TITLE SLIDE IS IN
Q1 INTERIM MANAGEMENT
SENTENCE
CASE. STATEMENT
GREEN
BACKGROUND.
Presentation to Fixed
Income Investors
00
Q1Month
2017 0000
Presenters Name
HIGHLIGHTS
Strong financial performance continues to demonstrate the strength of the
business model
• Strong underlying performance with significant improvement in statutory profit and returns
– Increase in underlying profit to £2.1bn with an improved underlying return on tangible equity of 15.1%
– Positive operating jaws while credit quality remains strong with a net AQR of 12bps
– Statutory profit before tax has doubled to £1.3bn; statutory return on tangible equity of 8.8%
• Strong capital generation of 0.7% CET1 as our differentiated business model continues to deliver
– CET1 ratio of 14.5% (pre dividend accrual) with c.0.8% still retained for MBNA; total capital ratio of 21.9%
• Helping Britain prosper through continued support to SMEs and first-time buyers
• On track to deliver the Group financial targets for 2017
– Now expect 2017 full year NIM to be close to 2.80% and AQR to be inside existing 25bps guidance (both pre MBNA)
– Open book mortgage balances expected to stabilise and then grow to close the year in line with 31 December 2016
– 2017 capital generation expected to be at the top end of the 170-200bps ongoing guidance range
1
UNDERLYING FINANCIAL PERFORMANCE
Strong underlying performance
(£m)
Q1
2017
Q1
2016
Change
Net interest income
2,928
2,906
1%
Other income
1,482
1,477
–
Total income
4,410
4,383
1%
(232)
(193)
(20)%
4,178
4,190
–
(1,968)
(1,987)
1%
(127)
(149)
15%
– Positive operating jaws of 1%; cost:income ratio of 47.1%
Underlying profit
2,083
2,054
1%
– Lower impairment charge reflects benefit of releases and
Net interest margin
2.80%
2.74%
6bp
Cost:income ratio
47.1%
47.4%
AQR
0.12%
0.14%
(2)bp
Underlying RoTE
15.1%
15.0%
0.1pp
Operating lease depreciation
Net income
Operating costs
Impairment
• Increase in underlying profit to £2.1bn
– NII increased 1% to £2.9bn reflecting an improved margin
of 2.80% primarily due to lower funding and deposit costs
– Stable other income of £1.5bn; operating lease
depreciation increase reflects strong fleet leasing volumes
– Operating costs down 1% through continued cost control
and Simplification programme benefits
writebacks; gross AQR of 23bps and a net AQR of 12bps
(0.3)pp • Improved underlying RoTE of 15.1%
2
INCOME
Total income of £4.4bn with increased NII and stable other income
Net interest margin – vs Q4 2016 (%)
Other income trend (£bn)
12bps
1.6
0.03
0.11
2.80
1.5
1.5
1.5
Q4
2016
Q1
2017
1.4
2.68
(0.02)
Q4
2016
Asset
spread
& mix
Liability
spread
& mix
Wholesale
funding
& other
Q1
2017
Divisional AIEAs (£bn)
Retail
Q4 2016
300
88
35 11 434
Q1 2017
86
Q2
2016
Q3
2016
• Improved NII of £2.9bn with 12bps increase in margin
– NIM improvement due to lower funding and deposit costs
including full quarter benefit of deposit re-pricing actions
Commercial
Banking
Consumer
Finance
298
Q1
2016
36 11 431
– Now expect 2017 FY NIM to be close to 2.80% (pre MBNA)
• AIEA reduction due to capital and returns optimisation in
Global Corporates and lower mortgage balances
Run-off
• Other income of £1.5bn stable year-on-year
3
STATUTORY FINANCIAL PERFORMANCE
Significant increase in statutory profit reflecting lower below the line charges
(£m)
Q1
2017
Q1
2016
Underlying profit
2,083
2,054
• Market volatility and other items in 2016 included the
£790m ECN redemption charge
• Restructuring costs include Simplification, non-branch
Market volatility and other items
(72)
(1,124)
Restructuring costs
(157)
(161)
PPI
(350)
–
Other conduct
(200)
(115)
1,304
654
(414)
(123)
Statutory profit before tax
Taxation
property rationalisation and ring-fencing spend
• Q1 PPI provision of £350m as previously announced
following the FCA’s revised policy statement in March
• Other conduct includes £100m for HBOS Reading
compensation and £100m for Retail matters
• Effective tax rate of 32% primarily due to non-deductible
conduct charges
Statutory profit after tax
