TIDMLLOY

RNS Number : 2534E

Lloyds Banking Group PLC

27 October 2022

Llo yds Banking Group plc

Q3 2022 Interim Management Statement

27 October 2022

RESULTS FOR THE NINE MONTHSED 30 SEPTEMBER 2022

"In February we announced an ambitious new strategy. While the operating environment has changed significantly since then, our customer focus remains unchanged. We continue to execute against our strategic goals, based on our objectives of transforming the business, while generating a stronger growth trajectory and enabling the Group to deliver higher, more sustainable returns.

Our income growth, balance sheet momentum and resilient customer franchise have enabled the Group to deliver a robust financial performance and strong capital generation, alongside updated guidance for 2022.

The current environment is concerning for many people and we are committed to maintaining support for our customers. The Group's resilient business model and prudent approach to risk position the Group well to face the current macroeconomic uncertainties while generating enhanced returns for our shareholders."

Charlie Nunn, Group Chief Executive

Robust financial results with resilient credit performance and continued business momentum

-- Maintaining support for customers and progressing strategic priorities with significant strategic investment

-- Supporting the transition to a low carbon economy; announced new sector-based 2030 emissions reduction targets and a new net zero ambition for our supply chain in our Net Zero Activity Update(1)

-- Statutory profit after tax of GBP4.0 billion (nine months to 30 September 2021: GBP5.5 billion), with higher net income more than offset by impairment charges as a result of the revised economic outlook (versus a significant write-back in 2021)

-- Robust revenue growth supported by continued recovery in customer activity and UK Bank Rate changes. Net income of GBP13.0 billion, up 12 per cent; higher net interest and other income and continued low operating lease depreciation

-- Underlying net interest income up 15 per cent, significantly driven by a stronger banking net interest margin of 2.84 per cent year to date (2.98 per cent in the third quarter)

-- Operating costs of GBP6.4 billion, up 6 per cent compared to the first nine months of 2021, reflecting stable business-as-usual costs alongside higher planned strategic investment and new businesses

-- Underlying profit before impairment up 29 per cent to GBP6.5 billion in the period (with GBP2.4 billion in the third quarter), as a result of robust net income growth

-- Observed asset quality remains strong and the portfolio is well-positioned in the context of cost of living pressures. Underlying impairment of GBP1.0 billion (of which GBP0.7 billion was recognised in the third quarter) reflects a resilient observed credit performance, but impacted by the weakening economic outlook and associated scenarios in the third quarter, partially offset by COVID-19 releases

Continued franchise growth and strong capital generation

-- Loans and advances to customers at GBP456.3 billion were up GBP7.7 billion in the first nine months and up GBP0.2 billion in the quarter, with continued growth in the open mortgage book

-- Customer deposits of GBP484.3 billion were up GBP8.0 billion in the first nine months and GBP6.1 billion in the quarter. Loan to deposit ratio of 94 per cent continues to provide robust funding and liquidity and potential for growth

-- Capital generation of 191 basis points(2) in the first nine months based on robust banking performance and including the Insurance dividend paid in July 2022

-- CET1 ratio of 15.0 per cent after ordinary dividend and variable pension contributions, remaining well ahead of the ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent. Commitment to consider excess capital returns as usual at year-end

Outlook

Given the robust financial performance in the first nine months of 2022 and incorporating revised macroeconomic forecasts in the third quarter, the Group is updating its 2022 guidance:

-- Banking net interest margin now expected to be greater than 290 basis points

-- Operating costs expected to be c.GBP8.8 billion

-- Asset quality ratio now expected to be c.30 basis points

-- Return on tangible equity expected to be c.13 per cent

-- Risk-weighted assets at the end of 2022 expected to be c.GBP210 billion

-- Capital generation now expected to be between 225 and 250 basis points(2)

(1) The Net Zero Activity Update can be found at www.lloydsbankinggroup.com/investors/esg-information.html.

(2) Excluding regulatory changes on 1 January 2022, ordinary dividend and variable pension contributions.

INCOME STATEMENT - UNDERLYING BASIS (A) AND KEY BALANCE SHEET METRICS

 
                               Nine              Nine                                Three             Three 
                             months            months                               months            months 
                              ended             ended                                ended             ended 
                             30 Sep            30 Sep                               30 Sep            30 Sep 
                               2022              2021             Change              2022              2021             Change 
                               GBPm              GBPm                  %              GBPm              GBPm                  % 
 
Underlying net 
 interest 
 income                       9,529             8,270                 15             3,394             2,852                 19 
Underlying other 
 income                       3,811             3,753                  2             1,282             1,336                (4) 
Operating lease 
 depreciation                 (295)             (382)                 23              (82)             (111)                 26 
                   ----------------  ----------------                     ----------------  ---------------- 
Net income                   13,045            11,641                 12             4,594             4,077                 13 
                   ----------------  ----------------                     ----------------  ---------------- 
Operating costs 
 (1)                        (6,436)           (6,066)                (6)           (2,187)           (2,013)                (9) 
Remediation                    (89)             (525)                 83              (10)             (100)                 90 
                   ----------------  ----------------                     ----------------  ---------------- 
Total costs                 (6,525)           (6,591)                  1           (2,197)           (2,113)                (4) 
                   ----------------  ----------------                     ----------------  ---------------- 
Underlying profit 
 before 
 impairment                   6,520             5,050                 29             2,397             1,964                 22 
Underlying 
 impairment 
 (charge) credit 
 (1)                        (1,045)               853                                (668)               119 
                   ----------------  ----------------                     ----------------  ---------------- 
Underlying profit             5,475             5,903                (7)             1,729             2,083               (17) 
Restructuring (1)              (69)              (34)                                 (22)              (24)                  8 
Volatility and 
 other 
 items                        (237)                65                                (199)              (30) 
Statutory profit 
 before 
 tax                          5,169             5,934               (13)             1,508             2,029               (26) 
Tax expense                 (1,134)             (469)                                (299)             (429)                 30 
                   ----------------  ----------------                     ----------------  ---------------- 
Statutory profit 
 after 
 tax                          4,035             5,465               (26)             1,209             1,600               (24) 
                   ----------------  ----------------                     ----------------  ---------------- 
 
Earnings per 
 share                         5.2p              7.1p             (1.9)p              1.5p              2.0p             (0.5)p 
Banking net 
 interest 
 margin (A)                   2.84%             2.52%               32bp             2.98%             2.55%               43bp 
Average 
 interest-earning 
 banking assets 
 (A)                     GBP451.4bn        GBP443.0bn                  2        GBP454.9bn        GBP447.2bn                  2 
Cost:income ratio 
 (A,1)                        50.0%             56.6%            (6.6)pp             47.8%             51.8%            (4.0)pp 
Asset quality 
 ratio 
 (A,1)                        0.30%           (0.25)%                                0.57%           (0.10)% 
Return on 
 tangible equity 
 (A)                          12.9%             17.6%            (4.7)pp             11.9%             14.5%            (2.6)pp 
 

(1) 2021 comparatives have been presented to reflect the new costs basis, consistent with the current period. See page 23 .

 
                         At 30            At 30                              At 31 
                           Sep              Jun            Change              Dec            Change 
                          2022             2022                 %             2021                 % 
 
Loans and 
 advances to 
 customers          GBP456.3bn       GBP456.1bn                         GBP448.6bn                 2 
Customer 
 deposits           GBP484.3bn       GBP478.2bn                 1       GBP476.3bn                 2 
Loan to 
 deposit ratio 
 (A)                       94%              95%             (1pp)              94% 
CET1 ratio               15.0%            14.7%             0.3pp            17.3%           (2.3)pp 
Pro forma CET1 
 ratio 
 (A,1)                   15.0%            14.8%             0.2pp            16.3%           (1.3)pp 
Total capital 
 ratio                   19.4%            19.3%             0.1pp            23.6%           (4.2)pp 
MREL ratio               32.8%            32.4%             0.4pp            37.2%           (4.4)pp 
UK leverage 
 ratio                    5.3%             5.3%                               5.8%           (0.5)pp 
Risk-weighted 
 assets             GBP210.8bn       GBP209.6bn                 1       GBP196.0bn                 8 
Wholesale 
 funding             GBP98.9bn        GBP97.7bn                 1        GBP93.1bn                 6 
Liquidity 
 coverage 
 ratio 
 (2)                      146%             142%             4.0pp             135%            11.0pp 
Tangible net 
 assets 
 per share (A)           49.0p            54.8p            (5.8)p            57.5p            (8.5)p 
 
   (A)   See page 25 . 

(1) The pro forma CET1 ratio comparative for 30 June 2022 reflects the interim dividend received from Insurance in July 2022. The 31 December 2021 comparative reflects the dividend received from Insurance in February 2022 and the full impact of the share buyback, but prior to the impact of regulatory changes that came into effect on 1 January 2022.

(2) The liquidity coverage ratio is calculated as a simple average of month-end observations over the previous 12 months.

