Lloyds Banking Group Plc · LSE:LLOY
Lloyds Banking — HBOS — H1 2005 Earnings Presentation
54 slides from Lloyds Banking's earnings presentation, Aug 3, 2005
Slide 1: Interim Results
Interim Results 3 August 2005
Slide 2: James Crosby
James) Crospy, D¢ HBOSoic
Slide 3: 2005: H1 Overview
2005: H1 Overview • Good but well paced growth • Stable margins and strong non-interest income • Tight cost control and further efficiency gains • Credit experience in line with expectations • Capital discipline and increased share buyback Strong profits growth and benchmark return on equity
Slide 4: Financial Overview
Financial Overview Phil Hodkinson
Slide 5: Key Financials
Key Financials H1 2005 H1 2004 Growth % Profit before tax (£m) 2,264 1,967 15 Underlying profit before tax* (£m) 2,359 1,989 19 Underlying earnings per share* (p) 41.8 36.5 15 Dividend per share (p) 11.75 10.8 9 Tier 1 capital ratio (%) 8.1 7.7 - Total capital ratio (%) 12.7 12.1 - Group return on e
Slide 6: Financial Performance
Financial Performance H1 2005 H1 2004 Growth £m £m % Net interest income 3,375 3,009 12 Underlying non-interest income* 1,901 1,571 21 Underlying operating income* 5,276 4,580 15 Underlying operating expenses* (2,207) (2,054) 7 Impairment losses (753) (602) 25 Other 43 65 - Underlying profit before
Slide 7: Asset Growth
Asset Growth Annualised growth Retail Corporate Total 0% 2% 4% 6% 8% 10% 12% 14% H1 2005 H2 2004
Slide 8: Margin Trends
Margin Trends Net Interest Margins H1 2005 H1 2004 % % Retail 1.82 1.83 Corporate 2.45 2.31 Treasury 0.08 0.11 International 2.16 2.17 Group 1.80 1.77
Slide 9: Non-interest Income
Non-interest Income Underlying Non-interest Income* H1 2005 H1 2004 Growth £m £m % Retail 500 444 13 Insurance & Investment 890 695 28 Corporate 365 268 36 Treasury 87 104 (16) International 59 60 (2) Group 1,901 1,571 21 * as defined in the Interim RNS
Slide 10: Expenses
Expenses Underlying Operating Expenses* H1 2005 H1 2004 Growth £m £m % Retail 1,036 1,037 - Insurance & Investment 459 414 11 Corporate 386 332 16 Treasury 64 52 23 International 163 123 33 Group Items 99 96 3 Total 2,207 2,054 7 * as defined in the Interim RNS
Slide 11: Cost:income Ratio
Cost:income Ratio H1 2005 H1 2004 Growth £m £m % Underlying operating income* 5,276 4,580 15 Underlying operating expenses* 2,207 2,054 7 Group cost:income ratio (%) 41.8 44.8 - Banking Divisions’ cost:income ratio (%) 40.0 42.4 - * as defined in the Interim RNS
Slide 12: Impaired Loans
Impaired Loans Impaired loans as a % of advances 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% June 2004 Dec 2004 June 2005 Retail Corporate International
Slide 13: Impairment Losses
Impairment Losses H1 2005 H1 2004 % Average % Average £m Advances £m Advances Retail 473 0.22 329 0.17 Corporate 256 0.32 258 0.35 International 24 0.10 15 0.08 Group 753 0.23 602 0.21
Slide 14: Divisional Profits
Divisional Profits Underlying Profit Before Tax* H1 2005 H1 2004 Growth £m £m % Retail 1,002 931 8 Insurance & Investment 436 283 54 Corporate 757 588 29 Treasury 110 137 (20) International 153 146 5 Group Items (99) (96) (3) Total 2,359 1,989 19 * as defined in the Interim RNS
Slide 15: Reported vs Underlying Profit
Reported vs Underlying Profit H1 2005 H1 2004 Growth £m £m % Profit before tax 2,264 1,967 15 Merger integration costs - 22 - Mortgage endowments 130 - - Grossing up for policyholder tax (35) - - Underlying profit before tax* 2,359 1,989 19 * as defined in the Interim RNS
Slide 16: Insurance & Investment
Insurance & Investment As reported in RNS H1 2005 H1 2004 Growth £m £m % Net interest income 16 16 - Non-interest income 5,160 2,244 130 Operating income 5,176 2,260 129 Operating expenses (4,729) (1,963) 141 Operating profit 447 297 51 Share of losses of associates & JCEs (11) (14) (21) Underlying
Slide 17: Insurance & Investment
Insurance & Investment On an underlying basis H1 2005 H1 2004 Growth £m £m % Net interest income 16 16 - Underlying non-interest income* 890 695 28 Underlying operating income* 906 711 27 Underlying operating expenses* (459) (414) 11 Operating profit 447 297 51 Share of losses of associates & JCEs (
Slide 18: IFRS – First Time Effects
IFRS – First Time Effects First time effects in H1 2005 Underlying Profits EPS £m % Employee share schemes (15) (0.7) Derivative hedge accounting (14) (0.7) Total (29) (1.4)
Slide 19: Basel II
