SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
 
 
FORM 6-K
 
 
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
 
 
29 July 2021
LLOYDS BANKING GROUP plc
(Translation of registrant's name into English)
 
5th Floor
25 Gresham Street
London
EC2V 7HN
United Kingdom
 
 
(Address of principal executive offices)
 
 
 
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
 
Form 20-F..X..     Form 40-F 
 
 
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
 
Yes         No ..X..
 
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule
12g3-2(b): 82- ________
 
 
Index to Exhibits
 
 
Item
 
 No. 1 Regulatory News Service Announcement, dated 29 July 2021
          re: 2021 Half-Year Results - Part 1 of 2
 
 
Lloyds Banking Group plc
 
2021 Half-Year Results
 
29 July 2021
 
 
Part 1 of 2
 
 
 
 
 
 
 
 
 
BASIS OF PRESENTATION
This release covers the results of Lloyds Banking Group plc together with its subsidiaries (the Group) for the six months ended 30 June 2021.
Underlying basis: In addition to the statutory basis of presentation, the results are also presented on an underlying basis. The Group Executive Committee, which is the chief operating decision maker for the Group, reviews the Group's results on an underlying basis in order to assess performance and allocate resources. Management uses underlying profit before tax, an alternative performance measure, as a measure of performance and believes that it provides important information for investors because it allows for a comparable representation of the Group's performance by removing the impact of certain items including volatility caused by market movements outside the control of management.
In arriving at underlying profit, statutory profit before tax is adjusted for the items below, to allow a comparison of the Group's underlying performance:
●     Restructuring, including severance-related costs, property transformation, technology research and development, regulatory programmes and merger, acquisition and integration costs
●    Volatility and other items, which includes the effects of certain asset sales, the volatility relating to the Group's hedging arrangements and that arising in the insurance business, the unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets
●     Payment protection insurance provisions
The analysis of lending and expected credit loss (ECL) allowances is presented on an underlying basis and reconciled to figures prepared on a statutory basis. On a statutory basis, purchased or originated credit-impaired (POCI) assets include a fixed pool of mortgages that were purchased as part of the HBOS acquisition at a deep discount to face value reflecting credit losses incurred from the point of origination to the date of acquisition. Over time, these POCI assets will run off as the loans redeem, pay down or losses crystallise. The underlying basis assumes that the lending assets acquired as part of a business combination were originated by the Group and are classified as either Stage 1, 2 or 3 according to the change in credit risk over the period since origination. Underlying ECL allowances have been calculated accordingly. The Group uses the underlying basis to monitor the creditworthiness of the lending portfolio and related ECL allowances.
Commentary within the results for the full year on page 1 and within the Interim Group Chief Executive's statement on pages 7 to 9 is given on an underlying basis.
Unless otherwise stated, income statement commentaries throughout this document compare the six months ended 30 June 2021 to the six months ended 30 June 2020, and the balance sheet analysis compares the Group balance sheet as at 30 June 2021 to the Group balance sheet as at 31 December 2020.
Alternative performance measures: The Group uses a number of alternative performance measures, including underlying profit, in the discussion of its business performance and financial position. These measures are labelled with a '†' throughout this document. Further information on these measures is set out on page 149.
 
 
 
 
 
 
 
 
 
CONTENTS
 
Page 
Results for the half-year
1
Income statement - underlying basis
3
Key balance sheet metrics
3
Quarterly information
5
Balance sheet analysis
6
Group results - statutory basis
7
Interim Group Chief Executive's statement
9
Summary of Group results
13
Segmental analysis - underlying basis
23
 
 
Divisional results
 
Retail
26
Commercial Banking
28
Insurance and Wealth
30
Central items
34
 
 
Other financial information
 
Reconciliation between statutory and underlying basis financial information
35
Banking net interest margin and average interest-earning assets
37
Volatility arising in the insurance business
38
Changes in Insurance assumptions
38
Tangible net assets per share
40
Return on tangible equity
40
Support measures
41
 
 
Risk management
 
Principal risks and uncertainties
42
Credit risk portfolio
44
Funding and liquidity management
68
Capital management
73
 
 
Statutory information
 
Condensed consolidated half-year financial statements (unaudited)
85
Consolidated income statement
86
Consolidated statement of comprehensive income
87
Consolidated balance sheet
88
Consolidated statement of changes in equity
90
Consolidated cash flow statement
93
Notes to the condensed consolidated half-year financial statements
94
 
 
Statement of directors' responsibilities
144
Independent review report to Lloyds Banking Group plc
145
Forward looking statements
147
Summary of alternative performance measures
149
Contacts
150
 
 
 
 
RESULTS FOR THE HALF-YEAR
 
"During the first six months of 2021, the Group has delivered a solid financial performance with continued business momentum, bolstered by an improved macroeconomic outlook for the UK. While we are seeing clear progress in the vaccine roll out and emergence from lockdown restrictions, the coronavirus pandemic continues to have a significant impact on the people, businesses and communities of the UK. In this context, the Group remains committed to Helping Britain Recover from the pandemic and delivering for all stakeholders."
 
William Chalmers
 Interim Group Chief Executive
 
Solid financial performance with continued business momentum, bolstered by improved macroeconomic outlook
 
●     Good progress on Strategic Review 2021 priorities, including record customer satisfaction scores, improved capabilities in Markets products and a leading payments card spend market share
 
 
●     Announced today the acquisition of Embark, a fast growing investment and retirement platform business. Embark enhances our capabilities to address the attractive mass market and self-directed Wealth segment, completing the Group's Wealth proposition. Embark will also enable the Group to re-platform its pensions and retirement proposition, significantly strengthening its offering in Retirement, an important growth market
 
 
●     Statutory profit before tax of £3.9 billion, increased significantly on first half of 2020, benefiting from solid business momentum and a net impairment credit in the period
 
 
●     Net income of £7.6 billion, up 2 per cent, with increased average interest-earning assets at £441 billion, a strong banking net interest margin of 2.50 per cent and other income of £2.4 billion, alongside a reduction in operating lease depreciation
 
 
●     Sustained cost discipline with operating costs of £3.7 billion, including the impact of rebuilding variable pay in the context of stronger than expected financial performance
 
 
●     Remediation charge of £425 million, materially driven by the £91 million regulatory fine relating to the communication of historical insurance renewals, £150 million of redress and operational costs for HBOS Reading, and charges in relation to other ongoing legacy programmes
 
 
●     Net impairment credit of £656 million, including £333 million in the second quarter, as a result of an £837 million release driven by improvements to the macroeconomic outlook for the UK, combined with robust credit performance. Management judgements in respect of coronavirus retained, now c.£1.2 billion
 
 
Balance sheet and capital strength further enhanced
 
●     Loans and advances at £447.7 billion, up £7.5 billion in the period, driven by strong growth of £12.6 billion in the open mortgage book
 
 
●     Customer deposits of £474.4 billion up £23.7 billion in the period, with continued inflows into the Group's trusted brands, including Retail current accounts which were up £9.9 billion in the period. Resulting loan to deposit ratio of 94 per cent, continues to provide a strong liquidity position and significant potential to lend into recovery
 
 
●     Strong capital build of 93 basis points in the first half prior to the interim ordinary dividend. Reintroduced a progressive and sustainable ordinary dividend policy, with an interim ordinary dividend of 0.67 pence per share
 
 
●     CET1 ratio of 16.7 per cent after dividend accrual, significantly ahead of both the ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent and regulatory requirement of c.11 per cent
 
 
Outlook
 
●     Given our solid financial performance and the improved UK macroeconomic outlook, the Group is enhancing its guidance for 2021. Based on the Group's current macroeconomic assumptions:
 
-      Net interest margin now expected to be around 250 basis points
-      Operating costs now expected to be c.£7.6 billion
-      Net asset quality ratio now expected to be below 10 basis points
-      Return on tangible equity now expected to be c.10 per cent, excluding the c.2.5 percentage point benefit from tax rate changes
-      Risk-weighted assets in 2021 now expected to be below £200 billion
 
 
 
INCOME STATEMENT − UNDERLYING BASIS
 
Half-year to 30 June 2021
 
 
 
Half-year
to 30 June 2020
 
 
 
Change
 
 
Half-year
to 31 Dec
2020
 
 
 
Change
 
 
£m
 
 
£m
 
 
%
 
 
£m
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
5,418 
 
 
5,478 
 
 
(1)
 
 
5,295 
 
 
 
Other income
2,417 
 
 
2,461 
 
 
(2)
 
 
2,054 
 
 
18 
 
Operating lease depreciation
(271)
 
 
(526)
 
 
48 
 
 
(358)
 
 
24 
 
Net income
7,564 
 
 
7,413 
 
 
 
 
6,991 
 
 
 
