Q1 2018 Interim Management Statement

HIGHLIGHTS FOR THE THREE MONTHS ENDED 31 MARCH 2018 Strong financial performance with significant increase in profit and returns on a statutory and underlying basis ·     Statutory profit before tax of £1.6 billion, 23 per cent higher, with return on tangible equity increasing to 12.3 per cent, reflecting improved underlying profit and lower below the line items ·     Net income at £4.3 billion, 4 per cent higher, with net interest margin increasing to 2.93 per cent ·     Cost:income ratio further improved to 47.8 per cent with positive jaws of 9 per cent ·     Asset quality remains strong with an asset quality ratio of 23 basis points ·     Balance sheet strength maintained with strong CET1 capital increase of 50 basis points in the quarter and CET1 ratio of 14.4 per cent pre 2018 dividend accrual1 ·     Tangible net assets per share higher at 52.3 pence2, driven by strong statutory profit ·     Strong start to the year with no change to the financial targets for 2018

 

 

 

 

GROUP CHIEF EXECUTIVE'S STATEMENT

 

In the first three months of 2018 we have again delivered strong financial performance with increased profits and returns, a significantly reduced gap between underlying and statutory profit and a strong increase in capital. These results continue to demonstrate the strength of our business model. In March, following our 2017 results and dividends announcement, we commenced our share buyback programme of up to £1 billion.

 

The UK economy continues to be resilient, benefiting from low unemployment and continued GDP growth. Asset quality remains strong with no deterioration seen across the portfolio. We expect the economy to continue to perform along these lines during 2018.

 

In February we announced our ambitious strategy to transform the Group into a digitised, simple, low risk, customer focused UK financial services provider. We have made a strong start to 2018 and have begun implementing the strategic initiatives which will further digitise the Group, enhance customer propositions, maximise our capabilities as an integrated financial service provider and transform the way we work.

 

 

1	Incorporates profits for the quarter, that remain subject to formal verification in accordance with the Capital Requirements Regulation.
2	After adjusting for IFRS 9.

António Horta-Osório

 Group Chief Executive

 

 

CONSOLIDATED INCOME STATEMENT − UNDERLYING BASIS

 

		Quarter		Quarter				Quarter
		ended		ended				ended
		31 Mar 2018		31 Mar 2017				31 Dec 2017
		£ million		£ million		%		£ million		%
Net interest income		3,171		2,928		8		3,203		(1)
Other income		1,411		1,482		(5)		1,429		(1)
Total income		4,582		4,410		4		4,632		(1)
Operating lease depreciation		(252)		(232)		(9)		(284)		11
Net income		4,330		4,178		4		4,348		-
Operating costs		(2,008)		(1,968)		(2)		(2,165)		7
Remediation		(60)		(200)		70		(325)		82
Total costs		(2,068)		(2,168)		5		(2,490)		17
Impairment		(258)		(127)				(257)		-
Underlying profit1		2,004		1,883		6		1,601		25
Restructuring		(138)		(157)		12		(152)		9
Volatility and other items		(174)		(72)				(69)
Payment protection insurance provision		(90)		(350)				(600)
Statutory profit before tax		1,602		1,304		23		780		105
Tax expense		(455)		(414)		(10)		(342)		(33)
Profit for the period		1,147		890		29		438		162
Earnings per share		1.5p		1.1p		36		0.4p		275
Banking net interest margin		2.93%		2.80%		13bp		2.90%		3bp
Average interest-earning banking assets		£437bn		£431bn		1		£439bn		-
Cost:income ratio1		47.8%		51.9%		(4.1)pp		57.3%		(9.5)pp
Asset quality ratio		0.23%		0.12%		11bp		0.23%		-
Underlying return on tangible equity1		15.4%		13.6%		1.8pp		11.5%		3.9pp
Return on tangible equity		12.3%		8.8%		3.5pp		4.2%		8.1pp

 

CONSOLIDATED BALANCE SHEET AND KEY RATIOS

 

 

		At 31 Mar		At 1 Jan		Change		At 31 Dec		Change
		2018		2018		%		2017		%
				(adjusted)2				(reported)
Loans and advances to customers3		£445bn		£444bn		-		£456bn		(2)
Customer deposits4		£413bn		£416bn		(1)		£416bn		(1)
Loan to deposit ratio		108%		107%		1pp		110%		(2)pp
Total assets		£805bn		£811bn		(1)		£812bn		(1)
CET1 ratio pre 2018 dividend accrual5,6		14.4%		13.9%		0.5pp		13.9%		0.5pp
CET1 ratio5,6		14.1%		13.9%		0.2pp		13.9%		0.2pp
Transitional total capital ratio5		21.6%		21.2%		0.4pp		21.2%		0.4pp
Transitional MREL ratio5		27.4%		25.7%		1.7pp		25.7%		1.7pp
UK leverage ratio5,6,7		5.3%		5.4%		(0.1)pp		5.4%		(0.1)pp
Risk-weighted assets5		£211bn		£211bn		-		£211bn		-
Tangible net assets per share		52.3p		51.7p		0.6p		53.3p		(1.0)p

 

1	Prior periods restated to include remediation.
2	Adjusted to reflect the impact of applying IFRS 9 from 1 January 2018, with transitional arrangements applied for capital.
3	Excludes reverse repos of £21.8 billion (31 December 2017: £16.8 billion).
4	Excludes repos of £3.3 billion (31 December 2017: £2.6 billion).
5	Incorporating profits, net of foreseeable dividends (unless otherwise stated), for the period that remain subject to formal verification in accordance with the Capital Requirements Regulation.
6	The CET1 and leverage ratios at 31 December 2017 were reported on a proforma basis, reflecting the dividend paid by the Insurance business in February 2018. In addition the CET1 ratio was post share buyback.
7	Calculated in accordance with the UK Leverage Ratio Framework. Excludes qualifying central bank claims.