QUARTERLY INFORMATION (A)

 
                        Quarter       Quarter 
                          ended         ended       Quarter       Quarter       Quarter        Quarter        Quarter 
                             30            30         ended         ended         ended          ended          ended 
                            Sep           Jun        31 Mar        31 Dec        30 Sep         30 Jun         31 Mar 
                           2022          2022          2022          2021          2021           2021           2021 
                           GBPm          GBPm          GBPm          GBPm          GBPm           GBPm           GBPm 
 
Underlying net 
 interest 
 income                   3,394         3,190         2,945         2,893         2,852          2,741          2,677 
Underlying other 
 income                   1,282         1,268         1,261         1,307         1,336          1,282          1,135 
Operating lease 
 depreciation              (82)         (119)          (94)          (78)         (111)          (123)          (148) 
                   ------------  ------------  ------------  ------------  ------------  -------------  ------------- 
Net income                4,594         4,339         4,112         4,122         4,077          3,900          3,664 
                   ------------  ------------  ------------  ------------  ------------  -------------  ------------- 
Operating costs 
 (1)                    (2,187)       (2,151)       (2,098)       (2,246)       (2,013)        (2,008)        (2,045) 
Remediation                (10)          (27)          (52)         (775)         (100)          (360)           (65) 
                   ------------  ------------  ------------  ------------  ------------  -------------  ------------- 
Total costs             (2,197)       (2,178)       (2,150)       (3,021)       (2,113)        (2,368)        (2,110) 
                   ------------  ------------  ------------  ------------  ------------  -------------  ------------- 
Underlying profit 
 before 
 impairment               2,397         2,161         1,962         1,101         1,964          1,532          1,554 
Underlying 
 impairment 
 (charge) credit 
 (1)                      (668)         (200)         (177)           532           119            374            360 
                   ------------  ------------  ------------  ------------  ------------  -------------  ------------- 
Underlying profit         1,729         1,961         1,785         1,633         2,083          1,906          1,914 
Restructuring (1)          (22)          (23)          (24)         (418)          (24)              6           (16) 
Volatility and 
 other 
 items                    (199)           100         (138)         (247)          (30)             95              - 
Statutory profit 
 before 
 tax                      1,508         2,038         1,623           968         2,029          2,007          1,898 
Tax (expense) 
 credit                   (299)         (416)         (419)         (548)         (429)            461          (501) 
                   ------------  ------------  ------------  ------------  ------------  -------------  ------------- 
Statutory profit 
 after 
 tax                      1,209         1,622         1,204           420         1,600          2,468          1,397 
                   ------------  ------------  ------------  ------------  ------------  -------------  ------------- 
 
Banking net 
 interest 
 margin (A)               2.98%         2.87%         2.68%         2.57%         2.55%          2.51%          2.49% 
Average 
interest-earning 
banking assets 
(A)                  GBP454.9bn    GBP451.2bn    GBP448.0bn    GBP449.4bn    GBP447.2bn     GBP442.2bn     GBP439.4bn 
 
Cost:income ratio 
 (A,1)                    47.8%         50.2%         52.3%         73.3%         51.8%          60.7%          57.6% 
Asset quality 
 ratio 
 (A,1)                    0.57%         0.17%         0.16%       (0.46)%       (0.10)%        (0.33)%        (0.33)% 
Return on 
 tangible 
 equity (A)               11.9%         15.6%         10.8%          2.9%         14.5%          24.4%          13.9% 
 
Loans and 
advances 
to customers         GBP456.3bn    GBP456.1bn    GBP451.8bn    GBP448.6bn    GBP450.5bn     GBP447.7bn     GBP443.5bn 
Customer deposits    GBP484.3bn    GBP478.2bn    GBP481.1bn    GBP476.3bn    GBP479.1bn     GBP474.4bn     GBP462.4bn 
Loan to deposit 
 ratio 
 (A)                        94%           95%           94%           94%           94%            94%            96% 
 
Risk-weighted 
assets               GBP210.8bn    GBP209.6bn    GBP210.2bn    GBP196.0bn    GBP200.7bn     GBP200.9bn     GBP198.9bn 
Tangible net 
 assets 
 per share (A)            49.0p         54.8p         56.5p         57.5p         56.6p          55.6p          52.4p 
 

(1) 2021 comparatives have been presented to reflect the new costs basis, consistent with the current period. See page 23 .

BALANCE SHEET ANALYSIS

 
                          At 30          At 30                            At 30                            At 31 
                            Sep            Jun                              Sep                              Dec 
                           2022           2022            Change           2021            Change           2021            Change 
                          GBPbn          GBPbn                 %          GBPbn                 %          GBPbn                 % 
 
Loans and 
advances 
to customers 
Open mortgage 
 book                     298.4          296.6                 1          292.6                 2          293.3                 2 
Closed mortgage 
 book                      12.3           13.1               (6)           14.8              (17)           14.2              (13) 
Credit cards (2)           14.3           14.2                 1           13.5                 6           13.8                 4 
UK Retail 
 unsecured 
 loans                      8.8            8.5                 4            8.1                 9            8.1                 9 
UK Motor Finance           14.2           14.2                             14.1                 1           14.0                 1 
Overdrafts                  1.0            1.0                              1.0                              1.0 
Retail other (1)           13.0           12.5                 4           10.8                20           10.9                19 
Wealth (2)                  1.0            1.0                              1.0                              1.0 
Small and Medium 
 Businesses 
 (2)                       39.8           41.1               (3)           43.8               (9)           42.5               (6) 
Corporate and 
 Institutional 
 Banking (2)               57.6           55.7                 3           51.0                13           50.0                15 
Central items 
 (2,3)                    (4.1)          (1.8)                            (0.2)                            (0.2) 
                  -------------  -------------                    -------------                    ------------- 
Loans and 
 advances 
 to customers             456.3          456.1                            450.5                 1          448.6                 2 
                  -------------  -------------                    -------------                    ------------- 
 
Customer 
deposits 
Retail current 
 accounts                 115.7          113.4                 2          109.6                 6          111.5                 4 
Retail 
 relationship 
 savings 
 accounts                 165.7          165.8                            162.6                 2          164.5                 1 
Retail tactical 
 savings 
 accounts                  16.2           16.9               (4)           16.8               (4)           16.8               (4) 
Wealth (2)                 14.9           14.9                             15.1               (1)           15.6               (4) 
Commercial 
 Banking 
 deposits                 170.2          166.7                 2          174.5               (2)          167.5                 2 
Central items 
 (2)                        1.6            0.5                              0.5                              0.4 
                  -------------  -------------                    -------------                    ------------- 
Total customer 
 deposits                 484.3          478.2                 1          479.1                 1          476.3                 2 
                  -------------  -------------                    -------------                    ------------- 
 
Total assets              892.9          890.4                            882.0                 1          886.6                 1 
Total 
 liabilities              846.5          840.3                 1          829.4                 2          833.4                 2 
 
Ordinary 
 shareholders' 
 equity                    40.0           44.4              (10)           46.5              (14)           47.1              (15) 
Other equity 
 instruments                6.2            5.5                13            5.9                 5            5.9                 5 
Non-controlling 
 interests                  0.2            0.2                              0.2                              0.2 
                  -------------  -------------                    -------------                    ------------- 
Total equity               46.4           50.1               (7)           52.6              (12)           53.2              (13) 
                  -------------  -------------                    -------------                    ------------- 
 
Ordinary shares 
 in 
 issue, 
 excluding own 
 shares                 67,464m        68,702m               (2)        70,979m               (5)        70,996m               (5) 
 

(1) Primarily Europe.

(2) The portfolios shown reflect the new organisation structure; comparatives have been presented on a consistent basis. See page 25 .

(3) Includes central fair value hedge accounting adjustments. 30 June 2022 included a GBP200 million ECL central adjustment that was not allocated to specific portfolios (30 September 2021 and 31 December 2021: GBP400 million). In the third quarter of 2022 this central adjustment was released.

GROUP RESULTS - STATUTORY BASIS

 
Summary income statement                                      Nine             Nine 
                                                            months           months 
                                                             ended            ended 
                                                            30 Sep           30 Sep 
                                                              2022             2021               Change 
                                                              GBPm             GBPm                    % 
Net interest income                                         11,061            7,073                   56 
Other income                                              (17,984)           20,012 
                                                   ---------------  --------------- 
Total income(1)                                            (6,923)           27,085 
Insurance claims(1)                                         20,181         (14,803) 
                                                   ---------------  --------------- 
Total income, net of insurance claims                       13,258           12,282                    8 
Operating expenses                                         (7,033)          (7,194)                    2 
Impairment (charge) credit                                 (1,056)              846 
                                                   ---------------  --------------- 
Profit before tax                                            5,169            5,934                 (13) 
Tax expense                                                (1,134)            (469) 
                                                   ---------------  --------------- 
Profit for the period                                        4,035            5,465                 (26) 
                                                   ---------------  --------------- 
 
Profit attributable to ordinary shareholders                 3,632            5,064                 (28) 
Profit attributable to other equity holders                    327              321                    2 
Profit attributable to non-controlling interests                76               80                  (5) 
                                                   ---------------  --------------- 
Profit for the period                                        4,035            5,465                 (26) 
                                                   ---------------  --------------- 
 
Ordinary shares in issue (weighted-average 
 - basic)                                                  69,478m          70,919m                  (2) 
Basic earnings per share                                      5.2p             7.1p               (1.9)p 
 

(1) Includes income and expense attributable to the policyholders of the Group's long-term assurance funds that materially offset in arriving at profit attributable to equity shareholders. These can, depending on market movements, lead to significant variances on a statutory basis in total income and insurance claims from one period to the next.

 
Summary balance sheet                                                      At 31 
                                                            At 30            Dec 
                                                         Sep 2022           2021               Change 
                                                             GBPm           GBPm                    % 
Assets 
Cash and balances at central banks                         84,841         76,420                   11 
Financial assets at fair value through profit 
 or loss                                                  174,235        206,771                 (16) 
Derivative financial instruments                           34,919         22,051                   58 
Financial assets at amortised cost                        536,843        517,156                    4 
Financial assets at fair value through other 
 comprehensive income                                      21,303         28,137                 (24) 
Other assets                                               40,781         35,990                   13 
                                                    -------------  ------------- 
Total assets                                              892,922        886,525                    1 
                                                    -------------  ------------- 
 
Liabilities 
Deposits from banks                                         9,032          7,647                   18 
Customer deposits                                         484,303        476,344                    2 
Repurchase agreements at amortised cost(1)                 46,378         31,125                   49 
Financial liabilities at fair value through 
 profit or loss                                            21,012         23,123                  (9) 
Derivative financial instruments                           33,983         18,060                   88 
Debt securities in issue                                   72,448         71,552                    1 
Liabilities arising from insurance and investment 
 contracts                                                142,977        168,463                 (15) 
Other liabilities                                          26,174         23,951                    9 
Subordinated liabilities                                   10,242         13,108                 (22) 
                                                    -------------  ------------- 
Total liabilities                                         846,549        833,373                    2 
                                                    -------------  ------------- 
Total equity                                               46,373         53,152                 (13) 
                                                    -------------  ------------- 
Total equity and liabilities                              892,922        886,525                    1 
                                                    -------------  ------------- 
 

(1) Repurchase agreements at amortised cost, previously included within other liabilities, are now shown separately; comparatives have been presented on a consistent basis .

