We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Name | Symbol | Market | Type |
---|---|---|---|
Hbos 5.75% Nts | LSE:68FF | London | Bond |
Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0 | - |
TIDM68FF
RNS Number : 0992Y
HBOS PLC
24 February 2012
HBOS plc
Results Announcement
For the year ended 31 December 2011
Member of the Lloyds Banking Group
FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with respect to the business, strategy and plans of HBOS plc, its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about the HBOS Group or the HBOS Group's 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 on circumstances that will occur in the future. The HBOS Group's actual future business, strategy, plans and/or results may differ materially from those expressed or implied in these forward looking statements as a result of a variety of risks, uncertainties and other factors, including, without limitation, UK domestic and global economic and business conditions; the ability to derive cost savings and other benefits, including, without limitation, as a result of the integration of HBOS into the Lloyds Banking Group and the Lloyds Banking Group's simplification programme; the ability to access sufficient funding to meet the HBOS Group's liquidity needs; changes to the HBOS plc's, Lloyds Banking Group plc's or Lloyds TSB Bank plc's credit ratings; risks concerning borrower or counterparty credit quality; instability in the global financial markets including Eurozone instability; changing demographic and market related trends; changes in customer preferences; changes to regulation, accounting standards or taxation, including changes to regulatory capital or liquidity requirements; the policies and actions of governmental or regulatory authorities in the UK, the European Union, or jurisdictions outside the UK, including other European countries and the US; the ability to attract and retain senior management and other employees; requirements or limitations imposed on Lloyds Banking Group plc, Lloyds TSB Bank plc and the HBOS Group as a result of HM Treasury's investment in Lloyds Banking Group plc; the ability to complete satisfactorily the disposal of certain assets as part of the Lloyds Banking Group's EU state aid obligations; the extent of any future impairment charges or write-downs caused by depressed asset valuations; exposure to regulatory scrutiny, legal proceedings or complaints, actions of competitors and other factors. Please refer to Lloyds Banking Group plc's latest Annual Report on Form 20-F filed with the US Securities and Exchange Commission for a discussion of certain factors together with examples of forward looking statements. The forward looking statements contained in this announcement are made as at the date of this announcement, and the HBOS Group undertakes no obligation to update any of its forward looking statements.
CONTENTS
Page Financial review 1 Principal risks and uncertainties 3 Primary statements Consolidated income statement 14 Consolidated statement of comprehensive income 15 Consolidated balance sheet 16 Consolidated statement of changes in equity 18 Consolidated cash flow statement 20 Notes 21 Contacts 40
FINANCIAL REVIEW
Principal activities
HBOS plc (the Company) and its subsidiaries (together, the Group) provide a wide range of banking and financial services in the UK and overseas.
During 2010, the Group earned revenue through interest and fees on a broad range of financial services products including current and savings accounts, personal loans, credit cards and mortgages within the retail market; loans and capital market products to commercial, corporate and asset finance customers; life, pensions and investment products; general insurance; and private banking and asset management.
However, following the restructuring of the Lloyds Banking Group's insurance entities described below, with effect from July 2011 the Group no longer has any general insurance activities and its life, pensions and investments activities are greatly reduced.
Restructuring of Lloyds Banking Group's insurance entities
In July 2011, the Lloyds Banking Group completed a restructuring of the legal ownership of its insurance businesses, as a result of which the Group's subsidiary, HBOS Insurance & Investment Group Limited, sold its wholly owned life, pensions and general insurance subsidiaries to Lloyds TSB General Insurance Holdings Limited and Scottish Widows Financial Services Holdings Limited, which are also wholly owned by Lloyds TSB Bank plc. These transactions resulted in a consolidated loss on disposal of GBP1,739 million.
Review of results
The Group's loss before tax increased by GBP1,843 million to GBP3,894 million for 2011 from GBP2,051 million in 2010. This was primarily due to a GBP1,155 million charge in respect of payment protection insurance and a loss of GBP1,739 million on disposal of the Group's wholly owned life, pensions and general insurance subsidiaries.
The trading surplus decreased by GBP4,002 million, or 45 per cent, from GBP8,925 million to GBP4,923 million, comprising a GBP28 million increase in net interest income, a GBP4,236 million decrease in total income, net of insurance claims, and a GBP206 million reduction in operating expenses.
Net interest income increased by GBP28 million, from GBP8,370 million to GBP8,398 million. A reduction in margins, reflecting increased funding costs, was offset by a lower income statement charge relating to the amounts allocated to unit holders in the Open-Ended Investment Companies included in the consolidated results of the Group.
Other income declined by GBP12,866 million from GBP15,841 million in 2010 to GBP2,975 million in 2011, largely due to a reduction in net trading income in the Group's life, pensions and insurance subsidiaries arising as a result of the effect of market conditions on policyholder assets. In addition, net trading income in the Group's banking operations also reduced significantly as a result of unfavourable market conditions.
Offsetting the decline in the life, pensions and insurance subsidiaries' net trading income is a decrease in the insurance claims expense from GBP9,605 million in 2010 to GBP975 million in the current year, also reflecting the impact of adverse market conditions.
FINANCIAL REVIEW(continued)
Total operating expenses decreased to GBP5,475 million in 2011, compared to GBP5,681 million in 2010. The decrease reflects integration savings, the non-recurrence of a provision of GBP500 million for customer goodwill payments in 2010 and lower depreciation and amortisation charges, largely as a result of reductions in operating lease assets, offset by a GBP1,155 million charge in respect of payment protection insurance in 2011 and the non-repetition of the pension curtailment gain of GBP316 million arising in 2010.
A reduction of GBP3,774 million in impairment losses, from GBP10,878 million in 2010 to GBP7,104 million in the current year, reflects continued improving business quality and portfolio trends resulting from the Group's prudent risk appetite, together with a significant reduction in impairment losses incurred by the Group's international businesses.
Total assets at 31 December 2011 were GBP567,999 million, GBP73,753 million, or 11 per cent, lower compared to GBP641,752 million at 31 December 2010. The majority of the decrease reflects disposal of the Group's wholly owned life, pensions and general insurance subsidiaries, with the remainder resulting from the continuing disposal of assets which are outside of the Group's risk appetite, customer deleveraging and de-risking and subdued demand in lending markets.
Debt securities in issue decreased by GBP25,303 million, or 25 per cent, to GBP75,457 million compared to GBP100,760 million at 31 December 2010 as funding requirements decreased in line with reductions in asset balances, reflecting the strategy of disposing of exposures outside of the Group's risk appetite.
Shareholders' equity decreased by GBP2,089 million, from GBP25,860 million to GBP23,771 million at 31 December 2011, reflecting the loss for the year, offset by gains on cash flow hedges.
The Group's capital ratios at 31 December 2011 improved with a total capital ratio of 16.0 per cent, compared to 14.1 per cent at 31 December 2010, and a tier 1 capital ratio of 12.3 per cent, compared to 11.4 per cent at 31 December 2010. During the year, risk-weighted assets were reduced by GBP53,289 million, or 21 per cent, from GBP252,613 million to GBP199,324 million at 31 December 2011.
PRINCIPAL RISKS AND UNCERTAINTIES
Liquidity and funding
The principal risks and uncertainties facing the Group are:
Risk definition
Liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost.
Funding risk is defined as the risk that the Group does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient.
Principal risks
Liquidity and funding continues to remain a key area of focus for the Group and the industry as a whole. Like all major banks, the Group is dependent on confidence in the short and long term wholesale funding markets. Should the Group, due to exceptional circumstances, be unable to continue to source sustainable funding, its ability to fund its financial obligations could be impacted.
The combination of right-sizing the Lloyds Banking Group balance sheet and continued development of the retail deposit base has seen the Lloyds Banking Group's wholesale funding requirement reduce in the past year. The progress Lloyds Banking Group has made to date in diversifying its funding sources has further strengthened its funding base.
During the first half of 2011 the Lloyds Banking Group accelerated term funding initiatives and the run down of certain non-core asset portfolios allowing a further reduction in total government and central bank facilities. Lloyds Banking Group repaid its remaining drawings under the Bank of England SLS scheme in full in June 2011. Outstandings under the Credit Guarantee Scheme reduced in line with their contractual maturities, with GBP23.5 billion remaining at end December. The outstanding amount matures during 2012.
The second half of 2011 has seen more difficult funding markets as investor confidence was impacted by concerns over the US debt ceiling and subsequent downgrade. This was followed by increased fears over Eurozone sovereign debt levels, downgrades and possible defaults and concerns are ongoing over the potential downside effects from financial market volatility. Despite this Lloyds Banking Group continued to fund adequately, maintaining a broadly stable stock of primary liquid assets during the year and meeting its regulatory liquidity ratio targets at all times.
Liquidity is managed at the aggregate Lloyds Banking Group level, with active monitoring at both business unit and Group level. Monitoring and control processes are in place to address both internal and regulatory requirements. In a stress situation the level of monitoring and reporting is increased commensurate with the nature of the stress event.
The Lloyds Banking Group carries out stress testing of its liquidity position against a range of scenarios, including those prescribed by the FSA. Lloyds Banking Group's liquidity risk appetite is also calibrated against a number of stressed liquidity metrics.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Lloyds Banking Group's stress testing framework considers these factors, including the impact of a range of economic and liquidity stress scenarios over both short and longer term horizons. Internal stress testing results at 31 December 2011 show that Lloyds Banking Group has liquidity resources representing more than 130 per cent of modelled outflows from all wholesale funding sources, corporate deposits and rating dependent contracts under the Group's severe liquidity stress scenario. In 2011, Lloyds Banking Group has maintained its liquidity levels in excess of the ILG regulatory minimum (FSA's Individual Liquidity Adequacy Standards) at all times. Funding projections show Lloyds Banking Group will achieve the proposed Basel lll liquidity and funding requirements in advance of expected implementation dates.
