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TIDM94WP
RNS Number : 5068W
Lloyds Bank PLC
01 August 2018
Lloyds Bank plc
2018 Half-Year Results
Member of the Lloyds Banking Group
FORWARD LOOKING STATEMENTS
This document contains certain forward looking statements with respect to the business, strategy, plans and / or results of the Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about the Group's or its directors' and/or management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in interest rates, inflation, exchange rates, stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group's or Lloyds Banking Group plc's credit ratings; the ability to derive cost savings and other benefits including, but without limitation as a result of any acquisitions, disposals and other strategic transactions; changing customer behaviour including consumer spending, saving and borrowing habits; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, instability as a result of the exit by the UK from the European Union (EU) and the potential for other countries to exit the EU or the Eurozone and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to the security of IT and operational infrastructure, systems, data and information resulting from increased threat of cyber and other attacks; natural, pandemic and other disasters, adverse weather and similar contingencies outside the Group's or Lloyds Banking Group plc's control; inadequate or failed internal or external processes or systems; acts of war, other acts of hostility, terrorist acts and responses to those acts, geopolitical, pandemic or other such events; changes in laws, regulations, practices and accounting standards or taxation, including as a result of the exit by the UK from the EU, or a further possible referendum on Scottish independence; changes to regulatory capital or liquidity requirements and similar contingencies outside the Group's or Lloyds Banking Group plc's control; the policies, decisions and actions of governmental or regulatory authorities or courts in the UK, the EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation together with any resulting impact on the future structure of the Group; the ability to attract and retain senior management and other employees and meet its diversity objectives; actions or omissions by the Group's directors, management or employees including industrial action; changes to the Group's post-retirement defined benefit scheme obligations; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; the value and effectiveness of any credit protection purchased by the Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services, lending companies and digital innovators and disruptive technologies; and exposure to regulatory or competition scrutiny, legal, regulatory or competition proceedings, investigations or complaints. Please refer to the latest Annual Report on Form 20-F filed by Lloyds Banking Group plc with the US Securities and Exchange Commission for a discussion of certain factors and risks together with examples of forward looking statements. Except as required by any applicable law or regulation, the forward looking statements contained in this document are made as of today's date, and the Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this document to reflect any change in the Group's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The information, statements and opinions contained in this document do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments.
CONTENTS
Page Financial review 1 Principal risks and uncertainties 5 Condensed consolidated half-year financial statements (unaudited) Consolidated income statement 6 Consolidated statement of comprehensive income 7 Consolidated balance sheet 8 Consolidated statement of changes in equity 10 Consolidated cash flow statement 14 Notes 16 Statement of directors' responsibilities 55 Independent review report 56 Contacts 58
FINANCIAL REVIEW
As a result of the requirements of the ring-fencing regulations, the Bank sold its subsidiary, Scottish Widows Group Limited, to its ultimate holding company during May 2018. This is only an internal reorganisation within the Lloyds Banking Group, but due to the significance of the Scottish Widows entities they have been classified as discontinued operations for the purposes of the Bank's consolidated statutory reporting.
In addition, also in May 2018, the Bank and its subsidiary, Bank of Scotland plc, sold the element of their commercial banking businesses required to be transferred in order to ensure compliance with the Ring-fencing legislation to Lloyds Bank Corporate Markets plc, a fellow Lloyds Banking Group undertaking.
Continuing operations
During the half-year to 30 June 2018, the Group recorded a profit before tax from its continuing operations of GBP2,354 million compared with a profit before tax in the half-year to 30 June 2017 of GBP2,579 million.
Total income decreased by GBP217 million, or 2 per cent, to GBP8,513 million in the half-year to 30 June 2018 compared with GBP8,730 million in the half-year to 30 June 2017; a GBP450 million increase in net interest income was more than offset by a decrease of GBP667 million in other income.
Net interest income was GBP6,391 million in the half-year to 30 June 2018, an increase of GBP450 million, or 8 per cent compared to GBP5,941 million in the half-year to 30 June 2017 as a result of margin improvements due to the benefit from the acquisition of MBNA and lower deposit and wholesale funding costs, more than offsetting continued asset pricing pressure.
Other income was GBP667 million lower at GBP2,122 million in the half-year to 30 June 2018 compared to GBP2,789 million in the half-year to 30 June 2017. Net fee and commission income was GBP189 million lower at GBP752 million in the half-year to 30 June 2018 compared to GBP941 million in the half-year to 30 June 2017, in part due to a lower level of current account fees as a result of changes to overdraft charging announced in July 2017, which took effect in November. Net trading income was GBP431 million lower at GBP184 million in the half-year to 30 June 2018 compared to GBP615 million in the half-year to 30 June 2017. Other operating income was GBP47 million lower at GBP1,186 million in the half-year to 30 June 2018 compared to GBP1,233 million in the half-year to 30 June 2017, with 2018 including a loss of GBP105 million on the sale of the Group's Irish residential mortgage portfolio.
Operating expenses decreased by GBP219 million to GBP5,729 million in the half-year to 30 June 2018 compared with GBP5,948 million in the half-year to 30 June 2017. There was a GBP433 million reduction in regulatory provisions partly offset by a GBP214 million increase in other operating expenses. The charge in respect of regulatory provisions was GBP778 million compared to GBP1,211 million in the half-year to 30 June 2017 and comprised a charge of GBP550 million in respect of payment protection insurance and GBP228 million in respect of other conduct issues. Other operating expenses were GBP214 million higher at GBP4,951 million in the half-year to 30 June 2018 compared to GBP4,737 million in the half-year to 30 June 2017 reflecting costs of GBP75 million in MBNA and an increased level of staff, restructuring and other costs.
Credit quality across the portfolio remains strong. Impairment losses increased by GBP227 million to GBP430 million in the half-year to 30 June 2018 compared with GBP203 million in the half-year to 30 June 2017, reflecting the expected lower releases and write-backs and the acquisition of MBNA. In the current benign economic environment, the implementation of IFRS 9 has not had a significant effect on the Group's impairment charge.
Discontinued operations
The Group sold the Scottish Widows Group to its ultimate holding company, Lloyds Banking Group plc, at the beginning of May 2018 and so the results of discontinued operations reflect four months of trading compared to a full six months in the half-year to 30 June 2017; a trading surplus of GBP370 million compared to GBP389 million for the half-year to 30 June 2017. The Group realised a profit of GBP1,010 million on the sale of Scottish Widows Group, which is reported as part of discontinued operations.
FINANCIAL REVIEW (continued)
Balance sheet and capital
Total assets were GBP130,811 million lower at GBP692,219 million at 30 June 2018 compared to GBP823,030 million at 31 December 2017, principally due to the sale of the Group's insurance activities. Loans and advances to customers were reduced following reclassifications on adoption of IFRS 9 but this has been partly offset by continued growth in targeted segments such as SME and motor finance, while the open mortgage book was broadly unchanged over the period. Financial assets held at fair value through other comprehensive income have reduced following sales of some of the Group's gilt holdings.
In May 2018, Standard & Poor's upgraded Lloyds Bank plc's long-term rating by one notch to 'A+'
Total equity has decreased by GBP10,550 million from GBP51,194 million at 31 December 2017 to GBP40,644 million at 30 June 2018, principally due to dividends paid of GBP10,422 million and a capital repayment of GBP1,800 million as the Group restructures its capital following the sale of businesses as part of the Lloyds Banking Group's programme for compliance with the Ring-fencing legislation.
The Group's common equity tier 1 capital ratio reduced to 15.1 per cent (31 December 2017: 15.8 per cent), predominantly reflecting the net impact of ring-fencing related restructuring activities on capital resources and risk-weighted assets during the period, including the transfer of the Group's holding in its Insurance business (Scottish Widows Group) to its ultimate parent company Lloyds Banking Group plc and the transfer of assets and liabilities of non ring-fenced portfolios to Lloyds Bank Corporate Markets plc. The restructuring activities resulted in the payment of a GBP7,622 million dividend to Lloyds Banking Group plc, a substantial reduction in the deduction for significant investments and the removal of the deconsolidation adjustments previously applied to shareholders' equity. The impact of the ring-fencing related restructuring activities was partially offset by profits generated during the period, the receipt of dividends paid by the Insurance business in February 2018, a reduction in the deferred tax asset deduction and a substantial reduction in excess expected losses resulting from the partial absorption of the increase in impairment provisions following the adoption of IFRS 9 on 1 January 2018, which were in turn offset by the accrual for foreseeable dividends in respect of the first half of 2018, the impact on retained earnings following the adoption of IFRS 9 on 1 January 2018 (net of transitional relief), movements through the FVOCI reserve and an increase in intangible assets which are deducted from capital.
The tier 1 capital ratio reduced to 17.9 per cent (31 December 2017: 18.3 per cent) primarily reflecting the reduction in common equity tier 1 and the annual reduction in the transitional limit applied to grandfathered AT1 capital instruments, partially offset by the reduction in risk-weighted assets. The total capital ratio increased to 22.0 per cent (31 December 2017: 21.5 per cent), largely reflecting the reduction in risk-weighted assets and the deduction for significant investments, partially offset by the reduction in common equity tier 1 capital.
Risk-weighted assets reduced by GBP18,981 million, or 9 per cent, to GBP187,047 million at 30 June 2018, compared to GBP206,028 million at 31 December 2017, largely reflecting the impact of the ring-fencing related restructuring activities.
Capital position at 30 June 2018
The Group's capital position as at 30 June 2018, applying CRD IV transitional rules and IFRS 9 transitional arrangements, is set out in the following section.
Financial review (continued)
Capital ratios
At At 30 June 31 Dec Capital resources (transitional) 2018 2017 GBPm GBPm Common equity tier 1 Shareholders' equity per balance sheet 37,335 47,598 Adjustment to retained earnings for foreseeable dividends (600) (2,475) Deconsolidation adjustments(1) - 738 Adjustment for own credit (13) 109 Cash flow hedging reserve (1,058) (1,573) Other adjustments 469 (28) 36,133 44,369 Less: deductions from common equity tier 1 Goodwill and other intangible assets (3,331) (2,952) Prudent valuation adjustment (202) (454) Excess of expected losses over impairment provisions and value adjustments (8) (477) Removal of defined benefit pension surplus (1,318) (541) Securitisation deductions (1) (191) Significant investments(1) - (3,990) Deferred tax assets (3,060) (3,264) --------- -------- Common equity tier 1 capital 28,213 32,500 --------- -------- Additional tier 1 Additional tier 1 instruments 5,937 6,593 Less: deductions from tier 1 Significant investments(1) (638) (1,373) Total tier 1 capital 33,512 37,720 --------- -------- Tier 2 Tier 2 instruments 7,693 7,700 Eligible provisions - 120 Less: deductions from tier 2 Significant investments(1) - (1,241) --------- -------- Total tier 2 capital 7,693 6,579 --------- -------- Total capital resources 41,205 44,299 --------- -------- Risk-weighted assets 187,047 206,028 Common equity tier 1 capital ratio(2) 15.1% 15.8% Tier 1 capital ratio(2) 17.9% 18.3% Total capital ratio(2) 22.0% 21.5% (1) Prior to the transfer of the Group's Insurance business during the period to Lloyds Banking Group plc (the ultimate parent company), the Group's Insurance business was deconsolidated for regulatory capital purposes and replaced by the amount of the Group's investment in the business. A part of this amount was deducted from capital (shown as 'significant investments' in the table above) and the remaining amount was risk-weighted, forming part of threshold risk-weighted assets. (2) Reflecting the full impact of IFRS 9 at 30 June 2018, without the application of transitional arrangements, the Group's common equity tier 1 capital ratio would be 14.8%, the tier 1 capital ratio would be 17.6% and the total capital ratio would be 22.0%.
