Lloyds Regulatory News (LLOY)

Lloyds Bank Corporate Markets plc

2023 Half-Year Results

13 September 2023

CONTENTS

LBCM's purpose is Helping Britain Prosper

By connecting the UK and Lloyds Banking Group with the world

RESULTS FOR THE HALF-YEAR

• Solid financial performance against a backdrop of continued market volatility and inflationary pressures - profit before tax of £213 million (half-year to 30 June 2022 £249 million) and strong CET1 ratio of 14.5 per cent (14.6 per cent at 31 December 2022)

• Continuing to support our customers' needs by providing product choice in an evolving environment and uncertain economic outlook. We are mindful of the impact of higher interest rates and inflation on our customers

• Solid business performance with Markets ending the half-year in the top three for sterling issuance1 and deepening foreign exchange percentage share of wallet; and supporting Lloyds Banking Group (LBG) on signature transactions

• Strategic investment continues with delivery including the further roll out of our new cash management and payments platform in the Crown Dependencies; and continuing to invest in our foreign exchange proposition including capabilities on the FXall and Bloomberg platforms

Lloyds Bank Corporate Markets plc's (LBCM) strategy continues to be to connect the UK and LBG with the world through a first-class banking, financing and risk management proposition, underpinned by excellent customer service. Guided by our purpose of Helping Britain Prosper, we remain fully focused on supporting our customers and helping them navigate the current environment.

Part of LBG, LBCM's purpose driven business model supports its customers (large corporates, financial institutions, commercial customers plus retail customers in the Crown Dependencies) with a range of products including risk management, commercial lending, retail banking services, bonds and structured finance, trade and working capital management and ESG product solutions. All served via its hubs in the UK, Jersey, Guernsey, Isle of Man, New York USA and Frankfurt Germany.

1  Refinitiv Eikon - All International Bonds in GBP, excluding Sovereign, Supranational and Agency.

REVIEW OF PERFORMANCE

 Income statement

REVIEW OF PERFORMANCE (continued)

Operating expenses for the period were £238 million and predominantly consist of management charges relating to the intra-group agreement with Lloyds Bank plc and staff costs. LBCM has maintained its cost discipline in the context of continued inflationary pressure and higher planned strategic investment in 2023.

An impairment credit of £18 million has been recognised in the period which is the release of previously charged stage 1 and 2 expected credit loss and is as a result of an improvement in the forward look economics at half-year versus the prior period. A tax charge of £46 million was recorded which is up versus the comparative period as a result of the increase in UK corporation tax rate in April 2023 plus other movements in the tax computation. 

 Balance sheet assets

Balance sheet liabilities

Total liabilities were £90,796 million at 30 June 2023, compared to £83,264 million at 31 December 2022.

REVIEW OF PERFORMANCE (continued)

 Balance sheet equity

Regulatory capital

The capital position of Lloyds Bank Corporate Markets plc (the Bank) is presented on an unconsolidated basis

REVIEW OF PERFORMANCE (continued)

The Bank's capital position as at 30 June 2023, after applying IFRS 9 transitional arrangements, is set out in the following section.

1 No relief under the IFRS 9 transitional arrangements for capital was applied at 30 June 2023. 31 December 2022 comparatives include an adjustment applied to reserves to reflect the application of the IFRS 9 transitional arrangements for capital.

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PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks that could impact LBCM's ability to deliver its long-term strategic objectives and the approach to managing each risk are reviewed and reported to the Board Risk Committee regularly in alignment with the risk management framework.

Our enterprise risk management framework

The LBG enterprise risk management framework (ERMF) applies to all legal entities and is the foundation for the delivery of effective and consistent risk control. It enables proactive identification, active management and monitoring of LBCM's risks, which is supported by our One Risk and Control Self-Assessment approach. 

LBCM has adopted the ERMF, supplemented with additional tailored practices set out to address LBCM-specific requirements. The ERMF and the LBCM risk management framework applies to LBCM business across all legal entities and locations.

LBG continues to conduct a detailed review of its ERMF, which may result in a future reclassification of the principal risks.

LBCM's risk appetite, principles, policies, procedures, controls and reporting are regularly reviewed and updated to ensure they remain in line with regulation, law, corporate governance and industry good practice.

Risk appetite is defined within LBCM as the amount and type of risk that it is prepared to seek, accept or tolerate in delivering its strategy. As a separate legal group with its own parent Board, LBCM maintains its own risk appetite which is aligned to the LBG approach but is adjusted to reflect the specific characteristics of LBCM's balance sheet and portfolio, including its international presence. The LBCM Board (Board) is responsible for approving LBCM's risk appetite statement annually. Board-level risk appetite metrics are supported by sub-Board level metrics and cascaded into more detailed business metrics and limits.

Regular close monitoring and comprehensive reporting to management and the Board ensures risk appetite limits are maintained and subject to stress analysis at a risk type and portfolio level, as appropriate.

Governance is maintained through delegation of authority from the Board down to subsidiary boards and to individuals. Senior executives are supported by a committee-based structure which is designed to ensure open challenge and enable effective Board engagement and decision-making.

