Lloyds Banking Group plc
22 February 2023
CONTENTS
Alternative performance measures
The Group uses a number of alternative performance measures, including underlying profit, in the description of its business performance and financial position. These measures are labelled with a superscript ‘A’ throughout this document. Further information on these measures is set out on page 34 . Unless otherwise stated, commentary on pages 1 and 2 and on pages 10 to 12 is given on an underlying basis.
Forward looking statements
This news release contains forward looking statements. For further details, reference should be made to page 83 .
RESULTS FOR THE FULL YEAR
“While the operating environment has changed significantly over the last year, the Group has delivered a robust financial performance with strong income growth, continued franchise strength and strong capital generation, enabling increased capital returns for shareholders.
A year ago we announced our ambitious new strategy with the aim of growing our business and deepening relationships with our customers, meeting more of their financial needs. We have made a good start to delivery and remain confident in our ability to deliver for all stakeholders.
We know that the current environment continues to be challenging for many people and have mobilised the organisation to further support our customers. Our purpose-driven strategy is more relevant now than ever before. We remain committed to Helping Britain Prosper and helping the country recover from the current economic uncertainties.
We continue to believe our strategy will create higher, more sustainable returns, as reflected in our enhanced guidance. We are excited about the opportunities ahead.”
Charlie Nunn, Group Chief Executive
Good start to our new strategy with early evidence of delivery
• Significant additional support for customers and colleagues given cost of living pressure
• Changing environment supports the strategic business case. Purpose-driven strategy will enable enhanced customer support whilst delivering efficient growth and diversification. Strategic investment of £0.9 billion in 2022
• Confidence building in strategic financial benefits with early momentum; £0.3 billion of gross cost saves1
• New organisational structure, leadership team and operating model implemented to deliver change more effectively
• Acquisition of Tusker, a vehicle management and leasing company focused on electric and low emissions vehicles, further developing the Group’s Motor business and aligned to our sustainability ambitions
• Supporting the transition to a low carbon economy with new sector-based 2030 emissions reduction targets, a new net zero ambition for our supply chain, alongside launching our first Group climate transition plan2
Robust financial performance and continued business momentum
• Statutory profit before tax of £6.9 billion (2021: £6.9 billion), with higher net income and lower total costs offset by impairment charges as a result of the revised economic outlook (versus a significant write-back in 2021)
• Net income of £18.0 billion, up 14 per cent, supported by continued recovery in customer activity and UK Bank Rate changes, alongside continued low operating lease depreciation
• Underlying net interest income up 18 per cent, primarily driven by a stronger banking net interest margin of 2.94 per cent in the year (3.22 per cent in the fourth quarter) and increased average interest-earning assets
• Other income of £5.2 billion, 4 per cent higher, building our confidence in growth potential. The fourth quarter included a £0.2 billion benefit from insurance assumption and methodology changes
• Operating costs of £8.8 billion, up 6 per cent compared to 2021 and in line with guidance, reflecting stable business-as-usual costs despite inflationary pressures, alongside higher planned strategic investment and new business costs. Remediation of £0.3 billion, down 80 per cent in the year
• Underlying profit before impairment up 46 per cent to £9.0 billion in the year (with £2.4 billion in the fourth quarter), as a result of solid net income growth
• Asset quality remains strong and the portfolio well-positioned in the context of cost of living pressures. Underlying impairment charge of £1.5 billion (£0.5 billion in the fourth quarter) and an asset quality ratio of 32 basis points reflect strong observed credit performance and a deteriorating economic outlook, partly offset by COVID-19 releases
Continued franchise growth and increased capital returns
• Loans and advances to customers at £454.9 billion were up £6.3 billion in the year, with continued growth in the open mortgage book
• Customer deposits of £475.3 billion down £1.0 billion in 2022, with Retail current account growth of £2.5 billion more than offset by reductions in Commercial Banking deposits. Loan to deposit ratio of 96 per cent continues to provide robust funding and liquidity and potential for growth