Lloyds Banking Group's stress testing shows that further credit rating downgrades may reduce investor appetite for some of the Group's liability classes and therefore funding capacity. In the fourth quarter of 2011, Lloyds Banking Group experienced downgrades in its long-term rating of between one and two notches from three of the major rating agencies. The impact that Lloyds Banking Group experienced following the downgrades were consistent with the Group's modelled outcomes based on the stress testing framework. Lloyds Banking Group has materially reduced its wholesale funding in recent years and operates a well diversified funding platform which together lessen the impact of stress events.
Lloyds Banking Group's borrowing costs and issuance in the capital markets are dependent on a number of factors, and increased cost or reduction of capacity could materially adversely affect the Group's results of operations, financial condition and prospects. In particular, reduction in the credit rating of Lloyds Banking Group or deterioration in the capital markets' perception of the Group's financial resilience, could significantly increase its borrowing costs and limit its issuance capacity in the capital markets. The impact on the Lloyds Banking Group's funding cost is subject to a number of assumptions and uncertainties and is therefore impossible to quantify precisely.
The downgrades that Lloyds Banking Group experienced in the fourth quarter of 2011, did not significantly change its borrowing costs, reduce its issuance capacity or require significant collateral posting. Lloyds Banking Group notes the recent announcements from Moody's placing the ratings of 114 European financial institutions, including Lloyds Banking Group, on review for downgrade. Even in the case of a simultaneous two notch downgrade from all rating agencies, the Group would remain investment grade.
At 31 December 2011, Lloyds Banking Group had GBP202 billion of highly liquid unencumbered assets in its liquidity portfolio which are available to meet cash and collateral outflows. This liquidity is available for deployment at immediate notice, subject to complying with regulatory requirements, and is a key component of the Group's liquidity management process.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Mitigating actions
The Group takes many mitigating actions with respect to this principal risk, key examples include:
Lloyds Banking Group has maintained its liquidity levels in excess of the ILG regulatory minimum (FSA's Individual Liquidity Adequacy Standards) at all times. Funding projections show that Lloyds Banking Group will achieve the proposed Basel lll liquidity and funding metrics in advance of expected implementation dates. The Liquidity Coverage Ratio (LCR) is due to be implemented on 1 January 2015 and the Net Stable Funding Ratio (NSFR) has a 1 January 2018 implementation date. The European Commission released its proposal for implementing Basel lll into Europe (CRD lV) in July 2011 and we note that discussions over the final detail are ongoing.
The Group carries out monthly stress testing of its liquidity position against a range of scenarios, including those prescribed by the FSA. The Group's liquidity risk appetite is also calibrated against a number of stressed liquidity metrics.
The key dependencies on successfully funding the Lloyds Banking Group's balance sheet include the continued functioning of the money and capital markets; successful right-sizing of Lloyds Banking Group's balance sheet; the repayment of the government Credit Guarantee Scheme facilities in accordance with the agreed terms; no more than limited further deterioration in the UK's and Lloyds Banking Group's credit rating; and no significant or sudden withdrawal of deposits resulting in increased reliance on money markets. Additionally, the Lloyds Banking Group has entered into a number of EU state aid related obligations to achieve reductions in certain parts of its balance sheet by the end of 2014. These are assumed within Lloyds Banking Group's funding plan. The requirement to meet this deadline may result in the Lloyds Banking Group having to provide funding to support these asset reductions and/or disposals and may also result in a lower price being achieved.
Credit
Risk definition
The risk of reductions in earnings and/or value, through financial loss, as a result of the failure of the party with whom the Group has contracted to meet its obligations (both on and off balance sheet).
Principal risks
Arising in the Retail, Wholesale, Commercial and Wealth and International operations, reflecting the risks inherent in the Group's lending activities and, to a much lesser extent in the Insurance operations in respect of investment of own funds. Adverse changes in the credit quality of the Group's UK and/or international borrowers and counterparties, or in their behaviour, would be expected to reduce the value of the Group's assets and materially increase the Group's write-downs and allowances for impairment losses. Credit risk can be affected by a range of factors, including, inter alia, increased unemployment, reduced asset values, lower consumer spending, increased personal or corporate insolvency levels, reduced corporate profits, increased interest rates or higher tenant defaults. Over the last four years, the global banking crisis and economic downturn has driven cyclically high bad debt charges. These have arisen from the Group's lending to:
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
- Wholesale customers (including those in Wealth and International): where companies continue to face difficult business conditions. Impairment levels have reduced materially since the peak of the economic downturn and more aggressive risk appetite in the HBOS businesses when elevated corporate default levels and illiquid commercial property markets resulted in heightened impairment charges. The reduction in public sector spending is deepening and exports are failing to offset domestic weakness. The possibility of further economic weakness remains. Financial market instability represents an additional downside risk. The Group has exposure in both the UK and internationally, including Europe, Ireland, USA and Australia, particularly in commercial real estate lending, where we have a high level of lending secured on secondary and tertiary assets.
- Retail customers: This portfolio will remain strongly linked to the economic environment, with inter alia house price falls, unemployment increases, consumer over-indebtedness and rising interest rates possible impacts to the secured and unsecured retail exposures.
Mitigating actions
The Group takes many mitigating actions with respect to this principal risk, key examples being that the Group follows a relationship based business model with risk management processes, appetites and experienced staff in place.
Regulatory
Risk definition
Regulatory risk is the risk of reductions in earnings and/ or value, through financial or reputational loss, from failing to comply with the applicable laws, regulations or codes.
Independent Commission on Banking
The Government appointed an independent Commission on Banking (ICB) to review possible measures to reform the banking system and promote stability and competition. The ICB published its final report on September 2011 putting forward recommendations to require ring-fencing of the retail activities of banks from their investment banking activities and additional capital requirements beyond those required under current drafts of the Capital Requirements Directive IV. The Report also makes recommendations in relation to the competitiveness of the UK banking market, including enhancing the competition remit of the new Financial Conduct Authority (FCA), implementing a new industry-wide switching solution by September 2013, and improving transparency. The ICB, which following the final report was disbanded, had the authority only to make recommendations, which the Government could choose to accept or reject.
The ICB specifically recommended in relation to Lloyds Banking Group's EU mandated branch disposal (Project Verde), that, to create a strong challenger in the UK banking market, the entity which results from the divestiture should have a share of the personal current account (PCA) market of at least 6 per cent (although this does not need to arise solely from the current accounts acquired from the Company) and a funding position at least as strong as its peers. The ICB did not specify a definitive timeframe for the divested entity to achieve a 6 per cent market share of PCAs but recommended that a market investigation should be carefully considered by competition authorities if 'a strong and effective challenger' has not resulted from Lloyd Banking Group's divestiture by 2015. The ICB did not recommend explicitly that Lloyds Banking Group should increase the size of the Project Verde disposal agreed with the European Commission but recommended that the Government prioritise the emergence of a strong new challenger over reducing market concentration through a 'substantially enhanced' divestiture by Lloyds Banking Group.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
The Government published its response to the ICB recommendations on 19 December 2011. The Government supported the recommendation that an entity with a larger share of the PCA market than the 4.6 per cent originally proposed might produce a more effective competitor. In relation to Lloyds Banking Group's announcement that it was to pursue exclusive negotiations with the Co-operative Group, the Government commented that such a transaction would deliver a significant enhancement of the PCA market share, with the share divested by Lloyds Banking Group combining with the Co-operative Group's existing share to create a competitor with approximately 7-8 per cent. The Government also stated that the execution of the divestment is a commercial matter, and it has no intention of using its shareholding to deliver an enhancement.
New regulatory regime
On 27 January 2012, the Government published the Financial Services Bill. The proposed new UK regulatory architecture will see the transition of regulatory and supervisory powers from the FSA to the new Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA). The PRA will be responsible for supervising banks, building societies and other large firms. The FCA will focus on consumer protection and market regulation. The Bill is also proposing new responsibilities and powers for the FCA. The most noteworthy are the proposed greater powers for the FCA in relation to competition and the proposal to widen its scope to include consumer credit. The Bill is expected to take effect in early 2013.
In April 2011, the FSA commenced an internal reorganisation as a first step in a process towards the formal transition of regulatory and supervisory powers from the FSA to the new FCA and PRA in 2013. Until this time the responsibility for regulating and supervising the activities of the subsidiaries will remain with the FSA. On 2 April the FSA will introduce a new 'twin peaks' model and the intention is to move the FSA as close as possible to the new style of regulation outlined in the Bill. There will be two independent groups of supervisors for banks, insurers and major investment firms covering prudential and conduct. (All other firms (ie those not dual regulated) will be solely supervised by the conduct supervisors).
In addition, the European Banking Authority, the European insurance and Occupational Pensions Authority and the European securities and Markets Authority as new EU Supervisory Authorities are likely to have greater influence on regulatory matters across the EU.
Capital and liquidity
Evolving capital and liquidity requirements continue to be a priority for Lloyds Banking Group. The Basel Committee on Banking Supervision has put forward proposals for a reform package which changes the regulatory capital and liquidity standards, the definition of 'capital', introduces new definitions for the calculation of counterparty credit risk and leverage ratios, additional capital buffers and development of a global liquidity standard. Implementation of these changes is expected to be phased in between 2013 and 2018.
Anti bribery
The Bribery Act 2010 came fully into force on 1 July 2011. It enhances previous laws on bribery and is supported by some detailed guidance issued by the Ministry of Justice on the steps a business needs to take to embed 'adequate procedures' to prevent bribery. A company convicted of failing to have 'adequate procedures' to prevent bribery could receive an unlimited fine. The Group operates a group-wide Anti-Bribery Policy, applicable to all of its businesses, operations and employees, which incorporates the requirements of the UK Bribery Act 2010.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
US regulation
Significant regulatory initiatives from the US impacting the Group include the Dodd-Frank Act (which imposes specific requirements for systemic risk oversight, securities market conduct and oversight, bank capital standards, arrangements for the liquidation of failing systemically significant financial institutions and restrictions to the ability of banks to engage in proprietary trading activities known as the 'Volcker Rule'). The Act will have both business and operational implications for the Group within and beyond the US. In addition the Foreign Account Tax Compliance Act (FATCA) requires non-US financial institutions to enter into disclosure agreements with the US Treasury and all non-financial non-US entities to report and or certify their ownership of US assets in foreign accounts or be subject to 30 per cent withholding tax.