REVIEW OF PERFORMANCE

Robust financial performance with continued business momentum

Statutory results

The Group's statutory profit before tax for the first nine months of 2022 was GBP5,169 million, 13 per cent lower than the same period in 2021. Results benefitted from higher income, more than offset by the impact of an impairment charge (compared to a credit in the prior year), including updates to the economic outlook in the third quarter. Statutory profit after tax was GBP4,035 million (nine months to 30 September 2021: GBP5,465 million, which included the benefit of a deferred tax remeasurement). In the third quarter of the year, statutory profit before tax was GBP1,508 million and statutory profit after tax was GBP1,209 million, a decrease on the second quarter of 26 per cent and 25 per cent respectively, again as a result of higher income more than offset by the impairment charge in light of the deterioration in the macroeconomic outlook as at 30 September 2022.

The Group's statutory income statement includes income and expenses attributable to the policyholders of the Group's long-term assurance funds. These items materially offset in arriving at profit attributable to equity shareholders but can, depending on market movements, lead to significant variances on a statutory basis between total income and insurance claims from one period to the next. In the nine months to 30 September 2022, due to deteriorating market conditions, the Group recognised losses on policyholder investments within total income which were materially offset by the corresponding reduction in insurance and investment contract liabilities, recognised as a decrease in insurance claims expense and a decrease in the amounts payable to unit holders in the Group's consolidated open-ended investment companies, recognised within net interest income.

Total statutory income net of insurance claims for the first nine months was GBP13,258 million, an increase of 8 per cent on the first nine months of 2021, reflecting continued recovery in customer activity and UK Bank Rate changes. The Group has maintained its focus on cost management, whilst increasing strategic investment as planned.

Loans and advances to customers are up 2 per cent on 31 December 2021 at GBP456.3 billion, including continued growth of GBP5.1 billion in the open mortgage book (GBP1.8 billion in the third quarter), alongside higher retail unsecured loan and credit card balances. Commercial Banking balances increased by GBP4.9 billion (including GBP0.6 billion in the third quarter) due to attractive growth opportunities as well as foreign exchange movements in the Corporate and Institutional Banking portfolio. Customer deposits have increased by GBP8.0 billion since the end of 2021, to GBP484.3 billion. This included Retail current account growth of GBP4.2 billion and Retail relationship savings growth of GBP1.2 billion, along with Commercial Banking deposit growth of GBP2.7 billion. In the nine months to 30 September 2022, due to market conditions, a reduction was seen in policyholder investments, primarily within financial assets at fair value through profit or loss. This was materially offset by a corresponding reduction in the related insurance and investment contract liabilities.

Total equity reduced during the period as the Group's profits were more than offset by reductions in the cash flow hedging reserve due to the rising rate environment, the impact of pension scheme remeasurements given market conditions and the impact of in-year distributions, including the share buyback programme that was announced in February 2022. This programme completed on 11 October 2022, with c.4.5 billion ordinary shares repurchased.

REVIEW OF PERFORMANCE (continued)

Underlying results(A)

The Group's underlying profit for the first nine months of the year was GBP5,475 million, compared to GBP5,903 million for the same period in 2021. Growth in net income was more than offset by an increased impairment charge, largely given the impact of the updated economic outlook and associated scenarios in the third quarter versus the underlying impairment credit for the same period in 2021. Underlying profit before impairment for the period was up 29 per cent to GBP6,520 million, driven by robust net income growth and lower remediation costs. In the third quarter, underlying profit before impairment was GBP2,397 million, up 11 per cent on the second quarter.

Net income of GBP13,045 million was up 12 per cent on the first nine months of 2021, with higher net interest income and other income as well as a continued low charge for operating lease depreciation.

Net interest income of GBP9,529 million was up 15 per cent, largely driven by a stronger banking net interest margin of 2.84 per cent (nine months to 30 September 2021: 2.52 per cent). The net interest margin benefitted from the UK Bank Rate increases, structural hedge earnings from the rising rate environment, continued funding and capital optimisation and robust balance growth, partly offset by mortgage margin reductions. In the third quarter, the net interest margin rose to 2.98 per cent. Average interest-earning banking assets were up 2 per cent compared to the first nine months of 2021 at GBP451.4 billion, driven by continued growth in the open mortgage book. The Group now expects the banking net interest margin for 2022 to be greater than 290 basis points.

The Group manages the risk to its earnings and capital from movements in interest rates by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 30 September 2022, the Group's structural hedge had an approved capacity of GBP250 billion (up GBP10 billion on 31 December 2021 and stable compared to 30 June 2022), including some of the balances from the deposit growth since the start of the coronavirus pandemic. The Group continues to review recent periods' deposit growth and its eligibility for the structural hedge. The nominal balance of the structural hedge was GBP250 billion at 30 September 2022 (31 December 2021: GBP240 billion) with a weighted-average duration of approximately three-and-a-half years (31 December 2021: approximately three-and-a-half years). The Group generated GBP1.9 billion of total gross income from structural hedge balances in the first nine months of 2022, representing material growth over the same period in 2021 (nine months to 30 September 2021: GBP1.6 billion).

Other income of GBP3,811 million was 2 per cent higher compared to GBP3,753 million for the first nine months of 2021, reflecting solid performance across Retail, Commercial Banking, Insurance, Pensions and Investments (previously Insurance and Wealth) and the Group's equity investments businesses. This included GBP1,282 million in the third quarter, slightly up on the second quarter.

Within Retail, other income was up 11 per cent on prior year, including improved current account and credit card performance. Commercial Banking was up 3 per cent versus the prior year due to higher financial markets activity and strong performance in transaction banking, partly offset by lower levels of corporate financing. Insurance, Pensions and Investments other income was 6 per cent higher than the prior year. This largely reflected the impact of increased workplace pension sales and bulk annuity deals along with the inclusion of Embark income and a benefit from assumption changes. Growth was partly offset by a decrease in the general insurance business contribution driven by market challenges, and particularly storm and subsidence claims. Assumption changes were GBP119 million including GBP47 million in the third quarter (nine months to 30 September 2021: GBP33 million). Other income associated with the Group's equity investments businesses, including Lloyds Development Capital, was lower after high contributions and releases in 2021.

Operating lease depreciation decreased to GBP295 million (nine months to 30 September 2021: GBP382 million), reflecting continued strength in used car prices, combined with the ongoing impact of a reduced, but stabilising Lex fleet size, given industry-wide supply constraints in the new car market. Operating lease depreciation further reduced to GBP82 million in the third quarter, compared to GBP119 million in the second quarter.

The Group delivered good organic growth in Insurance, Pensions and Investments and Wealth (within Retail) assets under administration (AuA), with over GBP6 billion net new money in open book AuA over the period. In total, open book AuA stand at GBP154 billion.

REVIEW OF PERFORMANCE (continued)

Cost discipline remains a core focus for the Group. The Group's cost:income ratio was 50.0 per cent compared to 56.6 per cent in the first nine months of 2021. Total costs of GBP6,525 million were 1 per cent lower than in the first nine months of 2021 (with GBP2,197 million in the third quarter). Within this, lower remediation costs (down 83 per cent) were partially offset by increased operating costs of GBP6,436 million (up 6 per cent), reflecting higher planned strategic investment and new businesses. Business-as-usual costs were stable. Operating costs as previously guided are still expected to be c.GBP8.8 billion for full-year 2022 (2021: GBP8.3 billion).

In the first nine months of 2022 the Group recognised remediation costs of GBP89 million (GBP10 million in the third quarter), principally relating to pre-existing programmes and significantly lower compared to the first nine months of 2021 (GBP525 million). There have been no further charges relating to HBOS Reading since the year-end and the provision held continues to reflect the Group's best estimate of its full liability, albeit significant uncertainties remain.

Impairment was a net charge of GBP1,045 million (including GBP668 million in the third quarter), compared to a net credit of GBP853 million for the first nine months of 2021. This reflected an observed performance charge of GBP532 million in the year to date (nine months to 30 September 2021: GBP245 million, net of GBP261 million of write-backs), equivalent to an asset quality ratio of 15 basis points and a GBP513 million charge (nine months to 30 September 2021: a credit of GBP1,098 million) from updates to the assessment of the economic outlook and associated scenarios. The updated outlook includes elevated risks from a higher inflation and interest rate environment, offset by a GBP200 million release of the COVID-19 central adjustment, driving GBP418 million of the GBP668 million charge in the third quarter. The asset quality ratio year to date is now 30 basis points.

The Group's loan portfolio continues to be well-positioned, reflecting a prudent through-the-cycle approach to lending with high levels of security, also reflected in strong recovery performance. Observed credit performance remains stable, with very modest evidence of deterioration and the flow of assets into arrears, defaults and write-offs at low levels and below pre-pandemic levels. These help sustain a low observed performance charge of GBP250 million in the third quarter, higher than earlier quarters in the year, largely due to fewer write-backs from asset sales and model-related releases. Stage 3 loans and advances have been stable across the third quarter (see below). Credit card minimum payers and overdraft and revolving credit facility (RCF) utilisation rates have remained low and in line with recent trends.

The Group's expected credit loss (ECL) allowance has increased in the first nine months of the year to GBP5.0 billion (31 December 2021: GBP4.5 billion). This reflects the balance of risks shifting from COVID-19 to increased inflationary pressures and rising interest rates within the Group's base case and wider economic scenarios. The deterioration in the economic outlook is now reflected in variables which credit models better capture. As a result, the Group's reliance on judgemental overlays for modelling risks in relation to inflationary pressures has reduced from GBP0.3 billion at the half-year to GBP0.1 billion in the third quarter, with these risks now captured more fully in models.

Management judgements in respect of COVID-19 are now GBP0.1 billion, having reduced by GBP0.2 billion in the third quarter and compared to GBP0.8 billion at 31 December 2021. Of the GBP0.7 billion reduction since 31 December 2021, GBP0.2 billion is now captured as expected within ECL portfolio models where previously distorted data or trends have now normalised. The remaining GBP0.5 billion release drives a net ECL reduction and credit to the impairment charge, with the bulk relating to the GBP0.4 billion central adjustment (GBP0.2 billion released in each of the second and third quarters) and GBP0.1 billion relating to ECL held against certain Commercial sectors in relation to the specific risk posed by the virus and potential social restrictions (released to profit in the first half).

