Moneyfacts.  We continue to develop our current account switching service and have recently been the first bank to be awarded a 4 star rating by Defaqto.  The ease and simplicity of our switching service across all brands provides customers with greater choice encouraging multiple product switching.  Since 2010 the switching service has been used by more than one million customers.

 

RETAIL (continued)

 

Investing in Growth

Alongside the Simplification programme, we are making strategic investments in preparation for growth opportunities. Through our multi-brand and multi-channel strategy we will grow the business by delivering deep and enduring customer relationships.  We are building the capabilities and skills of our colleagues, and helping the communities in which we operate, and Britain as a whole, to grow and prosper.

 

We are making additional investment in digital channels for customers to ensure they continue to be as convenient and accessible as possible.  These award-winning developments are appealing to customers and in the past year our internet banking user base has grown by 940,000, which takes us to 9 million active users.  Our mobile banking app now has two and half million active users, a remarkable increase since its launch in late 2011, and these users now account for almost 25 per cent of our log-ins.  These developments have been supported by other innovative new services for customers including our Halifax homebuyer app that provides customers with a one-stop shop for their house search.   

 

We continue to recognise the importance of the branch for many customers.  In February 2012 we made a public commitment to maintain the same number of branches for the next three years, including pledging not to close a branch if it is the last in a community.  We have started a significant investment programme across the Lloyds TSB branch network which, we believe, will be transformational.  This programme targets a number of areas including: upgrading branch interiors; extending opening hours to ensure they are customer centric; simplifying the advisor role structure and improving the queuing experience.  Pilots of the revised branch design and structure delivered strong improvements in customer advocacy and new product sales.  By the end of June 2012, 211 branches had already been refitted.

 

Supporting the UK economy and local communities

We know that our support for households is vital to the strength and prosperity of the UK economy and we continue to make a positive contribution.  In 2012, amongst other investments, the Group has provided around £30 million to the Lloyds TSB and Bank of Scotland Foundations to help fund grassroots charities working in disadvantaged areas. 

 

Through our community investment agenda we aim to make a lasting difference to the country, focusing on key themes such as financial capability and inclusion and supporting local communities and charities.  Our £4 million Money for Life programme helps people across the UK develop vital money management skills, and on the national day of employee volunteering, over 4,500 colleagues used the day to make a difference in their community.  In the year of the Olympic and Paralympic games we were also proud to continue our support for National Schools Sport Week which enabled over 12,000 schools and 4.3 million young people to take part in sporting activity.

 

Balance sheet progress

Retail continued to maintain its relationships with customers during the first half of 2012 with total customer balances remaining stable at £601.7 billion.  The mix of these balances moved towards customer deposits as customers reduced their personal indebtedness and Retail continued to make strong progress in attracting savings balances through its multi-brand and multi-channel strategy.  This change in customer balance composition has additionally supported the Group's funding.

 

Loans and advances to customers decreased by £5.8 billion, or 2 per cent, to £347.0 billion compared to 31 December 2011.  This was driven by reduced customer demand for new credit, existing customers continuing to reduce their personal indebtedness, non-core lending run-off and Retail maintaining a sustainable approach to risk.  The reduction in lending to customers was in part due to the repayment of unsecured debt where balances reduced by £1.1 billion, or 5 per cent.  Secured balances reduced by £4.7 billion, or 1 per cent, of which £0.7 billion was a reduction in non-core mortgage balances.

 

Retail's gross mortgage lending was £12.3 billion in the first half of 2012 which was equivalent to an estimated market share of 18 per cent.  During the first half of the year, Retail continued to increase its lending to first time buyers, helping over 25,000 customers buy their first home in the first half of 2012, equivalent to one in every four in the UK.  In addition, Retail continued to focus its new lending on home purchase with over 70 per cent of lending being for house purchase rather than re-mortgaging. 

RETAIL (continued)

 

Risk-weighted assets decreased by £3.0 billion to £100.2 billion compared to 31 December 2011.  This decrease was largely driven by the reduction in lending balances.

 

Total customer deposits increased by £7.6 billion, or 3 per cent, to £254.7 billion in the first half of 2012.  The solid performance reflected the successful multi-brand customer propositions and the agile pricing strategy that Retail has developed.  Retail continues to perform well in the savings market despite the high levels of competition, with a strong stable of savings brands providing customers with an award-winning range of products to meet their savings needs.

 

Retail continues to make a significant contribution to Group funding both through customer deposit growth and the supply of assets supporting £68.9 billion of debt securities in external issue.  During the year Retail contributed to £10.7 billion of new issuance.  The majority of these securitisations are backed by mortgages and have a fixed term repayment schedule and as such provide a stable source of funding for the Group.

 

Financial performance

Despite the subdued economic environment Retail delivered an underlying profit in the first half of 2012 of £1,409 million which was £87 million, or 7 per cent, higher than the first half of 2011.  Retail continued to deliver a strong return on risk-weighted assets delivering a return of 2.79 per cent in the first half of 2012, compared to 2.44 per cent in the first half of 2011.

 

Total underlying income fell by 10 per cent, to £4,256 million.  This was as a result of the reduced demand for lending, increased funding costs and prior de-risking of the balance sheet.  Retail has taken a number of actions to offset the pressure on income including making strategic investments and re-pricing of selected mortgage portfolios to reflect rising funding costs.

 

Net interest income decreased by 10 per cent in the first half of 2012, with net interest margin reducing by 12 basis points to 2.02 per cent when compared to the first half of 2011.  Net interest income was particularly constrained by muted demand for lending, previous de-risking of the lending portfolio and increased funding costs including the impact of continued competition for deposits.  Whilst the prior de-risking has suppressed income growth, it also supported an offsetting reduction in impairment charges. 

 

Other operating income decreased by 9 per cent in the first half of 2012 to £766 million, largely as a result of lower Bancassurance income as subdued customer demand reflected the investment market environment.  This business was also affected by preparation for Retail Distribution Review including advisor restructuring.  To support the business in the second half of 2012, new protection products have been launched which are better aligned to customer needs.  The fall in other income was also as a result of reductions in lending product fee income.

 

Total costs fell by 6 per cent compared to the first half of 2011.  Total costs benefited from the Simplification programme with successful delivery of end-to-end process enhancements, migration of customers to self-service channels and further improvements in purchasing arrangements across Retail.  These Simplification benefits were also supported by other day-to-day cost management activities and, in combination, effectively offset on-going cost inflation and increased investment spend.

 

Credit performance across the business continued to be strong considering the subdued economic environment and was supported by our sustainable approach to risk, a continued focus on lending to existing customers and low interest rates.  The impairment charge on loans and advances decreased by £415 million, or 35 per cent, to £758 million driven by reductions in the unsecured charge.  The unsecured impairment charge reduced to £585 million from £878 million in the first half of 2011, reflecting the impact of our sustainable approach to risk (resulting in improved new business quality), effective portfolio management and a reduction in unsecured balances.  The secured impairment charge decreased to £173 million from £295 million in the first half of 2011 largely reflecting a reduction in the rate of customers entering arrears and other underlying improvements in the quality of the secured portfolio.  While recent credit performance has been strong Retail remains exposed to the economic environment.

 

WHOLESALE

 

Key highlights

·    Underlying profit in the first half of 2012 was £14 million, compared to £98 million in the first half of 2011, with a 23 per cent fall in total underlying income broadly offset by a 31 per cent decrease in impairments.

·    Total underlying income decreased by 23 per cent, driven by a decline of 52 per cent in non-core total underlying income, primarily as a result of asset reductions, with a reduction in core total income of 16 per cent reflecting subdued demand and client deleveraging, and higher funding costs.

·    Net interest income decreased by 43 per cent, mainly as a result of the substantial reduction in non-core assets, which decreased 25 per cent, and a decline in net interest margin.  Core net interest income was 27 per cent lower, reflecting subdued demand and client deleveraging.  Net interest margin fell by 35 basis points, due to the impact of higher funding costs, with limited opportunities for asset re-pricing, and the impact of the non-core reduction programme.  Core margin was more resilient, reflecting a more balanced net customer funding position, declining 17 basis points.

·    Other income decreased by 9 per cent, with core other income down by 8 per cent, primarily reflecting a one-off income settlement received in the first half of 2011; excluding this, core other income increased by 3 per cent.  Non-core other income fell 14 per cent, primarily reflecting non-core asset reductions.

·     Total costs were broadly flat, as the benefits of cost management and Simplification initiatives were offset by ongoing investment in core client facing resource and systems.  Core costs rose 2 per cent as a result of this investment, while non-core costs reduced 19 per cent, reflecting the non-core portfolio reduction.

·    The impairment charge decreased by 31 per cent, principally driven by a 73 per cent reduction in the core impairment charge, as a result of lower impairments in Leveraged Acquisition Finance, Corporate and Mid Markets portfolios, where there were specific large impairments in 2011 which have not been repeated in this period.  The non-core impairment charge reduced 15 per cent, driven by lower charges in non-core Leveraged Acquisition Finance exposures.

·     Assets decreased by 19 per cent compared to December 2011, reflecting the targeted reduction in the non-core balance sheet.  Non-core assets fell by 25 per cent reflecting the disposal programme and run-off of non-core lending.  Net lending to core customers (excluding reverse repos) decreased 5 per cent as a result of subdued demand and continued client deleveraging as credit facilities matured and were not renewed by clients.  Risk-weighted assets reduced by 7 per cent.