• Strong pro forma capital generation of 245 basis points3 in the year, based on robust banking performance
• Pro forma CET1 ratio of 14.1 per cent4 after capital distributions and further pension contributions, remaining ahead of the ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent
• The Board has recommended a final ordinary dividend of 1.60 pence per share, resulting in a total ordinary dividend for 2022 of 2.40 pence per share, up 20 per cent on prior year, and in line with the Group’s progressive and sustainable ordinary dividend policy
• Given the Group’s strong capital position, the Board has also announced its intention to implement an ordinary share buyback programme of up to £2.0 billion
• Total capital returns in respect of 2022 of up to £3.6 billion, are equivalent to more than 10 per cent5 of the Group’s market capitalisation value
2023 Guidance
Based on our current macroeconomic assumptions, for 2023 the Group expects:
• Banking net interest margin to be greater than 305 basis points
• Operating costs to be c.£9.1 billion
• Asset quality ratio to be c.30 basis points
• Return on tangible equity to be c.13 per cent
• Capital generation to be c.175 basis points6
2024 and 2026 guidance
Based on the expected macroeconomic environment, the Group’s strategy and investment and reflecting our growth potential, efficiency and the capabilities of our people, technology and data, the Group has enhanced its medium and longer-term guidance:
• Operating costs now expected to be c.£9.2 billion in 2024, with a cost:income ratio of less than 50 per cent by 2026
• Asset quality ratio now expected to be c.30 basis points in 2024
• Return on tangible equity now expected to be c.13 per centin 2024 andgreater than 15 per cent by 2026
• Additional revenues from strategic initiatives of c.£0.7 billion by 2024 and c.£1.5 billion by 2026
• Risk-weighted assets to be between £220 billion and £225 billion at the end of 2024
• Capital generation now expected to be c.175 basis points in 2024, increasing to greater than 200 basis points by 2026 6
• The Group will maintain its progressive and sustainable ordinary dividend policy, whilst the Board expects to pay down to its target CET1 ratio by the end of 2024
Although the macroeconomic outlook remains uncertain, our people, business model and financial strength ensure that we can continue to support our customers and Help Britain Prosper. Our purpose-driven strategy is more relevant now than ever before and our experience in the last year reinforces our belief that successful strategic delivery will create a more sustainable business and deliver increased shareholder returns in the medium to longer-term.
1 Includes savings from both business-as-usual and strategic initiatives.
2 Published in our Environmental Sustainability Report 2022 which can be found at www.lloydsbankinggroup.com/investors/esg-information.html.
3 Excluding regulatory changes on 1 January 2022, ordinary dividends, variable pension contributions and the impact of the announced ordinary share buyback programme. Inclusive of the dividend received from the Insurance business in February 2023.
4 31 December 2022 reflects the dividend received from Insurance in February 2023 and the full impact of the announced share buyback, but excludes the impact of the phased unwind of IFRS 9 relief on 1 January 2023.
5 Market capitalisation as at 17 February 2023.
6 Excluding capital distributions. Inclusive of dividends received from the Insurance business.
INCOME STATEMENT – UNDERLYING BASIS A AND KEY BALANCE SHEET METRICS
| 2022 £m | 2021£m | Change% | |||||
| Underlying net interest income | 13,172 | 11,163 | 18 | ||||
| Underlying other income | 5,249 | 5,060 | 4 | ||||
| Operating lease depreciation | (373) | (460) | 19 | ||||
| Net income | 18,048 | 15,763 | 14 | ||||
| Operating costs 1 | (8,835) | (8,312) | (6) | ||||
| Remediation | (255) | (1,300) | 80 | ||||
| Total costs | (9,090) | (9,612) | 5 | ||||
| Underlying profit before impairment | 8,958 | 6,151 | 46 | ||||
| Underlying impairment (charge) credit 1 | (1,510) | 1,385 | |||||
| Underlying profit | 7,448 | 7,536 | (1) | ||||
| Restructuring 1 | (80) | (452) | 82 | ||||
| Volatility and other items | (440) | (182) | |||||
| Statutory profit before tax | 6,928 | 6,902 | |||||
| Tax expense | (1,373) | (1,017) | (35) | ||||
| Statutory profit after tax | 5,555 | 5,885 | (6) | ||||
| Earnings per share | 7.3p | 7.5p | (0.2)p | ||||
| Dividends per share – ordinary | 2.40p | 2.00p | 0.40p | ||||
| Share buyback value | £2.0bn | £2.0bn | |||||
| Banking net interest margin A | 2.94% | 2.54% | 40bp | ||||
| Average interest-earning banking assets A | £452.0bn | £444.6bn | 2 | ||||
| Cost:income ratio A,1 | 50.4% | 61.0% | (10.6)pp | ||||
| Asset quality ratio A,1 | 0.32% | (0.31)% | |||||
| Return on tangible equity A | 13.5% | 13.8% | (0.3)pp |
A See page 82 .