Basel II • HBOS will benefit given our mortgage share and diversity • For mortgages, Pillar 2 will be more significant than Pillar 1 • Recognition of benefit will be progressive not immediate: - FSA rules restrict speed of release (e.g. 5% in Yr1) - management’s view is more important • Pricing for
Slide 20: Capital Management
Capital Management • Stronger capital ratios • £284m shares bought back for cancellation in first half • Clerical Medical repaid £500m loan to HBOS plc in June • ROE and dividend cover supports 12% p.a. asset growth • 2005 share buyback programme will now be up to £1bn
Slide 21: Corporate
Corporate IN HBOS ic George Mitchell
Slide 22: Financial Performance
Financial Performance H1 2005 H1 2004 Growth % Net interest income (£m) 1,010 873 16 Non-interest income (£m) 676 477 42 Net operating income (£m) 1,686 1,350 25 Operating expenses (£m)* 386 332 16 Cost:income ratio (%) 28.1 29.1 - Underlying profits (£m) 757 588 29 * Before operating lease deprecia
Slide 23: Volume and Margin
Volume and Margin H1 2005 Lending growth (annualised) 9% RWA growth (annualised) 9% Deposit growth (annualised) 16% H1 2005 H2 2004 Net interest spread (bps) 231 224 Net interest margin (bps) 245 243
Slide 24: Impairment
Impairment H1 2005 H2 2004 H1 2004 Impairment losses (£m) 256 294 258 % of average advances 0.32 0.38 0.35 Jun 2005 Dec 2004 Jun 2004 Impaired loans (£m) 1,402 1,561 1,683 % of closing advances 1.72 2.00 2.25
Slide 25: Impact of Drive
Impact of Drive Including Excluding Drive Drive (i) Net interest margin - 6 months to June 05 (bps) 245 226 - 6 months to December 04 (bps) 243 238 (ii) Impairment losses - 6 months to June 05 (£m) 256 213 - 6 months to Dec 04 (£m) 294 282 As a % of average advances - 6 months to June 05 0.32 0.27 -
Slide 26: Treasury Financial Performance
Treasury Financial Performance H1 2005 H1 2004 Growth % Net interest income (£m) 87 85 2 Net interest margin (bps) 8 11 - Non-interest income - before IFRS impact (£m) 112 104 8 - after IFRS impact (£m) 87 104 (16) Expenses (£m) 64 52 23 Underlying profits (£m) 110 137 (20)
Slide 27: Treasury Prospects
Treasury Prospects • Continued diversification of our funding sources • Continued development of our sales activity • Continued cautious approach on credit
Slide 28: Corporate Prospects
Corporate Prospects • Lending growth similar to first half • Margin in line with first half • Continued focus on non-interest income • Further improvement in cost:income ratio • Further improvement in credit quality
Slide 29: International
International Colin Matthew
Slide 30: Financial & Operating Performance
Financial & Operating Performance H1 2005 H1 2004 Growth % Underlying profits (£m) 153 146 5 Cost:income ratio (%) 48.1 43.6 - Net interest margin (%) 2.16 2.17 - Jun 2005 Dec 2004 Growth* % Customer advances (£bn) 26.8 23.5 28 Customer deposits (£bn) 12.2 9.9 47 * Annualised
Slide 31: Australia: Financial Performance
Australia: Financial Performance H1 2005 H1 2004 Growth % Operating income (A$m) 592 528 12 Operating expenses (A$m) 301 249 21 Underlying profits (A$m) 256 260 - Adjusted profits (inc Treasury) (A$m) 267 260 3 Cost:income ratio (%) 50.1 46.7 - Net interest margin (%) 2.39 2.42 - Jun 2005 Dec 2004 G
Slide 32: Australia: Operating Highlights
Australia: Operating Highlights • Aggressive retail initiatives • Significant expansion of Business Banking presence • Strong business as usual performance • Credit quality robust
Slide 33: Australia: Prospects
Australia: Prospects • Continue the East Coast expansion through organic growth plans • Entrench the ‘Customer Champion’ image with further product offerings • Investment to create a scalable back office, shared services and IT infrastructure to support the growth plans
Slide 34: Ireland: Financial Performance
Ireland: Financial Performance H1 2005 H1 2004 Growth % Operating income (€m) 158 124 27 Operating expenses (€m) 71 56 27 Underlying profits (€m) 71 59 20 Cost:income ratio (%) 42.5 40.2 - Net interest margin (%) 1.80 2.06 - Jun 2005 Dec 2004 Growth* % Customer advances (€bn) 14.7 12.6 34 Customer d
Slide 35: Ireland: Operating Highlights
Ireland: Operating Highlights • Strong business as usual performance • Business Banking now the number 2 player • Mortgage business growth and new products launched • Acquisition of retail branch footprint • Strong credit quality
Slide 36: Ireland: Prospects
Ireland: Prospects • Establish a retail branch network • Continue to roll out further product offerings in both Retail and Commercial markets • Invest in Telephone and Internet Banking capability • Continued focus on Business Banking