European regulation
At a European level, the pace of regulatory reform has increased with a number of new directives or changes to existing directives planned in the next 12 months including a revised Markets in Financial Instruments Directive, Transparency Directive, Insurance Mediation Directive and a Fifth Undertakings in Collective Investments in Transferable Securities Directive as well as a proposed Directive regulating Packaged Retail Investment Products.
Mitigating actions
The Group takes many mitigating actions with respect to this principal risk, key examples include:
Independent Commission on Banking
We continue to play a constructive role in the debate with the government and other stakeholders on all issues under consideration in relation to the ICB's recommendations.
New regulatory regime
Lloyds Banking Group continues to work closely with the regulatory authorities and industry associations to ensure that it is able to identify and respond to regulatory changes and mitigate against risks to the Group and its stakeholders.
Capital and liquidity
Lloyds Banking Group is continuously assessing the impacts of regulatory developments which could have a material effect on the Group and is progressing its plans to implement regulatory changes and directives through change management programmes.
Anti bribery
The Group has no appetite for bribery and explicitly prohibits the payment, offer, acceptance or request of a bribe, including 'facilitation payments'.
The Group has enhanced its internal compliance processes including those associated with payment screening, colleague training and hospitality.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
US and European regulation
Lloyds Banking Group is continuously assessing the impacts of regulatory developments which could have a material effect on the Group and is progressing with its plans to implement regulatory changes and directives through change management programmes. The Group is also continuing to progress its plans to achieve Solvency II compliance.
Market risk
Risk definition
The risk of reductions in earnings and/or value, through financial or reputational loss, from unfavourable market moves; including changes in, and increased volatility of, interest rates, market-implied inflation rates, credit spreads, foreign exchange rates, equity, property and commodity prices.
Principal risks
The Group has a number of Market risks, the principal ones being:
- There is a risk to the Group's banking income arising from the level of interest rates and the margin of interbank rates over central bank rates. A further banking risk arises from competitive pressures on product terms in existing loans and deposits, which sometimes restrict the Group in its ability to change interest rates applying to customers in response to changes in interbank and central bank rates.
- Equity market movements and changes in credit spreads impact the Group's results.
- The main equity market risks arise in the life assurance companies and staff pension schemes.
- Credit spread risk arises in the life assurance companies, pension schemes and banking businesses.
Continuing concerns about the fiscal position in Eurozone countries resulted in increased credit spreads in the areas affected, and fears of contagion affected the Euro and widened spreads between central bank and interbank rates.
Mitigating actions
The Group takes many mitigating actions with respect to this principal risk, key examples include:
Market risk is managed within a Lloyds Banking Board approved framework using a range of metrics to monitor against stated appetite and potential market conditions.
Market Risk is reported regularly to appropriate committees.
The Group's trading activity is small relative to our peers and is not considered to be a principal risk.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Customer treatment
Risk definition
The risk of regulatory censure and/or a reduction in earnings/value, through financial or reputational loss, from inappropriate or poor customer treatment.
Principal risks
Customer treatment and how the Group manages its customer relationships affect all aspects of the Group's operations and are closely aligned with achievement of Lloyds Banking Group's strategic vision to be the best bank for customers. As a provider of a wide range of financial services products and numerous distribution channels to an extremely broad and varied customer base, we face significant conduct risks, such as: products or services not meeting the needs of our customers; sales processes which could result in selling products to customers which do not meet their needs; failure to deal with a customer's complaint effectively where we have got it wrong and not met customer expectations.
There remains a high level of scrutiny regarding the treatment of customers by financial institutions from regulatory bodies, the press and politicians. The FSA in particular continues to drive focus on conduct of business activities through its supervision activity.
There is a risk that certain aspects of the Group's business may be determined by regulatory bodies or the courts as not being conducted in accordance with applicable laws or regulations, or with what is fair and reasonable in their opinion. The Group may also be liable for damages to third parties harmed by the conduct of its business.
Mitigating actions
The Group takes many mitigating actions with respect to this principal risk, key examples include:
Lloyds Banking Group's Conduct Risk Strategy and supporting framework have been designed to support our vision and strategic aim to put the customer at the heart of everything we do. We have developed and implemented a framework to enable us to deliver for our customers, which is supported by Policies and Standards in key areas, including product governance, sales, responsible lending, customers in financial difficulties, claims and complaints handling.
Lloyds Banking Group actively engages with regulatory bodies and other stakeholders in developing its understanding of current customer treatment concerns.
People
Risk definition
The risk of reductions in earnings or value through financial or reputational loss arising from ineffectively leading colleagues responsibly and proficiently, managing people resource, supporting and developing colleague talent, or meeting regulatory obligations related to our people.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Principal risks
The quality and effectiveness of our people are fundamental to its success. Consequently, the Group's management of material people risks is critical to deliver against its long-term strategic objectives. Over the next year the Group's ability to manage people risks successfully may be affected by the following key drivers:
- Lloyds Banking Group's continuing structural consolidation and the sale of part of our branch network under Project Verde may result in disruption to our ability to lead and manage our people effectively.
- The continually changing, more rigorous regulatory environment may impact people strategy, remuneration practices and retention.
- Macroeconomic conditions and negative media attention on the banking sector may impact retention, colleague sentiment and engagement.
Mitigating actions
The Group takes many mitigating actions with respect to this principal risk, key examples include:
- Strong focus on leadership and colleague engagement, through delivery of strategies to attract, retain and develop high calibre staff together with implementation of rigorous succession planning.
- A continued focus on people risk management across the Group.
- Ensuring compliance with regulatory requirements related to Approved Persons and the FSA Remuneration Code, and embedding compliant and appropriate colleague behaviours in line with Group policies, values and people risk priorities.
- Strengthening risk management culture and capability across the Group, together with further embedding of risk objectives in the colleague performance and reward process.
Insurance risk
Risk definition
The risk of reductions in earnings and/or value, through financial or reputational loss, due to fluctuations in the timing, frequency and severity of insured/underwritten events and to fluctuations in the timing and amount of claims settlements.
Principal risks
The major sources of insurance risk are within the insurance businesses and the Group's defined benefit staff pension schemes ('pension schemes'). Insurance risk is inherent in the insurance business and can be affected by customer behaviour. Insurance risks accepted relate primarily to mortality, longevity, morbidity, persistency, expenses, property and unemployment. The primary insurance risk of the Group's pension schemes is related to longevity.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Insurance risk within the insurance businesses has the potential to significantly impact the earnings and capital position of the Insurance Division of the Group. For the Group's pension schemes, insurance risk could significantly increase the cost of pension provision and impact the balance sheet of the Group.
Mitigating actions
The Group takes many mitigating actions with respect to this principal risk, key examples include:
Insurance risk is reported regularly to appropriate committees and boards.
Actuarial assumptions are reviewed in line with experience and in-depth reviews are conducted regularly. Longevity assumptions for the Group's pension schemes are reviewed annually together with other IFRS assumptions. Expert judgement is required.
Insurance risk is controlled by robust processes including underwriting, pricing-to-risk, claims management, reinsurance and other risk mitigation techniques.
State funding and state aid
HM Treasury currently holds approximately 40.2 per cent of Lloyds Banking Group plc's ordinary share capital. United Kingdom Financial Investments Limited (UKFI) as manager of HM Treasury's shareholding continues to operate in line with the framework document between UKFI and HM Treasury managing the investment in Lloyds Banking Group plc on a commercial basis without interference in day-to-day management decisions. There is a risk that a change in Government priorities could result in the framework agreement currently in place being replaced leading to interference in the operations of the Group, although there have been no indications that the Government intends to change the existing operating arrangements.
Lloyds Banking Group made a number of undertakings to HM Treasury arising from the capital and funding support, including the provision of additional lending to certain mortgage and business sectors for the two years to 28 February 2011, and other matters relating to corporate governance and colleague remuneration. The lending commitments were subject to prudent commercial lending and pricing criteria, the availability of sufficient funding and sufficient demand from creditworthy customers. These lending commitments were delivered in full in the second year.
The subsequent agreement (known as 'Merlin') between five major UK banks (including Lloyds Banking Group) and the Government in relation to gross business lending capacity in the 2011 calendar year was subject to a similar set of criteria. Lloyds Banking Group delivered in full its share of the commitments by the five banks, both in respect of lending to Small and Medium Sized Enterprises (SMEs) and in respect of overall gross business lending. Lloyds Banking Group has made a unilateral lending pledge for 2012 as part of its publicly announced SME charter.
In addition, Lloyds Banking Group is subject to European state aid obligations in line with the Restructuring Plan agreed with HM Treasury and the EU College of Commissioners in November 2009, which is designed to support the long-term viability of the Group and remedy any distortion of competition and trade in the European Union (EU) arising from the State aid given to Lloyds Banking Group.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
This has placed a number of requirements on the Lloyds Banking Group including an asset reductions target from a defined pool of assets by the end of 2014 and the disposal of a certain portion of its retail business by the end of November 2013. In June 2011 Lloyds Banking Group issued an Information Memorandum to potential bidders of this retail banking business, which the European Commission confirmed met the requirements to commence the formal sale process for the sale no later than 30 November 2011. On 14 December 2011 Lloyds Banking Group announced that having reviewed the formal offers made, its preferred option was for a direct sale and that it was entering into exclusive discussions with The Co-operative Group. Lloyds Banking Group is also continuing to progress an Initial Public Offering (IPO) in parallel. Lloyds Banking Group continues to work closely with the EU Commission, HM Treasury and the Monitoring Trustee appointed by the EU Commission to ensure the successful implementation of the Restructuring Plan for the Retail banking business.
