TIDM94WP
RNS Number : 5068W
Lloyds Bank PLC
01 August 2018
Lloyds Bank plc
2018 Half-Year Results
Member of the Lloyds Banking Group
FORWARD LOOKING STATEMENTS
This document contains certain forward looking statements with
respect to the business, strategy, plans and / or results of the
Group and its current goals and expectations relating to its future
financial condition and performance. Statements that are not
historical facts, including statements about the Group's or its
directors' and/or management's beliefs and expectations, are
forward looking statements. By their nature, forward looking
statements involve risk and uncertainty because they relate to
events and depend upon circumstances that will or may occur in the
future. Factors that could cause actual business, strategy, plans
and/or results (including but not limited to the payment of
dividends) to differ materially from forward looking statements
made by the Group or on its behalf include, but are not limited to:
general economic and business conditions in the UK and
internationally; market related trends and developments;
fluctuations in interest rates, inflation, exchange rates, stock
markets and currencies; the ability to access sufficient sources of
capital, liquidity and funding when required; changes to the
Group's or Lloyds Banking Group plc's credit ratings; the ability
to derive cost savings and other benefits including, but without
limitation as a result of any acquisitions, disposals and other
strategic transactions; changing customer behaviour including
consumer spending, saving and borrowing habits; changes to borrower
or counterparty credit quality; instability in the global financial
markets, including Eurozone instability, instability as a result of
the exit by the UK from the European Union (EU) and the potential
for other countries to exit the EU or the Eurozone and the impact
of any sovereign credit rating downgrade or other sovereign
financial issues; technological changes and risks to the security
of IT and operational infrastructure, systems, data and information
resulting from increased threat of cyber and other attacks;
natural, pandemic and other disasters, adverse weather and similar
contingencies outside the Group's or Lloyds Banking Group plc's
control; inadequate or failed internal or external processes or
systems; acts of war, other acts of hostility, terrorist acts and
responses to those acts, geopolitical, pandemic or other such
events; changes in laws, regulations, practices and accounting
standards or taxation, including as a result of the exit by the UK
from the EU, or a further possible referendum on Scottish
independence; changes to regulatory capital or liquidity
requirements and similar contingencies outside the Group's or
Lloyds Banking Group plc's control; the policies, decisions and
actions of governmental or regulatory authorities or courts in the
UK, the EU, the US or elsewhere including the implementation and
interpretation of key legislation and regulation together with any
resulting impact on the future structure of the Group; the ability
to attract and retain senior management and other employees and
meet its diversity objectives; actions or omissions by the Group's
directors, management or employees including industrial action;
changes to the Group's post-retirement defined benefit scheme
obligations; the extent of any future impairment charges or
write-downs caused by, but not limited to, depressed asset
valuations, market disruptions and illiquid markets; the value and
effectiveness of any credit protection purchased by the Group; the
inability to hedge certain risks economically; the adequacy of loss
reserves; the actions of competitors, including non-bank financial
services, lending companies and digital innovators and disruptive
technologies; and exposure to regulatory or competition scrutiny,
legal, regulatory or competition proceedings, investigations or
complaints. Please refer to the latest Annual Report on Form 20-F
filed by Lloyds Banking Group plc with the US Securities and
Exchange Commission for a discussion of certain factors and risks
together with examples of forward looking statements. Except as
required by any applicable law or regulation, the forward looking
statements contained in this document are made as of today's date,
and the Group expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward looking
statements contained in this document to reflect any change in the
Group's expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
The information, statements and opinions contained in this document
do not constitute a public offer under any applicable law or an
offer to sell any securities or financial instruments or any advice
or recommendation with respect to such securities or financial
instruments.
CONTENTS
Page
Financial review 1
Principal risks and uncertainties 5
Condensed consolidated half-year financial statements (unaudited)
Consolidated income statement 6
Consolidated statement of comprehensive income 7
Consolidated balance sheet 8
Consolidated statement of changes in equity 10
Consolidated cash flow statement 14
Notes 16
Statement of directors' responsibilities 55
Independent review report 56
Contacts 58
FINANCIAL REVIEW
As a result of the requirements of the ring-fencing regulations,
the Bank sold its subsidiary, Scottish Widows Group Limited, to its
ultimate holding company during May 2018. This is only an internal
reorganisation within the Lloyds Banking Group, but due to the
significance of the Scottish Widows entities they have been
classified as discontinued operations for the purposes of the
Bank's consolidated statutory reporting.
In addition, also in May 2018, the Bank and its subsidiary, Bank
of Scotland plc, sold the element of their commercial banking
businesses required to be transferred in order to ensure compliance
with the Ring-fencing legislation to Lloyds Bank Corporate Markets
plc, a fellow Lloyds Banking Group undertaking.
Continuing operations
During the half-year to 30 June 2018, the Group recorded a
profit before tax from its continuing operations of GBP2,354
million compared with a profit before tax in the half-year to 30
June 2017 of GBP2,579 million.
Total income decreased by GBP217 million, or 2 per cent, to
GBP8,513 million in the half-year to 30 June 2018 compared with
GBP8,730 million in the half-year to 30 June 2017; a GBP450 million
increase in net interest income was more than offset by a decrease
of GBP667 million in other income.
Net interest income was GBP6,391 million in the half-year to 30
June 2018, an increase of GBP450 million, or 8 per cent compared to
GBP5,941 million in the half-year to 30 June 2017 as a result of
margin improvements due to the benefit from the acquisition of MBNA
and lower deposit and wholesale funding costs, more than offsetting
continued asset pricing pressure.
Other income was GBP667 million lower at GBP2,122 million in the
half-year to 30 June 2018 compared to GBP2,789 million in the
half-year to 30 June 2017. Net fee and commission income was GBP189
million lower at GBP752 million in the half-year to 30 June 2018
compared to GBP941 million in the half-year to 30 June 2017, in
part due to a lower level of current account fees as a result of
changes to overdraft charging announced in July 2017, which took
effect in November. Net trading income was GBP431 million lower at
GBP184 million in the half-year to 30 June 2018 compared to GBP615
million in the half-year to 30 June 2017. Other operating income
was GBP47 million lower at GBP1,186 million in the half-year to 30
June 2018 compared to GBP1,233 million in the half-year to 30 June
2017, with 2018 including a loss of GBP105 million on the sale of
the Group's Irish residential mortgage portfolio.
Operating expenses decreased by GBP219 million to GBP5,729
million in the half-year to 30 June 2018 compared with GBP5,948
million in the half-year to 30 June 2017. There was a GBP433
million reduction in regulatory provisions partly offset by a
GBP214 million increase in other operating expenses. The charge in
respect of regulatory provisions was GBP778 million compared to
GBP1,211 million in the half-year to 30 June 2017 and comprised a
charge of GBP550 million in respect of payment protection insurance
and GBP228 million in respect of other conduct issues. Other
operating expenses were GBP214 million higher at GBP4,951 million
in the half-year to 30 June 2018 compared to GBP4,737 million in
the half-year to 30 June 2017 reflecting costs of GBP75 million in
MBNA and an increased level of staff, restructuring and other
costs.
Credit quality across the portfolio remains strong. Impairment
losses increased by GBP227 million to GBP430 million in the
half-year to 30 June 2018 compared with GBP203 million in the
half-year to 30 June 2017, reflecting the expected lower releases
and write-backs and the acquisition of MBNA. In the current benign
economic environment, the implementation of IFRS 9 has not had a
significant effect on the Group's impairment charge.
Discontinued operations
The Group sold the Scottish Widows Group to its ultimate holding
company, Lloyds Banking Group plc, at the beginning of May 2018 and
so the results of discontinued operations reflect four months of
trading compared to a full six months in the half-year to 30 June
2017; a trading surplus of GBP370 million compared to GBP389
million for the half-year to 30 June 2017. The Group realised a
profit of GBP1,010 million on the sale of Scottish Widows Group,
which is reported as part of discontinued operations.
FINANCIAL REVIEW (continued)
Balance sheet and capital
Total assets were GBP130,811 million lower at GBP692,219 million
at 30 June 2018 compared to GBP823,030 million at 31 December 2017,
principally due to the sale of the Group's insurance activities.
Loans and advances to customers were reduced following
reclassifications on adoption of IFRS 9 but this has been partly
offset by continued growth in targeted segments such as SME and
motor finance, while the open mortgage book was broadly unchanged
over the period. Financial assets held at fair value through other
comprehensive income have reduced following sales of some of the
Group's gilt holdings.
In May 2018, Standard & Poor's upgraded Lloyds Bank plc's
long-term rating by one notch to 'A+'
Total equity has decreased by GBP10,550 million from GBP51,194
million at 31 December 2017 to GBP40,644 million at 30 June 2018,
principally due to dividends paid of GBP10,422 million and a
capital repayment of GBP1,800 million as the Group restructures its
capital following the sale of businesses as part of the Lloyds
Banking Group's programme for compliance with the Ring-fencing
legislation.
The Group's common equity tier 1 capital ratio reduced to 15.1
per cent (31 December 2017: 15.8 per cent), predominantly
reflecting the net impact of ring-fencing related restructuring
activities on capital resources and risk-weighted assets during the
period, including the transfer of the Group's holding in its
Insurance business (Scottish Widows Group) to its ultimate parent
company Lloyds Banking Group plc and the transfer of assets and
liabilities of non ring-fenced portfolios to Lloyds Bank Corporate
Markets plc. The restructuring activities resulted in the payment
of a GBP7,622 million dividend to Lloyds Banking Group plc, a
substantial reduction in the deduction for significant investments
and the removal of the deconsolidation adjustments previously
applied to shareholders' equity. The impact of the ring-fencing
related restructuring activities was partially offset by profits
generated during the period, the receipt of dividends paid by the
Insurance business in February 2018, a reduction in the deferred
tax asset deduction and a substantial reduction in excess expected
losses resulting from the partial absorption of the increase in
impairment provisions following the adoption of IFRS 9 on 1 January
2018, which were in turn offset by the accrual for foreseeable
dividends in respect of the first half of 2018, the impact on
retained earnings following the adoption of IFRS 9 on 1 January
2018 (net of transitional relief), movements through the FVOCI
reserve and an increase in intangible assets which are deducted
from capital.
The tier 1 capital ratio reduced to 17.9 per cent (31 December
2017: 18.3 per cent) primarily reflecting the reduction in common
equity tier 1 and the annual reduction in the transitional limit
applied to grandfathered AT1 capital instruments, partially offset
by the reduction in risk-weighted assets. The total capital ratio
increased to 22.0 per cent (31 December 2017: 21.5 per cent),
largely reflecting the reduction in risk-weighted assets and the
deduction for significant investments, partially offset by the
reduction in common equity tier 1 capital.
Risk-weighted assets reduced by GBP18,981 million, or 9 per
cent, to GBP187,047 million at 30 June 2018, compared to GBP206,028
million at 31 December 2017, largely reflecting the impact of the
ring-fencing related restructuring activities.
Capital position at 30 June 2018
The Group's capital position as at 30 June 2018, applying CRD IV
transitional rules and IFRS 9 transitional arrangements, is set out
in the following section.
Financial review (continued)
Capital ratios
At At
30 June 31 Dec
Capital resources (transitional) 2018 2017
GBPm GBPm
Common equity tier 1
Shareholders' equity per balance sheet 37,335 47,598
Adjustment to retained earnings for foreseeable
dividends (600) (2,475)
Deconsolidation adjustments(1) - 738
Adjustment for own credit (13) 109
Cash flow hedging reserve (1,058) (1,573)
Other adjustments 469 (28)
36,133 44,369
Less: deductions from common equity tier 1
Goodwill and other intangible assets (3,331) (2,952)
Prudent valuation adjustment (202) (454)
Excess of expected losses over impairment provisions
and value adjustments (8) (477)
Removal of defined benefit pension surplus (1,318) (541)
Securitisation deductions (1) (191)
Significant investments(1) - (3,990)
Deferred tax assets (3,060) (3,264)
--------- --------
Common equity tier 1 capital 28,213 32,500
--------- --------
Additional tier 1
Additional tier 1 instruments 5,937 6,593
Less: deductions from tier 1
Significant investments(1) (638) (1,373)
Total tier 1 capital 33,512 37,720
--------- --------
Tier 2
Tier 2 instruments 7,693 7,700
Eligible provisions - 120
Less: deductions from tier 2
Significant investments(1) - (1,241)
--------- --------
Total tier 2 capital 7,693 6,579
--------- --------
Total capital resources 41,205 44,299
--------- --------
Risk-weighted assets 187,047 206,028
Common equity tier 1 capital ratio(2) 15.1% 15.8%
Tier 1 capital ratio(2) 17.9% 18.3%
Total capital ratio(2) 22.0% 21.5%
(1) Prior to the transfer of the Group's Insurance business during
the period to Lloyds Banking Group plc (the ultimate parent company),
the Group's Insurance business was deconsolidated for regulatory
capital purposes and replaced by the amount of the Group's investment
in the business. A part of this amount was deducted from capital
(shown as 'significant investments' in the table above) and the
remaining amount was risk-weighted, forming part of threshold risk-weighted
assets.
(2) Reflecting the full impact of IFRS 9 at 30 June 2018, without the
application of transitional arrangements, the Group's common equity
tier 1 capital ratio would be 14.8%, the tier 1 capital ratio would
be 17.6% and the total capital ratio would be 22.0%.