Financial review (continued)
At At 30 June 31 Dec 2018 2017 GBPm GBPm Risk-weighted assets Foundation Internal Ratings Based (IRB) Approach 58,045 60,207 Retail IRB Approach 58,868 61,588 Other IRB Approach 11,073 12,359 -------- ------- IRB Approach 127,986 134,154 Standardised Approach 29,064 25,283 Credit risk 157,050 159,437 -------- ------- Counterparty credit risk 2,786 6,055 Contributions to the default fund of a central counterparty 459 428 Credit valuation adjustment risk 569 1,402 Operational risk 23,402 24,880 Market risk 1,260 3,051 -------- ------- Underlying risk-weighted assets 185,526 195,253 Threshold risk-weighted assets 1,521 10,775 -------- ------- Total risk-weighted assets 187,047 206,028
-------- -------
Principal risks and uncertainties
The significant risks faced by the Group which could impact the success of delivering against the Group's long-term strategic objectives and through which global macro-economic conditions, on-going political uncertainty, regulatory developments and market liquidity dynamics could manifest, are detailed below. Except where noted, there has been no significant change to the description of these risks or key mitigating actions disclosed in the Group's 2017 Annual Report and Accounts, with any quantitative disclosures updated herein.
Lloyds Banking Group continues to consider and assess the potential implications of the UK leaving the European Union and manage related developments to assess, and if possible mitigate any impact to its customers, colleagues and products - as well as legal, regulatory, tax, financial and capital implications.
Credit risk - The risk that parties with whom the Group has contracted fail to meet their financial obligations (both on and off balance sheet). Adverse changes in the economic, geopolitical and market environment could impact profitability due to an increase in impairment losses, write downs and/or decrease in asset valuations.
Regulatory and legal risk - The risks of changing legislation, regulation, policies, voluntary codes of practice and their interpretation in the markets in which the Group operates may have a significant impact on the Group's operations, business prospects, structure, costs, capital requirements and/or ability to enforce contractual obligations.
Conduct risk - Conduct risk can arise from a number of areas including selling products to customers which do not meet their needs; failing to deal with customers' complaints effectively; not meeting customers' expectations; failing to promote effective competition in the interest of customers; and exhibiting behaviours which could impact on the integrity of the market or undermine wider regulatory standards.
Operational risk - The Group faces significant operational risks which may disrupt services to customers, cause reputational damage, and result in financial loss. These include the availability, resilience and security of the Group's core IT systems, unlawful or inappropriate use of customer data, theft of sensitive data, fraud and financial crime threats, and the potential for failings in the Group's customer processes.
People risk - Key people risks include the risk that the Group fails to maintain organisational skills, capability, resilience and capacity levels in response to organisational, political and external market change and evolving business needs.
Capital risk - The risk that the Group has a sub-optimal quantity or quality of capital or that capital is inefficiently deployed across the Group.
Funding and liquidity risk - The risk that the Group has insufficient financial resources to meet its commitments as they fall due.
Governance risk - Against a background of increased regulatory focus on governance and risk management, the most significant challenges arise from meeting the requirements to ring-fence core UK financial services and activities from January 2019 and further requirements under the Senior Manager and Certification Regime (SMCR).
Market risk - The risk that the Group's capital or earnings profile is affected by adverse market rates, in particular interest rates and credit spreads in the banking business, and credit spreads in the Group's defined benefit pension schemes.
Model risk - The risk of financial loss, regulatory censure, reputational damage or customer detriment, as a result of deficiencies in the development, application and ongoing operation of financial models and rating systems.
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED INCOME STATEMENT
Half-year Half-year to 30 to 30 June June 2018 2017 Note GBPm GBPm Interest and similar income 8,045 7,778 Interest and similar expense (1,654) (1,837) --------- --------- Net interest income 6,391 5,941 --------- --------- Fee and commission income 1,290 1,428 Fee and commission expense (538) (487) --------- --------- Net fee and commission income 3 752 941 Net trading income 184 615 Other operating income 1,186 1,233 --------- --------- Other income 2,122 2,789 --------- --------- Total income 8,513 8,730 --------- --------- Regulatory provisions (778) (1,211) Other operating expenses (4,951) (4,737) --------- --------- Total operating expenses 4 (5,729) (5,948) --------- --------- Trading surplus 2,784 2,782 Impairment 5 (430) (203) Profit before tax - continuing operations 2,354 2,579 Tax expense 6 (704) (858) --------- --------- Profit after tax - continuing operations 1,650 1,721 Profit after tax - discontinued operations 10 1,314 331 --------- --------- Profit for the period 2,964 2,052 --------- --------- Profit attributable to ordinary shareholders 2,806 1,864 Profit attributable to other equity shareholders(1) 135 137 --------- --------- Profit attributable to equity holders 2,941 2,001 Profit attributable to non-controlling interests 23 51 Profit for the period 2,964 2,052 --------- --------- (1) The profit after tax attributable to other equity holders of GBP135 million (half-year to 30 June 2017: GBP137 million) is offset in reserves by a tax credit attributable to ordinary shareholders of GBP36 million (half-year to 30 June 2017: GBP37 million).
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Half-year Half-year to 30 to 30 June June 2018 2017 GBPm GBPm Profit for the period 2,964 2,052 Other comprehensive income: Items that will not subsequently be reclassified to profit or loss: Post-retirement defined benefit scheme remeasurements: --------- --------- Remeasurements before tax 908 (124) Tax (206) 32 --------- --------- 702 (92) Movements in revaluation reserve in respect of equity shares held at fair value through other comprehensive income: --------- --------- Change in fair value (97) Tax 22 --------- --------- (75) Gains and losses attributable to own credit risk: --------- --------- Gains and (losses) before tax 167 (44) Tax (45) 12 --------- --------- 122 (32) Items that may subsequently be reclassified to profit or loss: Movements in revaluation reserve in respect of debt securities held at fair value through other comprehensive income: --------- ---------
Change in fair value 109 Income statement transfers in respect of disposals (206) Impairment 1 Tax 46 --------- --------- (50) Movements in revaluation reserve in respect of available-for-sale financial assets: --------- --------- Change in fair value 455 Income statement transfers in respect of disposals (315) Income statement transfers in respect of impairment 6 Tax (48) --------- --------- 98 Movement in cash flow hedging reserve: --------- --------- Effective portion of changes in fair value (286) (212) Net income statement transfers (423) (313) Tax 194 140 --------- --------- (515) (385) Currency translation differences (tax: nil) (2) (7) --------- --------- Other comprehensive income for the period, net of tax 182 (418) --------- --------- Total comprehensive income for the period 3,146 1,634 --------- --------- Total comprehensive income attributable to ordinary shareholders arising from continuing operations 1,644 1,103 Total comprehensive income attributable to ordinary shareholders arising from discontinued operations 1,344 343 --------- --------- Total comprehensive income attributable to ordinary shareholders 2,988 1,446 Total comprehensive income attributable to other equity holders 135 137 --------- --------- Total comprehensive income attributable to equity holders 3,123 1,583 Total comprehensive income attributable to non-controlling interests 23 51 Total comprehensive income for the period 3,146 1,634 --------- ---------
CONSOLIDATED BALANCE SHEET
At At 30 June 31 Dec 2018 2017 Note GBPm GBPm Assets Cash and balances at central banks 50,091 58,521 Items in course of collection from banks 702 755 Financial assets at fair value through profit or loss 7 37,146 45,608 Derivative financial instruments 20,802 24,152 Loans and advances to banks 5,073 4,274 Loans and advances to customers 8 454,080 465,555 Debt securities 4,274 3,637 Due from fellow Lloyds Banking Group undertakings 27,485 6,195 -------- ------- Financial assets at amortised cost 490,912 479,661 Financial assets at fair value through other comprehensive income 31,300 Available-for-sale financial assets 41,717 Goodwill 474 474 Other intangible assets 3,033 2,666 Property, plant and equipment 8,889 9,062 Current tax recoverable 2 16 Deferred tax assets 3,238 3,104 Retirement benefit assets 12 1,584 723 Assets of discontinued operations 10a - 154,227 Assets of held-for-sale disposal group 10b 33,634 - Other assets 10,412 2,344 -------- ------- Total assets 692,219 823,030 -------- -------
CONSOLIDATED BALANCE SHEET (continued)
At At 30 June 31 Dec 2018 2017 Note GBPm GBPm Equity and liabilities Liabilities Deposits from banks 27,822 28,888 Customer deposits 401,558 418,124 Due to fellow Lloyds Banking Group undertakings 35,965 13,237 Items in course of transmission to banks 846 579 Financial liabilities at fair value through profit or loss 39,645 50,874 Derivative financial instruments 18,971 24,699 Notes in circulation 1,140 1,313 Debt securities in issue 11 69,971 61,865 Liabilities of discontinued operations 10a - 146,518 Liabilities of held-for-sale disposal group 10b 32,770 - Other liabilities 4,864 4,540 Retirement benefit obligations 12 265 281 Current tax liabilities 192 827 Other provisions 4,415 5,309 Subordinated liabilities 13,151 14,782 -------- ------- Total liabilities 651,575 771,836 Equity -------- ------- Share capital 1,574 1,574 Share premium account 600 600 Other reserves 6,969 7,706 Retained profits 28,192 37,718 -------- ------- Shareholders' equity 37,335 47,598 Other equity instruments 3,217 3,217 -------- ------- Total equity excluding non-controlling interests 40,552 50,815 Non-controlling interests 92 379 -------- ------- Total equity 40,644 51,194 -------- ------- Total equity and liabilities 692,219 823,030 -------- -------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders Share capital Other Non- and Other Retained equity controlling premium reserves profits Total instruments interests Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm Balance at 31 December 2017 2,174 7,706 37,718 47,598 3,217 379 51,194 Adjustment for IFRS 9 and IFRS 15 (note 18) - (236) (955) (1,191) - - (1,191) --------- ---------- -------- -------- ------------ ------------ -------- Balance at 1 January 2018 2,174 7,470 36,763 46,407 3,217 379 50,003 Comprehensive income Profit for the period - - 2,941 2,941 - 23 2,964 Other comprehensive income --------- ---------- -------- -------- ------------ ------------ -------- Post-retirement defined benefit scheme remeasurements,
net of tax - - 702 702 - - 702 Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax: Debt securities - (50) - (50) - - (50) Equity shares - (75) - (75) - - (75) Gains and losses attributable to own credit risk, net of tax - - 122 122 - - 122 Movements in cash flow hedging reserve, net of tax - (515) - (515) - - (515) Currency translation differences (tax: nil) - (2) - (2) - - (2) --------- ---------- -------- -------- ------------ ------------ -------- Total other comprehensive income - (642) 824 182 - - 182 --------- ---------- -------- -------- ------------ ------------ -------- Total comprehensive income - (642) 3,765 3,123 - 23 3,146 --------- ---------- -------- -------- ------------ ------------ -------- Transactions with owners --------- ---------- -------- -------- ------------ ------------ -------- Dividends - - (10,422) (10,422) - (5) (10,427) Distributions on other equity instruments, net of tax - - (99) (99) - - (99) Capital repayment to parent - - (1,800) (1,800) - - (1,800) Capital contributions received - - 126 126 - - 126 Changes in non-controlling interests - - - - - (305) (305) --------- ---------- -------- -------- ------------ ------------ -------- Total transactions with owners - - (12,195) (12,195) - (310) (12,505)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity shareholders ----------------------------------------- Share capital Other Non- and Other Retained equity controlling premium reserves profits Total instruments interests Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm Realised gains and losses on equity shares held at fair value through other comprehensive income - 141 (141) - - - - ---------- ---------- --------- ------ ------------ ------------ ------ Balance at 30 June 2018 2,174 6,969 28,192 37,335 3,217 92 40,644 ---------- ---------- --------- ------ ------------ ------------ ------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity shareholders Share capital Other Non- and Other Retained equity controlling premium reserves profits Total instruments interests Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm Balance at 1 January 2017 1,574 8,484 36,231 46,289 3,217 745 50,251 Comprehensive income Profit for the period - - 2,001 2,001 - 51 2,052 Other comprehensive income --------- ---------- --------- ------- ------------ ------------ ------- Post-retirement defined benefit scheme remeasurements, net of tax - - (92) (92) - - (92) Movements in revaluation reserve in respect of available-for-sale financial assets, net of tax - 98 - 98 - - 98 Gains and losses attributable to own credit risk, net of tax - - (32) (32) - - (32) Movements in cash flow hedging