2021 Q1 Interim Management Statement

Lloyds Bank plc

Q1 2021 Interim Management Statement

28 April 2021

REVIEW OF PERFORMANCE

Income statement

In the three months to 31 March 2021, the Group recorded a profit before tax of £1,768 million compared to £404 million in the same period in 2020, representing an increase of £1,364 million largely reflecting the improved economic outlook for the UK in the current quarter compared to the deterioration assumed in the first quarter of 2020. Profit after tax was £1,283 million.

Total income decreased by £258 million, or 7 per cent, to £3,644 million in the three months to 31 March 2021 compared to £3,902 million in the first three months of 2020; there was a decrease of £229 million in net interest income and £29 million a decrease in other income.

Net interest income was down £229 million, or 8 per cent, to £2,656 million compared to £2,885 million in the first three months of 2020. The net interest margin reduced as a result of the lower rate environment. Average interest-earning assets increased driven by growth in the open mortgage book and an increase in government-backed lending, partially offset by lower balances in unsecured personal loans, credit cards and motor finance, as well as the effects of the continued optimisation of the Corporate and Institutional book within Commercial Banking.

Other income was £29 million lower at £988 million in the three months to 31 March 2021 compared to £1,017 million in the same period last year; there was a fall in net fee and commission income as reduced card and other transaction-based income streams reflecting lower levels of customer activity driven by the coronavirus pandemic were only partly offset by some increase in commercial banking fees. Other operating income also decreased due to lower levels of operating lease rental income as a result of the reduced Lex Autolease vehicle fleet size and lower gains on the disposal of financial assets at fair value through other comprehensive income.

Total operating expenses increased by £25 million to £2,212 million compared to £2,187 million in the first three months of 2020. There was an increase of £41 million in operating costs reflecting higher restructuring costs, primarily technology research and development costs and severance, as well as slightly higher property transformation costs. These were partially offset by a reduction in depreciation of tangible fixed assets due to the reduced Lex Autolease vehicle fleet size. Staff costs were little changed. The charge in respect of regulatory provisions was £16 million lower at £64 million and related to pre-existing programmes.

As highlighted in the 2020 results, in relation to HBOS Reading, decisions from the independent panel re-review on direct and consequential losses will start to be issued during 2021. This is likely to result in further charges but it is not possible to estimate the potential impact at this stage.

There was a net release of expected credit loss allowances (ECLs) in the quarter of £336 million, compared to a charge of £1,311 million in the first quarter of 2020, largely reflecting the improved UK economic outlook.

The ECL allowance in respect of loans and advances to customers remains high by historical standards at £5,174 million, a coverage ratio of 1.1 per cent. This is consistent with the Group's updated macroeconomic projections. It assumes that a large proportion of expected losses will crystallise over the next 12 to 18 months as support measures subside and unemployment increases.

Credit performance has remained stable in the quarter, with the flow of assets into arrears, defaults and write-offs remaining at low levels in part due to the continued effectiveness of support schemes, including the Coronavirus Job Retention Scheme and payment holidays extended by the Group which have now largely matured. The Group has maintained judgemental ECL allowances in respect of losses assumed to have been suppressed over the last 12 months by support schemes, given that cumulative losses remain lower than would have ordinarily been anticipated.

The Group's £400 million central overlay has been maintained. It was added at the year end in recognition of the significant uncertainty with regard to the efficacy of the vaccine, the vaccination rollout, potential virus mutations and economic performance post lockdown restrictions and Government support. Although the base case outlook has improved in the first quarter, the Group still considers these risks to remain and that the conditioning assumptions for the base case and associated scenarios around this do not necessarily capture these unprecedented risks.

REVIEW OF PERFORMANCE (continued)

The Group recognised a tax expense of £485 million in the period compared to a credit of £396 million in the first three months of 2020. The prior year 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. On 3 March 2021, the 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. Had this change in corporation tax rate been substantively enacted at 31 March 2021, the impact would have been to recognise a c.£1.25 billion deferred tax credit in the income statement and a c.£150 million debit within other comprehensive income, increasing the Group's net deferred tax asset by c.£1.1 billion.

