HBOS half-year news release

HBOS plc

2021 Half-Year Results

29 July 2021

Member of the Lloyds Banking Group

CONTENTS

REVIEW OF PERFORMANCE

Principal activities

HBOS plc (the Company) and its subsidiaries (together, the Group) provide a wide range of banking and financial services. The Group's revenue is earned through interest and fees on a broad range of financial services products including current and savings accounts, personal loans, credit cards and mortgages within the retail market and loans and other products to commercial and corporate customers.

Income statement

The Group's profit before tax for the half-year to 30 June 2021 was £1,444 million, whilst total profit for the period was £1,479 million, both benefiting from solid business momentum and a net impairment credit in the context of the UK's improved macroeconomic outlook and robust credit performance. The Group's total profit for the period included a benefit of £420 million from the revaluation of deferred tax assets as a result of the revised corporation tax rate effective from 1 April 2023, substantively enacted in the second quarter.

Total income of £2,760 million was down 5 per cent on the first half of 2020, with slightly lower net interest income and significantly reduced other income.

Net interest income of £2,614 million was down 2 per cent compared to the first half of 2020, impacted by a reduction in net interest margins which more than offset the effects of higher average interest-earning assets. Net interest margins fell reflecting the lower rate environment. Average interest-earning assets were up on the first half of 2020, driven by strong growth in the Group's mortgage book.

Other income of £146 million was 39 per cent lower than the first half of 2020, driven by significant reductions in both net trading income and other operating income whilst net fee and commission income remained stable on the prior year. Net trading income for the period was a loss of £7 million compared to a gain of £56 million in the first half of 2020, largely impacted by foreign exchange movements. Other operating income in the period of £13 million was down £29 million largely due to the non-recurrence of a gain on disposal of business during the first half of 2020.

Operating expenses of £1,567 million were 13 per cent higher than in the first half of 2020, due to a higher regulatory provision charge and increased other operating expenses in the period. The charge for regulatory provisions increased to £235 million, driven by charges in respect of HBOS Reading 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. Other operating costs in the period were up £44 million as reductions in staff, premises and equipment and depreciation and amortisation costs were more than offset by increases in amounts recharged by fellow Lloyds Banking Group undertakings.

The impairment charge in the first half of the year was a net credit of £251 million, compared to a net charge of £1,454 million in the first half of 2020. The net credit in the period was driven by a release of expected credit loss (ECL) allowances resulting from the UK's improved macroeconomic outlook. This was partially offset by a low run-rate impairment charge reflecting the continued benign credit environment. Observed credit performance remained robust in the period, with the flow of assets into arrears, defaults and write-offs remaining at low levels. The Group's ECL allowance reduced in the first half of the year by £431 million to £2,899 million.

The Group recognised a net tax credit of £35 million in the period compared to a net credit of £160 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 £420 million deferred tax credit in the income statement and a £58 million debit within other comprehensive income, increasing the Group's net deferred tax asset by £362 million. Excluding the effects of the deferred tax uplift, the Group's effective tax rate was 27 per cent.

REVIEW OF PERFORMANCE (continued)

Balance sheet

The Group's balance sheet reflects healthy franchise growth. Total assets of £308,318 million were up 2 per cent compared to £301,864 million at 31 December 2020 driven by an increase in loans and advances to customers which was partly offset by reductions in amounts due from fellow Lloyds Banking Group undertakings. Loans and advances to customers were 5 per cent higher at £275,932 million compared to £263,766 million at 31 December 2020 driven by strong growth in the Group's mortgage book. Amounts due from fellow Lloyds Banking Group undertakings reduced by £4,120 million from £19,852 million at 31 December 2020 due to increased settlement activity in the period.