CONSOLIDATED INCOME STATEMENT
2011 2010 Note GBP million GBP million Interest and similar income 16,565 18,061 Interest and similar expense (8,167) (9,691) ----------- ----------- Net interest income 8,398 8,370 ----------- ----------- Fee and commission income 1,814 1,934 Fee and commission expense (727) (964) ----------- ----------- Net fee and commission income(1) 1,087 970 Net trading income (894) 9,095 Insurance premium income 1,657 3,649 Other operating income 1,125 2,127 ----------- ----------- Other income 2 2,975 15,841 ----------- ----------- Total income 11,373 24,211 Insurance claims(1) (975) (9,605) ----------- ----------- Total income, net of insurance claims 10,398 14,606 ----------- ----------- Payment protection insurance provision 15 (1,155) - Other operating expenses (4,320) (5,681) ----------- ----------- Total operating expenses 3 (5,475) (5,681) ----------- ----------- Trading surplus 4,923 8,925 Impairment 4 (7,104) (10,878) Share of results of joint ventures and associates 26 (98) Loss on disposal of businesses 5 (1,739) - Loss before tax (3,894) (2,051) Taxation 6 173 (264) ----------- ----------- Loss for the year (3,721) (2,315) ----------- ----------- Profit attributable to non-controlling interests 42 36 Loss attributable to equity shareholders (3,763) (2,351) ----------- ----------- Loss for the year (3,721) (2,315) ----------- ----------- (1) See note 2.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
2011 2010 GBP million GBP million Loss for the year (3,721) (2,315) Other comprehensive income Movements in revaluation reserve in respect of available-for-sale financial assets: Change in fair value (77) 205 Income statement transfers in respect of disposals (72) (52) Income statement transfers in respect of impairment 749 641 Other income statement transfers (76) (62) Taxation (128) (231) ----------- ----------- 396 501 Movements in cash flow hedging reserve: ----------- ----------- Effective portion of changes in fair value 1,350 (781) Net income statement transfers 373 1,378 Taxation (447) (174) ----------- ----------- 1,276 423 Currency translation differences (tax: nil) (6) (204) ----------- ----------- Other comprehensive income for the year, net of tax 1,666 720 ----------- ----------- Total comprehensive income for the year (2,055) (1,595) ----------- ----------- Total comprehensive income attributable to non-controlling interests 42 36 Total comprehensive income attributable to equity shareholders (2,097) (1,631) ----------- ----------- Total comprehensive income for the year (2,055) (1,595) ----------- -----------
CONSOLIDATED BALANCE SHEET
As at As at 31 December 31 December 2011 2010 Note GBP million GBP million Assets Cash and balances at central banks 3,075 2,375 Items in course of collection from banks 379 319 Trading and other financial assets at fair value through profit or loss 7 45,347 103,086 Derivative financial instruments 36,253 30,000 Loans and receivables: ------------ ------------ Loans and advances to banks 91,210 65,170 Loans and advances to customers 8 357,110 381,365 Debt securities 11,276 23,632 ------------ ------------ 459,596 470,167 Available-for-sale financial assets 10,498 13,843 Investment properties 1,686 3,356 Investments in joint ventures and associates 330 428 Goodwill 859 850 Value of in-force business 147 3,171 Other intangible assets 76 74 Tangible fixed assets 2,372 3,482 Current tax recoverable 338 64 Deferred tax assets 3,977 4,062 Retirement benefit assets 394 152 Other assets 2,672 6,323 ------------ ------------ Total assets 567,999 641,752 ------------ ------------
CONSOLIDATED BALANCE SHEET
As at As at 31 December 31 December 2011 2010 Note GBP million GBP million Equity and liabilities Liabilities Deposits from banks 150,042 143,137 Customer deposits 217,048 216,404 Items in course of transmission to banks 332 251 Trading liabilities 20,805 18,786 Derivative financial instruments 33,385 25,075 Notes in circulation 1,145 1,074 Debt securities in issue 11 75,457 100,760 Liabilities arising from insurance contracts and participating investment contracts 385 40,076 Liabilities arising from non-participating investment contracts 22,207 35,136 Unallocated surplus within insurance businesses - 321 Other liabilities 8,184 16,561 Retirement benefit obligations 107 100 Current tax liabilities 54 134 Deferred tax liabilities 1 47 Other provisions 1,064 806 Subordinated liabilities 12 13,613 16,674 ------------ ------------ Total liabilities 543,829 615,342 Equity ------------ ------------ Share capital 13 3,763 3,763 Share premium account 14 18,655 18,655 Other reserves 14 10,523 8,857 Retained profits 14 (9,170) (5,415) ------------ ------------ Shareholders' equity 23,771 25,860 Non-controlling interests 399 550 ------------ ------------ Total equity 24,170 26,410 ------------ ------------ Total equity and liabilities 567,999 641,752 ------------ ------------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders -------------------------------------------------- Share capital Non- and Other Retained controlling premium reserves profits Total interests Total GBP million GBP million GBP million GBP million GBP million GBP million Balance at 1 January 2011 22,418 8,857 (5,415) 25,860 550 26,410 Comprehensive income (Loss) profit for the year - - (3,763) (3,763) 42 (3,721) Other comprehensive income ----------- ----------- ----------- ----------- ------------ ----------- Movements in revaluation reserve in respect of available-for-sale financial assets, net of tax - 396 - 396 - 396 Movements in cash flow hedging reserve, net of tax - 1,276 - 1,276 - 1,276 Currency translation differences, net of tax - (6) - (6) - (6) ----------- ----------- ----------- ----------- ------------ ----------- Total other comprehensive income - 1,666 - 1,666 - 1,666 ----------- ----------- ----------- ----------- ------------ ----------- Total comprehensive income - 1,666 (3,763) (2,097) 42 (2,055) ----------- ----------- ----------- ----------- ------------ ----------- Transactions with owners ----------- ----------- ----------- ----------- ------------ ----------- Dividends - - - - (15) (15) Value of employee services: Share option schemes - - 8 8 - 8 Change in non-controlling interests - - - - (178) (178) ----------- ----------- ----------- ----------- ------------ ----------- Total transactions with owners - - 8 8 (193) (185) ----------- ----------- ----------- ----------- ------------ ----------- Balance at 31 December 2011 22,418 10,523 (9,170) 23,771 399 24,170 ----------- ----------- ----------- ----------- ------------ -----------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity shareholders -------------------------------------------------- Share capital Non- and Other Retained controlling premium reserves profits Total interests Total GBP million GBP million GBP million GBP million GBP million GBP million Balance at 1 January 2010 19,819 8,137 (3,071) 24,885 1,271 26,156 Comprehensive income (Loss) profit for the year - - (2,351) (2,351) 36 (2,315) Other comprehensive income ----------- ----------- ----------- ----------- ------------ ----------- Movements in revaluation reserve in respect of available-for-sale financial assets, net of tax - 501 - 501 - 501 Movements in cash flow hedging reserve, net of tax - 423 - 423 - 423 Currency translation differences, net of tax - (204) - (204) - (204) ----------- ----------- ----------- ----------- ------------ ----------- Total other comprehensive income - 720 - 720 - 720 ----------- ----------- ----------- ----------- ------------ ----------- Total comprehensive income - 720 (2,351) (1,631) 36 (1,595) ----------- ----------- ----------- ----------- ------------ ----------- Transactions with owners ----------- ----------- ----------- ----------- ------------ ----------- Dividends - - - - (24) (24) Issue of ordinary shares 2,599 - - 2,599 - 2,599 Value of employee services: Share option schemes - - 7 7 - 7 Change in non-controlling interests - - - - (733) (733) ----------- ----------- ----------- ----------- ------------ ----------- Total transactions with owners 2,599 - 7 2,606 (757) 1,849 ----------- ----------- ----------- ----------- ------------ ----------- Balance at 31 December 2010 22,418 8,857 (5,415) 25,860 550 26,410 ----------- ----------- ----------- ----------- ------------ -----------
CONSOLIDATED CASH FLOW STATEMENT
2011 2010 GBP million GBP million Loss before tax (3,894) (2,051) Adjustments for: Change in operating assets 2,110 57,056 Change in operating liabilities (6,854) (70,686) Non-cash and other items 2,128 5,624 Tax received 16 486 ----------- ----------- Net cash used in operating activities (6,494) (9,571) Cash flows from investing activities Purchase of available-for-sale financial assets (6,747) (1,561) Proceeds from sale and maturity of available-for-sale financial assets 9,743 10,293 Purchase of fixed assets (593) (1,277) Proceeds from sale of fixed assets 1,559 1,021 Acquisition of businesses, net of cash acquired (61) (65) Disposal of businesses, net of cash disposed 3,145 2,783 ----------- ----------- Net cash provided by investing activities 7,046 11,194 Cash flows from financing activities ----------- ----------- Dividends paid to non-controlling interests (15) (24) Interest paid on subordinated liabilities (750) (809) Repayment of subordinated liabilities (2,696) (331) Change in non-controlling interests 7 - ----------- ----------- Net cash used in financing activities (3,454) (1,164) Effects of exchange rate changes on cash and cash equivalents 1 - ----------- ----------- Change in cash and cash equivalents (2,901) 459 Cash and cash equivalents at beginning of year 9,543 9,084 ----------- ----------- Cash and cash equivalents at end of year 6,642 9,543 ----------- -----------
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.
NOTES
Page 1 Accounting policies, presentation and estimates 22 2 Other income 25 3 Operating expenses 25 4 Impairment 26 5 Loss on disposal of businesses 26 6 Taxation 26 7 Trading and other financial assets at fair value through 27 profit or loss 8 Loans and advances to customers 28 9 Allowance for impairment losses on loans and receivables 28 10 Securitisations and covered bonds 29 11 Debt securities in issue 30 12 Subordinated liabilities 30 13 Share capital 30 14 Reserves 30 15 Payment protection insurance 31 16 Contingent liabilities and commitments 32 17 Capital ratios 35 18 Related party transactions 36 19 Future accounting developments 38 20 Ultimate parent undertaking 39 21 Other information 39 1. Accounting policies, presentation and estimates
These financial statements as at and for the year to 31 December 2011 have been prepared in accordance with the Listing Rules of the Financial Services Authority (FSA) relating to Preliminary Results. They do not include all of the information required for full annual financial statements. The Group's consolidated financial statements as at and for the year ended 31 December 2011 have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Copies of the 2011 annual report and accounts will be published on the Lloyds Banking Group's website and will be available upon request from Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN, in March 2012.
