6-K 1 lbg1129q.htm 2020 FULL YEAR RESULTS lbg1129q
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
 
 
FORM 6-K
 
 
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
 
 
24 February 2021
LLOYDS BANKING GROUP plc
(Translation of registrant's name into English)
 
5th Floor
25 Gresham Street
London
EC2V 7HN
United Kingdom
 
 
(Address of principal executive offices)
 
 
 
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
 
Form 20-F..X..     Form 40-F 
 
 
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
 
Yes         No ..X..
 
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule
12g3-2(b): 82- ________
 
 
Index to Exhibits
 
 
Item
 
 No. 1 Regulatory News Service Announcement, dated 24 February 2021
          re: 2020 Full Year Results
 
 
 
 
 
 
 
 
2020 Results
 
News Release
 
Lloyds Banking Group plc
 
24 February 2021
 
 
 
 
 
CONTENTS
 
 
Page 
Results for the full year
1
Income statement - underlying basis
5
Key balance sheet metrics
5
Quarterly information
7
Balance sheet analysis
8
Group Chief Executive's statement
9
Strategic Review 2021
17
Summary of Group results
25
Segmental analysis - underlying basis
44
 
 
Divisional results
 
Retail
46
Commercial Banking
49
Insurance and Wealth
52
Central items
55
 
 
Other financial information
 
Reconciliation between statutory and underlying basis financial information
56
Banking net interest margin and average interest-earning assets
57
Volatility arising in the insurance business
57
Changes in Insurance assumptions
59
Tangible net assets per share
59
Return on tangible equity
60
 
 
Risk management
 
Credit risk portfolio
61
Funding and liquidity management
75
Capital management
76
 
 
Statutory information
 
Condensed consolidated financial statements
85
Consolidated income statement
85
Consolidated statement of comprehensive income
86
Consolidated balance sheet
87
Consolidated statement of changes in equity
89
Consolidated cash flow statement
94
Notes to the condensed consolidated financial statements
95
 
 
Forward looking statements
109
Summary of alternative performance measures
111
Contacts
112
 
 
 
 
 
 
 
BASIS OF PRESENTATION
 
This release covers the results of Lloyds Banking Group plc together with its subsidiaries (the Group) for the year ended 31 December 2020.
 
Statutory basis: Statutory profit before tax and statutory profit after tax are included within this document. However, a number of factors have had a significant effect on the comparability of the Group’s financial position and results. Accordingly, the results are also presented on an underlying basis.
 
Underlying basis: The statutory results are adjusted for certain items which are listed below, to allow a comparison of the Group’s underlying performance:
 
Restructuring, including severance-related costs, property transformation, technology research and development, regulatory programmes and merger, acquisition and integration costs
 
Volatility and other items, which includes the effects of certain asset sales, the volatility relating to the Group’s hedging arrangements and that arising in the insurance business, the unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets
 
Payment protection insurance provisions
 
Analysis of lending and expected credit loss (ECL) allowances are presented on an underlying basis and reconciled to figures prepared on a statutory basis where appropriate. On a statutory basis, purchased or originated credit-impaired (POCI) assets include a fixed pool of mortgages that were purchased as part of the HBOS acquisition at a deep discount to face value reflecting credit losses incurred from the point of origination to the date of acquisition. Over time, these POCI assets will run off as the loans redeem, pay down or losses crystallise. The underlying basis assumes that the lending assets acquired as part of a business combination were originated by the Group and are classified as either Stage 1, 2 or 3 according to the change in credit risk over the period since origination. Underlying ECL allowances have been calculated accordingly. The Group uses the underlying basis to monitor the creditworthiness of the lending portfolio and related ECL allowances.
 
Unless otherwise stated, income statement commentaries throughout this document compare the year ended 31 December 2020 to the year ended 31 December 2019, and the balance sheet analysis compares the Group balance sheet as at 31 December 2020 to the Group balance sheet as at 31 December 2019.
 
Segmental information: During the year ended 31 December 2020, the Group migrated certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail. In addition, Commercial Banking has been resegmented to reflect the division’s new client coverage model and is now analysed according to SME, Mid Corporates, Corporate and Institutional, and Other. The Group has also revised its approach to internal funding charges, including the adoption of the Sterling Overnight Index Average (SONIA) interest rate benchmark in place of the London Inter-bank Offered Rate (LIBOR). Comparatives have been restated accordingly.
 
Alternative performance measures: The Group uses a number of alternative performance measures, including underlying profit, in the discussion of its business performance and financial position. Further information on these measures is set out on page 1.
 
 
 
 
 
 
 
RESULTS FOR THE FULL YEAR
 
“The impact of the coronavirus pandemic on the people, businesses and communities in the UK and around the world in 2020 has been profound. We remain absolutely focused on working together with all of our stakeholders to support our customers and ensure a sustainable recovery.
 
The Group's unique business model, customer focused strategy and transformation in recent years positioned us well to respond effectively to the needs of our customers in 2020. At the same time, the Group’s financial performance in the year has been impacted by the pandemic. We are now seeing positive developments in the business, including growth of £10.2 billion in the open mortgage book in the second half of the year and total deposits up £39 billion in the year, the latter given curtailed retail spending and inflows to our trusted brands. Despite the significant impairment charge taken in the year, predominantly in the first half, the Group has delivered a statutory profit after tax of £1.4 billion. Further, the Group’s strong capital position has also enabled us to resume capital distributions with a dividend of 0.57 pence per share.
 
I am deeply proud of the vital work that has been done by Lloyds Banking Group to support the UK economy and to help Britain recover throughout 2020. I would again like to express my sincere gratitude to all of my colleagues, who continue to demonstrate extraordinary resilience and dedication as they serve their customers in very difficult circumstances. Our people went to incredible lengths to support customers most in need in 2020 and their efforts continue to ensure that customers and communities receive the services they need.
 
Looking forward, significant uncertainties remain, specifically relating to the coronavirus pandemic and the speed and efficacy of the vaccination programme in the UK and around the world. I remain confident that the Group’s clear purpose, unique business model, significant competitive advantages and the customer focused evolution of our strategy we have announced will ensure that the Group is able to Help Britain Recover and in so doing, help transition to a sustainable economy.”
 
António Horta-Osório
 
Group Chief Executive
 
Successfully supporting customers, colleagues and communities through the pandemic
 
Over £12 billion lending to businesses through Government-backed schemes, including Bounce Back Loan, Coronavirus Business Interruption Loan and Coronavirus Large Business Interruption Loan schemes
 
Around 1.3 million payment holidays granted to retail customers and 34,000 capital repayment holidays to small businesses and corporates to alleviate temporary financial pressures whilst also supporting a number of Corporate and Institutional clients with Covid Corporate Financing Facility advances
 
More than 50,000 colleagues working from home for most of 2020, increased from up to 15,000 before the pandemic
 
c.90 per cent of branches remained open through the pandemic, enabling the Group to continue to serve customers
 
 
Resilient financial performance in a highly challenging macroeconomic environment
 
Net income of £14.4 billion, down 16 per cent with net interest income of £10.8 billion, down 13 per cent. Net interest margin of 2.52 per cent, reflecting lower rates, actions taken to support customers and changes in asset mix, including growth in high quality UK mortgages and lower levels of unsecured lending; average interest-earning assets stable at £435 billion. Other income of £4.5 billion, impacted by lower levels of customer activity, the impact of negative assumption changes in Insurance and Wealth and lower non-recurring items
 
Total costs of £8.0 billion, 4 per cent lower, enabling continued investment in digital projects and enhanced support for customers during the pandemic
 
Trading surplus of £6.4 billion, a reduction of 27 per cent although providing significant capacity to absorb impairment impact of the coronavirus crisis
 
Impairment charge of £4.2 billion, including £3.8 billion in the first half, primarily reflecting a significant deterioration in the economic outlook and including a management overlay of £400 million applied in the second half, given ongoing uncertainties as a result of coronavirus
 
Statutory profit before tax of £1.2 billion and statutory profit after tax of £1.4 billion, both impacted by lower income and the increased impairment charge; tangible net asset value per share of 52.3 pence
 
 
Strong balance sheet and capital position
 
Loans and advances broadly in line with prior year at £440.2 billion with growth in the open mortgage book and Government-backed lending of £11.1 billion (£12.4 billion approved at 12 February 2021), more than offsetting lower balances in unsecured Retail, Corporate and Institutional, and the closed mortgage book
 
Open mortgage book up £7.2 billion in the year, including £10.2 billion in the second half and with a strong pipeline
 
Customer deposits up £38.9 billion in the year to £450.7 billion with Retail current accounts up 27 per cent having grown ahead of the market
 
Loan to deposit ratio of 98 per cent, providing a strong liquidity position and significant potential to lend into recovery
 
Board has recommended a final ordinary dividend of 0.57 pence per share, the maximum allowed under the regulator's guidelines
 
CET1 ratio of 16.4 per cent before dividends and 16.2 per cent after, both significantly ahead of the ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent and regulatory requirements of c.11 per cent
 
 
Significant transformation achieved under the third phase of the Group’s strategy (GSR3)
 
In 2018 we launched our ambitious strategy to transform the Group for success in a digital world and over the last three years we have invested £2.8 billion across our four strategic pillars, enabling us to:
 
Develop a leading customer experience; including the largest digital bank in the UK with 17.4 million digitally active customers and 12.5 million mobile app users with record NPS, alongside the largest UK branch network
 
Further digitise the Group; by progressively modernising and simplifying the IT architecture across 78 per cent of the Group’s cost base whilst continuing to migrate applications to private cloud
 
Maximise Group capabilities; by exceeding the £6 billion target for increasing net lending to start-ups, SMEs and Mid Market clients over the three years, whilst surpassing the 2020 target of £18 billion gross new lending to these businesses and also extending the Group’s unique Single Customer View functionality to c.6.5 million customers
 
Transform ways of working; by delivering 5.3 million hours of future skills training and 65 per cent of change using agile methodologies
 
 
Strategic Review 2021
 
Strategic Review 2021 builds on our core capabilities and the strong foundations from previous strategic reviews, while reinforcing our customer focus. We have made significant progress in recent years, leveraging the unique strengths and assets of the Group, including our purpose driven and customer focused business model, our low risk approach to business, our market leading efficiency and our leading multi-channel propositions, including the largest digital bank and branch network in the UK. Strategic Review 2021 will deliver co-ordinated growth opportunities in our two core customer segments, supported by enhanced capabilities in four areas. With 2021 execution underpinned by long-term strategic vision, we aim to:
 
Significantly deepen our customer relationships across banking, insurance and wealth, building our position as the preferred financial partner for personal customers
 
Build a leading digital SME proposition and a disciplined and strengthened Corporate and Institutional client offering, enabling the Group to be the best bank for business
 
Further enhance and leverage core capabilities, including through a modernised technology architecture, integrated payment solutions, a truly data-driven organisation and reimagined ways of working for our colleagues
 
 
2021 guidance, based on our current economic assumptions, reflects confidence in the Group’s unique business model and customer focused strategy
 
Net interest margin to be in excess of 240 basis points
 
Operating costs to reduce further to c.£7.5 billion
 
Net asset quality ratio to be below 40 basis points
 
Improving profitability with statutory return on tangible equity of between 5 and 7 per cent (on the new basis)
 
Risk-weighted assets in 2021 to be broadly stable on 2020
 
Intention to accrue dividends and resume progressive and sustainable ordinary dividend policy
 
 
INCOME STATEMENT − UNDERLYING BASIS
 

 
2020
 
 
2019
 
 
Change
 
£m
 
 
£m
 
 
%
 
 
 
 
 
 
 
 
Net interest income
10,773 
 
 
 
12,377 
 
 
 
(13)
 
 
Other income
4,515 
 
 
 
5,732 
 
 
 
(21)
 
 
Operating lease depreciation
(884)
 
 
 
(967)
 
 
 
 
 
Net income
14,404 
 
 
 
17,142 
 
 
 
(16)
 
 
Operating costs
(7,585)
 
 
 
(7,875)
 
 
 
 
 
Remediation
(379)
 
 
 
(445)
 
 
 
15 
 
 
Total costs
(7,964)
 
 
 
(8,320)
 
 
 
 
 
Trading surplus
6,440 
 
 
 
8,822 
 
 
 
(27)
 
 
Impairment
(4,247)
 
 
 
(1,291)
 
 
 
 
Underlying profit
2,193 
 
 
 
7,531 
 
 
 
(71)
 
 
Restructuring
(521)
 
 
 
(471)
 
 
 
(11)
 
 
Volatility and other items
(361)
 
 
 
(217)
 
 
 
(66)
 
 
Payment protection insurance provision
(85)
 
 
 
(2,450)
 
 
 