Total liabilities of £292,922 million were up 2 per cent compared to £287,998 million at 31 December 2020 driven by increased customer deposits and amounts due to fellow Lloyds Banking Group undertakings, which were partially offset by lower deposits from banks. Customer deposits of £169,941 million have increased by £6,940 million since the end of 2020, with continued inflows into the Group's trusted brands and significant growth seen in personal current accounts and savings balances since 2019. Amounts due to fellow Lloyds Banking Group undertakings have increased by £6,749 million in the period, funding the Group's growth in net customer lending since 31 December 2020.

Total equity increased by £1,530 million from £13,866 million at 31 December 2020 to £15,396 million at 30 June 2021 with total comprehensive income for the period of £1,569 million and capital contributions received of £15 million, partially offset by distributions to non-controlling interests of £54 million.

Capital

Neither the Company nor the Group are regulated from a capital perspective. Regulatory capital is instead managed in the Company's principal banking subsidiary, Bank of Scotland plc.

PRINCIPAL RISKS AND UNCERTAINTIES

The significant risks faced by the Group are detailed below. There has been no change to the definition of these risks from those disclosed in the Group's 2020 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. They include, but are not limited to the coronavirus pandemic, global macro-economic conditions and regulatory developments.

The coronavirus pandemic has had an impact on all risk types and continues to be a major area of focus. The Group responded quickly to the challenges faced, putting in place risk mitigation strategies and refining investment and strategic plans. Transition planning remains a key focus in ensuring that the Group continues to protect colleagues and services to customers as the situation continues to evolve and in ensuring that the lessons learned from the pandemic are embedded into future working practices.

The Lloyds Banking Group is participating in the 2021 Bank of England Biennial Exploratory Scenario on Climate (CBES) for delivery in October. The scope covers credit losses over a thirty year horizon, and how the Lloyds Banking Group would change its lending strategy to mitigate climate risk, under three different temperature scenarios. The CBES may be used to inform FPC and PRA supervision but will not be used to set capital requirements.

The Group's principal risks and uncertainties are reviewed and reported regularly to the Board of the Lloyds Banking Group in alignment with the Lloyds Banking Group's Enterprise Risk Management Framework.

Climate - The risk that the Group experiences losses and/or reputational damage as a result of climate change, either directly or through its customers. These losses may be realised from physical events, the required adaptation in transitioning to a low carbon economy, or as a consequence of the responses to managing these changes.

Market - The risk that the Group's capital or earnings profile is affected by adverse market rates or prices, in particular interest rates and credit spreads in the Banking business and credit spreads in the Group's defined benefit pension schemes.

Credit - The risk that parties with whom the Group has contracted fail to meet their financial obligations (both on and off- balance sheet).

Funding and liquidity - 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 the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost.

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

Change/execution - 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 operation within the risk appetite of the Lloyds Banking Group.

Conduct - The risk of customer detriment across the customer lifecycle 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.

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

People - 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 robust control to ensure all colleague-related requirements are met.

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

Operational - The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Model - The risk of financial loss, regulatory censure, reputational damage or customer detriment, as a result of deficiencies in the development, application or ongoing operation of models and rating systems.

Regulatory and legal - The risk of financial penalties, regulatory censure, criminal or civil enforcement action or customer detriment as a result of failure to identify, assess, correctly interpret, comply with, or manage regulatory and/or legal requirements.

Strategic - The risk which results from:

• Incorrect assumptions about internal or external operating environments

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

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

Credit risk

The economic outlook for the UK has improved as the country begins to show signs of exiting the COVID-19 crisis. Observed credit performance has seen the flow of assets into arrears, defaults and write-offs remain at low levels, in part due to the continued effectiveness of support schemes, including the Coronavirus Job Retention Scheme, provision of loans under the different government schemes, including the Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS), and payment holidays extended by the Group which have now largely matured. There are a number of headwinds which have the potential to further impact the Group's portfolios, including uncertainty around future UK and global economic conditions with the risk of an increase in unemployment and further business failures as the UK Government schemes wind down. In the context of this uncertainty, the Group's risk appetite and risk management approach continues to help ensure that timely and proactive actions are taken.

CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENT (UNAUDITED)

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)

1 Total comprehensive income attributable to owners of the parent was £1,515 million.

2 Total equity attributable to owners of the parent was £13,173 million.

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

1 Total comprehensive income attributable to owners of the parent for the half-year to 30 June 2020 was £519 million (half-year to 31 December 2020: £669 million).

2 Total equity attributable to owners of the parent at 30 June 2020 was £10,963 million (31 December 2020: £11,643 million).

1

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.

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS

Note 1: Accounting policies

These condensed consolidated half-year financial statements as at and for the period to 30 June 2021 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 HBOS plc (the Company) 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 2020 which complied with international accounting standards in conformity with the requirements of the Companies Act 2006, were prepared in accordance with International Financial Reporting Standards (IFRS) and were compliant with IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. Copies of the 2020 Annual Report and Accounts are available on the 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 continuing uncertainties affecting the UK economy post-pandemic and their potential effects upon the Group's performance and projected funding 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 for the foreseeable future.

Changes in accounting policy

The Group adopted the Interest Rate Benchmark Reform Phase 2 amendments from 1 January 2021. These amendments require that changes to expected future cash flows that both arise as a direct result of IBOR Reform and are economically equivalent to the previous cash flows are accounted for as a change to the effective interest rate with no adjustment to the asset or liability's carrying amount; no immediate gain or loss is recognised. The new requirements also provide relief from the requirement to discontinue hedge accounting as a result of amending hedge documentation if the changes are required solely as a result of the IBOR Reform. The amendments do not have a material impact on the Group's comparatives, which have not been restated.

Except for the change above, the Group's accounting policies are consistent with those applied by the Group in its 2020 Annual Report and Accounts and there have been no changes in the Group's methods of computation.

Future accounting developments

The IASB has issued a number of minor amendments to IFRSs effective 1 January 2022 and in later years (including IFRS 9 Financial Instruments and IAS 37 Provisions, Contingent Liabilities and Contingent Assets). 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 estimates

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 2020, 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 2021 the Group's expected credit loss allowance was £2,899 million (31 December 2020: £3,330 million), of which £2,795 million (31 December 2020: £3,201 million) was in respect of drawn balances.

The calculation of the Group's expected credit loss allowances 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 2020 Annual Report and Accounts. The principal changes made in the period ended 30 June 2021 are as follows:

Base Case and Economic Assumptions

The Group's base case economic scenario has been revised in light of the continuing impact of the coronavirus pandemic in the UK and globally. The scenario reflects judgements of the net effect of government-mandated restrictions on economic activity, large-scale government interventions and behavioural changes by households and businesses that may persist beyond the rollout of coronavirus vaccination programmes.

As large-scale vaccination efforts compete with the emergence of new viral strains in the UK and globally, there remains considerable uncertainty about the pace and eventual extent of the post-pandemic recovery. The Group's updated base case scenario builds in three key conditioning assumptions. First, that rising infections in the UK's third COVID-19 wave do not lead to a re-imposition of restrictions. Second, that the rollout of vaccination programmes among the UK's trading partners will reinforce an improving global backdrop. Third, that domestic policy measures remain accommodative, with monetary policy looking through a transient rise in inflation.

Conditioned on these assumptions and taking note of improvements in economic indicators in the second quarter, the Group's base case outlook continues to assume a rise in the unemployment rate as furlough support ends alongside a deceleration in residential and commercial property price growth. Risks around this base case economic view lie in both directions and are partly captured by the alternative economic scenarios generated. But uncertainties relating to the key conditioning assumptions, including epidemiological developments, the efficacy of vaccine rollouts against emergent strains and the response of the economy in those circumstances are not specifically captured by these scenarios. These specific risks have been recognised outside the modelled scenarios with a central adjustment.

The Group has incorporated 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 2021, for which actuals may have since emerged prior to publication.

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

Note 2: Critical accounting judgements and estimates (continued)

Base case scenario by quarter1