Operating costs
(3,730)
 
 
(3,699)
 
 
(1)
 
 
(3,886)
 
 
 
Remediation
(425)
 
 
(177)
 
 
 
 
(202)
 
 
 
Total costs
(4,155)
 
 
(3,876)
 
 
(7)
 
 
(4,088)
 
 
(2)
 
Underlying profit before impairment
3,409 
 
 
3,537 
 
 
(4)
 
 
2,903 
 
 
17 
 
Impairment
656 
 
 
(3,818)
 
 
 
 
(429)
 
 
 
Underlying profit (loss)
4,065 
 
 
(281)
 
 
 
 
2,474 
 
 
64 
 
Restructuring
(255)
 
 
(133)
 
 
(92)
 
 
(388)
 
 
34 
 
Volatility and other items
95 
 
 
(188)
 
 
 
 
(173)
 
 
 
Payment protection insurance provision
 
 
 
 
 
 
(85)
 
 
 
Statutory profit (loss) before tax
3,905 
 
 
(602)
 
 
 
 
1,828 
 
 
 
Tax (expense) credit
(40)
 
 
621 
 
 
 
 
(460)
 
 
91 
 
Statutory profit after tax
3,865 
 
 
19 
 
 
 
 
1,368 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share
5.1p
 
 
(0.3)p
 
 
 
 
1.5p
 
 
 
Dividends per share - ordinary
 
0.67p
 
 
-
 
 
 
 
0.57p
 
 
18
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banking net interest margin
2.50%
 
 
2.59%
 
 
(9)bp
 
 
2.44%
 
 
6bp
 
Average interest-earning banking assets
£441bn
 
 
£433bn
 
 
2
 
£437bn
 
 
Cost:income ratio
54.9%
 
 
52.3%
 
 
2.6pp
 
58.5%
 
 
(3.6)pp
Asset quality ratio
(0.30)%
 
 
 
1.73%
 
 
(203)bp
 
0.19%
 
 
(49)bp
Return on tangible equity1,†
19.2%
 
 
(1.3)%
 
 
20.5pp
 
5.9%
 
 
13.3pp
 
 
 
 
KEY BALANCE SHEET METRICS
 
At 30 June 2021
 
 
 
At 30 June 2020
 
 
 
Change
%
 
 
At 31 Dec 2020
 
 
 
Change
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and advances to customers2
 
£448bn
 
 
 
£440bn
 
 
 
 
 
£440bn
 
 
 
 
Customer deposits3
 
£474bn
 
 
 
£441bn
 
 
 
 
 
£451bn
 
 
 
 
Loan to deposit ratio
 
94%
 
 
 
100%
 
 
 
(6)pp
 
 
98%
 
 
 
(4)pp
 
CET1 ratio
 
16.7%
 
 
 
14.6%
 
 
 
2.1pp
 
 
16.2%
 
 
 
0.5pp
 
CET1 ratio pre IFRS 9 transitional relief and software4
 
15.5%
 
 
 
13.4%
 
 
 
2.1pp
 
 
14.5%
 
 
 
1.0pp
 
Transitional MREL ratio
 
36.3%
 
 
 
36.8%
 
 
 
(0.5)pp
 
 
36.4%
 
 
 
(0.1)pp
 
UK leverage ratio
 
5.8%
 
 
 
5.4%
 
 
 
0.4pp
 
 
5.8%
 
 
 
-
 
Risk-weighted assets
 
£201bn
 
 
 
£207bn
 
 
 
(3)
 
 
£203bn
 
 
 
(1)
 
Tangible net assets per share
 
55.6p
 
 
 
51.6p
 
 
 
4.0p
 
 
52.3p
 
 
 
3.3p
 
 
1        Revised basis, calculation shown on page 31.
 
 
2        Excludes reverse repos of £52.7 billion (30 June 2020: £61.1 billion; 31 December 2020: £58.6 billion).
 
 
3        Excludes repos of £7.9 billion (30 June 2020: £12.3 billion; 31 December 2020 £9.4 billion).
 
 
4        CET1 ratio 'pre IFRS 9 transitional relief and software' reflects the full impact of IFRS 9, prior to the application of the transitional relief arrangements and the reversal of the beneficial treatment currently applied to intangible software assets.
 
      
 
 
 
QUARTERLY INFORMATION
 
Quarterended 30 June 2021
 
 
 
Quarterended31 Mar 2021
 
 
 
Quarterended31 Dec 2020
 
 
 
Quarterended30 Sept 2020
 
 
 
Quarterended30 June 2020
 
 
 
Quarterended31 Mar 2020
 
 
 
£m
 
 
 
£m
 
 
 
£m
 
 
 
£m
 
 
 
£m
 
 
 
£m
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
2,741 
 
 
 
2,677 
 
 
 
2,677 
 
 
 
2,618 
 
 
 
2,528 
 
 
 
2,950 
 
 
Other income
 
1,282 
 
 
 
1,135 
 
 
 
1,066 
 
 
 
988 
 
 
 
1,235 
 
 
 
1,226 
 
 
Operating lease depreciation
 
(123)
 
 
 
(148)
 
 
 
(150)
 
 
 
(208)
 
 
 
(302)
 
 
 
(224)
 
 
Net income
 
3,900 
 
 
 
3,664 
 
 
 
3,593 
 
 
 
3,398 
 
 
 
3,461 
 
 
 
3,952 
 
 
Operating costs
 
(1,879)
 
 
 
(1,851)
 
 
 
(2,028)
 
 
 
(1,858)
 
 
 
(1,822)
 
 
 
(1,877)
 
 
Remediation
 
(360)
 
 
 
(65)
 
 
 
(125)
 
 
 
(77)
 
 
 
(90)
 
 
 
(87)
 
 
Total costs
 
(2,239)
 
 
 
(1,916)
 
 
 
(2,153)
 
 
 
(1,935)
 
 
 
(1,912)
 
 
 
(1,964)
 
 
Underlying profit before impairment
 
1,661 
 
 
 
1,748 
 
 
 
1,440 
 
 
 
1,463 
 
 
 
1,549 
 
 
 
1,988 
 
 
Impairment
 
333 
 
 
 
323 
 
 
 
(128)
 
 
 
(301)
 
 
 
(2,388)
 
 
 
(1,430)
 
 
Underlying profit (loss)
 
1,994 
 
 
 
2,071 
 
 
 
1,312 
 
 
 
1,162 
 
 
 
(839)
 
 
 
558 
 
 
Restructuring
 
(82)
 
 
 
(173)
 
 
 
(233)
 
 
 
(155)
 
 
 
(70)
 
 
 
(63)
 
 
Volatility and other items
 
95 
 
 
 
 
 
 
(202)
 
 
 
29 
 
 
 
233 
 
 
 
(421)
 
 
Payment protection insurance provision
 
 
 
 
 
 
 
(85)
 
 
 
 
 
 
 
 
 
 
 
Statutory profit (loss) before tax
 
2,007 
 
 
 
1,898 
 
 
 
792 
 
 
 
1,036 
 
 
 
(676)
 
 
 
74 
 
 
Tax credit (expense)
 
461 
 
 
 
(501)
 
 
 
(112)
 
 
 
(348)
 
 
 
215 
 
 
 
406 
 
 
Statutory profit (loss) after tax
 
2,468 
 
 
 
1,397 
 
 
 
680 
 
 
 
688 
 
 
 
(461)
 
 
 
480 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banking net interest margin
 
2.51%
 
 
 
2.49%
 
 
 
2.46%
 
 
 
2.42%
 
 
 
2.40%
 
 
 
2.79%
 
 
Average interest-earning banking assets
 
£442bn
 
 
 
£439bn
 
 
 
£437bn
 
 
 
£436bn
 
 
 
£435bn
 
 
 
£432bn
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost:income ratio
 
57.4%
 
 
 
52.3%
 
 
 
59.9%
 
 
 
56.9%
 
 
 
55.2%
 
 
 
49.7%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset quality ratio
 
(0.30)%
 
 
 
(0.29)%
 
 
 
0.11%
 
 
 
0.27%
 
 
 
2.16%
 
 
 
1.30%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on tangible equity1,†
 
24.4%
 
 
 
13.9%
 
 
 
5.9%
 
 
 
6.0%
 
 
 
(6.1%)
 
 
 
3.7%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and advances to customers2
 
£448bn
 
 
 
£444bn
 
 
 
£440bn
 
 
 
£439bn
 
 
 
£440bn
 
 
 
£443bn
 
 
Customer deposits3
 
£474bn
 
 
 
£462bn
 
 
 
£451bn
 
 
 
£447bn
 
 
 
£441bn
 
 
 
£428bn
 
 
Loan to deposit ratio
 
94%
 
 
 