 
Statutory profit before tax
1,226 
 
 
 
4,393 
 
 
 
(72)
 
 
Tax credit (expense)
161 
 
 
 
(1,387)
 
 
 
 
Statutory profit after tax
1,387 
 
 
 
3,006 
 
 
 
(54)
 
 
 
 
 
 
 
 
 
 
Earnings per share
1.2p
 
 
3.5p
 
 
(66)
 
 
Dividends per share – ordinary
 
0.57p
 
 
1.12p
 
 
 
 
 
 
 
 
 
 
 
Banking net interest margin
2.52%
 
 
2.88%
 
 
(36)bp
 
Average interest-earning banking assets
£435bn
 
 
£435bn
 
 
— 
 
Cost:income ratio
55.3%
 
 
48.5%
 
 
6.8pp
Asset quality ratio
0.96%
 
 
0.29%
 
 
67bp
Return on tangible equity – existing basis
3.7%
 
 
7.8%
 
 
(4.1)pp
Return on tangible equity – new basis
2.3%
 
 
6.6%
 
 
(4.3)pp
 
 
 
KEY BALANCE SHEET METRICS
 
 
At 31 Dec 2020
 
 
At 31 Dec 2019
 
 
Change%
 
 
 
 
 
 
 
Loans and advances to customers1
 
£440bn
 
 
£440bn
 
 
— 
 
 
Customer deposits2
 
£451bn
 
 
£412bn
 
 
 
 
Loan to deposit ratio
 
98%
 
 
107%
 
 
(9)pp
 
CET1 ratio3,4
 
16.2%
 
 
13.8%
 
 
2.4pp
 
CET1 ratio pre IFRS 9 transitional relief3,4
 
15.0%
 
 
13.4%
 
 
1.6pp
 
Transitional MREL ratio3,4
 
36.4%
 
 
32.6%
 
 
3.8pp
 
UK leverage ratio3,4
 
5.8%
 
 
5.2%
 
 
0.6pp
 
Risk-weighted assets3
 
£203bn
 
 
£203bn
 
 
— 
 
 
Tangible net assets per share
 
52.3p
 
 
50.8p
 
 
1.5p
 
 
1
Excludes reverse repos of £58.6 billion (31 December 2019: £54.6 billion).
 
2
Excludes repos of £9.4 billion (31 December 2019: £9.5 billion).
 
3
The CET1, MREL and leverage ratios and risk-weighted assets at 31 December 2019 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent first quarter period. The CET1 ratio pre IFRS 9 transitional relief reflects the full impact of IFRS 9, prior to the application of transitional arrangements. Excluding dividend accrual, the CET1 ratio at 31 December 2020 was 16.4 per cent.
 
4
CET1 ratios at 31 December 2020 include an increase of 51 basis points following the implementation of the revised capital treatment of intangible software assets. The benefit through CET1 capital is reflected through the MREL and leverage ratios.

 

 
QUARTERLY INFORMATION
 
 
Quarter
ended
31 Dec
2020
 
 
 
Quarter
ended
30 Sep
2020
 
 
 
Quarter
ended
30 Jun
2020
 
 
 
Quarter
ended
31 Mar
2020
 
 
 
Quarter
ended
31 Dec
2019
 
 
 
Quarter
ended
30 Sep
2019
 
 
 
Quarter
ended
30 Jun
2019
 
 
 
Quarter ended
31 Mar 2019
 
 
 
£m
 
 
 
£m
 
 
 
£m
 
 
 
£m
 
 
 
£m
 
 
 
£m
 
 
 
£m
 
 
 
£m
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
2,677 
 
 
 
 
2,618 
 
 
 
 
2,528 
 
 
 
 
2,950 
 
 
 
 
3,102 
 
 
 
 
3,130 
 
 
 
 
3,062 
 
 
 
 
3,083 
 
 
 
Other income
 
1,066 
 
 
 
 
988 
 
 
 
 
1,235 
 
 
 
 
1,226 
 
 
 
 
1,267 
 
 
 
 
1,315 
 
 
 
 
1,594 
 
 
 
 
1,556 
 
 
 
Operating lease depreciation
 
(150)
 
 
 
 
(208)
 
 
 
 
(302)
 
 
 
 
(224)
 
 
 
 
(236)
 
 
 
 
(258)
 
 
 
 
(254)
 
 
 
 
(219)
 
 
 
Net income
 
3,593 
 
 
 
 
3,398 
 
 
 
 
3,461 
 
 
 
 
3,952 
 
 
 
 
4,133 
 
 
 
 
4,187 
 
 
 
 
4,402 
 
 
 
 
4,420 
 
 
 
Operating costs
 
(2,028)
 
 
 
 
(1,858)
 
 
 
 
(1,822)
 
 
 
 
(1,877)
 
 
 
 
(2,058)
 
 
 
 
(1,911)
 
 
 
 
(1,949)
 
 
 
 
(1,957)
 
 
 
Remediation
 
(125)
 
 
 
 
(77)
 
 
 
 
(90)
 
 
 
 
(87)
 
 
 
 
(219)
 
 
 
 
(83)
 
 
 
 
(123)
 
 
 
 
(20)
 
 
 
Total costs
 
(2,153)
 
 
 
 
(1,935)
 
 
 
 
(1,912)
 
 
 
 
(1,964)
 
 
 
 
(2,277)
 
 
 
 
(1,994)
 
 
 
 
(2,072)
 
 
 
 
(1,977)
 
 
 
Trading surplus
 
1,440 
 
 
 
 
1,463 
 
 
 
 
1,549 
 
 
 
 
1,988 
 
 
 
 
1,856 
 
 
 
 
2,193 
 
 
 
 
2,330 
 
 
 
 
2,443 
 
 
 
Impairment
 
(128)
 
 
 
 
(301)
 
 
 
 
(2,388)
 
 
 
 
(1,430)
 
 
 
 
(341)
 
 
 
 
(371)
 
 
 
 
(304)
 
 
 
 
(275)
 
 
 
Underlying profit
 
1,312 
 
 
 
 
1,162 
 
 
 
 
(839)
 
 
 
 
558 
 
 
 
 
1,515 
 
 
 
 
1,822 
 
 
 
 
2,026 
 
 
 
 
2,168 
 
 
 
Restructuring
 
(233)
 
 
 
 
(155)
 
 
 
 
(70)
 
 
 
 
(63)
 
 
 
 
(191)
 
 
 
 
(98)
 
 
 
 
(56)
 
 
 
 
(126)
 
 
 
Volatility and other items
 
(202)
 
 
 
 
29 
 
 
 
 
233 
 
 
 
 
(421)
 
 
 
 
122 
 
 
 
 
126 
 
 
 
 
(126)
 
 
 
 
(339)
 
 
 
Payment protection insurance provision
 
(85)
 
 
 
 
— 
 
 
 
 
— 
 
 
 
 
— 
 
 
 
 
— 
 
 
 
 
(1,800)
 
 
 
 
(550)
 
 
 
 
(100)
 
 
 
Statutory profit (loss) before tax
 
792 
 
 
 
 
1,036 
 
 
 
 
(676)
 
 
 
 
74 
 
 
 
 
1,446 
 
 
 
 
50 
 
 
 
 
1,294 
 
 
 
 
1,603 
 
 
 
Tax (expense) credit
 
(112)
 
 
 
 
(348)
 
 
 
 
215 
 
 
 
 
406 
 
 
 
 
(427)
 
 
 
 
(288)
 
 
 
 
(269)
 
 
 
 
(403)
 
 
 
Statutory profit (loss) after tax
 
680 
 
 
 
 
688 
 
 
 
 
(461)
 
 
 
 
480 
 
 
 
 
1,019 
 
 
 
 
(238)
 
 
 
 
1,025 
 
 
 
 
1,200 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banking net interest margin
 
2.46%
 
 
 
2.42%
 
 
 
2.40%
 
 
 
2.79%
 
 
 
2.85%
 
 
 
2.88%
 
 
 
2.89%
 
 
 
2.91%
 
 
Average interest-earning banking assets
 
£437bn
 
 
 
£436bn
 
 
 
£435bn
 
 
 
£432bn
 
 
 
£437bn
 
 
 
£435bn
 
 
 
£433bn
 
 
 
£433bn
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost:income ratio
 
59.9%
 
 
 
56.9%
 
 
 
55.2%
 
 
 
49.7%
 
 
 
55.1%
 
 
 
47.6%
 
 
 
47.1%
 
 
 
44.7%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset quality ratio
 
0.11%
 
 
 
0.27%
 
 
 
2.16%
 
 
 
1.30%
 
 
 
0.30%
 
 
 
0.33%
 
 
 
0.27%
 
 
 
0.25%
 
 
Gross asset quality ratio
 
0.16%
 
 
 
0.28%
 
 
 
2.19%
 
 
 
1.35%
 
 
 
0.39%
 
 
 
0.40%
 
 
 
0.38%
 
 
 
0.30%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on tangible equity – existing basis
 
7.2%
 
 
 
7.4%
 
 
 
(4.8%)
 
 
 
5.0%
 
 
 
11.0%
 
 
 
(2.8%)
 
 
 
10.5%
 
 
 
12.5%
 
 
Return on tangible equity – new basis
 
5.9%
 
 
 
6.0%
 
 
 
(6.1%)
 
 
 
3.7%
 
 
 
9.8%
 
 
 
(4.0%)
 
 
 
9.3%
 
 
 
11.4%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and advances to customers1
 
£440bn
 
 
 
£439bn
 
 
 
£440bn
 
 
 
£443bn
 
 
 
£440bn
 
 
 
£447bn
 
 
 
£441bn
 
 
 
£441bn
 
 
Customer deposits2
 
£451bn
 
 
 
£447bn
 
 
 
£441bn
 
 
 
£428bn
 
 
 
£412bn
 
 
 
£419bn
 
 
 
£418bn
 
 
 
£417bn
 
 
Loan to deposit ratio
 
98%
 
 
 
98%
 
 
 
100%
 
 
 
103%
 
 
 
107%
 
 
 
107%
 
 
 
106%
 
 
 
106%
 
 
Risk-weighted assets3
 
£203bn
 
 
 
£205bn
 
 
 
£207bn
 
 
 
£209bn
 
 
 
£203bn
 
 
 
£209bn
 
 
 
£207bn
 
 
 
£208bn
 
 
Tangible net assets per share
 
52.3p
 
 
 
52.2p
 
 
 
51.6p
 
 
 
57.4p
 
 
 
50.8p
 
 
 
52.0p
 
 
 
53.0p
 
 
 
53.4p
 
 
 
1
Excludes reverse repos.
 
2
Excludes repos.
 
3
Risk-weighted assets at 30 June 2019 and 31 December 2019 are reported on a pro forma basis reflecting the Insurance dividend paid to the Group in the subsequent reporting period.

 

 
BALANCE SHEET ANALYSIS
 
At 31 Dec 2020
 
 
At 30 Sep 2020
 
 
Change
 
 
At 30 Jun 2020
 
 
Change
 
 
At 31 Dec 2019
 
 
Change
 
 
£bn
 
 
£bn
 
 
%
 
 
£bn
 
 
%
 
 
£bn
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and advances to customers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Open mortgage book
 
277.3 
 
 
 
270.6 
 
 
 
 
 
 
267.1 
 
 
 
 
 
 
270.1 
 
 
 
 
 
Closed mortgage book
 
16.5 
 
 
 
17.0 
 
 
 
(3)
 
 
 
17.5 
 
 
 
(6)
 
 
 
18.5 
 
 
 
(11)
 
 
Credit cards
 
14.3 
 
 
 
14.8 
 
 
 
(3)
 
 
 
15.2 
 
 
 
(6)
 
 
 
17.7 
 
 
 
(19)
 
 
UK Retail unsecured loans
 
8.0 
 
 
 
8.2 
 
 
 
(2)
 
 
 
8.2 
 
 
 
(2)
 
 
 
8.4 
 
 
 
(5)
 
 
UK Motor Finance
 
14.7 
 
 
 
14.8 
 
 
 
(1)
 
 
 
15.3 
 
 
 
(4)
 
 
 
15.6 
 
 
 
(6)
 
 
Overdrafts
 
0.9 
 
 
 
1.0 
 
 
 
(10)
 
 
 
1.0 
 
 
 
(10)
 
 
 
1.3 
 
 
 
(31)
 
 
Retail other1
 
10.4 
 
 
 
10.2 
 
 
 
 
 
 
9.7 
 
 
 
 
 
 
9.0 
 
 
 
16 
 
 
SME2
 
40.6 
 
 
 
40.0 
 
 
 
 
 
 
38.4 
 
 
 
 
 
 
32.1 
 
 
 
26 
 
 
Mid Corporates3
 
4.1 
 
 
 
