LLOYDS BANKING GROUP PLC The Group now expects the net interest margin for 2021 to be in excess of 245 basis points.
Other income of GBP1,135 million was 7 per cent lower than in the first quarter of 2020 reflecting lower levels of customer activity and new business as a consequence of the coronavirus pandemic, particularly within Retail and Insurance and Wealth. This was in part mitigated by strong performance in the Group's equity investment businesses. In aggregate the Group's other income was up 6 per cent relative to the fourth quarter of 2020, when the Group took a charge in Insurance and Wealth for the annual basis review.
Operating lease depreciation reduced to GBP148 million (three months to 31 March 2020: GBP224 million) as a result of the continued impact of a smaller Lex fleet size, combined with a benefit from the more resilient used car price outlook of c.GBP30 million. Total costs Total costs of GBP1,916 million were 2 per cent lower than in the first three months of 2020, driven by continued control of operating costs, down 1 per cent at GBP1,851 million whilst continuing to prioritise investment in the business.
The Group continues to expect operating costs for 2021 to reduce to c.GBP7.5 billion including net coronavirus-related costs and compensation headwinds.
REVIEW OF PERFORMANCE (continued)
Remediation charges of GBP65 million (three months to 31 March 2020: GBP87 million) were related to pre-existing programmes. As highlighted in the 2020 results, in relation to HBOS Reading, decisions from the independent panel re-review on direct and consequential losses will start to be issued during 2021. This is likely to result in further charges but it is not possible to estimate the potential impact at this stage. Impairment The impairment charge in the quarter was a net credit of GBP323 million, compared to a charge of GBP1,430 million in the first quarter of 2020. The net credit in the quarter was driven by continued strong asset quality with a low charge of GBP209 million given the continued benign credit environment and a GBP459 million release of expected credit loss (ECL) allowances resulting from improvements to the UK's economic outlook. The Group has retained the judgemental overlays applied at year end and has continued to offset modelled releases not deemed reflective of underlying risk. Management judgements in respect of coronavirus of c.GBP1 billion (31 December 2020: c.GBP0.9 billion) include a central GBP400 million overlay (31 December 2020: GBP400 million), as well as c.GBP600 million of judgements within the underlying portfolios (31 December 2020: c.GBP500 million).
The Group's ECL allowance reduced in the quarter from GBP6.9 billion to GBP6.2 billion, of which GBP459 million resulted from improvements to the economic outlook, including the impact of the extension of the Government's Coronavirus Job Retention Scheme. Reductions in Commercial Banking ECL also reflect improved outcomes on restructuring cases, lower flows to default and recent reductions in exposures due to asset optimisation.
The ECL allowance remains high by historical standards and is consistent with the Group's updated macroeconomic projections. It assumes that a large proportion of expected losses will crystallise over the next 12 to 18 months as support measures subside and unemployment increases.
Observed credit performance has remained stable in the quarter, with the flow of assets into arrears, defaults and write-offs remaining at low levels in part due to the continued effectiveness of support schemes, including the Coronavirus Job Retention Scheme and payment holidays extended by the Group which have now largely matured. The Group has maintained judgemental ECL allowances in respect of losses assumed to have been suppressed over the last 12 months by support schemes, given that cumulative losses remain lower than would have ordinarily been anticipated.
The Group's GBP400 million central overlay was added at year end in recognition of the significant uncertainty with regard to the efficacy of the vaccine, the vaccination rollout, potential virus mutations and economic performance post lockdown restrictions and Government support. Although the base case outlook has improved in the first quarter, the Group still considers these risks to remain and that the conditioning assumptions for the base case and associated scenarios around this do not necessarily capture these unprecedented risks.
Given the benefit recognised in the first quarter of the year, the full year charge is now expected to be materially lower than the guidance set out at year-end. Based on the Group's improved economic assumptions, the net asset quality ratio for 2021 is now expected to be below 25 basis points.
REVIEW OF PERFORMANCE (continued)
Impairment charge
Quarter Quarter Quarter
ended ended Change ended Change
31 Mar 31 Mar 31 Dec 2020
2021 2020
GBPm GBPm % GBPm %
Charges pre-updated multiple economic scenarios1
Retail 321 325 1 383 16
Commercial Banking (111) 52 41
Other (1) (9) 89 (6) 83
209 368 43 418 50
Coronavirus impacted restructuring cases2 (73) 218 (31)
Updated economic outlook:
Retail (240) 564 (417) 42
Commercial Banking (219) 280 (42)
Other - - 200
(459) 844 (259) (77)
Impairment (credit) charge (323) 1,430 128
Asset quality ratio (0.29)% 1.30% (159)bp 0.11% (40)bp
Gross asset quality ratio (0.18)% 1.35% (153)bp 0.16% (34)bp 1. Charges based on economic assumptions as at 31 December 2019. 2. Additional (releases)/charges 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.
ECL allowance as a percentage of drawn balances
At 31 Mar At 31 Dec
Change
20211 20201
GBPm GBPm %
Stage 2 gross loans and advances to customers 53,626 60,514 (11)
Stage 2 loans and advances to customers as % of total 10.7% 12.0% (1.3)pp
Stage 2 ECL allowances2 2,384 2,727 (13)
Stage 2 ECL allowances2 as % of Stage 2 drawn balances 4.4% 4.5% (0.1)pp
Stage 3 gross loans and advances to customers 8,970 9,089 (1)
Stage 3 loans and advances to customers as a % of total 1.8% 1.8% -
Stage 3 ECL allowances2 2,348 2,508 (6)
Stage 3 ECL allowances2 as % of Stage 3 drawn balances3 27.1% 28.6% (1.5)pp
Total loans and advances to customers4 502,055 505,129 (1)
Total ECL allowance2 6,194 6,832 (9)
Total ECL allowances2 as % of drawn balances3 1.2% 1.4% (0.2)pp 1. Underlying basis. Refer to basis of presentation on page 19. 2. Expected credit loss. 3. Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail and Commercial Banking of GBP321 million (31 December 2020: GBP317 million). Comparatives restated to reflect
exclusion of Commercial Banking recoveries. 4. Includes reverse repos of GBP52.8 billion (31 December 2020: GBP58.6 billion).
REVIEW OF PERFORMANCE (continued) Statutory profit Restructuring costs of GBP173 million, up from GBP63 million in the first quarter of 2020 but down from GBP233 million in the fourth quarter of 2020, reflected increased severance and technology research and development costs, as well as slightly higher property transformation costs. Volatility and other items reduced to net nil in the first quarter of 2021 (three months to 31 March 2020: net loss of GBP421 million) with positive insurance volatility and other gains offsetting fair value unwind and the amortisation of purchased intangibles.
Return on tangible equity for the period was 13.9 per cent (three months to 31 March 2020: 3.7 per cent) and earnings per share were 1.8 pence (three months to 31 March 2020: 0.5 pence), both reflecting the benefit of the impairment credit.
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