96%
 
 
 
98%
 
 
 
98%
 
 
 
100%
 
 
 
103%
 
 
Risk-weighted assets
 
£201bn
 
 
 
£199bn
 
 
 
£203bn
 
 
 
£205bn
 
 
 
£207bn
 
 
 
£209bn
 
 
Tangible net assets per share
 
55.6p
 
 
 
52.4p
 
 
 
52.3p
 
 
 
52.2p
 
 
 
51.6p
 
 
 
57.4p
 
 
 
1        Revised basis, calculation shown on page 31.
 
 
2        Excludes reverse repos.
 
 
3        Excludes repos.
 
       
 
 
 
BALANCE SHEET ANALYSIS
 
At 30 June 2021
 
 
At 31 Mar 2021
 
 
Change
 
 
At 30 June 2020
 
 
Change
 
 
At 31 Dec 2020
 
 
Change
 
 
£bn
 
 
£bn
 
 
%
 
 
£bn
 
 
%
 
 
£bn
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and advances to customers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Open mortgage book
 
289.9 
 
 
283.3 
 
 
 
 
267.1 
 
 
 
 
277.3 
 
 
 
Closed mortgage book
 
15.3 
 
 
15.9 
 
 
(4)
 
 
17.5 
 
 
(13)
 
 
16.5 
 
 
(7)
 
Credit cards
 
13.6 
 
 
13.5 
 
 
 
 
15.2 
 
 
(11)
 
 
14.3 
 
 
(5)
 
UK Retail unsecured loans
 
8.0 
 
 
7.8 
 
 
 
 
8.2 
 
 
(2)
 
 
8.0 
 
 
 
UK Motor Finance
 
14.4 
 
 
14.9 
 
 
(3)
 
 
15.3 
 
 
(6)
 
 
14.7 
 
 
(2)
 
Overdrafts
 
1.0 
 
 
0.9 
 
 
11 
 
 
1.0 
 
 
 
 
0.9 
 
 
11 
 
Retail other1
 
10.5 
 
 
10.3 
 
 
 
 
9.7 
 
 
 
 
10.4 
 
 
 
SME2
 
40.4 
 
 
41.1 
 
 
(2)
 
 
38.4 
 
 
 
 
40.6 
 
 
 
Mid Corporates
 
3.8 
 
 
4.0 
 
 
(5)
 
 
4.6 
 
 
(17)
 
 
4.1 
 
 
(7)
 
Corporate and Institutional
 
44.9 
 
 
45.6 
 
 
(2)
 
 
55.0 
 
 
(18)
 
 
46.0 
 
 
(2)
 
Commercial Banking other
 
3.9 
 
 
4.1 
 
 
(5)
 
 
5.0 
 
 
(22)
 
 
4.3 
 
 
(9)
 
Wealth
 
1.0 
 
 
1.0 
 
 
 
 
0.9 
 
 
11 
 
 
0.9 
 
 
11 
 
Central items
 
1.0 
 
 
1.1 
 
 
(9)
 
 
2.5 
 
 
(60)
 
 
2.2 
 
 
(55)
 
Loans and advances to customers3
 
447.7 
 
443.5 
 
 
440.4 
 
 
440.2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer deposits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail current accounts
 
107.3 
 
 
103.0 
 
 
 
 
87.5 
 
 
23 
 
 
97.4 
 
 
10 
 
Commercial current accounts2,4
 
49.5 
 
 
47.2 
 
 
 
 
44.2 
 
 
12 
 
 
47.6 
 
 
 
Retail relationship savings accounts
 
161.3 
 
 
158.2 
 
 
 
 
148.5 
 
 
 
 
154.1 
 
 
 
Retail tactical savings accounts
 
16.4 
 
 
13.8 
 
 
19 
 
 
12.7 
 
 
29 
 
 
14.0 
 
 
17 
 
Commercial deposits2,5
 
124.5 
 
 
125.5 
 
 
(1)
 
 
133.8 
 
 
(7)
 
 
122.7 
 
 
 
Wealth
 
14.8 
 
 
14.1 
 
 
 
 
13.5 
 
 
10 
 
 
14.1 
 
 
 
Central items
 
0.6 
 
 
0.6 
 
 
 
 
0.9 
 
 
(33)
 
 
0.8 
 
 
(25)
 
Total customer deposits6
 
474.4 
 
 
462.4 
 
 
 
 
441.1 
 
 
 
 
450.7 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
879.7 
 
 
869.5 
 
 
1
 
 
873.0 
 
 
 
 
871.3 
 
 
 
Total liabilities
 
827.8 
 
 
820.0 
 
 
1
 
 
824.1 
 
 
 
 
821.9 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ordinary shareholders' equity
 
45.8 
 
 
43.4 
 
 
 
 
42.8 
 
 
 
 
43.3 
 
 
 
Other equity instruments
 
5.9 
 
 
5.9 
 
 
 
 
5.9 
 
 
 
 
5.9 
 
 
 
Non-controlling interests
 
0.2 
 
 
0.2 
 
 
 
 
0.2 
 
 
 
 
0.2 
 
 
 
Total equity
 
51.9 
 
 
49.5 
 
 
 
 
48.9 
 
 
 
 
49.4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ordinary shares in issue, excluding own shares
 
70,956m
 
70,936m
 
 
70,735m
 
 
70,812m
 
 
1        Primarily Europe.
 
 
2        Includes Retail Business Banking.
 
 
3        Excludes reverse repos.
 
 
4        Primarily non-interest-bearing Commercial Banking current accounts.
 
 
5        Primarily Commercial Banking interest-bearing accounts.
 
 
6        Excludes repos.
 
     
 
 
 
GROUP RESULTS − STATUTORY BASIS
 
The results below are prepared in accordance with International Financial Reporting Standards (IFRSs). The underlying results are shown on page 2. A reconciliation between the statutory and underlying results is shown on page 28.
 
 
Income statement
 
Half-year
to 30 June
2021
 
 
 
Half-year
to 30 June
2020
 
 
 
Change
 
 
Half-year
to 31 Dec
2020
 
 
 
Change
 
 
£m
 
 
£m
 
 
%
 
 
£m
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
4,373 
 
 
 
6,556 
 
 
 
(33)
 
 
4,193 
 
 
 
 
Other income
 
15,195 
 
 
 
316 
 
 
 
 
 
18,102 
 
 
 
(16)
 
Total income
 
19,568 
 
 
 
6,872 
 
 
 
 
 
22,295 
 
 
 
(12)
 
Insurance claims
 
(11,489)
 
 
 
1,023 
 
 
 
 
 
(15,064)
 
 
 
(24)
 
Total income, net of insurance claims
 
8,079 
 
 
 
7,895 
 
 
 
 
 
7,231 
 
 
 
12 
 
Operating expenses
 
(4,897)
 
 
 
(4,668)
 
 
 
(5)
 
 
(5,077)
 
 
 
 
Impairment
 
723 
 
 
 
(3,829)
 
 
 
 
 
(326)
 
 
 
 
Profit (loss) before tax
 
3,905 
 
 
 
(602)
 
 
 
 
 
1,828 
 
 
 
 
Tax (expense) credit
 
(40)
 
 
 
621 
 
 
 
 
 
(460)
 
 
 
91 
 
Profit for the period
 
3,865 
 
 
 
19 
 
 
 
 
 
1,368 
 
 
 
 
 
 
 
The Group's statutory income statement includes income and expense attributable to the policyholders of the Group's long-term assurance funds. These items materially offset in arriving at profit attributable to equity shareholders but can, depending on market movements, lead to significant variances on a statutory basis between total income and insurance claims from one period to the next. In the six months to 30 June 2021, due to strong market conditions, the Group recognised significant gains on policyholder investments within total income which were materially offset by an increase within insurance claims expense, representing the growth in the corresponding insurance and investment contract liabilities.
 
