2022 Half-Year Results

Lloyds Bank Corporate Markets plc

2022 Half-Year Results

Member of the Lloyds Banking Group

CONTENTS

REVIEW OF PERFORMANCE

Lloyds Bank Corporate Markets plc (the Bank) and its subsidiaries (the Group) carries out the non-ring fenced banking operations of Lloyds Banking Group (LBG) and provides a wide range of banking and financial services in the UK and overseas. The Group operates as an integrated business across the UK, the Crown Dependencies, the USA, Singapore and Germany, and contributes to the financial results of the Commercial Banking Division of LBG.

The Group's strategic purpose as part of LBG is to Help Britain Prosper by connecting the UK and LBG with the world through a first class banking, financing and risk management proposition. All underpinned by excellent customer service.

Principal activities

Supporting a diverse range of customers, the Group provides a broad range of banking products to help them achieve their financial goals. The Group's revenues are earned through the provision of financing and risk management solutions to commercial customers; and current accounts, savings accounts, mortgages, car finance and personal loans in the retail market in our Crown Dependencies businesses.

The target market for these products and services in the UK and internationally is made up of large corporates, financial institutions and commercial customers plus, in the Crown Dependencies, retail customers and includes the following product propositions:

- Commercial lending (including fixed rate loans, revolving credit facilities, variable loans and business mortgages)

- Trade and working capital management (including trade services, trade finance, supply chain finance and asset finance)

- Bonds and structured finance (including bonds, structured lending and asset securitisation)

- Risk management (including foreign exchange, rates, credit, commodities and liabilities management)

- Retail banking services (including mortgages, personal current accounts, personal loans and motor finance) in the Crown Dependencies

- ESG product solutions (including green bonds and sustainability-linked loans)

Review of results

During the half-year to 30 June 2022, the Group recorded a profit before tax of £249 million compared to £193 million during the half-year to 30 June 2021, an overall increase of £56 million. The Group has benefited from good performance in its core businesses including increased lending combined with rising interest rates and foreign exchange trading activity. Work has continued successfully on the tasks required to safely close down the Singapore branch which is on schedule to complete this year and continued progress has been made on the transition from Interbank Offered Rates (IBORs) to Alternative Risk Free Reference Rates (refer Note 14).

The Group recognised an impairment charge of £11 million (2021: £47 million impairment credit in the half-year to 30 June 2021) in the income statement relating to expected credit loss (ECL) driven largely by the future economic outlook. The Group's ECL calculated under IFRS 9 requires the use of a range of possible future outcomes and more details are contained in Notes 2 and 4.

Regulatory capital adequacy remains strong, with a Bank CET1 ratio of 12.6 per cent (2021: 13.1 per cent); reflecting the stability of the business, and the strength of the client franchise served by the Bank. Risk weighted assets have increased by £2,136 million from £18,436 million at 31 December 2021 to £20,572 million at 30 June 2022, reflecting increased lending and an increase on 1 January 2022 regarding the impact of regulatory changes, including a new standardised approach for measuring counterparty credit risk (SA-CCR). The Bank's UK leverage ratio of 4.5 per cent at 30 June 2022 increased from 3.5 per cent at 31 December 2021, largely following the impact of regulatory changes applied under the UK leverage ratio framework on 1 January 2022.

Total income was £476 million in the first half of 2022 compared to £350 million in the first half of 2021 which is an increase of 36 per cent. This predominantly comprises net interest income of £131 million (£70 million in the half-year to 30 June 2021), net fee and commission income of £107 million (£117 million in the half-year to 30 June 2021) and net trading income of £234 million (£171 million in the half-year to 30 June 2021). This reflects good lending growth, stable funding and resilient trading performance.

Operating expenses were £216 million, up from £204 million in the half-year to 30 June 2021, an increase of £12 million which includes severance and other costs of closing the Singapore branch. Operating expenses consist predominantly of management charges relating to the Intra Group Agreement paid to Lloyds Bank plc, staff costs and other operating expenses. The taxation charge in the period was £42 million (six months to 30 June 2021 £60 million charge) and more details are contained in Note 5.