1 2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 34 .
| At 31 Dec 2022 | At 31 Dec 2021 | Change% | |||||
| Loans and advances to customers | £454.9bn | £448.6bn | 1 | ||||
| Customer deposits | £475.3bn | £476.3bn | |||||
| Loan to deposit ratio A | 96% | 94% | 2pp | ||||
| CET1 ratio | 15.1% | 17.3% | (2.2)pp | ||||
| Pro forma CET1 ratio A,1 | 14.1% | 16.3% | (2.2)pp | ||||
| Total capital ratio | 19.7% | 23.6% | (3.9)pp | ||||
| MREL ratio | 31.7% | 37.2% | (5.5)pp | ||||
| UK leverage ratio | 5.6% | 5.8% | (0.2)pp | ||||
| Risk-weighted assets | £210.9bn | £196.0bn | 8 | ||||
| Wholesale funding 2 | £100.3bn | £93.1bn | 8 | ||||
| Liquidity coverage ratio 2 | 144% | 135% | 9pp | ||||
| Tangible net assets per share A | 51.9p | 57.5p | (5.6)p |
1 31 December 2022 reflects the dividend received from Insurance in February 2023 and the full impact of the announced share buyback, but excludes the impact of the phased unwind of IFRS 9 relief on 1 January 2023. The 31 December 2021 comparative reflects the dividend received from Insurance in February 2022 and the full impact of the share buyback in respect of 2021 that completed in 2022, but excludes the impact of regulatory changes that came into effect on 1 January 2022.
2 Wholesale funding includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7 billion); the comparative has been presented on a consistent basis.The liquidity coverage ratio is calculated as a simple average of month-end observations over the previous 12 months.
QUARTERLY INFORMATION A
| Quarter ended 31 Dec 2022 £m | Quarter ended 30 Sep 2022 £m | Quarter ended 30 Jun 2022 £m | Quarter ended 31 Mar 2022 £m | Quarter ended 31 Dec 2021£m | Quarter ended 30 Sep 2021 £m | Quarterended30 Jun2021£m | Quarterended31 Mar2021£m | ||||||||||||||||
| Underlying net interest income | 3,643 | 3,394 | 3,190 | 2,945 | 2,893 | 2,852 | 2,741 | 2,677 | |||||||||||||||
| Underlying other income | 1,438 | 1,282 | 1,268 | 1,261 | 1,307 | 1,336 | 1,282 | 1,135 | |||||||||||||||
| Operating lease depreciation | (78) | (82) | (119) | (94) | (78) | (111) | (123) | (148) | |||||||||||||||
| Net income | 5,003 | 4,594 | 4,339 | 4,112 | 4,122 | 4,077 | 3,900 | 3,664 | |||||||||||||||
| Operating costs 1 | (2,399) | (2,187) | (2,151) | (2,098) | (2,246) | (2,013) | (2,008) | (2,045) | |||||||||||||||
| Remediation | (166) | (10) | (27) | (52) | (775) | (100) | (360) | (65) | |||||||||||||||
| Total costs | (2,565) | (2,197) | (2,178) | (2,150) | (3,021) | (2,113) | (2,368) | (2,110) | |||||||||||||||
| Underlying profit before impairment | 2,438 | 2,397 | 2,161 | 1,962 | 1,101 | 1,964 | 1,532 | 1,554 | |||||||||||||||
| Underlying impairment (charge) credit 1 | (465) | (668) | (200) | (177) | 532 | 119 | 374 | 360 | |||||||||||||||
| Underlying profit | 1,973 | 1,729 | 1,961 | 1,785 | 1,633 | 2,083 | 1,906 | 1,914 | |||||||||||||||