Financial review (continued)
At At
30 June 31 Dec
2018 2017
GBPm GBPm
Risk-weighted assets
Foundation Internal Ratings Based (IRB) Approach 58,045 60,207
Retail IRB Approach 58,868 61,588
Other IRB Approach 11,073 12,359
-------- -------
IRB Approach 127,986 134,154
Standardised Approach 29,064 25,283
Credit risk 157,050 159,437
-------- -------
Counterparty credit risk 2,786 6,055
Contributions to the default fund of a central
counterparty 459 428
Credit valuation adjustment risk 569 1,402
Operational risk 23,402 24,880
Market risk 1,260 3,051
-------- -------
Underlying risk-weighted assets 185,526 195,253
Threshold risk-weighted assets 1,521 10,775
-------- -------
Total risk-weighted assets 187,047 206,028
-------- -------
Principal risks and uncertainties
The significant risks faced by the Group which could impact the
success of delivering against the Group's long-term strategic
objectives and through which global macro-economic conditions,
on-going political uncertainty, regulatory developments and market
liquidity dynamics could manifest, are detailed below. Except where
noted, there has been no significant change to the description of
these risks or key mitigating actions disclosed in the Group's 2017
Annual Report and Accounts, with any quantitative disclosures
updated herein.
Lloyds Banking Group continues to consider and assess the
potential implications of the UK leaving the European Union and
manage related developments to assess, and if possible mitigate any
impact to its customers, colleagues and products - as well as
legal, regulatory, tax, financial and capital implications.
Credit risk - The risk that parties with whom the Group has
contracted fail to meet their financial obligations (both on and
off balance sheet). Adverse changes in the economic, geopolitical
and market environment could impact profitability due to an
increase in impairment losses, write downs and/or decrease in asset
valuations.
Regulatory and legal risk - The risks of changing legislation,
regulation, policies, voluntary codes of practice and their
interpretation in the markets in which the Group operates may have
a significant impact on the Group's operations, business prospects,
structure, costs, capital requirements and/or ability to enforce
contractual obligations.
Conduct risk - Conduct risk can arise from a number of areas
including selling products to customers which do not meet their
needs; failing to deal with customers' complaints effectively; not
meeting customers' expectations; failing to promote effective
competition in the interest of customers; and exhibiting behaviours
which could impact on the integrity of the market or undermine
wider regulatory standards.
Operational risk - The Group faces significant operational risks
which may disrupt services to customers, cause reputational damage,
and result in financial loss. These include the availability,
resilience and security of the Group's core IT systems, unlawful or
inappropriate use of customer data, theft of sensitive data, fraud
and financial crime threats, and the potential for failings in the
Group's customer processes.
People risk - Key people risks include the risk that the Group
fails to maintain organisational skills, capability, resilience and
capacity levels in response to organisational, political and
external market change and evolving business needs.
Capital risk - The risk that the Group has a sub-optimal
quantity or quality of capital or that capital is inefficiently
deployed across the Group.
Funding and liquidity risk - The risk that the Group has
insufficient financial resources to meet its commitments as they
fall due.
Governance risk - Against a background of increased regulatory
focus on governance and risk management, the most significant
challenges arise from meeting the requirements to ring-fence core
UK financial services and activities from January 2019 and further
requirements under the Senior Manager and Certification Regime
(SMCR).
Market risk - The risk that the Group's capital or earnings
profile is affected by adverse market rates, in particular interest
rates and credit spreads in the banking business, and credit
spreads in the Group's defined benefit pension schemes.
Model risk - The risk of financial loss, regulatory censure,
reputational damage or customer detriment, as a result of
deficiencies in the development, application and ongoing operation
of financial models and rating systems.
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED INCOME STATEMENT
Half-year Half-year
to 30 to 30
June June
2018 2017
Note GBPm GBPm
Interest and similar income 8,045 7,778
Interest and similar expense (1,654) (1,837)
--------- ---------
Net interest income 6,391 5,941
--------- ---------
Fee and commission income 1,290 1,428
Fee and commission expense (538) (487)
--------- ---------
Net fee and commission income 3 752 941
Net trading income 184 615
Other operating income 1,186 1,233
--------- ---------
Other income 2,122 2,789
--------- ---------
Total income 8,513 8,730
--------- ---------
Regulatory provisions (778) (1,211)
Other operating expenses (4,951) (4,737)
--------- ---------
Total operating expenses 4 (5,729) (5,948)
--------- ---------
Trading surplus 2,784 2,782
Impairment 5 (430) (203)
Profit before tax - continuing operations 2,354 2,579
Tax expense 6 (704) (858)
--------- ---------
Profit after tax - continuing operations 1,650 1,721
Profit after tax - discontinued operations 10 1,314 331
--------- ---------
Profit for the period 2,964 2,052
--------- ---------
Profit attributable to ordinary shareholders 2,806 1,864
Profit attributable to other equity shareholders(1) 135 137
--------- ---------
Profit attributable to equity holders 2,941 2,001
Profit attributable to non-controlling interests 23 51
Profit for the period 2,964 2,052
--------- ---------
(1) The profit after tax attributable to other equity holders of GBP135
million (half-year to 30 June 2017: GBP137 million) is offset
in reserves by a tax credit attributable to ordinary shareholders
of GBP36 million (half-year to 30 June 2017: GBP37 million).
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Half-year Half-year
to 30 to 30
June June
2018 2017
GBPm GBPm
Profit for the period 2,964 2,052
Other comprehensive income:
Items that will not subsequently be reclassified
to profit or loss:
Post-retirement defined benefit scheme remeasurements:
--------- ---------
Remeasurements before tax 908 (124)
Tax (206) 32
--------- ---------
702 (92)
Movements in revaluation reserve in respect of
equity shares held at fair value through other
comprehensive income:
--------- ---------
Change in fair value (97)
Tax 22
--------- ---------
(75)
Gains and losses attributable to own credit risk:
--------- ---------
Gains and (losses) before tax 167 (44)
Tax (45) 12
--------- ---------
122 (32)
Items that may subsequently be reclassified to
profit or loss:
Movements in revaluation reserve in respect of
debt securities held at fair value through other
comprehensive income:
--------- ---------
Change in fair value 109
Income statement transfers in respect of disposals (206)
Impairment 1
Tax 46
--------- ---------
(50)
Movements in revaluation reserve in respect of
available-for-sale financial assets:
--------- ---------
Change in fair value 455
Income statement transfers in respect of disposals (315)
Income statement transfers in respect of impairment 6
Tax (48)
--------- ---------
98
Movement in cash flow hedging reserve:
--------- ---------
Effective portion of changes in fair value (286) (212)
Net income statement transfers (423) (313)
Tax 194 140
--------- ---------
(515) (385)
Currency translation differences (tax: nil) (2) (7)
--------- ---------
Other comprehensive income for the period, net
of tax 182 (418)
--------- ---------
Total comprehensive income for the period 3,146 1,634
--------- ---------
Total comprehensive income attributable to ordinary
shareholders arising from continuing operations 1,644 1,103
Total comprehensive income attributable to ordinary
shareholders arising from discontinued operations 1,344 343
--------- ---------
Total comprehensive income attributable to ordinary
shareholders 2,988 1,446
Total comprehensive income attributable to other
equity holders 135 137
--------- ---------
Total comprehensive income attributable to equity
holders 3,123 1,583
Total comprehensive income attributable to non-controlling
interests 23 51
Total comprehensive income for the period 3,146 1,634
--------- ---------
CONSOLIDATED BALANCE SHEET
At At
30 June 31 Dec
2018 2017
Note GBPm GBPm
Assets
Cash and balances at central banks 50,091 58,521
Items in course of collection from banks 702 755
Financial assets at fair value through profit
or loss 7 37,146 45,608
Derivative financial instruments 20,802 24,152
Loans and advances to banks 5,073 4,274
Loans and advances to customers 8 454,080 465,555
Debt securities 4,274 3,637
Due from fellow Lloyds Banking Group undertakings 27,485 6,195
-------- -------
Financial assets at amortised cost 490,912 479,661
Financial assets at fair value through other
comprehensive income 31,300
Available-for-sale financial assets 41,717
Goodwill 474 474
Other intangible assets 3,033 2,666
Property, plant and equipment 8,889 9,062
Current tax recoverable 2 16
Deferred tax assets 3,238 3,104
Retirement benefit assets 12 1,584 723
Assets of discontinued operations 10a - 154,227
Assets of held-for-sale disposal group 10b 33,634 -
Other assets 10,412 2,344
-------- -------
Total assets 692,219 823,030
-------- -------
CONSOLIDATED BALANCE SHEET (continued)
At At
30 June 31 Dec
2018 2017
Note GBPm GBPm
Equity and liabilities
Liabilities
Deposits from banks 27,822 28,888
Customer deposits 401,558 418,124
Due to fellow Lloyds Banking Group undertakings 35,965 13,237
Items in course of transmission to banks 846 579
Financial liabilities at fair value through
profit or loss 39,645 50,874
Derivative financial instruments 18,971 24,699
Notes in circulation 1,140 1,313
Debt securities in issue 11 69,971 61,865
Liabilities of discontinued operations 10a - 146,518
Liabilities of held-for-sale disposal group 10b 32,770 -
Other liabilities 4,864 4,540
Retirement benefit obligations 12 265 281
Current tax liabilities 192 827
Other provisions 4,415 5,309
Subordinated liabilities 13,151 14,782
-------- -------
Total liabilities 651,575 771,836
Equity
-------- -------
Share capital 1,574 1,574
Share premium account 600 600
Other reserves 6,969 7,706
Retained profits 28,192 37,718
-------- -------
Shareholders' equity 37,335 47,598
Other equity instruments 3,217 3,217
-------- -------
Total equity excluding non-controlling interests 40,552 50,815
Non-controlling interests 92 379
-------- -------
Total equity 40,644 51,194
-------- -------
Total equity and liabilities 692,219 823,030
-------- -------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
Share
capital Other Non-
and Other Retained equity controlling
premium reserves profits Total instruments interests Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 31
December 2017 2,174 7,706 37,718 47,598 3,217 379 51,194
Adjustment for
IFRS 9 and IFRS
15 (note 18) - (236) (955) (1,191) - - (1,191)
--------- ---------- -------- -------- ------------ ------------ --------
Balance at 1 January
2018 2,174 7,470 36,763 46,407 3,217 379 50,003
Comprehensive
income
Profit for the
period - - 2,941 2,941 - 23 2,964
Other comprehensive
income
--------- ---------- -------- -------- ------------ ------------ --------
Post-retirement
defined benefit
scheme remeasurements,
net of tax - - 702 702 - - 702
Movements in
revaluation
reserve in respect
of financial assets
held at fair value
through other
comprehensive
income, net of
tax:
Debt securities - (50) - (50) - - (50)
Equity shares - (75) - (75) - - (75)
Gains and losses
attributable to
own credit risk,
net of tax - - 122 122 - - 122
Movements in cash
flow hedging reserve,
net of tax - (515) - (515) - - (515)
Currency translation
differences (tax:
nil) - (2) - (2) - - (2)
--------- ---------- -------- -------- ------------ ------------ --------
Total other
comprehensive
income - (642) 824 182 - - 182
--------- ---------- -------- -------- ------------ ------------ --------
Total comprehensive
income - (642) 3,765 3,123 - 23 3,146
--------- ---------- -------- -------- ------------ ------------ --------
Transactions with
owners
--------- ---------- -------- -------- ------------ ------------ --------
Dividends - - (10,422) (10,422) - (5) (10,427)
Distributions
on other equity
instruments, net
of tax - - (99) (99) - - (99)
Capital repayment
to parent - - (1,800) (1,800) - - (1,800)
Capital contributions
received - - 126 126 - - 126
Changes in
non-controlling
interests - - - - - (305) (305)
--------- ---------- -------- -------- ------------ ------------ --------
Total transactions
with owners - - (12,195) (12,195) - (310) (12,505)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity shareholders
-----------------------------------------
Share
capital Other Non-
and Other Retained equity controlling
premium reserves profits Total instruments interests Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Realised gains
and losses on
equity shares
held at fair value
through other
comprehensive
income - 141 (141) - - - -
---------- ---------- --------- ------ ------------ ------------ ------
Balance at 30
June 2018 2,174 6,969 28,192 37,335 3,217 92 40,644
---------- ---------- --------- ------ ------------ ------------ ------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity shareholders
Share
capital Other Non-
and Other Retained equity controlling
premium reserves profits Total instruments interests Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 January
2017 1,574 8,484 36,231 46,289 3,217 745 50,251
Comprehensive income
Profit for the period - - 2,001 2,001 - 51 2,052
Other comprehensive
income
--------- ---------- --------- ------- ------------ ------------ -------
Post-retirement
defined benefit
scheme remeasurements,
net of tax - - (92) (92) - - (92)
Movements in revaluation
reserve in respect
of available-for-sale
financial assets,
net of tax - 98 - 98 - - 98
Gains and losses
attributable to
own credit risk,
net of tax - - (32) (32) - - (32)
Movements in cash
flow hedging reserve,
net of tax - (385) - (385) - - (385)
Currency translation
differences (tax:
nil) - (7) - (7) - - (7)
--------- ---------- --------- ------- ------------ ------------ -------
Total other
comprehensive
income - (294) (124) (418) - - (418)
--------- ---------- --------- ------- ------------ ------------ -------
Total comprehensive
income - (294) 1,877 1,583 - 51 1,634
--------- ---------- --------- ------- ------------ ------------ -------
Transactions with
owners
--------- ---------- --------- ------- ------------ ------------ -------
Dividends - - (1,600) (1,600) - (10) (1,610)
Distributions on
other equity
instruments,
net of tax - - (100) (100) - - (100)
Redemption of preference
shares 600 - (600) - - - -
Capital contributions
received - - 219 219 - - 219
Return of capital
contributions - - (74) (74) - - (74)
Changes in
non-controlling
interests - - - - - (3) (3)
--------- ---------- --------- ------- ------------ ------------ -------
Total transactions
with owners 600 - (2,155) (1,555) - (13) (1,568)
--------- ---------- --------- ------- ------------ ------------ -------
Balance at 30 June
2017 2,174 8,190 35,953 46,317 3,217 783 50,317
--------- ---------- --------- ------- ------------ ------------ -------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity shareholders
Share
capital Other Non-
and Other Retained equity controlling
premium reserves profits Total instruments interests Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 July
2017 2,174 8,190 35,953 46,317 3,217 783 50,317
Comprehensive income
Profit for the period - - 2,138 2,138 - 39 2,177