The Board and senior management play a vital role in shaping and embedding a supportive risk culture. Senior leaders set a clear tone from the top and lead by example reflecting LBG values, encouraging a culture of intellectual curiosity, innovation and proactive risk management amongst all colleagues.

PRINCIPAL RISKS AND UNCERTAINTIES (continued)

Current thematic and emerging risks

The significant risks encountered by LBCM are detailed below. The external risks faced by LBCM may also impact the success of delivering against LBCM's long-term strategic objectives. They include, but are not limited to, the uncertainties linked to the macroeconomic environment and specifically the impacts of the war in Ukraine that continue to put a strain on commodity and energy prices, financial markets volatility, supply chain disruptions, high interest rates and high inflation which are contributing to the cost of living challenges and pressures on the UK economy, where LBCM mainly operates.

In addition, LBCM continues to monitor and address current thematic risks that could have an adverse impact on business model, financial conditions, operations and its ability to achieve revenue targets. They include, but are not limited to:

- The extent and rapid pace of regulatory changes and increased oversight, which could increase costs and prudential resource requirements for LBCM and result in changes to LBCM's legal and operating structure and create risks from non-compliance that include censure, fines and removal of business permissions to operate

- The effectiveness of proprietary models as models are at risk of being insufficiently predictive due to the limitations of historical data, the recent extreme market volatility, and the risk of ineffectiveness in parameterisation, implementation, oversight and monitoring

- Climate risk is the risk that LBCM experiences losses and/or reputational damage as a result of climate change, either directly or through its customers. LBCM is aligned with LBG, its parent company, with the goal of reducing emissions financing by more than 50 per cent by 2030 and achieving net zero financed emissions by 2050 (refer LBG Half-Year results 2023 and the LBG environmental sustainability report)

- The complexity of the transition from IBORs to Alternative Risk Free Reference Rates which could have material adverse impacts such as less liquid interest rates, increased litigation or disputes and higher operational risks

- The changes to employee expectations following the COVID-19 pandemic and significant structural and regulatory change across the industry may adversely impact LBCM by disrupting the recruitment and retention of key talent

- The discussions between the UK and the EU, continues to create uncertainty on the future UK legal and regulatory framework with the potential to affect the LBCM's business model in the EU

PRINCIPAL RISKS AND UNCERTAINTIES (continued)

Principal risks 

There have been minor changes to the definition of these risks from those disclosed in the LBCM's 2022 Annual Report and Accounts.

Capital risk

The risk that an insufficient quantity or quality of capital is held to meet regulatory requirements or to support business strategy, an inefficient level of capital is held or that capital is inefficiently deployed across LBCM.

Change & execution risk

The risk that, in delivering its change agenda, LBCM fails to ensure compliance with laws and regulation, maintain available and effective customer and colleague services, and/or operate within LBCM's risk appetite.

Conduct risk

The risk of detriment across the customer life cycle including: failures in product management, distribution and servicing activities; from other risks materialising, or other activities which could undermine the integrity of the market or distort competition, leading to unfair customer outcomes, regulatory censure, reputational damage or financial loss.

Customer harm or detriment is defined as consumer loss, distress or inconvenience to customers due to breaches of regulatory or internal requirements or our wider duty to act fairly and reasonably.

The introduction of Consumer Duty has increased regulatory expectations in relation to customer outcomes for consumers. The direct impact for LBCM, considering its business and customer base, is limited, however LBCM would reflect LBG standards where appropriate.

Credit risk

The risk that parties with whom LBCM has contracted fail to meet their financial obligations (both on and off-balance sheet).

Data risk

The risk of LBCM failing to effectively govern, manage, and control its data, including data processed by third party suppliers, or failure to drive value from data; leading to unethical decisions making, poor customer outcomes, loss of value to LBCM and mistrust.

Funding and liquidity risk

The risk that LBCM does not have sufficiently stable and diverse sources of funding or that the funding structure is inefficient; and the risk that financial resources are insufficient to meet commitments as they fall due or can only be obtained at excessive cost.

Market risk

The risk that LBCM's capital or earnings profile is affected by adverse moves in market rates, in particular changes and volatility in interest and foreign exchange rates, inflation rates, commodity prices and credit spreads in the banking and markets businesses.

Model risk

The risk of financial loss, regulatory censure, reputational damage or customer detriment from deficiencies in developing, applying and operating models and rating systems.

Operational resilience risk

The risk that LBCM fails to design resilience into business operations (including those that are outsourced), underlying infrastructure and controls (people, property, process and technology) to withstand external or internal events that could impact the continuity of operations and fails to respond in a way which meets customers and stakeholder expectations and needs when the continuity of operations is compromised.

PRINCIPAL RISKS AND UNCERTAINTIES (continued)

Operational risk

The risk of inadequate or failed internal processes, people or systems, or external events, leading to loss such as cyber-attack, internal and/or external fraud or financial crime, IT systems failures as well as failure to ensure compliance with regulation. This includes the provision of services to LBCM (including people, systems and processes) outsourced to Lloyds Bank plc via a shared service provision model or by external providers via Lloyds Bank plc. The Shared Service Model creates internal service provision risk and this may be elevated in situations where LBCM's priorities are not wholly aligned with those of the wider Lloyds Banking Group.

