Group Chief Executive's Statement
The first half of 2010 was a significant milestone for Lloyds Banking Group as the Group returned to profit. Despite the challenging economic environment, the core businesses performed strongly and we continued to see positive momentum across all of the key income statement line items: income, margins, costs and impairments and an extension of the positive business trends established in 2009. Given the business model we have established, coupled with the gradual recovery in economic growth in the UK, we continue to believe that the Group is well positioned to deliver a strong financial performance over the coming years.
On a statutory basis, the Group delivered a profit before tax of £1.3 billion in the first half of 2010.
On a combined businesses basis, the Group reported a £1.6 billion profit for the first six months of the year, compared to a £4.0 billion loss in the first half of 2009. Our total income, net of insurance claims, rose 5 per cent, primarily driven by a strong performance in Retail, whilst costs fell 5 per cent. This led to an 11 per cent uplift in the trading surplus, and a further improvement in our cost:income ratio to 43.5 per cent. There was a significant decrease in impairments, which were 51 per cent lower than the first half of 2009, at £6.6 billion, with improvements in Wholesale and Retail.
Our customer relationship focus remains at the heart of our business strategy and acquiring and deepening customer relationships is fundamental to this. It is pleasing therefore that we have continued to see strong progress in our customer relationship franchises, with good levels of profitable growth and strong new business flows.
In Retail, we opened 880,000 current accounts and 2.6 million new savings accounts, which are important drivers for future growth, and attracted £6.6 billion in retail deposits.
We are actively supporting the UK’s economic recovery by lending to our business and mortgage customers. During the first half the Group extended £14.9 billion of gross new mortgages to UK homeowners (including £2.5 billion in new lending to first-time buyers), and £23.7 billion of committed gross lending to UK businesses (of which £5.7 billion was for SMEs). The Group is committed to helping 100,000 start-ups per year over the next three years and is currently approving four in five lending applications from SME customers. As a result of this we are pleased to report that we are currently ahead of our lending commitments made to the UK Government.
In the Wealth and International division, we built on the momentum of last year, delivering an annualised 12 per cent increase in Wealth relationship customers. In Insurance, despite the continuing difficult market conditions we made good progress in improving the customer propositions and the profitability of key products in our life, pensions and investments offering.
The integration of the two businesses, one of the largest ever undertaken in the UK, continues to progress well. We have achieved a cost synergy run-rate of £1,084 million by the end of June and are on track to deliver our targeted £2 billion synergy run-rate by the end of 2011. The key programmes we have put in place to date include: rationalising our businesses to eliminate areas of duplication; developing a common systems platform; leveraging our procurement skills; and re-aligning our property requirements. Through the significant focus on operational workstreams, we will create a more efficient and effective organisation and our customers will see the benefit of greater investment in systems and the business.
Our balance sheet reduction plans are on track and we reduced our assets by a further £23 billion in the first half of the year bringing the total reduction to £83 billion since acquisition. We remain focused on reducing the size of our balance sheet and expect to deliver a further £117 billion reduction in assets in line with our guidance of a £200 billion reduction by 2014.
We have further strengthened our capital ratios and at the half-year the Group’s core tier 1 ratio increased to 9.0 per cent (December 2009: 8.1 per cent) which is substantially in excess of regulatory requirements. This is the result of a number of liability management exercises undertaken during the first six months of the year, lower risk-weighted assets and a good business performance. Our tier 1 ratio now stands at 10.3 per cent and our total capital ratio is 13.4 per cent.
Good progress continues to be made on funding and liquidity and we have reduced our reliance on wholesale funding by £15 billion to £311 billion in the first half of the year. The Group continued to widen its diverse range of funding sources and has also maintained the maturity profile of its funding.
We continue to believe that a gradual recovery over the next couple of years remains the most likely outcome for the economy. We believe that GDP growth will recover to 1.3 per cent in 2010 with a further increase to 2.1 per cent in 2011. We expect that UK house prices will remain static in 2010 with a modest increase of 3 per cent in 2011 and we also expect some recovery in commercial property prices with 6 per cent growth this year and 2 per cent next year. Finally, we believe that unemployment and corporate failures will peak in 2010, and at lower rates than during the last recession.
The Group, like all other financial institutions, is operating in an evolving and more demanding regulatory environment. We welcome the opportunity to actively engage with our regulators on many of the issues facing the industry and support the many positive aspects of the pending regulatory reform around markets, prudential regulation and customer engagement. The industry must continue to work with the regulators to find the balance between regulatory reform and the recovery of the banking sector and wider economy.
Our staff have continued to perform extraordinarily in the first half of 2010 as the Group continues to serve and support our customers in a difficult environment, while delivering one of the largest banking mergers in history. The strong core business performance and positive momentum being seen in the business are due to the significant contribution of our staff. The Board and myself are very appreciative of this.
The Group’s aim is to be recognised as the UK’s best financial services business and to deliver sustainable value through the cycle for our customers and shareholders. The principal element of the Group's strategy remains the focus on building deep, long-lasting customer relationships in all its franchises. We continue to support this with a focus on driving down costs and maintaining effective capital management disciplines, within a strong, prudent risk management framework. Based on our economic outlook and the current regulatory context we would expect to see a smaller, more productive balance sheet and are expecting returns on equity of more than 15 per cent over the medium to longer term.
Also in Interim Results 2010:
Lloyds TSB Bank plc, Lloyds TSB Scotland plc and Bank of Scotland plc (members of Lloyds Banking Group), are authorised and regulated by the Financial Services Authority. FSA authorisation can be checked on the FSA’s Register at: www.fsa.gov.uk/register/home.do. Lloyds TSB Bank plc, Lloyds TSB Scotland plc and Bank of Scotland plc are members of the Financial Services Compensation Scheme and the Financial Ombudsman Service.