reserve, net of tax - (385) - (385) - - (385) Currency translation differences (tax: nil) - (7) - (7) - - (7) --------- ---------- --------- ------- ------------ ------------ ------- Total other comprehensive income - (294) (124) (418) - - (418) --------- ---------- --------- ------- ------------ ------------ ------- Total comprehensive income - (294) 1,877 1,583 - 51 1,634 --------- ---------- --------- ------- ------------ ------------ ------- Transactions with owners --------- ---------- --------- ------- ------------ ------------ ------- Dividends - - (1,600) (1,600) - (10) (1,610) Distributions on other equity instruments, net of tax - - (100) (100) - - (100) Redemption of preference shares 600 - (600) - - - - Capital contributions received - - 219 219 - - 219 Return of capital contributions - - (74) (74) - - (74) Changes in non-controlling interests - - - - - (3) (3) --------- ---------- --------- ------- ------------ ------------ ------- Total transactions with owners 600 - (2,155) (1,555) - (13) (1,568) --------- ---------- --------- ------- ------------ ------------ ------- Balance at 30 June 2017 2,174 8,190 35,953 46,317 3,217 783 50,317 --------- ---------- --------- ------- ------------ ------------ -------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity shareholders Share capital Other Non- and Other Retained equity controlling premium reserves profits Total instruments interests Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm Balance at 1 July 2017 2,174 8,190 35,953 46,317 3,217 783 50,317 Comprehensive income Profit for the period - - 2,138 2,138 - 39 2,177 Other comprehensive income --------- ---------- --------- ------- ------------ ------------ ------- Post-retirement defined benefit scheme remeasurements, net of tax - - 574 574 - - 574 Movements in revaluation reserve in respect of available-for-sale financial assets, net of tax - (198) - (198) - - (198) Gains and losses attributable to own credit risk, net of tax - - (8) (8) - - (8) Movements in cash flow hedging reserve, net of tax - (266) - (266) - - (266) Currency translation differences, net of tax - (20) - (20) - - (20) --------- ---------- --------- ------- ------------ ------------ ------- Total other comprehensive income - (484) 566 82 - - 82 --------- ---------- --------- ------- ------------ ------------ ------- Total comprehensive income - (484) 2,704 2,220 - 39 2,259 --------- ---------- --------- ------- ------------ ------------ ------- Transactions with owners --------- ---------- --------- ------- ------------ ------------ ------- Dividends - - (1,050) (1,050) - (59) (1,109) Distributions on other equity
instruments - - (99) (99) - - (99) Capital contribution received - - 213 213 - - 213 Return of capital contributions - - (3) (3) - - (3) Changes in non-controlling interests - - - - - (384) (384) --------- ---------- --------- ------- ------------ ------------ ------- Total transactions with owners - - (939) (939) - (443) (1,382) --------- ---------- --------- ------- ------------ ------------ ------- Balance as at 31 December 2017 2,174 7,706 37,718 47,598 3,217 379 51,194 --------- ---------- --------- ------- ------------ ------------ -------
CONSOLIDATED CASH FLOW STATEMENT
Half-year Half-year to 30 to 30 June June 2018 2017 GBPm GBPm Profit before tax 3,734 2,968 Adjustments for: Change in operating assets (6,945) (16,790) Change in operating liabilities 2,969 (3,421) Non-cash and other items (1,946) 8,559 Tax paid (1,173) (38) --------- --------- Net cash provided by (used in) operating activities (3,361) (8,722) Cash flows from investing activities Purchase of financial assets (6,050) (1,847) Proceeds from sale and maturity of financial assets 14,856 5,276 Purchase of fixed assets (1,733) (1,960) Proceeds from sale of fixed assets 542 763 Acquisition of businesses, net of cash acquired (26) (1,909) Disposal of businesses, net of cash disposed 7,622 26 --------- --------- Net cash provided by investing activities 15,211 349 Cash flows from financing activities --------- --------- Dividends paid to ordinary shareholders (10,422) (1,600) Distributions on other equity instruments (135) (137) Dividends paid to non-controlling interests (5) (10) Return of capital contribution - (74) Interest paid on subordinated liabilities (625) (655) Proceeds from issue of subordinated liabilities 201 - Repayment of subordinated liabilities (1,612) (1,236) Capital repayment to parent company (1,800) - Borrowings from parent company 9,430 4,149 Repayments to parent company (3,817) - Interest paid on borrowing from parent company (322) (111) Change in non-controlling interests - (3) Net cash used in financing activities (9,107) 323 Effects of exchange rate changes on cash and cash equivalents 1 - --------- --------- Change in cash and cash equivalents 2,744 (8,050) Cash and cash equivalents at beginning of period 60,982 62,908 --------- --------- Cash and cash equivalents at end of period 63,726 54,858 --------- ---------
Cash and cash equivalents comprise cash and balances at central banks (excluding mandatory deposits) and amounts due from banks with a maturity of less than three months.
CONSOLIDATED CASH FLOW STATEMENT (continued)
Discontinued operations
The impact of the Group's discontinued operations on the above cash flow statement is as follows:
Half-year Half-year to 30 to 30 June June 2018 2017 GBPm GBPm Net cash provided by operating activities (11,529) (11,466) Net cash from investing activities 60 224 Net cash used in financing activities (682) (655) --------- --------- Change in cash and cash equivalents (12,151) (11,897) --------- ---------
NOTES
Page 1 Accounting policies, presentation and estimates 17 2 Segmental analysis 24 3 Net fee and commission income 25 4 Operating expenses 26 5 Impairment 26 6 Taxation 27 7 Financial assets at fair value through profit or loss 27 8 Loans and advances to customers 28 9 Allowance for impairment losses 29 10 Disposal groups and discontinued operations 30 11 Debt securities in issue 33 12 Post-retirement defined benefit schemes 34 13 Provisions for liabilities and charges 35 14 Contingent liabilities and commitments 36 15 Fair values of financial assets and liabilities 40 16 Related party transactions 49 17 Dividends on ordinary shares 49 18 Implementation of IFRS 9 and IFRS 15 50 19 Future accounting developments 54 20 Ultimate parent undertaking 54 21 Other information 54 1. Accounting policies, presentation and estimates
These condensed consolidated half-year financial statements as at and for the period to 30 June 2018 have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority (FCA) and with International Accounting Standard 34 (IAS 34), Interim Financial Reporting as adopted by the European Union and comprise the results of Lloyds Bank plc (the Bank) together with its subsidiaries (the Group). They do not include all of the information required for full annual financial statements and should be read in conjunction with the Group's consolidated financial statements as at and for the year ended 31 December 2017 which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Copies of the 2017 Annual Report and Accounts are available on the Lloyds Banking Group's website and are available upon request from Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN.
The directors consider that it is appropriate to continue to adopt the going concern basis in preparing the condensed consolidated half-year financial statements. In reaching this assessment, the directors have considered projections for the Group's capital and funding position.
Except as noted below, the accounting policies are consistent with those applied by the Group in its 2017 Annual Report and Accounts.
Changes in accounting policy
The Group has adopted IFRS 9 and IFRS 15 with effect from 1 January 2018.
(i) IFRS 9 Financial Instruments
IFRS 9 replaces IAS 39 and addresses classification, measurement and derecognition of financial assets and liabilities, the impairment of financial assets measured at amortised cost or fair value through other comprehensive income and general hedge accounting.
Impairment: IFRS 9 replaces the IAS 39 'incurred loss' impairment approach with an 'expected credit loss' approach. The revised approach applies to financial assets including finance lease receivables, recorded at amortised cost or fair value through other comprehensive income; loan commitments and financial guarantees that are not measured at fair value through profit or loss are also in scope. The expected credit loss approach requires an allowance to be established upon initial recognition of an asset reflecting the level of losses anticipated after having regard to, amongst other things, expected future economic conditions. Subsequently the amount of the allowance is affected by changes in the expectations of loss driven by changes in associated credit risk.
Classification and measurement: IFRS 9 requires financial assets to be classified into one of the following measurement categories: fair value through profit or loss, fair value through other comprehensive income and amortised cost. Classification is made on the basis of the objectives of the entity's business model for managing its financial assets and the contractual cash flow characteristics of the instruments. The requirements for derecognition are broadly unchanged from IAS 39. The standard also retains most of the IAS 39 requirements for financial liabilities except for those designated at fair value through profit or loss whereby that part of the fair value change attributable to the entity's own credit risk is recorded in other comprehensive income. The Group early adopted this requirement with effect from 1 January 2017.
1. Accounting policies, presentation and estimates (continued)
General hedge accounting: The new hedge accounting model aims to provide a better link between risk management strategy, the rationale for hedging and the impact of hedging on the financial statements. The standard does not explicitly address macro hedge accounting solutions, which are being considered in a separate IASB project - Accounting for Dynamic Risk Management. Until this project is finalised, the IASB has provided an accounting policy choice to retain IAS 39 hedge accounting in its entirety or choose to apply the IFRS 9 hedge accounting requirements. The Group has elected to continue applying hedge accounting as set out in IAS 39.
(ii) IFRS 15 Revenue from Contracts with Customers
IFRS 15 has replaced IAS 18 Revenue and IAS 11 Construction Contracts. The core principle of IFRS 15 is that revenue reflects the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled. The recognition of such revenue is in accordance with five steps to: identify the contract; identify the performance obligations; determine the transaction price; allocate the transaction price to the performance obligations; and recognise revenue when the performance obligations are satisfied.
Details of the impact of adoption of IFRS 9 and IFRS 15 are provided in note 18.
The following policies will substantially replace the relevant sections of the existing policies (D), (E) and (H) in the 2018 Annual Report and Accounts as they relate to revenue recognition, classification and measurement and impairment. Policies that are substantially unchanged such as accounting for borrowings, sales and repurchase agreements, recognition and derecognition and hedge accounting are not repeated.
(D) Revenue recognition
Interest income and expense are recognised in the income statement for all interest-bearing financial instruments using the effective interest method, except for those classified at fair value through profit or loss. The effective interest method is a method of calculating the amortised cost of a financial asset or liability and of allocating the interest income or interest expense over the expected life of the financial instrument. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument to the gross carrying amount of the financial asset (before adjusting for expected credit losses) or to the amortised cost of the financial liability, including early redemption fees, and related penalties, and premiums and discounts that are an integral part of the overall return. Direct incremental transaction costs related to the acquisition, issue or disposal of a financial instrument are also taken into account. Interest income from non-credit impaired financial assets is recognised by applying the effective interest rate to the gross carrying amount of the asset; for credit impaired financial assets, the effective interest rate is applied to the net carrying amount after deducting the allowance for expected credit losses. Impairment policies are set out in (H) below.
Fees and commissions receivable which are not an integral part of the effective interest rate are recognised as income as the services are provided. Current account and card fees are accrued evenly over the course of the year. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan once drawn. Where it is unlikely that loan commitments will be drawn, loan commitment fees are recognised over the life of the facility. Incremental costs incurred to generate fee and commission income are charged to fees and commissions expense as they are incurred.
Dividend income is recognised when the right to receive payment is established.
1. Accounting policies, presentation and estimates (continued)
(E) Financial assets and liabilities
On initial recognition, financial assets are classified as measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss, depending on the Group's business model for managing the financial assets and whether the cash flows represent solely payments of principal and interest. The Group assesses its business models at a portfolio level based on its objectives for the relevant portfolio, how the performance of the portfolio is managed and reported, and the frequency of asset sales. Financial assets with embedded derivatives are considered in their entirety when considering their cash flow characteristics. The Group reclassifies financial assets when and only when its business model for managing those assets changes.