Other comprehensive
income
--------- ---------- --------- ------- ------------ ------------ -------
Post-retirement
defined benefit
scheme remeasurements,
net of tax - - 574 574 - - 574
Movements in revaluation
reserve in respect
of available-for-sale
financial assets,
net of tax - (198) - (198) - - (198)
Gains and losses
attributable to
own credit risk,
net of tax - - (8) (8) - - (8)
Movements in cash
flow hedging reserve,
net of tax - (266) - (266) - - (266)
Currency translation
differences, net
of tax - (20) - (20) - - (20)
--------- ---------- --------- ------- ------------ ------------ -------
Total other
comprehensive
income - (484) 566 82 - - 82
--------- ---------- --------- ------- ------------ ------------ -------
Total comprehensive
income - (484) 2,704 2,220 - 39 2,259
--------- ---------- --------- ------- ------------ ------------ -------
Transactions with
owners
--------- ---------- --------- ------- ------------ ------------ -------
Dividends - - (1,050) (1,050) - (59) (1,109)
Distributions on
other equity
instruments - - (99) (99) - - (99)
Capital contribution
received - - 213 213 - - 213
Return of capital
contributions - - (3) (3) - - (3)
Changes in
non-controlling
interests - - - - - (384) (384)
--------- ---------- --------- ------- ------------ ------------ -------
Total transactions
with owners - - (939) (939) - (443) (1,382)
--------- ---------- --------- ------- ------------ ------------ -------
Balance as at
31 December 2017 2,174 7,706 37,718 47,598 3,217 379 51,194
--------- ---------- --------- ------- ------------ ------------ -------
CONSOLIDATED CASH FLOW STATEMENT
Half-year Half-year
to 30 to 30
June June
2018 2017
GBPm GBPm
Profit before tax 3,734 2,968
Adjustments for:
Change in operating assets (6,945) (16,790)
Change in operating liabilities 2,969 (3,421)
Non-cash and other items (1,946) 8,559
Tax paid (1,173) (38)
--------- ---------
Net cash provided by (used in) operating activities (3,361) (8,722)
Cash flows from investing activities
Purchase of financial assets (6,050) (1,847)
Proceeds from sale and maturity of financial
assets 14,856 5,276
Purchase of fixed assets (1,733) (1,960)
Proceeds from sale of fixed assets 542 763
Acquisition of businesses, net of cash acquired (26) (1,909)
Disposal of businesses, net of cash disposed 7,622 26
--------- ---------
Net cash provided by investing activities 15,211 349
Cash flows from financing activities
--------- ---------
Dividends paid to ordinary shareholders (10,422) (1,600)
Distributions on other equity instruments (135) (137)
Dividends paid to non-controlling interests (5) (10)
Return of capital contribution - (74)
Interest paid on subordinated liabilities (625) (655)
Proceeds from issue of subordinated liabilities 201 -
Repayment of subordinated liabilities (1,612) (1,236)
Capital repayment to parent company (1,800) -
Borrowings from parent company 9,430 4,149
Repayments to parent company (3,817) -
Interest paid on borrowing from parent company (322) (111)
Change in non-controlling interests - (3)
Net cash used in financing activities (9,107) 323
Effects of exchange rate changes on cash and
cash equivalents 1 -
--------- ---------
Change in cash and cash equivalents 2,744 (8,050)
Cash and cash equivalents at beginning of period 60,982 62,908
--------- ---------
Cash and cash equivalents at end of period 63,726 54,858
--------- ---------
Cash and cash equivalents comprise cash and balances at central
banks (excluding mandatory deposits) and amounts due from banks
with a maturity of less than three months.
CONSOLIDATED CASH FLOW STATEMENT (continued)
Discontinued operations
The impact of the Group's discontinued operations on the above
cash flow statement is as follows:
Half-year Half-year
to 30 to 30
June June
2018 2017
GBPm GBPm
Net cash provided by operating activities (11,529) (11,466)
Net cash from investing activities 60 224
Net cash used in financing activities (682) (655)
--------- ---------
Change in cash and cash equivalents (12,151) (11,897)
--------- ---------
NOTES
Page
1 Accounting policies, presentation and estimates 17
2 Segmental analysis 24
3 Net fee and commission income 25
4 Operating expenses 26
5 Impairment 26
6 Taxation 27
7 Financial assets at fair value through profit or loss 27
8 Loans and advances to customers 28
9 Allowance for impairment losses 29
10 Disposal groups and discontinued operations 30
11 Debt securities in issue 33
12 Post-retirement defined benefit schemes 34
13 Provisions for liabilities and charges 35
14 Contingent liabilities and commitments 36
15 Fair values of financial assets and liabilities 40
16 Related party transactions 49
17 Dividends on ordinary shares 49
18 Implementation of IFRS 9 and IFRS 15 50
19 Future accounting developments 54
20 Ultimate parent undertaking 54
21 Other information 54
1. Accounting policies, presentation and estimates
These condensed consolidated half-year financial statements as
at and for the period to 30 June 2018 have been prepared in
accordance with the Disclosure Guidance and Transparency Rules of
the Financial Conduct Authority (FCA) and with International
Accounting Standard 34 (IAS 34), Interim Financial Reporting as
adopted by the European Union and comprise the results of Lloyds
Bank plc (the Bank) together with its subsidiaries (the Group).
They do not include all of the information required for full annual
financial statements and should be read in conjunction with the
Group's consolidated financial statements as at and for the year
ended 31 December 2017 which were prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the European Union. Copies of the 2017 Annual Report and Accounts
are available on the Lloyds Banking Group's website and are
available upon request from Investor Relations, Lloyds Banking
Group plc, 25 Gresham Street, London EC2V 7HN.
The directors consider that it is appropriate to continue to
adopt the going concern basis in preparing the condensed
consolidated half-year financial statements. In reaching this
assessment, the directors have considered projections for the
Group's capital and funding position.
Except as noted below, the accounting policies are consistent
with those applied by the Group in its 2017 Annual Report and
Accounts.
Changes in accounting policy
The Group has adopted IFRS 9 and IFRS 15 with effect from 1
January 2018.
(i) IFRS 9 Financial Instruments
IFRS 9 replaces IAS 39 and addresses classification, measurement
and derecognition of financial assets and liabilities, the
impairment of financial assets measured at amortised cost or fair
value through other comprehensive income and general hedge
accounting.
Impairment: IFRS 9 replaces the IAS 39 'incurred loss'
impairment approach with an 'expected credit loss' approach. The
revised approach applies to financial assets including finance
lease receivables, recorded at amortised cost or fair value through
other comprehensive income; loan commitments and financial
guarantees that are not measured at fair value through profit or
loss are also in scope. The expected credit loss approach requires
an allowance to be established upon initial recognition of an asset
reflecting the level of losses anticipated after having regard to,
amongst other things, expected future economic conditions.
Subsequently the amount of the allowance is affected by changes in
the expectations of loss driven by changes in associated credit
risk.
Classification and measurement: IFRS 9 requires financial assets
to be classified into one of the following measurement categories:
fair value through profit or loss, fair value through other
comprehensive income and amortised cost. Classification is made on
the basis of the objectives of the entity's business model for
managing its financial assets and the contractual cash flow
characteristics of the instruments. The requirements for
derecognition are broadly unchanged from IAS 39. The standard also
retains most of the IAS 39 requirements for financial liabilities
except for those designated at fair value through profit or loss
whereby that part of the fair value change attributable to the
entity's own credit risk is recorded in other comprehensive income.
The Group early adopted this requirement with effect from 1 January
2017.
1. Accounting policies, presentation and estimates (continued)
General hedge accounting: The new hedge accounting model aims to
provide a better link between risk management strategy, the
rationale for hedging and the impact of hedging on the financial
statements. The standard does not explicitly address macro hedge
accounting solutions, which are being considered in a separate IASB
project - Accounting for Dynamic Risk Management. Until this
project is finalised, the IASB has provided an accounting policy
choice to retain IAS 39 hedge accounting in its entirety or choose
to apply the IFRS 9 hedge accounting requirements. The Group has
elected to continue applying hedge accounting as set out in IAS
39.
(ii) IFRS 15 Revenue from Contracts with Customers
IFRS 15 has replaced IAS 18 Revenue and IAS 11 Construction
Contracts. The core principle of IFRS 15 is that revenue reflects
the transfer of goods or services to customers in an amount that
reflects the consideration to which an entity expects to be
entitled. The recognition of such revenue is in accordance with
five steps to: identify the contract; identify the performance
obligations; determine the transaction price; allocate the
transaction price to the performance obligations; and recognise
revenue when the performance obligations are satisfied.
Details of the impact of adoption of IFRS 9 and IFRS 15 are
provided in note 18.
The following policies will substantially replace the relevant
sections of the existing policies (D), (E) and (H) in the 2018
Annual Report and Accounts as they relate to revenue recognition,
classification and measurement and impairment. Policies that are
substantially unchanged such as accounting for borrowings, sales
and repurchase agreements, recognition and derecognition and hedge
accounting are not repeated.
(D) Revenue recognition
Interest income and expense are recognised in the income
statement for all interest-bearing financial instruments using the
effective interest method, except for those classified at fair
value through profit or loss. The effective interest method is a
method of calculating the amortised cost of a financial asset or
liability and of allocating the interest income or interest expense
over the expected life of the financial instrument. The effective
interest rate is the rate that exactly discounts the estimated
future cash payments or receipts over the expected life of the
financial instrument to the gross carrying amount of the financial
asset (before adjusting for expected credit losses) or to the
amortised cost of the financial liability, including early
redemption fees, and related penalties, and premiums and discounts
that are an integral part of the overall return. Direct incremental
transaction costs related to the acquisition, issue or disposal of
a financial instrument are also taken into account. Interest income
from non-credit impaired financial assets is recognised by applying
the effective interest rate to the gross carrying amount of the
asset; for credit impaired financial assets, the effective interest
rate is applied to the net carrying amount after deducting the
allowance for expected credit losses. Impairment policies are set
out in (H) below.
Fees and commissions receivable which are not an integral part
of the effective interest rate are recognised as income as the
services are provided. Current account and card fees are accrued
evenly over the course of the year. Loan commitment fees for loans
that are likely to be drawn down are deferred (together with
related direct costs) and recognised as an adjustment to the
effective interest rate on the loan once drawn. Where it is
unlikely that loan commitments will be drawn, loan commitment fees
are recognised over the life of the facility. Incremental costs
incurred to generate fee and commission income are charged to fees
and commissions expense as they are incurred.
Dividend income is recognised when the right to receive payment
is established.
1. Accounting policies, presentation and estimates (continued)
(E) Financial assets and liabilities
On initial recognition, financial assets are classified as
measured at amortised cost, fair value through other comprehensive
income or fair value through profit or loss, depending on the
Group's business model for managing the financial assets and
whether the cash flows represent solely payments of principal and
interest. The Group assesses its business models at a portfolio
level based on its objectives for the relevant portfolio, how the
performance of the portfolio is managed and reported, and the
frequency of asset sales. Financial assets with embedded
derivatives are considered in their entirety when considering their
cash flow characteristics. The Group reclassifies financial assets
when and only when its business model for managing those assets
changes.
Equity investments are measured at fair value through profit or
loss unless the Group elects at initial recognition to account for
the instruments at fair value through other comprehensive income.
For these investments, dividends are recognised in profit or loss
but fair value gains and losses are not subsequently reclassified
to profit or loss following derecognition of the investment.
(1) Financial assets measured at amortised cost
Financial assets that are held to collect contractual cash flows
where those cash flows represent solely payments of principal and
interest are measured at amortised cost. A basic lending
arrangement results in contractual cash flows that are solely
payments of principal and interest on the principal amount
outstanding. Where the contractual cash flows introduce exposure to
risks or volatility unrelated to a basic lending arrangement such
as changes in equity prices or commodity prices, the payments do
not comprise solely principal and interest. Financial assets
measured at amortised cost are predominantly loans and advances to
customers and banks together with certain debt securities. Loans
and advances are initially recognised when cash is advanced to the
borrower at fair value inclusive of transaction costs. Interest
income is accounted for using the effective interest method (see
(D) above).
Financial liabilities are measured at amortised cost, except for
trading liabilities and other financial liabilities designated at
fair value through profit or loss on initial recognition which are
held at fair value.
(2) Financial assets measured at fair value through other
comprehensive income
Financial assets that are held to collect contractual cash flows
and for subsequent sale, where the assets' cash flows represent
solely payments of principal and interest, are recognised in the
balance sheet at their fair value, inclusive of transaction costs.
Gains and losses arising from changes in fair value are recognised
directly in other comprehensive income, until the financial asset
is either sold or matures, at which time the cumulative gain or
loss previously recognised in other comprehensive income is
recognised in the income statement other than in respect of equity
shares, for which the cumulative revaluation amount is transferred
directly to profit and loss reserves. Interest calculated using the
effective interest method and foreign exchange gains and losses on
assets denominated in foreign currencies are recognised in the
income statement. In addition, the Group recognises a charge for
expected credit losses in the income statement (see (H) below). As
the asset is measured at fair value, the charge does not adjust the
carrying value of the asset, it is reflected in other comprehensive
income.