·     Customer deposits excluding repos decreased by 4 per cent, however excluding the Markets business and pooled positions, Core deposits increased by 6 per cent.

·     In delivering its strategic objectives, Wholesale continued to deepen its relationships with existing core clients through investment in products and capabilities in support of their wider needs.  The Transaction Banking Transformation Programme which was initiated in 2011 continues to improve Wholesale's cash management, payments and trade offerings, alongside which we are enhancing product capabilities in other areas including Interest Rate Management, Foreign Exchange, Debt Capital Markets and Money Markets.

 

 

WHOLESALE(continued)

 

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		554		969		(43)		791
Other income		1,261		1,387		(9)		899
Total underlying income		1,815		2,356		(23)		1,690
Total costs		(808)		(816)		1		(718)
Impairment		(993)		(1,442)		31		(1,259)
Underlying profit (loss)		14		98		(86)		(287)
Banking net interest margin		1.12%		1.47%				1.29%
Cost:income ratio		44.5%		34.6%				42.5%
Impairment as a % of average advances		1.52%		1.98%				1.87%
Return on risk-weighted assets		0.02%		0.11%				(0.36)%

 

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		108.2		116.9		(7)
Reverse repos		5.8		16.8		(65)
Loans and advances to customers		114.0		133.7		(15)
Loans and advances to banks		7.5		8.4		(11)
Debt securities		6.4		12.5		(49)
Available-for-sale financial assets		7.3		12.6		(42)
		135.2		167.2		(19)
Customer deposits excluding repos		81.2		84.3		(4)
Repos		4.1		7.1		(42)
Customer deposits		85.3		91.4		(7)
Risk-weighted assets		143.2		154.4		(7)

 

 

WHOLESALE (continued)

 

Core		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		610		835		(27)		766
Other income		991		1,072		(8)		723
Total underlying income		1,601		1,907		(16)		1,489
Total costs		(718)		(705)		(2)		(622)
Impairment		(111)		(407)		73		(334)
Underlying profit		772		795		(3)		533
Banking net interest margin		1.70%		1.87%				1.91%
Cost:income ratio		44.8%		37.0%				41.8%
Impairment as a % of average advances		0.25%		0.96%				0.82%
Return on risk-weighted assets		1.54%		1.50%				1.04%

 

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		72.7		76.3		(5)
Reverse repos		5.8		16.8		(65)
Loans and advances to customers		78.5		93.1		(16)
Loans and advances to banks		7.2		8.2		(12)
Debt securities		0.2		0.2
Available-for-sale financial assets		2.2		3.1		(29)
		88.1		104.6		(16)
Customer deposits excluding repos		79.0		81.5		(3)
Repos		4.1		7.1		(42)
Customer deposits		83.1		88.6		(6)
Risk-weighted assets		99.8		101.0		(1)

 

WHOLESALE (continued)

 

Non-core		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		(56)		134				25
Other income		270		315		(14)		176
Total underlying income		214		449		(52)		201
Total costs		(90)		(111)		19		(96)
Impairment		(882)		(1,035)		15		(925)
Underlying loss		(758)		(697)		(9)		(820)
Banking net interest margin		0.29%		0.92%				0.51%
Impairment as a % of average advances		3.56%		3.49%				3.51%

 

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		35.5		40.6		(13)
Reverse repos		-		-
Loans and advances to customers		35.5		40.6		(13)
Loans and advances to banks		0.3		0.3
Debt securities		6.2		12.3		(50)
Available-for-sale financial assets		5.1		9.4		(46)
		47.1		62.6		(25)
Customer deposits excluding repos		2.2		2.8		(21)
Repos		-		-
Customer deposits		2.2		2.8		(21)
Risk-weighted assets		43.4		53.4		(19)

 

WHOLESALE (continued)

 

Strategic focus

Wholesale's strategy is to be the best bank for Mid-Markets, Corporate and selected Financial Institutions clients, by supporting them with a focused set of value-added product capabilities.  We will continue to strengthen our core client franchise by retaining and deepening recurring, multi-product relationships.  We will build on the deep insight we have into client needs to offer a targeted range of lending, Transaction Banking, Risk Management and Capital-light markets products.  At the same time, Wholesale will also actively reduce its exposure to mono-line product-driven businesses with returns below the cost of capital.

 

Progress against strategic initiatives

 

Reshaping the Business

In order to focus resource on core businesses, Wholesale has continued to make substantial progress in reducing its exposure to capital-intensive, non-relationship portfolios and thereby both reduce risk and improve its customer funding position.

 

In the first half of 2012, Wholesale reduced non-core assets by £15.5 billion, reducing the overall loan to deposit ratio to 133 per cent, down from 139 per cent at end 2011.  Our core lending business continues to have a loan to deposit ratio of less than 100 per cent.

 

Simplifying the Bank

We have significantly simplified the Wholesale organisational structure to better align and co-ordinate the delivery of our products to match our clients' needs.  We are making good progress in a number of initiatives to simplify our end-to-end processes to improve efficiency and enhance responsiveness to our clients.

 

We continually assess our product range to eliminate marginal products and reduce exposure to capital-intensive businesses that are not part of our core client proposition or do not deliver returns above the cost of capital.

 

Investing in Growth and Supporting the UK Economy

As part of our investment in products to support our core clients, we are continuing to invest in our Transaction Banking capabilities to help UK businesses optimise their cash management and finance their trade flows.  We have enhanced our on-line platform, Arena, with the addition of new features for Commercial and Mid-Corporate clients, including capabilities to view online balances, receive details of transactions, forecast cash flows and carry out analytics across different currencies.  This is bringing clear benefits to our clients and in the first half the number of online clients more than doubled, to over 2,000 accounts.

 

In the first half of 2012, we supported our UK Corporate clients in raising £7.7 billion of financing in the Debt Capital Markets, enabling them to finance and grow their businesses.  In Foreign Exchange, we increased our client volumes by 21 per cent compared to the same period last year by delivering further improvement in the way we connect electronically with clients, make prices and manage our risk.  We have also improved our rankings in interest rate products, with stronger market penetration, and higher market share and quality scores.

 

Wholesale attained top 3 and top 20 positions in Investment Grade Corporate Sterling and Corporate Euro debt issuance, with market share increasing by approximately 50 per cent and 120 per cent respectively, and we won the 'Most Improved Corporate Debt Capital Markets Team' award at the Euroweek Bond Awards.  In interest rate products Wholesale was rated as number one in a leading professional firm survey of Corporate and Mid-Corporate clients.

 

The depth and strength of our client relationships was reflected in the award to Wholesale (jointly with Commercial), for the eighth year in a row, of Bank of the Year at the FDs' Excellence Awards (in association with the Institute of Chartered Accountants in England and Wales, supported by the CBI). 

 

 

WHOLESALE (continued)

 

Balance sheet progress

In 2012 Wholesale continued to focus on strengthening and de-risking the balance sheet by reducing non-core assets.  Assets (comprising loans and advances to customers and banks, reverse repos, debt securities and available-for-sale financial assets) reduced by £32.0 billion, or 19 per cent, to £135.2 billion.  This reflected deleveraging by core clients, lower reverse repos, and continued active de-risking of the non-core asset portfolio.  The non-core asset reduction was £15.5 billion, or 25 per cent, driven by a reduction of treasury assets of £10.6 billion.

 

Loans and advances to core customers excluding reverse repos reduced by £3.6 billion, or 5 per cent, to £72.7 billion as demand for new corporate lending and refinancing of existing facilities was more than offset by the level of maturities, reflecting a continued trend of subdued corporate lending demand and client deleveraging as credit facilities matured and were not renewed by clients.

 

Reverse repos form part of the Group's on balance sheet primary liquidity assets portfolio.  The mix of this portfolio is managed in order to optimise returns; the decrease of £11.0 billion is offset by increases within other primary liquidity asset classes.  (See page 98 for the composition of Primary Liquid Assets).

 

Available-for-sale financial assets balances reduced by £5.3 billion, or 42 per cent, to £7.3 billion and debt securities by £6.1 billion, or 49 per cent, to £6.4 billion.  This was largely driven by the reduction in the non-core balance sheet through treasury and other asset sales or not replenishing holdings after amortisations and maturities.

 

In total, customer deposits excluding repos decreased by 4 per cent to £81.2 billion primarily due to customer deposits on the core book decreasing by 3 per cent to £79.0 billion.  Within this, the mix of customer deposits has changed in the half year. Excluding a reduction in deposit flows in our Markets business and 'pooled' positions within Transaction Banking (which show an equal and opposite asset impact), there was an increase of 6 per cent in other core deposit portfolios.

 

Risk-weighted assets decreased by £11.2 billion, or 7 per cent, to £143.2 billion, primarily reflecting balance sheet reductions including treasury asset sales and run-down in other non-core asset portfolios, as well as the impact of subdued corporate lending.  Non-core risk-weighted assets represent £10.0 billion, or 89 per cent, of this reduction.

 

Financial performance

Underlying profit was £14 million compared to £98 million in the first half of 2011.  A reduction of £541 million in total income was broadly offset by a significant decrease in the impairment charge which reduced by £449 million to £993 million.

 

Core underlying profit was £772 million, £23 million below the first half of 2011, with lower income primarily as a result of client deleveraging being broadly offset by a significant reduction in core impairments.  The non-core underlying loss was £758 million, or £61 million more than the prior half year, with cost and impairment reductions only partially offsetting lower income.