| Restructuring 1 | (11) | (22) | (23) | (24) | (418) | (24) | 6 | (16) | |||||||||||||||
| Volatility and other items | (203) | (199) | 100 | (138) | (247) | (30) | 95 | – | |||||||||||||||
| Statutory profit before tax | 1,759 | 1,508 | 2,038 | 1,623 | 968 | 2,029 | 2,007 | 1,898 | |||||||||||||||
| Tax (expense) credit | (239) | (299) | (416) | (419) | (548) | (429) | 461 | (501) | |||||||||||||||
| Statutory profit after tax | 1,520 | 1,209 | 1,622 | 1,204 | 420 | 1,600 | 2,468 | 1,397 | |||||||||||||||
| Banking net interest margin A | 3.22% | 2.98% | 2.87% | 2.68% | 2.57% | 2.55% | 2.51% | 2.49% | |||||||||||||||
| Average interest-earning banking assets A | £453.8bn | £454.9bn | £451.2bn | £448.0bn | £449.4bn | £447.2bn | £442.2bn | £439.4bn | |||||||||||||||
| Cost:income ratio A,1 | 51.3% | 47.8% | 50.2% | 52.3% | 73.3% | 51.8% | 60.7% | 57.6% | |||||||||||||||
| Asset quality ratio A,1 | 0.38% | 0.57% | 0.17% | 0.16% | (0.46)% | (0.10)% | (0.33)% | (0.33)% | |||||||||||||||
| Return on tangible equity A | 16.3% | 11.9% | 15.6% | 10.8% | 2.9% | 14.5% | 24.4% | 13.9% | |||||||||||||||
| Loans and advances to customers | £454.9bn | £456.3bn | £456.1bn | £451.8bn | £448.6bn | £450.5bn | £447.7bn | £443.5bn | |||||||||||||||
| Customer deposits | £475.3bn | £484.3bn | £478.2bn | £481.1bn | £476.3bn | £479.1bn | £474.4bn | £462.4bn | |||||||||||||||
| Loan to deposit ratio A | 96% | 94% | 95% | 94% | 94% | 94% | 94% | 96% | |||||||||||||||
| Risk-weighted assets | £210.9bn | £210.8bn | £209.6bn | £210.2bn | £196.0bn | £200.7bn | £200.9bn | £198.9bn | |||||||||||||||
| Tangible net assets per share A | 51.9p | 49.0p | 54.8p | 56.5p | 57.5p | 56.6p | 55.6p | 52.4p |
1 2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 34 .
BALANCE SHEET ANALYSIS
| At 31 Dec 2022 £bn | At 30 Sep 2022 £bn | Change% | At 30 Jun 2022 £bn | Change% | At 31 Dec 2021 £bn | Change% | |||||||||||
| Loans and advances to customers | |||||||||||||||||
| Open mortgage book | 299.6 | 298.4 | 296.6 | 1 | 293.3 | 2 | |||||||||||
| Closed mortgage book | 11.6 | 12.3 | (6) | 13.1 | (11) | 14.2 | (18) | ||||||||||
| Credit cards 1 | 14.3 | 14.3 | 14.2 | 1 | 13.8 | 4 | |||||||||||
| UK Retail unsecured loans | 8.7 | 8.8 | (1) | 8.5 | 2 | 8.1 | 7 | ||||||||||
| UK Motor Finance | 14.3 | 14.2 | 1 | 14.2 | 1 | 14.0 | 2 | ||||||||||
| Overdrafts | 1.0 | 1.0 | 1.0 | 1.0 | |||||||||||||
| Retail other 2 | 13.8 | 13.0 | 6 | 12.5 | 10 | 10.9 | 27 | ||||||||||
| Wealth 1 | 0.9 | 1.0 | (10) | 1.0 | (10) | 1.0 | (10) | ||||||||||
| Small and Medium Businesses 1 | 37.7 | 39.8 | (5) | 41.1 | (8) | 42.5 | (11) | ||||||||||
| Corporate and Institutional Banking 1 | 56.0 | 57.6 | (3) | 55.7 | 1 | 50.0 | 12 | ||||||||||
| Central items 1,3 | (3.0) | (4.1) | (27) | (1.8) | 67 | (0.2) | |||||||||||
| Loans and advances to customers | 454.9 | 456.3 | 456.1 | 448.6 | 1 | ||||||||||||
| Customer deposits | |||||||||||||||||