1. Accounting policies, presentation and estimates (continued)
(3) Financial instruments measured at fair value through profit
or loss
Financial assets are classified at fair value through profit or
loss where they do not meet the criteria to be measured at
amortised cost or fair value through other comprehensive income or
where they are designated at fair value through profit or loss to
reduce an accounting mismatch. Derivatives are carried at fair
value.
The assets backing the insurance and investment contracts issued
by the Group do not meet the criteria to be measured at amortised
cost or fair value through other comprehensive income as they are
managed on a fair value basis and accordingly are measured at fair
value through profit or loss. Similarly, trading securities, which
are debt securities and equity shares acquired principally for the
purpose of selling in the short term or which are part of a
portfolio which is managed for short-term gains, do not meet these
criteria and are also measured at fair value through profit or
loss. Financial assets measured at fair value through profit or
loss are recognised in the balance sheet at their fair value. Fair
value gains and losses together with interest coupons and dividend
income are recognised in the income statement within net trading
income in the period in which they occur.
Financial liabilities are measured at fair value through profit
or loss where they are trading liabilities or where they are
designated at fair value through profit or loss in order to reduce
an accounting mismatch; where the liabilities are part of a group
of liabilities (or assets and liabilities) which is managed, and
its performance evaluated, on a fair value basis; or where the
liabilities contain one or more embedded derivatives that
significantly modify the cash flows arising under the contract and
would otherwise need to be separately accounted for. Financial
liabilities measured at fair value through profit or loss are
recognised in the balance sheet at their fair value. Fair value
gains and losses are recognised in the income statement within net
trading income in the period in which they occur, except that gains
and losses attributable to changes in own credit risk are
recognised in other comprehensive income.
The fair values of assets and liabilities traded in active
markets are based on current bid and offer prices respectively. If
the market is not active the Group establishes a fair value by
using valuation techniques. The fair values of derivative financial
instruments are adjusted where appropriate to reflect credit risk
(via credit valuation adjustments (CVAs), debit valuation
adjustments (DVAs) and funding valuation adjustments (FVAs)),
market liquidity and other risks.
1. Accounting policies, presentation and estimates (continued)
(H) Impairment of financial assets
The impairment charge in the income statement includes the
change in expected credit losses and certain fraud costs. Expected
credit losses are recognised for loans and advances to customers
and banks, other financial assets held at amortised cost, financial
assets measured at fair value through other comprehensive income,
and certain loan commitments and financial guarantee contracts.
Expected credit losses are calculated by using an appropriate
probability of default, adjusted to take into account a range of
possible future economic scenarios, and applying this to the
estimated exposure of the Group at the point of default after
taking into account the value of any collateral held or other
mitigants of loss and including the impact of discounting using the
effective interest rate.
At initial recognition, allowance (or provision in the case of
some loan commitments and financial guarantees) is made for
expected credit losses resulting from default events that are
possible within the next 12 months (12-month expected credit
losses). In the event of a significant increase in credit risk,
allowance (or provision) is made for expected credit losses
resulting from all possible default events over the expected life
of the financial instrument (lifetime expected credit losses).
Financial assets where 12-month expected credit losses are
recognised are considered to be Stage 1; financial assets which are
considered to have experienced a significant increase in credit
risk are in Stage 2; and financial assets which have defaulted or
are otherwise considered to be credit impaired are allocated to
Stage 3.
An assessment of whether credit risk has increased significantly
since initial recognition considers the change in the risk of
default occurring over the remaining expected life of the financial
instrument. The assessment is unbiased, probability-weighted and
uses forward-looking information consistent with that used in the
measurement of expected credit losses. In determining whether there
has been a significant increase in credit risk, the Group uses a
quantitative test based on relative and absolute PD movements
linked to internal credit ratings together with qualitative
indicators such as watchlists and other indicators of historic
delinquency. However, unless identified at an earlier stage, the
credit risk of financial assets is deemed to have increased
significantly when more than 30 days past due. Where the credit
risk subsequently improves such that it no longer represents a
significant increase in credit risk since origination, the asset is
transferred back to Stage 1.
Assets are transferred to Stage 3 when they have defaulted or
are otherwise considered to be credit impaired. IFRS 9 contains a
rebuttable presumption that default occurs no later than when a
payment is 90 days past due. The Group uses this 90 day backstop
for all its products except for UK mortgages. For UK mortgages, the
Group has assumed a backstop of 180 days past due as mortgage
exposures more than 90 days past due, but less than 180 days,
typically show high cure rates and this aligns to the Group's risk
management practices.
In certain circumstances, the Group will renegotiate the
original terms of a customer's loan, either as part of an ongoing
customer relationship or in response to adverse changes in the
circumstances of the borrower. In the latter circumstances, the
loan will remain classified as either Stage 2 or Stage 3 until
there is sufficient evidence to demonstrate a significant reduction
in the risk of non-payment of future cash flows. Renegotiation may
also lead to the loan and associated allowance being derecognised
and a new loan being recognised initially at fair value.
A loan or advance is normally written off, either partially or
in full, against the related allowance when the proceeds from
realising any available security have been received or there is no
realistic prospect of recovery and the amount of the loss has been
determined. Subsequent recoveries of amounts previously written off
decrease the amount of impairment losses recorded in the income
statement. For both secured and unsecured retail balances, the
write-off takes place only once an extensive set of collections
processes has been completed, or the status of the account reaches
a point where policy dictates that continuing concessions are no
longer appropriate. For commercial lending, a write-off occurs if
the loan facility with the customer is restructured, the asset is
under administration and the only monies that can be received are
the amounts estimated by the administrator, the underlying assets
are disposed and a decision is made that no further settlement
monies will be received, or external evidence (for example, third
party valuations) is available that there has been an irreversible
decline in expected cash flows.
1. Accounting policies, presentation and estimates (continued)
Future accounting developments
Details of those IFRS pronouncements which will be relevant to
the Group but which will not be effective at 31 December 2018 and
which have not been applied in preparing these condensed
consolidated half-year financial statements are set out in note
19.
Critical accounting estimates and judgements
The preparation of the Group's financial statements requires
management to make judgements, estimates and assumptions that
impact the application of accounting policies and the reported
amounts of assets, liabilities, income and expenses. Due to the
inherent uncertainty in making estimates, actual results reported
in future periods may include amounts which differ from those
estimates. Estimates, judgements and assumptions are continually
evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be
reasonable under the circumstances. Other than in relation to the
implementation of IFRS 9, there have been no significant changes in
the basis upon which estimates have been determined, compared to
that applied at 31 December 2017.
The calculation of the Group's expected credit loss (ECL)
allowances and provisions against loan commitments and guarantees
under IFRS 9 requires the Group to make a number of judgements,
assumptions and estimates. The most significant are set out
below.
Definition of default
The probability of default (PD) of an exposure, both over a 12
month period and over its lifetime, is a key input to the
measurement of the ECL allowance. Default has occurred when there
is evidence that the customer is experiencing significant financial
difficulty which is likely to affect the ability to repay amounts
due.
The definition of default adopted by the Group is described in
(H) Impairment of financial assets above. This definition is
aligned to the regulatory definition of default used by the Group
for capital and regulatory reporting except that the Group has made
the decision to treat forborne non-performing past term interest
only mortgages as credit impaired.
As noted in (H) Impairment of financial assets, the Group has
rebutted the presumption in IFRS 9 that default occurs no later
than when a payment is 90 days past due. The impact on the Group's
ECL allowance of assuming a backstop of 180 days past due for UK
mortgages is not material.
Lifetime of an exposure
To derive the PDs necessary to calculate the ECL allowance it is
necessary to estimate the expected life of each financial
instrument. A range of approaches has been adopted across different
product groupings including the full contractual life and taking
into account behavioural factors such as early repayments and
refinancing. For Retail assets, the Group has defined the lifetime
for each product by analysing the time taken for all losses to be
observed and for a material proportion of the assets to fully
resolve through either closure or write-off. For revolving
products, the Group has considered the losses beyond the
contractual term over which the Group is exposed to credit risk.
For Commercial overdraft facilities, the average behavioural life
has been used. Changes to the assumed expected lives of the
Commercial assets could have a material effect on the ECL allowance
recognised by the Group.
1. Accounting policies, presentation and estimates (continued)
Significant increase in credit risk (SICR)
Performing assets are classified as either Stage 1 or Stage 2.
An ECL allowance equivalent to 12 months expected losses is
established against assets in Stage 1; assets classified as Stage 2
carry an ECL allowance equivalent to lifetime expected losses.
Assets are transferred from Stage 1 to Stage 2 when there has been
an SICR since initial recognition. As described in (H) Impairment
of financial assets above, the Group uses a quantitative test
together with qualitative indicators and a backstop of 30 days past
due for determining whether there has been a SICR. The setting of
precise trigger points combined with risk indicators requires
judgement. The use of different trigger points may have a material
impact upon the size of the ECL allowance.
For Retail, a deterioration of four grades for credit cards,
personal loans or overdrafts, or three grades for personal
mortgages, or two grades for asset finance accounts, would trigger
a transfer to Stage 2. For Commercial a doubling of PD with a
minimum increase in PD of 1 per cent and a resulting change in the
underlying grade would trigger a transfer.
Forward looking information
The measurement of expected credit losses is required to reflect
an unbiased probability-weighted range of possible future
outcomes.
In order to do this the Group uses a model to project a number
of key variables to generate in excess of 2,000 possible future
economic scenarios. These are ranked according to severity of loss
and four scenarios are selected to represent the full loss
distribution; a central scenario which reflects the assumptions
used for medium-term planning purposes, an upside and a downside
scenario and a severe downside scenario. Each scenario receives a
30 per cent weighting except for the severe downside scenario which
is weighted at 10 per cent. These scenarios are used to produce a
weighted average PD for each product grouping which is used to
determine stage allocation and calculate the related ECL
allowance.
The choice of alternative scenarios and probability weighting is
a combination of quantitative analysis and judgemental assessments,
designed to ensure that the full range of possible outcomes and
material non-linearity are captured. The key UK economic
assumptions made by the Lloyds Banking Group as at 30 June 2018 are
shown below:
Severe
Base Case Upside Downside Downside
% % % %
Interest rate 1.43 2.29 0.90 0.65
Unemployment rate 4.8 4.0 5.7 7.1
House price growth 2.7 6.5 (2.9) (5.6)
CRE price growth 0.5 9.0 (5.3) (8.1)
2. Segmental analysis
The Group provides a wide range of banking and financial
services in the UK and in certain locations overseas. The Group
Executive Committee (GEC) of the Lloyds Banking Group has been
determined to be the chief operating decision maker for the Group.
Following the transfer of HBOS to the Group on 1 January 2010, all
of the trading activities of the Lloyds Banking Group are carried
out within the Group and, as a result, the chief operating decision
maker reviewed the Group's performance by considering that of the
Lloyds Banking Group. However, following the sale of the Group's
insurance business and certain other businesses as a result of the
ring-fencing legislation this is no longer the case. Accordingly,
the chief operating decision maker now reviews the results of the
Group's businesses separately.
The Group's activities are organised into two financial
reporting segments: Retail and Commercial Banking.
There has been no change to the Group's segmental accounting for
internal segment services or derivatives entered into by units for
risk management purposes since 31 December 2017.
Half-year to 30
June 2018
Commercial Continuing Discontinued
Retail Banking Other operations Operations(1) Adjustments Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 4,488 1,442 461 6,391 11 - 6,402
Other income,
net of insurance
claims 1,086 737 299 2,122 692 (296) 2,518
------- ---------- ------- ----------- -------------- ----------- -------
Total income,
net of insurance
claims(2) 5,574 2,179 760 8,513 703 (296) 8,920
Costs (3,632) (1,069) (1,028) (5,729) (333) 296 (5,766)
------- ---------- ------- ----------- -------------- ----------- -------
Trading surplus 1,942 1,110 (268) 2,784 370 - 3,154
Impairment (461) 9 22 (430) - - (430)
Profit on disposal - - - - 1,010 - 1,010
------- ---------- ------- ----------- -------------- ----------- -------
Profit before
tax 1,481 1,119 (246) 2,354 1,380 - 3,734
------- ---------- ------- ----------- -------------- ----------- -------
Total external
assets 350,505 170,140 171,574 692,219 - - 692,219
Total external
liabilities 262,547 212,235 176,793 651,575 - - 651,575
(1) The Group's discontinued operations were previously in its Insurance
segment.
(2) An analysis of segment income between internal and external revenue
is not available.
2. Segmental analysis (continued)
Half-year to 30
June 2017
Commercial Continuing Discontinued
Retail Banking Other Operations Operations(1) Adjustments Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 4,186 1,496 259 5,941 (676) - 5,265
Other income,
net of insurance
claims 1,169 1,035 585 2,789 1,552 (247) 4,094
------- ---------- ------- ----------- -------------- ----------- -------
Total income,
net of insurance
claims(2) 5,355 2,531 844 8,730 876 (247) 9,359
Costs (4,223) (1,255) (470) (5,948) (487) 247 (6,188)
------- ---------- ------- ----------- -------------- ----------- -------
Trading surplus 1,132 1,276 374 2,782 389 - 3,171
Impairment (218) 1 14 (203) - - (203)
Profit before
tax 914 1,277 388 2,579 389 - 2,968
------- ---------- ------- ----------- -------------- ----------- -------
Total external
assets 349,594 186,185 133,024 668,803 154,227 (7,414) 815,616
Total external
liabilities 261,855 236,211 127,252 625,318 146,518 (7,414) 764,422
(1) The Group's discontinued operations were previously in its Insurance
segment.