 

Total underlying income decreased by £541 million to £1,815 million, mainly driven by a decrease in net interest income.  This reflected the loss of income from the significant reduction in non-core assets, lower lending volumes as a result of subdued client demand and the continuing trend of client deleveraging, and a decrease in margin reflecting higher wholesale funding costs.

 

 

WHOLESALE (continued)

 

Core income was £1,601 million, or £306 million below the first half of 2011, reflecting subdued demand and client deleveraging which resulted in lower lending balances, higher wholesale funding costs and in other income the impact of a non-recurring one-off settlement.  This more than offset a strong performance in our Markets business, particularly in the Sales, Credit Trading, Swaps Trading, and Money Markets areas.  Transaction Banking income was up 16 per cent driven by increased payments revenues and an improved trade offering, while in Capital Markets income in Debt Capital Markets (DCM) bond syndication increased 38 per cent driven by increased investor activity and growth in market share, though this was offset by overall subdued demand in loan syndication.  Non-core income decreased to £214 million, or £235 million lower than in the first half of 2011, given significant asset reductions.

 

Banking net interest income, which excludes trading activity, decreased by £318 million to £611 million as a result of reduced balances, mainly reflecting the substantial reduction in non-core assets and the decline in net interest margin as a result of higher funding costs.  Total net interest income decreased by £415 million, or 43 per cent, to £554 million, and was impacted by income losses on the non-core non-banking book from low interest bearing assets, not capable of covering their funding costs. 

 

Banking net interest margin decreased by 35 basis points to 1.12 per cent, as asset margins decreased as a result of higher wholesale funding costs, the effect of which was partly offset by higher deposit values. The core banking margin was more resilient, reflecting a balanced funding position, decreasing of 17 basis points to 1.70 per cent.  The non-core banking margin, which is predominantly asset based, decreased by 63 basis points to 0.29 per cent, largely as a result of higher wholesale funding costs.

 

Other income decreased by £126 million, or 9 per cent, to £1,261 million, mainly reflecting a non-recurring settlement received in 2011 associated with a sizeable financial services company failure.  Excluding this, other core income increased by 3 per cent in a challenging environment, due to a stronger performance in our Markets business.  Non-core other income fell 14 per cent, primarily reflecting non-core asset reductions.

 

Total costs were broadly flat, decreasing by £8 million, or 1 per cent, to £808 million.  This reflects a continued focus on cost management including savings attributable to the Simplification programme and the reduction in non-core assets, offset by continued investment in client facing resources.  Core costs rose 2 per cent, primarily as a result of this investment, while non-core costs reduced 19 per cent, reflecting the non-core portfolio reduction.

 

The impairment charge decreased £449 million, or 31 per cent, to £993 million, principally driven by a 73 per cent reduction in the core impairment charge, primarily as a result of lower impairments in leveraged acquisition finance, Corporate and Mid Markets portfolios, where there were specific large impairments in 2011 which have not been repeated in this period.  The non-core impairment charge reduced 15 per cent, driven by lower charges in non-core leveraged acquisition finance exposures.

 

Impairment charges have decreased substantially compared with 2011 due to robust and proactive risk management, an appropriately impaired portfolio (against our current economic assumptions), and a low interest rate environment helping to maintain defaults at lower levels.  Impairment charges as an annualised percentage of average loans and advances to customers reduced to 1.52 per cent from 1.98 per cent in the first half of 2011.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THIS PAGE IS INTENTIONALLY LEFT BLANK

 

 

COMMERCIAL

 

Key highlights

·    Underlying profit has increased £44 million or 21 per cent to £255 million, compared to the first half of 2011, with a reduction in total income more than offset by substantial reductions in costs and impairments.  The return on risk-weighted assets was 2.03 per cent compared with 1.59 per cent in 2011.

·    Total income decreased by 5 per cent to £797 million, with an increase in funding costs more than offsetting the benefit of increased business volumes.

·    Net interest income reduced by 7 per cent to £587 million, with income from increased core lending offset by higher wholesale funding costs, and non-core asset reductions.  Customer income (excluding wholesale funding costs) increased by 2 per cent largely due to the successful growth in term lending and current account products.

·    Other income increased by 1 per cent to £210 million, driven by an overall increase in business activity levels.

·    Total costs reduced by 8 per cent, primarily as a result of enhanced cost management, and Simplification savings.

·    The impairment charge reduced by 32 per cent to £109 million, reflecting the continued benefits of the low interest rate environment and the ongoing application of our prudent risk appetite.  The quality of our new business remains good.

·    Core loans and advances to customers excluding reverse repos increased by 4 per cent year-on-year (3 per cent compared to December 2011) against a contracting market, underlining our commitment to supporting Small and Medium-sized Enterprises (SMEs), whilst non-core assets fell by 29 per cent year-on-year to £1.2 billion.

·    Customer deposits excluding repos grew by 2 per cent year-on-year (4 per cent compared to December 2011), reflecting our ongoing success in attracting new SME customers and current accounts from existing customers.

·    In delivering its strategic objectives, Commercial has focused on strengthening its customer relationships and supporting SMEs through the difficult trading conditions by further developing its understanding and support of individual business requirements.  This is demonstrated by the following:

·    Gross new lending to SMEs is on track to exceed our £12 billion full year target and we have now increased this commitment by £1 billion given the benefit of the UK Government's Funding for Lending Scheme.

·    SME net lending grew 4 per cent year-on-year against a continued market contraction of 4 per cent.

·    We supported over 64,000 start ups in the first half of the year towards commitment to support at least 100,000 in 2012.

·    Supporting customers through responsible lending, and creating sustainable returns for shareholders with improving credit quality, balance sheet funding and RWA use.

·    Over 10 per cent increase in cross-sales of Wealth Management, Retail, Insurance, Fleet Hire, and Treasury products allowing SME customers to fulfil all their financial needs through collective Group product offerings.

 

COMMERCIAL (continued)

 

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		587		634		(7)		617
Other income		210		208		1		218
Total underlying income		797		842		(5)		835
Total costs		(433)		(471)		8		(477)
Impairment		(109)		(160)		32		(143)
Underlying profit		255		211		21		215
Banking net interest margin		3.98%		4.27%				4.15%
Cost:income ratio		54.3%		55.9%				57.1%
Impairment as a % of average advances		0.72%		1.07%				1.04%
Return on risk-weighted assets		2.03%		1.59%				1.65%

 

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		29.3		28.8		2
Customer deposits excluding repos		33.5		32.1		4
Total customer balances		62.8		60.9		3
Risk-weighted assets		24.9		25.4		(2)

 

 

COMMERCIAL (continued)

 

Core		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		582		619		(6)		610
Other income		210		207		1		218
Total underlying income		792		826		(4)		828
Total costs		(430)		(468)		8		(474)
Impairment		(116)		(160)		28		(136)
Underlying profit		246		198		24		218
Banking net interest margin		4.13%		4.39%				4.34%
Cost:income ratio		54.3%		56.7%				57.2%
Impairment as a % of average advances		0.80%		1.14%				1.05%
Return on risk-weighted assets		2.08%		1.61%				1.78%

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		28.1		27.4		3
Customer deposits excluding repos		33.2		31.8		4
Total customer balances		61.3		59.2		4
Risk-weighted assets		23.7		23.8

 

Non-core		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		5		15		(67)		7
Other income		-		1				-
Total underlying income		5		16		(69)		7
Total costs		(3)		(3)				(3)
Impairment		7		-				(7)
Underlying profit (loss)		9		13		(31)		(3)
Banking net interest margin		0.77%		2.01%				0.80%
Impairment as a % of average advances		(1.15)%		-				0.92%

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		1.2		1.4		(14)
Customer deposits excluding repos		0.3		0.3
Total customer balances		1.5		1.7		(12)
Risk-weighted assets		1.2		1.6		(25)

 

 

COMMERCIAL (continued)

 

Strategic focus

Commercial's goal is to be the best bank for small and medium sized businesses.  Commercial's main strategic focus is to improve the depth of relationship with SMEs through specialist customer propositions in key markets.  This is achieved by leveraging strong relationship management skills, focusing on meeting the broader financial services needs of SME customers, and by optimising customer service through efficiencies that also contribute to cost effectiveness targets.  Commercial is also improving accessibility and functionality of new digital channels promoted through Group support for a major national initiative, 'Go On UK' to transform the UK into the most digitally capable country in the world.  Commercial is actively promoting digital products as well as providing expert guidance to customers on how to use digital to optimise their prospects for growth.

 

Reshaping the Business and Strengthening the Balance Sheet

The business is focused on improving its offerings to customers, leveraging wider Group capabilities, and supporting SMEs through the cycle to help them prosper and develop.  This is being achieved through continued investment in our Relationship Managers, supported by product and system development aligning to customers' wider financial needs.  For example in the first half of 2012 we launched a specialist manufacturing proposition with over 100 Relationship Managers trained through a programme designed with the Engineering Employers' Federation and Manufacturing Technologies Association at the University of Warwick, Lloyds TSB also sponsored MACH 2012, the UK's premiere manufacturing technologies event, which saw over 20,000 visitors.

 

Supporting the full range of customer needs continued to result in deposit and lending growth, strengthening the balance sheet, while driving gross customer income growth.  Work with Group partners to leverage their products and expertise to drive value for SMEs has delivered an increase of over 10 per cent in referrals and needs met for customers compared to 2011.

 

In addition, the benefit of close relationship support through the cycle is evidenced in the improvement in portfolio quality while risk-weighted assets have reduced in the context of increased lending, reflecting the improvement in risk profiles as well as the higher mix of secured lending in the book.