Equity investments are measured at fair value through profit or loss unless the Group elects at initial recognition to account for the instruments at fair value through other comprehensive income. For these investments, dividends are recognised in profit or loss but fair value gains and losses are not subsequently reclassified to profit or loss following derecognition of the investment.
(1) Financial assets measured at amortised cost
Financial assets that are held to collect contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. A basic lending arrangement results in contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. Where the contractual cash flows introduce exposure to risks or volatility unrelated to a basic lending arrangement such as changes in equity prices or commodity prices, the payments do not comprise solely principal and interest. Financial assets measured at amortised cost are predominantly loans and advances to customers and banks together with certain debt securities. Loans and advances are initially recognised when cash is advanced to the borrower at fair value inclusive of transaction costs. Interest income is accounted for using the effective interest method (see (D) above).
Financial liabilities are measured at amortised cost, except for trading liabilities and other financial liabilities designated at fair value through profit or loss on initial recognition which are held at fair value.
(2) Financial assets measured at fair value through other comprehensive income
Financial assets that are held to collect contractual cash flows and for subsequent sale, where the assets' cash flows represent solely payments of principal and interest, are recognised in the balance sheet at their fair value, inclusive of transaction costs. Gains and losses arising from changes in fair value are recognised directly in other comprehensive income, until the financial asset is either sold or matures, at which time the cumulative gain or loss previously recognised in other comprehensive income is recognised in the income statement other than in respect of equity shares, for which the cumulative revaluation amount is transferred directly to profit and loss reserves. Interest calculated using the effective interest method and foreign exchange gains and losses on assets denominated in foreign currencies are recognised in the income statement. In addition, the Group recognises a charge for expected credit losses in the income statement (see (H) below). As the asset is measured at fair value, the charge does not adjust the carrying value of the asset, it is reflected in other comprehensive income.
1. Accounting policies, presentation and estimates (continued)
(3) Financial instruments measured at fair value through profit or loss
Financial assets are classified at fair value through profit or loss where they do not meet the criteria to be measured at amortised cost or fair value through other comprehensive income or where they are designated at fair value through profit or loss to reduce an accounting mismatch. Derivatives are carried at fair value.
The assets backing the insurance and investment contracts issued by the Group do not meet the criteria to be measured at amortised cost or fair value through other comprehensive income as they are managed on a fair value basis and accordingly are measured at fair value through profit or loss. Similarly, trading securities, which are debt securities and equity shares acquired principally for the purpose of selling in the short term or which are part of a portfolio which is managed for short-term gains, do not meet these criteria and are also measured at fair value through profit or loss. Financial assets measured at fair value through profit or loss are recognised in the balance sheet at their fair value. Fair value gains and losses together with interest coupons and dividend income are recognised in the income statement within net trading income in the period in which they occur.
Financial liabilities are measured at fair value through profit or loss where they are trading liabilities or where they are designated at fair value through profit or loss in order to reduce an accounting mismatch; where the liabilities are part of a group of liabilities (or assets and liabilities) which is managed, and its performance evaluated, on a fair value basis; or where the liabilities contain one or more embedded derivatives that significantly modify the cash flows arising under the contract and would otherwise need to be separately accounted for. Financial liabilities measured at fair value through profit or loss are recognised in the balance sheet at their fair value. Fair value gains and losses are recognised in the income statement within net trading income in the period in which they occur, except that gains and losses attributable to changes in own credit risk are recognised in other comprehensive income.
The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the Group establishes a fair value by using valuation techniques. The fair values of derivative financial instruments are adjusted where appropriate to reflect credit risk (via credit valuation adjustments (CVAs), debit valuation adjustments (DVAs) and funding valuation adjustments (FVAs)), market liquidity and other risks.
1. Accounting policies, presentation and estimates (continued)
(H) Impairment of financial assets
The impairment charge in the income statement includes the change in expected credit losses and certain fraud costs. Expected credit losses are recognised for loans and advances to customers and banks, other financial assets held at amortised cost, financial assets measured at fair value through other comprehensive income, and certain loan commitments and financial guarantee contracts.
Expected credit losses are calculated by using an appropriate probability of default, adjusted to take into account a range of possible future economic scenarios, and applying this to the estimated exposure of the Group at the point of default after taking into account the value of any collateral held or other mitigants of loss and including the impact of discounting using the effective interest rate.
At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is made for expected credit losses resulting from default events that are possible within the next 12 months (12-month expected credit losses). In the event of a significant increase in credit risk, allowance (or provision) is made for expected credit losses resulting from all possible default events over the expected life of the financial instrument (lifetime expected credit losses). Financial assets where 12-month expected credit losses are recognised are considered to be Stage 1; financial assets which are considered to have experienced a significant increase in credit risk are in Stage 2; and financial assets which have defaulted or are otherwise considered to be credit impaired are allocated to Stage 3.
An assessment of whether credit risk has increased significantly since initial recognition considers the change in the risk of default occurring over the remaining expected life of the financial instrument. The assessment is unbiased, probability-weighted and uses forward-looking information consistent with that used in the measurement of expected credit losses. In determining whether there has been a significant increase in credit risk, the Group uses a quantitative test based on relative and absolute PD movements linked to internal credit ratings together with qualitative indicators such as watchlists and other indicators of historic delinquency. However, unless identified at an earlier stage, the credit risk of financial assets is deemed to have increased significantly when more than 30 days past due. Where the credit risk subsequently improves such that it no longer represents a significant increase in credit risk since origination, the asset is transferred back to Stage 1.
Assets are transferred to Stage 3 when they have defaulted or are otherwise considered to be credit impaired. IFRS 9 contains a rebuttable presumption that default occurs no later than when a payment is 90 days past due. The Group uses this 90 day backstop for all its products except for UK mortgages. For UK mortgages, the Group has assumed a backstop of 180 days past due as mortgage exposures more than 90 days past due, but less than 180 days, typically show high cure rates and this aligns to the Group's risk management practices.
In certain circumstances, the Group will renegotiate the original terms of a customer's loan, either as part of an ongoing customer relationship or in response to adverse changes in the circumstances of the borrower. In the latter circumstances, the loan will remain classified as either Stage 2 or Stage 3 until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows. Renegotiation may also lead to the loan and associated allowance being derecognised and a new loan being recognised initially at fair value.
A loan or advance is normally written off, either partially or in full, against the related allowance when the proceeds from realising any available security have been received or there is no realistic prospect of recovery and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded in the income statement. For both secured and unsecured retail balances, the write-off takes place only once an extensive set of collections processes has been completed, or the status of the account reaches a point where policy dictates that continuing concessions are no longer appropriate. For commercial lending, a write-off occurs if the loan facility with the customer is restructured, the asset is under administration and the only monies that can be received are the amounts estimated by the administrator, the underlying assets are disposed and a decision is made that no further settlement monies will be received, or external evidence (for example, third party valuations) is available that there has been an irreversible decline in expected cash flows.
1. Accounting policies, presentation and estimates (continued)
Future accounting developments
Details of those IFRS pronouncements which will be relevant to the Group but which will not be effective at 31 December 2018 and which have not been applied in preparing these condensed consolidated half-year financial statements are set out in note 19.
Critical accounting estimates and judgements
The preparation of the Group's financial statements requires management to make judgements, estimates and assumptions that impact the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may include amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Other than in relation to the implementation of IFRS 9, there have been no significant changes in the basis upon which estimates have been determined, compared to that applied at 31 December 2017.
The calculation of the Group's expected credit loss (ECL) allowances and provisions against loan commitments and guarantees under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. The most significant are set out below.
Definition of default
The probability of default (PD) of an exposure, both over a 12 month period and over its lifetime, is a key input to the measurement of the ECL allowance. Default has occurred when there is evidence that the customer is experiencing significant financial difficulty which is likely to affect the ability to repay amounts due.
The definition of default adopted by the Group is described in (H) Impairment of financial assets above. This definition is aligned to the regulatory definition of default used by the Group for capital and regulatory reporting except that the Group has made the decision to treat forborne non-performing past term interest only mortgages as credit impaired.
As noted in (H) Impairment of financial assets, the Group has rebutted the presumption in IFRS 9 that default occurs no later than when a payment is 90 days past due. The impact on the Group's ECL allowance of assuming a backstop of 180 days past due for UK mortgages is not material.
Lifetime of an exposure
To derive the PDs necessary to calculate the ECL allowance it is necessary to estimate the expected life of each financial instrument. A range of approaches has been adopted across different product groupings including the full contractual life and taking into account behavioural factors such as early repayments and refinancing. For Retail assets, the Group has defined the lifetime for each product by analysing the time taken for all losses to be observed and for a material proportion of the assets to fully resolve through either closure or write-off. For revolving products, the Group has considered the losses beyond the contractual term over which the Group is exposed to credit risk. For Commercial overdraft facilities, the average behavioural life has been used. Changes to the assumed expected lives of the Commercial assets could have a material effect on the ECL allowance recognised by the Group.
1. Accounting policies, presentation and estimates (continued)
Significant increase in credit risk (SICR)
Performing assets are classified as either Stage 1 or Stage 2. An ECL allowance equivalent to 12 months expected losses is established against assets in Stage 1; assets classified as Stage 2 carry an ECL allowance equivalent to lifetime expected losses. Assets are transferred from Stage 1 to Stage 2 when there has been an SICR since initial recognition. As described in (H) Impairment of financial assets above, the Group uses a quantitative test together with qualitative indicators and a backstop of 30 days past due for determining whether there has been a SICR. The setting of precise trigger points combined with risk indicators requires judgement. The use of different trigger points may have a material impact upon the size of the ECL allowance.
For Retail, a deterioration of four grades for credit cards, personal loans or overdrafts, or three grades for personal mortgages, or two grades for asset finance accounts, would trigger a transfer to Stage 2. For Commercial a doubling of PD with a minimum increase in PD of 1 per cent and a resulting change in the underlying grade would trigger a transfer.
Forward looking information
The measurement of expected credit losses is required to reflect an unbiased probability-weighted range of possible future outcomes.
In order to do this the Group uses a model to project a number of key variables to generate in excess of 2,000 possible future economic scenarios. These are ranked according to severity of loss and four scenarios are selected to represent the full loss distribution; a central scenario which reflects the assumptions used for medium-term planning purposes, an upside and a downside scenario and a severe downside scenario. Each scenario receives a 30 per cent weighting except for the severe downside scenario which is weighted at 10 per cent. These scenarios are used to produce a weighted average PD for each product grouping which is used to determine stage allocation and calculate the related ECL allowance.
The choice of alternative scenarios and probability weighting is a combination of quantitative analysis and judgemental assessments, designed to ensure that the full range of possible outcomes and material non-linearity are captured. The key UK economic assumptions made by the Lloyds Banking Group as at 30 June 2018 are shown below:
Severe Base Case Upside Downside Downside % % % % Interest rate 1.43 2.29 0.90 0.65 Unemployment rate 4.8 4.0 5.7 7.1 House price growth 2.7 6.5 (2.9) (5.6) CRE price growth 0.5 9.0 (5.3) (8.1) 2. Segmental analysis
The Group provides a wide range of banking and financial services in the UK and in certain locations overseas. The Group Executive Committee (GEC) of the Lloyds Banking Group has been determined to be the chief operating decision maker for the Group. Following the transfer of HBOS to the Group on 1 January 2010, all of the trading activities of the Lloyds Banking Group are carried out within the Group and, as a result, the chief operating decision maker reviewed the Group's performance by considering that of the Lloyds Banking Group. However, following the sale of the Group's insurance business and certain other businesses as a result of the ring-fencing legislation this is no longer the case. Accordingly, the chief operating decision maker now reviews the results of the Group's businesses separately.
The Group's activities are organised into two financial reporting segments: Retail and Commercial Banking.
There has been no change to the Group's segmental accounting for internal segment services or derivatives entered into by units for risk management purposes since 31 December 2017.