Stage 2 loans and advances increased to GBP64 billion (31 December 2021: GBP42 billion), with 92 per cent up to date. Of the GBP22 billion increase, GBP15 billion occurred in the third quarter as a result of the updated economic outlook, largely in UK mortgages and Commercial Banking. 99 per cent of the increase in the third quarter related to up to date loans. The increases in Stage 2 assets during the first half of the year, and in Stage 3 loans in the year to date, are not reflective of observed deterioration, but driven by changes in credit risk measurement and modelling associated with CRD IV regulatory requirements(1) since the end of 2021. Stage 3 loans of GBP11 billion as at 30 September 2022 were stable compared to the second quarter.

On the basis of the Group's updated base case and the significant change in economic context and associated scenarios since half-year, the Group now expects the 2022 asset quality ratio to be c.30 basis points.

(1) As previously outlined, on 1 January 2022 the Group amended its definition of Stage 3 for UK mortgages, maintaining alignment between IFRS 9 and regulatory definitions of default. For UK mortgages, default was previously deemed to have occurred no later than when a payment was 180 days past due. In line with CRD IV this definition has now been reduced to 90 days, as well as including end-of-term payments on past due interest-only accounts and any non-performing loans. Furthermore, additional assets moved to Stage 2 given the consequential change in approach to the prediction and modelling of up to date accounts and their likelihood of reaching the new broader definition of default in the future. Given the accounts that moved to Stage 2 were up to date with low probability of default, there was no material ECL impact.

REVIEW OF PERFORMANCE (continued)

Restructuring costs of GBP69 million were higher than in the first nine months of 2021 (GBP34 million) and included costs associated with the integration of Embark. Since the first quarter of 2022 all restructuring costs, with the exception of merger, acquisition and integration costs, have been reported as part of the Group's operating costs.

Volatility and other items were a net loss of GBP237 million in the first nine months of 2022, comprising GBP95 million of negative market volatility and GBP142 million relating to amortisation of purchased intangibles and fair value unwind. Market volatility included negative insurance volatility of GBP144 million due to rising interest rates and wider bond spreads which was partly offset by positive banking volatility of GBP74 million. This compares to gains in the first nine months of 2021 including GBP132 million of positive insurance volatility. In the third quarter, market volatility included GBP102 million of negative insurance volatility and GBP35 million of negative banking volatility, again principally from rising interest rates.

The return on tangible equity for the first nine months of 2022 was 12.9 per cent reflecting the Group's robust financial performance (nine months to 30 September 2021: 17.6 per cent, benefitting from a net impairment credit and remeasurement of deferred tax assets). The Group continues to expect the return on tangible equity for 2022 to be c.13 per cent.

Capital

The Group's CET1 capital ratio reduced from 16.3 per cent on a pro forma basis at 31 December 2021 to 15.0 per cent at 30 September 2022. This included a reduction of 230 basis points on 1 January 2022 for regulatory changes (as previously reported), subsequently offset by strong capital generation of 191 basis points during the first nine months of this year. Capital generation reflected banking profitability of 169 basis points, including a net impairment offset of 31 basis points, plus 16 basis points for the interim dividend received from the Insurance business in July 2022 (GBP300 million). The capital generation further benefitted from a reduction in underlying risk-weighted assets, post 1 January 2022 regulatory changes, equivalent to 14 basis points and other movements of 23 basis points. This was offset in part by 31 basis points related to the full 2022 fixed pension deficit contributions for the Group's defined benefit pension schemes. Capital generation during the third quarter of 52 basis points was driven by banking profitability of 52 basis points (including a net impairment offset of 18 basis points) and other movements of 6 basis points. This was offset by a reduction of 6 basis points from an increase in risk-weighted assets.

The net impairment offset of 31 basis points for the year to date reflects the impairment charge of 41 basis points, offset by IFRS 9 dynamic relief of 10 basis points resulting from the increase in Stage 1 and Stage 2 expected credit losses in the third quarter. In relation to capital usage, the impact of the interim ordinary dividend and the foreseeable ordinary dividend accrual at 30 September 2022 equated to 60 basis points.

During the first nine months of the year a total of GBP1.8 billion in pension deficit contributions (both fixed and variable) has been paid into the Group's three main defined benefit pension schemes. As previously announced, the fixed contributions for the year of GBP0.8 billion (equivalent to 31 basis points) were paid in full in the first quarter. The variable contributions of GBP1.0 billion reflected GBP0.5 billion paid in the first quarter and GBP0.5 billion in the third quarter (equivalent to 37 basis points in total). This substantially covers the payment of the agreed variable pension contributions (c.95 per cent) relating to 30 per cent of in-year distributions, in accordance with the current agreement with the Trustees, with a small residual to be paid in the fourth quarter. The impact of recent volatility has had no material impact on the funding position of the pension schemes.

The Group now expects capital generation in 2022 of between 225 and 250 basis points. The Group maintains its commitment to consider the return of excess capital as usual at year-end.

REVIEW OF PERFORMANCE (continued)

 
Pro forma CET1 ratio as at 31 December 2021 (1)                     16.3% 
Regulatory change on 1 January 2022 (bps)                           (230) 
Pro forma CET1 ratio as at 1 January 2022                           14.0% 
Banking build (including impairment charge) (bps)                     169 
Insurance dividend (bps)                                               16 
Underlying risk-weighted assets (bps)                                  14 
Fixed pension deficit contributions (bps)                            (31) 
Other movements (bps)                                                  23 
                                                         ---------------- 
Capital generation (bps)                                              191 
                                                         ---------------- 
Ordinary dividend (bps)                                              (60) 
Variable pension contributions (bps)                                 (37) 
                                                         ---------------- 
Net movement in CET1 ratio excluding regulatory change 
 (bps)                                                                 94 
CET1 ratio as at 30 September 2022                                  15.0% 
                                                         ---------------- 
 

(1) 31 December 2021 ratio reflects the dividend received from Insurance in February 2022 and the full impact of the share buyback.

Risk-weighted assets increased by GBP16 billion to GBP212 billion (pro forma) on 1 January 2022, reflecting regulatory changes which include the anticipated impact of the implementation of new CRD IV models to meet revised regulatory standards for modelled outputs. Risk-weighted assets subsequently reduced by GBP1 billion during the first nine months of the year to GBP211 billion at 30 September 2022, largely reflecting optimisation activity and Retail model reductions linked to the resilient underlying credit performance, partly offset by the growth in balance sheet lending and impact of foreign exchange. The GBP1 billion increase in risk-weighted assets during the third quarter was largely driven by the growth in lending and foreign exchange impacts, partially offset by further optimisation and Retail model reductions. The new CRD IV models remain subject to finalisation and approval by the PRA and therefore the final risk-weighted asset impact remains subject to this.

The Group continues to expect risk-weighted assets at the end of 2022 to be around GBP210 billion.

In October the PRA reduced the Group's Pillar 2A CET1 capital requirement to around 1.5 per cent of risk-weighted assets (previously around 2 per cent of risk-weighted assets), with the Group's regulatory minimum CET1 capital requirement now around 10.5 per cent. The planned increases in the UK countercyclical capital buffer rate to 1 per cent in December 2022 and to 2 per cent from July 2023 will lead to an increase in the Group's countercyclical capital buffer (CCyB), initially to around 0.9 per cent and then to 1.8 per cent, which will be partially offset by the removal of the 0.25 per cent CCyB related element of the PRA buffer. The Board's view of the ongoing level of CET1 capital required to grow the business, meet current and future regulatory requirements and cover uncertainties continues to be around 12.5 per cent, plus a management buffer of around 1 per cent.

Tangible net assets per share were 49.0 pence, down from 57.5 pence at 31 December 2021, with the favourable impact from profits more than offset by cash flow hedging reserve movements as a result of increased interest rates (9.5 pence), pensions remeasurements (2.2 pence) and the impacts from payment of ordinary dividends (2.2 pence).

FURTHER IMPAIRMENT DETAIL

The analyses which follow have been presented on an underlying basis. See page 23 .

Underlying impairment(A)

 
                          Nine               Nine                              Three             Three 
                        months             months                             months            months 
                         ended              ended                              ended             ended 
                        30 Sep             30 Sep                             30 Sep            30 Sep 
                          2022            2021(1)           Change              2022           2021(1)            Change 
                          GBPm               GBPm                %              GBPm              GBPm                 % 
 
Charges 
(credits) 
pre-updated 
MES (2) 
              ----------------  -----------------                   ----------------  ---------------- 
 Retail (3)                520                601               13               235               163              (44) 
 Commercial 
  Banking 
  (3)                        1              (354)                                  8              (21) 
 Other (3)                  11                (2)                                  7                 - 
              ----------------  -----------------                   ----------------  ---------------- 
                           532                245                                250               142 
Updated 
economic 
outlook 
              ----------------  -----------------                   ----------------  ---------------- 
 Retail (3)                541              (678)                                370             (141) 
 Commercial 
  Banking 
  (3)                      372              (420)                                248             (120) 
 Other(3)                (400)                  -                              (200)                 - 
              ----------------  -----------------                   ----------------  ---------------- 
                           513            (1,098)                                418             (261) 
              ----------------  -----------------                   ----------------  ---------------- 
Underlying 
 impairment 
 charge 
 (credit) 
 (A)                     1,045              (853)                                668             (119) 
              ----------------  -----------------                   ----------------  ---------------- 
 
Asset 
 quality 
 ratio 
 (A)                     0.30%            (0.25)%                              0.57%           (0.10)% 
 

(1) Non lending-related fraud costs, previously reported within underlying impairment, are now included within operating costs. Comparatives have been presented on a consistent basis.

(2) Impairment charges absent the impact from updated economic outlook, thus reflecting observed movements in credit quality. Coronavirus impacted restructuring cases, previously disclosed separately, are now reported within charges pre-updated MES (multiple economic scenarios); comparatives have been presented on a consistent basis.

(3) Impairment charges for Retail, Commercial Banking and Other reflect the new organisation structure; comparatives have been presented on a consistent basis. See page 25 .