Total assets were £1,378 million higher at £90,077 million at 30 June 2022 compared to £88,699 million at 31 December 2021. Cash and balances at central banks decreased by £5,798 million from £22,140 million at 31 December 2021 to £16,342 million at 30 June 2022 reflecting a lower assessment of liquidity required. Financial assets at fair value through profit or loss were £15,709 million at 30 June 2022 compared to £22,409 million at 31 December 2021 and predominantly consist of reverse repurchase agreements which have reduced in the period offsetting increases in derivative balances. Derivative financial instruments of £27,716 million at 30 June 2022 increased by £9,726 million compared to £17,990 million at 31 December 2021 reflecting fair value mark to market movements and the impact of the USD exchange rate at the period end. Financial assets at amortised cost increased by £2,296 million from £25,616 million at 31 December 2021 to £27,912 million at 30 June 2022, mainly as a result of increased customer lending.

Total liabilities of the Group were £86,867 million at 30 June 2022 compared to £85,210 million at 31 December 2021, a increase of £1,657 million. Deposits from banks were £3,223 million at 30 June 2022 which is £598 million lower than £3,821 million at 31 December 2021. Customer deposits increased by £314 million from £26,967 million at 31 December 2021 to £27,281 million at 30 June 2022 reflecting customer activity. Financial liabilities at fair value through profit or loss at 30 June 2022 of £14,082 million have decreased by £2,500 million when compared with the 31 December 2021 balance of £16,582 million which reflects a reduction in repurchase agreements offset by an increase in short positions. Derivative financial instruments of £23,122 million have increased by £7,550 million compared to the 31 December 2021 balance of £15,572 million reflecting fair value mark to market movements. Debt securities in issue of £14,929 million has decreased by £1,715 million compared to £16,644 million at 31 December 2021.

Total equity at 30 June 2022 was £3,210 million which is a decrease of £279 million compared to £3,489 million at 31 December 2021 including profits in the period less the dividend paid to LBG in the period of £220 million (2021: £200 million) and movements in other reserves (refer Note 10).

Capital position at 30 June 2022

The Bank's capital position as at 30 June 2022 is set out in the following section.

1 Threshold risk-weighted assets are now included within Other IRB Approach and the Standardised (STA) Approach. In addition securitisation risk-weighted assets are now shown separately. Comparatives have been presented on a consistent basis.

2 Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital.

PRINCIPAL RISKS AND UNCERTAINTIES

The most significant risks that could impact the Group's ability to deliver its long-term strategic objectives, and approach to managing each risk, are reviewed and reported to the Board Risk Committee regularly. There has been no change to the principal risks as disclosed in the Group 2021 Annual Report and Accounts.

The external risks faced by the Group may also impact the success of delivering against the Group's long-term strategic objectives. These risks arise primarily from the war between Russia and Ukraine and the COVID-19 pandemic. The conflict is generating severe economic, political, social and humanitarian impacts across Europe and in the rest of the world. The Group's exposure to Russia, Ukraine and surrounding countries is not material, given our low risk appetite, and the impact of economic sanctions remains limited and manageable. However consequences are being felt through financial markets volatility, inflationary pressures and the risks associated with the conflict remain very high, such as economic contraction, cyber-attacks, higher default levels and other consequences of sanctions. The possibility of secondary sanctions could however add complexity to existing operational requirements in managing our exposure. In addition, the COVID-19 pandemic impacts remain through additional pressure on the global macro-economic conditions, global supply chains or public debts. A deterioration in the macro-economic environment may also impact the Group through higher impairments.