4.4 
 
 
 
(7)
 
 
 
4.6 
 
 
 
(11)
 
 
 
5.3 
 
 
 
(23)
 
 
Corporate and Institutional3
 
46.0 
 
 
 
50.2 
 
 
 
(8)
 
 
 
55.0 
 
 
 
(16)
 
 
 
54.6 
 
 
 
(16)
 
 
Commercial Banking other
 
4.3 
 
 
 
4.6 
 
 
 
(7)
 
 
 
5.0 
 
 
 
(14)
 
 
 
5.2 
 
 
 
(17)
 
 
Wealth
 
0.9 
 
 
 
0.9 
 
 
 
— 
 
 
 
0.9 
 
 
 
— 
 
 
 
0.9 
 
 
 
— 
 
 
Central items
 
2.2 
 
 
 
2.5 
 
 
 
(12)
 
 
 
2.5 
 
 
 
(12)
 
 
 
1.7 
 
 
 
29 
 
 
Loans and advances to customers4
 
440.2 
 
 
439.2 
 
 
— 
 
 
440.4 
 
 
— 
 
 
440.4 
 
 
— 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer deposits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail current accounts
 
97.4 
 
 
 
91.7 
 
 
 
 
 
 
87.5 
 
 
 
11 
 
 
 
76.9 
 
 
 
27 
 
 
Commercial current accounts2,5
 
47.6 
 
 
 
45.7 
 
 
 
 
 
 
44.2 
 
 
 
 
 
 
34.9 
 
 
 
36 
 
 
Retail relationship savings accounts
 
154.1 
 
 
 
149.9 
 
 
 
 
 
 
148.5 
 
 
 
 
 
 
144.5 
 
 
 
 
 
Retail tactical savings accounts
 
14.0 
 
 
 
12.5 
 
 
 
12 
 
 
 
12.7 
 
 
 
10 
 
 
 
13.3 
 
 
 
 
 
Commercial deposits2,6
 
122.7 
 
 
 
132.9 
 
 
 
(8)
 
 
 
133.8 
 
 
 
(8)
 
 
 
127.6 
 
 
 
(4)
 
 
Wealth
 
14.1 
 
 
 
13.6 
 
 
 
 
 
 
13.5 
 
 
 
 
 
 
13.7 
 
 
 
 
 
Central items
 
0.8 
 
 
 
0.9 
 
 
 
(11)
 
 
 
0.9 
 
 
 
(11)
 
 
 
0.9 
 
 
 
(11)
 
 
Total customer deposits7
 
450.7 
 
 
 
447.2 
 
 
 
 
 
 
441.1 
 
 
 
 
 
 
411.8 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
871.3 
 
 
 
868.9 
 
 
 
— 
 
 
 
873.0 
 
 
 
— 
 
 
 
833.9 
 
 
 
 
 
Total liabilities
 
821.9 
 
 
 
819.4 
 
 
 
— 
 
 
 
824.1 
 
 
 
— 
 
 
 
786.1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
43.3 
 
 
 
43.4 
 
 
 
— 
 
 
 
42.8 
 
 
 
 
 
 
41.7 
 
 
 
 
 
Other equity instruments
 
5.9 
 
 
 
5.9 
 
 
 
— 
 
 
 
5.9 
 
 
 
— 
 
 
 
5.9 
 
 
 
— 
 
 
Non-controlling interests
 
0.2 
 
 
 
0.2 
 
 
 
— 
 
 
 
0.2 
 
 
 
— 
 
 
 
0.2 
 
 
 
— 
 
 
Total equity
 
49.4 
 
 
 
49.5 
 
 
 
— 
 
 
 
48.9 
 
 
 
 
 
 
47.8 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ordinary shares in issue, excluding own shares
 
70,812m
 
70,776m
 
— 
 
 
70,735m
 
— 
 
 
70,031m
 
 
 
1
Primarily Europe.
 
2
Includes Retail Business Banking.
 
3
Commercial Banking segmentation has been updated to reflect new client coverage model.
 
4
Excludes reverse repos. 

5
Primarily non-interest-bearing Commercial Banking current accounts.
 
6
Primarily Commercial Banking interest-bearing accounts.
 
7
Excludes repos.
GROUP CHIEF EXECUTIVE’S STATEMENT
 
The impact of the coronavirus pandemic on the people, businesses and communities in the UK and around the world in 2020 has been profound. Many countries, including the UK, have seen unprecedented levels of economic contraction as a result of lockdown measures, as well as comprehensive and co-ordinated Government support measures. In this environment, we remain absolutely focused on working with all our stakeholders to support our customers and ensure a sustainable recovery.
 
The Group’s successful ongoing transformation, continued investment and growing franchise strength positioned us well to face the pandemic. In response to the challenging economic environment, we provided around 1.3 million payment holidays on mortgages, loans, credit cards and motor finance products while we also set up dedicated phone lines for customers over 70 years old and for customers who are working on the frontline in the NHS. We are also providing significant support for our business clients, providing more than £31 billion of gross lending to small and medium sized businesses, including Government-backed lending. Within Insurance and Wealth, we have supported the NHS by providing free additional insurance cover to its workers and by alleviating pressure on GPs with a reduction in medical evidence required for insurance claims.
 
The Group has benefited from its multi-brand, multi-channel distribution model during the pandemic, as we have been able to continue serving customers through the UK's leading digital bank, the largest branch network in the UK and our telephony centres. I am particularly pleased with how quickly the Group adapted to the initial lockdown and how well our digital banking proposition has performed in a period of significantly heightened usage. Our infrastructure has been highly resilient, with around 90 per cent of our branches remaining open while our digital channels have performed well, attaining record levels of customer satisfaction despite significantly increased usage.
 
Once again I would like to express my gratitude to all of our colleagues for their resilience, dedication and hard work throughout 2020. Our people have retained their clear focus on supporting their customers and Helping Britain Prosper in very challenging circumstances. I am proud of everything the Group has done to support the UK economy in 2020. This would not have been possible without the exemplary dedication of our colleagues.
 
Given our clear UK focus, the Group’s financial performance is inextricably linked to the health of the UK economy and thereby the impact of the coronavirus pandemic. Significant uncertainties remain relating to the pandemic, the third national lockdown and the speed and efficacy of the vaccination programme. Nonetheless, the Group’s purpose, unique business model, competitive advantages and ambitious strategic evolution will ensure that it will be able to Help Britain Recover from the crisis whilst delivering long-term sustainable returns for our shareholders.
 
Financial performance
 
In the context of the pandemic, statutory profit after tax was £1.4 billion. This was 54 per cent lower than 2019 and earnings per share of 1.2 pence were down 66 per cent. Lower profits were significantly due to the impairment charge of £4.2 billion in 2020 (2019: £1.3 billion), primarily reflecting the deterioration in the economic outlook. Trading surplus of £6.4 billion was down 27 per cent on 2019, reflecting continued revenue pressures partly offset by lower total costs. Our relentless focus on cost efficiencies has led to a 4 per cent reduction in operating costs despite absorbing additional coronavirus-related expenses during 2020.
 
Loans and advances were broadly in line with prior year at £440.2 billion. Growth in the open mortgage book of £7.2 billion, including £10.2 billion in the second half of the year, and £11.1 billion (£12.4 billion approved at 12 February 2021) of Government-backed lending, more than offset lower unsecured Retail balances and other Corporate and Institutional lending, as well as the continued reduction in the closed mortgage book.
 
The Group’s capital position remains strong with a CET1 ratio of 16.4 per cent before allowing for ordinary dividends and 16.2 per cent after dividends, both ahead of the Board’s ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent. Given our strong capital position at the year end and the regulator’s clarification that banks may resume capital distributions, the Board has recommended a final ordinary dividend of 0.57 pence per share, the maximum allowed under the Prudential Regulation Authority's temporary framework on 2020 distributions.
 
CHIEF EXECUTIVE’S STATEMENT (continued)
 
Strategic progress
 
The Group’s previous three-year strategic plan was launched in February 2018 and we have now achieved our ambitious target of transforming the Group for success in a digital world by investing £2.8 billion across our four strategic pillars.
 
Leading customer experience
 
In 2020, we successfully built on our track record of improving customer propositions, even in the context of our focus on supporting our customers and ensuring operational resilience during the coronavirus crisis. The pandemic has accelerated the shift towards digital for everyday banking needs. We are the largest digital bank in the UK and have seen our digitally-active customer base increase to 17.4 million customers, while our active mobile app users have increased by nearly two million in 2020 to 12.5 million customers. At the same time, we have continued to enhance our digital propositions, with a focus on convenience and control. As a consequence, we have seen our digital customer satisfaction scores improve to a year end record high of 67.
 
Alongside creating the UK’s leading digital bank, we have maintained the UK’s largest branch network. We have managed to keep around 90 per cent of our branches open during the coronavirus pandemic, using appropriate safeguarding measures. In addition, we have maintained our ATM network at over 95 per cent capacity and have set up dedicated telephone lines for our customers over 70 years old and those working on the frontline in the NHS.
 
Digitising the Group
 
We have accelerated the digitisation of the Group by progressively modernising and simplifying the IT architecture, continuing to digitise customer journeys and migrating applications to private cloud. We have now digitised 78 per cent of the Group’s cost base, ahead of our GSR3 target of 70 per cent. With cumulative technology spend of more than £4 billion over GSR3, our ongoing focus on transforming the business and investing in digital enabled us to respond effectively to the accelerated shift to digital channels brought about by the coronavirus pandemic. The proportion of products originated via digital channels increased significantly in 2020, up 10 percentage points to 85 per cent, our highest level to date.
 
Despite this significant progress, we are only just starting to see the transformation that technology is enabling. Customers will increasingly expect to interact with us in a more effective, agile and personalised way. To compete effectively against new entrants and respond to these evolving customer expectations, we need to continue to transform how we work, replace some of our legacy systems and enhance our use of data across the business. Some of this development will be internal but we will also increasingly use partnerships with specialist technology and fintech providers.
 
Maximising Group capabilities
 
We have actively supported our Commercial Banking clients through the pandemic, exceeding our £6 billion target for increasing net lending to start-ups, SME and Mid Market clients over the last three years. Outside of our support for the Government lending schemes, in 2020 we also achieved our £18 billion commitment for gross lending to UK businesses.
 
In 2020 we increased the number of customers with access to our unique Single Customer View capability by c.1.5 million to c.6.5 million. We also expanded the scope of Single Customer View to include Halifax Share Dealing so that customers with this functionality are now able to view their pensions and investment portfolios alongside their banking products. We have seen cumulative growth in open book assets under administration of £46 billion, or 69 per cent, over the GSR3 period to £113 billion, only narrowly missing the £50 billion growth target despite challenging market conditions.
 
 
 
GROUP CHIEF EXECUTIVE’S STATEMENT (continued)
 
Transforming ways of working
 
The coronavirus pandemic is having significant implications for our colleagues, in both their personal and professional lives. These include accelerating the transition to new ways of working for the majority of the Group and accentuating the skills that we have sought to develop over the course of GSR3. Since March 2020, more than 50,000 colleagues (over 70 per cent of our workforce) have worked remotely and we have increased our adoption of remote working tools to greatly increase collaboration and support more agile working practices.
 
In 2020 we delivered an additional 2.1 million training hours to develop the skills for the future, taking the total to 5.3 million hours over the course of GSR3, ahead of our target. In addition, the proportion of change programmes delivered using agile methodologies has increased to 65 per cent over the course of GSR3, ahead of our target of 50 per cent.
 
Our 2020 Colleague Survey received almost 50,000 responses and showed positive increases in all main areas, including overall engagement up 7 percentage points to 81 per cent. This reflects the highest level since measurement started in 2011 and is above the UK high-performing norm.
 
Strategic Review 2021
 
Today's environment continues to evolve and provide new challenges. The macroeconomic environment remains uncertain, whilst we are witnessing increasing societal expectations, an accelerated shift to digital and new technology capabilities in the context of the pandemic driving a step change in ways of working.
 
Throughout 2020 the management team, in conjunction with the Board, have worked on developing an evolution of our strategy to address these issues. We have made significant progress in recent years, leveraging the unique strengths and assets of the Group, including our purpose driven and customer focused business model, our low risk approach to business, our market leading efficiency and our leading multi-channel propositions, including the largest digital bank and branch network in the UK. This has created the platform for Strategic Review 2021, the next stage of our journey.
 