Total expected credit loss allowance

 
                                               Underlying basis(A) 
                                                                             At 31 
                                         At 30             At 30               Dec 
                                      Sep 2022          Jun 2022              2021 
                                          GBPm              GBPm              GBPm 
 
Customer related balances 
                              ----------------  ----------------  ---------------- 
 Drawn                                   4,685             4,247             4,277 
 Undrawn                                   286               236               200 
                              ----------------  ----------------  ---------------- 
                                         4,971             4,483             4,477 
Loans and advances to banks                  7                 4                 1 
Debt securities                              6                 4                 3 
Other assets                                33                23                18 
                              ----------------  ----------------  ---------------- 
Total ECL allowance                      5,017             4,514             4,499 
                              ----------------  ----------------  ---------------- 
 

FURTHER IMPAIRMENT DETAIL (continued)

Loans and advances to customers and expected credit loss allowance - underlying basis(A)

 
                                                                                                   Stage            Stage 
                                                                                                       2                3 
                            Stage             Stage             Stage                               as %             as % 
At 30 September                 1                 2                 3             Total               of               of 
2022                         GBPm              GBPm              GBPm              GBPm            total            total 
 
Loans and advances to customers 
 UK mortgages             259,541            46,153             6,613           312,307             14.8              2.1 
 Credit cards              12,018             2,526               292            14,836             17.0              2.0 
 Loans and 
  overdrafts                8,723             1,339               255            10,317             13.0              2.5 
 UK Motor 
  Finance                  12,335             1,949               169            14,453             13.5              1.2 
 Other                     13,294               650               158            14,102              4.6              1.1 
                 ----------------  ----------------  ----------------  ----------------  ---------------  --------------- 
Retail (1)                305,911            52,617             7,487           366,015             14.4              2.0 
                 ----------------  ----------------  ----------------  ----------------  ---------------  --------------- 
 Small and 
  Medium 
  Businesses               31,783             6,266             2,279            40,328             15.5              5.7 
 Corporate and 
  Institutional 
  Banking                  52,001             5,029             1,650            58,680              8.6              2.8 
                 ----------------  ----------------  ----------------  ----------------  ---------------  --------------- 
Commercial 
 Banking                   83,784            11,295             3,929            99,008             11.4              4.0 
Equity 
 Investments 
 and 
 Central Items 
 (2)                      (4,010)                 -                 6           (4,004) 
                 ----------------  ----------------  ----------------  ----------------  ---------------  --------------- 
Total gross 
 lending                  385,685            63,912            11,422           461,019             13.9              2.5 
                                                                                         ---------------  --------------- 
ECL allowance 
 on drawn 
 balances                   (632)           (1,847)           (2,206)           (4,685) 
                 ----------------  ----------------  ----------------  ---------------- 
Net balance 
 sheet carrying 
 value                    385,053            62,065             9,216           456,334 
                 ----------------  ----------------  ----------------  ---------------- 
 
Customer related ECL allowance (drawn and undrawn) 
 UK mortgages                  48               705               823             1,576 
 Credit cards                 182               382               118               682 
 Loans and 
  overdrafts                  175               273               138               586 
 UK Motor 
  Finance (3)                 107                85                93               285 
 Other                         15                18                48                81 
                 ----------------  ----------------  ----------------  ---------------- 
Retail (1)                    527             1,463             1,220             3,210 
                 ----------------  ----------------  ----------------  ---------------- 
 Small and 
  Medium 
  Businesses                  104               292               153               549 
 Corporate and 
  Institutional 
  Banking                     133               243               832             1,208 
                 ----------------  ----------------  ----------------  ---------------- 
Commercial 
 Banking                      237               535               985             1,757 
Equity 
 Investments 
 and 
 Central Items                  -                 -                 4                 4 
                 ----------------  ----------------  ----------------  ---------------- 
Total                         764             1,998             2,209             4,971 
                 ----------------  ----------------  ----------------  ---------------- 
 
Customer related ECL allowance (drawn and undrawn) as a percentage 
 of loans and advances to customers (4) 
 UK mortgages                   -               1.5              12.4               0.5 
 Credit cards                 1.5              15.1              54.4               4.6 
 Loans and 
  overdrafts                  2.0              20.4              72.6               5.7 
 UK Motor 
  Finance                     0.9               4.4              55.0               2.0 
 Other                        0.1               2.8              30.4               0.6 
                 ----------------  ----------------  ----------------  ---------------- 
Retail (1)                    0.2               2.8              16.6               0.9 
                 ----------------  ----------------  ----------------  ---------------- 
 Small and 
  Medium 
  Businesses                  0.3               4.7              13.0               1.4 
 Corporate and 
  Institutional 
  Banking                     0.3               4.8              50.5               2.1 
                 ----------------  ----------------  ----------------  ---------------- 
Commercial 
 Banking                      0.3               4.7              34.9               1.8 
Equity 
 Investments 
 and 
 Central Items                                    -              66.7 
                 ----------------  ----------------  ----------------  ---------------- 
Total                         0.2               3.1              21.7               1.1 
                 ----------------  ----------------  ----------------  ---------------- 
 

(1) Retail balances exclude the impact of the HBOS acquisition-related adjustments.

(2) Contains centralised fair value hedge accounting adjustments.

(3) UK Motor Finance for Stages 1 and 2 include GBP93 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

(4) Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of GBP75 million, Loans and overdrafts of GBP65 million, Small and Medium Businesses of GBP1,104 million and Corporate and Institutional Banking of GBP1 million.

FURTHER IMPAIRMENT DETAIL (continued)

Loans and advances to customers and expected credit loss allowance - underlying basis(A) (continued)

 
                                                                                                  Stage            Stage 
                                                                                                      2                3 
                            Stage             Stage             Stage                              as %             as % 
                                1                 2                 3            Total               of               of 
At 30 June 2022              GBPm              GBPm              GBPm             GBPm            total            total 
 
Loans and advances to customers 
 UK mortgages             268,568            35,555             6,764          310,887             11.4              2.2 
 Credit cards 
  (1)                      12,186             2,289               280           14,755             15.5              1.9 
 Loans and 
  overdrafts                8,666             1,144               256           10,066             11.4              2.5 
 UK Motor 
  Finance                  12,476             1,832               179           14,487             12.6              1.2 
 Other (1)                 12,711               626               150           13,487              4.6              1.1 
                 ----------------  ----------------  ----------------  ---------------  ---------------  --------------- 
Retail (2)                314,607            41,446             7,629          363,682             11.4              2.1 
                 ----------------  ----------------  ----------------  ---------------  ---------------  --------------- 
 Small and 
  Medium 
  Businesses 
  (1)                      34,310             5,053             2,147           41,510             12.2              5.2 
 Corporate and 
  Institutional 
  Banking (1)              52,129             2,910             1,653           56,692              5.1              2.9 
                 ----------------  ----------------  ----------------  ---------------  ---------------  --------------- 
Commercial 
 Banking                   86,439             7,963             3,800           98,202              8.1              3.9 
Equity 
 Investments 
 and 
 Central Items 
 (3)                      (1,549)                 1                 6          (1,542) 
                 ----------------  ----------------  ----------------  ---------------  ---------------  --------------- 
Total gross 
 lending                  399,497            49,410            11,435          460,342             10.7              2.5 
                                                                                        ---------------  --------------- 
ECL allowance 
 on drawn 
 balances                   (776)           (1,389)           (2,082)          (4,247) 
                 ----------------  ----------------  ----------------  --------------- 
Net balance 
 sheet carrying 
 value                    398,721            48,021             9,353          456,095 
                 ----------------  ----------------  ----------------  --------------- 
 
Customer related ECL allowance (drawn and undrawn) 
 UK mortgages                  45               470               716            1,231 
 Credit cards 
  (1)                         172               346               111              629 
 Loans and 
  overdrafts                  164               243               135              542 
 UK Motor 
  Finance (4)                 105                80               105              290 
 Other (1)                     14                16                48               78 
                 ----------------  ----------------  ----------------  --------------- 
Retail (2)                    500             1,155             1,115            2,770 
                 ----------------  ----------------  ----------------  --------------- 
 Small and 
  Medium 
  Businesses 
  (1)                         106               177               153              436 
 Corporate and 
  Institutional 
  Banking (1)                  93               166               814            1,073 
                 ----------------  ----------------  ----------------  --------------- 
Commercial 
 Banking                      199               343               967            1,509 
Equity 
 Investments 
 and 
 Central Items                200                 -                 4              204 
                 ----------------  ----------------  ----------------  --------------- 
Total                         899             1,498             2,086            4,483 
                 ----------------  ----------------  ----------------  --------------- 
 
Customer related ECL allowance (drawn and undrawn) as a percentage 
 of loans and advances to customers (5) 
 UK mortgages                   -               1.3              10.6              0.4 
 Credit cards 
  (1)                         1.4              15.1              53.6              4.3 
 Loans and 
  overdrafts                  1.9              21.2              70.7              5.4 
 UK Motor 
  Finance                     0.8               4.4              58.7              2.0 
 Other (1)                    0.1               2.6              32.0              0.6 
                 ----------------  ----------------  ----------------  --------------- 
Retail (2)                    0.2               2.8              14.9              0.8 
                 ----------------  ----------------  ----------------  --------------- 
 Small and 
  Medium 
  Businesses 
  (1)                         0.3               3.5              12.5              1.1 
 Corporate and 
  Institutional 
  Banking (1)                 0.2               5.7              49.3              1.9 
                 ----------------  ----------------  ----------------  --------------- 
Commercial 
 Banking                      0.2               4.3              33.6              1.6 
Equity 
 Investments 
 and 
 Central Items 
 (6)                                              -              66.7 
                 ----------------  ----------------  ----------------  --------------- 
Total                         0.2               3.0              20.1              1.0 
                 ----------------  ----------------  ----------------  --------------- 
 
   (1)   Reflects the new organisation structure. See page 25 . 

(2) Retail balances exclude the impact of the HBOS acquisition-related adjustments.

(3) Contains centralised fair value hedge accounting adjustments.

(4) UK Motor Finance for Stages 1 and 2 include GBP94 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

(5) Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of GBP73 million, Loans and overdrafts of GBP65 million, Small and Medium Businesses of GBP921 million and Corporate and Institutional Banking of GBP1 million.

   (6)   Equity Investments and Central Items excludes the GBP200 million ECL central adjustment. 