| Retail current accounts | 114.0 | 115.7 | (1) | 113.4 | 1 | 111.5 | 2 | ||||||||||
| Retail relationship savings accounts | 166.3 | 165.7 | 165.8 | 164.5 | 1 | ||||||||||||
| Retail tactical savings accounts | 16.1 | 16.2 | (1) | 16.9 | (5) | 16.8 | (4) | ||||||||||
| Wealth 1 | 14.4 | 14.9 | (3) | 14.9 | (3) | 15.6 | (8) | ||||||||||
| Commercial Banking deposits | 163.8 | 170.2 | (4) | 166.7 | (2) | 167.5 | (2) | ||||||||||
| Central items 1 | 0.7 | 1.6 | (56) | 0.5 | 40 | 0.4 | 75 | ||||||||||
| Total customer deposits | 475.3 | 484.3 | (2) | 478.2 | (1) | 476.3 | |||||||||||
| Total assets | 877.8 | 892.9 | (2) | 890.4 | (1) | 886.6 | (1) | ||||||||||
| Total liabilities | 830.3 | 846.5 | (2) | 840.3 | (1) | 833.4 | |||||||||||
| Ordinary shareholders’ equity | 42.0 | 40.0 | 5 | 44.4 | (5) | 47.1 | (11) | ||||||||||
| Other equity instruments | 5.3 | 6.2 | (15) | 5.5 | (4) | 5.9 | (10) | ||||||||||
| Non-controlling interests | 0.2 | 0.2 | 0.2 | 0.2 | |||||||||||||
| Total equity | 47.5 | 46.4 | 2 | 50.1 | (5) | 53.2 | (11) | ||||||||||
| Ordinary shares in issue, excluding own shares | 66,944m | 67,464m | (1) | 68,702m | (3) | 70,996m | (6) |
1 The portfolios shown reflect the new organisation structure; comparatives have been presented on a consistent basis. See page 82 .
2 Primarily Europe.
3 Includes central fair value hedge accounting adjustments.
GROUP RESULTS – STATUTORY BASIS
| Summary income statement | 2022£m | 2021£m | Change% | ||||
| Net interest income | 13,957 | 9,366 | 49 | ||||
| Other income | (8,149) | 28,078 | |||||
| Total income1 | 5,808 | 37,444 | (84) | ||||
| Insurance claims and changes in insurance and investment contract liabilities1 | 12,401 | (21,120) | |||||
| Total income, net of insurance claims and changes in insurance and investment contract liabilities | 18,209 | 16,324 | 12 | ||||
| Operating expenses | (9,759) | (10,800) | 10 | ||||
| Impairment (charge) credit | (1,522) | 1,378 | |||||
| Profit before tax | 6,928 | 6,902 | |||||
| Tax expense | (1,373) | (1,017) | (35) | ||||
| Profit for the year | 5,555 | 5,885 | (6) | ||||
| Profit attributable to ordinary shareholders | 5,021 | 5,355 | (6) | ||||
| Profit attributable to other equity holders | 438 | 429 | 2 | ||||
| Profit attributable to non-controlling interests | 96 | 101 | (5) | ||||
| Profit for the year | 5,555 | 5,885 | (6) | ||||
| Ordinary shares in issue (weighted-average – basic) | 68,847m | 70,937m | (3) | ||||
| Basic earnings per share | 7.3p | 7.5p | (0.2)p |
1 Includes income and expense attributable to the policyholders of the Group’s long-term assurance funds that materially offset in arriving at profit before tax. These can, depending on market movements, lead to significant variances on a statutory basis in total income and insurance claims and changes in insurance and investment contract liabilities from one period to the next.
