2023 Q1 Interim Management Statement
Member of the Lloyds Banking Group
FINANCIAL REVIEW
Income statement
The Group's statutory profit before tax for the
first three months of 2023 was £2,068 million, £611 million higher
than the same period in 2022. Higher total income was partly offset
by higher operating expenses and the impact of an increased
impairment charge. Profit for the period was £1,513 million (three
months ended 31 March 2022: £1,050 million).
Total income for the first three months was
£4,629 million, an increase of 21 per cent on 2022, primarily
reflecting higher net interest income in the quarter.
Net interest income of £3,542 million was up 21
per cent on the prior year, driven by stronger margins and higher
average interest-earning banking assets. Relative to the prior
year, the net interest margin benefitted from the higher interest
rate environment. Average interest-earning banking assets were
higher compared to the first three months of 2022, supported by
growth in the open mortgage book and Retail unsecured.
Other income was £199 million higher at £1,087
million in the three months ended 31 March 2023 compared to
£888 million in the same period last year. Net fee and
commission income increased to £322 million, compared to
£301 million in the first quarter of 2022 due to higher card
and other transaction-based income streams, reflecting improved
levels of customer activity. Net trading income was £51 million
higher at £142 million in the three months ended 31 March
2023, in part reflecting the change in fair value of interest rate
derivatives and foreign exchange contracts in the banking book not
mitigated through hedge accounting. Other operating income
increased to £623 million compared to £496 million in the three
months ended 31 March 2022 as a result of higher gains on the
disposal of financial assets at fair value through other
comprehensive income.
Total operating expenses of £2,315 million were
6 per cent higher than in the prior year. This reflects higher
planned strategic investment, new business costs and inflationary
effects. In the first three months of 2023 the Group recognised
remediation costs of £17 million in relation to pre-existing
programmes (three months ended 31 March 2022: £33 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 uncertainties remain.
Following the FCA's Motor Market review, the Group continues to
receive complaints and is engaging with the Financial Ombudsman
Service in respect of historical motor commission arrangements. The
remediation and financial impact, if any, is uncertain.
Impairment was a net charge of £246 million
(three months ended 31 March 2022: £178 million). There was a
pre-updated multiple economic scenarios (MES) charge of £324
million in the period (three months ended 31 March 2022: £151
million), reflecting the expected credit loss (ECL) allowance build
from Stage 1 loans rolling forward into a more adverse economic
outlook, as well as increased flows to default primarily driven by
legacy UK mortgage portfolios and charges on existing Stage 3
clients in Commercial Banking. The Group also recognised a net £78
million MES credit (three months ended 31 March 2022:
£27 million charge) as a result of the slightly improved
economic outlook in the first quarter.
Modest observed deterioration has translated to
a small underlying net increase in Stage 3 balances within UK
mortgages (when excluding the impact from the exit of £2.5 billion
of legacy Retail mortgage loans). Unsecured flow to default rates
are essentially flat. Stage 2 loans and advances to customers
decreased to £56 billion (31 December 2022: £60 billion)
largely as a result of the updated economic outlook, with 94 per
cent up to date (31 December 2022: 94 per cent). Stage 3 assets
were £8 billion as at 31 March 2023 (31 December 2022: £8
billion).
The Group recognised a tax expense of £555
million in the period compared to £407 million in the first three
months of 2022.
FINANCIAL REVIEW (continued)
Balance sheet
Total assets were £740 million higher at
£617,668 million at 31 March 2023 compared to £616,928 million at
31 December 2022. Cash and balances at central banks rose by
£6,628 million to £78,633 million reflecting increased liquidity
holdings. Financial assets at amortised cost were £7,925 million
lower at £483,471 million compared to £491,396 million at 31
December 2022 with debt securities £2,001 million higher, offset by
a reduction in reverse repurchase agreements of £7,960 million and
loans and advances to customers of £2,663 million to
£432,964 million. The reduction in loans and advances to
customers largely resulted from the exit of £2.5 billion of legacy
Retail mortgage loans (including £2.1 billion in the closed
mortgage book), an additional reduction of £0.6 billion in the
open mortgage book and repayments of government-backed lending in
Commercial Banking, partly offset by £1.2 billion growth in other
Retail lending, principally unsecured. Financial asset at fair
value through other comprehensive income decreased £919 million as
a result of asset sales during the quarter. Other assets increased
£3,007 million, reflecting higher settlement balances and
retirement benefit assets, partly offset by lower deferred tax
assets.
Total liabilities were £2,607 million lower at
£575,262 million compared to £577,869 million at 31 December 2022.
Customer deposits at £441,729 million decreased by £4,443 million
since the end of 2022 including a decrease in Retail current
account balances of £3.5 billion from seasonal customer outflows,
including tax payments, higher spend and a more competitive market,
including from UK Government National Savings and Investments
offers and the Group's own savings rates. Retail savings increased
slightly during the quarter, capturing some of the movements from
elsewhere in the deposit base. In addition, there were decreases in
deposits from banks of £1,749 million and repurchase
agreements at amortised cost of £1,254 million. Offsetting these
reductions, debt securities in issue increased by
£3,279 million following issuances during the quarter and
other liabilities increased £1,234 million as a result of higher
settlement balances.
Total equity increased from £39,059 million at
31 December 2022 to £42,406 million at 31 March 2023, as a result
of the profit for the period, positive movements in the cash flow
hedging reserve, pension scheme remeasurements, and issuances of
other equity instruments.
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