The directors consider that it is appropriate to continue to adopt the going concern basis in preparing the Group's financial statements. In reaching this assessment, the directors have considered projections for the Group's capital and funding position and have had regard to the factors set out in Principal risks and uncertainties: Liquidity and funding on pages 3 to 5.
In previous years the Group has included annual management charges on non-participating investment contracts within insurance claims. In light of developing industry practice, these amounts (2011: GBP444 million; 2010: GBP454 million) are now included within net fee and commission income.
Accounting policies
The accounting policies are consistent with those applied by the Group in its 2010 annual report and accounts.
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. Save for the estimates detailed below, there have been no significant changes in the basis upon which estimates have been determined, compared to that applied at 31 December 2010.
Payment protection insurance
The Group has charged a provision of GBP1,155 million in respect of payment protection insurance (PPI) policies as a result of discussions with the FSA and a judgment handed down by the UK High Court (see note 14 for more information). The provision represents management's best estimate of the anticipated costs of related customer contact and/or redress, including administration expenses. However, there are still a number of uncertainties as to the eventual costs from any such contact and/or redress given the inherent difficulties of assessing the impact of detailed implementation of the FSA Policy Statement of 10 August 2010 for all PPI complaints, uncertainties around the ultimate emergence period for complaints, the availability of supporting evidence and the activities of claims management companies, all of which will significantly affect complaints volumes, uphold rates and redress costs.
1. Accounting policies, presentation and estimates (continued)
The provision requires significant judgement by management in determining appropriate assumptions, which include the level of complaints, uphold rates, proactive contact and response rates, Financial Ombudsman Service referral and uphold rates as well as redress costs for each of the many different populations of customers identified by the Group in its analyses used to determine the best estimate of the anticipated costs of redress. If the level of complaints was one percentage point higher (lower) than estimated for all policies open within the last six years then the provision made in 2011 would increase (decrease) by approximately GBP25 million. However, it should be noted that there are a large number of inter-dependent assumptions under-pinning the provision; this sensitivity assumes that all assumptions, other than the level of complaints, remain constant.
The Group re-evaluates the assumptions underlying its analysis at each reporting date as more information becomes available. As noted above, there is inherent uncertainty in making estimates; actual results in future periods may differ from the amount provided.
Recoverability of deferred tax assets
At 31 December 2011 the Group carried deferred tax assets on its balance sheet of GBP3,977 million (2010: GBP4,062 million) and deferred tax liabilities of GBP1 million (2010: GBP47 million). This presentation takes into account the ability of the Group to net deferred tax assets and liabilities only where there is a legally enforceable right of offset. The largest category of deferred tax asset relates to tax losses carried forward.
The recoverability of the Group's deferred tax assets in respect of carry forward losses is based on an assessment of future levels of taxable profit expected to arise that can be offset against these losses. The Group's expectations as to the level of future taxable profits take into account the Group's long-term financial and strategic plan, and anticipated future tax adjusting items.
In making this assessment account is taken of, business plans, the five year board approved operating plan and the following future risk factors:
-- The expected future economic outlook as set out in the Group Chief Executive's statement contained in the Annual Report of Lloyds Banking Group.
-- The retail banking business disposal as required by the European Commission; and -- Future regulatory change.
The Group's total deferred tax asset includes GBP3,568 million (2010 GBP3,899 million) in respect of trading losses carried forward. The tax losses have arisen in individual legal entities and will be used as future taxable profits arise in those legal entities, though substantially all of the unused tax losses for which a deferred tax asset has been recognised arise in Bank of Scotland plc. The deferred tax asset will be utilised over different time periods in each of the entities in which the tax losses arise. The Group's assessment is that these tax losses will be fully used within eight years.
Under current UK tax law there is no expiry date for unused tax losses.
Deferred tax assets totalling GBP571 million (2010: GBP597 million) have not been recognised in respect of certain capital losses carried forward, trading losses carried forward (mainly in certain overseas companies) and unrelieved foreign tax credits as there are no predicted future capital or taxable profits against which these losses can be recognised.
1. Accounting policies, presentation and estimates (continued)
New accounting pronouncements
The Group has adopted the following new standards and amendments to standards which became effective for financial years beginning on or after 1 January 2011. None of these standards or amendments have had a material impact on these condensed interim financial statements.
(i) Amendment to IAS 32 Financial Instruments: Presentation - 'Classification of Rights Issues'. Requires rights issues denominated in a currency other than the functional currency of the issuer to be classified as equity regardless of the currency in which the exercise price is denominated.
(ii) IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments. Clarifies that when an entity renegotiates the terms of its debt with the result that the liability is extinguished by the debtor issuing its own equity instruments to the creditor, a gain or loss is recognised in the income statement representing the difference between the carrying value of the financial liability and the fair value of the equity instruments issued; the fair value of the financial liability is used to measure the gain or loss where the fair value of the equity instruments cannot be reliably measured.
(iii) Improvements to IFRSs (issued May 2010). Amends IFRS 7 Financial instruments: Disclosure to require further disclosures in respect of collateral held by the Group as security for financial assets and sets out minor amendments to other standards as part of the annual improvements process.
(iv) Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement. Applies when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover those requirements and permits such an entity to treat the benefit of such an early payment as an asset.
(v) IAS 24 Related Party Disclosures (Revised). Simplifies the definition of a related party and provides a partial exemption from the requirement to disclose transactions and outstanding balances with the government and government-related entities. The Group has taken advantage of an exemption in respect of government and government-related transactions that permits an entity to disclose only transactions that are individually or collectively significant. Details of related party transactions are disclosed in note 17.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2011 and which have not been applied in preparing these financial statements are given in note 18.
The ultimate parent undertaking, Lloyds Banking Group plc, produces consolidated accounts which set out the basis of the segments through which it manages performance and allocates resources across the consolidated Lloyds Banking Group.
2. Other income 2011 2010 GBPm GBPm Fee and commission income: ----- ------ Current account fees 357 343 Credit and debit card fees 214 203 Other fees and commissions(1) 1,243 1,388 ----- ------ 1,814 1,934 Fee and commission expense (727) (964) ----- ------ Net fee and commission income 1,087 970 Net trading income (894) 9,095 Insurance premium income 1,657 3,649 Gains on capital transactions(2) 610 359 Other 515 1,768 ----- ------ Other operating income 1,125 2,127 Total other income 2,975 15,841 ----- ------ (1) In previous years the Group has included annual management charges on non-participating investment contracts within insurance claims. In light of developing industry practice, these amounts (2011: GBP444 million; 2010: GBP454 million) are now included within net fee and commission income. (2) During December 2011, the Lloyds Banking Group completed the exchange of certain subordinated debt securities issued by Lloyds TSB Bank plc and the Company for new subordinated debt securities issued by Lloyds TSB Bank plc by undertaking an exchange offer on certain securities which were eligible for call before 31 December 2012. This exchange resulted in a gain for the Group on extinguishment of the existing securities of GBP610 million being the difference between the carrying amount of the securities extinguished and the fair value of the new securities issued together with related fees and costs. During 2010, as part of the Lloyds Banking Group's management of capital, the Group had exchanged certain existing subordinated debt securities for new securities and ordinary shares. These exchanges resulted in a gain on extinguishment of the existing liabilities of GBP359 million in the year ended 31 December 2010. 3. Operating expenses 2011 2010(1) GBPm GBPm Administrative expenses: Staff costs excluding pension curtailment gain 2,219 2,632 Pension curtailment gain(2) - (316) ----- ------- Total staff costs 2,219 2,316 Premises and equipment 460 473 Customer goodwill payments provision - 500 Other expenses 1,221 1,462 ----- ------- 3,900 4,751 Depreciation and amortisation 355 878 Impairment of tangible fixed assets 65 52 ----- ------- Total operating expenses, excluding payment protection insurance provision 4,320 5,861 Payment protection insurance provision (note 14) 1,155 - Total operating expenses 5,475 5,861 ----- ------- (1) During 2011, the Group has reviewed the analysis of certain cost items and as a result has reclassified certain items of expenditure; comparatives for 2010 have been restated accordingly. (2) Following changes by the Group to the terms of its UK defined benefit pension schemes in 2010, all future increases to pensionable salary are capped each year at the lower of: Retail Prices Index inflation; each employee's actual percentage increase in pay; and 2 per cent of pensionable pay. In addition to this, during the second half of 2010 there was a change in commutation factors in certain defined benefit schemes. These changes led to a net curtailment gain of GBP316 million recognised in the income statement in 2010. 4. Impairment 2011 2010 GBPm GBPm Impairment losses on loans and receivables: ----- ------ Loans and advances to customers 6,961 10,786 Debt securities classified as loans and receivables 60 (19) ----- ------ Impairment losses on loans and receivables (note 9) 7,021 10,767 Impairment of available-for-sale financial assets 78 100 Other credit risk provisions 5 11 ----- ------ Total impairment charged to the income statement 7,104 10,878 ----- ------ 5. Disposal of businesses
In July 2011, the Lloyds Banking Group completed a restructuring of the legal ownership of its insurance businesses, as a result of which the Group's subsidiary, HBOS Insurance & Investment Group Limited, sold its wholly owned life, pensions and general insurance subsidiaries to Lloyds TSB General Insurance Holdings Limited and Scottish Widows Financial Services Holdings Limited, which are also wholly owned by Lloyds TSB Bank plc for a total consideration of GBP3,013 million.