 

REVIEW OF PERFORMANCE

 

Strong financial performance with significant increase in profit and returns on a statutory and underlying basis

Statutory profit before tax was up 23 per cent at £1,602 million and profit after tax was up 29 per cent at £1,147 million, both driven by a 6 per cent increase in underlying profit to £2,004 million and lower below the line items. The statutory return on tangible equity improved 3.5 percentage points to 12.3 per cent.

 

Net income of £4,330 million was 4 per cent higher than the first quarter of 2017 with an 8 per cent increase in net interest income, more than offsetting a 5 per cent decrease in other income, while operating lease depreciation increased 9 per cent mainly reflecting fleet growth in Lex Autolease.

 

Net interest income increased by £243 million to £3,171 million, largely reflecting a 13 basis point increase in the net interest margin to 2.93 per cent driven by the benefit from MBNA and lower deposit and wholesale funding costs, more than offsetting continued asset pricing pressure. Average interest-earning assets of £437 billion were up on prior year due to targeted business growth. Other income was £1,411 million with the decrease reflecting higher weather related insurance claims, lower bulk annuity business, transaction flows in Commercial Banking and the changes to overdraft charging which took effect in November, partly offset by continued growth in the Lex Autolease business.

 

Operating costs at £2,008 million increased 2 per cent, reflecting MBNA. Our market leading cost:income ratio improved further to 47.8 per cent with positive jaws of 9 per cent.

 

Credit quality across the portfolio remains strong. The asset quality ratio increased to 23 basis points largely due to the expected lower releases and write backs, the inclusion of MBNA and the non-recurrence of debt sales realised in the first quarter of 2017. The stable gross AQR of 27 basis points includes 3 basis points for MBNA.

 

Restructuring of £138 million included severance costs relating to the Group's strategic investment plans, the rationalisation of the non-branch property portfolio, implementation of the ring-fencing requirements and MBNA integration costs. The increase in the volatility and other items line largely reflects the movements in equity markets and credit spreads in the quarter. The Payment Protection Insurance charge of £90 million comprises the increased costs in relation to the completion of the requirement under the Plevin ruling to proactively contact customers who have previously had their complaints defended.

 

Balance sheet strength maintained with strong increase in capital

Loans and advances to customers were adjusted on adoption of IFRS 9, resulting in around £11.5 billion reduction to £444 billion primarily due to the reclassification of certain assets. After this adjustment, loans and advances to customers increased slightly in the quarter to £445 billion with continued growth in targeted segments, including £0.3 billion in SME and £0.3 billion in motor finance, while the open mortgage book of £267 billion remained in line with year end 2017. The loan to deposit ratio was slightly up at 108 per cent.

 

The CET1 ratio has strengthened to 14.4 per cent before dividend accrual with an increase of 50 basis points in the quarter primarily driven by strong statutory profit after tax. After accruing for dividends the CET1 ratio remains strong at 14.1 per cent. The Group remains well positioned to meet its Minimum Requirement for Own Funds and Eligible Liabilities (MREL) from 2020 and, as at 31 March 2018, had a transitional MREL ratio of 27.4 per cent. The UK leverage ratio reduced to 5.3 per cent. Tangible net assets per share increased to 52.3 pence after adjusting the December position for the implementation of IFRS 9.

 

 

ADDITIONAL FINANCIAL INFORMATION

 

1.         Banking net interest margin and average interest-earning banking assets

		Quarter		Quarter
		ended		ended
		31 Mar 2018		31 Mar 2017
		£m		£m
Group net interest income - statutory basis		3,791		2,363
Insurance gross up		(678)		499
Volatility and other items		58		66
Group net interest income - underlying basis		3,171		2,928
Non-banking net interest income		(9)		47
Banking net interest income - underlying basis		3,162		2,975

 

		Quarter		Quarter
		ended		ended
		31 Mar 2018		31 Mar 2017
		£bn		£bn
Net loans and advances to customers		444.5		444.7
Impairment provision and fair value adjustments		4.2		3.6
Non-banking items:
Fee based loans and advances		(5.5)		(8.5)
Sale of assets to Insurance		-		(6.6)
Other non-banking		(5.6)		(3.4)
Gross banking loans and advances		437.6		429.8
Averaging		(0.5)		1.1
Average interest-earning banking assets		437.1		430.9
Banking net interest margin		2.93%		2.80%

 

2.         Return on tangible equity

		Quarter		Quarter
		ended		ended
		31 Mar 2018		31 Mar 2017
Average shareholders' equity (£bn)		43.3		43.7
Average intangible assets (£bn)		(5.2)		(3.9)
Average tangible equity (£bn)		38.1		39.8
Underlying profit after tax1 (£m)		1,473		1,381
Add back amortisation of intangible assets (post tax) (£m)		67		49
Less profit attributable to non-controlling interests and other equity holders (£m)		(91)		(98)
Adjusted underlying profit after tax (£m)		1,449		1,332
Underlying return on tangible equity1		15.4%		13.6%
Group statutory profit after tax (£m)		1,147		890
Add back amortisation of intangible assets (post tax) (£m)		67		49
Add back amortisation of purchased intangible assets (post tax) (£m)		31		26
Less profit attributable to non-controlling interests and other equity holders (£m)		(91)		(98)
Adjusted statutory profit after tax (£m)		1,154		867
Statutory return on tangible equity		12.3%		8.8%

 

1	Prior periods restated to include remediation.