FURTHER IMPAIRMENT DETAIL (continued)

Loans and advances to customers and expected credit loss allowance - underlying basis(A) (continued)

 
                                                                                                   Stage            Stage 
                                                                                                       2                3 
                            Stage             Stage             Stage                               as %             as % 
At 31 December                  1                 2                 3            Total                of               of 
2021                         GBPm              GBPm              GBPm             GBPm             total            total 
 
Loans and advances to customers 
 UK mortgages             276,021            28,579             4,191          308,791               9.3              1.4 
 Credit cards 
  (1)                      11,905             2,075               292           14,272              14.5              2.0 
 Loans and 
  overdrafts                8,181             1,105               271            9,557              11.6              2.8 
 UK Motor 
  Finance                  12,247             1,828               201           14,276              12.8              1.4 
 Other (1)                 11,198               593               169           11,960               5.0              1.4 
                 ----------------  ----------------  ----------------  ---------------  ----------------  --------------- 
Retail (2)                319,552            34,180             5,124          358,856               9.5              1.4 
                 ----------------  ----------------  ----------------  ---------------  ----------------  --------------- 
 Small and 
  Medium 
  Businesses 
  (1)                      36,134             4,992             1,747           42,873              11.6              4.1 
 Corporate and 
  Institutional 
  Banking (1)              46,585             2,538             1,816           50,939               5.0              3.6 
                 ----------------  ----------------  ----------------  ---------------  ----------------  --------------- 
Commercial 
 Banking                   82,719             7,530             3,563           93,812               8.0              3.8 
Equity 
 Investments 
 and 
 Central Items 
 (3)                          144                 -                 7              151                 -              4.6 
                 ----------------  ----------------  ----------------  ---------------  ----------------  --------------- 
Total gross 
 lending                  402,415            41,710             8,694          452,819               9.2              1.9 
                                                                                        ----------------  --------------- 
ECL allowance 
 on drawn 
 balances                   (919)           (1,377)           (1,981)          (4,277) 
                 ----------------  ----------------  ----------------  --------------- 
Net balance 
 sheet carrying 
 value                    401,496            40,333             6,713          448,542 
                 ----------------  ----------------  ----------------  --------------- 
 
Customer related ECL allowance (drawn and undrawn) 
 UK mortgages                  50               653               581            1,284 
 Credit cards 
  (1)                         147               253               131              531 
 Loans and 
  overdrafts                  136               170               139              445 
 UK Motor 
  Finance (4)                 108                74               116              298 
 Other (1)                     15                15                52               82 
                 ----------------  ----------------  ----------------  --------------- 
Retail (2)                    456             1,165             1,019            2,640 
                 ----------------  ----------------  ----------------  --------------- 
 Small and 
  Medium 
  Businesses 
  (1)                         104               176               179              459 
 Corporate and 
  Institutional 
  Banking (1)                  68               122               782              972 
                 ----------------  ----------------  ----------------  --------------- 
Commercial 
 Banking                      172               298               961            1,431 
Equity 
 Investments 
 and 
 Central Items                400                 -                 6              406 
                 ----------------  ----------------  ----------------  --------------- 
Total                       1,028             1,463             1,986            4,477 
                 ----------------  ----------------  ----------------  --------------- 
 
Customer related ECL allowance (drawn and undrawn) as a percentage 
 of loans and advances to customers (5) 
 UK mortgages                   -               2.3              13.9              0.4 
 Credit cards 
  (1)                         1.2              12.2              58.2              3.7 
 Loans and 
  overdrafts                  1.7              15.4              67.5              4.7 
 UK Motor 
  Finance                     0.9               4.0              57.7              2.1 
 Other (1)                    0.1               2.5              30.8              0.7 
                 ----------------  ----------------  ----------------  --------------- 
Retail (2)                    0.1               3.4              20.4              0.7 
                 ----------------  ----------------  ----------------  --------------- 
 Small and 
  Medium 
  Businesses 
  (1)                         0.3               3.5              14.5              1.1 
 Corporate and 
  Institutional 
  Banking (1)                 0.1               4.8              43.1              1.9 
                 ----------------  ----------------  ----------------  --------------- 
Commercial 
 Banking                      0.2               4.0              31.6              1.5 
Equity 
 Investments 
 and 
 Central Items 
 (6)                            -                 -              85.7              4.0 
                 ----------------  ----------------  ----------------  --------------- 
Total                         0.3               3.5              24.7              1.0 
                 ----------------  ----------------  ----------------  --------------- 
 

(1) Reflects the new organisation structure. See page 25 .

(2) Retail balances exclude the impact of the HBOS and MBNA acquisition-related adjustments.

(3) Contains centralised fair value hedge accounting adjustments.

(4) UK Motor Finance for Stages 1 and 2 include GBP95 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

(5) Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of GBP67 million, Loans and overdrafts of GBP65 million, Small and Medium Businesses of GBP515 million and Corporate and Institutional Banking of GBP3 million.

   (6)   Equity Investments and Central Items excludes the GBP400 million ECL central adjustment. 

FURTHER IMPAIRMENT DETAIL (continued)

Stage 2 loans and advances to customers and expected credit loss allowance - underlying basis(A)

 
                                   Up to date 
                 ----------------------------------------------  ----------              ----------              ---------- 
                                                                        1 to 30                 Over 30 
                                                                          days                    days 
                      PD movements              Other(1)               past due(2)              past due                  Total 
                 ----------------------  ----------------------  ----------------------  ----------------------  ------------------------ 
                      Gross                   Gross                   Gross                   Gross                   Gross 
At 30 September     lending      ECL(3)     lending      ECL(3)     lending      ECL(3)     lending      ECL(3)     lending      ECL(3) 
 2022                  GBPm        GBPm        GBPm        GBPm        GBPm        GBPm        GBPm        GBPm        GBPm        GBPm 
 
 UK mortgages        34,716         257       7,915         213       2,349         118       1,173         117      46,153         705 
 Credit cards         2,275         291         132          47          90          28          29          16       2,526         382 
 Loans and 
  overdrafts            943         169         232          45         121          39          43          20       1,339         273 
 UK Motor 
  Finance               854          27         927          23         136          25          32          10       1,949          85 
 Other                  166           4         394           8          54           4          36           2         650          18 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Retail               38,954         748       9,600         336       2,750         214       1,313         165      52,617       1,463 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 Small and 
  Medium 
  Businesses          4,408         246       1,235          26         399          13         224           7       6,266         292 
 Corporate 
  and 
  Institutional 
  Banking             4,856         242          39           -          14           -         120           1       5,029         243 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Commercial 
 Banking              9,264         488       1,274          26         413          13         344           8      11,295         535 
Equity 
Investments 
and Central 
Items                     -           -           -           -           -           -           -           -           -           - 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Total                48,218       1,236      10,874         362       3,163         227       1,657         173      63,912       1,998 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 
At 30 June 2022 
                             ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 UK mortgages        24,356         193       7,836         161       2,290          60       1,073          56      35,555         470 
 Credit cards 
  (4)                 2,042         257         131          45          87          28          29          16       2,289         346 
 Loans and 
  overdrafts            735         140         235          42         134          43          40          18       1,144         243 
 UK Motor 
  Finance               675          24         977          21         143          25          37          10       1,832          80 
 Other (4)              169           3         354           7          54           3          49           3         626          16 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Retail               27,977         617       9,533         276       2,708         159       1,228         103      41,446       1,155 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 Small and 
  Medium 
  Businesses 
  (4)                 3,146         139       1,257          22         413          10         237           6       5,053         177 
 Corporate 
  and 
  Institutional 
  Banking (4)         2,672         160         123           3          26           3          89           -       2,910         166 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Commercial 
 Banking              5,818         299       1,380          25         439          13         326           6       7,963         343 
Equity 
 Investments 
 and Central 
 Items                    -           -           1           -           -           -           -           -           1           - 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Total                33,795         916      10,914         301       3,147         172       1,554         109      49,410       1,498 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 
At 31 December 
 2021 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 UK mortgages        17,917         226       6,053         222       2,270          73       2,339         132      28,579         653 
 Credit cards 
  (4)                 1,754         179         209          41          86          21          26          12       2,075         253 
 Loans and 
  overdrafts            505          82         448          43         113          30          39          15       1,105         170 
 UK Motor 
  Finance               581          20       1,089          26         124          19          34           9       1,828          74 
 Other (4)              194           4         306           7          44           2          49           2         593          15 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Retail               20,951         511       8,105         339       2,637         145       2,487         170      34,180       1,165 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 Small and 
  Medium 
  Businesses 
  (4)                 3,570         153         936          14         297           6         189           3       4,992         176 
 Corporate 
  and 
  Institutional 
  Banking (4)         2,479         119          25           3           6           -          28           -       2,538         122 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Commercial 
 Banking              6,049         272         961          17         303           6         217           3       7,530         298 
Equity 
Investments 
and Central 
Items                     -           -           -           -           -           -           -           -           -           - 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Total                27,000         783       9,066         356       2,940         151       2,704         173      41,710       1,463 
                 ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 

(1) Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments.

(2) Includes assets that have triggered PD movements, or other rules, given that being 1-29 days in arrears in and of itself is not a Stage 2 trigger.

   (3)   Expected credit loss allowance on loans and advances to customers (drawn and undrawn). 
   (4)   Reflects the new organisation structure. See page 25 . 

FURTHER IMPAIRMENT DETAIL (continued)

ECL sensitivity to economic assumptions

The measurement of ECL reflects an unbiased probability-weighted range of possible future economic outcomes. The Group achieves this by generating four economic scenarios to reflect the range of outcomes; the central scenario reflects the Group's base case assumptions used for medium-term planning purposes, an upside and a downside scenario are also selected together with a severe downside scenario. If the base case moves adversely it generates a new, more adverse downside and severe downside which are then incorporated into the ECL. The base case, upside and downside scenarios carry a 30 per cent weighting; the severe downside is weighted at 10 per cent. These assumptions can be found on pages 19 and 18.

The table below shows the Group's ECL for the probability-weighted, upside, base case, downside and severe downside scenarios, the severe downside scenario incorporating adjustments made to CPI inflation and UK Bank Rate paths. The stage allocation for an asset is based on the overall scenario probability-weighted PD and hence the staging of assets is constant across all the scenarios. In each economic scenario the ECL for individual assessments and post-model adjustments is constant reflecting the basis on which they are evaluated.