| Summary balance sheet | At 31 Dec 2022£m | At 31 Dec2021£m | Change% | ||||
| Assets | |||||||
| Cash and balances at central banks | 91,388 | 76,420 | 20 | ||||
| Financial assets at fair value through profit or loss | 180,609 | 206,771 | (13) | ||||
| Derivative financial instruments | 24,753 | 22,051 | 12 | ||||
| Financial assets at amortised cost | 520,322 | 517,156 | 1 | ||||
| Financial assets at fair value through other comprehensive income | 23,154 | 28,137 | (18) | ||||
| Other assets | 37,603 | 35,990 | 4 | ||||
| Total assets | 877,829 | 886,525 | (1) | ||||
| Liabilities | |||||||
| Deposits from banks | 7,266 | 7,647 | (5) | ||||
| Customer deposits | 475,331 | 476,344 | |||||
| Repurchase agreements at amortised cost1 | 48,596 | 31,125 | 56 | ||||
| Financial liabilities at fair value through profit or loss | 17,755 | 23,123 | (23) | ||||
| Derivative financial instruments | 24,042 | 18,060 | 33 | ||||
| Debt securities in issue | 73,819 | 71,552 | 3 | ||||
| Liabilities arising from insurance and investment contracts | 149,868 | 168,463 | (11) | ||||
| Other liabilities | 22,901 | 23,951 | (4) | ||||
| Subordinated liabilities | 10,730 | 13,108 | (18) | ||||
| Total liabilities | 830,308 | 833,373 | |||||
| Total equity | 47,521 | 53,152 | (11) | ||||
| Total equity and liabilities | 877,829 | 886,525 | (1) |
1 Repurchase agreements at amortised cost, previously included within other liabilities, are now shown separately; comparatives have been presented on a consistent basis.
GROUP CHIEF EXECUTIVE’S STATEMENT
Throughout 2022, we have continued to deliver on our purpose of Helping Britain Prosper, core to everything we do, whilst creating a more sustainable and inclusive future for people and businesses. Last year we announced our ambitious new strategy with the aim of growing our business and deepening relationships with our customers, meeting more of their financial needs. While the operating environment has changed significantly since then, our purpose-driven strategy is more relevant now than ever before. Based on significant strategic action we have made a good start and are seeing early evidence of delivery. We believe our strategy will create higher more sustainable returns, as reflected in our enhanced guidance and are excited about the opportunities ahead.
During the year, the Group delivered a robust financial performance with continued income growth supported by higher interest rates and solid business volumes. Costs were in line with expectations despite ongoing inflationary pressures. As a result of the Group’s performance and strong pro forma capital generation of 245 basis points in the year, the Board has recommended a final ordinary dividend of 1.60 pence per share, resulting in a total dividend for the year of 2.40 pence, an increase of 20 per cent on prior year and in line with our progressive and sustainable ordinary dividend policy. In addition, the Group has announced a share buyback programme of up to £2.0 billion, resulting in total capital returns of up to £3.6 billion, equivalent to more than 10 per cent of the Group’s market capitalisation value.
We know that the current environment continues to be challenging for many people and have mobilised the organisation to further support our customers. We are committed to maintaining support for our customers, clients and colleagues in the current environment and have invested in deep capabilities to facilitate this. This includes training more than 4,600 colleagues to provide financial assistance to individuals and businesses, build financial resilience to face cost of living challenges and support customers with tailored products if needed. We also saw over 5 million registrations for our Your Credit Score tool, leveraging our digital strengths to help customers take greater control of their own finances. For our colleagues, we provided additional payments in August and December 2022 and designed a new pay deal for 2023, focused on our lower paid colleagues, to provide greater protection and certainty.