Statutory RoTE
890
531
8.8%
5.7%
• Improved statutory RoTE of 8.8%
4
BALANCE SHEET
Strong capital generation in the quarter
Common equity tier 1 ratio (%)
• CET1 ratio of 14.5% pre dividend accrual
0.7%
0.7
0.1
0.2
13.8
14.5
14.3
– Q1 capital generation of 0.7% with strong
financial performance and continued de-risking
(0.2)
(0.3)
– Around 0.8% of capital still retained to cover
the capital impact of the MBNA acquisition
Dec
2016
pro forma
Underlying
post tax
Conduct
Market
movements
RWAs
& other
Mar
2017
(pre dividend
accrual)
2017
dividend
accrual
Mar
2017
– 2017 capital generation now expected to be at
the top end of 170-200bps ongoing guidance
Tangible net assets per share (p)
• Total capital remains strong at 21.9%
1.7p
2.9
54.8
0.8
(1.2)
56.5
• Leverage ratio stable at 5.0%
(0.8)
• TNAV increased 1.7p per share to 56.5p
– Driven by strong statutory profit and positive
Dec
2016
Underlying
profit
Tax &
other stat
items
Conduct
Reserve
movements
Mar
2017
reserve movements, partly offset by conduct
5
SUMMARY
Confidence in the Group’s future prospects is reflected in our strong financial targets
Financial targets
• Strong financial targets reflecting strength of
• Our differentiated business model is delivering
– Simple, efficient and low risk business model
provides competitive advantage
– Multi-brand and multi-channel operating model
– Strong underlying financial performance with
significant increase in statutory profit
– Continued strong capital generation
• Focused on delivering final year of current
strategic plan and preparing next three year plan
business model
– Now expect 2017 FY NIM to be close to 2.80%
(pre MBNA)
– Now expect 2017 FY AQR to be inside existing
25bps guidance (pre MBNA)
– Cost:income ratio of around 45% exiting 2019,
with reductions every year
– 2017 capital generation expected to be at the top
end of the 170-200bps ongoing guidance range
– Statutory RoTE of 13.5 to 15.0% in 2019
6
TITLE SLIDE IS IN
SENTENCE
CASE.
FUNDING AND
LIQUIDITY
GREEN BACKGROUND.
00 Month 0000
Presenters Name
GROUP STRUCTURE AND FUTURE REGULATORY REQUIREMENTS
Simple, UK focused business model positions the Group well for ring-fencing
Simplified Group structure
LLOYDS BANKING GROUP PLC
•
•
•
Senior Unsecured (MREL)
Subordinated Debt
Equity
LLOYDS BANK PLC
•
•
Senior Unsecured
Covered Bonds
HBOS plc
Scottish Widows
Group
Simplified structure under ring-fencing
LLOYDS BANKING GROUP PLC
Ring-fenced
bank
Non
ring-fenced
entity
Insurance
Vast majority of
banking business will
sit in RFB
Bank of Scotland plc
Multi-brand and multi-channel
Clear strategic focus
8
CREDIT RATINGS
All ratings on stable outlook unless specified
LBG (HoldCo)
Lloyds Bank
HBOS
Bank of Scotland
Long Term
Baa1
A1
A1
A1
Short Term
P-2
P-1
P-1
P-1
MOODY’S
S&P
Negative
Outlook
A
Negative
Outlook
BBB+
Negative
Outlook
Long Term
BBB+
A
Short Term
A-2
A-1
A-2
A-1
Long Term
A+
A+
A+
A+
Short Term
F1
F1
F1
F1
Negative
Outlook
FITCH
9
WHOLESALE FUNDING
Composition of wholesale funding as at 31 March 2017
Product, currency and maturity – £106bn
Senior unsecured debt maturities(1)
LB PLC (£27bn total)
18%
LBG PLC (£5bn total)
6%
18%
MM Funding
Covered Bonds
24%
36%
GBP
26%
-
EUR
32%
Securitisation
USD
Senior
Other
5.2
1.2
3.4
Subordinated
4%
1.6
4.8
4.4
-
2.4
36%
2017 (3) 2018
2019
2020
2021
1.5
0.7
0.2
1.3
2022
2023
2024
2.7
1.0
0.1
0.5
2025
2026
0.4
2027
• Wholesale funding decreased to £106bn
£37bn
£29bn
£20bn per annum; lower funding requirement
in 2017 partly due to the availability of the
Term Funding Scheme
£16bn
£15bn
£9bn
< 1 yr (MM)
(2)
< 1 yr
1 yr - 2 yr
2 yr - 5 yr
• Steady-state funding requirement of £15 –
> 5 yr
• Maintain multiple issuance platforms with
access to diverse funding sources globally
29%
(1)
71%
Maturities reflect public and private senior unsecured debt. (2)Excludes balances relating to margins of £2.7 billion (31 December 2016: £3.2 billion) and settlement accounts of £1.2 billion 10
(31 December 2016: £1.8 billion). (3)Maturities for the remainder of 2017.