 

Simplifying the Bank

Commercial has made further progress with Simplification, enabling investments to be applied across brands that share a single banking platform.  Simpler organisational structures and processes have been delivered which have additionally resulted in lower back office staffing requirements.

 

The customer benefits arising from Simplification are important and significant progress has been made in simplifying the lending process.  A successful pilot of the new process has halved the time taken to complete lending transactions to customers and we expect to have fully implemented the new process by the end of 2012.  Our simple and transparent approach is also attractive to customers, as evidenced by over 65,000 customers who have now signed up to the ground-breaking Monthly Price Plan tariffs that provide certainty and control over bank charges, an increase of over 35,000 since the start of the year.

 

 

COMMERCIAL (continued)

 

Investing in Growth and Supporting the UK Economy

SMEs are a strategic priority reflecting the Group's commitment to the sector, the competitive advantage of the Group's distribution strengths and relationship expertise, and the potential to offer a wide range of products from across the Group.

 

Commercial's commitments to customers are set out in our SME Charter, which has been refreshed and extended in this half year to encourage enterprise, provide clear and fair pricing, access to finance and support for communities.  This will be supported by at least 200 substantial customer networking events which have proved to be a key platform for recruitment and customer support.

 

In support of the SME sector, the Group has committed to make available £12 billion of gross lending in 2012 through the core Commercial business.  We are on track to exceed our £12 billion full year target and we have now increased this commitment by £1 billion given the benefit of the UK Government's Funding for Lending Scheme.  Commercial's core net lending balance growth of 4 per cent compared favourably with the 4 per cent contraction of SME lending across the industry reported by the Bank of England.

 

Through the National Loan Guarantee Scheme, Lloyds TSB Bank plc issued £1.4 billion of senior unsecured debt guaranteed by the UK Government.  The scheme enhances the terms of finance raised by Lloyds TSB Bank plc, thereby improving the terms of loans so that SME demand for borrowing is stimulated, providing all eligible customers with a 1 per cent discount on their funding rate for a certain period of time.

 

Building on its Best for Business campaign, Lloyds TSB Commercial in partnership with the Guardian newspaper, launched the Guardian 'Small Business Network' in June.  Commercial customers will benefit from this partnership by enabling them to share best practice tips and innovative thinking, accessing insight and guidance from business experts, taking part in live question and answer discussions, and the chance to be profiled in the Guardian.

 

The Commercial Finance business, which provides asset backed lending to SMEs, has continued to increase support and funding to UK businesses.  Invoice Finance client numbers increased 3 per cent and Equipment Financing (Hire Purchase) increased 5 per cent in the first half of the year.

 

Commercial encourages enterprise by helping people start in business and has supported over 64,000 start up businesses already in 2012 making a total of over 292,000 towards our three year commitment to help 300,000 businesses.  More than 300 members of Lloyds Banking Group's staff are now trained as mentors to businesses from pre-start up to growth and social enterprise.

 

Awards

In demonstration of our commitment to supporting the community Commercial were awarded Bank of the Year for an unprecedented Eighth year at the FDs' Excellence Awards (joint with Wholesale) and best charity account provider for the second year in succession from Business Moneyfacts.  Arena, Lloyds Bank's e-solution, has also won the award for 'Best Innovation in the SME Finance Sector' at the Business Moneyfacts Awards 2012.

 

 

COMMERCIAL (continued)

 

Balance sheet progress

Loans and advances to customers were £29.3 billion, an increase of £0.5 billion compared to 31 December 2011.  Core lending grew 4 per cent year-on-year, reflecting our commitment to support SME customers through developing an integrated SME proposition.  The reduction in non-core assets was more than offset by the increase in core term lending, backed by significant promotional support which included running over 100 customer events in the first half of 2012.

 

Commercial's risk-weighted assets decreased by £0.5 billion to £24.9 billion compared to December 2011 and reduced by £1.9 billion since 30 June 2011.  Our improvement in risk profiles reflects the decrease in risk-weighted assets compared to an overall increase in lending since year end.

 

Customer deposits increased 4 per cent to £33.5 billion reflecting our continued achievement in attracting new customers particularly through our current account range.

 

Financial performance

Underlying profit was £255 million compared to a profit of £211 million, an increase of 21 per cent against the comparable period in 2011 with lower income more than offset by reductions in both costs and impairments.

 

Total income decreased by 5 per cent to £797 million, with a 2 per cent rise in income relating to increased business volumes being offset by increased funding costs.

 

Net interest income was 7 per cent lower in the first half of 2012 despite a 2 per cent increase in core lending income as higher funding costs resulted in a 29 bps reduction to banking net interest margin.

 

Other operating income was 1 per cent or £2 million higher, driven by an overall increase in business activity levels.

 

Total costs have continued to be well controlled and decreased by £38 million, or 8 per cent, primarily through successful delivery of Simplification initiatives, including back office staffing requirements.

 

Impairment decreased £51 million, 32 per cent, due to an overall improvement in the credit quality of the portfolio through continued application of a prudent risk appetite with the continued benefits of the low interest rate environment helping to maintain defaults at a lower level.  Impairment charges as an annualised percentage of average loans and advances to customers has reduced by 35 basis points to 0.72 per cent compared to the first half of 2011.

 

 

 

WEALTH, ASSET FINANCE AND INTERNATIONAL

 

Key highlights

·     Underlying loss decreased 52 per cent to £995 million, driven by a continued reduction in impairments and costs partly offset by a fall in non-core income as a result of the focus on non-core balance sheet reduction.

·     Within the Wealth business, underlying profit increased by 17 per cent to £176 million against a background of difficult investment markets, reflecting strong deposit growth and simplification of our business model.

·     Total underlying income decreased by 21 per cent to £1,479 million.

·     Net interest income was 30 per cent lower, primarily reflecting lower lending volumes in our International and Asset Finance non-core businesses where we have continued to focus on asset and risk reduction and, where appropriate, disposals. 

·     Banking net interest margin was 19 basis points lower at 1.45 per cent, driven by higher funding costs and asset mix partly offset by higher deposit balances.  Average interest earning assets have reduced by 19 per cent to £60.5 billion.  In our core business, banking net interest margin increased by 58 basis points driven by the benefit from the continued inflow of deposits since the year-end and good management of asset margins.

·     Other income decreased by 16 per cent to £1,031 million, largely as a result of lower operating lease assets in the non-core motor and specialist asset finance portfolios, and lower management fees in the Wealth business due to subdued investment markets.

·     Total costs decreased by 9 per cent to £1,177 million (10 per cent excluding operating lease depreciation) as we continue to benefit from the simplification of our business model and despite significant investment in our core Wealth businesses.

·     The impairment charge reduced by 51 per cent to £1,297 million, continuing the trend of slowing rate of impaired loan migration.  The coverage ratio increased from 60.6 per cent to 65.5 per cent reflecting further provisions in the year, particularly in our non-core Irish and European wholesale businesses.

·     Net loans and advances to customers, excluding reverse repos, decreased by 13 per cent, largely driven by de-risking of the balance sheet through reducing non-core assets.  Risk-weighted assets decreased by 9 per cent, reflecting lower asset balances and additional impairment provisions, particularly in International.

·     Customer deposits grew by 18 per cent (or 36 per cent on an annualised basis), primarily due to continued strong inflows within both the UK and International Wealth businesses together with further growth in our international on-line deposit business.

·     In delivering its strategic objectives, Wealth demonstrated continued strength in client acquisition through the UK franchise with a 3 per cent increase in the number of clients in the affluent proposition.  We have made material progress on simplifying our international footprint, having now announced the disposal of or exit from ten countries. In addition during the first half of 2012, we have announced a reduced presence in a further three locations.  Corporate lending has been refocused around selected customers aligned to UK product and sector plans and the Group's international risk appetite.  International is contributing to a strengthening of the Group's balance sheet through a significant and managed run-down of non-core assets together with diversification of sources of funding through international deposits.  In Asset Finance, we are the number one in vehicle and leasing markets supporting the key SME and Corporate segments and we have completed the disposal of, or closed to new business those parts of the portfolio which are outside of our risk appetite.