The Group has a clear purpose of Helping Britain Prosper, which drives our strategy. Given the pandemic and the challenging macroeconomic environment, our focus for 2021 is Helping Britain Recover. This is in the context of delivering co-ordinated growth opportunities by building the UK’s preferred financial partner for personal customers and the best bank for business. Delivery of the Group's customer focused ambitions in our two main segments, will be underpinned by the enhancement of four core capabilities within our business. These capabilities focus on delivering a modernised technology architecture, building an integrated payments platform, creating a data-driven organisation and implementing reimagined ways of working. Strategic execution in 2021, supported by increased investment, is underpinned by long-term strategic vision in these customer segments and capabilities.
 
Helping Britain Prosper
 
We recognise that the focus of the Group's purpose must evolve in response to the current environment with changing societal and customer needs and expectations. Given our focus on the UK, we are dedicated to helping our customers, clients, colleagues and communities get through the coronavirus pandemic and rebuild livelihoods, whilst delivering long-term sustainable success for shareholders. Our core values underpin our purpose to Help Britain Prosper. With this in mind, our focus for the near-term will be to Help Britain Recover.
 
We are committed to supporting a sustainable recovery which supports all of the people and regions in our society. In 2021, we will Help Britain Recover by concentrating on five key areas where we can make the most difference, all of which are embedded in our business strategy. This is discussed further in the Strategic Review 2021 section, below.
 
Help rebuild households’ financial health and wellbeing
 
Support businesses across the UK to recover, adapt and grow
 
Expand availability of affordable and quality homes
 
Accelerate the transition to a low carbon economy
 
Build an inclusive society and organisation
 
 
GROUP CHIEF EXECUTIVE’S STATEMENT (continued)
 
The Group is committed to helping the UK transition to a sustainable low carbon economy. We continue to make progress in implementing our financed emissions reduction ambition on the path to net zero by 2050 or sooner, working with customers, Government and the market to help reduce the emissions we finance. In so doing, we are also focusing on enhancing our green finance products and services. This includes supporting renewable energy projects since the start of 2018 that could power the equivalent of 10.1 million homes, more than doubling the number of electric vehicles we finance, raising around £2.9 billion funding in green and sustainable bonds for our clients since 2016 and offering pensions to our customers and colleagues with sustainable investment choices.
 
We are working hard to tackle social disadvantage across Britain. In 2020, the Group’s four independent charitable Foundations received £25.5 million of funding, enabling them to continue their work in supporting nearly 2,800 charities. These charities tackle vital issues such as domestic abuse, mental health, modern slavery and human trafficking, and employability. The Group has committed to maintain its £25.5 million funding to the Foundations in 2021, ensuring that these charities can secure a more certain future during these difficult times and safeguard their important work.
 
Our ongoing commitment to helping people save for the future is key to developing social mobility and we have increased the open book assets that we hold on behalf of customers in retirement and investment products by £46 billion since the start of 2018.
 
As the UK's largest mortgage lender, we recognise the vital importance of helping Britain get a home. We have provided close to £9 billion of finance for the social housing sector and lent c.£40 billion to first-time buyers over 2018 to 2020.
 
Building capability and digital skills was more important in 2020 than ever, given the need for customers to access services during periods of lockdown. We have now facilitated digital training for 1.8 million individuals, SMEs and charities since the start of 2018 and delivered over 12,500 devices to customers, enabling them to safely book medical appointments, connect with family and access internet banking facilities.
 
Supporting businesses to start up and to grow is fundamental to Helping Britain Recover. We have now helped over 265,000 businesses start up since the beginning of 2018 and trained over 1,200 apprentices through our investment in the Lloyds Bank Advanced Manufacturing Training Centre since the beginning of 2018.
 
The Group launched The Big Conversation: Helping Britain Recover in September 2020, a national programme of events which brought together more than 900 businesses, community members, policy makers and subject-matter experts across the UK’s nations and regions to explore how we can together help the UK recover from the impact of coronavirus and build a more resilient and sustainable economy.
 
We are championing Britain’s diversity and in 2020 launched our Race Action plan. This makes the Group the first FTSE 100 company to make such public commitments, including a new goal to specifically increase Black representation in senior roles to align with the overall UK labour market. We also published our first Ethnicity Pay Gap Report, made progress on gender diversity and published our annual Gender Pay Gap Report.
 
Further information on our approach to environmental, social and governance issues can be found in our 2020 Environmental, Social and Governance Report, available on the Group’s website.
 
Management change
 
It is with mixed emotions that I will step down as Group Chief Executive at the end of April. It has been a great honour to work alongside all of my colleagues and achieve the remarkable transformation of the past ten years, but now is the right time to move on, following my announcement last July.
 
Charlie Nunn will be the next Group Chief Executive. He was previously the Global Chief Executive of Wealth and Personal Banking at HSBC and has had a long and successful career in financial services. Charlie will find a warm welcome at Lloyds Banking Group and a deep commitment from all of our people to deliver on our purpose and to Help Britain Recover. I am sure that he will find his time here as fulfilling and fascinating as I have done and I wish him the very best.
 
GROUP CHIEF EXECUTIVE’S STATEMENT (continued)
 
Outlook
 
The impact of the coronavirus pandemic on the people, businesses and communities in the UK and around the world continues to be profound. Significant uncertainties remain, specifically relating to the pandemic and the speed and efficacy of the vaccination programme. I remain confident that the Group’s clear purpose, unique business model, significant competitive advantages and the customer focused evolution of our strategy we have announced in Strategic Review 2021 will ensure that the Group is able to Help Britain Recover and in so doing, help transition to a sustainable economy.
 
The Group faces the future with confidence. This is reflected in our guidance for 2021, based on our current macroeconomic assumptions:
 
Net interest margin to be in excess of 240 basis points
 
Operating costs to reduce further to c.£7.5 billion
 
Net asset quality ratio to be below 40 basis points
 
Improving profitability with statutory return on tangible equity of between 5 and 7 per cent (on the new basis)
 
Risk-weighted assets in 2021 to be broadly stable on 2020
 
Intention to accrue dividends and resume progressive and sustainable ordinary dividend policy
 
 
I would like to again express my thanks to all of my colleagues, without whom the Group's customer focus, resilient financial performance and significant strategic transformation, achieved in very challenging circumstances, would not have been possible.
 
 
 
 
 
 
STRATEGIC REVIEW 2021
Accelerating the Group’s transformation to become the UK’s preferred financial partner
 
Lloyds Banking Group is a customer focused, sustainable, efficient and low risk UK financial services leader with the clear purpose of Helping Britain Prosper. The next phase of our strategy, Strategic Review 2021, is focused on Helping Britain Recover and building the UK’s preferred financial partner for personal customers and the best bank for business.
Strategic Review 2021 will deliver co-ordinated growth opportunities in our two core customer segments, supported by enhanced capabilities in four areas
 
  Preferred financial partner for personal customers, through leveraging our unique competitive advantages to significantly deepen customer relationships
 
  Best bank for business, through building a leading digital SME proposition, with a disciplined and strengthened business for Corporate and Institutional clients
 
  Further develop and leverage our core capabilities, including delivering a modernised technology architecture, building integrated payment solutions, creating a data driven organisation and implementing reimagined ways of working
 
Clear execution outcomes for the coming year are outlined for all these areas and underpinned by long-term strategic vision. Strategic Review 2021 will thus enable the Group to deliver revenue generation and diversification whilst unlocking further efficiency gains, within our low risk and capital efficient business. The Group's purpose, unique business model and ambitious strategy will allow us to Help Britain Recover and deliver long-term sustainable returns for our shareholders.
 
 
2020 was an unprecedented year for both society and the economy, given the impact of the coronavirus pandemic. Looking forward, we continue to expect significant challenges. We have a strategic imperative to help restore personal and business finances to health across the UK in the context of increasing societal expectations of financial services providers and a continued challenging macroeconomic environment. The pandemic has also driven an accelerated shift to digital and new technology capabilities, with increased competition, alongside lasting changes to ways of working.
 
Developed in conjunction with the Board, Strategic Review 2021 builds on our core capabilities and the strong foundations from previous strategic reviews, while reinforcing our customer focus. We have made significant progress in recent years, leveraging the unique strengths and assets of the Group, including our purpose driven and customer focused business model, our low risk approach to business, our market leading efficiency and our leading multi-channel propositions, including the largest digital bank and branch network in the UK. This has created the platform for Strategic Review 2021, the next step of our journey.
 
In delivering the evolution of our strategy, we intend to Help Britain Recover alongside delivering co-ordinated growth opportunities by building the UK’s preferred financial partner for personal customers and the best bank for business. Delivery of the Group's customer focused ambitions will be underpinned by the enhancement of four core capabilities behind our business. Specifically, these are delivering a modernised technology architecture, building an integrated payments platform, creating an efficient data-driven organisation and implementing reimagined ways of working. Each of these key initiatives is outlined below.
 
In meeting our objectives, Strategic Review 2021 brings together clear execution outcomes for 2021, underpinned by our long-term strategic vision. Our competitive cost advantage enables us to maintain high levels of strategic investment and we will invest c.£0.9 billion in 2021 to support these initiatives and the long-term strength of the business. Our plans, along with the key performance measures outlined below, will ensure we meet the needs of customers, colleagues and communities, whilst delivering sustainable value to shareholders.
 

 
STRATEGIC REVIEW 2021 (continued)
 
Helping Britain Recover
 
Lloyds Banking Group’s purpose is to Help Britain Prosper. With our new strategy, we will further embed our purpose across all of our activities. This will ensure we contribute to creating an environmentally sustainable and inclusive future for the UK and by doing so, build a successful and sustainable business.
 
The global pandemic will have lasting social and economic effects on the United Kingdom. Its impact has been felt by everyone, whether through financial hardship, reduced choices, mental distress or personal loss. Our focus will therefore be to Help Britain Recover, and we are committed to working with others in five areas where we can make the most difference. These objectives are embedded in our business areas.
 
We will help rebuild households’ financial health and wellbeing
 
We remain committed to supporting our customers to become financially resilient and to plan and save for the future. We will provide practical support, and flexibility where possible, to help our customers facing financial difficulty get back on track and help as many customers as we can to stay in their own home. In 2021, we will:
 
Have over 6,500 colleagues trained to support customers to build their financial resilience
 
Maintain our commitment to supporting mental health and become accredited as ‘Mental Health Accessible’ for Halifax and Bank of Scotland, in addition to the existing Lloyds Bank accreditation
 
Partner with independent debt advice organisations to ensure customers have access to practical support
 
 
We will support businesses to recover, adapt and grow
 
We will be by the side of businesses as they recover, supporting UK business to adapt and grow, and create quality jobs across the regions of the UK. In 2021, we will:
 
Develop appropriate recovery plans for clients, supported by 1,100 business specialists in communities across Britain
 
Support at least 75,000 UK businesses to start up in 2021
 
Help at least 185,000 small businesses boost their digital capability through our Regional Academies, partnerships and digital mentoring
 
 
We will expand the availability of affordable and quality homes
 
As the UK recovers from the pandemic, we aspire to a UK in which all households have access to stable, affordable and safe homes in places they want to live. We are committed to broadening access to home ownership and exploring opportunities to increase our support to the UK rental sector. In 2021, we will:
 
Provide £10 billion of lending to help people to buy their first home in 2021, and lead a national conversation on how more households can access the housing market
 
Provide £1.5 billion of new funding support, including £500 million in ESG-linked funding, in support of the social housing sector
 
Support the creation of national sustainability standards for house-building finance and assess the energy retrofit requirements of over 200,000 homes in the social housing sector
 
 
We will help accelerate the transition to a low carbon economy
 
With recovery comes an opportunity to build a greener future, creating new businesses and jobs for the future. We want to play our part in supporting the transition to net zero and are committed to working with customers, Government and the market to help reduce the carbon emissions we finance by more than 50 per cent by 2030 on the path to net zero by 2050 or sooner. In 2021, we will:
 
Expand the funding available under our green finance initiatives from £3 billion to £5 billion in the year, to support businesses to transition
 
Launch a new goal to ensure our own operations are net zero by 2030
 
Become the first major pensions and insurance provider to target halving the carbon footprint of investments by 2030 on the path to net zero by 2050
 
Introduce a flagship fossil fuel-free fund to support green growth, allowing pension savers to choose to invest in UK companies pursuing a positive environmental impact
 
 
STRATEGIC REVIEW 2021 (continued)
 
We will help build an inclusive society through our financial services offering and by creating an organisation that reflects the society we serve
 
We believe that the economic and social recovery should be one that’s truly inclusive and involves communities across the UK’s nations and regions. In 2021, we will:
 
Set new aspirations for a leadership team that reflects the society we serve, of 50 per cent women, 3 per cent Black and 13 per cent Black, Asian and Minority Ethnic colleagues in senior roles by 2025
 
Maintain our £25.5 million contribution to our independent charitable Foundations, with the Lloyds Bank Foundation for England and Wales focusing 25 per cent of its support on Black, Asian and Minority Ethnic led charities
 
Support regional regeneration, including launching the ‘Regional Housing Growth Initiative’, helping small and medium sized housebuilders create more homes in the North of England, the Midlands and the regions of Scotland
 
Support financial inclusion by providing banking for groups of people experiencing homelessness, financial abuse or victims of modern slavery and supporting the prisoner banking programme
 
 
Preferred financial partner for personal customers
 
We are the UK’s largest financial services provider, holding a relationship with c.50 per cent of the UK adult population and 17.4 million digital users. We have a unique opportunity to meet more of our customers’ broader financial needs and improve their overall financial resilience throughout their lifetime, with personalised products and services that are increasingly relevant to them. By leveraging our unique capabilities we will significantly deepen customer relationships across our multiple brands in banking, insurance and wealth, thereby diversifying the Group's income. During 2021, investment will focus on:
 
Enabling financial resilience and wellbeing through dedicated customer assessment and support
 
Deepening relationships with priority segments through enhanced journeys and new capabilities
 
Digitising to reduce cost to serve
 
 
Measures of success in 2021 include, the Group's expectations of net mortgage open book growth as well as maintenance of all channels' record net promoter scores. Beyond 2021, the Group expects to increase the number of priority customers with existing needs met by both Retail and Insurance and Wealth and to achieve £25 billion in net new money in open book assets under administration by 2023. We continue to expect Schroders Personal Wealth to be a top 3 financial planning business, although this is now expected by 2025.
 