Robust financial performance with ongoing strength in our customer franchise
In 2022, we delivered a robust financial performance, with statutory profit before tax of £6.9 billion. Underlying profit before impairment of £9.0 billion was up 46 per cent on 2021, including net income of £18.0 billion, driven by increased average interest-earning assets, a strengthened banking net interest margin, continued recovery in other income and lower operating lease depreciation. Cost discipline was sustained, with operating costs of £8.8 billion, up 6 per cent and in line with guidance, reflecting stable business-as-usual costs and higher planned strategic investment and new businesses. We saw strong observed asset quality with sustained low levels of new to arrears and very modest deterioration in observed credit metrics. Underlying asset quality remains strong, despite the weaker macroeconomic environment.
The Group also benefitted from continued balance sheet growth during the year. Loans and advances to customers were up £6.3 billion at £454.9 billion. This included continued growth of £6.3 billion in the open mortgage book (£1.2 billion of which was in the fourth quarter), alongside higher retail unsecured loan and credit card balances. Commercial Banking balances increased by £1.2 billion during the year due to attractive growth opportunities in the Corporate and Institutional Banking portfolio, partly offset by repayments of government-backed lending. The Group also saw growth in its open book investments, with over £8 billion net new money in the period1, despite difficult market conditions. Customer deposits decreased by £1.0 billion from the end of 2021 to £475.3 billion, with Retail deposits up £2.4 billion in the period, including current account balances up £2.5 billion, more than offset by reductions in Commercial Banking deposits. Group deposits are up c.£65 billion since the end of 2019.
Significant progress on serving all stakeholders, with a good start to our new strategy
We have a purpose-driven strategy. Core to this is our focus on building an inclusive society and supporting the transition to a low carbon economy, while creating new opportunities for our future growth. To build a more inclusive society we have supported £2.1 billion of funding to the social housing sector and lent £14.3 billion to first time buyers in the year. We have also helped around 185,000 small businesses boost their digital capability and technology adoption in the year. Importantly, we are also on track to reach our gender and ethnic diversity ambitions by 2025 supported by delivering a race education programme to our workforce in 2022.
To support the transition to a low carbon economy we have funded over £13 billion of green and sustainable financing2,3 in 2022 and made around £12 billion of discretionary investments in climate-aware strategies through Scottish Widows. We have also created a new partnership with Octopus Energy to support in retrofitting the UK housing stock and launched our first Group climate transition plan which you can find in our Environmental Sustainability Report.
GROUP CHIEF EXECUTIVE’S STATEMENT (continued)
Despite external developments and challenges, our strategy remains the right one. It is more important than ever to deliver against our purpose-driven outcomes that benefit all our stakeholders. We are responding to the economic environment by increasing support to customers and colleagues, whilst accelerating our efficiency actions to offset the significant inflationary pressures in the business. During 2022, the Group invested £0.9 billion of incremental strategic investment, delivering gross cost savings of £0.3 billion so far. We have extended our ambition for savings even further, increasing our 2024 gross cost savings target by an additional £0.2 billion.
Driving revenue growth and diversification
We have made good progress on building deeper customer relationships, as well as innovating and broadening our product offerings and improving the ease with which our customers can access them. We remain the UK’s largest digital bank and have continued to invest in personalisation and digitisation, resulting in a 15 per cent increase in daily logons and growing our digitally active users by 8 per cent to 19.8 million. We have also expanded our presence in areas where we are under-represented. For example, we grew our protection market share by around 1 percentage point1. In our new mass affluent business, we saw an increase in banking balances4 of over 5 per cent and launched new, tailored banking products, including packaged bank accounts and credit cards, as well as enhanced direct to consumer investments. We are building capability as we look to launch our differentiated, digital first model in earnest later this year. In February 2023, the Group announced the acquisition of Tusker, a vehicle management and leasing company focused on electric and low emissions vehicles. This will further develop the Group’s Motor business in a way that is clearly aligned with the organisation’s purpose and sustainability ambitions.