WHOLESALE FUNDING
Diverse and simple term funding model has enabled successful execution
£3.5bn Term issuance in Q1
LBG (HoldCo)
GBP
EUR
USD
Issuer
Capital/ MREL(2) issuance
Other
Lloyds Banking • Subordinated debt: AT1, Tier 2
Group
• Senior unsecured debt
(Baa1/BBB+/A+)(1)
HoldCo senior
– EMTN, SEC Registered Shelf, AUD (Kangaroo),
Subordinated debt
Samurai(3)
Maintain usage of a diverse range of OpCo funding
formats
OpCo senior
Lloyds Bank (OpCo)
Funding platforms
Covered bonds
Lloyds Bank
(A1/A/A+)(1)
• Senior unsecured debt
– GMTN, EMTN, SEC Registered Shelf, AUD (Kangaroo),
Samurai/Uridashi Shelf, SSD/NSV
Private placements
• Covered Bonds: Eur 60bn (UK Residential Mortgages)
Securitisation
£bn
(1)
0
1
2
3
Securitisation
• RMBS (UK): Permanent
• Credit Card ABS: Penarth
Moody’s / S&P / Fitch. (2) MREL – minimum requirement for own funds and eligible liabilities.
(3)
Expected establishment of Samurai shelf in late 2017.
11
LIQUIDITY
Strong liquidity position
Primary/LCR eligible liquid assets(1) (£bn)
123
105
• The Group maintains a strong liquid asset portfolio
133
121
(2)
comprised largely of cash and LCR eligible securities
• The increase in liquid assets in the quarter reflects
actions taken in anticipation of the MBNA acquisition
2014
2015
2016
2017 Q1
• LCR eligible liquid assets are almost 9 times Money
Loan to deposit composition
Balance sheet
2014(3)
2015
2016
2017 Q1
Loans and advances to customers
£456bn
£455bn
£450bn
£445bn
Customer deposits
£423bn
£418bn
£413bn
£415bn
108%
109%
109%
107%
Loan to deposit ratio
(1)
Markets funding and in excess of total outstanding
wholesale funding
• LCR comfortably exceeds regulatory requirements
The UK regulator adopted the EU delegated act on 1 October 2015. Prior to this, liquidity was managed on an Individual Liquidity Adequacy Statement (ILAS) basis. 2015 liquid assets
are classed as LCR eligible. (2) Excludes TSB. At 31 December 2014, TSB had £4.5bn of liquid assets, bringing the Group total liquid assets to £109bn. (3) Excludes TSB.
12
TITLE
SLIDE
IS
IN
CAPITAL
POSITION
AND
SENTENCE
CASE.
BANKING
REFORM
GREEN BACKGROUND.
00 Month 0000
Presenters Name
STRONG CAPITAL BASE
Well positioned in an evolving regulatory environment
Capital composition(1) (%)
Capital Resources
(£bn)
21.4
21.5
21.9
46.8
Tier 2
4.4
4.2
4.4
9.4
Tier 1
0.9
0.9
1.2
0.7
1.5
2.5
5.3
AT1
2.5
• Strong capital position
– Fully loaded CET1 of 14.3% (post dividend accrual) with
c.0.8% still retained for MBNA
– Total capital ratio of 21.9%
2.4
• Strong capital generation in Q1 of 0.7% CET1
CET1
12.8(2)
13.8
14.3
30.6
• 2017 capital generation expected to be at the top end of
170-200bps ongoing guidance range
• Group capital position remains above transitional total
capital ratio target of around 20%
Dec 2016
2015
(1)
Mar 2017
As a percentage of risk-weighted assets; fully loaded CET1 ratios; Total capital includes grandfathered capital securities. (2) Pro forma, including Insurance dividend.