 
GROUP RESULTS − STATUTORY BASIS (continued)
 
 
Balance sheet
 
At 30 June
2021
 
 
 
At 30 June
2020
 
 
 
Change
 
 
At 31 Dec
2020
 
 
 
Change
 
 
£m
 
 
£m
 
 
%
 
 
£m
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and balances at central banks
 
78,966 
 
 
 
78,139 
 
 
 
 
 
73,257 
 
 
 
 
Financial assets at fair value through profit or loss
 
177,589 
 
 
 
157,113 
 
 
 
13 
 
 
171,626 
 
 
 
 
Derivative financial instruments
 
22,193 
 
 
 
32,978 
 
 
 
(33)
 
 
29,613 
 
 
 
(25)
 
Financial assets at amortised cost
 
516,175 
 
 
 
518,314 
 
 
 
 
 
514,994 
 
 
 
 
Financial assets at fair value through other comprehensive income
 
26,213 
 
 
 
27,211 
 
 
 
(4)
 
 
27,603 
 
 
 
(5)
 
Other assets
 
58,551 
 
 
 
59,239 
 
 
 
(1)
 
 
54,176 
 
 
 
 
Total assets
 
879,687 
 
 
 
872,994 
 
 
 
 
 
871,269 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits from banks
 
20,655 
 
 
 
34,124 
 
 
 
(39)
 
 
31,465 
 
 
 
(34)
 
Customer deposits
 
482,349 
 
 
 
453,446 
 
 
 
 
 
460,068 
 
 
 
 
Financial liabilities at fair value through profit or loss
 
21,054 
 
 
 
21,474 
 
 
 
(2)
 
 
22,646 
 
 
 
(7)
 
Derivative financial instruments
 
17,951 
 
 
 
28,631 
 
 
 
(37)
 
 
27,313 
 
 
 
(34)
 
Debt securities in issue
 
81,268 
 
 
 
99,931 
 
 
 
(19)
 
 
87,397 
 
 
 
(7)
 
Liabilities arising from insurance and investment contracts
 
162,399 
 
 
 
143,052 
 
 
 
14 
 
 
154,512 
 
 
 
 
Subordinated liabilities
 
13,527 
 
 
 
17,717 
 
 
 
(24)
 
 
14,261 
 
 
 
(5)
 
Other liabilities
 
28,598 
 
 
 
25,757 
 
 
 
11 
 
 
24,194 
 
 
 
18 
 
Total liabilities
 
827,801 
 
 
 
824,132 
 
 
 
 
 
821,856 
 
 
 
 
Total equity
 
51,886 
 
 
 
48,862 
 
 
 
 
 
49,413 
 
 
 
 
Total equity and liabilities
 
879,687 
 
 
 
872,994 
 
 
 
 
 
871,269 
 
 
 
 
 
 
 
The Group's balance sheet includes assets and liabilities associated with the policyholders of the Group's long-term assurance funds. These items have no material impact in total upon the net assets attributable to equity shareholders but can, depending on market movements, lead to significant variances on a statutory basis, predominantly between financial assets at fair value through profit or loss and liabilities arising from insurance and investment contracts from one period to the next. In the six months to 30 June 2021, due to strong market conditions, significant growth was seen in policyholder investments, primarily within financial assets at fair value through profit or loss. This was materially offset by an increase in the corresponding insurance and investment contract liabilities.
 
 
 
INTERIM GROUP CHIEF EXECUTIVE'S STATEMENT
 
Since the start of the pandemic the Group has continued to Help Britain Recover, supporting Retail and Commercial customers and communities across the UK. In this context, over the last six months the Group has delivered a solid financial performance, with continued business momentum and balance sheet growth. It has been an honour to be Interim Group Chief Executive since May and I am proud of the positive impact that we have been able to make. The dedication of colleagues and their support of customers and businesses in these unique and challenging times is impressive.
 
Today, the coronavirus pandemic continues to have a significant impact on the people, businesses and communities in the UK and Government support measures remain important. While we are clearly seeing positive developments and the macroeconomic outlook is improving, supported by the successful vaccine roll out in the UK and emergence from lockdown restrictions, the outlook remains uncertain.
 
As we look forward into the remainder of 2021, I am confident that the Group's people, financial strength and business model will continue to Help Britain Recover. I look forward to working with Charlie Nunn when he starts in August as our new Group Chief Executive. I am confident he will find a truly customer focused business in a strong financial and strategic position. We remain committed to supporting our customers, colleagues and communities and ensuring a sustainable recovery.
 
Financial performance
 
In the context of continued business momentum and balance sheet growth the Group has delivered a solid financial performance with statutory profit before tax of £3.9 billion in the first half of 2021, significantly higher than the first half of 2020 and benefiting from a net impairment credit in the period. Net income of £7.6 billion was up 2 per cent, benefiting from increased average interest-earning assets and a strengthened net interest margin in the second quarter of 2021, as well as some early signs of recovery in other income and a reduction in operating lease depreciation. The Group continues to maintain its focus on cost management, with a market-leading cost:income ratio of 54.9 per cent. Operating costs increased slightly over the period due to the rebuilding of variable pay in the context of stronger than expected financial performance in income and impairments. Remediation charges also increased in the period as we took charges relating to a number of ongoing legacy issues. Increased profits were supported by the net impairment credit of £656 million, as a result of a release of expected credit loss (ECL) allowances of £837 million driven by the improved macroeconomic outlook for the UK, combined with robust credit performance.
 
The balance sheet continues to grow with loans and advances to customers at £447.7 billion, up 2 per cent in the first half of 2021, driven by strong growth in mortgage lending. Customer deposits continued to increase, with growth of £23.7 billion since the end of 2020, including significant growth in Retail current accounts and relationship savings balances. Deposit balances are now up c.£63 billion over the last eighteen months.
 
The Group's capital position remains strong with a CET1 ratio of 16.7 per cent after dividend accrual. Given the strength of the capital position and the regulator's clarification that banks may resume capital distributions, the Board has announced an interim ordinary dividend of 0.67 pence per share, in line with the Board's commitment to future capital returns, and has reintroduced a progressive and sustainable ordinary dividend policy.
 
Strategic progress 
 
We launched Strategic Review 2021 in February this year, with a focus on Helping Britain Recover and further enhancing our core capabilities, specifically technology, payments, data and our people. Strategic Review 2021 supports the creation of sustainable shareholder value through revenue generation and diversification, further efficiency gains and disciplined growth as we accelerate our transformation and build the UK's preferred financial partner for personal customers and the best bank for business. In the first half of 2021, we invested £0.4 billion to support these strategic initiatives.
 
INTERIM GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
 
We are committed to helping our customers, clients, colleagues and communities through the coronavirus pandemic and rebuilding livelihoods, whilst delivering long-term sustainable returns for shareholders. We recognise that the focus of the Group's purpose, Helping Britain Prosper, must evolve in response to the current environment with changing societal and customer needs and expectations. We are therefore committed to Helping Britain Recover and supporting a sustainable recovery which benefits all of our stakeholders.
 
During the first half of 2021 we have made meaningful progress across all five of our Helping Britain Recover priority areas that are embedded in our business ambitions and where we can make the most difference. For example:
 
●     We have helped rebuild households' financial health and wellbeing through directing customers to free independent debt advice for more than 130,000 accounts
 
 
●     We have supported businesses to recover, adapt and grow through supporting over 48,000 businesses to start up and helping 75,000 small businesses boost their digital capability
 
 
●     We have expanded the availability of affordable and quality homes with new lending of c.£9.0 billion to nearly 43,000 first-time buyers, almost reaching our full year 2021 target of £10 billion, as well as delivering £2.1 billion of new funding support to the social housing sector, exceeding our full year target
 
 
●     We are accelerating the transition to a low carbon economy, expanding the funding available under our discounted green finance initiatives from £3 billion to £5 billion in the first half of 2021, with more than £8.6 billion of total green finance delivered since 2016. In addition, we have renewed our strategic relationship with Jaguar Land Rover, and have extended our contract with Tesla, supporting the delivery of the Group's goal of helping to reduce the emissions we finance by more than 50 per cent by 2030 on path to net zero by 2050, or sooner. Furthermore, our progress on reducing our own operational emissions has recently been recognised in being ranked sixth in the Financial Times' inaugural listing of Europe's Climate Leaders
 
 
●     We are continuing to contribute to an inclusive society and build an inclusive organisation. In June 2021 we collaborated with City Mental Health Alliance to publish a research report on 'Mental Health And Race at Work' and have launched a pilot to improve free access to cash in underserved areas
 
 
Building the UK's preferred financial partner for personal customers and best bank for business
 
We are building on our position as the UK's largest personal customer franchise with our multi-brand, multi-channel model, leveraging our unique capabilities to meet more of our customers' needs. During the first half of 2021, we increased our net open mortgage book by £12.6 billion. We are exceeding our target to maintain record all channel net promoter score with a 3 point increase in the first half of 2021. We have seen positive annual net new money in Insurance and Wealth, with cumulative net flows for open book assets under administration of £4 billion in the first half of 2021.
 
We have today announced that we intend to acquire the Embark Group (Embark), a fast growing investment and retirement platform business. Embark enhances our capabilities to address the attractive mass market and self-directed Wealth segment, completing the Group's Wealth proposition. Embark will also enable us to re-platform the Group's pensions and retirement proposition, delivering a market-leading platform for intermediaries and significantly strengthening the Group's offering in Retirement, an important growth market.
 