 

    

WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)

 

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		448		642		(30)		542
Other income		1,031		1,221		(16)		1,103
Total underlying income		1,479		1,863		(21)		1,645
Total costs		(1,177)		(1,288)		9		(1,244)
Impairment		(1,297)		(2,647)		51		(2,163)
Underlying loss		(995)		(2,072)		52		(1,762)
Wealth		176		151		17		136
International		(1,342)		(2,393)		44		(2,024)
Asset Finance		171		170		1		126
Underlying loss		(995)		(2,072)		52		(1,762)
Banking net interest margin		1.45%		1.64%				1.52%
Cost:income ratio		79.6%		69.1%				75.6%
Impairment as a % of average advances		4.31%		7.21%				6.28%
Return on risk-weighted assets		(3.68)%		(6.05)%				(5.89)%

 

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet and other items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		43.9		50.2		(13)
Customer deposits excluding repos		49.7		42.0		18
Total customer balances		93.6		92.2		2
Operating lease assets		2.7		2.7
Funds under management		181.5		182.0
Risk-weighted assets		51.5		56.7		(9)

 

 

WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)

 

Core		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		160		159		1		150
Other income		963		1,004		(4)		996
Total underlying income		1,123		1,163		(3)		1,146
Total costs		(914)		(953)		4		(954)
Impairment		(16)		(17)		6		(34)
Underlying profit		193		193				158
Banking net interest margin		3.90%		3.32%				3.47%
Cost:income ratio		81.4%		81.9%				83.2%
Impairment as a % of average advances		0.39%		0.41%				0.82%
Return on risk-weighted assets		3.02%		2.83%				2.36%

 

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet and other items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		7.4		8.1		(9)
Customer deposits excluding repos		49.0		40.7		20
Total customer balances		56.4		48.8		16
Operating lease assets		2.6		2.6
Funds under management		181.1		181.6
Risk-weighted assets		12.5		13.5		(7)

 

 

WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)

 

Non-core		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		288		483		(40)		392
Other income		68		217		(69)		107
Total underlying income		356		700		(49)		499
Total costs		(263)		(335)		21		(290)
Impairment		(1,281)		(2,630)		51		(2,129)
Underlying loss		(1,188)		(2,265)		48		(1,920)
Banking net interest margin		1.08%		1.41%				1.24%
Impairment as a % of average advances		4.91%		8.11%				7.03%

 

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet and other items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		36.5		42.1		(13)
Customer deposits excluding repos		0.7		1.3		(46)
Total customer balances		37.2		43.4		(14)
Operating lease assets		0.1		0.1
Funds under management		0.4		0.4
Risk-weighted assets		39.0		43.2		(10)

 

 

WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)

 

Strategic focus

Wealth provides strong growth opportunities for the Group and through deepening the relationships with existing Group clients alongside targeted customer acquisition, its goal is to be recognised as the primary Wealth advisor to UK mass affluent, affluent and high net worth customers together with UK expatriates and others with UK connections.  We aim to increase our market share in UK and International Wealth primarily through growing the amount of customer deposits and funds under management that we manage on behalf of franchise customers, whilst improving margins and operating efficiency.

 

In the International businesses, the priority is to maximise value in the medium term.  The immediate focus is on close management of the balance sheet.  We are contributing to a strengthening of the Group's balance sheet through a significant and managed run-down of non-core assets together with increasing and diversifying our funding through international deposit gathering.  At the same time, International is delivering operational efficiencies and rightsizing its cost base to fit its reshaped business models.

 

In Asset Finance, we have refocused the business into sectors which fit our risk appetite and profitability and are looking to deliver focused, profitable growth while completing the run-down or disposal of the closed to new business portfolios.

 

Progress against strategic initiatives

 

Reshaping the Business and Strengthening the Balance Sheet

Focus remains on maximising value and aligning with the Group's risk appetite through close management of the lending portfolio, continuing disciplined reduction of non-core assets, diversifying sources of funding and rationalisation of our international presence.

 

We have further reduced non-core loans and advances to customers, excluding reverse repos, by £5.6 billion in the first half of 2012 through a mixture of repayments and selected asset disposals (in addition to foreign exchange and impairment effects as outlined below).  This reduction includes the sale of £0.8 billion (gross) of Australian corporate real estate loans, which further de-risks the Australian business and has resulted in a cumulative 92 per cent reduction of the real estate non-performing portfolio.  It also includes the impact of a £0.3 billion (gross) asset reduction in Ireland in respect of a successful disposal of a portfolio of Wholesale assets.

 

Our international on-line deposit business continued to grow strongly with customer balances as at June 2012 of £19.8 billion, an increase of £6.0 billion.  Overall, the Wealth, Asset Finance and International businesses have become a significant contributor to the Group's funding with a 20 per cent deposit growth across the UK and International Wealth businesses as well as in International online deposits.  The division has also made good progress towards reducing its International presence with a further three closures and disposals announced bringing the total to ten and achieving two thirds of our target to halve our international footprint.

 

Simplifying the Bank

The Simplification initiative is well underway, the focus of which is on simplifying operations and processes, delayering management structures, consolidating supplier relationships and increasing the efficiency of distribution channels.  Wealth, Asset Finance and International is in the process of realising additional efficiencies and cost savings through its initiatives to streamline operating models, create a shared support infrastructure and develop a single customer platform across all International Wealth businesses.

 

Investing in Growth and Supporting the UK Economy

The division will focus on serving customers both within the UK and also those with UK connections.  In International, corporate lending has been refocused around selected customers aligned to UK product and sector plans and the Group's international risk appetite.  In Wealth, the focus of propositions will be within the existing UK customer franchise in addition to customers with UK connections in Commonwealth countries, Europe, Middle East, and on the Indian Subcontinent.

 

WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)

 

The division is investing significantly in UK and International Wealth to grow market share in what is viewed as a key growth opportunity for the Group.  The investment is geared towards developing compelling propositions for affluent and high net worth customers.  Underpinning this, we are consolidating our platforms and simplifying the operating model which together with the creation of compelling products will deliver a better customer experience in a more efficient manner, thereby improving customer onboarding, retention and value capture through cross sales.

 

Balance sheet progress

Net loans and advances to customers decreased by £6.3 billion to £43.9 billion as we continued to focus management action on de-risking the balance sheet.  The reduction of £6.3 billion reflects net repayments (including asset sales) of £5.0 billion, additional impairment provisions mainly within the International businesses, and foreign exchange movements of £1.0 billion.

 

Risk-weighted assets decreased by £5.2 billion to £51.5 billion, reflecting lower asset balances and increased impairment provisions, particularly in the non-core portfolios, together with improved use of collateral across all businesses.

 

Customer deposits increased by £7.7 billion to £49.7 billion mainly due to continued strong deposit inflows in the International deposit businesses.

 

Financial performance

From 2012 we have made a small number of changes to our segmental reporting to reflect changes in management responsibilities and to align more closely to our strategic objectives.  The primary changes are to report Asset Finance as part of Wealth, Asset Finance and International rather than Wholesale division and to redefine the Wealth and International segments so that Wealth encompasses only our UK and International Wealth businesses, SWIP and St. James' Place.  Prior year segment comparatives have been restated and there is no impact on overall Group results.

 

Underlying loss before tax reduced by 52 per cent to £995 million primarily due to a £1,350 million reduction in impairments and lower expenses but partially offset by a fall in non-core income as a result of the balance sheet reduction.

 

Within the core business, underlying profit remained flat at £193 million as lower income, which reduced by 3 per cent largely as a result of lower income from fund management as investment markets remained subdued in the first half of 2012 was offset by a reduction in costs.  Core costs reduced by 4 per cent to £914 million largely as a result of the impact of one off regulatory costs in the prior year and strong cost management across all our businesses.

 

Underlying non-core loss reduced by 48 per cent to £1,188 million driven by a continued reduction in impairments and costs partly offset by a fall in non-core income as a result of the focus on non-core balance sheet reduction.

 

Net interest income decreased by 30 per cent, or 31 per cent in constant currency terms.  This was entirely driven by the non-core business, with higher funding costs and the increased strain of impaired assets, reflected in a 31 per cent reduction in net lending margins together with lower lending volumes due to the managed run-off of selected International and Asset Finance portfolios.  This was partially offset by the impact of continued deposit inflows in the core International deposit business together with improving volumes and margins across the core Wealth businesses.

 

Other income decreased by 16 per cent, mainly due to lower operating lease assets in the non-core motor and specialist asset finance portfolios, and the impact of subdued investment markets on the Wealth businesses.

 

Total costs decreased by 9 per cent (10 per cent excluding operating lease depreciation).  This reflected our continued focus on simplifying our business model and reducing our international footprint.  This cost reduction was achieved despite increased demand on the business through an 18 per cent increase in customer deposits.  The cost:income ratio (treating operating lease depreciation as negative income) was 73.2 per cent.

 

The impairment charge reduced by 51 per cent to £1,297 million largely as a result of lower charges in the wholesale Irish and Australian businesses.  The rate of increase in newly impaired loans in Ireland has slowed through the second half of 2011 and the first half of 2012. 

WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)

 

Wealth

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		181		149		21		172
Other income		448		474		(5)		460
Total underlying income		629		623		1		632
Total costs		(445)		(457)		3		(478)
Impairment		(8)		(15)		47		(18)
Underlying profit		176		151		17		136
Cost:income ratio		70.7%		73.4%				75.6%
Impairment as a % of average advances		0.32%		0.60%				0.73%

 

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet and other items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		4.5		4.8		(6)
Customer deposits excluding repos		28.2		26.2		8
Total customer balances		32.7		31.0		5
Funds under management		180.9		180.8
Risk-weighted assets		5.5		5.7		(4)

 

In Wealth, our key focus has been to grow our market share in UK and International Wealth primarily through growing the total amount of deposits and funds under management that we manage on behalf of franchise customers, whilst improving margins and operating efficiency.  Funds under management increased by £0.1 billion at £180.9 billion, reflecting a shift of customer appetite away from investment products towards deposits.

 

Underlying profit before tax increased by 17 per cent to £176 million driven by a combination of increased income and better operating efficiency.

 

Total income increased by 1 per cent to £629 million, reflecting strong deposit growth of £2.0 billion, or 8 per cent in the year (approximately 16 per cent annualised), and margins partially offset by lower income from fund management as investment markets remained subdued in the first half of 2012.

 

Total costs decreased by 3 per cent to £445 million driven by benefits from cost saving initiatives across the Wealth businesses as part of the Simplification programme and despite significant investment in the Wealth business in the first half of the year.