Slide 37: Retail Insurance & Investment
Retail Insurance & Investment Andy Hornby
Slide 38: Retail Financial Performance
Retail Financial Performance • Underlying profits up 8% to £1,002m • Net interest income up 9% with stable margins • Non-interest income up 13% • Operating costs down 0.1% • Positive 10% ‘jaws’ • Cost:income ratio falls to 41.7% (H1 2004 45.9%)
Slide 39: Retail Operating Performance
Retail Operating Performance • Annualised customer lending up 8% • Net mortgage lending share held at 17% • Unsecured personal loans balance growth held at 3% • 21% share of bank account switchers market • 0.5 million new credit cards • 16,000 new Business Banking customers in England & Wales
Slide 40: Stable Margins
Stable Margins Movement in Margin Basis Points Net interest margin for half year ended Dec 2004 184 Mortgages and Savings (3) Banking (1) Personal Lending (2) Credit Cards 4 Wholesale Funding - Capital Earnings - Net interest margin for half year ended June 2005 182
Slide 41: Secured Credit
Secured Credit • Secured impairments 1.84% (end 2004 1.43%) • The rise in impairments reflects continued deliberate policy - Slowing asset growth - 30% of new business from high margin specialist markets - Remaining underweight in low return re-mortgage activity • Mainstream arrears 1.31% (CML avera
Slide 42: Unsecured Credit
Unsecured Credit • Total impairments stable at 10.7% (end 2004 10.8%) • Unsecured personal loans impairments 14.3% (end 2004 13.6%) • Credit card impairments stable at 9.9% (end 2004 9.9%) • Bank account impairments 6.5% (end 2004 7.4%) • We continue to tighten lending criteria
Slide 43: Rigorous Cost Control
Rigorous Cost Control • Costs down 0.1% • Second wave underway of post-merger cost savings • Low cost scale IT systems drive productivity gains • Cost:income ratio down to 41.7% (H1 2004 45.9%) • Cost growth will remain below inflation in 2005
Slide 44: Retail Prospects
Retail Prospects • Long-term scope for 15%-20% share in all key markets • Short-term growth restraint in mortgages and unsecured personal loans • Maintain momentum in non-interest income • Rigorous cost control and reductions in cost:income ratio Future value creation
Slide 45: Insurance & Investment
Insurance & Investment
Slide 46: Sales and Profits Momentum
Sales and Profits Momentum Profits • Underlying profits up 54% to £436m - Insurance underlying profits up 20% to £233m - Investment underlying profits up 128% to £203m - up 13% to £155m exc short-term fluctuations Sales • Insurance up 12% to £941m GWP • Investment up 12% to £707m EPI (up 13% in UK)
Slide 47: Insurance – Building Market Presence
Insurance – Building Market Presence GWP Growth vs H1 2004 £m % Repayment insurance 524 17 Household insurance 223 (4) Motor insurance 149 23 Other* 45 15 Total 941 12 *includes Legal Protection and Travel
Slide 48: Insurance Prospects Supported by Strong Fundamentals
Insurance Prospects Supported by Strong Fundamentals • Large, quality in force book • Sales prospects remain robust - Repayment: new third party relationships - Household: mortgage related sales and direct marketing - Motor: further development of esure / First Alternative • Current benign underwrit
Slide 49: UK Investment: Market Share Gains Continue
UK Investment: Market Share Gains Continue 15.0% 12.5% 10.0% 7.5% 5.0% 2000 2001 2002 2003 2004 H1 '05 HBOS Aviva Standard Life L&G Prudential Market shares based on 6% estimated growth H1 2005 vs H1 2004. Prudential figures exclude Phoenix annuity acquisition acquisition
Slide 50: Multi-channel Strategy Drives Investment Sales
Multi-channel Strategy Drives Investment Sales Sales (EPI) Growth vs H1 2004 £m % Bancassurance 371 17 Intermediary 232 2 Wealth Management 104 15 Total 707 12
Slide 51: Robust New Business Profitability
Robust New Business Profitability H1 2005 H1 2004 % EPI % EPI Bancassurance 26 29 Intermediary 23 20 Wealth Management 35 36 Total 26 26 New business profitability exceeding medium-term target of 25%
Slide 52: Investment Prospects
Investment Prospects • Bancassurance - highly productive sales force: £550K EPI per advisor p.a. - massive potential as UK’s No 1 liquid savings franchise • Intermediaries - profitability underpinned by low cost manufacturing base - selective participation in multi-ties • Wealth Management - SJPC to
Slide 53: Interim Results
Interim Results 3 August 2005
Slide 54: D¢ HBOS» @) oa A
D¢ HBOS» @) oa A