FINANCIAL REVIEW

Income statement

Lloyds Bank plc together with its subsidiaries' (the Group) statutory profit before tax for the first three months of 2024 was £1,587 million, 23 per cent lower than the same period in 2023. This was due to lower net interest income and higher operating expenses, partly offset by a lower impairment charge. Profit for the period was £1,159 million (three months ended 31 March 2023: £1,513 million).

Total income for the first three months was £4,385 million, a decrease of 5 per cent on 2023, primarily reflecting lower net interest income in the quarter.

Net interest income of £3,127 million was down 12 per cent from the same period in 2023, primarily driven by a lower net interest income margin. The lower margin reflects expected headwinds due to deposit churn and asset margin compression, particularly in the mortgage book as it refinances in a lower margin environment. These factors were partially offset by benefits from higher structural hedge earnings in the higher rate environment. Average interest-earning banking assets were lower compared to the first three months of 2023, significantly due to a modest reduction in the mortgage book and continued repayments of government-backed lending in the Small and Medium Businesses portfolio.

Other income was £171 million higher at £1,258 million in the three months ended 31 March 2024 compared to £1,087 million in the same period last year, driven by improved UK Motor Finance performance including growth from the acquisition of Tusker.

Total operating expenses of £2,728 million were 18 per cent higher than the same period in 2023. This includes expected elevated severance charges taken early in the year and a new sector-wide Bank of England levy, replacing the former charging structure. This annual levy of c.£0.1 billion was charged through operating expenses in the first quarter and will have a broadly neutral impact on profit in 2024, with an offsetting benefit recognised in net interest income over the course of the year. The Group continues to maintain cost discipline and delivery of cost efficiencies, in the context of inflationary pressures and ongoing strategic investment. Operating lease depreciation of £290 million increased compared to the prior year (three months to 31 March 2023: £140 million). This reflects a full quarter of depreciation from Tusker, alongside growth in the fleet size and declines in used car prices.

The Group recognised remediation costs of £20 million in the first three months (three months ended 31 March 2023: £17 million), in relation to pre-existing programmes. There have been no further charges relating to the potential impact of the FCA review into historical motor finance commission arrangements, with the FCA having indicated it will update in September.

Impairment was a charge of £70 million (three months ended 31 March 2023: £246 million). This reflects a larger credit from improvements to the Group's economic outlook in the first quarter compared to the prior year. The decrease also includes a release in Commercial Banking from loss rates used in the model, while observing a low charge on new and existing Stage 3 clients. Asset quality remains strong with credit performance across portfolios stable in the quarter and remaining broadly at, or favourable to pre-pandemic experience.

The Group recognised a tax expense of £428 million in the period compared to £555 million in the first three months of 2023 driven by lower profit in the period.

FINANCIAL REVIEW (continued)

Balance sheet

Total assets were £632 million higher at £606,037 million at 31 March 2024 compared to £605,405 million at 31 December 2023. Cash and balances at central banks reduced by £4,883 million to £53,026 reflecting a change in the mix of liquidity holdings. Financial assets at amortised cost were £5,396 million higher at £493,467 million compared to £488,071 million at 31 December 2023 with reverse repurchase agreements £6,849 million higher, offset by a reduction in loans and advances to customers of £1,046 million to £432,078 million. The decrease in loans and advances to customers represented a £1.6 billion reduction in the UK mortgages portfolio following the expected refinancing of the higher maturities in the fourth quarter of 2023, as well as a £0.8 billion reduction in Small and Medium Business lending, including repayments of government-backed lending. This was partly offset by growth in UK Retail unsecured loans of £0.7 billion, due to organic balance growth and lower repayments following a securitisation in the fourth quarter of 2023, alongside growth in UK Motor Finance and credit cards.

Total liabilities were £541 million higher at £565,515 million compared to £564,974 million at 31 December 2023. Customer deposits stood at £440,021 million at the end of the first quarter, a decrease of £1,932 million. Retail deposits were up £1.3 billion in the quarter with a combined increase of £0.9 billion across Retail savings and Wealth, driven by inflows to limited withdrawal and fixed products and a £0.4 billion increase in current account balances, benefiting from seasonally lower spend and bank holiday timing impacts (with the latter expected to reverse in the second quarter). This was partly offset by seasonal tax payments and outflows to savings products, including the Group's own savings offers. Growth in Retail was more than offset by a reduction in Commercial Banking deposits of £3.1 billion, largely due to Small and Medium Businesses balance reductions. Offsetting this reduction, amounts due to fellow Lloyds Banking Group undertakings increased £930 million, debt securities in issue increased £1,649 million following issuances during the quarter and other liabilities increased £770 million driven by increased amounts due for settlement as a result of the bank holiday weekend.

Total equity increased from £40,431 million at 31 December 2023 to £40,522 million at 31 March 2024, as a result of profit for the period partly offset by increased longer-term rates impacting the cash flow hedging reserve and pension surplus, along with the dividend paid in the quarter.

Capital

The Group's common equity tier 1 (CET1) capital ratio reduced from 14.4 per cent at 31 December 2023 to 14.2 per cent at 31 March 2024. Profit for the first three months of the year was offset by the accrual for foreseeable ordinary dividends and an increase in risk-weighted assets.

The Group's total capital ratio reduced from 20.5 per cent at 31 December 2023 to 20.1 per cent at 31 March 2024 reflecting the increase in risk-weighted assets and the impact of both interest rates and a reduction in eligible provisions on Tier 2 capital.

Risk-weighted assets have increased by £1,744 million during the quarter from £182,560 million at 31 December 2023 to £184,304 million at 31 March 2024. This largely reflected the impact of Retail lending. The impact from credit and model calibrations was minimal.

The Group's UK leverage ratio reduced from 5.6 per cent at 31 December 2023 to 5.5 per cent at 31 March 2024 reflecting an increase in the leverage exposure measure principally related to increases in securities financing transactions and off-balance sheet items.