 

 

WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)

 

Funds under management

		As at  30 June  2012		As at  30 June  2011		As at  31 Dec  2011
		£bn		£bn		£bn
Scottish Widows Investment Partnership (SWIP)
Internal		117.0		120.7		116.8
External		21.3		26.7		23.1
		138.3		147.4		139.9
Other Wealth:
St James's Place		30.9		29.1		28.5
Invista Real Estate		0.2		2.5		0.8
Private and International Banking		12.1		14.3		12.8
Closing funds under management		181.5		193.3		182.0
		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Half-year  to 31 Dec  2011
		£bn		£bn		£bn
Opening funds under management		182.0		192.0		193.3
Inflows:
SWIP         - internal		0.4		1.0		1.7
- external		0.8		0.7		0.8
Other		3.4		3.8		4.7
		4.6		5.5		7.2
Outflows:
SWIP         - internal		(2.5)		(4.4)		(0.1)
- external		(2.7)		(1.8)		(3.5)
Other		(3.2)		(2.1)		(8.0)
		(8.4)		(8.3)		(11.6)
Investment return, expenses and commission		3.3		4.1		(6.9)
Net operating (decrease) increase in funds		(0.5)		1.3		(11.3)
Closing funds under management		181.5		193.3		182.0

 

Funds under management reduced by £0.5 billion to £181.5 billion.  Net outflows of £3.8 billion reflect expected attrition on insurance funds within SWIP, the market backdrop and a shift in customer investments in our Wealth businesses away from funds towards Wealth and Retail deposits. 

WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)

 

International

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		114		302		(62)		205
Other income		57		157		(64)		109
Total underlying income		171		459		(63)		314
Total costs		(278)		(335)		17		(278)
Impairment		(1,235)		(2,517)		51		(2,060)
Underlying loss		(1,342)		(2,393)		44		(2,024)
Cost:income ratio		162.6%		73.0%				88.5%
Impairment as a % of average advances		5.07%		8.51%				7.36%

 

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet and other items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		33.8		39.0		(13)
Customer deposits excluding repos		21.5		15.8		36
Total customer balances		55.3		54.8		1
Funds under management		0.6		1.2
Risk-weighted assets		37.9		41.6		(9)

 

Balance sheet progress

Within International, our key focus has been to strengthen the balance sheet through material and targeted reductions in non-core assets and diversifying sources of funding through international deposit raising.

 

Net loans and advances to customers decreased by £5.2 billion or 13 per cent, to £33.8 billion due to net repayments of £4.0 billion across all businesses (including the sale of £0.8 billion (gross) of Australia corporate real estate loans), further impairment provisions and foreign exchange movements of £1.0 billion.  The division is focused on de-risking and right-sizing the balance sheet, focusing on key Group relationships, as well as reducing concentrations in Commercial Real Estate.

 

Risk-weighted assets decreased by £3.7 billion, or 9 per cent, to £37.9 billion reflecting lower asset balances and further impairment provisions, improved use of collateral and foreign exchange rate movements.  This is partly offset by an increase in risk-weighted assets to cover further deterioration in the Irish housing market and other credit risk model changes which impact risk-weighted assets.

 

Customer deposits increased by £5.7 billion, or 36 per cent, to £21.5 billion driven by continued strong performance within our International deposit business.

 

 

WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)

 

Financial performance

Underlying loss reduced by £1,051 million to £1,342 million as a result of a lower impairment charge, mainly reflecting a reduction of £882 million in Ireland and £383 million in Australia.  This improvement was partially offset by a fall in total income which decreased by 63 per cent, but was 53 per cent lower in constant currency terms, reflecting lower interest-earning assets (which have reduced by 16 per cent since December 2011 and by 19 per cent over the last 12 months) and the increased strain of lost earnings on higher impaired assets.

 

Total costs reduced by 17 per cent, or 18 per cent on constant currency terms, reflecting cost saving initiatives across the International business, partly offset by the continued investment in the International deposit business.

 

The impairment charge and loans and advances to customers are summarised by key geography in the following table.

 

		Impairment charges						Loans and advances to customers
		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Half-year  to 31 Dec  2011		As at  30 June  2012		As at  31 Dec  2011
		£m		£m		£m		£bn		£bn
Ireland wholesale		832		1,539		1,137		6.9		8.7
Ireland retail		65		240		271		5.6		6.0
Australia		203		586		448		6.9		8.1
Wholesale Europe		111		111		93		4.8		5.9
Latin America/Middle East		-		24		41		0.2		0.4
Netherlands (retail)		6		4		17		5.8		6.2
Spain (retail)		12		11		48		1.5		1.5
Asia (retail)		6		2		5		2.1		2.2
		1,235		2,517		2,060		33.8		39.0

 

The impairment charge reduced by £1,282 million, or 51 per cent, to £1,235 million due to reduced impairment charges in Ireland and Australia.  The rate of increase in newly impaired loans in Ireland has reduced, and a significant portion of the Australian impaired portfolio was disposed of in 2011.  Excluding Ireland, the impairment charge reduced by £400 million, or 54 per cent to £338 million.

 

 

WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)

 

Asset Finance

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		153		191		(20)		165
Other income		526		590		(11)		534
Total underlying income		679		781		(13)		699
Total costs		(454)		(496)		8		(488)
Impairment		(54)		(115)		53		(85)
Underlying profit		171		170		1		126
Cost:income ratio		66.9%		63.5%				69.8%
Impairment as a % of average advances		1.65%		2.51%				2.13%

 

 

		As at  30 June  2012		As at  31 Dec  2011		Change  since  31 Dec  2011
Key balance sheet and other items		£bn		£bn		%
Loans and advances to customers excluding reverse repos		5.6		6.4		(13)
Operating lease assets		2.7		2.7
Risk-weighted assets		8.1		9.4		(14)

 

Within Asset Finance, our key focus has been to complete the run-off of the portfolios, now closed to new business, which are outside of our risk appetite while delivering focused, profitable growth elsewhere.

 

Loans and advances to customers reduced by 13 per cent to £5.6 billion as we continued to run-off the portfolios that are closed to new business.

 

Underlying profit increased by 1 per cent to £171 million as a result of improved impairment charges and total costs offset by lower income.  Excluding the results of Hill Hire (disposed of in June 2011), from the prior year, underlying profit before tax increased by 2 per cent.

 

Total income decreased by 13 per cent to £679 million, despite improving margins in the retail business, largely as a result of closed book run-off together with the impact of the Hill Hire disposal.  Excluding the Hill Hire income included in the first half of 2011, total income decreased by 10 per cent.

 

Operating lease depreciation decreased 6 per cent to £329 million, reflecting the reduced fleet size and strong disposal returns in Lex Autolease.

 

Total costs (excluding operating lease depreciation) decreased by 15 per cent to £125 million, reflecting the lower asset base and simplification of our business model.  The cost:income ratio (treating operating lease depreciation as negative income) was 35.6 per cent.

 

The impairment charge reduced by 53 per cent to £54 million (of which £52 million or 96 per cent related to non-core assets), driven by stronger credit management and improving credit quality.  The retail portfolio saw more customers meeting their payment arrangements resulting in a lower proportion of people falling into arrears.  The retail impairments also benefited from debt sale activity in the first half of the year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THIS PAGE IS INTENTIONALLY LEFT BLANK

 

INSURANCE

 

Key highlights

·     Underlying profit in the first half of 2012 was £502 million, compared to £681 million in the first half of 2011, primarily due to a £109 million reduction in LP&I UK income predominantly as a result of the reduction in economic returns which drive income generated from policyholder funds.  Also, incremental adverse property claims of £65 million as a result of weather events have impacted the first half of the year, with the period from April to June being the wettest on record.

·     Total underlying income, net of insurance claims, decreased by £210 million to £886 million.  This was mainly due to a reduction in LP&I UK income as referred to above, adverse property claims and the underwriting of pet insurance.

·     Total costs improved by 7 per cent due to a continued focus on cost management and delivery of Simplification cost savings combined with the non-recurrence of the 2011 charge in respect of FSCS levy.

·     LP&I UK sales (PVNBP) decreased by 2 per cent reflecting the subdued economic climate, evidenced by lower Bancassurance protection and investment volumes, mitigated by continued strong sales of corporate pensions before the implementation of the Retail Distribution Review (RDR).

·     LP&I UK margin on an EEV basis decreased to 3.8 per cent in the first half of 2012 from 4.2 per cent in the first half of 2011.  While remaining strong, the decrease is a reflection of changes in the business mix.  The Internal Rate of Return (IRR) on new business remains in excess of 16 per cent.

·     General Insurance profits reduced by 30 per cent to £158 million due to increased weather related claims in 2012, an £18 million cost of underwriting pet insurance for customers whose pets have pre-existing conditions, and the impact of the continued run-off of the PPI book.

·     In delivering its strategic objectives, Insurance is focusing on simplifying service and claims processes across the business and has implemented a new organisational design allowing the business greater flexibility in responding to the changing market-place to ensure we are better placed to serve customer needs.