14
EVOLUTION OF CET1 REGULATORY BUFFERS
Strong capital generative business provides comfort for meeting regulatory buffers
LBG capital buffer evolution (%)
• Differentiated low risk business model with strong
capital generation
PRA + MB
PRA + MB
PRA + MB
PRA + MB
ratio maintained at c.13%
SRB
CCyB
CCB 0.625%
CCB 1.25%
CCB 1.875%
• PRA Buffer reduced reflecting de-risking; target CET1
CCB 2.50%
• Pillar 2a capital requirement of 4.5%, of which 2.5%
has to be met with CET1 (reviewed annually by PRA)
• Capital Conservation Buffer is transitioning in over the
Pillar 1 + 2a
Pillar7%
1 + 2a
7.1%
Pillar 1 + 2a
Pillar
7% 1 + 2a
?%
Pillar 1 + 2a
Pillar 1 + 2a
?%
Pillar 1 + 2a
four year period to 1 January 2019
Pillar 1 + 2a
?%
• Systemic Risk Buffer applicable to ring-fenced bank
Jan 2016
Jan 2017
Jan 2018
Jan 2019
Notes
• PRA + MB: PRA buffer plus Management buffer
• CCB: Capital Conservation Buffer (to incrementally increase by 0.625% annually to 1 January 2019)
• CCyB: UK Countercyclical Capital Buffer is currently 0%. Once increased, will be effective 12months later
• SRB: A Systemic Risk Buffer will be set for the ringfenced bank early in 2019, effective three months later
• Pillar 2A: assumed constant for illustration purposes
from 2019; lower at the Group level
• Current MDA buffer circa 6.0% in excess of 2017 MDA
requirements
15
RELATIVE CAPITAL STRENGTH
Well capitalised relative to global peers
LBG capital composition - strong relative to peers(1)
Tier 1
CET1
Total Capital
21.9%
LBG Total Capital
20.2%
17.5%
3.2%
LBG Tier 1 Capital
15.1%
2.9%
14.0%
1.2%
1.9%
17.5%
1.6%
14.3%
LBG
12.9%
UK Average
13.4%
France Average
11.1%
10.3%
Canada Average
US Average
Source: respective banks’ most recent results announcement available prior to 20 April 2017. UK average: San UK, Barclays, RBS, HSBC and Standard Chartered. France average:
BNP Paribas, Credit Agricole and BPCE. Canada average: Bank of Montreal, Bank of Nova Scotia, CIBC, National Bank of Canada, Royal Bank of Canada and TD Bank. US average:
Capital One, Northern Trust, PNC, U.S. Bancorp. Ratios disclosed on a current rules basis per jurisdictional requirements.
(1)
16
UK APPROACH TO RESOLUTION
Defined approach underpinned by clear preference for structural subordination
1
Losses arise at OpCo
Losses occur at the OpCo and are passed to
HoldCo via write down of intercompany
assets
HoldCo Loss Absorption Hierarchy
HoldCo Senior Unsecured
OpCo Loss Absorption Hierarchy
HoldCo Tier 2
MREL eligible
Excluded Liabilities
HoldCo Additional Tier 1
External Senior Unsecured
HoldCo Equity
Internal Senior Unsecured (LAC(1))
Internal and External Tier 2
Internal and External Additional Tier 1
Internal Equity
(1)
LAC: Loss Absorbing Capacity.
2
HoldCo investors bear loss in accordance
with creditor hierarchy – ‘No creditor worse
off’ principle respected
17
FUTURE CAPITAL REQUIREMENTS
Progress toward interim and final MREL requirements from a position of strength
due to strong capital and diversified funding
MREL requirement
• MREL to be met with regulatory capital
Flexibility to achieve MREL target by partially refinancing
maturing OpCo senior liabilities
MREL
Issuance
c. £4-5bn MREL
issuance p.a.
2xPillar 1 +
2xPillar 2A + CBR
• Good progress on MREL issuance
2xPillar 1 +
Pillar 2A + CBR(1)
~ c. mid 20s%
HoldCo
Senior
HoldCo Senior
and senior unsecured issuance at
HoldCo level
• Expect £4-5 bn of HoldCo senior/MREL
HoldCo
Senior
TC = 20%
Total
Capital
21.9%
Total Capital
Total Capital
issuance per annum as we transition
towards MREL target ratios
• HoldCo senior issuance will largely
refinance maturing OpCo liabilities
• End state MREL requirement will be
2017MREL
Q1
2016:
Estimate
(1)
MREL Issuance 2020: Interim MREL MREL Issuance
(2017 - 2019)
Requirement
CBR: Combined Buffer Requirement.