Best bank for business
 
We have a unique position in the UK as an integrated financial services provider with active relationships with over 60 per cent of the FTSE100, while we have increased our SME lending market share by 6 percentage points to 19 per cent, since 2010. We will both address the short-term financial challenges facing our customers and build longer-term resilience, with products and services relevant to their changing needs. We intend to improve our digital SME proposition and continue building a disciplined and strengthened Corporate and Institutional client franchise, delivering new and capital-efficient revenue streams. During 2021, investment will focus on:
 
Automating recovery support and financing the green transition
 
Enhancing SME channel and service with increased digitisation
 
Strengthening Corporate and Institutional product capabilities
 
 
As a result, in 2021 we expect to see a greater than 50 per cent increase in SME products originated via a digital source and a profitable improvement in the customer share of markets products for core clients. In the longer-term, the Group expects to see a 5 point increase in the SME and Retail Business Banking digital NPS by 2023, while we will continue to progress our efforts to reduce the carbon emissions that we finance by more than 50 per cent by 2030.
 
STRATEGIC REVIEW 2021 (continued)
 
Modernised technology architecture
 
In order to retain our leading UK customer position and our cost leadership position in an increasingly competitive operating environment, we must continue modernising our technology infrastructure. This aims to deliver increased agility and responsiveness to customer trends, while supporting our broader strategic priorities around customer propositions and operational efficiency. Under GSR3 we spent over £4 billion on technology and there is an opportunity to build on this by developing an efficient, scalable and resilient cloud-based architecture, supporting our business transformation. During 2021, investment will focus on delivering efficiency gains and improved customer experience through:
 
Further broadening self service capabilities through digitisation
 
Proving and leveraging public cloud to create the foundations for future technology architecture
 
Simplifying the Group's legacy estate through technology optimisation
 
 
Based on investment in 2021, we will deliver further enhancements to our digital offerings in order to maintain our record mobile app NPS. This will be supported by doubling the volume of releases on our mobile app, with investments in cloud reducing the time taken to deliver new features. Our investment in technology is a precursor to simplifying our estate. We expect to migrate around 30 per cent and decommission 20 per cent of the Group’s technology applications and services by the end of 2023.
 
In addition, the Group is increasing technology research and development investment in order to assess the customers and business benefits that next-generation technologies could have on the organisation. This will be supported by a number of strategic partnerships with specialist partners such as Google, Microsoft and Thought Machine. In 2021, we will safely migrate c.400,000 customer accounts to a pilot of the new bank architecture and in so doing reduce the number of applications associated with the legacy architecture of this portfolio by c.40 per cent. Our performance against these targeted outcomes will determine the pace and scale with which we deploy these technologies across the Group, with significant medium-term opportunities including transformed customer experiences and significantly improved operational agility and efficiency. As a result of this investment, the Group expects restructuring costs to be higher in 2021 than in 2020.
 
Integrated payments provider
 
The Group is the largest card issuer and one of the largest payments providers in the UK with meaningful market shares across debit and credit card spend. We have also developed a new cash management and payments (CM&P) platform for corporate clients, with leading API functionality during GSR3. Between 2017 and 2020, customers significantly increased their use of online shopping, reflecting the quick, convenient and secure experience it provides. As a result of this change, our mix of e-commerce debit spend increased by 13 percentage points to 46 per cent. We have the opportunity to capture this growth opportunity and defend our franchise in the face of increased competitive disruption, via development of our multi-channel payments proposition. There is also a significant opportunity to grow our merchant acquiring business, which has a market share 14 percentage points below our SME primary relationship business. To address these opportunities and further diversify the Group's revenues, we aim to enhance our payments business, leading in the integration of services, channels and data. During 2021, investment will focus on:
 
Enhancing cards e-commerce and international payments experience to drive increased customer usage
 
Building capability and integration of the new CM&P platform
 

Developing our merchant services proposition with improved distribution capabilities
 
 
 
This investment will support the Group’s 2021 targets of maintaining its leading share of card spend and delivering a 3-fold increase in corporate clients using the new CM&P platform. Over the longer-term, the Group expects to grow its share of credit card spend and achieve new client growth of 15 to 20 per cent per annum in merchant services.
 
 
 
 
STRATEGIC REVIEW 2021 (continued)
 
Data-driven organisation
 
Our franchise, reach and the progress of the past few years give us unique data, scale and capabilities in the UK which we aim to harness, leverage and further develop. Our customers trust us to look after their money, but also after their most confidential data. We are fully committed to keeping them safe and to use their data only to offer more relevant, personalised and improved propositions. We will thereby leverage our unique data proposition to create value for our customers while reducing risk and realising efficiency gains. During 2021, investment will focus on:
 
Expanding the use of data to enable more personalised customer and business propositions
 
Extending machine learning capabilities to drive faster and more accurate decisions
 
Delivering organisational reform of data strategy and management, supporting collaboration
 
 
As examples of measures of success, the Group expects a 50 per cent return on investment in the first year from its investment in advanced analytics. The investment in data will also enable the Group to increase fraud detection rates by at least 10 per cent based on the expansion of machine learning. Further, the Group is targeting a significant increase in the proportion of existing customer needs met using advanced data and analytics, including for example, a greater than 20 per cent increase in home insurance needs met through our direct channels, alongside increases in other products in the longer-term.
 
Reimagined ways of working
 
Our people continue to be our most significant competitive advantage and crucial to the success of our business. The pandemic has accelerated trends in employee expectations and the shift towards more flexible working. We made significant investment in our colleagues’ skills, development and experience during GSR3. In Strategic Review 2021 we must further evolve our colleague proposition, transform our offices to deliver a sustainable and efficient workspace driving collaboration and innovation and enable our colleagues to develop skills of the future. This must be underpinned by a purpose-led and inclusive culture. During 2021, investment will focus on:
 
Further building our purpose-led culture through refreshed values and behaviours
 
Delivering sustainable workplace solutions, including a reduced office footprint
 
Building career pathways to attract and retain a more diverse, skilled and future ready workforce
 
 
Our measures of success include, in 2021 the Group maintaining its leading employee engagement index score. Also in 2021, we intend to achieve an 8 per cent reduction in office space, leading to around a 20 per cent cumulative reduction by 2023. By 2025, we aspire to having 50 per cent of senior roles held by women, 3 per cent held by Black colleagues and 13 per cent held by Black, Asian and Minority Ethnic colleagues.
 
Summary
 
Together these initiatives constitute Strategic Review 2021 and mark the next stage of our strategic journey. The Group’s core purpose of Helping Britain Prosper remains unchanged, but this stage of our strategy is focused on Helping Britain Recover, in areas where we can make the most difference. Strategic Review 2021 is fully aligned to our purpose. The strategy will unlock co-ordinated growth opportunities across the Group’s core business areas, supported by significant targeted investment to enhance key capabilities. Clear execution outcomes for the coming year are outlined and underpinned by long-term strategic vision. Strategic Review 2021 will thereby enable the Group to deliver revenue generation and diversification whilst unlocking further efficiency gains, within our low risk and capital efficient business. The Group's purpose, unique business model and ambitious strategy will allow us to Help Britain Recover and deliver long-term sustainable returns for our shareholders.
 
 
 
SUMMARY OF GROUP RESULTS
 
Financial performance reflects the challenging economic environment
 
The Group’s statutory profit before tax for the year was £1,226 million with statutory profit after tax of £1,387 million. Both measures were impacted by the significant impairment charge taken during the year, the majority of which was recognised during the first half and reflected the Group’s revised economic outlook for the UK, following the outbreak of the coronavirus pandemic. In the fourth quarter, statutory profit before tax was £792 million and statutory profit after tax was £680 million, both benefiting from improved business conditions and a reduced impairment charge.
 
Trading surplus for the year was £6,440 million, a reduction of 27 per cent on 2019, reflecting the challenging external environment. Net income was down 16 per cent to £14,404 million, driven by both lower net interest income and lower other income. The Group has maintained its focus on delivering cost savings, with total costs down 4 per cent, while continuing to invest in the Group's digital propositions.
 
The Group’s underlying profit was £2,193 million for the year, compared to an underlying profit of £7,531 million in 2019, reflecting lower net income and the significant impairment charge of £4,247 million taken in 2020.
 
The Group’s balance sheet remains very strong. Loans and advances to customers were flat on prior year at £440 billion. This includes an increase in open mortgage book net lending of £7.2 billion in the year, with £6.7 billion growth in the fourth quarter, reflecting the strength of the UK housing market. Total customer deposits increased by £38.9 billion in the year, to £450.7 billion. Retail current account growth was £20.5 billion in 2020 and ahead of the market, driven by lower levels of customer spending during the pandemic and inflows to the Group’s trusted brands. Commercial Banking current account growth also illustrates the Group's strong customer relationships and a proportion of the Government-backed lending being retained on deposit by SME customers.
 
The Group’s CET1 capital ratio post dividend increased 242 basis points over the year, from 13.8 per cent (on a pro forma basis) to 16.2 per cent, or 16.4 per cent pre dividend accrual.
 
Net income
 
 
2020
 
 
 
2019
 
 
 
Change
 
 
£m
 
 
 
£m
 
 
 
%
 
 
 
 
 
 
 
 
 
Net interest income
 
10,773 
 
 
 
 
12,377 
 
 
 
 
(13)
 
 
Other income
 
4,515 
 
 
 
 
5,732 
 
 
 
 
(21)
 
 
Operating lease depreciation
 
(884)
 
 
 
 
(967)
 
 
 
 
 
 
Net income
 
14,404 
 
 
 
 
17,142 
 
 
 
 
(16)
 
 
 
 
 
 
 
 
 
 
Banking net interest margin
 
2.52%
 
 
 
2.88%
 
 
 
(36)bp
 
Average interest-earning banking assets
 
£435.0bn
 
 
 
£434.7bn
 
 
 
— 
 
 
 
Net income of £14,404 million was 16 per cent lower than in the prior year, reflecting both lower net interest income and lower other income in the period, partially offset by a decrease in operating lease depreciation.
 
Net interest income of £10,773 million was down 13 per cent, driven by a reduction in the banking net interest margin and stable average interest-earning banking assets. The net interest margin was down 36 basis points to 2.52 per cent. This reflected the lower rate environment, actions taken during the year to support customers and a change in asset mix, largely as a result of reduced levels of customer activity and demand during the coronavirus pandemic. The net interest margin in the fourth quarter of 2.46 per cent, up 4 basis points on the third quarter, reflected the positive impact of deposit repricing and improved mortgage pricing, together with reduced funding costs, partially offset by lower income from the Group’s structural hedge.
 
In 2021, based on current economic assumptions, the Group expects a net interest margin in excess of 240 basis points.
 
SUMMARY OF GROUP RESULTS (continued)
 
The Group manages the risk to its earnings and capital from movements in interest rates centrally by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 31 December 2020 the Group’s structural hedge had an approved capacity of £210 billion (increased from the prior year reflecting account management and core deposit growth in 2020), a nominal balance of £186 billion (31 December 2019: £179 billion) and a weighted-average duration of around two and a half years (31 December 2019: around three years). The Group generated £2.4 billion of gross income from the structural hedge balances in 2020 (2019: £2.7 billion). In 2021, based on current economic assumptions, the Group expects c.£60 billion of maturities and c.£400 million lower income from the structural hedge, with lower maturities in 2022 and 2023.
 
