94WP Lloyds Bk.

Member of the Lloyds Banking Group

REVIEW OF PERFORMANCE

Income statement

In the nine months to 30 September 2022, the Group recorded a profit before tax of £4,480 million compared to £5,103 million in the same period in 2021, representing a reduction of £623 million as higher total income was more than offset by the impact of a net impairment charge for the period compared to a net credit for the first nine months of 2021. Profit after tax was £3,346 million.

Total income increased by £1,047 million, or 9 per cent, to £12,119 million in the nine months to 30 September 2022 compared to £11,072 million in the first nine months of 2021; there was an increase of £1,209 million in net interest income and a decrease of £162 million in other income.

Net interest income was £9,458 million, an increase of £1,209 million compared to £8,249 million in the nine months to 30 September 2021. The increase in net interest income was driven by an improved margin, as a result of UK Bank Rate increases and continued funding and capital optimisation, partly offset by mortgage margin reductions. Increased average interest-earning assets reflecting continued growth in the open mortgage book also contributed positively.

Other income was £162 million lower at £2,661 million in the nine months to 30 September 2022 compared to £2,823 million in the same period last year. Net fee and commission income increased by £58 million to £971 million, compared to £913 million in the first nine months of 2021, due to higher credit and debit card fees, reflecting increased levels of customer activity, more than offsetting some reduction from lower levels of corporate financing activity. Net trading income was £305 million lower at £88 million in the nine months to 30 September 2022, in part reflecting the change in fair value of interest rate derivatives and foreign exchange contracts not mitigated by hedge accounting. Other operating income increased by £85 million to £1,602 million compared to £1,517 million in the nine months to 30 September 2021, in part due to improved gains on disposal of financial assets at fair value through other comprehensive income.

Total operating expenses decreased by £131 million to £6,629 million compared to £6,760 million in the first nine months of 2021. Increased staff costs reflected salary increases and the impact of a one-off £1,000 cost of living payment to staff, partly offset by headcount reductions. In addition, there was an increase in IT-related costs, as a result of the Group's strategic investment programmes. Depreciation charges were lower reflecting the continued strength in used car prices. The charge in respect of regulatory provisions was £346 million lower at £67 million and largely related to pre-existing programmes. There have been no further charges relating to HBOS Reading since the end of 2021 and the provision held continues to reflect the Group's best estimate of its full liability, albeit significant uncertainties remain.

There was a net impairment charge in the nine months to 30 September 2022 of £1,010 million, compared to a net credit of £791 million in the first nine months of 2021, largely reflecting a low charge arising from observed credit performance and a charge in the first nine months of 2022 as a result of updates to the assessment of the economic outlook and associated scenarios, compared to a significant credit in the first nine months of 2021. The updated outlook includes elevated risks from a higher inflation and interest rate environment, offset by a £400 million release of the COVID-19 central adjustment in the nine months to 30 September 2022.

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. Stage 3 loans and advances have been stable across the third quarter. 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 increased in the first nine months of the year to £4,519 million (31 December 2021: £4,000 million). 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, with these risks now captured more fully in models.

The Group recognised a tax expense of £1,134 million in the period compared to £141 million in the first nine months of 2021. During the first nine months of 2021 the Group had recognised a deferred tax credit in the income statement of £1,189 million following substantive enactment, in May 2021, of the UK Government's increase in the rate of corporation tax from 19 per cent to 25 per cent with effect from 1 April 2023.

REVIEW OF PERFORMANCE (continued)

Balance sheet

Total assets were £24,590 million, or 4 per cent, higher at £627,439 million at 30 September 2022 compared to £602,849 million at 31 December 2021. Cash and balances at central banks rose by £13,223 million to £67,502 million reflecting the placement of funds from increased available liquidity. Financial assets at amortised cost were £14,947 million higher at £505,263 million at 30 September 2022 compared to £490,316 million at 31 December 2021, as a result of a £2,456 million increase in loans and advances to banks, £4,434 million increase in loans and advances to customers, net of impairment allowances, £2,780 million in debt securities, and £5,163 million in reverse repurchase agreement balances. The increase in loans and advances to customers, net of impairment allowances, was driven by continued growth in the open mortgage book and increases in Corporate and Institutional lending due to attractive growth opportunities as well as foreign exchange movements, partially offset by further reductions in the closed mortgage book and hedging impacts. Other assets increased by £3,772 million mainly due to a £2,272 million increase in deferred tax assets and a £470 million increase in current tax recoverable. Financial assets at fair value through other comprehensive income were £6,787 million lower at £20,999 million as a result of asset sales during the period.

Total liabilities were £28,395 million, or 5 per cent, higher at £590,472 million compared to £562,077 million at 31 December 2021. Customer deposits increased by £5,771 million to £455,144 million compared to £449,373 million at 31 December 2021, as a result of continued inflows to Retail current and savings accounts and Commercial Banking balances. Repurchase agreements at amortised cost increased £16,255 million to £46,361 million, as the Group took advantage of favourable funding opportunities and amounts due to fellow Lloyds Banking Group undertakings were £3,654 million higher at £5,144 million, also reflecting funding arrangements. Subordinated liabilities decreased by £2,675 million following redemptions during the period.

Ordinary shareholders' equity decreased £3,794 million to £32,616 million at 30 September 2022 as retained profit for the period was more than offset by negative movements in the cash flow hedging reserve as a result of increased interest rates and adverse defined benefit post-retirement scheme remeasurements.

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