88CS Lloyds Bk. 50

FINANCIAL REVIEW

Income statement

The Group's profit before tax for the first nine months of 2024 was £3,927 million, 27 per cent lower than the same period in 2023. This was driven by lower net interest income and higher operating expenses, partly offset by a lower impairment charge. Profit after tax was £2,727 million (nine months to 30 September 2023 £3,975 million).

Total income for the first nine months of 2024 was £12,613 million, a decrease of 8 per cent on the same period in 2023. Within this, net interest income of £9,378 million was 10 per cent lower on the prior year, driven by a lower margin. The lower margin reflected anticipated headwinds due to deposit churn and asset margin compression, particularly in the mortgage book as it refinances in a lower margin environment. These factors were partially offset by benefits from higher structural hedge earnings as balances are reinvested in the higher rate environment.

Other income amounted to £3,235 million in the nine months to 30 September 2024 compared to £3,268 million in the same period in 2023, with improved UK Motor Finance performance, reflecting growth following the acquisition of Tusker in the first quarter of 2023, increased fleet size and higher average rental value, partially offset by the impact of changes to commission arrangements with Scottish Widows.

Operating expenses of £8,392 million were 13 per cent higher than in the prior year. This includes the impacts of higher operating lease depreciation, largely as a result of fleet growth, the depreciation of higher value vehicles and declines in used electric car prices, alongside higher ongoing strategic investment, accelerated severance charges and inflationary pressure. It also includes c.£0.1 billion relating to the sector-wide change in the charging approach for the Bank of England Levy taken in the first quarter. In the nine months to 30 September 2024, the Group recognised remediation costs of £118 million (nine months to 30 September 2023: £127 million), largely in relation to pre-existing programmes, with no further charges in respect of the FCA review of historical motor finance commission arrangements. The FCA confirmed in September 2024 its intention to set out next steps in its review in May 2025, including its assessment of the outcome of the Judicial Review and Court of Appeal decisions involving other market participants; the Group will assess the impact, if any, of these decisions.

The impairment charge was £294 million compared with a £881 million charge in the nine months to 30 September 2023. The decrease reflects a larger credit from improvements to the Group's economic outlook in the first half of the year, notably house price growth and through changes to the severe downside scenario methodology. The charge also benefitted from strong portfolio performance, a large debt sale write-back, and a release in Commercial Banking from loss rates used in the model. Asset quality remains strong with resilient credit performance.

Balance sheet

Total assets were £4,207 million higher at £609,612 million at 30 September 2024 compared to £605,405 million at 31 December 2023. Financial assets at amortised cost were £15,406 million higher at £503,477 million compared to £488,071 million at 31 December 2023 with increases in reverse repurchase agreements of £11,128 million and loans and advances to customers of £7,355 million, partly offset by a reduction in loans and advances to banks of £2,919 million. The increase in reverse repurchase agreements and the decrease in cash and balances at central banks by £17,984 million to £39,925 million reflected a change in the mix of liquidity holdings. The increase in loans and advances to customers included growth in UK mortgages, UK Retail unsecured loans, credit cards and the European retail business, partly offset by government-backed lending repayments in Commercial Banking. Financial assets at fair value through other comprehensive income were £5,032 million higher reflecting a change in the mix of liquidity holdings. Other assets increased by £1,864 million to £28,925 million, driven by higher settlement balances and higher operating lease assets reflecting continued motor finance growth.

Total liabilities were £4,390 million higher at £569,364 million compared to £564,974 million at 31 December 2023. Customer deposits at £446,311 million have increased by £4,358 million since the end of 2023, driven by inflows to limited withdrawal and fixed term savings products, partly offset by a reduction in current account balances and an expected significant outflow in Commercial Banking. In addition, repurchase agreements at £41,370 million have increased by £3,668 million since the end of 2023. Debt securities in issue at amortised cost decreased by £7,369 million to £45,080 million at 30 September 2024. Amounts due to fellow Lloyds Banking Group undertakings increased by £1,510 million to £4,442 million at 30 September 2024. Other liabilities increased by £3,042 million to £12,926 million, driven by higher settlement balances.

Total equity was £40,248 million at 30 September 2024 was broadly stable compared to £40,431 million at 31 December 2023, with the profit for the period largely offset by interim dividends of £3.4 billion, pension revaluations and movements in the cash flow hedging reserve.

FINANCIAL REVIEW (continued)

Capital

The Group's common equity tier 1 (CET1) capital ratio reduced to 13.6 per cent at 30 September 2024 (31 December 2023: 14.4 per cent). This largely reflected profit for the period, offset by the payment of interim ordinary dividends, the accrual for foreseeable ordinary dividends and an increase in risk-weighted assets.

The Group's total capital ratio reduced to 19.8 per cent (31 December 2023: 20.5 per cent). The issuance of AT1 and Tier 2 capital instruments was more than offset by the reduction in CET1 capital, the reduction in eligible provisions recognised through Tier 2 capital, the impact of regulatory amortisation and foreign exchange on Tier 2 capital instruments and the increase in risk-weighted assets.

Risk-weighted assets have increased by £2,350 million to £184,910 million at 30 September 2024 (31 December 2023: £182,560 million). This reflects the impact of Retail lending growth, Retail secured CRD IV model updates and other movements, partly offset by optimisation including capital efficient securitisation activity.

The Group's UK leverage ratio reduced to 5.3 per cent (31 December 2023: 5.6 per cent). This reflected both the reduction in the total tier 1 capital position and an increase in the leverage exposure measure, principally related to the increase in securities financing transactions and other balance sheet movements.