Average interest-earning banking assets were stable compared to prior year at £435 billion, with growth due to Government-backed lending to support business clients through the coronavirus crisis, open mortgage book growth and the full impact of the 2019 Tesco mortgage book acquisition. This was offset by lower balances in the closed mortgage book and in credit cards, as well as reductions in revolving credit facilities (RCFs) and the continued optimisation of the Corporate and Institutional book within Commercial Banking. Average interest-earning banking assets in the fourth quarter increased marginally to £437 billion as the Group continued to benefit from strong growth in the open mortgage book (lending balances up £6.7 billion in the fourth quarter), offset by further RCF reductions in Commercial Banking. The Group expects average interest-earning assets in 2021 to be flat to modestly higher than in 2020.
 
Other income of £4,515 million in 2020 was 21 per cent lower than in 2019 reflecting lower levels of customer activity across the Group’s main business lines, largely due to the coronavirus pandemic, combined with an adverse impact from assumption changes in Insurance and Wealth and lower non-recurring items. Within Retail, other income fell as a result of reduced customer spending and the continuing impact of a lower Lex fleet size. Commercial Banking saw lower transaction banking income as a consequence of coronavirus-related activity levels, with resilience in markets income. Insurance and Wealth income was lower than the prior year, impacted by reduced new business given the effects of the pandemic, the non-recurrence of c.£140 million of new business income associated with workplace pensions auto-enrolment benefits in 2019 and £60 million of negative methodology and assumption changes in 2020 versus £336 million of positive assumption changes, including the benefit of the change in investment management provider in 2019. In addition, across the Group a £77 million charge was incurred as a consequence of the response to the Asset Management Market Review, largely incurred in Insurance and Wealth. Income associated with the Group's equity investments business, including Lloyds Development Capital, was £281 million (2019: £341 million), with £166 million recognised in the fourth quarter.
 
Other income includes a gain of £149 million (2019: £185 million) on the sale of gilts and other liquid assets. 2019 also benefited from the non-recurrence of a £50 million performance related earn-out following the sale of Vocalink.
 
Operating lease depreciation reduced to £884 million (2019: £967 million) as a result of the continued impact of a smaller Lex fleet size, combined with the benefit of resilient used car prices.
 
 
 
 
SUMMARY OF GROUP RESULTS (continued)
 
Total costs
 
 
2020
 
 
2019
 
 
Change
 
 
£m
 
 
£m
 
 
%
 
 
 
 
 
 
 
Operating costs
 
7,585
 
 
7,875
 
 
 
 
Remediation
 
379
 
 
445
 
 
15 
 
 
Total costs
 
7,964
 
 
8,320
 
 
 
 
 
 
 
 
 
 
Business as usual costs
 
5,233 
 
 
 
5,478 
 
 
 
 
 
 
 
 
 
 
 
Cost:income ratio
 
55.3%
 
 
48.5%
 
 
6.8pp
 
 
Total costs of £7,964 million were 4 per cent lower than in 2019, driven by continued reductions in operating costs and lower levels of remediation. Operating costs of £7,585 million were 4 per cent lower, in the context of continued investment in the Group’s digital transformation. Business as usual costs were down 4 per cent, driven by ongoing cost management as well as lower remuneration and reduced travel costs, partially offset by increased pension costs and coronavirus-related expenses.
 
Total investment spend in 2020 amounted to £2.0 billion, down 14 per cent on 2019. This included £0.9 billion relating to strategic investment, taking the cumulative strategic spend since the start of GSR3 to £2.8 billion. Although investment spend continues to be managed carefully in response to the current operating environment, the Group has continued to prioritise technology and digital projects and will continue to invest in the long-term success of the business.
 
During 2020 the Group capitalised c.£1.3 billion of investment spend, of which c.£0.9 billion related to intangible assets. Total capitalised spend was equivalent to c.60 per cent of above the line investment, in line with prior periods.
 
Despite the continued delivery of cost savings, the lower net income over the period meant that the Group’s cost:income ratio of 55.3 per cent was higher than in 2019.
 
The Group now expects operating costs to reduce further to c.£7.5 billion in 2021.
 
Remediation charges were £379 million (2019: £445 million) and down 15 per cent on 2019, including additional charges of £125 million in the fourth quarter relating to pre-existing programmes. During the year additional charges, both redress and operational costs, of £159 million, have been taken in relation to HBOS Reading, as well as further costs in relation to arrears handling, packaged bank account complaints and various settlements in relation to historic claims. A number of programmes are now close to conclusion. Others, such as HBOS Reading, including the conclusion of the recommendations from the Cranston Review, are still ongoing and further costs are likely to be incurred.
 

 
SUMMARY OF GROUP RESULTS (continued)
 
Impairment
 
The impairment charge for the year was £4,247 million, an increase of £2,956 million compared to 2019. This was primarily driven by the charge in the first half reflecting potential future losses in light of the Group's revised economic outlook for the UK as a consequence of the coronavirus pandemic. The charge of £128 million taken in the fourth quarter was below typical pre-crisis levels and reflected the relative economic stability in the quarter.
 
The Group’s net asset quality ratio was 0.96 per cent compared with 0.29 per cent in 2019, largely driven by increases in expected credit loss (ECL) allowance in the first half of the year. Excluding the updated economic assumptions and coronavirus-impacted restructuring cases, the asset quality ratio would not have been materially higher than in 2019.
 
Charges of £403 million were taken in the year on restructuring cases whose recovery strategies were affected more immediately by the coronavirus pandemic. Aside from these cases, observed credit performance has remained stable, in part as a result of the continued effectiveness of Government support schemes and payment holidays extended by the Group. Additional funding has been made available by those schemes to businesses impacted by lockdown restrictions which has prevented a more material increase in business failures and unemployment.
 
Observed credit quality remains stable with the flow of assets into arrears, defaults and write-offs remaining at low levels. The Group has built a significant ECL allowance in the expectation that when the support schemes unwind, insolvencies and unemployment will consequently increase. The Group's total ECL allowance across all asset classes has increased from £4.2 billion to £6.9 billion in the year, with the majority of the increase in provisions established for up to date assets in Stage 1 and Stage 2. This increase was established in the first half of 2020 in response to changes in the Group’s economic outlook. Subsequent improvements to the economic outlook are predicated upon coronavirus vaccine developments which have emerged, reversing some of the ECL increases in the second half, including in the fourth quarter.
 
Overall the Group’s loan portfolio continues to be well-positioned, reflecting a prudent through-the-cycle approach to credit risk and high levels of security. The Retail portfolio is heavily weighted toward high quality mortgage lending where low loan-to-value ratios provide security against potential risks. The prime consumer finance portfolio also benefits from high quality growth in past periods in the context of the Group’s prudent risk appetite. The commercial portfolio reflects a diverse client base with relatively limited exposure to the most vulnerable sectors so far affected by the coronavirus outbreak. Within Commercial Banking, the Group’s management of concentration risk includes single name and country limits as well as controls over the overall exposure to certain higher risk and vulnerable sectors or asset classes.
 
 
 
SUMMARY OF GROUP RESULTS (continued)
 
 
2020
 
 
2019
 
 
Change
 
£m
 
 
£m
 
 
%
 
 
 
 
 
 
 
 
Charges pre-updated multiple economic scenarios1
 
 
 
 
 
 
 
 
Retail
 
1,359 
 
 
 
 
1,038 
 
 
 
(31)
 
Commercial Banking
 
252 
 
 
 
 
306 
 
 
 
18 
 
Other
 
(1)
 
 
 
 
(53)
 
 
 
(98)
 
 
1,610 
 
 
 
1,291 
 
 
 
(25)
 
Coronavirus impacted restructuring cases2
 
403 
 
 
 
— 
 
 
 
— 
 
Updated economic outlook
 
 
 
 
 
 
 
 
Retail
 
1,025 
 
 
 
— 
 
 
 
— 
 
Commercial Banking
 
809 
 
 
 
— 
 
 
 
— 
 
Other
 
400 
 
 
 
— 
 
 
 
— 
 
 
2,234 
 
 
 
— 
 
 
 
— 
 
Impairment charge
 
4,247 
 
 
 
 
1,291 
 
 
 
 
(229)
 
 
 
 
 
 
 
 
 
Asset quality ratio
 
0.96%
 
 
0.29%
 
 
67bp
Gross asset quality ratio
 
0.99%
 
 
0.37%
 
 
62bp
 
1
Represents charge excluding impact of updating for economic outlook in 2020.
 
2
Additional charges made during 2020 on cases subject to restructuring at the end of 2019, where the coronavirus pandemic is considered to have had a direct effect upon the recovery strategy.
 
 
 
 
At 31 Dec 20201
At 31 Dec 20191
Change%
 
 
£m
£m
 
 
 
 
Stage 2 gross loans and advances to customers
 
60,514
38,440 
57 
 
 
Stage 2 loans and advances to customers as % of total
 
12.0%
 
7.7%
 
4.3pp
Stage 2 ECL allowances2
 
2,727 
1,423 
92 
 
 
Stage 2 ECL allowances2 as % of Stage 2 drawn balances
 
4.5%
 
3.7%
 
0.8pp
 
 
 
 
Stage 3 gross loans and advances to customers
 
9,089 
8,754
 
 
Stage 3 loans and advances to customers as a % of total
 
1.8%
 
1.8%
 
 
Stage 3 ECL allowances2
 
2,508
1,922
30 
 
 
Stage 3 ECL allowances2 as % of Stage 3 drawn balances3
 
28.1%
 
22.5%
 
5.6pp
 
 
 
 
Total loans and advances to customers4
 
505,129
498,805
 
 
Total ECL allowance on loans and advances to customers2
 
6,832
4,142
65 
 
 
Total ECL allowances on loans and advances to customers2 as % of drawn balances3
 
1.4%
 
0.8%
 
0.6pp
 
 
1
Underlying basis. Refer to basis of presentation.
 
2
Expected credit loss allowances on loans and advances to customers (drawn and undrawn).
 
3
Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail of £179 million (31 December 2019: £205 million).
 
4
Includes reverse repos of £58.6 billion (31 December 2019: £54.6 billion).
 
 
 
SUMMARY OF GROUP RESULTS (continued)
 
The updated economic outlook in the fourth quarter drove a £659 million ECL release which was partially offset by a central overlay of £400 million. This overlay was added in recognition of the significant uncertainty that remains as to the efficacy of the vaccine, the vaccination programme, potential virus mutation, further lockdowns and economic performance post lockdown restrictions and Government support, recognising that the full range of these risks is not captured in the Group's method of generating alternative scenarios around its base case. The previous £200 million central overlay noted at the half-year for the severe scenario is now included in model outputs within divisional ECL provisions. The scale of the current uncertainty overlay approximately equates to a c.1 percentage point increase in unemployment allied with a 5 per cent lower HPI in 2021, or a c.10 percentage point higher weighting of the severe downside scenario.
 
The resulting ECL on drawn and undrawn loans and advances to customers of £6.8 billion represents 1.4 per cent coverage of gross loans and advances to customers, up 0.6 percentage points from 0.8 per cent at 31 December 2019. The ECL allowance remains high by historical standards and consistent with the Group's updated macroeconomic projections, assumes that a large proportion of expected losses will crystallise over the next 12 to 18 months as support measures subside and unemployment increases.
 
The ECL allowance continues to reflect a probability-weighted view of future economic scenarios with a 30 per cent weighting applied to base case, upside and downside scenarios and a 10 per cent weighting to the severe downside. All scenarios have deteriorated since the start of the year, following the changes made to the base case. They also reflect a widening of the range of potential outcomes, following changes to the generation of scenarios around the base case.
 
Stage 2 loans and advances increased to £60.5 billion (31 December 2019: £38.4 billion), equivalent to 12.0 per cent (31 December 2019: 7.7 per cent) of total loans and advances to customers, as a result of the deterioration in economic outlook. Of these, 89 per cent are up to date (31 December 2019: 79 per cent, 30 September 2020: 89 per cent). Stage 3 loans and advances as a proportion of the portfolio have remained stable at 1.8 per cent in 2020 with limited increase in flows to default, given the availability of Government support and payment holidays. Approximately 90 per cent of payment holidays have now recommenced payment, with only £5.8 billion outstanding as at 16 February 2021. At 31 December £6.4 billion remained outstanding, of which 31 per cent was included in the £60.5 billion of Stage 2 assets. If those Retail customers in Stage 1 with payment holidays still in place at 31 December 2020 were moved to Stage 2, the impact on ECL would be less than £50 million.
 