As announced within Strategic Review 2021, the Group aims to meet more of its customers' broader financial needs, whilst retaining more of the c.£10 billion assets under administration which customers invest with third parties each year. The acquisition of Embark will deliver a modern, industry-leading mass market, direct-to-consumer proposition, complementing the Group's existing advice offerings through Schroders Personal Wealth and Cazenove Capital. The acquisition will see the Group acquire c.£35 billion of assets under administration on behalf of c.410,000 consumer clients.
 
We are targeting a top-three position in direct-to-consumer self-directed and robo-advice business in the medium term. We are also targeting a top-three position in the individual pensions and retirement drawdown market by 2025. The acquisition of Embark transforms our ability to achieve these objectives. As a consequence, we are increasing our Strategic Review 2021 net new money target from £25 billion to c.£40 billion by 2023, to reflect this increased growth potential.
 
INTERIM GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
 
Through a combination of the Group's new capabilities and its multi-brand, multi-channel distribution model across more than 25 million customers, the Group expects this acquisition to deliver attractive growth and returns over time and create value for shareholders. A consideration of c.£390 million will be paid for the entire share capital of Embark upon completion. The transaction is expected to have a c.30 basis points impact on Group CET1 capital and deliver a mid-teens return on invested capital in the medium term, both including all integration and restructuring costs.
 
We have progressed towards our vision to be the best bank for business, building on our outstanding reach, supported by our brand and scale, our historic above-market growth in SME and a strong presence among large corporate clients. During the first half of 2021, we increased our SME and Retail Business Banking digital net promoter score by 3 points, targeting a 5 point increase by the end of 2023. We have also improved our share of FX products for core clients in 2021 and have improved our GBP rates ranking by four places to sixth.
 
Enhanced capabilities
 
We are progressively modernising our technology architecture in order to deliver better customer propositions and to structurally improve our operational efficiency and agility. We have further strengthened our digital offering for customers, including increasing the volume of mobile releases and improving customer satisfaction, with our record mobile app net promoter score increasing by 4 points in the first half of 2021, surpassing our target. Additionally, in line with the technology R&D investment we highlighted at the full year, we safely migrated around 120,000 customer accounts to our pilot new bank architecture in the first half. Although fewer than the c.400,000 originally planned, it was sufficient to provide a significant proof-point for our investment, allowing work to progress.
 
We have further invested in our payments proposition with a leading market share of card spend, in line with target. In addition, we have achieved a twofold increase in the number of corporate clients onboarded to the new cash management and payments platform with its improved capability to meet client needs. We remain on track for a threefold increase by the end of the year.
 
We have further invested in data capabilities to deliver more effective outcomes for our customers and our colleagues. During the first half of 2021, we have extended machine learning capabilities to drive faster mortgage approvals for 20,000 franchise customers using automated income verification analysis. In addition, we migrated 45 million customer records to private cloud hosting to prove our data migration capabilities. This reflects another important proof-point.
 
The pandemic has accelerated many of the trends previously evident in the workplace. These require a reduced office footprint, but also enhanced workspaces to foster collaboration and creativity. It is very important that we respond to this opportunity to best serve our colleagues and to enhance efficiency. During the first half of 2021, we have reduced office space by c.3 per cent, on track to meet our target of an 8 per cent reduction in 2021. We have also created three distinct workstyles, known as 'home', 'hub' and 'hybrid', as part of our planning for future ways of working. We expect around 80 per cent of colleagues to work in a hybrid manner under this model.
 
Much work remains to be done on Strategic Review 2021, but the first half represents a strong start on our programme.
 
Outlook
 
●     Given our solid financial performance and the improved UK macroeconomic outlook, the Group is enhancing its guidance for 2021. Based on the Group's current macroeconomic assumptions:
 
-      Net interest margin now expected to be around 250 basis points
-      Operating costs now expected to be c.£7.6 billion
-      Net asset quality ratio now expected to be below 10 basis points
-      Return on tangible equity now expected to be c.10 per cent, excluding the c.2.5 percentage point benefit from tax rate changes
-      Risk-weighted assets in 2021 now expected to be below £200 billion
 
Although the macroeconomic outlook remains uncertain, the Group's people, financial strength and business model will ensure that we can continue to support our customers and Help Britain Recover. This is fully aligned with the Group's long term strategic objectives, the position of the franchise and the interests of our shareholders.
 
 
 
SUMMARY OF GROUP RESULTS
 
Solid financial performance with continued business momentum, bolstered by macroeconomic outlook
 
Statutory results
 
The Group's statutory profit before tax for the half-year to 30 June 2021 was £3,905 million, whilst statutory profit after tax was £3,865 million, both benefiting from solid business momentum and a net impairment credit driven by the UK's improved macroeconomic outlook, combined with robust credit performance. The Group's statutory profit after tax included a benefit of £970 million from the revaluation of deferred tax assets given the revised corporation tax rate effective from 1 April 2023, substantively enacted in the second quarter.
 
On a statutory basis, net income was up 2 per cent on the first half of 2020 reflecting lower net interest income given the reduced margins combined with lower levels of customer activity, more than offset by the positive impact of market volatility. Statutory operating expenses were up £229 million, impacted by a higher remediation charge in the period and increased restructuring costs. Statutory impairment for the period was a net credit as a result of a release of expected credit loss (ECL) allowances driven by the improved macroeconomic outlook for the UK, combined with robust credit performance.
 
Underlying results
 
The Group's underlying profit was £4,065 million for the period, compared to an underlying loss of £281 million in the first six months of 2020, reflecting both solid financial performance and the improved macroeconomic outlook.
 
Underlying profit before impairment for the period of £3,409 million continues to recover and although down 4 per cent on the first six months of 2020 is up 17 per cent on the second six months of 2020. Net income was 2 per cent higher than in the first half of 2020 at £7,564 million and 8 per cent higher when compared to the second half of 2020. The Group continues to maintain its focus on cost management, with a market-leading cost:income ratio, although operating costs increased slightly on prior year due to the rebuilding of variable pay, given stronger than expected financial performance in income and impairments. Total costs, including remediation, were up 7 per cent on the prior year, given the slight increase in operating costs and a higher remediation charge in the period, materially driven by a regulatory fine relating to the communication of historical insurance renewals, further costs in relation to HBOS Reading and other litigation relating to ongoing legacy programmes.
 
The Group's balance sheet remains strong. Loans and advances to customers were 2 per cent higher at £448 billion, driven by strong growth in mortgage lending. Customer deposits increased 5 per cent to £474 billion with significant growth in Retail current accounts and relationship savings balances, continuing the trend seen since 2019. The Group's CET1 ratio was 16.7 per cent after dividend accrual, significantly ahead of both the ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent and the regulatory requirement of c.11 per cent.
 
Net income
 
Half-year to 30 June 2021
 
 
 
Half-year
to 30 June 2020
 
 
 
Change
 
 
Half-year
to 31 Dec
2020
 
 
 
Change
 
 
£m
 
 
 
£m
 
 
 
%
 
 
£m
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
5,418 
 
 
 
5,478 
 
 
 
(1)
 
 
5,295 
 
 
 
 
Other income
 
2,417 
 
 
 
2,461 
 
 
 
(2)
 
 
2,054 
 
 
 
18 
 
Operating lease depreciation
 
(271)
 
 
 
(526)
 
 
 
48 
 
 
(358)
 
 
 
24 
 
Net income
 
7,564 
 
 
 
7,413 
 
 
 
 
 
6,991 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banking net interest margin
 
2.50%
 
 
 
2.59%
 
 
 
(9)bp
 
 
2.44%
 
 
6bp
 
Average interest-earning banking assets
 
£440.8bn
 
 
 
£433.2bn
 
 
 
 
£436.6bn
 
 
 
SUMMARY OF GROUP RESULTS (continued)
 
Net income of £7,564 million was up 2 per cent on the first half of 2020, with slightly lower net interest income and other income more than offset by a reduction in operating lease depreciation. Compared to the second half of 2020, net income was up 8 per cent, driven by significant improvements in other income as well as an increase in net interest income and lower operating lease depreciation.
 
Net interest income of £5,418 million was down 1 per cent versus the first half of 2020, impacted by a reduction in the banking net interest margin which more than offset the effects of higher average interest-earning banking assets. The banking net interest margin reduced by 9 basis points to 2.50 per cent, reflecting the lower rate environment and change in asset mix, including lower unsecured balances. The banking net interest margin in the second quarter of 2021 improved to 2.51 per cent versus the first quarter, benefiting from improving structural hedge earnings and asset and liability mix in Commercial Banking. Average interest-earning banking assets were up 2 per cent compared to the first half of 2020, driven by strong growth in the open mortgage book and the impact of Government supported loan schemes. These were partially offset by the effects of the continued optimisation of the Corporate and Institutional book within Commercial Banking and lower unsecured and motor balances.
 