 
                  Probability-                              Base                            Severe 
Underlying            weighted           Upside             case         Downside         downside 
basis (A)                 GBPm             GBPm             GBPm             GBPm             GBPm 
 
UK mortgages             1,576              877            1,147            1,788            4,327 
Credit cards               682              594              649              742              866 
Other Retail               952              903              937              984            1,048 
Commercial 
 Banking                 1,768            1,365            1,580            1,909            3,117 
Other                       39               39               39               39               39 
               ---------------  ---------------  ---------------  ---------------  --------------- 
At 30 
 September 
 2022                    5,017            3,778            4,352            5,462            9,397 
               ---------------  ---------------  ---------------  ---------------  --------------- 
 
UK mortgages             1,231              856            1,004            1,374            2,607 
Credit 
 cards(1)                  629              546              597              686              804 
Other Retail 
 (1)                       910              863              895              941            1,004 
Commercial 
 Banking (1)             1,515            1,316            1,413            1,587            2,200 
Other (1)                  229              229              229              229              229 
               ---------------  ---------------  ---------------  ---------------  --------------- 
At 30 June 
 2022                    4,514            3,810            4,138            4,817            6,844 
               ---------------  ---------------  ---------------  ---------------  --------------- 
 
UK mortgages             1,284            1,084            1,170            1,414            1,833 
Credit 
 cards(1)                  531              453              511              579              682 
Other Retail 
 (1)                       825              760              811              863              950 
Commercial 
 Banking (1)             1,433            1,295            1,358            1,505            1,859 
Other (1)                  426              426              427              426              424 
               ---------------  ---------------  ---------------  ---------------  --------------- 
At 31 
 December 
 2021                    4,499            4,018            4,277            4,787            5,748 
               ---------------  ---------------  ---------------  ---------------  --------------- 
 
   (1)   Reflects the new organisation structure. See page 25 . 

FURTHER IMPAIRMENT DETAIL (continued)

Base case and MES economic assumptions

The Group's base case economic scenario reflects the outlook as of 30 September 2022 and was revised in light of developments in energy pricing, changes in UK fiscal policy prior to the balance sheet date and a continuing shift towards a more restrictive monetary policy stance by central banks. The Group's updated base case scenario was based upon three conditioning assumptions: first, the war in Ukraine remains 'local', without overtly involving neighbouring countries, NATO or China; second, the fiscal loosening implied by the UK Government's 'Growth Plan' of 23 September 2022 would be offset principally by Government spending cuts; and third, central bank reaction functions, including of the Bank of England, are focused on controlling inflation, motivating a more rapid tightening of UK monetary policy. The Group continues to assume that no further UK COVID-19 national lockdowns are mandated. Based on these assumptions and incorporating the macroeconomic information published in the third quarter, the Group's base case scenario comprises an economic downturn with a rise in the unemployment rate, declining residential and commercial property prices, and continuing increases in the UK Bank Rate against a backdrop of elevated inflationary pressures. Risks to the base case economic view exist in both directions and are partly captured by the generation of alternative economic scenarios. Each of the scenarios includes forecasts for key variables as of the third quarter of 2022, for which data or revisions to history may have since emerged prior to publication.

At 30 September 2022, the Group has included an adjusted severe downside scenario to incorporate high CPI inflation and UK Bank Rate profiles and has adopted this adjusted severe downside scenario in calculating its ECL allowance. This is because the historic macroeconomic and loan loss data upon which the scenario model is calibrated imply an association of downside economic outcomes with lower inflation rates, easier monetary policy, and therefore low interest rates. This adjustment is considered to better reflect the risks around the Group's base case view in a macroeconomic environment in which supply shocks are the principal concern.

UK economic assumptions - base case scenario by quarter

Key quarterly assumptions made by the Group in the base case scenario are shown below. Gross domestic product is presented quarter-on-quarter. House price growth, commercial real estate price growth and CPI inflation are presented year-on-year, i.e from the equivalent quarter in the previous year. Unemployment rate and UK Bank Rate are presented as at the end of each quarter.

 
                               First        Second         Third        Fourth         First        Second         Third        Fourth 
                             quarter       quarter       quarter       quarter       quarter       quarter       quarter       quarter 
                                2022          2022          2022          2022          2023          2023          2023          2023 
 At 30 September 2022              %             %             %             %             %             %             %             % 
 
Gross domestic product           0.8         (0.1)         (0.1)         (0.3)         (0.4)         (0.3)         (0.2)         (0.1) 
Unemployment rate                3.7           3.8           3.7           3.8           4.3           4.7           5.1           5.4 
House price growth              11.1          12.5          10.4           5.0         (0.2)         (5.8)         (8.2)         (7.9) 
Commercial real estate 
 price growth                   18.0          18.0          12.3           2.8         (5.6)        (11.8)        (13.7)        (14.4) 
UK Bank Rate                    0.75          1.25          2.25          4.00          4.00          4.00          4.00          4.00 
CPI inflation                    6.2           9.2          10.2          10.7           9.8           6.5           5.2           3.2 
 

FURTHER IMPAIRMENT DETAIL (continued)

UK economic assumptions - scenarios by year

Key annual assumptions made by the Group are shown below. Gross domestic product and Consumer Price Index (CPI) inflation are presented as an annual change, house price growth and commercial real estate price growth are presented as the growth in the respective indices within the period. Unemployment rate and UK Bank Rate are averages for the period.

 
                                                                                                                                    2022 
                                                                                                                                 to 2026 
                                     2022               2023               2024               2025               2026            average 
 At 30 September 2022                   %                  %                  %                  %                  %                  % 
 
Upside 
Gross domestic product                3.6                0.4                1.0                1.5                2.1                1.7 
Unemployment rate                     3.3                2.8                3.2                3.5                3.8                3.3 
House price growth                    6.1              (2.7)                7.2                8.5                6.1                5.0 
Commercial real estate 
 price growth                         8.7              (3.6)                0.1                1.0                1.9                1.6 
UK Bank Rate                         2.16               5.28               5.17               4.30               4.12               4.20 
CPI inflation                         9.0                6.1                2.9                3.2                2.6                4.8 
 
Base case 
Gross domestic product                3.4              (1.0)                0.4                1.4                2.0                1.2 
Unemployment rate                     3.7                4.9                5.4                5.5                5.5                5.0 
House price growth                    5.0              (7.9)              (0.5)                2.5                2.3                0.2 
Commercial real estate 
 price growth                         2.8             (14.4)              (2.7)                0.4                1.9              (2.6) 
UK Bank Rate                         2.06               4.00               3.38               2.56               2.50               2.90 
CPI inflation                         9.1                6.2                2.5                2.2                1.3                4.2 
 
Downside 
Gross domestic product                3.2              (2.3)              (0.2)                1.2                1.9                0.8 
Unemployment rate                     4.1                6.6                7.5                7.3                7.2                6.5 
House price growth                    3.9             (12.9)              (8.9)              (5.4)              (3.3)              (5.5) 
Commercial real estate 
 price growth                       (1.4)             (23.0)              (6.5)              (2.5)              (0.2)              (7.1) 
UK Bank Rate                         2.00               2.93               1.76               1.04               1.07               1.76 
CPI inflation                         9.0                6.0                1.9                1.1                0.0                3.6 
 
Severe downside 
Gross domestic product                2.4              (4.5)              (0.3)                1.0                1.8                0.0 
Unemployment rate                     4.9                9.8               10.5               10.0                9.5                8.9 
House price growth                    2.4             (17.9)             (16.6)             (10.3)              (6.0)             (10.0) 
Commercial real estate 
 price growth                       (9.2)             (35.7)             (13.6)              (6.4)              (0.7)             (14.1) 
UK Bank Rate - 
 modelled                            1.78               0.91               0.36               0.21               0.23               0.70 
UK Bank Rate - 
 adjusted                            2.44               7.00               4.88               3.00               2.75               4.01 
CPI inflation - 
 modelled                             9.1                5.9                1.0              (0.4)              (1.9)                2.7 
CPI inflation - 
 adjusted                             9.9               14.3                9.0                4.1                1.3                7.7 
 
Probability-weighted 
Gross domestic product                3.3              (1.3)                0.3                1.4                2.0                1.1 
Unemployment rate                     3.8                5.3                5.9                5.9                5.9                5.4 
House price growth                    4.7              (8.8)              (2.3)                0.6                0.9              (1.1) 
Commercial real estate 
 price growth                         2.1             (15.8)              (4.1)              (1.0)                1.0              (3.8) 
UK Bank Rate - 
 modelled                            2.04               3.75               3.13               2.39               2.33               2.73 
UK Bank Rate - 
 adjusted                            2.11               4.36               3.58               2.67               2.58               3.06 
CPI inflation - 
 modelled                             9.1                6.1                2.3                1.9                1.0                4.1 
CPI inflation - 
 adjusted                             9.1                6.9                3.1                2.4                1.3                4.6 
 

INTEREST RATE SENSITIVITY

The Group manages the risk to its earnings and capital from movements in interest rates centrally by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 30 September 2022, the Group's structural hedge had an approved capacity of GBP 250 billion (up GBP10 billion on 31 December 2021 and stable compared to 30 June 2022).

Illustrative cumulative impact of parallel shifts in interest rate curve(1)

The table below shows the banking book net interest income sensitivity to an instantaneous parallel increase in interest rates. Sensitivities reflect shifts in the interest rate curve. The marginal reduction in Year 1 sensitivity compared to the year-end and half-year has been driven by structural hedge maturity reinvestment. The actual impact will also depend on the prevailing regulatory and competitive environment at the time. This sensitivity is illustrative and does not reflect new business margin implications and/or pricing actions today or in future periods, other than as outlined.

The following assumptions have been applied:

-- Instantaneous parallel shift in interest rate curve, including UK Bank Rate

-- Balance sheet remains constant

-- Illustrative 50 per cent pass-through on deposits and 100 per cent pass-through on assets, which could be different in practice

 
                  Year               Year               Year 
                     1                  2                  3 
                  GBPm               GBPm               GBPm 
 
+100bps          c.625            c.1,025            c.1,450 
+50bps           c.300              c.525              c.725 
+25bps           c.150              c.250              c.350 
 

(1) Sensitivity based on modelled impact on banking book net interest income, including the future impact of structural hedge maturities. Annual impacts are presented for illustrative purposes only and are based on a number of assumptions which are subject to change. Year 1 reflects the 12 months from the 30 September 2022 balance sheet position.

ALTERNATIVE PERFORMANCE MEASURES

In addition to the statutory basis of presentation, the results are also presented on an underlying basis. The Group Executive Committee, which is the chief operating decision maker for the Group, reviews the Group's results on an underlying basis in order to assess performance and allocate resources. Management uses underlying profit before tax, an alternative performance measure, as a measure of performance and believes that it provides important information for investors because it allows for a comparable representation of the Group's performance by removing the impact of items such as volatility caused by market movements outside the control of management.

