Lloyds: Q1 2020 Down On Covid-19 But Balance Sheet Remains Solid

In 1Q 2020 Lloyds Banking Group plc's (Lloyds or the Group) statutory profit before tax was GBP 74 million, declining by 95% YoY (1Q 2019: GBP 1.6 billion). Return on tangible equity was 5%. Underlying profit, which excludes restructuring, volatility and other items, and payment protection insurance (PPI) provision was GBP 558 million, down 74% compared to GBP 2.2. billion in 1Q 2019. The strong decline in Lloyds' profits reflected a significant increase in the cost of risk and a decline in revenues. The Group did not take any further provisions for PPI in 1Q 2020.

Loan loss provisions were GBP 1.4 billion (1Q 2019: GBP 275 million), driven by the revision of the economic outlook, following the Covid-19 pandemic and charges relating to existing restructuring cases, also affected by the coronavirus pandemic. The cost of risk in 1Q 2020 was 130bps (1Q 2019: 25bps), of which 97bps relates to impairment charges for coronavirus impacted restructuring cases and updated economic outlook.

Revenues were GBP 4 billion, down 11 %, reflecting a strong decline in Other income (down 21% YoY), and a more moderate 4% drop in net interest income.

The decline in Other income was due to high weather related claims in February in the Insurance and Wealth division, subdued client activity in Commercial Banking, lower fee revenues, due the implementation of Covid-19-related restrictions, negative impact of the revaluation of the Group's private equity business, and non-recurrence of some one-off gains in 1Q 2019.

Net interest income was down due to reductions in the net interest margin (NIM) and average interest-earning banking assets. NIM was 2.79%, down 12 bps YoY due competitive pressures in mortgage lending and reduced liability spreads. Average interest-earning banking assets were down as well due to lower balances in the closed mortgage book and the effects of the Commercial Banking portfolio optimisation, which more than offset growth in the open mortgage book and UK motor finance.

Total costs declined by 1% YoY to GBP 2 billion with a reduction in operating costs more than offsetting increased remediation charges. Operating costs remained under strict control and were GBP 1.9 billion, down 4%, despite continued strategic investment and the response to the Covid-19 outbreak. The underlying cost-to-income ratio was 49.7%, worsening from 44.7% in the same quarter last year.

Despite a substantial increase in the cost of risk, the share of Stage 3 in total customer loans remained stable at 1.8% during the quarter while the provision coverage increased to 1.03% from 0.83% of the gross exposure. Loan quality is supported by a relatively low average LTV of 44% in the retail mortgage book. Around 90% of the back book has LTVs below 80%. Motor finance is predominantly secured and residual value is provisioned. However, some uptick in credit cards arrears has already been observed.

The Group's CET1 ratio strengthened by 45 bps to 14.2% during the quarter. The reduction of the countercyclical buffer to zero increased the Group's capital cushion over regulatory requirements. The accruing impact of pre-impairment build (+56bps) was fully offset by impairment (-56bps). However, the cancellation of the final 2019 dividend had a relatively strong positive impact (+83bps) due to the Group's strong internal generation capacity. This was in part offset by RWA growth and other factors (-38 bps).

Other balance sheet metrics remained strong as well. The Group's UK leverage ratio increased by 10bps quarter on quarter to 5.3%. The loan to deposit ratio declined by 40bps to 103%, mainly reflecting growth in commercial deposits balances. Liquid assets (calculated as a simple average of month end observation over the previous 12 months) were GBP 132 billion, corresponding to 138% LCR ratio (end-2019: GBP 131 billion and 137%, respectively).