In addition to the geopolitical situation and COVID-19, the Group continues to monitor and address existing and emerging risks that could have an adverse impact on business model, financial conditions, operations and our ability to achieve revenue targets:

- The Group is subject to extensive regulation, supervision and examination by regulatory bodies in countries where it has a presence, as well as from wider initiatives. The pace and scope of new regulations could have material adverse impacts on the Group's business, financial and operating conditions such as regulatory fines for non compliance, additional capital requirements, business operations restrictions and associated costs

- The Group continues its transition from Interbank Offered Rates (IBORs) to Alternative Risk Free Reference Rates. The complexity of the transition could have material adverse impacts such as less liquid interest rates, increased litigation or disputes and higher operational risks

- Since the relationship between the UK and the European Union has still not settled, the UK's exit from the EU continues to create uncertainty as to what the future UK legal and regulatory framework will look like, noting the potential for the UK to deviate from the EU's legal and regulatory system. Trade disruption continues to be felt and meeting stringent EU regulations restrict the scope of the Group business model in the European Union

- The Group uses proprietary models to forecast losses, measure capital requirements, make business decisions and assess and control our operations and financial condition. Models are inherently subject to limitations due to their use of historical data and trends, simplifying assumptions and reliance on uncertain macroeconomic and financial variables. Our models may not be sufficiently predictive of future results due to limited historical data, extreme market volatility, parameterisation and implementation errors. In addition, our models may be ineffective if we fail to oversee them and detect flaws in the review and monitoring process

- The Group operates in a highly competitive market where the recruitment and retention of talent, particularly at a junior level, remains challenging. Ensuring that we have the right number and calibre of employees is core to the Group's success

- On climate risk, the Group is aligned with LBG, its service provider, which has taken a strategic approach to support the transition to a low carbon economy and the aims of the 2015 Paris Climate Agreement, the UK Government's net zero target, the Ten Point Plan for the Green Industrial Revolution and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations

- The provision of services to the Group is outsourced to Lloyds Bank plc via a shared service provision model or by external providers via Lloyds Bank plc. Therefore, issues impacting the shared service provider could have a detrimental impact on the Group's operations

PRINCIPAL RISKS AND UNCERTAINTIES (continued)

Credit risk - The risk that parties with whom the Group has contracted fail to meet their financial obligations (both on and off-balance sheet). Observed or anticipated changes in the economic environment could impact profitability due to an increase in delinquency, defaults, write-downs and/or expected credit losses.

Regulatory and legal risk - The risk arising from the failure to identify, assess, correctly interpret, comply with, or manage regulatory and/or legal requirements, leading to customer detriment, failure to prevent and/or detect economic crime, financial penalties, regulatory censure, criminal or civil enforcement action.

Conduct risk - The risk of detriment across the customer life cycle including: failures in product management, distribution and servicing activities, from other risks materialising, or other activities which could undermine the integrity of the market or distort competition, leading to unfair customer outcomes, regulatory censure, reputational damage or financial loss.

Operational risk - The risk of inadequate or failed internal processes, people, systems or from external events leading to loss. This includes cyber-attack, internal and/or external fraud or financial crime, IT systems failures or, failure to ensure compliance with associated increasingly complex and detailed regulation.

Operational risk: shared services model (SSM) - LBG's chosen ring-fencing operating model introduces risk for the Group in the execution of that model as a shared service recipient.

Key Risks include:

- Key reliance on the SSM increases the prominence of internal service provision risk which is compounded, given the leanness of the relevant teams, in situations where the Group's priorities are not wholly aligned with those of the wider LBG

- Business process risk (i.e. non-adherence to key processes, including those relating to market, operational, capital, credit, economic crime prevention and funding & liquidity risk)

- Information security & cyber risk including access management, records, data protection and cyber

- IT systems risk due to reliance on the shared service from LBG's IT department

- Reliance on the SSM to operate a number of key controls and processes designed to detect, prevent and respond to economic crime

- Operational risk around business resilience, change activity and sourcing

- Impact of resourcing challenges LBG might face around attracting and retaining people with the necessary skills

Operational resilience risk - The risk that the Group fails to design resilience into business operations, underlying infrastructure and controls (people, process and technical) to withstand external or internal events that could impact the continuity of operations or alternatively the failure to respond to events in a way which meets stakeholder expectations and needs when the continuity of operations is compromised.