(2) An analysis of segment income between internal and external revenue
is not available.
3. Net fee and commission income
Half-year Half-year
to 30 to 30
June June
2018 2017
GBPm GBPm
Fee and commission income:
--------- ---------
Current accounts 315 367
Credit and debit card fees 478 460
Other 497 601
--------- ---------
Total fee and commission income 1,290 1,428
Fee and commission expense (538) (487)
--------- ---------
Net fee and commission income 752 941
--------- ---------
Current account and credit and debit card fees principally arise
in Retail. Other fees include corporate banking, treasury and other
fees arising in Commercial Banking; and private banking and asset
management fees.
4. Operating expenses
Half-year Half-year
to 30 to 30
June June
2018 2017
GBPm GBPm
Administrative expenses:
Staff costs 2,405 2,258
Premises and equipment 357 388
Other expenses 1,006 1,000
--------- ---------
3,768 3,646
Depreciation and amortisation 1,183 1,091
Total operating expenses, excluding regulatory
provisions 4,951 4,737
Regulatory provisions (note 13):
--------- ---------
Payment protection insurance provision 546 700
Other regulatory provisions 232 511
--------- ---------
778 1,211
Total operating expenses 5,729 5,948
--------- ---------
5. Impairment
Half-year Half-year
to 30 to 30
June June
2018 2017
GBPm GBPm
Loans and advances to customers 444 200
Debt securities - (4)
--------- ---------
Financial assets at amortised cost 444 196
Undrawn balances (15) 1
Financial assets at fair value through other
comprehensive income (2017: available-for-sale
financial assets) 1 6
--------- ---------
Total impairment charged to the income statement 430 203
--------- ---------
6. Taxation
In accordance with IAS 34, the Group's income tax expense for
the half-year to 30 June 2018 is based on the best estimate of the
weighted-average annual income tax rate expected for the full
financial year. The tax effects of one-off items are not included
in the weighted-average annual income tax rate, but are recognised
in the relevant period.
An explanation of the relationship between tax expense and
accounting profit is set out below:
Half-year Half-year
to 30 to 30
June June
2018 2017
GBPm GBPm
Profit before tax from continuing operations 2,354 2,579
--------- ---------
Tax thereon at UK corporation tax rate of 19
per cent (2017: 19.25 per cent) (447) (496)
Impact of surcharge on banking profits (182) (231)
Non-deductible costs: conduct charges (92) (172)
Other non-deductible costs (23) (24)
Non-taxable income 35 32
Tax exempt gains on disposals 1 69
Recognition of losses that arose in prior years (10) 9
Remeasurement of deferred tax due to rate changes - (42)
Differences in overseas tax rates 3 (1)
Adjustments in respect of prior years 11 (3)
Tax effect of share of results in joint ventures - 1
Other items - -
--------- ---------
Tax charge on profit from continuing operations (704) (858)
--------- ---------
7. Financial assets at fair value through profit or loss
At At
30 June 31 Dec
2018 2017
GBPm GBPm
Trading assets 32,840 42,830
Other financial assets at fair value through
profit or loss:
-------- -------
Treasury and other bills 57 18
Loans and advances to customers 2,609 -
Debt securities 512 2,710
Equity shares 1,128 50
-------- -------
4,306 2,778
-------- -------
Total financial assets at fair value through
profit or loss 37,146 45,608
-------- -------
8. Loans and advances to customers
At At
30 June 31 Dec
2018 2017
GBPm GBPm
Agriculture, forestry and fishing 7,219 7,074
Energy and water supply 1,525 1,609
Manufacturing 5,865 7,886
Construction 4,746 4,428
Transport, distribution and hotels 13,669 14,074
Postal and communications 2,165 2,148
Property companies 26,097 27,606
Financial, business and other services 52,121 54,003
Personal:
Mortgages 298,219 304,480
Other 28,840 28,757
Lease financing 1,860 2,094
Hire purchase 14,691 13,591
-------- -------
457,017 467,750
Allowance for impairment losses on loans and
advances to customers (note 9) (2,937) (2,195)
-------- -------
Total loans and advances to customers 454,080 465,555
-------- -------
Loans and advances to customers include advances securitised
under the Group's securitisation and covered bond programmes (see
note 11).
9. Allowance for impairment losses
Stage 1 Stage 2 Stage 3 Total
In respect of drawn balances GBPm GBPm GBPm GBPm
Balance at 31 December 2017 2,198
Adjustment for IFRS 9 (note 18) 1,033
------- ------- ------- -----
Balance at 1 January 2018 575 1,114 1,542 3,231
Exchange and other adjustments (7) (1) (35) (43)
Advances written off - - (795) (795)
Recoveries of advances written off in previous years - - 113 113
Charge to the income statement (59) (141) 644 444
------- ------- ------- -----
509 972 1,469 2,950
In respect of undrawn balances
Balance at 31 December 2017 30
Adjustment for IFRS 9 (note 18) 243
------- ------- ------- -----
Balance at 1 January 2018 147 126 - 273
Exchange and other adjustments (15) (16) 21 (10)
Charge to the income statement 10 (36) 11 (15)
------- ------- ------- -----
142 74 32 248
------- ------- ------- -----
At 30 June 2018 651 1,046 1,501 3,198
------- ------- ------- -----
In respect of:
------- ------- ------- -----
Loans and advances to banks 1 - - 1
Loans and advances to customers (note 8) 508 965 1,464 2,937
Debt securities - - 2 2
Other assets - 7 3 10
------- ------- ------- -----
Drawn balances 509 972 1,469 2,950
Provisions in relation to loan commitments and financial
guarantees 142 74 32 248
------- ------- ------- -----
Total allowance for impairment losses 651 1,046 1,501 3,198
------- ------- ------- -----
10. Disposal groups and discontinued operations
(a) Discontinued operations
At 31 December 2017, the Group classified the assets and
liabilities of the Scottish Widows Group as a held-for-sale
disposal group on the basis that a sale of its operations to its
ultimate holding company, Lloyds Banking Group plc, was expected to
occur within 12 months; this sale completed in the first half of
2018.
The Group did not recognise any impairment relating to disposal
groups classified as held-for-sale during the half-year to 30 June
2017.
These operations have been classified as discontinued operations
and the profit after tax from these activities reported as a single
line on the Group's income statement.
In order to fairly reflect the results and financial position of
the Group's continuing operations and its discontinued operations,
transactions that the continuing operations have with the
discontinued operations are reported on the relevant line in the
Group's income statement or balance sheet, with the matching
transaction similarly reported in the discontinued operations
income statement or balance sheet within the Group's disposal
group. All such transactions fully eliminate within the Group's
statutory consolidation and there is no net impact on profit before
tax or equity.
Income statement
The results of the discontinued operations, up to the point of
sale in 2018, are as follows:
Half-year Half-year
to to
30 June 30 June
2018 2017
GBPm GBPm
Interest and similar income 14 117
Interest and similar expense (3) (793)
--------- ---------
Net interest income 11 (676)
--------- ---------
Fee and commission income 106 210
Fee and commission expense (180) (303)
--------- ---------
Net fee and commission income (74) (93)
Net trading income (790) 5,223
Insurance premium income 2,714 4,099
Other operating income 205 299
--------- ---------
Other income 2,055 9,528
--------- ---------
Total income 2,066 8,852
Insurance claims (1,363) (7,976)
--------- ---------
Total income, net of insurance claims 703 876
Operating expenses (333) (487)
--------- ---------
Trading surplus 370 389
Profit on disposal of the discontinued operations 1,010 -
---------
Profit before tax 1,380 389
Taxation (66) (58)
--------- ---------
Profit after tax from discontinued operations 1,314 331
--------- ---------
10. Disposal group and discontinued operations (continued)
Balance sheet
The asset and liabilities of the disposal group at 31 December
2017 were comprised as follows:
As at
31 Dec
2017
GBPm
Assets
Trading and other financial assets at fair value through
profit or loss 125,051
Derivative financial instruments 3,465
Loans and receivables:
-------
Loans and advances to banks 2,337
Due from fellow Lloyds Banking Group undertakings 1,721
-------
4,058
Goodwill 1,836
Value of in-force business 4,839
Other intangible assets 169
Property, plant and equipment 3,655
Deferred tax assets 1
Other assets 11,153
-------
Total assets of disposal group 154,227
-------
Liabilities
Deposits from banks 916
Due to fellow Lloyds Banking Group undertakings 2,063
Derivative financial instruments 3,147
Debt securities in issue 1,794
Liabilities arising from insurance contracts and participating
investment contracts 103,434
Liabilities arising from non-participating investment
contracts 15,447
Other liabilities 16,049
Retirement benefit obligations 77
Current tax liabilities 187
Deferred tax liabilities 823
Other provisions 236
Subordinated liabilities 2,345
-------
Total liabilities of disposal group 146,518
-------
Cumulative other comprehensive income relating to discontinued
operations at 31 December 2017 was a deficit of GBP129 million.
10. Disposal group and discontinued operations (continued)
(b) Disposal group
During the second half of 2018, the Group will be selling its US
and offshore operations to a fellow Lloyds Banking Group
undertaking, Lloyds Bank Corporate Markets plc, as part of the
ongoing programme for compliance with ring-fencing legislation.
These businesses have been classified as a disposal group as at 30
June 2018. The assets and liabilities of the disposal group are
comprised as follows:
As at
30 June
2018
GBPm
Cash and balances at central banks 12,041
Loans and advances to customers 7,041
Amounts due from fellow Lloyds Banking Group undertakings 14,213
Other assets 339
--------
Assets of held-for-sale disposal group 33,634
--------
Customer deposits 16,299
Debt securities in issue 2,423
Amounts due to fellow Lloyds Banking Group undertakings 13,967
Other liabilities 81
--------
Liabilities of held-for-sale disposal group 32,770
--------
11. Debt securities in issue
30 June 2018 31 December 2017
At fair At fair
value value
through At through At
profit or amortised Total profit or amortised Total
loss cost loss cost
GBPm GBPm GBPm GBPm GBPm GBPm
Medium-term notes issued 7,043 19,243 26,286 7,815 18,763 26,578
Covered bonds - 26,712 26,712 - 26,132 26,132
Certificates of deposit - 8,955 8,955 - 9,999 9,999
Securitisation notes 54 5,050 5,104 - 3,730 3,730
Commercial paper - 10,011 10,011 - 3,241 3,241
--------- --------- ------ --------- --------- ------
Total debt securities in issue 7,097 69,971 77,068 7,815 61,865 69,680
--------- --------- ------ --------- --------- ------
The notes issued by the Group's securitisation and covered bond
programmes are held by external parties and by subsidiaries of the
Group.
Securitisation programmes
At 30 June 2018, external parties held GBP5,104 million (31
December 2017: GBP3,730 million) and the Group's subsidiaries held
GBP21,698 million (31 December 2017: GBP21,466 million) of total
securitisation notes in issue of GBP26,802 million (31 December
2017: GBP25,196 million). The notes are secured on loans and
advances to customers and debt securities held at amortised cost
amounting to GBP32,999 million (31 December 2017: GBP35,475
million), the majority of which have been sold by subsidiary
companies to bankruptcy remote structured entities. The structured
entities are consolidated fully and all of these loans are retained
on the Group's balance sheet.
Covered bond programmes
At 30 June 2018, external parties held GBP26,712 million (31
December 2017: GBP26,132 million) and the Group's subsidiaries held
GBP700 million (31 December 2017: GBP700 million) of total covered
bonds in issue of GBP27,412 million (31 December 2017: GBP26,832
million). The bonds are secured on certain loans and advances to
customers amounting to GBP35,384 million (31 December 2017:
GBP31,989 million) that have been assigned to bankruptcy remote
limited liability partnerships. These loans are retained on the
Group's balance sheet.
Cash deposits of GBP3,763 million (31 December 2017: GBP3,507
million) which support the debt securities issued by the structured
entities, the term advances related to covered bonds and other
legal obligations are held by the Group.
12. Post-retirement defined benefit schemes
The Group's post-retirement defined benefit scheme obligations
are comprised as follows:
At At
30 June 31 Dec
2018 2017
GBPm GBPm
Defined benefit pension schemes:
Fair value of scheme assets 43,200 43,722
Present value of funded obligations (41,739) (43,136)
-------- --------
Net pension scheme asset 1,461 586
Other post-retirement schemes (142) (144)
-------- --------
Net retirement benefit asset 1,319 442
-------- --------
Recognised on the balance sheet as:
Retirement benefit assets 1,584 723
Retirement benefit obligations (265) (281)
----- -----
Net retirement benefit asset 1,319 442
----- -----
The movement in the Group's net post-retirement defined benefit
scheme asset during the period was as follows:
GBPm
Asset at 1 January 2018 442
Income statement charge (265)
Employer contributions 280
Remeasurement 871
Exchange and other adjustments (9)
-----
Asset at 30 June 2018 1,319
-----
The principal assumptions used in the valuations of the defined
benefit pension scheme were as follows:
At At
30 June 31 Dec
2018 2017
% %
Discount rate 2.78 2.59
Rate of inflation:
Retail Prices Index 3.11 3.20
Consumer Price Index 2.06 2.15
Rate of salary increases 0.00 0.00
Weighted-average rate of increase for pensions
in payment 2.67 2.71
13. Provisions for liabilities and charges
Provisions Payment Other Vacant
for Protection regulatory leasehold
commitments Insurance provisions property Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 31
December 2017 30 2,775 1,084 56 1,364 5,309
Adjustment for
IFRS 9 243 243
------------- --------
Balance at 1 January
2018 273 5,552
Exchange and other
adjustments (10) 100 1 - 43 134
Provisions applied - (1,142) (482) (9) (440) (2,073)
Charge for the
period (15) 546 232 13 26 802
------------- ------------ ------------ ----------- ------ --------
At 30 June 2018 248 2,279 835 60 993 4,415
------------- ------------ ------------ ----------- ------ --------
Payment protection insurance (excluding MBNA)
The Group increased the provision for PPI costs by a further
GBP546 million in the half year to 30 June 2018, of which GBP456
million was in the second quarter, bringing the total amount
provided to GBP19,192 million.