 

 

INSURANCE (continued)

 

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		(37)		(25)		(48)		(42)
Other income		1,156		1,319		(12)		1,368
Insurance claims		(233)		(198)		(18)		(145)
Total underlying income, net of insurance claims		886		1,096		(19)		1,181
Total costs		(384)		(415)		7		(397)
Underlying profit		502		681		(26)		784
Underlying profit by business unit
Life, Pensions and Investments:
UK business		338		436		(22)		450
European business		6		19		(68)		63
General Insurance		158		226		(30)		271
Underlying profit		502		681		(26)		784
EEV new business margin		3.6%		4.1%				3.9%
Life, Pensions and Investments sales (PVNBP)		5,627		5,763				4,899

 

 

Core		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		(41)		(30)		(37)		(47)
Other income		1,126		1,282		(12)		1,279
Insurance claims		(233)		(198)		(18)		(145)
Total  underlying income, net of insurance claims		852		1,054		(19)		1,087
Total costs		(365)		(395)		8		(377)
Underlying profit		487		659		(26)		710

 

 

Non-core		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		4		5		(20)		5
Other income		30		37		(19)		89
Total underlying income		34		42		(19)		94
Total costs		(19)		(20)		5		(20)
Underlying profit		15		22		(32)		74

 

 

 

INSURANCE(continued)

 

Strategic focus

Insurance is a relationship business focused on helping our customers to protect themselves today whilst preparing for a secure financial future.  Its objective is to be the best Insurance business for customers.

 

Progress against strategic initiatives

 

Reshaping the Business and Strengthening the Balance Sheet

Work to reshape Insurance to operate as one business with an increasingly customer-focused corporate and management structure is fundamentally complete with a single Executive committee and Board now in place.  We have also continued to develop new and enhanced product propositions and to pursue our strategy of selective participation in the important Intermediary and Direct channels.

 

Following a participation review we announced the withdrawal from the Offshore Bond market in the first quarter of 2012.  At the same time we announced our intention to selectively increase our participation in the risk market where product economics and returns meet our criteria.  We plan to launch an enhanced Annuities product and beyond that we are aiming to enter the IFA protection market.

 

Simplifying the Business

Insurance continues to focus on cost reduction with costs improving by 7 per cent year-on-year.  Efficiencies have been achieved without compromising the quality of customer service and customer satisfaction ratings have remained robust across the division.

 

We have made good progress with the Simplification programme in the first half of 2012.  A new organisational design has been implemented allowing the business greater flexibility in responding to the changing market place to ensure we are better placed to serve customer needs.  The continuous improvement programme is transforming back office and customer contact centre processes, reducing handling time and improving the overall customer experience.

 

The Simplification programme will continue to deliver further improvements through the provision of simpler systems and processes.

 

Investing in Growth and Supporting the UK Economy

In Insurance we are focused on leveraging our multi-brand strategy to deliver sustainable growth in key markets.

 

Through the Group strategic initiative programme we are investing in building lasting relationships with our bancassurance customers through the introduction of new advice models, enhanced products and access to new direct channels.

 

Our Protection for Life plan has been further enhanced through the addition of Essential Earnings Cover (EEC).  Recognising our customers' needs for income protection, EEC is an affordable product designed to build consumer confidence through guaranteed premiums and simpler application and claim processes.  It will provide our customers with significant income protection if they suffer an accident or illness that prevents them from working.

 

We are also seeing good traction in corporate pensions business through our intermediary channel, following a significant investment in our proposition.  Our direct sales force which serves those of our customers who do not have a financial adviser is also performing well following enhanced targeting of those customers.

 

Within Life, Pensions and Investments we recognise a large opportunity in the corporate pensions market as schemes move towards auto-enrolment and a shift from defined benefit to defined contribution schemes.  We also continue to explore opportunities within the annuity market.

 

 

INSURANCE(continued)

 

The Retail Distribution Review (RDR) comes into effect from 1 January 2013 and our preparations are progressing well, both in terms of proposition development and in supporting Independent Financial Advisers (IFAs) as they transition business models to comply with the new regulations.  Inevitably, as a result of RDR, some IFAs will choose to exit markets and therefore some customers will no longer receive advice from their IFAs.  The business is committed to providing a direct proposition to maintain a high quality of service to these customers.

 

Scottish Widows was awarded Best Group Pension Provider in the Corporate Adviser awards and Best Personal Pensions Provider in the Professional Adviser awards.  More recently, Scottish Widows also received an award for its customer focus at the annual Customer Contact Innovation Awards.  These awards celebrate excellence in the industry and recognise initiatives which put customers at the heart of businesses.

 

In General Insurance, our strategy is focused around protecting and growing our home insurance business whilst seeking to expand its role in other markets, including commercial insurance, through targeted participation and underwriting strategy.  In line with this we have witnessed strong growth in motor insurance, a product that we distribute directly.  An increased focus by the General Insurance business and Commercial banking to improve the customer experience has resulted in a year-on-year increase in premiums of Essential Business Insurance of 17 per cent.

 

Many parts of the country have experienced record levels of rainfall, and as a result our home claims operations have experienced a significant uplift in open flood claim volumes since April.  We have been working to get our customers' lives back on track by deploying our Rapid Response Vehicle to some of the most affected areas, and ensuring our specialist Personal Claims Consultants are deployed to the worst hit areas.

 

Life, Pensions and Investments

 

UK business

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Net interest income		(37)		(24)		(54)		(38)
Other income		631		727		(13)		731
Total underlying income		594		703		(16)		693
Total costs		(256)		(267)		4		(243)
Underlying profit		338		436		(22)		450
Underlying profit by business unit
New business profit    - insurance business1		186		201		(7)		181
- investment business1		(25)		(33)		24		(18)
Total new business profit		161		168		(4)		163
Existing business profit		189		267		(29)		272
Experience and assumption changes		(12)		1				15
Underlying profit		338		436		(22)		450
EEV new business margin (UK)		3.8%		4.2%				4.2%
Life, Pensions and Investments sales (PVNBP)		5,510		5,595		(2)		4,624

 

1

As required under IFRS, products are split between insurance and investment contracts depending on the level of insurance risk contained.  For insurance contracts, the new business profit includes the net present value of profits expected to emerge over the lifetime of the contract, including profits anticipated in periods after the year of sale; for investment contracts the figure reflects the profit in the year of sale only, after allowing for the deferral of income and expenses.  Consequently the recognition of profit from investment contracts is deferred relative to insurance contracts.

 

 

INSURANCE(continued)

 

Life, Pensions and Investments (LP&I UK) profit was impacted by lower income due to reduction in economic returns which drive income generated from policyholder funds.  For insurance contracts, future cash-flows are discounted to give a current Value of in Force assets.  A number of assumptions, including economic indices, are used to model those cash-flows.  The subdued economic environment has resulted in the rate of return used in calculating the 2012 results being significantly lower than the comparable rate in the prior year, driving a reduction in existing business profits.  Existing business was also impacted by higher interest payments following capital restructuring initiatives completed in 2011.

 

Total new business profit decreased by £7 million, or 4 per cent, to £161 million.  The decrease primarily reflects lower Bancassurance volumes, as the economic environment continues to curb customers' desire to invest, partly offset by a strong corporate pensions performance, up 22 per cent versus prior year, through the intermediary channel.

 

LP&I UK margin on an EEV basis remains strong despite reducing to 3.8 per cent in the first half of 2012 from 4.2 per cent in the same period in 2011.  The decrease reflects changes in the business mix.  The Internal Rate of Return (IRR) on new business remains in excess of 16 per cent.

 

The capital position of the Scottish Widows Group remains robust.  The estimated Insurance Groups Directive (IGD) capital surplus for the group was £4.0 billion, which compares to £3.7 billion at 31 December 2011.

 

European business

Profit decreased by £13 million, or 68 per cent, to £6 million.  The reduction was driven largely by an expected reduction in new business due to the strategy of focusing on the relationship with our key distributors and securing value in the existing book of business.

 

New business

An analysis of the present value of new business premiums for business written by the Insurance division, split between the UK and European Life, Pensions and Investments Businesses is given below:

 

Present Value of New Business Premiums (PVNBP)

				Half-year  to 30 June  2012						Half-year  to 30 June  2011				Change  since  30 June  2011	Half-year  to 31 Dec  2011
Analysis by product		UK		Europe		Total		UK		Europe		Total				Total
		£m		£m		£m		£m		£m		£m		%		£m
Protection		295		16		311		376		18		394		(21)		367
Payment protection		7		-		7		11		-		11		(36)		10
Savings and investments		331		67		398		633		99		732		(46)		647
Individual pensions		877		34		911		780		51		831		10		793
Corporate and other pensions		2,857		-		2,857		2,350		-		2,350		22		2,073
Retirement income		369		-		369		394		-		394		(6)		353
Managed fund business		77		-		77		58		-		58		33		58
Life and pensions		4,813		117		4,930		4,602		168		4,770		3		4,301
OEICs		697		-		697		993		-		993		(30)		598
Total		5,510		117		5,627		5,595		168		5,763		(2)		4,899
Analysis by channel
Intermediary		3,773		117		3,890		3,407		168		3,575		9		3,283
Bancassurance		1,389		-		1,389		1,850		-		1,850		(25)		1,366
Direct		348		-		348		338		-		338		3		250
Total		5,510		117		5,627		5,595		168		5,763		(2)		4,899

 

INSURANCE(continued)

 

Total sales (PVNBP) have decreased by 2 per cent to £5,627 million primarily reflecting lower savings and investments, OEICs and protection volumes partially offset by strong sales of individual and corporate pensions in LP&I UK.

 

Sales of protection and investment products through the Bancassurance channel have reduced, partly due to subdued customer demand reflecting the market environment and preparation within the Retail business for the Retail Distribution Review (RDR) including advisor restructuring.  Total sales in the Bancassurance channel have increased compared to the second half of 2011.

 

In the Intermediary channel there has been strong growth, particularly in Corporate Pension sales prior to the introduction of RDR, a reflection of the underlying strength of our proposition and the quality of service provided to customers.  Initiatives such as My Money Works and our market leading auto enrolment engine, combined with a continuing focus on our strong relationships, will ensure that the business is well positioned to take advantage of the changing market-place as a result of RDR.  Individual pensions have increased by 10 per cent, driven by sales of our flagship Retirement Account product.