Half-year to 30 June 2018 Commercial Continuing Discontinued Retail Banking Other operations Operations(1) Adjustments Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm Net interest income 4,488 1,442 461 6,391 11 - 6,402 Other income, net of insurance claims 1,086 737 299 2,122 692 (296) 2,518 ------- ---------- ------- ----------- -------------- ----------- ------- Total income, net of insurance claims(2) 5,574 2,179 760 8,513 703 (296) 8,920 Costs (3,632) (1,069) (1,028) (5,729) (333) 296 (5,766) ------- ---------- ------- ----------- -------------- ----------- ------- Trading surplus 1,942 1,110 (268) 2,784 370 - 3,154 Impairment (461) 9 22 (430) - - (430) Profit on disposal - - - - 1,010 - 1,010 ------- ---------- ------- ----------- -------------- ----------- ------- Profit before tax 1,481 1,119 (246) 2,354 1,380 - 3,734 ------- ---------- ------- ----------- -------------- ----------- ------- Total external assets 350,505 170,140 171,574 692,219 - - 692,219 Total external liabilities 262,547 212,235 176,793 651,575 - - 651,575 (1) The Group's discontinued operations were previously in its Insurance segment. (2) An analysis of segment income between internal and external revenue is not available. 2. Segmental analysis (continued) Half-year to 30 June 2017 Commercial Continuing Discontinued Retail Banking Other Operations Operations(1) Adjustments Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm Net interest income 4,186 1,496 259 5,941 (676) - 5,265 Other income, net of insurance claims 1,169 1,035 585 2,789 1,552 (247) 4,094 ------- ---------- ------- ----------- -------------- ----------- ------- Total income, net of insurance claims(2) 5,355 2,531 844 8,730 876 (247) 9,359 Costs (4,223) (1,255) (470) (5,948) (487) 247 (6,188) ------- ---------- ------- ----------- -------------- ----------- ------- Trading surplus 1,132 1,276 374 2,782 389 - 3,171 Impairment (218) 1 14 (203) - - (203) Profit before tax 914 1,277 388 2,579 389 - 2,968 ------- ---------- ------- ----------- -------------- ----------- ------- Total external assets 349,594 186,185 133,024 668,803 154,227 (7,414) 815,616 Total external liabilities 261,855 236,211 127,252 625,318 146,518 (7,414) 764,422 (1) The Group's discontinued operations were previously in its Insurance segment. (2) An analysis of segment income between internal and external revenue is not available. 3. Net fee and commission income Half-year Half-year to 30 to 30 June June 2018 2017 GBPm GBPm Fee and commission income: --------- --------- Current accounts 315 367 Credit and debit card fees 478 460 Other 497 601 --------- --------- Total fee and commission income 1,290 1,428 Fee and commission expense (538) (487) --------- --------- Net fee and commission income 752 941 --------- ---------
Current account and credit and debit card fees principally arise in Retail. Other fees include corporate banking, treasury and other fees arising in Commercial Banking; and private banking and asset management fees.
4. Operating expenses Half-year Half-year to 30 to 30 June June 2018 2017 GBPm GBPm Administrative expenses: Staff costs 2,405 2,258 Premises and equipment 357 388 Other expenses 1,006 1,000 --------- --------- 3,768 3,646 Depreciation and amortisation 1,183 1,091 Total operating expenses, excluding regulatory provisions 4,951 4,737 Regulatory provisions (note 13): --------- ---------
Payment protection insurance provision 546 700 Other regulatory provisions 232 511 --------- --------- 778 1,211 Total operating expenses 5,729 5,948 --------- --------- 5. Impairment Half-year Half-year to 30 to 30 June June 2018 2017 GBPm GBPm Loans and advances to customers 444 200 Debt securities - (4) --------- --------- Financial assets at amortised cost 444 196 Undrawn balances (15) 1 Financial assets at fair value through other comprehensive income (2017: available-for-sale financial assets) 1 6 --------- --------- Total impairment charged to the income statement 430 203 --------- --------- 6. Taxation
In accordance with IAS 34, the Group's income tax expense for the half-year to 30 June 2018 is based on the best estimate of the weighted-average annual income tax rate expected for the full financial year. The tax effects of one-off items are not included in the weighted-average annual income tax rate, but are recognised in the relevant period.
An explanation of the relationship between tax expense and accounting profit is set out below:
Half-year Half-year to 30 to 30 June June 2018 2017 GBPm GBPm Profit before tax from continuing operations 2,354 2,579 --------- --------- Tax thereon at UK corporation tax rate of 19 per cent (2017: 19.25 per cent) (447) (496) Impact of surcharge on banking profits (182) (231) Non-deductible costs: conduct charges (92) (172) Other non-deductible costs (23) (24) Non-taxable income 35 32 Tax exempt gains on disposals 1 69 Recognition of losses that arose in prior years (10) 9 Remeasurement of deferred tax due to rate changes - (42) Differences in overseas tax rates 3 (1) Adjustments in respect of prior years 11 (3) Tax effect of share of results in joint ventures - 1 Other items - - --------- --------- Tax charge on profit from continuing operations (704) (858) --------- --------- 7. Financial assets at fair value through profit or loss At At 30 June 31 Dec 2018 2017 GBPm GBPm Trading assets 32,840 42,830 Other financial assets at fair value through profit or loss: -------- ------- Treasury and other bills 57 18 Loans and advances to customers 2,609 - Debt securities 512 2,710 Equity shares 1,128 50 -------- ------- 4,306 2,778 -------- ------- Total financial assets at fair value through profit or loss 37,146 45,608 -------- ------- 8. Loans and advances to customers At At 30 June 31 Dec 2018 2017 GBPm GBPm Agriculture, forestry and fishing 7,219 7,074 Energy and water supply 1,525 1,609 Manufacturing 5,865 7,886 Construction 4,746 4,428 Transport, distribution and hotels 13,669 14,074 Postal and communications 2,165 2,148 Property companies 26,097 27,606 Financial, business and other services 52,121 54,003 Personal: Mortgages 298,219 304,480 Other 28,840 28,757 Lease financing 1,860 2,094 Hire purchase 14,691 13,591 -------- ------- 457,017 467,750 Allowance for impairment losses on loans and advances to customers (note 9) (2,937) (2,195) -------- ------- Total loans and advances to customers 454,080 465,555 -------- -------
Loans and advances to customers include advances securitised under the Group's securitisation and covered bond programmes (see note 11).
9. Allowance for impairment losses Stage 1 Stage 2 Stage 3 Total In respect of drawn balances GBPm GBPm GBPm GBPm Balance at 31 December 2017 2,198 Adjustment for IFRS 9 (note 18) 1,033 ------- ------- ------- ----- Balance at 1 January 2018 575 1,114 1,542 3,231 Exchange and other adjustments (7) (1) (35) (43) Advances written off - - (795) (795) Recoveries of advances written off in previous years - - 113 113 Charge to the income statement (59) (141) 644 444 ------- ------- ------- ----- 509 972 1,469 2,950 In respect of undrawn balances Balance at 31 December 2017 30 Adjustment for IFRS 9 (note 18) 243 ------- ------- ------- ----- Balance at 1 January 2018 147 126 - 273 Exchange and other adjustments (15) (16) 21 (10) Charge to the income statement 10 (36) 11 (15) ------- ------- ------- ----- 142 74 32 248 ------- ------- ------- ----- At 30 June 2018 651 1,046 1,501 3,198 ------- ------- ------- ----- In respect of: ------- ------- ------- ----- Loans and advances to banks 1 - - 1 Loans and advances to customers (note 8) 508 965 1,464 2,937 Debt securities - - 2 2 Other assets - 7 3 10 ------- ------- ------- ----- Drawn balances 509 972 1,469 2,950 Provisions in relation to loan commitments and financial guarantees 142 74 32 248 ------- ------- ------- ----- Total allowance for impairment losses 651 1,046 1,501 3,198 ------- ------- ------- ----- 10. Disposal groups and discontinued operations
(a) Discontinued operations
At 31 December 2017, the Group classified the assets and liabilities of the Scottish Widows Group as a held-for-sale disposal group on the basis that a sale of its operations to its ultimate holding company, Lloyds Banking Group plc, was expected to occur within 12 months; this sale completed in the first half of 2018.
The Group did not recognise any impairment relating to disposal groups classified as held-for-sale during the half-year to 30 June 2017.
These operations have been classified as discontinued operations and the profit after tax from these activities reported as a single line on the Group's income statement.
In order to fairly reflect the results and financial position of the Group's continuing operations and its discontinued operations, transactions that the continuing operations have with the discontinued operations are reported on the relevant line in the Group's income statement or balance sheet, with the matching transaction similarly reported in the discontinued operations income statement or balance sheet within the Group's disposal group. All such transactions fully eliminate within the Group's statutory consolidation and there is no net impact on profit before tax or equity.
Income statement
The results of the discontinued operations, up to the point of sale in 2018, are as follows:
Half-year Half-year to to 30 June 30 June 2018 2017 GBPm GBPm Interest and similar income 14 117 Interest and similar expense (3) (793) --------- --------- Net interest income 11 (676) --------- --------- Fee and commission income 106 210 Fee and commission expense (180) (303) --------- --------- Net fee and commission income (74) (93) Net trading income (790) 5,223 Insurance premium income 2,714 4,099 Other operating income 205 299 --------- --------- Other income 2,055 9,528 --------- --------- Total income 2,066 8,852 Insurance claims (1,363) (7,976) --------- --------- Total income, net of insurance claims 703 876 Operating expenses (333) (487) --------- --------- Trading surplus 370 389 Profit on disposal of the discontinued operations 1,010 - --------- Profit before tax 1,380 389 Taxation (66) (58) --------- --------- Profit after tax from discontinued operations 1,314 331 --------- --------- 10. Disposal group and discontinued operations (continued)
Balance sheet
The asset and liabilities of the disposal group at 31 December 2017 were comprised as follows:
As at 31 Dec 2017 GBPm Assets Trading and other financial assets at fair value through profit or loss 125,051 Derivative financial instruments 3,465 Loans and receivables: ------- Loans and advances to banks 2,337 Due from fellow Lloyds Banking Group undertakings 1,721 ------- 4,058 Goodwill 1,836 Value of in-force business 4,839 Other intangible assets 169 Property, plant and equipment 3,655 Deferred tax assets 1 Other assets 11,153 ------- Total assets of disposal group 154,227 ------- Liabilities Deposits from banks 916 Due to fellow Lloyds Banking Group undertakings 2,063 Derivative financial instruments 3,147 Debt securities in issue 1,794 Liabilities arising from insurance contracts and participating investment contracts 103,434 Liabilities arising from non-participating investment contracts 15,447 Other liabilities 16,049 Retirement benefit obligations 77 Current tax liabilities 187 Deferred tax liabilities 823 Other provisions 236 Subordinated liabilities 2,345 ------- Total liabilities of disposal group 146,518 -------
Cumulative other comprehensive income relating to discontinued operations at 31 December 2017 was a deficit of GBP129 million.
10. Disposal group and discontinued operations (continued) (b) Disposal group
During the second half of 2018, the Group will be selling its US and offshore operations to a fellow Lloyds Banking Group undertaking, Lloyds Bank Corporate Markets plc, as part of the ongoing programme for compliance with ring-fencing legislation. These businesses have been classified as a disposal group as at 30 June 2018. The assets and liabilities of the disposal group are comprised as follows:
As at 30 June 2018 GBPm Cash and balances at central banks 12,041 Loans and advances to customers 7,041 Amounts due from fellow Lloyds Banking Group undertakings 14,213 Other assets 339 -------- Assets of held-for-sale disposal group 33,634 -------- Customer deposits 16,299 Debt securities in issue 2,423 Amounts due to fellow Lloyds Banking Group undertakings 13,967 Other liabilities 81 -------- Liabilities of held-for-sale disposal group 32,770 -------- 11. Debt securities in issue 30 June 2018 31 December 2017 At fair At fair value value through At through At profit or amortised Total profit or amortised Total loss cost loss cost GBPm GBPm GBPm GBPm GBPm GBPm Medium-term notes issued 7,043 19,243 26,286 7,815 18,763 26,578 Covered bonds - 26,712 26,712 - 26,132 26,132 Certificates of deposit - 8,955 8,955 - 9,999 9,999 Securitisation notes 54 5,050 5,104 - 3,730 3,730 Commercial paper - 10,011 10,011 - 3,241 3,241 --------- --------- ------ --------- --------- ------ Total debt securities in issue 7,097 69,971 77,068 7,815 61,865 69,680
--------- --------- ------ --------- --------- ------
The notes issued by the Group's securitisation and covered bond programmes are held by external parties and by subsidiaries of the Group.