The charge in the second quarter is largely driven by a
potentially higher total volume of complaints and associated
administration costs due to higher reactive complaint volumes
received over the past six months and ongoing volatility. The
remaining provision is consistent with an average of approximately
13,000 complaints per week through to the industry deadline of the
end of August 2019.
At 30 June 2018, a provision of GBP1,964 million remained
unutilised relating to complaints and associated administration
costs. Total cash payments were GBP1,017 million during the six
month to 30 June 2018.
Sensitivities
The Group estimates that it has sold approximately 16 million
PPI policies since 2000. These include policies that were not
mis-sold and those that have been successfully claimed upon. Since
the commencement of the PPI redress programme in 2011 the Group
estimates that it has contacted, settled or provided for
approximately 53 per cent of the policies sold since 2000.
The total amount provided for PPI represents the Group's best
estimate of the likely future cost. However a number of risks and
uncertainties remain including with respect to future volumes. The
cost could differ from the Group's estimates and the assumptions
underpinning them, and could result in a further provision being
required. There is also uncertainty around the impact of regulatory
changes, FCA media campaign and Claims Management Company and
customer activity, and any potential additional remediation arising
from the continuous improvement of the Group's operational
practices.
For every additional 1,000 reactive complaints per week above
13,000 on average from July 2018 through to the industry deadline
of the end of August 2019, the Group would expect an additional
charge of GBP150 million.
Payment protection insurance (MBNA)
With regard to MBNA, as announced in December 2016, the Group's
exposure is capped at GBP240 million, already provided for, through
an indemnity received from Bank of America. MBNA increased its PPI
provision by GBP100 million in the half year to 30 June 2018, but
the Group's exposure continues to remain capped at GBP240 million
under the arrangement that it has with Bank of America
notwithstanding this increase by MBNA.
13. Provisions for liabilities and charges (continued)
Other provisions for legal actions and regulatory matters
In the course of its business, the Group is engaged in
discussions with the PRA, FCA and other UK and overseas regulators
and other governmental authorities on a range of matters. The Group
also receives complaints in connection with its past conduct and
claims brought by or on behalf of current and former employees,
customers, investors and other third parties and is subject to
legal proceedings and other legal actions. Where significant,
provisions are held against the costs expected to be incurred in
relation to these matters and matters arising from related internal
reviews. During the six months to 30 June 2018 the Group charged a
further GBP232 million in respect of legal actions and other
regulatory matters, and the unutilised balance at 30 June 2018 was
GBP835 million (31 December 2017: GBP1,084 million). The most
significant items are as follows.
Arrears handling related activities
The Group has provided an additional GBP46 million (bringing the
total provided to date to GBP688 million), for the costs of
identifying and rectifying certain arrears management fees and
activities. Following a review of the Group's arrears handling
activities, the Group has put in place a number of actions to
improve further its handling of customers in these areas and has
made good progress in reimbursing mortgage arrears fees to the
565,000 impacted customers.
Packaged bank accounts
In the half-year to 30 June 2018, the Group provided an
additional GBP25 million in respect of complaints relating to
alleged mis-selling of packaged bank accounts raising the total
amount provided to GBP775 million. A number of risks and
uncertainties remain in particular with respect to future
volumes.
HBOS Reading - customer review
The Group is undertaking a review into a number of customer
cases from the former HBOS Impaired Assets Office based in Reading.
This review follows the conclusion of a criminal trial in which a
number of individuals, including two former HBOS employees, were
convicted of conspiracy to corrupt, fraudulent trading and
associated money laundering offences which occurred prior to the
acquisition of HBOS by the Lloyds Banking Group in 2009. The Group
provided GBP100 million in the year to 31 December 2017 and is in
the process of paying compensation to the victims of the fraud for
economic losses as well as ex-gratia payments and awards for
distress and inconvenience. The review is ongoing and at 30 June
2018, the Group had made offers to 67 customers, which represents
more than 90 per cent of the customers in the review.
14. Contingent liabilities and commitments
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the Group
is not directly involved in the ongoing investigations and
litigation (as described below) which involve card schemes such as
Visa and MasterCard. However, the Group is a member of Visa and
MasterCard and other card schemes.
- The European Commission continues to pursue competition
investigations against MasterCard and Visa probing, amongst other
things, MIFs paid in respect of cards issued outside the EEA;
- Litigation brought by retailers continues in the English
Courts against both Visa and MasterCard.
- Any ultimate impact on the Group of the above investigations
and litigation against Visa and MasterCard remains uncertain at
this time.
Visa Inc completed its acquisition of Visa Europe on 21 June
2016. As part of this transaction, the Group and certain other UK
banks also entered into a Loss Sharing Agreement (LSA) with Visa
Inc, which clarifies the allocation of liabilities between the
parties should the litigation referred to above result in Visa Inc
being liable for damages payable by Visa Europe. The maximum amount
of liability to which the Group may be subject under the LSA is
capped at the cash consideration which was received by the Group at
completion. Visa Inc may also have recourse to a general indemnity,
previously in place under Visa Europe's Operating Regulations, for
damages claims concerning inter or intra-regional MIF setting
activities.
LIBOR and other trading rates
In July 2014, the Group announced that it had reached
settlements totalling GBP217 million (at 30 June 2014 exchange
rates) to resolve with UK and US federal authorities legacy issues
regarding the manipulation several years ago of Group companies'
submissions to the British Bankers' Association (BBA) London
Interbank Offered Rate (LIBOR) and Sterling Repo Rate. The Group
continues to cooperate with various other government and regulatory
authorities, including the Swiss Competition Commission, and a
number of US State Attorneys General, in conjunction with their
investigations into submissions made by panel members to the bodies
that set LIBOR and various other interbank offered rates.
Certain Group companies, together with other panel banks, have
also been named as defendants in private lawsuits, including
purported class action suits, in the US in connection with their
roles as panel banks contributing to the setting of US Dollar,
Japanese Yen and Sterling LIBOR and the Australian BBSW Reference
Rate. Certain of the plaintiffs' claims, including those in
connection with USD and JPY LIBOR, have been dismissed by the US
Federal Court for Southern District of New York (subject to one
appeal), and decisions are awaited on the Group's motions to
dismiss the Sterling LIBOR and BBSW claims.
Certain Group companies are also named as defendants in (i) UK
based claims; and (ii) in a Dutch class action, each raising LIBOR
manipulation allegations. A number of the claims against the Group
in relation to the alleged mis-sale of interest rate hedging
products also include allegations of LIBOR manipulation.
It is currently not possible to predict the scope and ultimate
outcome on the Group of the various outstanding regulatory
investigations not encompassed by the settlements, any private
lawsuits or any related challenges to the interpretation or
validity of any of the Group's contractual arrangements, including
their timing and scale.
14. Contingent liabilities and commitments (continued)
UK shareholder litigation
In August 2014, the Lloyds Banking Group and a number of former
directors were named as defendants in a claim by a number of
claimants who held shares in Lloyds TSB Group plc (LTSB) prior to
the acquisition of HBOS plc, alleging breaches of duties in
relation to information provided to shareholders in connection with
the acquisition and the recapitalisation of LTSB. The defendants
refute all claims made. A trial commenced in the English High Court
on 18 October 2017 and concluded on 5 March 2018 with judgment to
follow. It is currently not possible to determine the ultimate
impact on the Group (if any).
Tax authorities
The Lloyds Banking Group has an open matter in relation to a
claim for group relief of losses incurred in its former Irish
banking subsidiary, which ceased trading on 31 December 2010. In
2013 HMRC informed the Lloyds Banking Group that their
interpretation of the UK rules which allow the offset of such
losses denies the claim. If HMRC's position is found to be correct
management estimate that this would result in an increase in
current tax liabilities of approximately GBP650 million (including
interest) and a reduction in the Lloyds Banking Group's deferred
tax asset of approximately GBP350 million (overall impact on the
Group of GBP900 million). The Lloyds Banking Group does not agree
with HMRC's position and, having taken appropriate advice, does not
consider that this is a case where additional tax will ultimately
fall due. There are a number of other open matters on which the
Group is in discussion with HMRC (including the tax treatment of
certain costs arising from the divestment of TSB Banking Group
plc), none of which is expected to have a material impact on the
financial position of the Group.
Residential mortgage repossessions
In August 2014, the Northern Ireland High Court handed down
judgment in favour of the borrowers in relation to three
residential mortgage test cases concerning certain aspects of the
Group's practice with respect to the recalculation of contractual
monthly instalments of customers in arrears. The FCA is actively
engaged with the industry in relation to these considerations and
has published Guidance on the treatment of customers with mortgage
payment shortfalls. The Guidance covers remediation for mortgage
customers who may have been affected by the way firms calculate
these customers' monthly mortgage instalments. The Group is
implementing the Guidance and has now contacted most of the
affected customers with any remaining customers being contacted
during 2018.
Mortgage arrears handling activities
On 26 May 2016, the Group was informed that an enforcement team
at the FCA had commenced an investigation in connection with the
Group's mortgage arrears handling activities. This investigation is
ongoing and it is currently not possible to make a reliable
assessment of the liability, if any, that may result from the
investigation.
14. Contingent liabilities and commitments (continued)
Other legal actions and regulatory matters
In addition, during the ordinary course of business the Group is
subject to other complaints and threatened or actual legal
proceedings (including class or group action claims) brought by or
on behalf of current or former employees, customers, investors or
other third parties, as well as legal and regulatory reviews,
challenges, investigations and enforcement actions, both in the UK
and overseas. All such material matters are periodically
reassessed, with the assistance of external professional advisers
where appropriate, to determine the likelihood of the Group
incurring a liability. In those instances where it is concluded
that it is more likely than not that a payment will be made, a
provision is established to management's best estimate of the
amount required at the relevant balance sheet date. In some cases
it will not be possible to form a view, for example because the
facts are unclear or because further time is needed properly to
assess the merits of the case, and no provisions are held in
relation to such matters. In these circumstances, specific
disclosure in relation to a contingent liability will be made where
material. However the Group does not currently expect the final
outcome of any such case to have a material adverse effect on its
financial position, operations or cash flows.
Contingent liabilities and commitments arising from the banking
business
At At
30 June 31 Dec
2018 2017
GBPm GBPm
Contingent liabilities
Acceptances and endorsements 72 71
Other:
-------- -------
Other items serving as direct credit substitutes 901 740
Performance bonds and other transaction-related
contingencies 2,306 2,300
-------- -------
3,207 3,040
-------- -------
Total contingent liabilities 3,279 3,111
-------- -------
Commitments
Documentary credits and other short-term trade-related
transactions 1 -
Forward asset purchases and forward deposits
placed 184 384
Undrawn formal standby facilities, credit lines
and other commitments to lend:
Less than 1 year original maturity:
-------- -------
Mortgage offers made 12,814 11,156
Other commitments 83,386 81,793
-------- -------
96,200 92,949
1 year or over original maturity 35,124 36,386
-------- -------
Total commitments 131,509 129,719
-------- -------
Of the amounts shown above in respect of undrawn formal standby
facilities, credit lines and other commitments to lend, GBP60,930
million (31 December 2017: GBP60,126 million) was irrevocable.
15. Fair values of financial assets and liabilities
The valuations of financial instruments have been classified
into three levels according to the quality and reliability of
information used to determine those fair values. Note 43 to the
Group's 2017 financial statements describes the definitions of the
three levels in the fair value hierarchy.
Valuation control framework
Key elements of the valuation control framework, which covers
processes for all levels in the fair value hierarchy including
level 3 portfolios, include model validation (incorporating
pre-trade and post-trade testing), product implementation review
and independent price verification. Formal committees meet
quarterly to discuss and approve valuations in more judgemental
areas.
Transfers into and out of level 3 portfolios
Transfers out of level 3 portfolios arise when inputs that could
have a significant impact on the instrument's valuation become
market observable; conversely, transfers into the portfolios arise
when consistent sources of data cease to be available.
Valuation methodology
For level 2 and level 3 portfolios, there is no significant
change to what was disclosed in the Group's 2017 Annual Report and
Accounts in respect of the valuation methodology (techniques and
inputs) applied to such portfolios.
The table below summarises the carrying values of financial
assets and liabilities presented on the Group's balance sheet. The
fair values presented in the table are at a specific date and may
be significantly different from the amounts which will actually be
paid or received on the maturity or settlement date.