 

The direct channel continues to perform well and is being developed for future growth.  This channel will become even more important following the introduction of RDR.

 

 

INSURANCE(continued)

 

Funds under management

The table below shows the funds of the Life, Pensions and Investment companies within the Insurance division.  These funds are predominantly managed within the Group by the Wealth, Asset Finance and International division.

 

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Half-year  to 31 Dec  2011
		£bn		£bn		£bn
Opening funds under management		127.6		133.1		133.3
UK business
Premiums		5.3		5.6		4.5
Claims and surrenders		(7.1)		(7.5)		(7.1)
Net outflow of business		(1.8)		(1.9)		(2.6)
Investment return, expenses and commission		2.7		2.3		(2.5)
Net movement		0.9		0.4		(5.1)
European business
Net movement		-		0.1		(0.6)
Dividends and capital repatriation		-		(0.3)		-
Closing funds under management		128.5		133.3		127.6
Managed by the Group		102.8		107.6		103.4
Managed by third parties		25.7		25.7		24.2
Closing funds under management		128.5		133.3		127.6

 

The net outflow of business is primarily a result of the move in sales mix away from savings products which generate large single premiums, caused in part by more difficult economic conditions and the run-off of the in-force book.

 

The key drivers of investment return are equity and gilt market movements.  In the year to date UK equity markets have risen by 3 per cent and European markets have risen by 2 per cent while gilt markets increased by 3 per cent.

 

Maturity profile of in-force business

The table below shows the profile of the Value of In-Force (VIF) asset recognised on the IFRS balance sheet based on the date when the profit is expected to emerge.

 

		VIF		VIF emergence in years (%)
		Total  £m		0-5		6-10		11-15		16-20		>20
30 June 2012		5,264		38		24		17		11		10
31 December 2011		5,247		37		24		16		10		13

 

The increase in VIF is mainly due to increased business partially offset by the expected run-off of business.

 

The profile of the emergence of VIF in future years shows that almost 40 per cent of the VIF is expected to be released within 5 years, with nearly 80 per cent expected to be released within 15 years.

 

 

INSURANCE (continued)

 

General Insurance

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Change  since  30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		%		£m
Home insurance		425		421		1		436
Payment protection insurance		46		71		(35)		54
Other		9		33		(73)		20
Net operating income		480		525		(9)		510
Claims paid on insurance contracts (net of reinsurance)		(233)		(198)		(18)		(145)
Operating income, net of claims		247		327		(24)		365
Total costs		(89)		(101)		12		(94)
Underlying profit		158		226		(30)		271
Combined ratio		80%		73%				66%

 

Underlying profit decreased by 30 per cent to £158 million, a result that is broadly in line with the prior period when excluding increased weather related claims in 2012, the cost of underwriting pet insurance for pets with pre-existing conditions, and the impact of the continued run-off of the PPI book.

 

Total income for home insurance was 1 per cent up on last year at £425 million and reflects the maturity and competitiveness of the market.

 

PPI income continues to reduce as a result of the Group ceasing to write new PPI business in 2010.

 

Increased claims of £233 million, 18 per cent higher than in 2011, were mainly driven by adverse property claims following the weather events that have impacted the first half of the year, with the period from April to June being the wettest on record.  Claims were further impacted by the cost of underwriting pet insurance for pets with pre-existing conditions.  The combined impact was partly offset by lower unemployment claims which continue to be positively impacted by the reduction in the size of the PPI book.

 

Operating expenses decreased by £12 million, or 12 per cent, to £89 million primarily as a result of further delivery of Simplification savings and a continued focus on cost management.

 

Despite the impact of weather related claims our combined ratio remains strong at 80 per cent.

 

GROUP OPERATIONS

 

		Half-year  to 30 June  2012		Half-year  to 30 June  20111		Change  since  30 June  2011	,	Half-year  to 31 Dec  20111
		£m		£m		%		£m
Total underlying income		17		(6)				48
Direct costs:
Information technology		(591)		(621)		5		(553)
Operations		(349)		(363)		4		(349)
Property		(458)		(467)		2		(442)
Sourcing		(24)		(27)		11		(29)
Support functions		(37)		(42)		12		(41)
		(1,459)		(1,520)		4		(1,414)
Result before recharges to divisions		(1,442)		(1,526)		6		(1,366)
Total net recharges to divisions		1,376		1,464				1,372
Underlying (loss) profit		(66)		(62)				6

 

1	2011 comparative figures have been amended to reflect the effect of the continuing consolidation of operations across the Group.  To ensure a fair comparison of the 2012 performance, 2011 direct costs have been increased with an equivalent offsetting increase in recharges to divisions.

 

Strategy

Group Operations' aim is to be a world class operations business whilst ensuring value through cost and process efficiency.  This will be achieved by: providing excellent technology and effective processes to support the business; driving simplification, automation and continuous improvement; developing world class operations, leadership and capability; and, maintaining strong controls to protect the Group.

 

Progress against strategic initiatives

The Simplification programme, part of the Group's Strategic transformational journey, is on track to achieve £1.7 billion of savings in 2014.  The programme continues to make good progress and a strong pipeline of early deliverables has seen the successful implementation of a number of initiatives in the first half of 2012 that not only reduce costs, but also enhance customer service.  Group Operations is playing a major part in the whole programme but particularly through further improved sourcing, End-to-End process re-engineering, and property consolidation.

 

Sourcing: We are optimising our demand management, simplifying specifications and further strengthening our supplier relationships.  We have reduced the number of suppliers to the Group from just over 18,000 to less than 14,000 in the past 12 months whilst continuing to focus on a core group of lead suppliers.

 

End-to-End Processes: We are conducting an end-to-end redesign of our core processes, including significant process automation, simplifying processes for our staff, increasing accuracy, and reducing complaints.  For example: a fully re-engineered process for setting up and handling customer accounts transferred from other banks and improvements to internet banking customer enrolment.  These initiatives are already resulting in more time to serve customers and creating an improved customer experience.

 

Property: We are continuing our consolidation of the Group's property, enabling the delivery of process and efficiency savings from the Simplification programme.  We have also outsourced our property facilities and asset management services.

 

Group Operations is also playing a key role in delivering the technical expertise and support for the other Group strategic initiatives.

 

GROUP OPERATIONS (continued)

 

Financial performance

Direct costs in the first half of 2012 decreased by £61 million, or 4 per cent, to £1,459 million reflecting the continued focus on cost management and the delivery of Simplification benefits.

 

Information Technology costs decreased by 5 per cent, with Simplification savings offsetting costs supporting the Group's investment programme.

 

Operations costs decreased by 4 per cent, through the continuing rationalisation of our major Operations functions.  Operations includes Banking Operations, Collections and Recoveries, and Payments and Business Services.

 

Group Property costs decreased by 2 per cent, with the continuing consolidation of the Group's property portfolio delivering further benefits.

 

Sourcing includes the cost of running the department and certain centrally-managed contracts.  Sourcing continues to play a major part in helping to deliver Group-wide sourcing savings.

 

Support functions (includes Group Security & Fraud and Group Change Management) have decreased by 12 per cent through the delivery of Simplification benefits.

CENTRAL ITEMS

 

		Half-year  to 30 June  2012		Half-year  to 30 June  2011		Half-year  to 31 Dec  2011
		£m		£m		£m
Total underlying income		(4)		236		103
Total costs		(51)		(65)		(194)
Trading surplus		(55)		171		(91)
Impairment		-		-		(3)
Underlying (loss) profit		(55)		171		(94)

 

Central items include income and expenditure not recharged to the divisions, including the costs of certain central and head office functions and corporate one-off costs such as the UK bank levy.

 

Total underlying income largely reflects the net impact of items not recharged by the Group's Corporate Treasury to the divisions.  The reduction in income retained in the centre compared to the first half of 2011 is largely due to the impact of certain capital and risk management actions being retained centrally.

 

 

 

 

Core and non-core business

 

Half-year to 30 June 2012	Underlying  income, net  of insurance  claims		Impairment  charge		Loans and  advances to  customers1			Risk-  weighted  assets		Customer  deposits1
		£m		£m		£bn		£bn		£bn
Core portfolios
Retail		4,221		(735)		320.1		90.4		254.7
Wholesale		1,601		(111)		78.5		99.8		83.1
Commercial		792		(116)		28.1		23.7		33.2
Wealth, Asset Finance and International		1,123		(16)		7.4		12.5		49.0
Insurance		852		-		-		-		-
Group Operations & Central items		13		-		0.2		12.7		-
		8,602		(978)		434.3		239.1		420.0
Non-core portfolios
Retail		35		(23)		26.9		9.8		-
Wholesale		214		(882)		35.5		43.4		2.2
Commercial		5		7		1.2		1.2		0.3
Wealth, Asset Finance and International		356		(1,281)		36.5		39.0		0.7
Insurance		34		-		-		-		-
		644		(2,179)		100.1		93.4		3.2
Total Group		9,246		(3,157)		534.4		332.5		423.2

 

		%		%		%		%		%
Core portfolios		93.0		31.0		81.3		71.9		99.2
Non-core portfolios		7.0		69.0		18.7		28.1		0.8

 

 

Half-year to 30 June 2011	Underlying  income, net  of insurance  claims			Impairment  charge	Loans and  advances to  customers1			Risk-  weighted  assets		Customer  deposits1