The Group manages the risk to its earnings and capital from movements in interest rates centrally by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 30 June 2021 the Group's structural hedge had an approved capacity of £225 billion, a prudent increase from £210 billion at year end 2020, capturing part of the liability growth since year end 2019, given the success in attracting deposit balances. The nominal balance of the structural hedge was £215 billion as at 30 June 2021 (31 December 2020: £186 billion) with a weighted-average duration of around three-and-a-half years (31 December 2020: around two-and-a-half years). The Group generated £1.1 billion of total gross income from the structural hedge balances in the first half of 2021 (half-year to 30 June 2020: £1.3 billion), impacted by market rates.
 
Taking all of these factors into account, the Group now expects the net interest margin for full year 2021 to be around 250 basis points, with low single-digit percentage growth in average interest-earning assets in 2021.
 
Other income of £2,417 million was 2 per cent lower than the first half of 2020, reflecting lower levels of insurance new business income, a lower Lex fleet size and significantly lower levels of gilt and other liquid asset sales (half-year to 30 June 2021: £23 million, half-year to 30 June 2020: £135 million). This was in part mitigated by strong performance in the Group's equity investment businesses, including Lloyds Development Capital, of £280 million (half-year to 30 June 2020: £9 million loss). The Group's other income was up 18 per cent on the second half of 2020, significantly due to the absence of the negative insurance assumption changes and experience variance seen in the second half of 2020.
 
In the second quarter of 2021, other income of £1,282 million was up £147 million against the previous three months, including a strong contribution from the Group's equity investment businesses and positive assumption changes in Insurance. The Group is also seeing some early signs of increasing customer activity and new business, particularly in Retail and workplace pensions within Insurance and Wealth.
 
Operating lease depreciation reduced to £271 million (half-year to 30 June 2020: £526 million) driven by strength in used vehicle prices during the first half of 2021, as well as the continued impact of a smaller Lex fleet size.
 
 
 
SUMMARY OF GROUP RESULTS (continued)
 
Total costs
 
Half-year to 30 June 2021
 
 
 
Half-yearto 30 June 2020
 
 
 
Change
 
 
Half-yearto 31 Dec2020
 
 
 
Change
 
 
£m
 
 
 
£m
 
 
 
%
 
 
£m
 
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating costs
 
3,730
 
 
 
3,699
 
 
 
(1)
 
 
3,886
 
 
 
 
Remediation
 
425
 
 
 
177
 
 
 
 
 
202
 
 
 
 
Total costs
 
4,155
 
 
 
3,876
 
 
 
(7)
 
 
4,088
 
 
 
(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost:income ratio
 
54.9%
 
 
 
52.3%
 
 
 
2.6pp
 
 
58.5%
 
 
 
(3.6)pp
 
 
Total costs of £4,155 million were 7 per cent higher than in the first half of 2020, due to slightly higher operating costs and a higher remediation charge in the period. The Group continues to maintain its focus on cost management, with a market-leading cost:income ratio of 54.9 per cent. In the context of stronger than expected financial performance in income and impairments, the Group is accelerating the rebuild of variable pay in 2021, which has resulted in the slight increase in operating costs in the period.
 
Total investment spend in the first half of 2021 amounted to £0.9 billion, prioritising technology and digital projects whilst building on the customer ambitions and enhanced capabilities outlined in Strategic Review 2021, including £0.4 billion strategic investment spend. During the first half of 2021 the Group capitalised c.£0.6 billion of investment spend, of which c.£0.4 billion related to intangible assets. Total capitalised spend amounted to 64 per cent of investment.
 
The Group now expects operating costs for 2021 to be broadly in line with 2020 at c.£7.6 billion, as a result of the accelerated rebuild of variable pay in the context of stronger than expected financial performance.
 
Remediation charges increased to £425 million, materially driven by the £91 million regulatory fine relating to the communication of historic home insurance renewals, HBOS Reading charges as previously flagged, as well as litigation costs and charges in relation to other ongoing legacy programmes. With respect to HBOS Reading, £150 million was incurred in the first half of 2021, including operational costs to provide for the likelihood of activities spanning across 2022 as well as the outcome to date of decisions from the independent panel re-review on direct and consequential losses. Further significant charges over 2021 and 2022 could be required as more panel decisions are published, but at this stage it is not possible to reliably estimate the potential impact or timings.
 
 
SUMMARY OF GROUP RESULTS (continued)
 
Impairment
 
Asset quality remains strong, with low levels of new to arrears. Impairment in the first half of the year was a net credit of £656 million, compared to a net charge of £3,818 million in the first half of 2020. The net credit in the period resulted from an £837 million release of expected credit loss (ECL) allowances driven by improvements to the macroeconomic outlook for the UK, of which £378 million was recognised in the second quarter of 2021. This was partially offset by a low run-rate impairment charge of £252 million, reflecting strong asset quality in a continued benign credit environment and some releases against Commercial Banking exposures.
 
The Group's ECL allowance reduced in the first half of the year by £1.3 billion to £5.6 billion (31 December 2020: £6.9 billion, 31 December 2019: £4.2 billion), of which £837 million resulted from improvements to the macroeconomic outlook, including stronger GDP performance, improved unemployment outlook partly given the impact of the extension of the Government's Coronavirus Job Retention Scheme announced in the first quarter of 2021 and strength in house prices. Observed credit performance remained robust in the period, with the flow of assets into arrears, defaults and write-offs remaining at low levels. Reductions in Commercial Banking ECL allowances also reflect improved outcomes on restructuring cases, reduction in Stage 2 exposures and lower flows to default.
 
The ECL allowance remains high by historical standards, £1.4 billion above 31 December 2019 and assumes that a large proportion of these additional expected losses will crystallise over the next 12 months. This is expected to take place as support measures subside and unemployment increases, with the Group's base case predicting a peak of 6.6 per cent in the fourth quarter of 2021. The ECL allowance continues to reflect a probability-weighted view of future economic scenarios with a 30 per cent weighting of base case, upside and downside and a 10 per cent weighting of the severe downside. The improvement in unemployment and asset price outlook we have seen in 2021 within the base case is further reflected in all scenarios which have improved significantly since the year end.
 
The Group has retained the judgemental overlays applied at year end and has continued to offset modelled releases not deemed reflective of underlying risk. Management judgements in respect of coronavirus of c.£1.2 billion (31 December 2020: c.£0.9 billion) include a central £400 million overlay, as well as c.£800 million of judgements within the underlying portfolios (31 December 2020: c.£500 million). The central overlay was added at year end in recognition of the significant uncertainty with regard to the efficacy of coronavirus vaccines, the vaccination rollout, potential virus mutations and economic performance post lockdown restrictions and Government support. Although the base case outlook has improved throughout the first half, the Group considers these risks remain and that the conditioning assumptions for the improved base case and associated scenarios do not capture these unprecedented risks.
 
Overall the Group's loan portfolio continues to be well positioned, reflecting a prudent, through-the-cycle approach to credit risk and high levels of security. The Retail portfolio is heavily weighted towards high quality mortgage lending where low loan-to-value ratios provide security against potential risks. The prime consumer finance portfolio also benefits from previous high quality growth and the Group's prudent risk appetite. The Commercial portfolio reflects a diverse client base with limited exposure to sectors most affected by the coronavirus pandemic. Within Commercial Banking, management of concentration risk includes single name and country limits as well as controls over the overall exposure to certain higher risk sectors and asset classes.
 
Whilst covered by Government guarantees and with significant adoption of the Government's Pay As You Grow scheme, early trends in Bounce Back Loan Scheme (BBLS) repayments indicate fewer than 10 per cent of customers due to commence repayment across the Group have entered arrears.
 
Given the experience of the first half of the year and the Group's current macroeconomic assumptions, the full year impairment charge is expected to be materially lower than the guidance set out in the first quarter, with the net asset quality ratio for 2021 now expected to be below 10 basis points.
 
 
 
SUMMARY OF GROUP RESULTS (continued)
 
Half-year to 30 June 2021
 
 
 
Half-yearto 30 June 2020
 
 
 
Change
 
 
Half-year to 31 Dec 2020
 
 
Change
 
 
£m
 
 
£m
 
 
%
 
£m
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Charges pre-updated multiple economic scenarios1
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
527 
 
 
578 
 
 
 
781 
 
 
33 
Commercial Banking
 
(272)
 
 
 
206 
 
 
 
 
46 
 
 
 
Other
 
(3)
 
 
 
 
 
 
 
(5)
 
 
40 
 
252 
 
 
788 
 
 
68 
 
822 
 
 
69 
Coronavirus impacted restructuring cases2
 
(71)
 
 
432 
 
 
 
 
(29)
 
 
 
Updated economic outlook:
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
(544)
 
 
 
1,517 
 
 
 
 
(492)
 
 
(11)
Commercial Banking
 
(293)
 
 
 
881 
 
 
 
 
(72)
 
 
 
Other
 
 
 
 
200 
 
 
 
 
200 
 
 
 
 
(837)
 
 
2,598 
 
 
 
 
(364)
 
 
 
Impairment (credit) charge
 
(656)
 
 
 
3,818 
 
 
 
 
 
429 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset quality ratio
 
(0.30)%
 
 
1.73%
 
 
(203)bp
 
0.19%
 
 
(49bp)
 
1        Charges based on the economic outlook as at 31 December 2019, prior to the impact of the coronavirus pandemic on forward looking expected losses.
 