The Group’s ECL coverage of Stage 2 assets increased to 4.5 per cent (31 December 2019: 3.7 per cent), again reflecting the updated economic outlook. Coverage of Stage 3 assets has also increased to 28.1 per cent (31 December 2019: 22.5 per cent) primarily due to an increase in ECL of £403 million on distressed existing clients whose recovery strategies were affected by the coronavirus pandemic.
 
Despite action taken to mitigate the significant levels of uncertainty through the use of the central overlay, the extent of the impairment charge in 2021 will depend on the potential severity and duration of the economic shock in the UK. Based on current macroeconomic assumptions, the Group expects the 2021 net asset quality ratio to be below 40 basis points.
 
SUMMARY OF GROUP RESULTS (continued)
 
Commercial Banking lending in key coronavirus-impacted sectors1
 
 
At 31 December 2020
 
 
At 30 June 2020
 
 
Drawn
 
 
Undrawn
 
 
Drawn and undrawn
 
 
Drawn as a % of loans and advances
 
 
Drawn
 
 
Undrawn
 
 
Drawn and undrawn
 
 
Drawn as a % of loans and advances
 
£bn
 
 
£bn
 
 
£bn
 
 
%
 
 
£bn
 
 
£bn
 
 
£bn
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail non-food
 
2.2
 
 
1.7
 
 
3.9
 
 
0.5 
 
 
 
2.4
 
 
1.8
 
 
4.2
 
 
0.5 
 
 
Automotive dealerships2
 
1.8
 
 
2.0
 
 
3.8
 
 
0.4 
 
 
 
2.4
 
 
1.5
 
 
3.9
 
 
0.5 
 
 
Oil and gas
 
1.1
 
 
2.7
 
 
3.8
 
 
0.2 
 
 
 
1.4
 
 
2.7
 
 
4.1
 
 
0.3 
 
 
Construction
 
1.2
 
 
1.7
 
 
2.9
 
 
0.2 
 
 
 
1.3
 
 
1.7
 
 
3.0
 
 
0.3 
 
 
Passenger transport
 
1.2
 
 
1.1
 
 
2.3
 
 
0.2 
 
 
 
1.3
 
 
0.6
 
 
1.9
 
 
0.4 
 
 
Hotels
 
1.9
 
 
0.3
 
 
2.2
 
 
0.4 
 
 
 
1.9
 
 
0.3
 
 
2.2
 
 
0.3 
 
 
Leisure
 
0.7
 
 
0.7
 
 
1.4
 
 
0.1 
 
 
 
0.8
 
 
0.5
 
 
1.3
 
 
0.2 
 
 
Restaurants and bars
 
0.7
 
 
0.5
 
 
1.2
 
 
0.1 
 
 
 
0.8
 
 
0.5
 
 
1.3
 
 
0.2 
 
 
Total
 
10.8
 
 
10.7
 
 
21.5
 
 
2.1 
 
 
 
12.3
 
 
9.6
 
 
21.9
 
 
2.7 
 
 
 
1
Lending classified using ONS SIC codes at legal entity level.
 
2
Automotive dealerships includes Black Horse Motor Wholesale lending (within Retail Division).
 
 
Retail payment holiday characteristics1
 
 
Mortgages
 
 
Cards
 
 
Loans
 
 
Motor
 
 
Total
 
 
000s
 
£bn
 
 
000s
 
£bn
 
 
000s
 
£bn
 
 
000s
 
£bn
 
 
000s
 
£bn
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total payment holidays granted
 
489
 
61.9 
 
 
 
338
 
1.7 
 
 
 
298
 
2.4 
 
 
 
155
 
2.3 
 
 
 
1,279
 
68.3 
 
 
First payment holiday still in force
 
10
 
1.4 
 
 
 
14
 
0.1 
 
 
 
11
 
0.1 
 
 
 
9
 
0.1 
 
 
 
44
 
1.7 
 
 
Matured payment holidays – repaying
 
428
 
53.8 
 
 
 
276
 
1.4 
 
 
 
248
 
2.0 
 
 
 
127
 
1.8 
 
 
 
1,079
 
58.9 
 
 
Matured payment holidays – extended
 
26
 
3.7 
 
 
 
11
 
0.1 
 
 
 
18
 
0.2 
 
 
 
9
 
0.2 
 
 
 
64
 
4.1 
 
 
Matured payment holidays – missed payment
 
24
 
3.1 
 
 
 
36
 
0.2 
 
 
 
20
 
0.2 
 
 
 
10
 
0.2 
 
 
 
91
 
3.6 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As a percentage of total matured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Matured payment holidays – repaying
 
89%
 
89%
 
 
85%
 
85%
 
 
87%
 
86%
 
 
87%
 
83%
 
 
87%
 
89%
 
Matured payment holidays – extended
 
5%
 
6%
 
 
3%
 
4%
 
 
6%
 
7%
 
 
6%
 
9%
 
 
5%
 
6%
 
Matured payment holidays – missed payment
 
5%
 
5%
 
 
11%
 
11%
 
 
7%
 
7%
 
 
7%
 
8%
 
 
7%
 
5%
 
 
1.
Mortgages, credit cards and personal loans at 16 February 2021; Motor finance at 17 February 2021 Analysis of mortgage payment holidays excludes St James Place, Intelligent Finance and Tesco; Motor finance payment holidays excludes Lex Autolease. Total payment holidays granted are equal to the sum of first payment holiday still in force and matured payment holidays. Totals and percentages calculated using unrounded numbers.
 
 
Government-backed loan scheme approvals and value1
 
 
000s
 
 
£bn
 
 
 
 
 
 
 
Coronavirus Business Interruption Loan Scheme
10.1
 
 
 
2.4
 
 
Bounce Back Loan Scheme
327.0
 
 
 
9.3
 
 
Coronavirus Large Business Interruption Loan Scheme
 
0.1
 
 
 
0.7
 
 
Total
337.2
 
 
 
12.4
 
 
 
1
Data as at 12 February 2021.
 
SUMMARY OF GROUP RESULTS (continued)
 
Around 1.3 million Retail payment holidays, on £68.3 billion of lending, have been granted to help alleviate temporary financial pressure on customers during the crisis. Payment holidays of up to three months have been granted across Retail mortgages, personal loans, credit cards and motor finance, with extensions available of up to three months should customers request them. There are c.44,000 (£1.7 billion) payment holidays where the first payment holiday is still in force and 1.2 million (£66.6 billion) that have matured, including c.64,000 (£4.1 billion) that have then been extended.
 
The vast majority of first payment holidays (98 per cent) have now matured, of which 89 per cent by value have restarted payments, 6 per cent have been extended and 5 per cent have missed payment when due.
 
Mortgages account for the largest proportion of payment holidays, with a total of around 489,000 having been granted, equating to customer balances of £61.9 billion. As at 16 February 2021, 98 per cent, or c.479,000, have matured with 89 per cent, or 428,000, of those having resumed repayments, 5 per cent having extended and 5 per cent having missed payment. The average LTV of customers extending their mortgage payment holidays and still in extension remains relatively low at 50 per cent, compared to 44 per cent for the total mortgage book.
 
The Group also granted c.338,000 payment holidays on £1.7 billion of credit card balances, 298,000 payment holidays on £2.4 billion of unsecured personal loans and c.155,000 payment holidays on £2.3 billion of motor finance products. These products have experienced c.85 per cent of customers resuming payments at the end of their payment holidays. Only £0.1 billion of credit card balances have been subject to a payment holiday extension and are still in extension. £0.2 billion of total credit card payment holidays granted have missed payment.
 
Across all products, customers who are in extension remain of a typically lower credit quality than the wider book and tend to have higher average balances than customers who have not requested payment holidays. It should also be noted that of the customers missing payments after conclusion of the payment holiday, typically one third were in arrears at the start of the payment holiday.
 
Following the announcement of the latest national coronavirus-related lockdown, since 1 January 2021, the Group has granted c.28,000 new payment holidays on £0.8 billion of Retail balances.
 
For the duration of the payment holiday the Group continues to recognise interest on the loan under the effective interest rate method.
 
The Group has approved c.337,000 loans with a total value of £12.4 billion to customers under Government-backed loan schemes including c.327,000 loans totalling £9.3 billion approved under the Bounce Back Loan Scheme.
 
 
 
 
SUMMARY OF GROUP RESULTS (continued)
 
Statutory profit
 
 
2020
 
 
2019
 
 
Change
 
£m
 
 
£m
 
 
%
 
 
 
 
 
 
 
 
Underlying profit
2,193 
 
 
 
7,531 
 
 
 
(71)
 
Restructuring
(521)
 
 
 
(471)
 
 
 
(11)
 
Volatility and other items
 
 
 
 
 
 
 
Market volatility and asset sales
(59)
 
 
 
126 
 
 
 
 
Amortisation of purchased intangibles
(69)
 
 
 
(68)
 
 
 
(1)
 
Fair value unwind
(233)
 
 
 
(275)
 
 
 
15 
 
 
(361)
 
 
 
(217)
 
 
 
(66)
 
Payment protection insurance provision
(85)
 
 
 
(2,450)
 
 
 
 
Statutory profit before tax
1,226 
 
 
 
4,393 
 
 
 
(72)
 
Tax credit (expense)
161 
 
 
 
(1,387)
 
 
 
 
Statutory profit after tax
1,387 
 
 
 
3,006 
 
 
 
(54)
 
 
 
 
 
 
 
 
 
Earnings per share
 
1.2p
 
 
3.5p
 
 
(66)
 
Return on tangible equity – existing basis1
3.7%
 
 
7.8%
 
 
(4.1)pp
Return on tangible equity – new basis1
2.3%
 
 
6.6%
 
 
(4.3)pp
 
1
Calculation shown on page 41.
 
 
Further information on the reconciliation of underlying to statutory results is included on page 38.
 
 
 
Restructuring
 
 
2020
 
 
2019
 
 
Change
 
£m
 
 
£m
 
 
%
 
 
 
 
 
 
 
 
Severance costs
(156)
 
 
 
(97)
 
 
 
(61)
 
Property transformation
(146)
 
 
 
(121)
 
 
 
(21)
 
Technology research and development
(61)
 
 
 
(6)
 
 
 
 
Regulatory programmes
(42)
 
 
 
(63)
 
 
 
33 
 
Mergers and acquisitions, integration and other restructuring costs
(116)
 
 
 
(184)
 
 
 
37 
 
Total restructuring
(521)
 
 
 
(471)
 
 
 
(11)
 
 
Restructuring costs of £521 million were 11 per cent higher than in 2019 with £233 million incurred in the fourth quarter, as the Group resumed the property transformation programme and role reduction activities that were paused earlier in the year and also as a function of increased investment in technology research and development. The Group expects to increase its investment in technology research and development in 2021 and as a result expects restructuring costs to be higher in 2021 than in 2020.
 
Volatility and other items at a net loss of £361 million in 2020 comprised £59 million of negative market volatility and asset sales, £69 million of amortisation of purchased intangibles and £233 million of fair value unwind. Market volatility and asset sales included £222 million of negative insurance volatility, driven mainly by falling equity markets and a loss of £106 million relating to liability management exercises largely occurring in the fourth quarter. This was offset against positive banking volatility of £392 million, primarily reflecting exchange rate and interest rate movements. Comparatives for 2019 include a one-off charge for exiting the Standard Life Aberdeen investment management agreement.
 
SUMMARY OF GROUP RESULTS (continued)
 
The Group recognised a charge of £85 million for PPI in the final quarter of the year. This charge was driven by the impact of coronavirus delaying operational activities during 2020, the final stages of work to ensure operational completeness and final validation of information requests and complaints with third parties that resulted in a limited number of additional complaints to be handled. Of the approximately six million enquiries received pre-deadline, more than 99 per cent have now been processed. A small part of the costs incurred during the year also reflect the costs associated with litigation activity to date.
 
The return on tangible equity for 2020 was 3.7 per cent (2019: 7.8 per cent) and earnings per share were 1.2 pence (2019: 3.5 pence). In the fourth quarter of the year, return on tangible equity was 7.2 per cent.
 
Going forward and in order to aid comparability across the banking sector, the Group will report its statutory return on tangible equity without adding back the post-tax amortisation of intangible assets to the return. On this new basis and given improving profitability, the Group is targeting a return on tangible equity of between 5 and 7 per cent in 2021 and in excess of the cost of equity in the medium-term.
 
Tax
 
The Group recognised a tax credit of £161 million in the period, which was impacted by an uplift in the value of deferred tax assets of c.£350 million recognised in the first half of 2020. This credit reflected the UK corporation tax rate being held at 19 per cent, as substantively enacted on 17 March 2020. The Group continues to expect a medium-term effective tax rate around 25 per cent.
 