This resulted in a consolidated loss on disposal of GBP1,739 million.
6. Taxation
A reconciliation of the tax credit that would result from applying the standard UK corporation tax rate to the loss before tax to the actual tax credit is given below:
2011 2010 GBPm GBPm Loss before tax (3,894) (2,051) ------- ------- Tax credit thereon at UK corporation tax rate of 26.5 per cent (2010: 28 per cent) 1,032 574 Factors affecting tax credit: UK corporation tax rate change (332) (119) Disallowed and non-taxable items 23 48 Overseas tax rate differences (12) 109 Gains exempted or covered by capital losses (459) 54 Policyholder interests 140 (109) Tax losses surrendered for no payment (1) (421) Tax losses where no deferred tax provided (246) (526) Deferred tax on tax losses not previously recognised 40 - Adjustments in respect of previous years (3) 112 Effect of profit (loss) in joint ventures and associates 7 (27) Other items (16) 41 ------- ------- Tax credit (charge) 173 (264) ------- ------- 6. Taxation (continued)
On 23 March 2011, the Government announced that the corporation tax rate applicable from 1 April 2011 would be 26 per cent. This change passed into legislation on 29 March 2011. The enacted reduction in the main rate of corporation tax from 28 per cent to 27 per cent with effect from 1 April 2011 had been incorporated in the Group's deferred tax calculations as at 31 December 2010. In addition, the Finance Act 2011, which passed into law on 19 July 2011, included legislation to reduce the main rate of corporation tax from 26 per cent to 25 per cent with effect from 1 April 2012. The change in the main rate of corporation tax from 27 per cent to 25 per cent has resulted in a reduction in the Group's net deferred tax asset at 31 December 2011 of GBP325 million, comprising the GBP332 million charge included in the income statement and a GBP7 million credit included in equity.
The proposed further reductions in the rate of corporation tax by 1 per cent per annum to 23 per cent by 1 April 2014 are expected to be enacted separately each year. The effect of these further changes upon the Group's deferred tax balances and leasing business cannot be reliably quantified at this stage.
7. Trading and other financial assets at fair value through profit or loss 2011 2010 GBPm GBPm Trading assets 21,840 23,751 Other financial assets at fair value through profit or loss: ------ ------- Loans and advances to customers 54 - Debt securities 4,300 18,560 Equity shares 19,153 60,775 ------ ------- 23,507 79,335 ------ ------- Total trading and other financial assets at fair value through profit or loss 45,347 103,086 ------ -------
Included in the above is GBP23,474 million (31 December 2010: GBP81,013 million) of assets relating to the insurance businesses.
8. Loans and advances to customers 2011 2010 GBPm GBPm Agriculture, forestry and fishing 588 602 Energy and water supply 1,670 1,145 Manufacturing 2,946 3,881 Construction 6,818 6,983 Transport, distribution and hotels 20,135 23,232 Postal and communications 357 1,032 Property companies 42,418 58,092 Financial, business and other services 33,077 32,029 Personal: Mortgages 243,222 246,690 Other 12,920 16,974 Lease financing 3,840 4,458 Hire purchase 772 1,358 Due from fellow Group undertakings 11,698 10,205 Total loans and advances to customers before allowance for impairment losses 380,461 406,681 Allowance for impairment losses on loans and advances (note 9) (23,351) (25,316) -------- -------- Total loans and advances to customers 357,110 381,365 -------- --------
Loans and advances to customers include advances securitised under the Group's securitisation and covered bond programmes. Further details are given in note 10.
9. Allowance for impairment losses on loans and receivables 2011 2010 GBPm GBPm Balance at 1 January 26,607 23,272 Exchange and other adjustments (374) 411 Disposal of subsidiary undertakings - (149) Advances written off (8,650) (7,376) Recoveries of advances written off in previous years 66 57 Unwinding of discount (171) (375) Charge to the income statement (note 4) 7,021 10,767 Balance at 31 December 24,499 26,607 ------- ------- In respect of: Loans and advances to customers (note 8) 23,351 25,316 Debt securities 1,148 1,291 ------- ------- Balance at 31 December 24,499 26,607 ------- ------- 10. Securitisation and covered bonds
The Group's principal securitisation and covered bond programmes, together with the balances of the loans subject to these arrangements and the carrying value of the notes in issue at 31 December, are listed in the table below.
2011 2010 ---------------------- ---------------------- Loans and Loans and advances Notes in advances Notes in securitised issue securitised issue GBPm GBPm GBPm GBPm Securitisation programmes ------------ -------- ------------ -------- UK residential mortgages 91,246 68,425 102,801 83,367 US residential mortgage-backed securities 4,659 6,351 7,197 7,221 Irish residential mortgages 5,531 5,661 6,061 6,191 Credit card receivables 6,792 4,810 7,372 3,856 Dutch residential mortgages 4,960 4,817 4,551 4,415 Personal loans - - 3,012 2,011 Commercial loans 680 631 667 633 Motor vehicle loans 1,573 1,341 926 975 ------------ ------------ 115,441 92,036 132,587 108,669 ------------ ------------ Less held by the Group (65,118) (78,686) -------- -------- Total securitisation programmes (note 11) 26,918 29,983 -------- -------- Covered bond programmes Residential mortgage-backed 48,521 38,882 55,032 44,271 Social housing loan-backed 3,370 2,605 3,377 2,400 ------------ -------- ------------ -------- 51,891 41,487 58,409 46,671 ------------ ------------ Less held by the Group (13,515) (17,239) -------- -------- Total covered bond programmes (note 11) 27,972 29,432 -------- -------- Total securitisation and covered bond programmes 54,890 59,415 -------- --------
Securitisation programmes
Loans and advances to customers and debt securities classified as loans and receivables include loans securitised under the Group's securitisation programmes, the majority of which have been sold by subsidiary companies to bankruptcy remote special purpose entities (SPEs). As the SPEs are funded by the issue of debt on terms whereby the majority of the risks and rewards of the portfolio are retained by the subsidiary, the SPEs are consolidated fully and all of these loans are retained on the Group's balance sheet, with the related notes in issue included within debt securities in issue. In addition to the SPEs detailed above, the Group sponsors a conduit programme, Grampian.
Covered bond programmes
Certain loans and advances to customers have been assigned to bankruptcy remote limited liability partnerships to provide security to issues of covered bonds by the Group. The Group retains all of the risks and rewards associated with these loans and the partnerships are consolidated fully with the loans retained on the Group's balance sheet, and the related covered bonds in issue included within debt securities in issue.
Cash deposits of GBP13,381 million (2010: GBP25,139 million) held by the Group are restricted in use to repayment of the debt securities issued by the SPEs and other legal obligations.
11. Debt securities in issue 2011 2010 GBPm GBPm Medium-term notes issued 12,489 24,426 Covered bonds (note 10) 27,972 29,432 Certificates of deposit 350 3,062 Securitisation notes (note 10) 26,918 29,983 Commercial paper 6,169 11,320 ------ ------- 73,898 98,223 Amounts due to fellow Group undertakings 1,559 2,537 Total debt securities in issue 75,457 100,760 ------ ------- 12. Subordinated liabilities
The movement in subordinated liabilities during the year was as follows:
GBPm At 1 January 2011 16,674 Repurchases and redemptions during the year (2,696) Foreign exchange and other movements (365) ------- At 31 December 2011 13,613 ------- 13. Share capital
Ordinary share capital in issue is as follows:
Number of shares Ordinary shares of 25 pence each (millions) GBPm At 1 January and 31 December 2011 15,053 3,763 ----------- ----- 14. Reserves Other reserves ----------------------------------------- Share Available- Cash flow Merger Retained premium for-sale hedging and other Total profits GBPm GBPm GBPm GBPm GBPm GBPm ---------- --------- ---------- At 1 January 2011 18,655 (894) (417) 10,168 8,857 (5,415) Loss for the year - - - - - (3,763) Value of employee services - - - - - 8 Change in fair value of available-for-sale assets (net of tax) - (31) - - (31) - Change in fair value of hedging derivatives (net of tax) - - 996 - 996 - Transfers to income statement (net of tax) - 427 280 - 707 - Exchange and other adjustments - - - (6) (6) - ---------- --------- ---------- ------ At 31 December 2011 18,655 (498) 859 10,162 10,523 (9,170) -------- ---------- --------- ---------- ------ -------- 15. Payment protection insurance
There has been extensive scrutiny of the payment protection insurance (PPI) market in recent years.
In October 2010, the UK Competition Commission confirmed its decision to prohibit the active sale of PPI by a distributor to a customer within seven days of a sale of credit. This followed the completion of its formal investigation into the supply of PPI services (other than store card PPI) to non-business customers in the UK in January 2009 and a referral of the proposed prohibition to the Competition Appeal Tribunal. The Competition Commission consulted on the wording of a draft Order to implement its findings from October 2010, and published the final Order on 24 March 2011 which became effective on 6 April 2011. Following an earlier decision to stop selling single premium PPI products, the Group ceased to offer PPI products to its customers in July 2010.
On 29 September 2009 the FSA announced that several firms had agreed to carry out reviews of past sales of single premium loan protection insurance. Lloyds Banking Group agreed in principle that it would undertake a review in relation to sales of single premium loan protection insurance made through its branch network since 1 July 2007. That review will now form part of the ongoing PPI work referred to below.
On 1 July 2008, the Financial Ombudsman Service (FOS) referred concerns regarding the handling of PPI complaints to the Financial Services Authority (FSA) as an issue of wider implication. On 29 September 2009 and 9 March 2010, the FSA issued consultation papers on PPI complaints handling. The FSA published its Policy Statement on 10 August 2010, setting out evidential provisions and guidance on the fair assessment of a complaint and the calculation of redress, as well as a requirement for firms to reassess historically rejected complaints which had to be implemented by 1 December 2010.