2        Additional (credits)/charges on cases subject to restructuring at the end of 2019, where the coronavirus pandemic is considered to have had a direct effect upon the recovery strategy.
 
At 30 June 20211
 
At 31 Dec 20201
 
Change
%
 
 
£m
 
£m
 
 
 
 
 
 
 
Stage 2 gross loans and advances to customers
 
54,129 
 
60,514 
 
(11)    
Stage 2 loans and advances to customers as % of total
 
10.7%
 
 
12.0%
 
 
(1.3)pp
Stage 2 ECL allowances2
 
2,081 
 
2,727 
 
(24)    
Stage 2 ECL allowances2 as % of Stage 2 drawn balances
 
3.8%
 
 
4.5%
 
 
(0.7)pp
 
 
 
 
 
 
Stage 3 gross loans and advances to customers
 
8,616 
 
9,089 
 
(5)    
Stage 3 loans and advances to customers as a % of total
 
1.7%
 
 
1.8%
 
 
(0.1)pp
Stage 3 ECL allowances2
 
2,108 
 
2,508 
 
(16)    
Stage 3 ECL allowances2 as % of Stage 3 drawn balances3
 
25.6%
 
 
28.6%
 
 
(3.0)pp
 
 
 
 
 
 
Total loans and advances to customers4
 
505,496 
 
505,129 
 
   
Total ECL allowance on loans and advances to customers2
 
5,555 
 
6,832 
 
(19)    
Total ECL allowances on loans and advances to customers2 as % of drawn balances3
 
1.1%
 
 
1.4%
 
 
(0.3)pp
 
 
1        Underlying basis. Refer to basis of presentation.
 
 
2        Expected credit loss allowance on loans and advances to customers (drawn and undrawn).
 
 
3        Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail and Commercial Banking of £380 million (31 December 2020: £317 million). Comparatives restated to reflect exclusion of Commercial Banking recoveries.
 
 
4        Includes reverse repos of £52.7 billion (31 December 2020: £58.6 billion).
 
SUMMARY OF GROUP RESULTS (continued)
 
Statutory profit
 
Half-year to 30 June 2021
 
 
 
Half-year
to 30 June 2020
 
 
 
Change
 
 
Half-year
to 31 Dec
2020
 
 
 
Change
 
 
£m
 
 
£m
 
 
%
 
 
£m
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Statutory profit (loss) before tax
3,905 
 
 
(602)
 
 
 
 
1,828 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring
 
 
 
 
 
 
 
 
 
 
 
 
Severance costs
(69)
 
 
(28)
 
 
 
 
(128)
 
 
46 
Property transformation
(42)
 
 
(37)
 
 
(14)
 
(109)
 
 
61 
Technology research and development
(81)
 
 
(19)
 
 
 
 
(42)
 
 
(93)
Regulatory programmes
(32)
 
 
(19)
 
 
(68)
 
(23)
 
 
(39)
Mergers and acquisitions, integration and other restructuring costs
(31)
 
 
 
(30)
 
 
 
(3)
 
 
(86)
 
 
 
64 
 
 
(255)
 
 
(133)
 
 
(92)
 
(388)
 
 
34 
Volatility and other items
 
 
 
 
 
 
 
 
 
 
 
 
Market volatility and asset sales
239 
 
 
(43)
 
 
 
 
(16)
 
 
 
Amortisation of purchased intangibles
(35)
 
 
(34)
 
 
(3)
 
(35)
 
 
 
Fair value unwind
(109)
 
 
(111)
 
 
 
(122)
 
 
11 
 
95 
 
 
(188)
 
 
 
 
(173)
 
 
 
Payment protection insurance provision
 
 
 
 
 
 
(85)
 
 
 
Total adjustments
(160)
 
 
(321)
 
 
50 
 
(646)
 
 
75 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underlying profit (loss)
4,065 
 
 
(281)
 
 
 
 
2,474 
 
 
64 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share
 
5.1p
 
 
(0.3)p
 
 
 
 
1.5p
 
 
 
Return on tangible equity1,†
19.2%
 
 
(1.3)%
 
 
20.5pp
 
5.9%
 
 
13.3pp
 
1        Calculation shown on page 31.
 
 
Further information on the reconciliation of underlying to statutory results is included on page 28.
 
Restructuring costs of £255 million, up from £133 million in the first half of 2020, reflected an increase in technology research and development spend as the Group invests in investigating and proving new technologies, as well as higher severance costs. A further increase in restructuring costs beyond the level of the first half is expected in the second half of 2021.
 
Volatility and other items, comprising market volatility and asset sales of £239 million, largely offset by the amortisation of purchased intangibles and the unwind of acquisition fair value adjustments, resulted in a net gain of £95 million compared to a net loss of £188 million in the first half of 2020. Within market volatility and asset sales, insurance volatility was favourable compared to prior year, driven largely by rising equity markets compared to the significant downturn in the first half of 2020, along with the narrowing spreads experienced this year. This was alongside reduced levels of positive banking volatility as a result of exchange rate movements.
 
 
SUMMARY OF GROUP RESULTS (continued)
 
Tax
 
The Group recognised a tax expense of £40 million in the period compared to a net credit of £621 million in the first six months of 2020. In March 2021, the UK Government announced its intention to increase the rate of corporation tax from 19 per cent to 25 per cent with effect from 1 April 2023 and this was substantively enacted on 24 May 2021. As a result of this change in tax rate, the Group has recognised a £970 million deferred tax credit in the income statement and a £184 million debit within other comprehensive income, increasing the Group's net deferred tax asset by £786 million. The prior year tax credit included an uplift in deferred tax assets following the announcement by the UK Government that it would maintain the corporation tax rate at 19 per cent.
 
Return on tangible equity
 
The return on tangible equity for the first half of the year was 19.2 per cent, which included the annualised c.5 percentage point benefit from the corporation tax rate change. Based on the Group's current macroeconomic assumptions, return on tangible equity for the full year is now expected to be c.10 per cent, excluding the equivalent c.2.5 percentage point benefit from tax rate changes over the year.
 
Balance sheet
 
At 30 June 2021
 
 
At 30 June 2020
 
 
Change%
 
 
At 31 Dec2020
 
 
Change%
 
 
 
 
 
 
 
 
 
 
 
Loans and advances to customers1
 
£448bn
 
 
£440bn
 
 
 
 
£440bn
 
 
 
Customer deposits2
 
£474bn
 
 
£441bn
 
 
 
 
£451bn
 
 
 
Loan to deposit ratio
 
94%
 
 
100%
 
 
(6)pp
 
 
98%
 
 
(4)pp
 
 
 
 
 
 
 
 
 
 
 
Wholesale funding
 
£103bn
 
 
£125bn
 
 
(17)
 
 
£109bn
 
 
(6)
 
Wholesale funding <1 year maturity
 
£34bn
 
 
£40bn
 
 
(16)
 
 
£34bn
 
 
(2)
 
Of which money-market funding <1 year maturity3
 
£21bn
 
 
£26bn
 
 
(17)
 
 
£22bn
 
 
 
Liquidity coverage ratio - eligible assets4
 
£139bn
 
 
£138bn
 
 
 
 
£142bn
 
 
(2)
 
Liquidity coverage ratio5
 
131%
 
 
140%
 
 
(9)pp
 
136%
 
 
(5)pp
 
1        Excludes reverse repos of £52.7 billion (30 June 2020: £61.1 billion; 31 December 2020: £58.6 billion).
 
 
2        Excludes repos of £7.9 billion (30 June 2020: £12.3 billion; 31 December 2020 £9.4 billion).
 
 
3        Excludes balances relating to margins of £4.0 billion (30 June 2020: £6.9 billion; 31 December 2020: £5.3 billion).
 
 
4        Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts.
 
 
5        The liquidity coverage ratio is calculated as a simple average of month end observations over the previous 12 months.
 