In arriving at underlying profit, statutory profit before tax is adjusted for the items below, to allow a comparison of the Group's underlying performance:

-- Restructuring costs relating to merger, acquisition and integration activities

-- Volatility and other items, which includes the effects of certain asset sales, the volatility relating to the Group's hedging arrangements and that arising in the insurance business, the unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets

As announced at the 2021 full-year, in the first quarter of 2022 the Group adopted a new basis for cost reporting, including all restructuring costs, with the exception of merger, acquisition and integration costs, within operating costs. Non lending-related fraud costs, previously included within underlying impairment, are also now reported as part of operating costs. This has not impacted the statutory impairment charge. Comparatives have been presented on a consistent basis.

The analysis of lending and expected credit loss (ECL) allowances is presented on an underlying basis. On a statutory basis, purchased or originated credit-impaired (POCI) assets include a fixed pool of mortgages that were purchased as part of the HBOS acquisition at a deep discount to face value reflecting credit losses incurred from the point of origination to the date of acquisition. Over time, these POCI assets will run off as the loans redeem, pay down or losses crystallise. The underlying basis assumes that the lending assets acquired as part of a business combination were originated by the Group and are classified as either Stage 1, 2 or 3 according to the change in credit risk over the period since origination. Underlying ECL allowances have been calculated accordingly. The Group uses the underlying basis to monitor the creditworthiness of the lending portfolio and related ECL allowances.

The Group calculates a number of metrics that are used throughout the banking and insurance industries on an underlying basis. A description of these measures and their calculation, which remain unchanged since the year-end, is set out on pages 27 to 31 of the Group's 2022 Half-Year Results News Release.

ALTERNATIVE PERFORMANCE MEASURES (continued)

 
                                                                      Nine              Nine 
                                                                    months            months 
                                                                     ended             ended 
                                                                    30 Sep            30 Sep 
                                                                      2022              2021 
 
Banking net interest margin(A) 
Underlying net interest income (GBPm)                                9,529             8,270 
Remove non-banking underlying net interest expense 
 (GBPm)                                                                 69                86 
                                                          ----------------  ---------------- 
Banking underlying net interest income (GBPm)                        9,598             8,356 
                                                          ----------------  ---------------- 
 
Statutory net loans and advances to customers (GBPbn)                456.3             450.5 
Add back expected credit loss allowance (drawn) (GBPbn)                4.3               4.4 
Acquisition related fair value adjustments (GBPbn)                     0.4               0.4 
                                                          ----------------  ---------------- 
Underlying gross loans and advances to customers 
 (GBPbn)                                                             461.0             455.3 
Adjustment for non-banking and other items: 
 Fee-based loans and advances (GBPbn)                                (8.1)             (5.4) 
 Other non-banking and other items (GBPbn)                             4.4               0.9 
                                                          ----------------  ---------------- 
Interest-earning banking assets (GBPbn)                              457.3             450.8 
Averaging (GBPbn)                                                    (5.9)             (7.8) 
                                                          ----------------  ---------------- 
Average interest-earning banking assets (GBPbn)(A)                   451.4             443.0 
                                                          ----------------  ---------------- 
 
Banking net interest margin(A)                                       2.84%             2.52% 
 
 
                                                                  Nine              Nine 
                                                                months            months 
                                                                 ended             ended 
                                                                30 Sep            30 Sep 
                                                                  2022              2021 
 
Return on tangible equity(A) 
Profit attributable to ordinary shareholders (GBPm)              3,632             5,064 
 
Average shareholders' equity (GBPbn)                              44.4              44.7 
Remove average intangible assets (GBPbn)                         (6.6)             (6.3) 
                                                      ----------------  ---------------- 
Average tangible equity (GBPbn)                                   37.8              38.4 
                                                      ----------------  ---------------- 
 
Return on tangible equity(A)                                     12.9%             17.6% 
 

BASIS OF PRESENTATION

This news release covers the results of Lloyds Banking Group plc together with its subsidiaries (the Group) for the nine months to 30 September 2022. Unless otherwise stated, income statement commentaries throughout this document compare the nine months to 30 September 2022 to the nine months to 30 September 2021, and the balance sheet analysis compares the Group balance sheet as at 30 September 2022 to the Group balance sheet as at 31 December 2021. The Group uses a number of alternative performance measures, including underlying profit, in the discussion of its business performance and financial position. These measures are labelled with a superscript 'A' throughout this document. Further information on these measures is set out on page 23 . Unless otherwise stated, commentary on page 1 is given on an underlying basis. The Q3 2022 Interim Pillar 3 Report can be found at www.lloydsbankinggroup.com/investors/financial-downloads .

Operating cost comparatives have been presented to reflect the new costs basis, consistent with the current period. See page 23 .

Segmental information: On 1 July 2022 the Group adopted a new organisation structure, aligned to our strategic objectives and our existing three customer-facing divisions. Disclosure will continue to be based on these three divisions, reflecting the basis on which management runs the Group. To reflect the new organisation structure, the Group migrated certain business units between these divisions, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been represented accordingly. Total Group figures are unaffected by these changes.

FORWARD LOOKING STATEMENTS

This document contains certain forward-looking statements within the meaning of Section 21E of the US Securities Exchange Act of 1934, as amended, and section 27A of the US Securities Act of 1933, as amended, with respect to Lloyds Banking Group plc together with its subsidiaries (the Group) and its current goals and expectations. Statements that are not historical or current facts, including statements about the Group's or its directors' and/or management's beliefs and expectations, are forward looking statements. Words such as, without limitation, 'believes', 'achieves', 'anticipates', 'estimates', 'expects', 'targets', 'should', 'intends', 'aims', 'projects', 'plans', 'potential', 'will', 'would', 'could', 'considered', 'likely', 'may', 'seek', 'estimate', 'probability', 'goal', 'objective', 'deliver', 'endeavour', 'prospects', 'optimistic' and similar expressions or variations on these expressions are intended to identify forward looking statements. These statements concern or may affect future matters, including but not limited to: projections or expectations of the Group's future financial position, including profit attributable to shareholders, provisions, economic profit, dividends, capital structure, portfolios, net interest margin, capital ratios, liquidity, risk-weighted assets (RWAs), expenditures or any other financial items or ratios; litigation, regulatory and governmental investigations; the Group's future financial performance; the level and extent of future impairments and write-downs; the Group's ESG targets and/or commitments; statements of plans, objectives or goals of the Group or its management and other statements that are not historical fact; expectations about the impact of COVID-19; and statements of assumptions underlying such 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 forward looking statements include, but are not limited to: general economic and business conditions in the UK and internationally; market related risks, trends and developments; risks concerning borrower and counterparty credit quality; fluctuations in interest rates, inflation, exchange rates, stock markets and currencies; volatility in credit markets; volatility in the price of the Group's securities; changes in consumer behaviour; any impact of the transition from IBORs to alternative reference rates; 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 and other benefits including, but without limitation, as a result of any acquisitions, disposals and other strategic transactions; inability to capture accurately the expected value from acquisitions; potential changes in dividend policy; the ability to achieve strategic objectives; insurance risks; management and monitoring of conduct risk; exposure to counterparty risk; credit rating risk; tightening of monetary policy in jurisdictions in which the Group operates; instability in the global financial markets, including within the Eurozone, and as a result of ongoing uncertainty following the exit by the UK from the European Union (EU) and the effects of the EU-UK Trade and Cooperation Agreement; political instability including as a result of any UK general election and any further possible referendum on Scottish independence; operational risks; conduct risk; technological changes and risks to the security of IT and operational infrastructure, systems, data and information resulting from increased threat of cyber and other attacks; natural pandemic (including but not limited to the COVID-19 pandemic) and other disasters; inadequate or failed internal or external processes or systems; acts of hostility or terrorism and responses to those acts, or other such events; geopolitical unpredictability; the war between Russia and Ukraine; the tensions between China and Taiwan; risks relating to sustainability and climate change (and achieving climate change ambitions), including the Group's ability along with the government and other stakeholders to measure, manage and mitigate the impacts of climate change effectively; changes in laws, regulations, practices and accounting standards or taxation; changes to regulatory capital or liquidity requirements and similar contingencies; assessment related to resolution planning requirements; the policies and actions of governmental or regulatory authorities or courts together with any resulting impact on the future structure of the Group; failure to comply with anti-money laundering, counter terrorist financing, anti-bribery and sanctions regulations; failure to prevent or detect any illegal or improper activities; projected employee numbers and key person risk; increased labour costs; assumptions and estimates that form the basis of the Group's financial statements; the impact of competitive conditions; and exposure to legal, regulatory or competition proceedings, investigations or complaints. A number of these influences and factors are beyond the Group's control. Please refer to the latest Annual Report on Form 20-F filed by Lloyds Banking Group plc with the US Securities and Exchange Commission (the SEC), which is available on the SEC's website at www.sec.gov , for a discussion of certain factors and risks. Lloyds Banking Group plc may also make or disclose written and/or oral forward-looking statements in other written materials and in oral statements made by the directors, officers or employees of Lloyds Banking Group plc to third parties, including financial analysts. 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 the Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this document whether as a result of new information, future events or otherwise. 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.

CONTACTS

For further information please contact:

INVESTORS AND ANALYSTS

Douglas Radcliffe

Group Investor Relations Director

020 7356 1571

douglas.radcliffe@lloydsbanking.com

Edward Sands

Director of Investor Relations

020 7356 1585

edward.sands@lloydsbanking.com

Nora Thoden

Director of Investor Relations - ESG

020 7356 2334

nora.thoden@lloydsbanking.com

CORPORATE AFFAIRS

Grant Ringshaw

External Relations Director

020 7356 2362

grant.ringshaw@lloydsbanking.com

Matt Smith

Head of Media Relations

020 7356 3522

matt.smith@lloydsbanking.com

Copies of this News Release may be obtained from:

Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN

The statement can also be found on the Group's website - www.lloydsbankinggroup.com

Registered office: Lloyds Banking Group plc, The Mound, Edinburgh, EH1 1YZ

Registered in Scotland No. SC095000

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END

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(END) Dow Jones Newswires

October 27, 2022 02:00 ET (06:00 GMT)

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