Securitisation programmes
At 30 June 2018, external parties held GBP5,104 million (31 December 2017: GBP3,730 million) and the Group's subsidiaries held GBP21,698 million (31 December 2017: GBP21,466 million) of total securitisation notes in issue of GBP26,802 million (31 December 2017: GBP25,196 million). The notes are secured on loans and advances to customers and debt securities held at amortised cost amounting to GBP32,999 million (31 December 2017: GBP35,475 million), the majority of which have been sold by subsidiary companies to bankruptcy remote structured entities. The structured entities are consolidated fully and all of these loans are retained on the Group's balance sheet.
Covered bond programmes
At 30 June 2018, external parties held GBP26,712 million (31 December 2017: GBP26,132 million) and the Group's subsidiaries held GBP700 million (31 December 2017: GBP700 million) of total covered bonds in issue of GBP27,412 million (31 December 2017: GBP26,832 million). The bonds are secured on certain loans and advances to customers amounting to GBP35,384 million (31 December 2017: GBP31,989 million) that have been assigned to bankruptcy remote limited liability partnerships. These loans are retained on the Group's balance sheet.
Cash deposits of GBP3,763 million (31 December 2017: GBP3,507 million) which support the debt securities issued by the structured entities, the term advances related to covered bonds and other legal obligations are held by the Group.
12. Post-retirement defined benefit schemes
The Group's post-retirement defined benefit scheme obligations are comprised as follows:
At At 30 June 31 Dec 2018 2017 GBPm GBPm Defined benefit pension schemes: Fair value of scheme assets 43,200 43,722 Present value of funded obligations (41,739) (43,136) -------- -------- Net pension scheme asset 1,461 586 Other post-retirement schemes (142) (144) -------- -------- Net retirement benefit asset 1,319 442 -------- -------- Recognised on the balance sheet as: Retirement benefit assets 1,584 723 Retirement benefit obligations (265) (281) ----- ----- Net retirement benefit asset 1,319 442 ----- -----
The movement in the Group's net post-retirement defined benefit scheme asset during the period was as follows:
GBPm Asset at 1 January 2018 442 Income statement charge (265) Employer contributions 280 Remeasurement 871 Exchange and other adjustments (9) ----- Asset at 30 June 2018 1,319 -----
The principal assumptions used in the valuations of the defined benefit pension scheme were as follows:
At At 30 June 31 Dec 2018 2017 % % Discount rate 2.78 2.59 Rate of inflation: Retail Prices Index 3.11 3.20 Consumer Price Index 2.06 2.15 Rate of salary increases 0.00 0.00 Weighted-average rate of increase for pensions in payment 2.67 2.71 13. Provisions for liabilities and charges Provisions Payment Other Vacant for Protection regulatory leasehold commitments Insurance provisions property Other Total GBPm GBPm GBPm GBPm GBPm GBPm Balance at 31 December 2017 30 2,775 1,084 56 1,364 5,309 Adjustment for IFRS 9 243 243 ------------- -------- Balance at 1 January 2018 273 5,552 Exchange and other adjustments (10) 100 1 - 43 134 Provisions applied - (1,142) (482) (9) (440) (2,073) Charge for the period (15) 546 232 13 26 802 ------------- ------------ ------------ ----------- ------ -------- At 30 June 2018 248 2,279 835 60 993 4,415 ------------- ------------ ------------ ----------- ------ --------
Payment protection insurance (excluding MBNA)
The Group increased the provision for PPI costs by a further GBP546 million in the half year to 30 June 2018, of which GBP456 million was in the second quarter, bringing the total amount provided to GBP19,192 million.
The charge in the second quarter is largely driven by a potentially higher total volume of complaints and associated administration costs due to higher reactive complaint volumes received over the past six months and ongoing volatility. The remaining provision is consistent with an average of approximately 13,000 complaints per week through to the industry deadline of the end of August 2019.
At 30 June 2018, a provision of GBP1,964 million remained unutilised relating to complaints and associated administration costs. Total cash payments were GBP1,017 million during the six month to 30 June 2018.
Sensitivities
The Group estimates that it has sold approximately 16 million PPI policies since 2000. These include policies that were not mis-sold and those that have been successfully claimed upon. Since the commencement of the PPI redress programme in 2011 the Group estimates that it has contacted, settled or provided for approximately 53 per cent of the policies sold since 2000.
The total amount provided for PPI represents the Group's best estimate of the likely future cost. However a number of risks and uncertainties remain including with respect to future volumes. The cost could differ from the Group's estimates and the assumptions underpinning them, and could result in a further provision being required. There is also uncertainty around the impact of regulatory changes, FCA media campaign and Claims Management Company and customer activity, and any potential additional remediation arising from the continuous improvement of the Group's operational practices.
For every additional 1,000 reactive complaints per week above 13,000 on average from July 2018 through to the industry deadline of the end of August 2019, the Group would expect an additional charge of GBP150 million.
Payment protection insurance (MBNA)
With regard to MBNA, as announced in December 2016, the Group's exposure is capped at GBP240 million, already provided for, through an indemnity received from Bank of America. MBNA increased its PPI provision by GBP100 million in the half year to 30 June 2018, but the Group's exposure continues to remain capped at GBP240 million under the arrangement that it has with Bank of America notwithstanding this increase by MBNA.
13. Provisions for liabilities and charges (continued)
Other provisions for legal actions and regulatory matters
In the course of its business, the Group is engaged in discussions with the PRA, FCA and other UK and overseas regulators and other governmental authorities on a range of matters. The Group also receives complaints in connection with its past conduct and claims brought by or on behalf of current and former employees, customers, investors and other third parties and is subject to legal proceedings and other legal actions. Where significant, provisions are held against the costs expected to be incurred in relation to these matters and matters arising from related internal reviews. During the six months to 30 June 2018 the Group charged a further GBP232 million in respect of legal actions and other regulatory matters, and the unutilised balance at 30 June 2018 was GBP835 million (31 December 2017: GBP1,084 million). The most significant items are as follows.
Arrears handling related activities
The Group has provided an additional GBP46 million (bringing the total provided to date to GBP688 million), for the costs of identifying and rectifying certain arrears management fees and activities. Following a review of the Group's arrears handling activities, the Group has put in place a number of actions to improve further its handling of customers in these areas and has made good progress in reimbursing mortgage arrears fees to the 565,000 impacted customers.
Packaged bank accounts
In the half-year to 30 June 2018, the Group provided an additional GBP25 million in respect of complaints relating to alleged mis-selling of packaged bank accounts raising the total amount provided to GBP775 million. A number of risks and uncertainties remain in particular with respect to future volumes.
HBOS Reading - customer review
The Group is undertaking a review into a number of customer cases from the former HBOS Impaired Assets Office based in Reading. This review follows the conclusion of a criminal trial in which a number of individuals, including two former HBOS employees, were convicted of conspiracy to corrupt, fraudulent trading and associated money laundering offences which occurred prior to the acquisition of HBOS by the Lloyds Banking Group in 2009. The Group provided GBP100 million in the year to 31 December 2017 and is in the process of paying compensation to the victims of the fraud for economic losses as well as ex-gratia payments and awards for distress and inconvenience. The review is ongoing and at 30 June 2018, the Group had made offers to 67 customers, which represents more than 90 per cent of the customers in the review.
14. Contingent liabilities and commitments
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the Group is not directly involved in the ongoing investigations and litigation (as described below) which involve card schemes such as Visa and MasterCard. However, the Group is a member of Visa and MasterCard and other card schemes.
- The European Commission continues to pursue competition investigations against MasterCard and Visa probing, amongst other things, MIFs paid in respect of cards issued outside the EEA;
- Litigation brought by retailers continues in the English Courts against both Visa and MasterCard.
- Any ultimate impact on the Group of the above investigations and litigation against Visa and MasterCard remains uncertain at this time.
Visa Inc completed its acquisition of Visa Europe on 21 June 2016. As part of this transaction, the Group and certain other UK banks also entered into a Loss Sharing Agreement (LSA) with Visa Inc, which clarifies the allocation of liabilities between the parties should the litigation referred to above result in Visa Inc being liable for damages payable by Visa Europe. The maximum amount of liability to which the Group may be subject under the LSA is capped at the cash consideration which was received by the Group at completion. Visa Inc may also have recourse to a general indemnity, previously in place under Visa Europe's Operating Regulations, for damages claims concerning inter or intra-regional MIF setting activities.
LIBOR and other trading rates
In July 2014, the Group announced that it had reached settlements totalling GBP217 million (at 30 June 2014 exchange rates) to resolve with UK and US federal authorities legacy issues regarding the manipulation several years ago of Group companies' submissions to the British Bankers' Association (BBA) London Interbank Offered Rate (LIBOR) and Sterling Repo Rate. The Group continues to cooperate with various other government and regulatory authorities, including the Swiss Competition Commission, and a number of US State Attorneys General, in conjunction with their investigations into submissions made by panel members to the bodies that set LIBOR and various other interbank offered rates.
Certain Group companies, together with other panel banks, have also been named as defendants in private lawsuits, including purported class action suits, in the US in connection with their roles as panel banks contributing to the setting of US Dollar, Japanese Yen and Sterling LIBOR and the Australian BBSW Reference Rate. Certain of the plaintiffs' claims, including those in connection with USD and JPY LIBOR, have been dismissed by the US Federal Court for Southern District of New York (subject to one appeal), and decisions are awaited on the Group's motions to dismiss the Sterling LIBOR and BBSW claims.
Certain Group companies are also named as defendants in (i) UK based claims; and (ii) in a Dutch class action, each raising LIBOR manipulation allegations. A number of the claims against the Group in relation to the alleged mis-sale of interest rate hedging products also include allegations of LIBOR manipulation.
It is currently not possible to predict the scope and ultimate outcome on the Group of the various outstanding regulatory investigations not encompassed by the settlements, any private lawsuits or any related challenges to the interpretation or validity of any of the Group's contractual arrangements, including their timing and scale.
14. Contingent liabilities and commitments (continued)
UK shareholder litigation
In August 2014, the Lloyds Banking Group and a number of former directors were named as defendants in a claim by a number of claimants who held shares in Lloyds TSB Group plc (LTSB) prior to the acquisition of HBOS plc, alleging breaches of duties in relation to information provided to shareholders in connection with the acquisition and the recapitalisation of LTSB. The defendants refute all claims made. A trial commenced in the English High Court on 18 October 2017 and concluded on 5 March 2018 with judgment to follow. It is currently not possible to determine the ultimate impact on the Group (if any).
Tax authorities
The Lloyds Banking Group has an open matter in relation to a claim for group relief of losses incurred in its former Irish banking subsidiary, which ceased trading on 31 December 2010. In 2013 HMRC informed the Lloyds Banking Group that their interpretation of the UK rules which allow the offset of such losses denies the claim. If HMRC's position is found to be correct management estimate that this would result in an increase in current tax liabilities of approximately GBP650 million (including interest) and a reduction in the Lloyds Banking Group's deferred tax asset of approximately GBP350 million (overall impact on the Group of GBP900 million). The Lloyds Banking Group does not agree with HMRC's position and, having taken appropriate advice, does not consider that this is a case where additional tax will ultimately fall due. There are a number of other open matters on which the Group is in discussion with HMRC (including the tax treatment of certain costs arising from the divestment of TSB Banking Group plc), none of which is expected to have a material impact on the financial position of the Group.