People risk

The risk that LBCM fails to provide an appropriate colleague and customer centric culture, supported by robust reward and wellbeing policies and processes; effective leadership to manage colleague resources; effective talent and succession management; and control framework to ensure all colleague related requirements are met.

Regulatory and legal risk

The risk arising from the failure to identify, assess, correctly interpret or, comply with regulatory and/or legal requirements, leading to customer detriment, failure to prevent and/or detect economic crime, financial penalties, regulatory censure, criminal or civil enforcement action.

Strategic risk

The risk which results from:

- Incorrect assessments of internal or external operating environments

- Failure to understand the potential impact of strategic responses and business plans on existing risk types

- Failure to respond appropriately to material changes in the external or internal operating environments

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STATUTORY INFORMATION

CONSOLIDATED INCOME STATEMENT (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated half-year financial statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated half-year financial statements.

CONSOLIDATED BALANCE SHEET

The accompanying notes are an integral part of the condensed consolidated half-year financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated half-year financial statements.

 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (continued)

The accompanying notes are an integral part of the condensed consolidated half-year financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (continued)

The accompanying notes are an integral part of the condensed consolidated half-year financial statements.

CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

Cash and cash equivalents comprise cash and non-mandatory balances with central banks and amounts due from banks with a maturity of less than three months.

The accompanying notes are an integral part of the condensed consolidated half-year financial statements.

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS

Note 1: Basis of preparation and accounting policies

These condensed consolidated half-year financial statements as at and for the period to 30 June 2023 have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority (FCA) and with International Accounting Standard 34 (IAS 34), Interim Financial Reporting as adopted by the United Kingdom and comprise the results of Lloyds Bank Corporate Markets plc (the Bank) together with its subsidiaries (the Group). References within this document to LBCM refer to the Group as defined here. Lloyds Banking Group plc is the ultimate parent company of LBCM and is also referred to as LBG in this document. These statements do not include all of the information required for full annual financial statements and should be read in conjunction with LBCM's consolidated financial statements as at and for the year ended 31 December 2022 which complied with international accounting standards in conformity with the requirements of the Companies Act 2006 and were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Copies of the 2022 Annual Report and Accounts are available at www.lloydsbankinggroup.com and are also available upon request from Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN.

The directors consider that it is appropriate to continue to adopt the going concern basis in preparing these condensed consolidated half-year financial statements. In reaching this assessment, the directors have taken into account the uncertainties affecting the UK economy and their potential effects upon LBCM's performance and projected funding and capital position; the impact of further stress scenarios has also been considered. On this basis, the directors are satisfied that LBCM will maintain adequate levels of funding and capital for the foreseeable future.

LBCM's accounting policies are consistent with those applied by LBCM in its financial statements for the year ended 31 December 2022 and there have been no changes in LBCM's methods of computation.

Future accounting developments

The IASB has issued a number of minor amendments to IFRSs effective 1 January 2024, including IFRS 16 Lease liability in a sale and leaseback, IAS 1 Non-current liabilities with covenants, and IAS 1 Classification of liabilities as current or non-current. These amendments are not expected to have a significant impact on LBCM and, apart from the amendments relating to IFRS 16 Lease liability in a sale and leaseback, have not been endorsed for use in the UK.

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)

Note 2: Critical accounting judgements and key sources of estimation uncertainty

The preparation of LBCM's financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions in applying the accounting policies that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from these estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In preparing the financial statements, LBCM has considered the impact of climate-related risks on its financial position and performance. While the effects of climate change represent a source of uncertainty, LBCM does not consider there to be a material impact on its judgements and estimates from the physical, transition and other climate-related risks in the short term.

LBCM's significant judgements, estimates and assumptions are unchanged compared to those applied at 31 December 2022. Further information on the critical accounting judgements and key sources of estimation uncertainty for the allowance for expected credit losses is set out in note 8.

Note 3: Operating expenses

Note 4: Impairment

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)

Note 5: Tax expense

In accordance with IAS 34, LBCM's income tax expense for the half-year to 30 June 2023 is based on the best estimate of the weighted-average annual income tax rate expected for the full financial year. The tax effects of one-off items are not included in the weighted-average annual income tax rate, but are recognised in the relevant period.

An explanation of the relationship between tax expense and accounting profit is set out below:

Note 6: Financial assets at fair value through profit or loss

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)

Note 7: Financial assets at amortised cost

The movement tables are compiled by comparing the position at the reporting date to that at the beginning of the year.

Transfers between stages are deemed to have taken place at the start of the reporting period, with all other movements shown in the stage in which the asset is held at the period end, with the exception of those held within purchased or originated credit-impaired, which are not transferable.

Additions and repayments comprise new loans originated and repayments of outstanding balances throughout the reporting period. Loans which are written off in the period are first transferred to Stage 3 before acquiring a full allowance and subsequent write-off.

Half-year to 30 June 2023