 
The Group's balance sheet reflects healthy franchise growth. Loans and advances to customers were 2 per cent higher at £448 billion compared to £440 billion at 31 December 2020. Within Retail, strong growth in the open mortgage book of £12.6 billion was only partially offset by the continued run off of the closed mortgage book and lower cards balances. Commercial Banking experienced reductions as a result of continued optimisation activity within the Corporate and Institutional book and a market where corporate liquidity levels are high and demand for new lending restrained. Customer deposits have increased by £23.7 billion since the end of 2020, with continued inflows into the Group's trusted brands and significant growth of £47.2 billion seen in Retail current accounts and relationship savings balances since 2019. Within Commercial Banking, deposits were up £3.6 billion, largely driven by the inflow of short-term balances, in June 2021.
 
The Group's loan to deposit ratio of 94 per cent continues to provide a strong liquidity position and significant potential to lend into recovery. The Group's funding and liquidity position is further discussed on page 54.
 
 
 
SUMMARY OF GROUP RESULTS (continued)
 
Capital
 
At 30 June 2021
 
At 30 June 2020
 
 
Change
%
 
At 31 Dec2020
 
 
Change
%
 
 
 
 
 
 
 
 
 
 
CET1 ratio
16.7%
 
14.6%
 
2.1pp
 
 
16.2%
 
0.5pp
 
CET1 ratio pre IFRS 9 transitional relief and software1
15.5%
 
 
13.4%
 
 
2.1pp
 
 
14.5%
 
 
1.0pp
 
Transitional total capital ratio
23.1%
 
22.3%
 
0.8pp
 
 
23.3%
 
(0.2)pp
 
Transitional MREL ratio
36.3%
 
36.8%
 
(0.5)pp
 
 
36.4%
 
(0.1)pp
 
UK leverage ratio
5.8%
 
5.4%
 
0.4pp
 
 
5.8%
 
-
 
Risk-weighted assets
£201bn
 
£207bn
 
(3)
 
 
£203bn
 
(1)
 
 
 
 
 
 
 
 
 
 
 
Ordinary shareholders' equity
 
£46bn
 
£43bn
 
 
 
£43bn
 
 
Tangible net assets per share
55.6p
 
 
51.6p
 
 
4.0p
 
 
52.3p
 
3.3p
 
 
 
 
 
 
 
 
 
 
 
 
1        CET1 ratio 'pre IFRS 9 transitional relief and software' reflects the full impact of IFRS 9, prior to the application of the transitional relief arrangements, and the reversal of the beneficial treatment currently applied to intangible software assets.
Capital movements
 
bps
 
 
 
 
Banking build (pre impairment credit)
 
115 
 
Impairment credit net of IFRS 9 transitional relief release
 
(6)
 
Underlying risk-weighted assets
 
16 
 
Pension contributions and other movements
 
(32)
 
Capital build
 
93 
 
Revised software rules1
 
(6)
 
Ordinary dividend accrual
 
(37)
 
Net movement in CET1 ratio
 
50 
 
 
1        Reduction in benefit driven by prudential amortisation.
 
 
The Group's CET1 capital ratio increased from 16.2 per cent at 31 December 2020 to 16.7 per cent post dividend accrual. The strong capital build of 93 basis points during the first six months of the year largely reflected banking build (pre impairment credit), with a limited offset from the net impact of the impairment credit and partial release of IFRS 9 transitional relief which included 5 basis points relating to the phased reduction in static relief. Further increases in capital build from a reduction in underlying risk-weighted assets and other movements were more than offset by pension contributions of 35 basis points made during the period which reflected the full 2021 fixed contributions for the Group's three main defined benefit pension schemes. The accrual for foreseeable ordinary dividends includes the impact of the interim ordinary dividend.
 
The PRA have confirmed their intention to remove the beneficial treatment currently applied to intangible software assets and reinstate the original requirement to deduct these assets in full. This change will be implemented on 1 January 2022 and is expected to reduce the Group's reported CET 1 ratio by c.50 basis points at that time.
 
The Group continues to apply the revised IFRS 9 transitional arrangements for capital, with the total relief recognised at 30 June 2021 amounting to 78 basis points.
 
Excluding the IFRS 9 transitional relief and removing the current beneficial treatment applied to intangible software assets would reduce the Group's CET1 capital ratio from 16.7 per cent to 15.5 per cent, on the basis of the position at 30 June 2021.
 
SUMMARY OF GROUP RESULTS (continued)
 
The Board's view of the ongoing level of CET1 capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties is around 12.5 per cent, plus a management buffer of around 1 per cent.
 
Risk-weighted assets at £201 billion reduced by £1.8 billion in the first six months of the year, primarily driven by continued optimisation activity undertaken in Commercial Banking, partially offset by a temporary increase in market risk and limited impacts from credit deterioration, the latter in part due to the mitigating impact of house price increases. Given the improved macroeconomic outlook, risk-weighted assets in 2021 are now expected to be below £200 billion by the end of the year. On 1 January 2022, regulatory headwinds from the implementation of new CRD IV models (predominantly relating to mortgages) and changes to counterparty credit risk rules (SA-CCR) are expected to increase risk-weighted assets by £15-£20 billion. Significant uncertainty remains around the outcome of the implementation and the macroeconomic environment at the time, both of which may impact this assessment.
 
Tangible net assets per share increased by 3.3 pence to 55.6 pence at 30 June 2021 from 52.3 pence at 31 December 2020.
 
Dividend
 
In respect of the first half of 2021 and following the PRA update of 13 July 2021, the Board has announced an interim ordinary dividend of 0.67 pence per share, reintroducing a progressive and sustainable ordinary dividend policy.
 
Going forward, the Group will revert to paying any ordinary dividends half yearly, rather than quarterly, with the quantum announced with the half year and full year results. The Board believes this approach is appropriate in the current environment given its simplicity, environmental benefits and the additional flexibility it provides to the business. The Board will continue to give due consideration at each year end to the return of any surplus capital through the use of special dividends or buybacks.
 

 
 
 
 
 
SEGMENTAL ANALYSIS - UNDERLYING BASIS
Half-year to 30 June 2021
 
Retail
 
 
 
Commercial
Banking
 
 
 
Insurance
and Wealth
 
 
 
Central
items
 
 
 
Group
 
 
£m
 
 
£m
 
 
£m
 
 
£m
 
 
£m
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
4,218 
 
 
1,153 
 
 
36 
 
 
11 
 
 
5,418 
 
Other income
 
812 
 
 
677 
 
 
660 
 
 
268 
 
 
2,417 
 
Operating lease depreciation
 
(263)
 
 
(8)
 
 
 
 
 
 
(271)
 
Net income
 
4,767 
 
 
1,822 
 
 
696 
 
 
279 
 
 
7,564 
 
Operating costs
 
(2,296)
 
 
(901)
 
 
(493)
 
 
(40)
 
 
(3,730)
 
Remediation
 
(153)
 
 
(169)
 
 
(116)
 
 
13 
 
 
(425)
 
Total costs
 
(2,449)
 
 
(1,070)
 
 
(609)
 
 
(27)
 
 
(4,155)
 
Underlying profit before impairment
 
2,318 
 
 
752 
 
 
87 
 
 
252 
 
 
3,409 
 
Impairment
 
17 
 
 
636 
 
 
 
 
 
 
656 
 
Underlying profit
 
2,335 
 
 
1,388 
 
 
89 
 
 
253 
 
 
4,065 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banking net interest margin
 
2.45%
 
 
 
2.96%
 
 
 
 
 
 
 
 
 
2.50%
 
 
Average interest-earning banking assets
 
£358.3bn
 
 
 
£81.6bn
 
 
 
£0.9bn
 
 
 
-
 
 
 
£440.8bn
 
 
Asset quality ratio
 
(0.01)%
 
 
 
(1.48)%
 
 
 
 
 
 
 
 
 
(0.30)%
 
 
Return on risk-weighted assets
 
4.75%
 
 
 
3.82%
 
 
 
 
 
 
 
 
 
4.08%
 
 
Loans and advances to customers1
 
£361.5bn
 
 
 
£84.2bn
 
 
 
£1.0bn
 
 
 
£1.0bn
 
 
 
£447.7bn
 
 
Customer deposits2
 
£309.8bn
 
 
 
£149.2bn
 
 
 
£14.8bn
 
 
 
£0.6bn
 
 
 
£474.4bn
 
 
Risk-weighted assets
 
£100.0bn
 
 
 
£72.7bn
 
 
 
£1.4bn
 
 
 
£26.8bn
 
 
 
£200.9bn
 
 
 
 
Half-year to 30 June 2020
 
Retail
 
 
 
Commercial
Banking
 
 
 
Insurance
and Wealth
 
 
 
Central
items
 
 
 
Group
 
 
£m
 
 
£m
 
 
£m
 
 
£m
 
 
£m
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
4,233 
 
 
1,222 
 
 
14 
 
 
 
 
5,478 
 
Other income