In SME, we continue to digitise and diversify our business, with positive early momentum demonstrated by a more than 20 per cent growth in new merchant services clients. We are also broadening our product capabilities with strategic fintech partnerships where appropriate. Alongside, our targeted Corporate and Institutional offering delivered c.£8 billion of green and sustainable financing2, driven by purpose-driven growth with businesses transitioning to net zero. We are meeting more needs for existing clients and growing non-lending income, supported by investment in product capabilities. This is reflected in a c.20 per cent growth in our percentage share of wallet for foreign exchange trading.
Investing in enablers to improve delivery
Maintaining discipline with regards to cost and capital efficiency is critical to our strategy. To this end, increased customer engagement and continued investment in digital propositions enable us to optimise the cost-to-serve to customers by, for example, streamlining our branch network, whilst reducing our office footprint by c.12 per cent. We remain committed to identifying further efficiencies to minimise the net cost impact from inflationary pressures and create the necessary capacity for investment. With regards to capital efficiency, we have demonstrated RWA discipline during the year whilst pursuing growth in capital-lite and fee generating businesses.
In order to deliver our strategy, we are focused on maximising the potential of our people, technology and data, the key enablers. For our people, efforts in 2022 have focused on positioning the organisation for future success. We have established an experienced, new leadership team with significant capabilities in strategic and digital delivery, alongside a flatter executive structure aligned with our strategic priorities. The strengthening of our senior leadership team is also delivering on our inclusion and diversity objectives. In addition, we restructured our business and technology teams to set up a new platform-based operating model that brings together expertise in cross cutting, multi-functional teams to now drive greater accountability and collaboration and help to effect more quickly and efficiently. Finally, we have continued to invest in the talent, skills and capabilities needed to deliver our long-term growth strategy with our approach extending to consideration of international in-sourcing opportunities and how we work with third parties.
We are investing in modernising our technology estate, improving resilience and operational agility. During 2022 we decommissioned 5 per cent of our legacy applications, in line with our target of a greater than 15 per cent reduction by the end of 2024. As part of our effort to grow the role of data in our business, we reduced our data centre estate by 10 per cent in 2022. We also successfully ingested the first significant tranche of data onto Google’s public cloud platform and continue to target 20 per cent of our applications to be on public and private cloud in 2024. Our experience in 2022 has enhanced our conviction in the fundamental importance of our technology and data transformation programme for the long-term success of the Group.
Through our purpose-driven strategy we will continue to drive revenue growth and diversification across our main businesses, unlocking opportunities through our consumer and commercial franchises. This growth will in turn leverage the Group’s cost and capital efficiency, building on our strong foundations. Critical to this is our intention to maximise the potential of our people, technology and data in supporting our ambitions.
GROUP CHIEF EXECUTIVE’S STATEMENT (continued)
Outlook
Although the macroeconomic outlook remains uncertain, our people, business model and financial strength ensure that we can continue to support our customers and Help Britain Prosper. Our purpose-driven strategy is more relevant now than ever before and our experience in the last year reinforces our belief that successful strategic delivery will create a more sustainable business and deliver increased shareholder returns in the medium to longer-term. Based on our current macroeconomic assumptions the Group expects:
2023 guidance
• Banking net interest margin to be greater than 305 basis points
• Operating costs to be c.£9.1 billion
• Asset quality ratio to be c.30 basis points
• Return on tangible equity to be c.13 per cent
• Capital generation to be c.175 basis points
2024 and 2026 guidance
• Operating costs now expected to be c.£9.2 billion in 2024, with a cost:income ratio of less than 50 per cent by 2026
• Asset quality ratio now expected to be c.30 basis points in 2024
• Return on tangible equity now expected to be c.13 per centin 2024 andgreater than 15 per cent by 2026
• Additional revenues from strategic initiatives of c.£0.7 billion by 2024 and c.£1.5 billion by 2026
• Risk-weighted assets to be between £220 billion and £225 billion at the end of 2024
• Capital generation now expected to be c.175 basis points in 2024, increasing to greater than 200 basis pointsby 2026
• The Group will maintain its progressive and sustainable ordinary dividend policy, whilst the Board expects to pay down to its target CET1 ratio by the end of 2024
1 See page 25.
2 See page 26 .
3 See page 21.
4 Banking balances calculated as the absolute total of Retail customers, excluding Motor.