People risk - The risk that the Group fails to provide an appropriate colleague and customer centric culture, supported by robust reward and wellbeing policies and processes; effective leadership to manage colleague resources; effective talent and succession management; and control framework to ensure all colleague related requirements are met.

Capital risk - The risk that the Group has a sub-optimal quantity or quality of capital or that capital is inefficiently deployed across the Group.

Funding and liquidity risk - Funding risk is defined as the risk that the Group does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient. Liquidity risk is defined as the risk that financial resources are insufficient to meet commitments as they fall due or can only secure them at excessive cost.

Market risk - The risk that the Group's capital or earnings profile is affected by adverse market rates, in particular changes and volatility in interest and foreign exchange rates, inflation rates, commodity prices and credit spreads through activity in the banking and markets businesses.

Model risk - The risk of financial loss, regulatory censure, reputational damage or customer detriment from deficiencies in developing, applying and operating models and rating systems.

Data risk - The risk of the Group failing to effectively govern, manage, and control its data (including data processed by third party suppliers) leading to unethical decisions, poor customer outcomes, loss of value to the Group and mistrust.

PRINCIPAL RISKS AND UNCERTAINTIES (continued)

Governance risk - The risk that its organisational infrastructure fails to provide robust oversight of decision making and the control mechanisms to ensure strategies and management instructions are implemented effectively.

Change/execution risk - The risk that, in delivering its change agenda, the Group fails to ensure compliance with laws and regulation, maintain effective customer service and availability, and/or operate within the Group's risk appetite.

Strategic risk - Strategic risk is defined as the risk which results from:

- Incorrect assumptions about internal or external operating environments

- Failure to understand the potential impact of strategic responses and business plans on existing risk types

- Failure to respond or the inappropriate strategic response to material changes in the external or internal operating environments

STATUTORY INFORMATION

CONSOLIDATED INCOME STATEMENT (UNAUDITED)

1 Restated - See note 1

The accompanying notes are an integral part of the condensed consolidated half-year financial statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

CONSOLIDATED BALANCE SHEET

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (continued)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (continued)

CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

Cash and cash equivalents comprise cash and non-mandatory balances with central banks and amounts due from banks with a maturity of less than three months.

1 Restated see Note 1

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS

Note 1: Basis of preparation and accounting policies

These condensed consolidated half-year financial statements as at and for the period to 30 June 2022 have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority (FCA) and with International Accounting Standard 34 (IAS 34), Interim Financial Reporting as adopted by the United Kingdom and comprise the results of Lloyds Bank Corporate Markets plc (the Bank) together with its subsidiaries (the Group). They do not include all of the information required for full annual financial statements and should be read in conjunction with the Group's consolidated financial statements as at and for the year ended 31 December 2021 which complied with international accounting standards in conformity with the requirements of the Companies Act 2006 and were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Copies of the 2021 Annual Report and Accounts are available on the Group's website Group's website and are available upon request from Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN.

The Directors consider that it is appropriate to continue to adopt the going concern basis in preparing the condensed consolidated half-year financial statements. In reaching this assessment, the Directors have taken into account the uncertainties affecting the UK economy and their potential effects upon the Group's performance and projected funding and capital position; the impact of further stress scenarios has also been considered. On this basis, the Directors are satisfied that the Group will maintain adequate levels of funding and capital for the foreseeable future.

The 2021 interest income and interest expense balances as at 30 June 2021 have been restated to reflect £11 million negative interest correctly in the interest expense line. There has been no impact to net interest income.

Changes in accounting policy

Except for the matter referred to below, the Group's accounting policies are consistent with those applied by the Group in its financial statements for the year ended 31 December 2021 and there have been no changes in the Group's methods of computation.