Balance sheet

Total assets were £4,536 million higher at £604,475 million at 31 March 2021 compared to £599,939 million at 31 December 2020. There was an increase in cash and balances at central banks which were £11,805 million higher at £61,693 million reflecting increased liquidity holdings. Partly offsetting this, financial assets at amortised cost decreased by £1,917 million, to £490,049 million at 31 March 2021 compared to £491,966 million at 31 December 2020, as a result of a £4,861 million decrease in bank and customer reverse repurchase agreement balances. Other loans and advances to customers, net of impairment allowances, were £3,227 million higher as increases in the open mortgage book, motor finance and SME lending were only partially offset by reductions in the closed mortgage book, other retail balances and larger corporate lending. Derivative assets were £1,680 million lower at £6,661 million compared to £8,341 million at 31 December 2020, reflecting reduced volumes and movements in interest and exchange rates over the first three months of 2021.

Total liabilities were £4,380 million higher at £563,201 million compared to £558,821 million at 31 December 2020. Customer deposits increased by £11,804 million, or 3 per cent, to £446,373 million compared to £434,569 million at 31 December 2020, as a result of growth in retail current and savings accounts and commercial deposits. This increase was partly offset by a reduction in deposits from banks which were £3,408 million lower at £21,589 million, reflecting the reduced need for wholesale funding following further growth in customer deposits, and in derivative liabilities which were £1,863 million lower.

Shareholders' equity was little changed at £35,259 million as profit retentions were largely offset by movements in the cash flow hedging reserve.

Capital

The Group's Common equity tier 1 (CET1) capital ratio has increased from 15.5 per cent at 31 December 2020 to 16.1 per cent1 at 31 March 2021, primarily as a result of profit for the period and a reduction in risk-weighted assets, partially offset by pension contributions. The tier 1 capital ratio increased from 19.8 per cent at 31 December 2020 to 20.0 per cent1 at 31 March 2021 and the total capital ratio increased from 23.5 per cent at 31 December 2020 to 23.9 per cent1 at 31 March 2021, reflecting the increase in CET1 capital and the reduction in risk-weighted assets, partially offset by the annual reduction in transitional limits applied to legacy tier 1 and tier 2 instruments. The total capital ratio also reflects the issuance of a new tier 2 capital instrument in the quarter.

Risk-weighted assets reduced by £2.7 billion, or 2 per cent, to £168.2 billion at 31 March 2021, compared to £170.9 billion at 31 December 2020, primarily driven by optimisation activity undertaken in Commercial Banking.

The Group's UK leverage ratio increased from 5.5 per cent at 31 December 2020 to 5.6 per cent1 at 31 March 2021.

1 Incorporating profits for the period that remain subject to formal verification in accordance with the Capital Requirements Regulation.

CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEET

ADDITIONAL FINANCIAL INFORMATION

1. Basis of presentation

This release covers the results of Lloyds Bank plc (the Bank) together with its subsidiaries (the Group) for the three months ended 31 March 2021.

Accounting policies

The accounting policies are consistent with those applied by the Group in its 2020 Annual Report and Accounts.

2. Capital

Capital and leverage ratios reported as at 31 March 2021 incorporate profits for the three months that remain subject to formal verification in accordance with the Capital Requirements Regulation. The Group's Q1 2021 Interim Pillar 3 Report can be found at: https://www.lloydsbankinggroup.com/investors/financial-downloads.html

3. UK economic assumptions

Base case scenario by quarter

Key quarterly assumptions made by the Group are shown below. Gross domestic product is presented quarter on quarter, house price growth and commercial real estate growth is presented year on year.

ADDITIONAL FINANCIAL INFORMATION (continued)

3. UK economic assumptions (continued)

Scenarios by year

Key annual assumptions made by the Group are shown below. Gross domestic product is presented as an annual change, house price growth and commercial real estate price growth are presented as the growth in the respective indices within the period. UK Bank Rate and unemployment rate are averages for the period.

ADDITIONAL FINANCIAL INFORMATION (continued)

3. UK economic assumptions (continued)

ADDITIONAL FINANCIAL INFORMATION (continued)

4. Group loans and advances to customers and expected credit loss allowances

1 Includes reverse repos of £52.8 billion.

2 UK Motor Finance for Stages 1 and 2 include £168 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

3 Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Retail of £186 million, and in Commercial Banking of £135 million.

ADDITIONAL FINANCIAL INFORMATION (continued)

4. Group loans and advances to customers and expected credit loss allowances (continued)

1 Includes reverse repos of £58.6 billion.

2 UK Motor Finance for Stages 1 and 2 include £192 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

3 Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Retail of £179 million, and in Commercial Banking of £138 million.

ADDITIONAL FINANCIAL INFORMATION (continued)

5. Group Stage 2 loans and advances to customers