30 June 2018 31 December 2017
----------------- ------------------
Carrying Fair Carrying Fair
value value value value
GBPm GBPm GBPm GBPm
Financial assets
Financial assets at fair value
through profit or loss 37,146 37,146 45,608 45,608
Derivative financial instruments 20,802 20,802 24,152 24,152
-------- ------- --------- -------
Loans and advances to banks 5,073 5,081 4,274 4,261
Loans and advances to customers 454,080 453,886 465,555 465,268
Debt securities 4,274 4,267 3,637 3,580
Due from fellow Lloyds Banking
Group undertakings 27,485 27,485 6,195 6,195
Financial assets at amortised
cost 490,912 490,719 479,661 479,304
Financial assets at fair value
through other comprehensive
income 31,300 31,300
Available-for-sale financial
assets 41,717 41,717
Financial liabilities
Deposits from banks 27,822 27,810 28,888 28,883
Customer deposits 401,558 401,828 418,124 418,413
Due to fellow Lloyds Banking
Group undertakings 35,965 35,965 13,237 13,237
Financial liabilities at fair
value through profit or loss 39,645 39,645 50,874 50,874
Derivative financial instruments 18,971 18,971 24,699 24,699
Debt securities in issue 69,971 72,433 61,865 64,790
Subordinated liabilities 13,151 15,458 14,782 17,288
15. Fair values of financial assets and liabilities (continued)
The carrying amount of the following financial instruments is a
reasonable approximation of fair value: cash and balances at
central banks, items in the course of collection from banks, items
in course of transmission to banks and notes in circulation.
The Group manages valuation adjustments for its derivative
exposures on a net basis; the Group determines their fair values on
the basis of their net exposures. In all other cases, fair values
of financial assets and liabilities measured at fair value are
determined on the basis of their gross exposures.
The following tables provide an analysis of the financial assets
and liabilities of the Group that are carried at fair value in the
Group's consolidated balance sheet, grouped into levels 1 to 3
based on the degree to which the fair value is observable.
Financial assets
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 30 June 2018
Financial assets at fair value
through profit or loss:
Loans and advances to customers - 24,761 1,965 26,726
Loans and advances to banks - 1,208 - 1,208
Debt securities 7,527 500 - 8,027
Equity shares 793 17 318 1,128
Treasury and other bills 57 - - 57
------- ------- ------- -------
Total financial assets at
fair value through profit
or loss 8,377 26,486 2,283 37,146
------- ------- ------- -------
Financial assets at fair value
through other comprehensive
income:
Debt securities 23,246 7,263 334 30,843
Equity shares 112 4 18 134
Treasury and other bills 323 - - 323
Total financial assets at
fair value through other comprehensive
income 23,681 7,267 352 31,300
------- ------- ------- -------
Derivative financial instruments - 20,727 75 20,802
------- ------- ------- -------
Total financial assets carried
at fair value 32,058 54,480 2,710 89,248
------- ------- ------- -------
At 31 December 2017
Financial assets at fair value
through profit or loss:
Loans and advances to customers - 30,568 - 30,568
Loans and advances to banks - 1,614 - 1,614
Debt securities 9,836 3,522 - 13,358
Equity shares - - 50 50
Treasury and other bills 18 - - 18
------- ------- ------- -------
Total financial assets at
fair value through profit
or loss 9,854 35,704 50 45,608
------- ------- ------- -------
Available-for-sale financial
assets:
Debt securities 34,763 6,046 92 40,901
Equity shares 555 38 223 816
Total available-for-sale financial
assets 35,318 6,084 315 41,717
------- ------- ------- -------
Derivative financial instruments 1 23,095 1,056 24,152
------- ------- ------- -------
Total financial assets carried
at fair value 45,173 64,883 1,421 111,477
------- ------- ------- -------
15. Fair values of financial assets and liabilities (continued)
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 31 December 2017 - disposal
group
Financial assets at fair value
through profit or loss:
Debt securities 10,445 27,553 874 38,872
Equity shares 85,289 18 872 86,179
Total financial assets at
fair value through profit
or loss 95,734 27,571 1,746 125,051
------- ------- ------- -------
Derivative financial instruments 245 3,220 - 3,465
------- ------- ------- -------
Total financial assets carried
at fair value 95,979 30,791 1,746 128,516
------- ------- ------- -------
Financial liabilities
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 30 June 2018
Financial liabilities at fair
value through profit or loss:
Liabilities held at fair value
through profit or loss - 7,822 - 7,822
Trading liabilities 55 31,768 - 31,823
------- ------- ------- ------
Total trading and other financial
liabilities at fair value
through profit or loss 55 39,590 - 39,645
------- ------- ------- ------
Derivative financial instruments - 18,846 125 18,971
------- ------- ------- ------
Total financial liabilities
carried at fair value 55 58,436 125 58,616
------- ------- ------- ------
At 31 December 2017
Financial liabilities at fair
value through profit or loss:
Liabilities held at fair value
through profit or loss - 7,812 - 7,812
Trading liabilities 1,106 41,956 - 43,062
------- ------- ------- ------
Total trading and other financial
liabilities at fair value
through profit or loss 1,106 49,768 - 50,874
------- ------- ------- ------
Derivative financial instruments 2 23,893 804 24,699
------- ------- ------- ------
Total financial liabilities
carried at fair value 1,108 73,661 804 75,573
------- ------- ------- ------
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 31 December 2017 - disposal
group
Total financial liabilities
carried at fair value - derivative
financial instruments 585 2,562 - 3,147
------- ------- ------- -----
15. Fair values of financial assets and liabilities (continued)
Movements in level 3 portfolio
The tables below analyse movements in the level 3 financial
assets portfolio.
Total
Financial Financial financial
assets at assets at assets
fair fair Available- carried
value through value through for-sale at
profit or other comprehensive financial Derivative fair
loss income assets assets value
GBPm GBPm GBPm GBPm GBPm
Balance at 31 December
2017 50 315 1,056 1,421
Adjustment for IFRS
9 (note 18) 1,987 302 (315) 1,974
-------------- -------------------- ---------- ---------- ----------
Balance at 1 January
2018 2,037 302 3,395
Exchange and other adjustments 7 (1) - 6
Gains recognised in
the income statement
within other income 38 - 2 40
Losses recognised in
other comprehensive
income within the revaluation
reserve in respect of
financial assets at
fair value through other
comprehensive income - 1 - 1
Purchases 8 - - 8
Sales - (91) (983) (1,074)
Transfers into the level
3 portfolio 193 334 - 527
Transfers out of the
level 3 portfolio - (193) - (193)
-------------- -------------------- ---------- ---------- ----------
At 30 June 2018 2,283 352 75 2,710
-------------- -------------------- ---------- ---------- ----------
Gains (losses) recognised
in the income statement
within other income
relating to those assets
held at 30 June 2018 12 - 2 14
Financial Total
assets at financial
fair Available- assets
value through for-sale carried
profit financial Derivative at
or loss assets assets fair value
GBPm GBPm GBPm GBPm
At 1 January 2017 2,305 894 1,399 4,598
Exchange and other adjustments (3) (15) 18 -
Losses recognised in the income
statement within other income (42) - (226) (268)
Losses recognised in other
comprehensive income within
the revaluation reserve in
respect of available-for-sale
financial assets - (199) - (199)
Purchases 263 24 5 292
Sales (244) (23) (40) (307)
Transfers into the level 3
portfolio - - - -
Transfers out of the level
3 portfolio (19) (21) (44) (84)
-------------- ---------- ---------- -----------
At 30 June 2017 2,260 660 1,112 4,032
-------------- ---------- ---------- -----------
Gains (losses) recognised in
the income statement within
other income relating to those
assets held at 30 June 2017 185 - (227) (42)
15. Fair values of financial assets and liabilities (continued)
Financial
assets at
fair
value through
profit or
Disposal group loss
GBPm
Balance at 31 December 2017 1,746
Adjustment for IFRS 9 (note 18) 6,755
--------------
Balance at 1 January 2018 8,501
Exchange and other adjustments (17)
Gains recognised in the income statement within other
income 27
Purchases 97
Sales (270)
Disposal of business (8,400)
Transfers into the level 3 portfolio 230
Transfers out of the level 3 portfolio (168)
--------------
At 30 June 2018 -
--------------
Gains recognised in the income statement within other
income
relating to those assets held at 30 June 2018 -
Financial
assets at
fair
value through
profit or
Disposal group loss
GBPm
At 1 January 2017 1,501
Exchange and other adjustments (1)
Gains recognised in the income statement within other
income 53
Purchases 40
Sales (87)
Transfers into the level 3 portfolio 56
Transfers out of the level 3 portfolio (104)
--------------
At 30 June 2017 1,458
--------------
Gains recognised in the income statement within other
income
relating to those assets held at 30 June 2017 49
15. Fair values of financial assets and liabilities (continued)
The tables below analyse movements in the level 3 financial
liabilities portfolio.
Financial Total
liabilities financial
at fair liabilities
value through carried
profit or Derivative at
loss liabilities fair value
GBPm GBPm GBPm
At 1 January 2018 - 804 804
Exchange and other adjustments - - -
Gains recognised in the income statement
within other income - (30) (30)
Additions - - -
Redemptions - (2) (2)
Sales - (647) (647)
Transfers out of level 3 portfolio - - -
--------------- ------------ ------------
At 30 June 2018 - 125 125
---------------- ------------ ------------
Gains recognised in the income statement
within other income relating to those
liabilities held at 30 June 2018 - (30) (30)
Financial Total
liabilities financial
at fair liabilities
value through carried
profit or Derivative at
loss liabilities fair value
GBPm GBPm GBPm
At 1 January 2017 2 960 962
Exchange and other adjustments - 14 14
Gains recognised in the income statement
within other income (2) (207) (209)
Additions - 19 19
Redemptions - (26) (26)
-------------- ------------ ------------
At 30 June 2017 - 760 760
-------------- ------------ ------------
Losses recognised in the income statement
within other income relating to those
liabilities held at 30 June 2017 - (209) (209)
15. Fair values of financial assets and liabilities (continued)
The tables below set out the effects of reasonably possible
alternative assumptions for categories of level 3 financial assets
and financial liabilities which have an aggregated carrying value
greater than GBP500 million.
At 30 June 2018
---------------------------------------
Effect of reasonably
possible alternative
assumptions(1)
-----------------------------
Significant
Valuation unobservable Carrying Favourable Unfavourable
technique(s) inputs Range(2) value changes changes
GBPm GBPm GBPm
Financial assets at fair value through
profit or loss:
Loans and 98bps
advances to Discounted Inferred spreads /
customers cashflows (bps) 102bps 1,964 39 (39)
Other 319
--------------------------------------------------------------- --------
2,283
--------
Financial assets at fair value through
other comprehensive income: 352
Derivative financial
assets:
Interest rate Option pricing Interest rate
derivatives model volatility 75 - -
-------------- --------------- ------------------------------ --------
75
--------
Financial assets carried at fair
value 2,710
--------
Financial liabilities at fair value through
profit or loss
Derivative financial
liabilities:
Interest rate Option pricing Interest rate
derivatives model volatility 125 - -
-------------- --------------- ------------------------------ --------
125
--------
Financial liabilities carried at
fair value 125
--------
(1) Where the exposure to an unobservable input is managed on a net
basis, only the net impact is shown in the table.
(2) The range represents the highest and lowest inputs used in the
level 3 valuations.
15. Fair values of financial assets and liabilities (continued)
At 31 December 2017
---------------------------------------
Effect of reasonably
possible alternative
assumptions(1)
-----------------------------
Significant
Valuation unobservable Carrying Favourable Unfavourable
technique(s) inputs Range(2) value changes changes
GBPm GBPm GBPm
Trading and other financial assets at fair
value through profit or loss:
Equity and Underlying n/a
venture capital asset/ net
investments asset value
(incl. property
prices) (3)
50 5 (5)
-------------------------------------------------- -------- --------
50
--------
Available for sale financial
assets 315
Derivative financial
assets:
Interest rate Option pricing Interest rate 9% /
derivatives model volatility 94% 1,056 11 (3)
----------------- ----------------- --------------- -------- --------
1,056
--------
Financial assets carried at fair
value 1,421
--------
Derivative financial
liabilities:
Interest rate Option pricing Interest rate 9% /
derivatives model volatility 94% 804 - -
----------------- ----------------- --------------- -------- --------
804
--------
Financial liabilities carried at
fair value 804
--------
(1) Where the exposure to an unobservable input is managed on a net
basis, only the net impact is shown in the table.
(2) The range represents the highest and lowest inputs used in the
level 3 valuations.
(3) Underlying asset/ net asset values represent fair value.
15. Fair values of financial assets and liabilities (continued)
Disposal group
At 31 December 2017
---------------------------------------
Effect of reasonably
possible alternative
assumptions(1)
-----------------------------
Significant
Valuation unobservable Carrying Favourable Unfavourable
technique(s) inputs Range(2) value changes changes
GBPm GBPm GBPm
Trading and other financial assets at fair
value through profit or loss:
Underlying
asset/net
Unlisted equities asset value
and debt securities, (incl. property
property prices), broker
partnerships quotes or
in the life discounted
funds cash flows(3) n/a n/a 1,746 26 (76)
--------------------- ----------------- --------------- ----------
Financial assets carried at fair
value 1,746
--------
(1) Where the exposure to an unobservable input is managed on a net
basis, only the net impact is shown in the table.
(2) The range represents the highest and lowest inputs used in the
level 3 valuations.
(3) Underlying asset/net asset values represent fair value.
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt
securities, unlisted equity investments and derivatives are
unchanged from those described in the Group's 2017 financial
statements.
Reasonably possible alternative assumptions
Valuation techniques applied to many of the Group's level 3
instruments often involve the use of two or more inputs whose
relationship is interdependent. The calculation of the effect of
reasonably possible alternative assumptions included in the table
above reflects such relationships and are unchanged from those
described in the Group's 2017 financial statements.
16. Related party transactions
Balances and transactions with fellow Lloyds Banking Group
undertakings
The Bank and its subsidiaries have balances due to and from the
Bank's parent company, Lloyds Banking Group plc, and fellow Group
undertakings. These are included on the balance sheet as
follows:
At At
30 June 31 Dec
2018 2017
GBPm GBPm
Assets
Due from fellow Lloyds Banking Group undertakings 27,485 6,195
Derivative financial instruments 9,247 666
Trading and other financial assets at fair value
through profit or loss 677 1,949
Liabilities
Due to fellow Lloyds Banking Group undertakings 35,965 13,237
Derivative financial instruments 7,577 1,384
Financial liabilities at fair value through profit
or loss 726 -
Debt securities in issue 172 181
Subordinated liabilities 3,107 2,841
During the half-year to 30 June 2018 the Group earned GBP34
million (half-year to 30 June 2017: GBP26 million) of interest
income and incurred GBP235 million (half-year to 30 June 2017:
GBP119 million) of interest expense on balances and transactions
with Lloyds Banking Group plc and fellow Group undertakings.
On 2 May 2018 to Bank completed the sale of Scottish Widows
Group to its parent company, Lloyds Banking Group plc, for a
consideration of GBP7,622 million. The Group recorded a profit of
GBP1,010 million on this sale.
Also in May 2018, the Bank and its subsidiary, Bank of Scotland
plc, sold the element of their commercial banking businesses
required to be transferred in order to ensure compliance with the
Ring-fencing legislation to Lloyds Bank Corporate Markets plc, a
fellow Lloyds Banking Group undertaking, for a total consideration
of GBP6.6 billion; no profit or loss arose on transfer.
Other related party transactions
Other related party transactions for the half-year to 30 June
2018 are similar in nature to those for the year ended 31 December
2017.
17. Dividends on ordinary shares
The directors have approved an interim dividend of GBP600
million which will be paid in the second half of 2018.
The Bank paid a dividend of GBP7,622 million on 2 May 2018 and a
dividend of GBP2,800 million on 16 May 2018; the Bank paid
dividends of GBP1,600 million on 11 May 2017 and a further GBP1,050
million on 22 September 2017.
18. Implementation of IFRS 9 and IFRS 15
IFRS 9 Financial Instruments
The Group adopted IFRS 9 from 1 January 2018. In accordance with
the transition requirements of IFRS 9, comparative information for
2017 has not been restated and transitional adjustments have been
accounted for through retained earnings as at 1 January 2018, the
date of initial application; and as a result shareholders' equity
reduced by GBP1,180 million, driven by the effects of additional
impairment provisions following the implementation of the expected
credit loss methodology and fair value adjustments following the
reclassification of certain financial assets to be measured at fair
value rather than amortised cost. It is not practicable to quantify
the impact of adoption of IFRS 9 in the results for the current
period.
The following table summarises the impact of the transitional
adjustment on the Group's loss allowances at 1 January 2018:
IFRS 9
IAS 39 loss
allowance Transitional allowance
at 31 adjustment at 1
December in loss January
2017 allowance 2018
GBPm GBPm GBPm
Loans and advances to banks - 1 1
Loans and advances to customers 2,195 1,022 3,217
Debt securities 3 - 3
Other assets - 10 10
---------- ------------ ----------
Drawn balances 2,198 1,033 3,231
Provisions for undrawn commitments
and financial guarantees 30 243 273
---------- ------------ ----------
Total loss allowance 2,228 1,276 3,504
---------- ------------ ----------
There were no impacts on the Group's loss allowances as a result
of changes in the measurement category of financial assets at 1
January 2018.
18. Implementation of IFRS 9 and IFRS 15 (continued)
The following table summarises the adjustments arising on the
adoption of IFRS 9 and IFRS 15 (see below) to the Group's balance
sheet as at 1 January 2018.
Adjusted
As at 31 IFRS 9: as at
December Classification IFRS 9: 1 January
2017 and measurement Impairment IFRS 15 2018
GBPm GBPm GBPm GBPm GBPm
Assets
Cash and balances at central
banks 58,521 - - - 58,521
Items in course of collection
from banks 755 - - - 755
Financial assets at fair
value through profit or
loss 45,608 13,130 - - 58,738
Derivative financial instruments 24,152 (360) - - 23,792
Loans and advances to
banks 4,274 (2,364) (1) - 1,909
Loans and advances to
customers 465,555 (10,460) (1,022) - 454,073
Debt securities 3,637 (329) - - 3,308
Due from fellow Lloyds
Banking Group undertakings 6,195 - - - 6,195
--------- ---------------- ----------- ------- ----------
Financial assets at amortised
cost 479,661 (13,153) (1,023) - 465,485
Financial assets at fair
value through other comprehensive
income 42,536 - - 42,536
Available-for-sale financial
assets 41,717 (41,717) - -
Goodwill 474 - - - 474
Other intangible assets 2,666 - - - 2,666
Property, plant and equipment 9,062 - - - 9,062
Current tax recoverable 16 - - - 16
Deferred tax assets 3,104 22 300 3 3,429
Retirement benefit assets 723 - - - 723
Assets of held-for-sale
disposal group 154,227 - - - 154,227
Other assets 2,344 (655) (10) - 1,679
--------- ---------------- ----------- ------- ----------
Total assets 823,030 (197) (733) 3 822,103
--------- ---------------- ----------- ------- ----------
18. Implementation of IFRS 9 and IFRS 15 (continued)
Adjusted
As at 31 IFRS 9: as at
December Classification IFRS 9: 1 January
2017 and measurement Impairment IFRS 15 2018
GBPm GBPm GBPm GBPm GBPm
Equity and liabilities
Liabilities
Deposits from banks 28,888 - - - 28,888
Customer deposits 418,124 - - - 418,124
Due to fellow Lloyds Banking
Group undertakings 13,237 - - - 13,237
Items in course of transmission
to banks 579 - - - 579
Financial liabilities
at fair value through
profit or loss 50,874 58 - - 50,932
Derivative financial instruments 24,699 - - - 24,699
Notes in circulation 1,313 - - - 1,313
Debt securities in issue 61,865 (48) - - 61,817
Liabilities of held-for-sale
disposal group 146,518 - - - 146,518
Other liabilities 4,540 - (3) 14 4,551
Retirement benefit obligations 281 - - - 281
Current tax liabilities 827 - - - 827
Other provisions 5,309 - 243 - 5,552
Subordinated liabilities 14,782 - - - 14,782
--------- ----------------- ----------- ------- ----------
Total liabilities 771,836 10 240 14 772,100
Equity
Shareholders' equity 47,598 (207) (973) (11) 46,407
Other equity instruments 3,217 - - - 3,217
Non-controlling interests 379 - - - 379
--------- ----------------- ----------- ------- ----------
Total equity 51,194 (207) (973) (11) 50,003
--------- ----------------- ----------- ------- ----------
Total equity and liabilities 823,030 (197) (733) 3 822,103
--------- ----------------- ----------- ------- ----------
18. Implementation of IFRS 9 and IFRS 15 (continued)
Reclassifications
IFRS
Balance sheet line IFRS 9 Measurement 9 Net
item category In Out allocation reclassification
GBPm GBPm GBPm
Financial assets
Financial assets
at FVTPL FVTPL 14,447 (1,139) FVOCI 13,308
Derivative assets FVTPL (Der) (360) FVTPL (360)
Loans and advances
--------- ------------------
* Banks AC (90) FVOCI (2,364)
(2,274) FVTPL
- Customers AC (10,474) FVTPL (10,474)
- Debt securities AC (329) FVOCI (329)
--------- ------------------
(13,167) (13,167)
Financial assets
at FVOCI FVOCI 42,591 - 42,591
Available-for-sale
assets (684) FVTPL
(41,033) FVOCI
---------
(41,717) (41,717)
Other assets AC (655) FVTPL (655)
Financial liabilities
Financial liabilities
at FVTPL FVTPL 48 48
Debt securities in
issue AC (48) FVTPL (48)
--------- ------------
Total 57,086 (57,086) -
------- --------- ------------------
Remeasurements
There has been a pre-tax charge of GBP229 million (GBP207
million net of tax) arising from the reclassification of financial
assets and liabilities to fair value through profit or loss and
fair value through other comprehensive income and consequent
remeasurement to fair value.
IFRS 15 Revenue from Contracts with Customers
The Group has adopted IFRS 15 from 1 January 2018 and in nearly
all cases the Group's existing accounting policy was consistent
with the requirements of IFRS 15; however, certain income streams
within the Group's car leasing business are now deferred, resulting
in an additional GBP14 million being recognised as deferred income
at 1 January 2018 with a corresponding debit of GBP11 million, net
of tax, to shareholders' equity. As permitted by the transition
options under IFRS 15, comparative figures for the prior year have
not been restated. The impact of adoption of IFRS 15 on the current
period is not material.
19. Future accounting developments
The following pronouncements are not applicable for the year
ending 31 December 2018 and have not been applied in preparing
these interim financial statements. Save as disclosed below, the
impact of these accounting changes is still being assessed by the
Group and reliable estimates cannot be made at this stage.
With the exception of IFRS 16 Leases, as at 31 July 2018 these
pronouncements are awaiting EU endorsement.
IFRS 16 Leases
IFRS 16 replaces IAS 17 Leases and is effective for annual
periods beginning on or after 1 January 2019.
IFRS 16 requires lessees to recognise a right of use asset and a
liability for future payments arising from a lease contract.
Lessees will recognise a finance charge on the liability and a
depreciation charge on the asset which could affect the timing of
the recognition of expenses on leased assets. This change will
mainly impact the properties that the Group currently accounts for
as operating leases. Finance systems will need to be changed to
reflect the new accounting rules and disclosures. Lessor accounting
requirements remain aligned to the current approach under IAS
17.
Minor amendments to other accounting standards
The IASB has issued a number of minor amendments to IFRSs
effective 1 January 2019 (including IFRIC 23 Uncertainty over
Income Tax Treatments). These revised requirements are not expected
to have a significant impact on the Group.
20. Ultimate parent undertaking
The Bank's ultimate parent undertaking and controlling party is
Lloyds Banking Group plc which is incorporated in Scotland. Lloyds
Banking Group plc has published consolidated accounts for the year
to 31 December 2017 and copies may be obtained from Investor
Relations, Lloyds Banking Group, 25 Gresham Street, London EC2V 7HN
and available for download from www.lloydsbankinggroup.com.
21. Other information
The financial information in these condensed consolidated
half-year financial statements does not constitute statutory
accounts within the meaning of section 434 of the Companies Act
2006. Statutory accounts for the year ended 31 December 2017 have
been delivered to the Registrar of Companies. The auditors' report
on those accounts was unqualified, did not include an emphasis of
matter paragraph and did not include a statement under section 498
of the Companies Act 2006.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors listed below (being all the directors of Lloyds
Bank plc) confirm that to the best of their knowledge these
condensed consolidated half-year financial statements have been
prepared in accordance with International Accounting Standard 34,
Interim Financial Reporting, as adopted by the European Union, and
that the half-year results herein includes a fair review of the
information required by DTR 4.2.7R and DTR 4.2.8R, namely:
-- an indication of important events that have occurred during
the six months ended 30 June 2018 and their impact on the condensed
consolidated half-year financial statements, and a description of
the principal risks and uncertainties for the remaining six months
of the financial year; and
-- material related party transactions in the six months ended
30 June 2018 and any material changes in the related party
transactions described in the last annual report.
Signed on behalf of the board by
António Horta-Osório
Group Chief Executive
31 July 2018
Lloyds Bank plc board of directors:
António Horta-Osório (Group Chief Executive)
George Culmer (Chief Financial Officer)
Juan Colombás (Chief Risk Officer)
Lord Blackwell (Chairman)
Anita Frew (Deputy Chairman)
Alan Dickinson
Simon Henry
Lord Lupton CBE
Deborah McWhinney
Nicholas Prettejohn
Stuart Sinclair
Sara Weller CBE
INDEPENDENT REVIEW REPORT TO LLOYDS BANK PLC
Report on the condensed consolidated half-year financial
statements
Our conclusion
We have reviewed Lloyds Bank plc's condensed consolidated
half-year financial statements (the "interim financial statements")
in the 2018 half-year results of Lloyds Bank plc (the "Bank") for
the six month period ended 30 June 2018. Based on our review,
nothing has come to our attention that causes us to believe that
the interim financial statements are not prepared, in all material
respects, in accordance with International Accounting Standard 34,
'Interim Financial Reporting', as adopted by the European Union and
the Disclosure Guidance and Transparency Rules sourcebook of the
United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated balance sheet as at 30 June 2018;
-- the consolidated income statement and consolidated statement
of comprehensive income for the period then ended;
-- the consolidated cash flow statement for the period then ended;
-- the consolidated statement of changes in equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the 2018 half-year
results have been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting', as adopted
by the European Union and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
As disclosed in note 1 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The 2018 half-year results, including the interim financial
statements, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the 2018
half-year results in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the 2018 half-year results based on our
review. This report, including the conclusion, has been prepared
for and only for the Bank for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the 2018
half-year results and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
31 July 2018
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Douglas Radcliffe
Group Investor Relations Director
020 7356 1571
douglas.radcliffe@finance.lloydsbanking.com
Edward Sands
Director of Investor Relations
020 7356 1585
edward.sands@lloydsbanking.com
Nora Thoden
Director of Investor Relations
020 7356 2334
andrew.downey@finance.lloydsbanking.com
CORPORATE AFFAIRS
Grant Ringshaw
Director of Media Relations
020 7356 2362
grant.ringshaw@lloydsbanking.com
Matt Smith
Head of Corporate Media
020 7356 3522
matt.smith@lloydsbanking.com
Copies of this news release may be obtained from Investor
Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V
7HN. The full news release can also be found on the Group's website
- www.lloydsbankinggroup.com.
Registered office: Lloyds Banking Group plc, The Mound,
Edinburgh, EH1 1YZ
Registered in Scotland No. 95000
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR GMGGRZMNGRZM
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