On 8 October 2010, the British Bankers' Association (BBA), the principal trade association for the UK banking and financial services sector, filed an application for permission to seek judicial review against the FSA and the FOS. The BBA sought an order quashing the FSA Policy Statement and an order quashing the decision of the FOS to determine PPI sales in accordance with the guidance published on its website in November 2008.
The Judicial Review hearing was held in late January 2011 and on 20 April 2011 judgment was handed down by the High Court dismissing the BBA's application. On 9 May 2011, the BBA confirmed that the banks and the BBA did not intend to appeal the judgment.
After publication of the judgment, the Group entered into discussions with the FSA with a view to seeking clarity around the detailed implementation of the Policy Statement. As a result, and given the initial analysis that the Group has conducted of compliance with applicable sales standards, which is continuing, the Group concluded that there are certain circumstances where customer contact and/or redress will be appropriate. Accordingly the Group made a provision in its income statement for the year ended 31 December 2011 of GBP1,155 million in respect of the anticipated costs of such contact and/or redress, including administration expenses. During 2011, the Group made redress payments of GBP375 million to customers. The Group anticipated that all claims will be settled by 2015. However, there are still a number of uncertainties as to the eventual costs from any such contact and/or redress given the inherent difficulties of assessing the impact of detailed implementation of the Policy Statement for all PPI complaints, uncertainties around the ultimate emergence period for complaints, the availability of supporting evidence and the activities of claims management companies, all of which will significantly affect complaints volumes, uphold rates and redress costs.
16. Contingent liabilities and commitments
Interchange fees
The European Commission has adopted a formal decision finding that an infringement of European Commission competition laws has arisen from arrangements whereby MasterCard set a uniform Multilateral Interchange Fee (MIF) in respect of cross-border transactions in relation to the use of a MasterCard or Maestro branded payment card. The European Commission has required that the MIF be reduced to zero for relevant cross-border transactions within the European Economic Area. This decision has been appealed to the General Court of the European Union (the General Court). Lloyds TSB Bank plc and Bank of Scotland plc (along with certain other MasterCard issuers) have successfully applied to intervene in the appeal in support of MasterCard's position that the arrangements for the charging of the MIF are compatible with European Union competition laws. The UK Government has also intervened in the General Court appeal supporting the European Commission position. An oral hearing took place on 8 July 2011 but judgment is not expected for six to twelve months. MasterCard has reached an understanding with the European Commission on a new methodology for calculating intra-European Economic Area MIF on an interim basis pending the outcome of the appeal.
Meanwhile, the European Commission is pursuing an investigation with a view to deciding whether arrangements adopted by Visa for the levying of the MIF in respect of cross-border payment transactions also infringe European Union competition laws. In this regard Visa reached an agreement with the European Commission to reduce the level of interchange for cross-border debit card transactions to the interim levels agreed by MasterCard. The UK's Office of Fair Trading has also commenced similar investigations relating to the MIF in respect of domestic transactions in relation to both the MasterCard and Visa payment schemes. The ultimate impact of the investigations on the Group can only be known at the conclusion of these investigations and any relevant appeal proceedings.
Interbank offered rate setting investigations
Several government agencies in the UK, US and overseas, including the US Commodity Futures Trading Commission, the US SEC, the US Department of Justice and the FSA as well as the European Commission, are conducting investigations into submissions made by panel members to the bodies that set various interbank offered rates. The Group, and/or its subsidiaries, were (at the relevant time) and remain members of various panels that submit data to these bodies. The Group has received requests from some government agencies for information and is co-operating with their investigations. In addition, recently the Group has been named in private lawsuits, including purported class action suits in the US with regard to the setting of London interbank offered rates (LIBOR). It is currently not possible to predict the scope and ultimate outcome of the various regulatory investigations or private lawsuits, including the timing and scale of the potential impact of any investigations and private lawsuits on the Group.
Financial Services Compensation Scheme (FSCS)
The FSCS is the UK's independent statutory compensation fund for customers of authorised financial services firms and pays compensation if a firm is unable to pay claims against it. The FSCS is funded by levies on the industry (and recoveries and borrowings where appropriate). The levies raised comprise both management expenses levies and, where necessary, compensation levies on authorised firms.
Following the default of a number of deposit takers in 2008, the FSCS borrowed funds from HM Treasury to meet the compensation costs for customers of those firms. The borrowings with HM Treasury, which total circa GBP20 billion, are on an interest-only basis until 31 March 2012 and the FSCS and HM Treasury are currently discussing the terms for refinancing these borrowings to take effect from 1 April 2012. Each deposit-taking institution contributes towards the management expenses levies in proportion to their share of total protected deposits on 31 December of the year preceding the scheme year, which runs from 1 April to 31 March. In determining an appropriate accrual in respect of the management expenses levy, certain assumptions have been
16. Contingent liabilities and commitments (continued)
made including the proportion of total protected deposits held by the Group, the level and timing of repayments to be made by the FSCS to HM Treasury and the interest rate to be charged by HM Treasury. For the year ended 31 December 2011, the Group has charged GBP86 million (2010: GBP28 million) to the income statement in respect of the costs of the FSCS.
Whilst it is expected that the substantial majority of the principal will be repaid from funds the FSCS receives from asset sales, surplus cash flow or other recoveries in relation to the assets of the firms that defaulted, to the extent that there remains a shortfall, the FSCS will raise compensation levies on all deposit-taking participants. The amount of any future compensation levies also depends on a number of factors including the level of protected deposits and the population of deposit-taking participants and will be determined at a later date. As such, although the Group's share of such compensation levies could be material, the Group has not recognised a provision in respect of them in these financial statements.
Shareholder complaints
Lloyds Banking Group plc and two former members of its Board of Directors have been named as defendants in a purported securities class action pending in the United States District Court for the Southern District of New York. The complaint, dated 23 November 2011, asserts claims under the Securities Exchange Act of 1934 in connection with alleged material omissions from statements made in 2008 in connection with the acquisition of HBOS. No quantum is specified.
In addition, a UK-based shareholder action group has threatened multi-claimant claims on a similar basis against Lloyds Banking Group plc and two former directors in the UK. No claim has yet been issued.
Lloyds Banking Group plc considers that the claims are without merit and will defend them vigorously. The claims have not been quantified and it is not possible to estimate the ultimate financial impact on the Group at this early stage.
FSA investigation into Bank of Scotland
As previously disclosed, in 2009 the FSA commenced a supervisory review into HBOS. The supervisory review has now been superseded as the FSA has commenced enforcement proceedings against Bank of Scotland plc in relation to its Corporate division pre 2009. The proceedings are ongoing and the Group is co-operating fully. It is too early to predict the outcome or estimate reliably any potential financial effects of the enforcement proceedings but they are not currently expected to be material.
Regulatory matters
In the course of its business, the Group is engaged in discussions with the FSA in relation to a range of conduct of business matters, including complaints handling, packaged bank accounts, savings accounts, product terms and conditions, interest-only mortgages, sales processes and remuneration schemes. The Group is keen to ensure that any regulatory concerns are understood and addressed. The ultimate impact on the Group of these discussions can only be known at the conclusion of such discussions.
Other legal actions and regulatory matters
In addition, during the ordinary course of business the Group is subject to other threatened and actual legal proceedings (which may include class action lawsuits brought on behalf of customers, shareholders or other third parties), regulatory investigations, regulatory challenges 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.
16. Contingent liabilities and commitments (continued)
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 to settle the obligation at the relevant balance sheet date. In some cases it will not be possible to form a view, either because the facts are unclear or because further time is needed properly to assess the merits of the case and no provisions are held against such matters. However the Group does not currently expect the final outcome of any such case to have a material adverse effect on its financial position.
Contingent liabilities and commitments arising from the banking business
2011 2010 GBPm GBPm Contingent liabilities Acceptances and endorsements 3 1 Other: ------ ------ Other items serving as direct credit substitutes 110 103 Performance bonds and other transaction-related contingencies 674 568 ------ ------ 784 671 ------ ------ Total contingent liabilities 787 672 ------ ------ Commitments Documentary credits and other short-term trade-related transactions 8 2 Undrawn formal standby facilities, credit lines and other commitments to lend: Less than 1 year original maturity: ------ ------ Mortgage offers made 6,311 6,875 Other commitments 22,851 32,144 ------ ------ 29,162 39,019 1 year or over original maturity 16,442 17,323 ------ ------ Total commitments 45,612 56,344 ------ ------ 17. Capital ratios As at 31 As at 31 December December Capital resources 2011 2010 GBPm GBPm Core tier 1 Shareholders' equity per balance sheet 23,771 25,860 Non-controlling interests per balance sheet 399 550 Regulatory adjustments to non-controlling interests (333) (270) Regulatory adjustments: Defined benefit pension adjustment (296) (583) Unrealised reserve on available-for-sale debt securities 840 1,237 Unrealised reserve on available-for-sale equity investments (342) (343) Cash flow hedging reserve (859) 417 Other items (16) - 23,164 26,868 Less: deductions from core tier 1 Goodwill (883) (875) Intangible assets (76) (74) 50 per cent excess of expected losses over impairment (684) - 50 per cent of securitisation positions (84) (132) Core tier 1 capital 21,437 25,787 Preferred securities(1) 3,070 3,057 Less: deductions from tier 1 50 per cent of material holdings (80) (25) Total tier 1 capital 24,427 28,819 --------- --------- Tier 2 Undated subordinated debt 664 731 Dated subordinated debt 6,602 9,550 Unrealised gains on available-for-sale equity investments 342 343 Eligible provisions 1,203 1,776 Less: deductions from tier 2 50 per cent excess of expected losses over impairment (684) - 50 per cent of securitisation positions (84) (132) 50 per cent of material holdings (80) (25) --------- --------- Total tier 2 capital 7,963 12,243 --------- --------- Supervisory deductions Unconsolidated investments - life (359) (4,344) - general insurance and other (101) (1,091) --------- --------- Total supervisory deductions (460) (5,435) --------- --------- Total capital resources 31,930 35,627 --------- --------- Risk-weighted assets 199,324 252,613 Core tier 1 capital ratio 10.8% 10.2% Tier 1 capital ratio 12.3% 11.4% Total capital ratio 16.0% 14.1% (1) Covered by grandfathering provisions issued by FSA. 18. Related party transactions
Balances and transactions with Lloyds Banking Group plc and fellow Group undertakings
The Company and its subsidiaries have balances due to and from the Company's ultimate parent company, Lloyds Banking Group plc, and fellow Group undertakings. These are included on the balance sheet as follows:
2011 2010 GBPm GBPm Assets Derivative financial instruments 4,196 1,437 Loans and advances to banks 85,800 55,053 Loans and advances to customers 11,698 10,205 Trading and other financial assets as fair value through profit or loss 7,515 3,475 Other 2,681 766 Liabilities Deposits from banks 144,502 131,133 Customer deposits 16,460 16,489 Derivative financial instruments 6,703 1,853 Trading liabilities 6,690 3,294 Debt securities in issue 1,559 2,537 Subordinated liabilities 272 312
During the year ended 31 December 2011 the Group earned GBP920 million (2010: GBP658 million) of interest income and incurred GBP1,974 million (2010: GBP1,249 million) of interest expense on balances and transactions with Lloyds Banking Group plc and fellow Group undertakings.