Residential mortgage repossessions
In August 2014, the Northern Ireland High Court handed down judgment in favour of the borrowers in relation to three residential mortgage test cases concerning certain aspects of the Group's practice with respect to the recalculation of contractual monthly instalments of customers in arrears. The FCA is actively engaged with the industry in relation to these considerations and has published Guidance on the treatment of customers with mortgage payment shortfalls. The Guidance covers remediation for mortgage customers who may have been affected by the way firms calculate these customers' monthly mortgage instalments. The Group is implementing the Guidance and has now contacted most of the affected customers with any remaining customers being contacted during 2018.
Mortgage arrears handling activities
On 26 May 2016, the Group was informed that an enforcement team at the FCA had commenced an investigation in connection with the Group's mortgage arrears handling activities. This investigation is ongoing and it is currently not possible to make a reliable assessment of the liability, if any, that may result from the investigation.
14. Contingent liabilities and commitments (continued)
Other legal actions and regulatory matters
In addition, during the ordinary course of business the Group is subject to other complaints and threatened or actual legal proceedings (including class or group action claims) brought by or on behalf of current or former employees, customers, investors or other third parties, as well as legal and regulatory reviews, challenges, investigations and enforcement actions, both in the UK and overseas. All such material matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of the Group incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established to management's best estimate of the amount required at the relevant balance sheet date. In some cases it will not be possible to form a view, for example because the facts are unclear or because further time is needed properly to assess the merits of the case, and no provisions are held in relation to such matters. In these circumstances, specific disclosure in relation to a contingent liability will be made where material. However the Group does not currently expect the final outcome of any such case to have a material adverse effect on its financial position, operations or cash flows.
Contingent liabilities and commitments arising from the banking business
At At 30 June 31 Dec 2018 2017 GBPm GBPm Contingent liabilities Acceptances and endorsements 72 71 Other: -------- ------- Other items serving as direct credit substitutes 901 740 Performance bonds and other transaction-related contingencies 2,306 2,300 -------- ------- 3,207 3,040 -------- ------- Total contingent liabilities 3,279 3,111 -------- ------- Commitments Documentary credits and other short-term trade-related
transactions 1 - Forward asset purchases and forward deposits placed 184 384 Undrawn formal standby facilities, credit lines and other commitments to lend: Less than 1 year original maturity: -------- ------- Mortgage offers made 12,814 11,156 Other commitments 83,386 81,793 -------- ------- 96,200 92,949 1 year or over original maturity 35,124 36,386 -------- ------- Total commitments 131,509 129,719 -------- -------
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, GBP60,930 million (31 December 2017: GBP60,126 million) was irrevocable.
15. Fair values of financial assets and liabilities
The valuations of financial instruments have been classified into three levels according to the quality and reliability of information used to determine those fair values. Note 43 to the Group's 2017 financial statements describes the definitions of the three levels in the fair value hierarchy.
Valuation control framework
Key elements of the valuation control framework, which covers processes for all levels in the fair value hierarchy including level 3 portfolios, include model validation (incorporating pre-trade and post-trade testing), product implementation review and independent price verification. Formal committees meet quarterly to discuss and approve valuations in more judgemental areas.
Transfers into and out of level 3 portfolios
Transfers out of level 3 portfolios arise when inputs that could have a significant impact on the instrument's valuation become market observable; conversely, transfers into the portfolios arise when consistent sources of data cease to be available.
Valuation methodology
For level 2 and level 3 portfolios, there is no significant change to what was disclosed in the Group's 2017 Annual Report and Accounts in respect of the valuation methodology (techniques and inputs) applied to such portfolios.
The table below summarises the carrying values of financial assets and liabilities presented on the Group's balance sheet. The fair values presented in the table are at a specific date and may be significantly different from the amounts which will actually be paid or received on the maturity or settlement date.
30 June 2018 31 December 2017 ----------------- ------------------ Carrying Fair Carrying Fair value value value value GBPm GBPm GBPm GBPm Financial assets Financial assets at fair value through profit or loss 37,146 37,146 45,608 45,608 Derivative financial instruments 20,802 20,802 24,152 24,152 -------- ------- --------- ------- Loans and advances to banks 5,073 5,081 4,274 4,261 Loans and advances to customers 454,080 453,886 465,555 465,268 Debt securities 4,274 4,267 3,637 3,580 Due from fellow Lloyds Banking Group undertakings 27,485 27,485 6,195 6,195 Financial assets at amortised cost 490,912 490,719 479,661 479,304 Financial assets at fair value through other comprehensive income 31,300 31,300 Available-for-sale financial assets 41,717 41,717 Financial liabilities Deposits from banks 27,822 27,810 28,888 28,883 Customer deposits 401,558 401,828 418,124 418,413 Due to fellow Lloyds Banking Group undertakings 35,965 35,965 13,237 13,237 Financial liabilities at fair value through profit or loss 39,645 39,645 50,874 50,874 Derivative financial instruments 18,971 18,971 24,699 24,699 Debt securities in issue 69,971 72,433 61,865 64,790 Subordinated liabilities 13,151 15,458 14,782 17,288 15. Fair values of financial assets and liabilities (continued)
The carrying amount of the following financial instruments is a reasonable approximation of fair value: cash and balances at central banks, items in the course of collection from banks, items in course of transmission to banks and notes in circulation.
The Group manages valuation adjustments for its derivative exposures on a net basis; the Group determines their fair values on the basis of their net exposures. In all other cases, fair values of financial assets and liabilities measured at fair value are determined on the basis of their gross exposures.
The following tables provide an analysis of the financial assets and liabilities of the Group that are carried at fair value in the Group's consolidated balance sheet, grouped into levels 1 to 3 based on the degree to which the fair value is observable.
Financial assets
Level 1 Level 2 Level 3 Total GBPm GBPm GBPm GBPm At 30 June 2018 Financial assets at fair value through profit or loss: Loans and advances to customers - 24,761 1,965 26,726 Loans and advances to banks - 1,208 - 1,208 Debt securities 7,527 500 - 8,027 Equity shares 793 17 318 1,128 Treasury and other bills 57 - - 57 ------- ------- ------- ------- Total financial assets at fair value through profit or loss 8,377 26,486 2,283 37,146 ------- ------- ------- ------- Financial assets at fair value through other comprehensive income: Debt securities 23,246 7,263 334 30,843 Equity shares 112 4 18 134 Treasury and other bills 323 - - 323 Total financial assets at fair value through other comprehensive income 23,681 7,267 352 31,300 ------- ------- ------- ------- Derivative financial instruments - 20,727 75 20,802 ------- ------- ------- ------- Total financial assets carried at fair value 32,058 54,480 2,710 89,248 ------- ------- ------- ------- At 31 December 2017 Financial assets at fair value through profit or loss: Loans and advances to customers - 30,568 - 30,568 Loans and advances to banks - 1,614 - 1,614 Debt securities 9,836 3,522 - 13,358 Equity shares - - 50 50 Treasury and other bills 18 - - 18 ------- ------- ------- ------- Total financial assets at fair value through profit or loss 9,854 35,704 50 45,608 ------- ------- ------- ------- Available-for-sale financial assets: Debt securities 34,763 6,046 92 40,901 Equity shares 555 38 223 816 Total available-for-sale financial assets 35,318 6,084 315 41,717 ------- ------- ------- ------- Derivative financial instruments 1 23,095 1,056 24,152 ------- ------- ------- ------- Total financial assets carried at fair value 45,173 64,883 1,421 111,477 ------- ------- ------- ------- 15. Fair values of financial assets and liabilities (continued) Level 1 Level 2 Level 3 Total GBPm GBPm GBPm GBPm At 31 December 2017 - disposal group Financial assets at fair value through profit or loss: Debt securities 10,445 27,553 874 38,872 Equity shares 85,289 18 872 86,179 Total financial assets at fair value through profit or loss 95,734 27,571 1,746 125,051 ------- ------- ------- ------- Derivative financial instruments 245 3,220 - 3,465 ------- ------- ------- ------- Total financial assets carried at fair value 95,979 30,791 1,746 128,516 ------- ------- ------- -------
Financial liabilities
Level 1 Level 2 Level 3 Total GBPm GBPm GBPm GBPm At 30 June 2018 Financial liabilities at fair value through profit or loss: Liabilities held at fair value through profit or loss - 7,822 - 7,822 Trading liabilities 55 31,768 - 31,823 ------- ------- ------- ------ Total trading and other financial liabilities at fair value through profit or loss 55 39,590 - 39,645 ------- ------- ------- ------ Derivative financial instruments - 18,846 125 18,971 ------- ------- ------- ------ Total financial liabilities carried at fair value 55 58,436 125 58,616 ------- ------- ------- ------ At 31 December 2017 Financial liabilities at fair value through profit or loss: Liabilities held at fair value through profit or loss - 7,812 - 7,812 Trading liabilities 1,106 41,956 - 43,062 ------- ------- ------- ------ Total trading and other financial liabilities at fair value through profit or loss 1,106 49,768 - 50,874 ------- ------- ------- ------ Derivative financial instruments 2 23,893 804 24,699 ------- ------- ------- ------ Total financial liabilities carried at fair value 1,108 73,661 804 75,573 ------- ------- ------- ------ Level 1 Level 2 Level 3 Total GBPm GBPm GBPm GBPm At 31 December 2017 - disposal group Total financial liabilities carried at fair value - derivative financial instruments 585 2,562 - 3,147 ------- ------- ------- ----- 15. Fair values of financial assets and liabilities (continued)
Movements in level 3 portfolio
The tables below analyse movements in the level 3 financial assets portfolio.
Total Financial Financial financial assets at assets at assets fair fair Available- carried value through value through for-sale at profit or other comprehensive financial Derivative fair loss income assets assets value GBPm GBPm GBPm GBPm GBPm Balance at 31 December 2017 50 315 1,056 1,421 Adjustment for IFRS 9 (note 18) 1,987 302 (315) 1,974 -------------- -------------------- ---------- ---------- ---------- Balance at 1 January 2018 2,037 302 3,395 Exchange and other adjustments 7 (1) - 6 Gains recognised in the income statement within other income 38 - 2 40 Losses recognised in other comprehensive income within the revaluation reserve in respect of financial assets at fair value through other comprehensive income - 1 - 1 Purchases 8 - - 8 Sales - (91) (983) (1,074) Transfers into the level 3 portfolio 193 334 - 527 Transfers out of the level 3 portfolio - (193) - (193) -------------- -------------------- ---------- ---------- ---------- At 30 June 2018 2,283 352 75 2,710 -------------- -------------------- ---------- ---------- ---------- Gains (losses) recognised in the income statement within other income relating to those assets held at 30 June 2018 12 - 2 14 Financial Total assets at financial fair Available- assets value through for-sale carried profit financial Derivative at or loss assets assets fair value GBPm GBPm GBPm GBPm At 1 January 2017 2,305 894 1,399 4,598 Exchange and other adjustments (3) (15) 18 - Losses recognised in the income statement within other income (42) - (226) (268) Losses recognised in other comprehensive income within the revaluation reserve in respect of available-for-sale financial assets - (199) - (199) Purchases 263 24 5 292 Sales (244) (23) (40) (307) Transfers into the level 3 portfolio - - - - Transfers out of the level 3 portfolio (19) (21) (44) (84) -------------- ---------- ---------- ----------- At 30 June 2017 2,260 660 1,112 4,032 -------------- ---------- ---------- ----------- Gains (losses) recognised in the income statement within other income relating to those assets held at 30 June 2017 185 - (227) (42) 15. Fair values of financial assets and liabilities (continued) Financial assets at fair value through profit or Disposal group loss GBPm Balance at 31 December 2017 1,746 Adjustment for IFRS 9 (note 18) 6,755 -------------- Balance at 1 January 2018 8,501 Exchange and other adjustments (17) Gains recognised in the income statement within other income 27 Purchases 97 Sales (270) Disposal of business (8,400) Transfers into the level 3 portfolio 230 Transfers out of the level 3 portfolio (168) -------------- At 30 June 2018 - -------------- Gains recognised in the income statement within other income relating to those assets held at 30 June 2018 - Financial assets at fair value through profit or Disposal group loss GBPm At 1 January 2017 1,501 Exchange and other adjustments (1) Gains recognised in the income statement within other income 53 Purchases 40 Sales (87) Transfers into the level 3 portfolio 56
Transfers out of the level 3 portfolio (104) -------------- At 30 June 2017 1,458 -------------- Gains recognised in the income statement within other income relating to those assets held at 30 June 2017 49 15. Fair values of financial assets and liabilities (continued)
The tables below analyse movements in the level 3 financial liabilities portfolio.