2022: End State
MREL Requirement
confirmed following Bank of England
review in 2020
18
LOSS ABSORBENCY FRAMEWORK
UK loss absorption hierarchy is well defined
UK resolution framework well established providing certainty to issuers and investors
• Stated preference for structural subordination by UK Resolution Authority – senior HoldCo issuers
• NCWO principle respected – creditor hierarchy is clear
• MREL requirements and eligibility have been clarified
Aligned with other HoldCo issuance markets: US, Japan, Switzerland
Other jurisdictions: No G-SIBs identified in Australia or Canada; resolution frameworks are evolving
European framework also continues to evolve in anticipation of harmonisation:
• French legislation passed to introduce ‘non preferred senior’ – build up of asset class underway
• Italian legislation passed but not effective until 2019; awaiting EU solution
• Spanish framework awaiting EU solution
• German legislation ranks tradable OpCo senior debt below ‘other’ senior claims in insolvency
19
SUMMARY
Well positioned to face any regulatory headwinds and loss absorbency requirements
• LBG is well capitalised relative to peers – 14.3% CET1 (post dividend accrual), 21.9% Total Capital and 5.0%
Leverage ratio
• Strong capital generation and simple low risk business model means LBG is well positioned for any regulatory
headwinds and loss absorbency requirements
• UK resolution framework is well established following further clarity from the BoE in November 2016
– Confirmation of structural subordination approach
– Senior OpCo debt ranks equally with other operating liabilities
– Creditor hierarchy is respected in line with ‘NCWO’ principle
• LBG on track to meet MREL requirements
– LBG structure supports ‘Single Point of Entry’ resolution strategy
– Good progress on MREL issuance across a range of markets and maturities
– Continue to expect £4-5 bn of senior HoldCo issuance per annum as we transition to end-state MREL ratios
20
FORWARD LOOKING STATEMENT AND BASIS OF PRESENTATION
FORWARD LOOKING STATEMENTS
This document contains certain forward looking statements with respect to the business, strategy and plans of Lloyds Banking Group and its current goals and expectations relating to its
future financial condition and performance. Statements that are not historical facts, including statements about Lloyds Banking Group's or its directors' and/or management's beliefs and
expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that
will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such forward looking statements made by the Group or on its behalf include, but are not limited to: general
economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in interest rates (including low or negative rates), exchange rates,
stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group's credit ratings; the ability to derive cost
savings and other benefits including, but without limitation as a result of any acquisitions, disposals and other strategic transactions; changing customer behaviour including consumer
spending, saving and borrowing habits; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, the exit by the UK
from the European Union (EU) and the potential for one or more other countries to exit the EU or the Eurozone and the impact of any sovereign credit rating downgrade or other
sovereign financial issues; technological changes and risks to cyber security; natural, pandemic and other disasters, adverse weather and similar contingencies outside the Group's
control; inadequate or failed internal or external processes or systems; acts of war, other acts of hostility, terrorist acts and responses to those acts, geopolitical, pandemic or other such
events; changes in laws, regulations, accounting standards or taxation, including as a result of the exit by the UK from the EU, or a further possible referendum on Scottish
independence; changes to regulatory capital or liquidity requirements and similar contingencies outside the Group's control; the policies, decisions and actions of governmental or
regulatory authorities or courts in the UK, the EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain
senior management and other employees; requirements or limitations on the Group as a result of HM Treasury's investment in the Group; actions or omissions by the Group's directors,
management or employees including industrial action; changes to the Group's post-retirement defined benefit scheme obligations; the extent of any future impairment charges or writedowns caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; the value and effectiveness of any credit protection purchased by the Group;
the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services, lending companies and digital
innovators and disruptive technologies; and exposure to regulatory or competition scrutiny, legal, regulatory or competition proceedings, investigations or complaints. Please refer to the
latest Annual Report on Form 20-F filed with the US Securities and Exchange Commission for a discussion of certain factors together with examples of forward looking statements.
Except as required by any applicable law or regulation, the forward looking statements contained in this document are made as of today's date, and Lloyds Banking Group expressly
disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements. The information, statements and opinions contained in this
document do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such
securities or financial instruments.
BASIS OF PRESENTATION
The results of the Group and its business are presented in this presentation on an underlying basis. The principles adopted in the preparation of the underlying basis of reporting are set
out on page 14 of the Q1 2017 Interim Management Statement.
© Lloyds Banking Group and its subsidiaries
21