Cash and cash equivalents: Following a decision by the IFRS Interpretations Committee in April 2022, the Group includes mandatory reserve deposits with central banks that are held in demand accounts within cash and cash equivalents disclosed in the cash flow statement, whereas these amounts were previously excluded from the amount presented in the cash flow statement. This change increased the Group's cash and cash equivalents at 31 December 2021 by £45 million (to £23,103 million) and at 30 June 2022 by £23 million (to £17,697 million). 

Future accounting developments

The IASB has issued a number of minor amendments to IFRSs effective 1 January 2023 (including IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors). These amendments are not expected to have a significant impact on the Group.

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)

Note 2: Critical accounting judgements and key sources of estimation uncertainty

The preparation of the Group's financial statements requires management to make judgements, estimates and assumptions that impact the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may include amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group's significant judgements, estimates and assumptions are unchanged compared to those applied at 31 December 2021, except as detailed below.

Allowance for expected credit losses

The Group recognises an allowance for expected credit losses (ECLs) for loans and advances to customers and banks, other financial assets held at amortised cost, financial assets measured at fair value through other comprehensive income and certain loan commitment and financial guarantee contracts. At 30 June 2022, the Group's ECL allowance was £28 million (31 December 2021: £17 million), of which £17 million (31 December 2021: £11 million) was in respect of drawn balances.

The calculation of the Group's ECLs and provisions against loan commitments and guarantees under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. These are set out in detail in the Group's 2021 Annual Report and Accounts. The principal changes made in the period ended 30 June 2022 are as follows:

Base case and MES economic assumptions

The Group's base case economic scenario has been revised in light of the ongoing war in Ukraine, intensifying global inflation pressures, and a continuing shift towards a more restrictive monetary policy stance by central banks. The Group's updated base case scenario has two conditioning assumptions: first, no further UK COVID-19 national lockdowns are mandated; and, second, the war in Ukraine remains 'local', i.e. without overtly involving neighbouring countries, NATO or China.

Based on these assumptions and incorporating the economic data published in the second quarter, the Group's base case scenario is for a modest rise in the unemployment rate alongside an easing of residential and commercial property prices, as the UK Bank Rate continues to be raised in response to persistent inflationary pressures. Risks around this base case economic view lie in both directions, and are partly captured by the generation of alternative economic scenarios. Uncertainties relating to key epidemiological developments, notably the possibility that a vaccine-resistant strain could emerge, are not specifically captured by these scenarios.

The Group has taken into account the latest available information at the reporting date in defining its base case scenario and generating alternative economic scenarios. The scenarios include forecasts for key variables in the second quarter of 2022, for which actuals may have since emerged prior to publication.

The Group's approach to generating alternative economic scenarios is set out in detail in its financial statements for the year ended 31 December 2021. For June 2022, the Group has judged it appropriate to include a non-modelled severe downside scenario to incorporate high CPI inflation and UK Bank Rate profiles and to adopt this adjusted severe downside scenario to calculate the Group's ECL. This is because the historic macroeconomic and loan loss data upon which the scenario model is calibrated imply an association of downside economic outcomes with easier monetary policy, and therefore low interest rates. The adjustment is considered to better reflect the risks around the Group's base case view in an economic environment where supply shocks are the principal concern.

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)

Note 2: Critical accounting judgements and key sources of estimation uncertainty (continued)

Scenarios by year

Key annual assumptions made by the Group are shown below. Gross domestic product and Consumer Price Index (CPI) inflation are 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. Unemployment rate and UK Bank Rate are averages for the period. For 31 December 2021, CPI numbers are translations of modelled Retail Price Index excluding mortgage interest payments (RPIX) estimates, except for the base case view.

The key UK economic assumptions made by the Group averaged over a five-year period are also shown below. The use of calendar years maintains a comparability between tables disclosed, noting that comparatives reflect one calendar year earlier.

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)

Note 2: Critical accounting judgements and key sources of estimation uncertainty (continued)

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)

Note 2: Critical accounting judgements and key sources of estimation uncertainty (continued)