 
 
SUMMARY OF GROUP RESULTS (continued)
 
Balance sheet
 
 
At 31 Dec 2020
 
At 31 Dec 2019
 
Change%
 
 
 
 
 
Loans and advances to customers1
 
£440bn
 
£440bn
 
— 
 
 
Customer deposits2
 
£451bn
 
£412bn
 
 
 
Loan to deposit ratio
 
98%
 
107%
 
(9)pp
 
 
 
 
 
Wholesale funding
 
£109bn
 
£124bn
 
(12)
 
 
Wholesale funding <1 year maturity
 
£34bn
 
£39bn
 
(13)
 
 
Of which money-market funding <1 year maturity3
 
£22bn
 
£25bn
 
(14)
 
 
Liquidity coverage ratio – eligible assets4
 
£142bn
 
£130bn
 
 
 
Liquidity coverage ratio5
 
136%
 
137%
 
(1)pp
 
1
Excludes reverse repos of £58.6 billion (31 December 2019: £54.6 billion).
 
2
Excludes repos of £9.4 billion (31 December 2019: £9.5 billion).
 
3
Excludes balances relating to margins of £5.3 billion (31 December 2019: £4.2 billion).
 
4
Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts. 2019 assets have been restated accordingly.
 
5
The Liquidity coverage ratio is calculated as a simple average of month end observations over the previous 12 months.
 
 
Loans and advances to customers were stable at £440.2 billion (31 December 2019: £440.4 billion). Within Retail, the open mortgage book increased by £10.2 billion in the second half of 2020 with £6.7 billion in the fourth quarter, reflecting the strength of the UK housing market. Commercial Banking loans, including Retail Business Banking, reduced by £2.2 billion in 2020 as the continued optimisation of the portfolio and reduced revolving credit facilities balances more than offset support provided to clients through Government-backed lending schemes.
 
Total customer deposits increased by £38.9 billion in the year, to £450.7 billion. The Group continues to target current account balance growth and optimise funding with Retail current accounts up 27 per cent at £97.4 billion (31 December 2019: £76.9 billion), having grown ahead of the market in the year. The Group's loan to deposit ratio of 98 per cent, down 9 percentage points on 2019, was driven by increased customer deposits and evidences a strong liquidity position and significant potential to lend into an economic recovery. The Group continues to access wholesale funding markets across a variety of currencies and markets. During the year, the Group repaid all outstanding amounts of its Term Funding Scheme (TFS) drawings of £15.4 billion and the remaining £1 billion outstanding of its Funding for Lending Scheme (FLS) drawings. In addition to the £1 billion drawn in the first half of the year, the Group has made drawings of £12.7 billion in the second half from the new Term Funding Scheme with additional incentives for SMEs (TFSME), taking the total outstanding amount to £13.7 billion at 31 December 2020. Overall, total wholesale funding has reduced to £109.4 billion at 31 December 2020 (31 December 2019: £124.2 billion) principally as a result of the growth in customer deposits.
 
SUMMARY OF GROUP RESULTS (continued)
 
Capital
 
 
At 31 Dec 2020
 
At 31 Dec 2019
 
Change%
 
 
 
 
 
 
CET1 ratio1,2
16.2%
 
13.8%
 
2.4pp
 
CET1 ratio pre IFRS 9 transitional relief1,2
15.0%
 
13.4%
 
1.6pp
 
Transitional total capital ratio1,2
23.3%
 
21.5%
 
1.8pp
 
Transitional MREL ratio1,2
36.4%
 
32.6%
 
3.8pp
 
UK leverage ratio1,2
5.8%
 
5.2%
 
0.6pp
 
Risk-weighted assets1
£203bn
 
£203bn
 
 
 
 
 
 
 
 
Shareholders' equity
£43bn
 
£42bn
 
 
 
Tangible net assets per share
52.3p
 
50.8p
 
1.5p
 
 
1
The CET1, total capital, MREL and leverage ratios and risk-weighted assets at 31 December 2019 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent first quarter period. The CET1 ratio pre IFRS 9 transitional relief reflects the full impact of IFRS 9, prior to the application of transitional arrangements. Excluding dividend accrual, the CET1 ratio at 31 December 2020 was 16.4 per cent.
 
2
CET1 ratios at 31 December 2020 include an increase of 51 basis points following the implementation of the revised capital treatment of intangible software assets. The benefit through CET1 capital is reflected through the total capital, MREL and leverage ratios.
 
 
Capital movements
 
bps
 
 
 
 
Banking business capital build excluding impairment
 
192 
 
 
Impairment charge
 
(174)
 
 
Banking business underlying capital build
 
18 
 
 
IFRS 9 transitional relief
 
83 
 
 
RWA and other movements
 
28 
 
 
Capital build pre software change
 
129 
 
 
Revised treatment of intangible software assets
 
51 
 
 
Reversal of FY 2019 ordinary dividend accrual
 
83 
 
 
Capital build pre dividend
 
263 
 
 
Ordinary dividend accrual
 
(21)
 
 
Capital build post dividend
 
242 
 
 
 
The Group’s CET1 capital ratio post dividend increased 242 basis points over the year, from 13.8 per cent on a pro forma basis to 16.2 per cent. Capital build prior to the dividend accrual of 21 basis points, the impact of the revised treatment of intangible software assets of 51 basis points and the 2019 full year dividend reversal of 83 basis points, was 129 basis points. Banking business capital build of 192 basis points was largely offset by the 174 basis point impact of impairment in the year, mitigated by the benefit of the IFRS 9 transitional relief (83 basis points). RWA and other movements contributed 28 basis points, with pension contributions (equivalent to 46 basis points) more than offset by reductions in underlying risk-weighted assets and excess expected losses as well as favourable market and other movements.
 
SUMMARY OF GROUP RESULTS (continued)
 
The increase in the CET1 ratio of 118 basis points in the fourth quarter (pre dividend accrual) reflected underlying profitability, risk-weighted asset reductions and the introduction of the revised capital treatment of intangible software assets.
 
The PRA is consulting on a proposal to reverse the revised capital treatment of software assets (which currently follows EU capital regulations). Should the PRA proceed with their proposal then the reinstatement of the original requirement to deduct these assets from capital will come into force during 2021. This could lead to a c.50 basis points reduction in the Group's CET1 capital ratio (net of a reduction in associated RWAs), and based on the position at 31 December 2020 the ratio would reduce to 15.7 per cent.
 
The Group applies the revised IFRS 9 transitional arrangements for capital as set out under current capital regulations. The arrangements provide for temporary capital relief for the increase in accounting impairment provisions following the initial implementation of IFRS 9 (‘static’ relief) and subsequent relief for any increases in Stage 1 and Stage 2 expected credit losses since 1 January 2020 (‘dynamic’ relief). The transitional arrangements do not cover Stage 3 expected credit losses.
 
Whilst the net increase in IFRS 9 transitional relief over the year amounted to 83 basis points, the Group’s total relief recognised at 31 December 2020 amounted to 115 basis points, including static relief.
 
Risk-weighted assets reduced by £0.7 billion over the year from £203.4 billion to £202.7 billion. Increases were from credit migrations and model calibrations (c.£2.5 billion); regulatory changes, including the revised capital treatment of intangible software assets (net £2.2 billion); and other movements, including Retail model updates (c.£1.9 billion). In addition, there were increases in risk-weighted assets attributable to deferred tax assets and the risk-weighted element of the Group's investment in Insurance following the increase in the Group's capital base (£1.6 billion). These were more than offset by reductions in lending balances outside Government-backed schemes (£3.6 billion) and optimisation activity undertaken in Commercial Banking (c.£5.3 billion).
 
Risk-weighted assets reduced by £2.5 billion in the fourth quarter, largely reflecting reductions from credit migrations and model calibrations (including HPI improvement), continued optimisation of the Commercial Banking portfolio and the disposal of a legacy equity investment in Visa Inc., offset in part by an increase as a result of the revised capital treatment of intangible software assets.
 
Whilst credit migration in 2020 has been less than expected, it is expected to have a fuller impact in 2021 and into 2022, consistent with economic forecasts. It is also expected that a material part of the Group's IFRS 9 dynamic relief that built up during 2020 will unwind in 2021 with the remainder expected to largely unwind in 2022, impacting CET1 ratios. As a result, based on current economic forecasts, the Group expects capital build in 2021 to be impacted by the expected unwind of IFRS 9 transitional relief, as well as profitability.
 
The deferral of the UK implementation of the remainder of CRR 2 means that expected risk-weighted asset inflation driven by changes to the new standardised approach for calculating counterparty credit risk exposure (SA-CCR) will now impact in 2022, with no significant regulatory changes expected in 2021, other than the PRA's proposed reversal of the revised treatment of software assets. Given these movements, as well as continued optimisation in the Commercial Banking portfolio, the Group expects risk-weighted assets in 2021 to be broadly stable on 2020, but with headwinds from regulatory changes in 2022.
 
During the first half of 2020 the PRA reduced the Group’s Pillar 2A CET1 requirement from 2.6 per cent to 2.3 per cent. In December 2020 the PRA further reduced the requirement to c.2.1 per cent in the context of a higher UK countercyclical capital buffer rate, which in normal conditions will be set at 2 per cent (currently set at zero per cent). In line with PRA policy, the latter reduction is currently fully offset by other regulatory capital requirements at the CET1 level.
 
 
SUMMARY OF GROUP RESULTS (continued)
 
Following the decision by the PRA to reduce the UK countercyclical capital buffer rate to zero earlier in the year, combined with the initial Pillar 2A reduction noted above, the Group’s CET1 capital regulatory requirement has reduced to c.11 per cent. Consequently, current CET1 headroom over requirements has increased.
 
The Board’s view of the ongoing level of CET1 capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties remains at c.12.5 per cent, plus a management buffer of c.1 per cent.
 
The transitional total capital ratio increased to 23.3 per cent (31 December 2019: 21.5 per cent on a pro forma basis) and the Group’s transitional minimum requirement for own funds and eligible liabilities (MREL), which came into force on 1 January 2020, is 36.4 per cent (31 December 2019: 32.6 per cent on a pro forma basis). The UK leverage ratio increased to 5.8 per cent.
 
Pensions
 
Terms have now been agreed in principle with the Group Pensions Trustee in respect of the valuations of the Group’s three main defined benefit pension schemes. The valuations showed an aggregate ongoing funding deficit of £7.3 billion as at 31 December 2019 (£7.3 billion deficit at 31 December 2016). The revised deficit now includes an allowance for the impact of RPI reform announced by the Chancellor of the Exchequer in November 2020.
 
Under the previous recovery plan, deficit contributions were committed of c.£0.8 billion in 2020 and c.£1.3 billion per annum from 2021 to 2024. Under the new recovery plans, c.£0.8 billion was paid in 2020 with contributions looking forward equating to c.£0.8 billion per annum, plus a further 30 per cent of in year capital distributions to ordinary shareholders, up to a limit on total deficit contributions of £2.0 billion per annum payable until this deficit has been removed. The Group continues to provide security to these pension schemes, with corporate guarantees and collateral pledged, while also making additional annual contributions for future service and scheme running costs.
 
Dividend
 
Following a request made by the PRA to large UK banks in March 2020, the Group suspended the payment of dividends on ordinary shares for the remainder of the year and cancelled the payment of the final dividend for 2019. These actions were undertaken as a precautionary measure to preserve capital as the spread of the coronavirus pandemic led to a UK-wide lockdown, with the potential to create a significant and prolonged downturn.
 
In December 2020, the PRA announced that dividend payments could recommence, provided that this was subject to a prudent framework for the setting of such distributions. As a result the PRA has established a cap on distributions for year end 2020.
 
Given the Group's strong capital position at the year end and the regulator’s clarification that banks may resume capital distributions, the Board has recommended a final ordinary dividend of 0.57 pence per share, the maximum allowed under the PRA's guidelines.
 
The PRA has additionally noted its intention to provide a further update on distributions ahead of the 2021 half year results for the large UK banks. It is expected that the PRA will take account of the outcome of the first stage of the Bank of England 2021 solvency stress test exercise in informing its approach to half year distributions. Ahead of the update at half year, dividends may be accrued for via capital, provided this is undertaken on an appropriately prudent basis, but may not be paid.
 
The Group will update the market on interim dividend payments with the half year results, following receipt of the update from the regulator and based on macroeconomic conditions at the time.
 
The Board remains committed to future capital returns. In 2021, the Board intends to accrue dividends and resume its progressive and sustainable ordinary dividend policy with the dividend at a higher level than 2020. As normal, the Board will give due consideration at year end to the size of the final dividend payment and any return of surplus capital in addition to the ordinary dividend, based on circumstances at the time.
 
SEGMENTAL ANALYSIS – UNDERLYING BASIS
 
2020
 
Retail
 
 
 
Commercial Banking