UK Government
In January 2009, the UK Government through HM Treasury became a related party of Lloyds Banking Group plc, the Company's ultimate parent company, following its subscription for ordinary shares issued under a placing and open offer. As at 31 December 2011, HM Treasury held a 40.2 per cent (31 December 2010: 40.6 per cent) interest in Lloyds Banking Group plc's ordinary share capital and consequently HM Treasury remained a related party of Lloyds Banking Group plc, and therefore of the Group, during the year ended 31 December 2011.
From 1 January 2011, in accordance with IAS 24 (Revised), UK Government-controlled entities became related parties of the Group. The Group regards the Bank of England and banks controlled by the UK Government, comprising The Royal Bank of Scotland Group plc, Northern Rock (Asset Management) plc and Bradford & Bingley plc, as related parties.
Since 31 December 2010, the Group has had the following significant transactions with the UK Government or UK Government-related entities:
Government and central bank facilities
During the year ended 31 December 2011, the Lloyds Banking Group participated in a number of schemes operated by the UK Government and central banks and made available to eligible banks and building societies.
18. Related party transactions (continued)
Special liquidity scheme and credit guarantee scheme
The Bank of England's UK Special Liquidity Scheme was launched in April 2008 to allow financial institutions to swap temporarily illiquid assets for treasury bills, with fees charged based on the spread between 3-month LIBOR
and the 3-month gilt repo rate. The scheme will operate for up to three years after the end of the drawdown period (30 January 2009) at the Bank of England's discretion. The Lloyds Banking Group did not utilise the Special Liquidity Scheme at 31 December 2011.
HM Treasury launched the Credit Guarantee Scheme in October 2008 as part of a range of measures announced by the UK Government intended to ease the turbulence in the UK banking system. It charged a commercial fee for the guarantee of new short and medium term debt issuance. The fee payable to HM treasury on guaranteed issues was based on a per annum rate of 50 basis points plus the median five-year credit default swap spread. The drawdown window for the Credit Guarantee Scheme closed for new issuance at the end of February 2010. At 31 December 2011, the Lloyds Banking Group had GBP23.5 billion of debt in issue under the Credit Guarantee Scheme (31 December 2010: GBP45.4 billion). During the year, fees of GBP28 million paid to HM Treasury in respect of guaranteed funding were included in the Lloyds Banking Group's income statement.
Lending commitments
The formal lending commitments entered into in connection with the Lloyds Banking Group's proposed participation in the Government Asset Protection Scheme have now expired and in February 2011, Lloyds Banking Group plc (together with Barclays, Royal Bank of Scotland, HSBC and Santander) announced, as part of the 'Project Merlin' agreement with HM Treasury, its capacity and willingness to increase business lending (including to small and medium-sized enterprises) during 2011.
Business Growth Fund
In May 2011 the Group agreed, together with The Royal Bank of Scotland plc (and three other non-related parties), to subscribe for shares in the Business Growth Fund plc which is the company created to fulfil the role of the Business Growth Fund as set out in the British Bankers' Association's Business Taskforce Report of October 2010. During 2011, the Lloyds Banking Group has incurred sunk costs of GBP4 million which have been written off. As at 31 December 2011, the Lloyds Banking Group's investment in the Business Growth Fund was GBP20 million.
Other government-related entities
Other than the transactions referred to above, there were no other significant transactions with the UK Government and UK Government-controlled entities (including UK Government-controlled banks) during the period that were not made in the ordinary course of business or that were unusual in their nature or conditions.
Other related party transactions
During 2011, the Group sold at fair value certain non-government bonds, equities and alternative assets to Lloyds TSB Group Pension Scheme No.1 for GBP79 million and to Lloyds TSB Group Pension Scheme No.2 for GBP43 million.
Except as noted above, other related party transactions for the year ended 31 December 2011 are similar in nature to those for the year ended 31 December 2010.
19. Future accounting developments
The following pronouncements may have a significant effect on the Group's financial statements but are not applicable for the year ending 31 December 2011 and have not been applied in preparing these financial statements. Save as disclosed, the full impact of these accounting changes is being assessed by the Group.
Pronouncement Nature of change IASB effective date ------------------------ -------------------------------------------- ------------------------ Amendments to Requires an entity to disclose information Annual and interim IFRS 7 Financial to enable users of its financial periods beginning Instruments: statements to evaluate the effect on or after 1 January Disclosures - or potential effect of netting arrangements 2013. 'Disclosures-Offsetting on the entity's balance sheet. Financial Assets and Financial Liabilities' ------------------------ -------------------------------------------- ------------------------ IFRS 10 Consolidated Supersedes IAS 27 Consolidated and Annual periods beginning Financial Statements Separate Financial Statements and on or after 1 January SIC-12 Consolidation - Special Purpose 2013. Entities and establishes principles for the preparation of consolidated financial statements when an entity controls one or more entities. ------------------------ -------------------------------------------- ------------------------ IFRS 12 Disclosure Requires an entity to disclose information Annual periods beginning of Interests that enables users of financial on or after 1 January in Other Entities statements to evaluate the nature 2013. of, and risks associated with, its interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. ------------------------ -------------------------------------------- ------------------------ IFRS 13 Fair The standard defines fair value, Annual periods beginning Value Measurement sets out a framework for measuring on or after 1 January fair value and requires disclosures 2013. about fair value measurements. It applies to IFRSs that require or permit fair value measurements or disclosures about fair value measurements. ------------------------ -------------------------------------------- ------------------------ IAS 19 Employee Prescribes the accounting and disclosure Annual periods beginning Benefits by employers for employee benefits. on or after 1 January Actuarial gains and losses (remeasurements) 2013. in respect of defined benefit pension schemes can no longer be deferred using the corridor approach and must be recognised immediately in other comprehensive income. At 31 December 2011, unrecognised actuarial gains were GBP532 million. The income statement charge for 2011 would have been approximately GBP50 million lower under the revised standard. ------------------------ -------------------------------------------- ------------------------ Amendments to Inserts application guidance to Annual periods beginning IAS 32 Financial address inconsistencies identified on or after 1 January Instruments: in applying the offsetting criteria 2014. Presentation used in the standard. Some gross - 'Offsetting settlement systems may qualify for Financial Assets offsetting where they exhibit certain and Financial characteristics akin to net settlement. Liabilities' ------------------------ -------------------------------------------- ------------------------ IFRS 9 Financial Replaces those parts of IAS 39 Financial Annual periods beginning Instruments(1) Instruments: Recognition and Measurement on or after 1 January relating to the classification, 2015. measurement and derecognition of financial assets and liabilities. Requires financial assets to be classified into two measurement categories, fair value and amortised cost, 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 available-for-sale financial asset and held-to-maturity investment categories in IAS 39 will be eliminated. The requirements for financial liabilities and derecognition are broadly unchanged from IAS 39. ------------------------ -------------------------------------------- ------------------------ (1) IFRS 9 is the initial stage of the project to replace IAS 39. Future stages are expected to result in amendments to IFRS 9 to deal with changes to the impairment of financial assets measured at amortised cost and hedge accounting. Until all stages of the replacement project are complete, it is not possible to determine the overall impact on the financial statements of the replacement of IAS 39.
As at 23 February 2012, these pronouncements were awaiting EU endorsement.
20. Ultimate parent undertaking
HBOS plc's ultimate parent undertaking and controlling party is Lloyds Banking Group plc which is incorporated in Scotland. Lloyds Banking Group plc will produce consolidated accounts for the year to 31 December 2010; these will be published in March 2012, and copies will be obtainable 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 included in these 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 2011 were approved by the directors on 23 February 2012 and will be delivered to the Registrar of Companies following publication in March 2012. The auditors' report on those accounts was unqualified and did not include a statement under sections 498(2) (accounting records or returns inadequate or accounts not agreeing with records and returns) or 498(3) (failure to obtain necessary information and explanations) of the Companies Act 2006.
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Kate O'Neill
Managing Director, Investor Relations
020 7356 3520
kate.o'neill@ltsb-finance.co.uk
Charles King
Director of Investor Relations
020 7356 3537
charles.king@ltsb-finance.co.uk
CORPORATE AFFAIRS
Matthew Young
Group Corporate Affairs Director
020 7356 2231
matt.young@lloydsbanking.com
Ed Petter Group Media Relations Director
020 8936 5655
ed.petter@lloydsbanking.com
Registered office: HBOS plc, The Mound, Edinburgh EH1 1YZ
Registered in Scotland no. SC218813
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR USOORUVAUUAR
1 Year Hbos 5.75% Nts Chart |
1 Month Hbos 5.75% Nts Chart |
It looks like you are not logged in. Click the button below to log in and keep track of your recent history.
Support: +44 (0) 203 8794 460 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions