Lloyds Regulatory News (LLOY)

Lloyds Banking Group plc

Q3 2016 Interim Management Statement

26 October 2016

FORWARD LOOKING STATEMENTS

This document contains certain forward looking statements with respect to the business, strategy and plans of Lloyds Banking Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Lloyds Banking Group's or its directors' and/or management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in interest rates (including low or negative rates), exchange rates, stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group's credit ratings; the ability to derive cost savings; changing customer behaviour including consumer spending, saving and borrowing habits; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, the exit by the UK from the European Union (EU) and the potential for one or more other countries to exit the EU or the Eurozone and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; natural, pandemic and other disasters, adverse weather and similar contingencies outside the Group's control; inadequate or failed internal or external processes or systems; acts of war, other acts of hostility, terrorist acts and responses to those acts, geopolitical, pandemic or other such events; changes in laws, regulations, accounting standards or taxation, including as a result of the exit by the UK from the EU, a further possible referendum on Scottish independence; changes to regulatory capital or liquidity requirements and similar contingencies outside the Group's control; the policies, decisions and actions of governmental or regulatory authorities or courts in the UK, the EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; requirements or limitations on the Group as a result of HM Treasury's investment in the Group; actions or omissions by the Group's directors, management or employees including industrial action; changes to the Group's post-retirement defined benefit scheme obligations; the provision of banking operations services to TSB Banking Group plc; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; the value and effectiveness of any credit protection purchased by the Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services, lending companies and digital innovators and disruptive technologies; and exposure to regulatory or competition scrutiny, legal, regulatory or competition proceedings, investigations or complaints. Please refer to the latest Annual Report on Form 20-F filed with the US Securities and Exchange Commission for a discussion of certain factors together with examples of forward looking statements. Except as required by any applicable law or regulation, the forward looking statements contained in this document are made as of today's date, and Lloyds Banking Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements. The information, statements and opinions contained in this document do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments.

HIGHLIGHTS FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2016

GROUP CHIEF EXECUTIVE'S STATEMENT

In the first nine months of the year the Group has delivered a robust underlying performance with a strong improvement in statutory profit and strong capital generation. Our differentiated, UK focused, simple, low risk business model continues to deliver and as a result we are reaffirming our stated 2016 guidance.

Strategic progress

We remain focused on delivering on our targets to support people, businesses and communities as set out in our Helping Britain Prosper Plan. We are making good progress against our strategic priorities: creating the best customer experience; becoming simpler and more efficient; and delivering sustainable growth. In the last 12 months we have grown net lending to SMEs by 4 per cent and have also grown net lending in both credit card balances and motor finance while continuing to grow our bulk annuity business. We remain committed to helping first-time buyers onto the housing ladder whilst continuing to balance risk and margin considerations versus volume in mortgages. We also continue to operate the UK's largest branch network and the largest digital bank with 12.4 million online users and 7.8 million mobile users of our top-rated apps.

The hard work undertaken in the last five years to transform and simplify the business has allowed the UK government to sell most of its stake in the Group, returning £17 billion including dividends on its original £20 billion investment. We welcome the recent decision to recommence the sale of its shares.

Well positioned to become the best bank for customers and shareholders

The outlook for the UK economy remains uncertain, however the strength of the recovery in recent years means the UK is well positioned. The Group's transformation and successful execution of strategy, along with its competitive advantages in costs and risk, also position us well for the future and to achieve our goal of becoming the best bank for customers and shareholders.

António Horta-Osório, Group Chief Executive

CONSOLIDATED INCOME STATEMENT − UNDERLYING BASIS

BALANCE SHEET AND KEY RATIOS

REVIEW OF FINANCIAL PERFORMANCE

Overview: robust underlying performance with strong improvement in statutory profit

The Group's underlying profit was £6,073 million, 4 per cent lower than in the first nine months of 2015, with marginally lower income and increases in the impairment charge and operating lease depreciation partially offset by lower operating costs. The underlying return on required equity was 13.6 per cent compared with 15.7 per cent in the same period of 2015.

Statutory profit before tax was £3,265 million (2015: £2,151 million), an increase of more than 50 per cent after a £1 billion charge relating to PPI in the third quarter. The statutory return on required equity improved to 5.9 per cent compared with 4.4 per cent in the same period of 2015.

Loans and advances to customers were 1 percent lower at £452 billion (31 December 2015: £455 billion) with continued growth in the UK Consumer Finance business and lending to SME and Mid Markets clients offset by reductions in closed portfolios and mortgages, where the Group continues to focus on margin rather than volume. Customer deposits at £424 billion were 1 per cent higher than at 31 December 2015.

The common equity tier 1 (CET1) ratio at 30 September 2016 was 14.1 per cent pre dividend and 13.4 per cent post dividend (31 December 2015: 13.0 per cent). The Group generated around 110 basis points of capital pre dividends in the nine months to 30 September 2016. The tangible net asset value per share was broadly stable at 54.9 pence (30 June 2016: 55.0 pence), having paid the interim dividend of 0.85 pence per share in September.

Total income

Total income was marginally lower at £13,150 million, with increased net interest income more than offset by lower other income.

Net interest income grew by 1 per cent to £8,630 million, reflecting the improvement in net interest margin to 2.72 per cent (2015: 2.63 per cent). The net interest margin continues to benefit from lower deposit and wholesale funding costs which have more than offset the pressure on asset pricing. The net interest margin of 2.69 per cent in the third quarter was higher than the same period last year, but slightly lower than the second quarter (2.74 per cent), partly reflecting the base rate change in early August. The Group continues to expect that the net interest margin for the 2016 full year will be around 2.70 per cent.

Other income for the first nine months was £4,520 million, 2 per cent lower than in the same period last year. Other income in the third quarter at £1,427 million, was up 4 per cent on the previous year, although down on the second quarter due to insurance. The Group now expects other income for the year to be around £6 billion.

REVIEW OF FINANCIAL PERFORMANCE (continued)

Costs

The Group continues to focus on cost management and delivering efficiency savings as we simplify the business. Operating costs were £5,959 million in the period, 2 per cent lower than in the first nine months of 2015, contributing to positive operating jaws of 0.5 per cent and an improved cost:income ratio of 47.7 per cent.

The Simplification programme has delivered £774 million of annual run-rate savings to date and the Group remains on track to deliver the revised target of £1.4 billion of savings by the end of 2017.

Operating lease depreciation increased by 19 per cent to £669 million, driven by the continued growth in the Lex Autolease business and additional charges related to certain leasing assets in Commercial Banking.

The Group continues to expect the full year cost:income ratio to be lower than the 2015 ratio of 49.3 per cent.

Impairment

The credit quality of the Group's lending portfolios remains strong. The impairment charge of £449 million increased from £336 million in the same period last year, but this was due to the expected lower level of releases and write-backs in the period rather than a deterioration in the underlying portfolios. The asset quality ratio was 14 basis points in the nine months to 30 September 2016 compared to 11 basis points in the same period in 2015. On a gross basis, before releases and write-backs, the asset quality ratio has remained stable at 26 basis points.

In line with previous guidance, the Group expects the asset quality ratio for the full year to be less than 20 basis points.

Impaired loans as a percentage of closing advances were 2.0 per cent compared with 2.1 per cent at 31 December 2015.

REVIEW OF FINANCIAL PERFORMANCE (continued)

Statutory profit

Further information on the reconciliation of underlying to statutory results is included on page 11. 

Statutory profit before tax was £3,265 million, an increase of more than 50 per cent on the same period last year (£2,151 million).

Market volatility and asset sales of £393 million (2015: negative £204 million) included the gain on sale of the Group's interest in Visa Europe of £484 million, negative insurance volatility of £157 million (2015: negative £316 million) and accounting volatility relating to hedging and liability management.

Restructuring costs were £390 million compared to £69 million in 2015 and included £293 million relating to the Simplification programme and £97 million relating to work on implementing the ring-fencing requirements.

Statutory profit in the first nine months of 2015 included a charge of £745 million for TSB costs, comprising £660 million relating to the sale of TSB and £85 million of TSB dual-running costs.

A provision of £1 billion was taken in the period for PPI to cover further operating costs and redress, including impact of proposed June 2019 deadline. A further provision of £150 million was taken in the third quarter to cover other conduct issues, including £100 million in respect of packaged bank accounts.

Taxation

The tax charge for the first nine months of 2016 was £1,189 million (2015: £536 million), representing an effective tax rate of 36 per cent (2015: 25 per cent). The higher effective tax rate reflects the impact of the change in corporation tax rates on the net deferred tax asset, the banking surcharge and restrictions on the deductibility of conduct provisions.

The Group continues to expect a medium term effective tax rate of around 27 per cent.

REVIEW OF FINANCIAL PERFORMANCE (continued)

Balance sheet

Loans and advances to customers were 1 per cent lower at £452 billion compared with 31 December 2015. There was continued strong growth in the UK Consumer Finance business and increased lending to SME and Mid Markets clients. This was offset by a reduction in mortgage balances as a result of the Group's decision to protect margins rather than focusing on market share in a low growth market, and a reduction in portfolios closed to new business.

Deposits were £424 billion, 1 per cent higher compared with £418 billion at 31 December 2015, primarily reflecting continued success in attracting high quality balances from commercial clients. Wholesale funding was £125 billion (30 June 2016: £131 billion), of which 36 per cent (30 June 2016: 39 per cent) had a maturity of less than one year. The Group intends to participate fully in the Bank of England's Term Funding Scheme in line with future funding needs.

The Group's liquidity position remains strong and the liquidity coverage ratio was in excess of 100 per cent at 30 September 2016. The CET1 ratio at 30 September 2016 was 14.1 per cent before allowing for 2016 foreseeable dividends; 13.4 per cent after allowing for dividends.

Capital generation in the third quarter was strong at 60 basis points, with 50 basis points of underlying capital generation, 60 basis points from market movements and 10 basis points from other items, offset by a 60 basis point impact from conduct.

Market movements in the third quarter of 60 basis points included a 20 basis point adverse impact from movements in the defined benefit pension schemes driven by the impact of credit spreads. The schemes moved from a net surplus of £430 million to a net deficit of £740 million in the quarter. This was more than offset by an 80 basis point favourable impact arising from changing our approach to how we hold gilts in the Group's liquidity portfolio. In the current low interest rate environment, we have decided it is no longer appropriate to commit to holding gilts to maturity. As a result, the Group has reclassified the £20 billion of gilts within the liquidity portfolio as 'available-for-sale' (previously classified as 'held-to-maturity').

REVIEW OF FINANCIAL PERFORMANCE (continued)

For the year-to-date, the Group has generated 110 basis points of capital with 160 basis points of underlying capital generation, 20 basis points from market movements and 10 basis points from other items, offset by 80 basis points relating to conduct. The positive impact of market movements was driven by the favourable impact in the year onheld-to-maturity gilts, largely offset by market driven movements in pensions and risk-weighted assets.

The Group continues to expect to generate around 160 basis points of capital (pre dividend) in the year.

During the third quarter the Prudential Regulation Authority reduced the Pillar 2A component of the Group's Individual Capital Guidance from 4.6 per cent to 4.5 per cent of risk-weighted assets, of which 2.5 per cent has to be covered by CET1 capital.

Tangible net asset value (TNAV) was 54.9 pence per share at 30 September 2016 compared with 52.3 pence at 31 December 2015. The increase of 2.6 pence, or 5.5 pence before dividend payments, is primarily driven by strong statutory profit and positive reserve movements. TNAV per share was broadly stable compared with 30 June 2016 (55.0 pence), but up 0.8 pence before dividend payments.

STATUTORY CONSOLIDATED INCOME STATEMENT AND BALANCE SHEET (UNAUDITED)

NOTES

1. Summary of movements in total equity

NOTES (continued)

2. Reconciliation between statutory and underlying basis results

The tables below set out a reconciliation from the statutory results to the underlying basis results, the principles of which are set out on the inside front cover.

NOTES (continued)

3. Banking net interest margin

A reconciliation of banking net interest income to Group net interest income showing the items that are excluded in determining banking net interest income follows:

Non-banking assets largely relate to fee based loans and advances within Commercial Banking and loans sold by Commercial Banking and Retail to Insurance to back annuitant liabilities. Other non-banking includes pooling arrangements where interest is received from or paid to customers based on the net of their lending and deposit balances but these balances cannot be netted on the Group balance sheet.

4. Underlying return on required equity

The Group's underlying return on required equity for the nine months ended 30 September 2016 was 13.6 per cent (nine months of 2015: 15.7 per cent). Required equity is the amount of shareholders' equity and non-controlling interests required to achieve a CET1 ratio of 12.0 per cent after allowing for regulatory adjustments and deductions.