Financial Total liabilities financial at fair liabilities value through carried profit or Derivative at loss liabilities fair value GBPm GBPm GBPm At 1 January 2018 - 804 804 Exchange and other adjustments - - - Gains recognised in the income statement within other income - (30) (30) Additions - - - Redemptions - (2) (2) Sales - (647) (647) Transfers out of level 3 portfolio - - - --------------- ------------ ------------ At 30 June 2018 - 125 125 ---------------- ------------ ------------ Gains recognised in the income statement within other income relating to those liabilities held at 30 June 2018 - (30) (30) Financial Total liabilities financial at fair liabilities value through carried profit or Derivative at loss liabilities fair value GBPm GBPm GBPm At 1 January 2017 2 960 962 Exchange and other adjustments - 14 14 Gains recognised in the income statement within other income (2) (207) (209) Additions - 19 19 Redemptions - (26) (26) -------------- ------------ ------------ At 30 June 2017 - 760 760 -------------- ------------ ------------ Losses recognised in the income statement within other income relating to those liabilities held at 30 June 2017 - (209) (209) 15. Fair values of financial assets and liabilities (continued)
The tables below set out the effects of reasonably possible alternative assumptions for categories of level 3 financial assets and financial liabilities which have an aggregated carrying value greater than GBP500 million.
At 30 June 2018 --------------------------------------- Effect of reasonably possible alternative assumptions(1) ----------------------------- Significant Valuation unobservable Carrying Favourable Unfavourable technique(s) inputs Range(2) value changes changes GBPm GBPm GBPm Financial assets at fair value through profit or loss: Loans and 98bps advances to Discounted Inferred spreads / customers cashflows (bps) 102bps 1,964 39 (39) Other 319 --------------------------------------------------------------- -------- 2,283 -------- Financial assets at fair value through other comprehensive income: 352 Derivative financial assets: Interest rate Option pricing Interest rate derivatives model volatility 75 - - -------------- --------------- ------------------------------ -------- 75 -------- Financial assets carried at fair value 2,710 -------- Financial liabilities at fair value through profit or loss Derivative financial liabilities: Interest rate Option pricing Interest rate derivatives model volatility 125 - - -------------- --------------- ------------------------------ -------- 125 -------- Financial liabilities carried at fair value 125 -------- (1) Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table. (2) The range represents the highest and lowest inputs used in the level 3 valuations. 15. Fair values of financial assets and liabilities (continued) At 31 December 2017 --------------------------------------- Effect of reasonably possible alternative assumptions(1) ----------------------------- Significant Valuation unobservable Carrying Favourable Unfavourable technique(s) inputs Range(2) value changes changes GBPm GBPm GBPm Trading and other financial assets at fair value through profit or loss: Equity and Underlying n/a venture capital asset/ net investments asset value (incl. property prices) (3) 50 5 (5) -------------------------------------------------- -------- -------- 50 -------- Available for sale financial assets 315 Derivative financial assets: Interest rate Option pricing Interest rate 9% / derivatives model volatility 94% 1,056 11 (3) ----------------- ----------------- --------------- -------- -------- 1,056 -------- Financial assets carried at fair value 1,421 -------- Derivative financial liabilities: Interest rate Option pricing Interest rate 9% / derivatives model volatility 94% 804 - - ----------------- ----------------- --------------- -------- -------- 804 --------
Financial liabilities carried at fair value 804 -------- (1) Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table. (2) The range represents the highest and lowest inputs used in the level 3 valuations. (3) Underlying asset/ net asset values represent fair value. 15. Fair values of financial assets and liabilities (continued)
Disposal group
At 31 December 2017 --------------------------------------- Effect of reasonably possible alternative assumptions(1) ----------------------------- Significant Valuation unobservable Carrying Favourable Unfavourable technique(s) inputs Range(2) value changes changes GBPm GBPm GBPm Trading and other financial assets at fair value through profit or loss: Underlying asset/net Unlisted equities asset value and debt securities, (incl. property property prices), broker partnerships quotes or in the life discounted funds cash flows(3) n/a n/a 1,746 26 (76) --------------------- ----------------- --------------- ---------- Financial assets carried at fair value 1,746 -------- (1) Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table. (2) The range represents the highest and lowest inputs used in the level 3 valuations. (3) Underlying asset/net asset values represent fair value.
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are unchanged from those described in the Group's 2017 financial statements.
Reasonably possible alternative assumptions
Valuation techniques applied to many of the Group's level 3 instruments often involve the use of two or more inputs whose relationship is interdependent. The calculation of the effect of reasonably possible alternative assumptions included in the table above reflects such relationships and are unchanged from those described in the Group's 2017 financial statements.
16. Related party transactions
Balances and transactions with fellow Lloyds Banking Group undertakings
The Bank and its subsidiaries have balances due to and from the Bank's parent company, Lloyds Banking Group plc, and fellow Group undertakings. These are included on the balance sheet as follows:
At At 30 June 31 Dec 2018 2017 GBPm GBPm Assets Due from fellow Lloyds Banking Group undertakings 27,485 6,195 Derivative financial instruments 9,247 666 Trading and other financial assets at fair value through profit or loss 677 1,949 Liabilities Due to fellow Lloyds Banking Group undertakings 35,965 13,237 Derivative financial instruments 7,577 1,384 Financial liabilities at fair value through profit or loss 726 - Debt securities in issue 172 181 Subordinated liabilities 3,107 2,841
During the half-year to 30 June 2018 the Group earned GBP34 million (half-year to 30 June 2017: GBP26 million) of interest income and incurred GBP235 million (half-year to 30 June 2017: GBP119 million) of interest expense on balances and transactions with Lloyds Banking Group plc and fellow Group undertakings.
On 2 May 2018 to Bank completed the sale of Scottish Widows Group to its parent company, Lloyds Banking Group plc, for a consideration of GBP7,622 million. The Group recorded a profit of GBP1,010 million on this sale.
Also in May 2018, the Bank and its subsidiary, Bank of Scotland plc, sold the element of their commercial banking businesses required to be transferred in order to ensure compliance with the Ring-fencing legislation to Lloyds Bank Corporate Markets plc, a fellow Lloyds Banking Group undertaking, for a total consideration of GBP6.6 billion; no profit or loss arose on transfer.
Other related party transactions
Other related party transactions for the half-year to 30 June 2018 are similar in nature to those for the year ended 31 December 2017.
17. Dividends on ordinary shares
The directors have approved an interim dividend of GBP600 million which will be paid in the second half of 2018.
The Bank paid a dividend of GBP7,622 million on 2 May 2018 and a dividend of GBP2,800 million on 16 May 2018; the Bank paid dividends of GBP1,600 million on 11 May 2017 and a further GBP1,050 million on 22 September 2017.
18. Implementation of IFRS 9 and IFRS 15
IFRS 9 Financial Instruments
The Group adopted IFRS 9 from 1 January 2018. In accordance with the transition requirements of IFRS 9, comparative information for 2017 has not been restated and transitional adjustments have been accounted for through retained earnings as at 1 January 2018, the date of initial application; and as a result shareholders' equity reduced by GBP1,180 million, driven by the effects of additional impairment provisions following the implementation of the expected credit loss methodology and fair value adjustments following the reclassification of certain financial assets to be measured at fair value rather than amortised cost. It is not practicable to quantify the impact of adoption of IFRS 9 in the results for the current period.
The following table summarises the impact of the transitional adjustment on the Group's loss allowances at 1 January 2018:
IFRS 9 IAS 39 loss allowance Transitional allowance at 31 adjustment at 1 December in loss January 2017 allowance 2018 GBPm GBPm GBPm Loans and advances to banks - 1 1 Loans and advances to customers 2,195 1,022 3,217 Debt securities 3 - 3 Other assets - 10 10 ---------- ------------ ---------- Drawn balances 2,198 1,033 3,231 Provisions for undrawn commitments and financial guarantees 30 243 273 ---------- ------------ ---------- Total loss allowance 2,228 1,276 3,504 ---------- ------------ ----------
There were no impacts on the Group's loss allowances as a result of changes in the measurement category of financial assets at 1 January 2018.
18. Implementation of IFRS 9 and IFRS 15 (continued)
The following table summarises the adjustments arising on the adoption of IFRS 9 and IFRS 15 (see below) to the Group's balance sheet as at 1 January 2018.
Adjusted As at 31 IFRS 9: as at December Classification IFRS 9: 1 January 2017 and measurement Impairment IFRS 15 2018 GBPm GBPm GBPm GBPm GBPm Assets Cash and balances at central banks 58,521 - - - 58,521 Items in course of collection from banks 755 - - - 755 Financial assets at fair value through profit or loss 45,608 13,130 - - 58,738 Derivative financial instruments 24,152 (360) - - 23,792 Loans and advances to banks 4,274 (2,364) (1) - 1,909 Loans and advances to customers 465,555 (10,460) (1,022) - 454,073 Debt securities 3,637 (329) - - 3,308 Due from fellow Lloyds
Banking Group undertakings 6,195 - - - 6,195 --------- ---------------- ----------- ------- ---------- Financial assets at amortised cost 479,661 (13,153) (1,023) - 465,485 Financial assets at fair value through other comprehensive income 42,536 - - 42,536 Available-for-sale financial assets 41,717 (41,717) - - Goodwill 474 - - - 474 Other intangible assets 2,666 - - - 2,666 Property, plant and equipment 9,062 - - - 9,062 Current tax recoverable 16 - - - 16 Deferred tax assets 3,104 22 300 3 3,429 Retirement benefit assets 723 - - - 723 Assets of held-for-sale disposal group 154,227 - - - 154,227 Other assets 2,344 (655) (10) - 1,679 --------- ---------------- ----------- ------- ---------- Total assets 823,030 (197) (733) 3 822,103 --------- ---------------- ----------- ------- ---------- 18. Implementation of IFRS 9 and IFRS 15 (continued) Adjusted As at 31 IFRS 9: as at December Classification IFRS 9: 1 January 2017 and measurement Impairment IFRS 15 2018 GBPm GBPm GBPm GBPm GBPm Equity and liabilities Liabilities Deposits from banks 28,888 - - - 28,888 Customer deposits 418,124 - - - 418,124 Due to fellow Lloyds Banking Group undertakings 13,237 - - - 13,237 Items in course of transmission to banks 579 - - - 579 Financial liabilities at fair value through profit or loss 50,874 58 - - 50,932 Derivative financial instruments 24,699 - - - 24,699 Notes in circulation 1,313 - - - 1,313 Debt securities in issue 61,865 (48) - - 61,817 Liabilities of held-for-sale disposal group 146,518 - - - 146,518 Other liabilities 4,540 - (3) 14 4,551 Retirement benefit obligations 281 - - - 281 Current tax liabilities 827 - - - 827 Other provisions 5,309 - 243 - 5,552 Subordinated liabilities 14,782 - - - 14,782 --------- ----------------- ----------- ------- ---------- Total liabilities 771,836 10 240 14 772,100 Equity Shareholders' equity 47,598 (207) (973) (11) 46,407 Other equity instruments 3,217 - - - 3,217 Non-controlling interests 379 - - - 379 --------- ----------------- ----------- ------- ---------- Total equity 51,194 (207) (973) (11) 50,003 --------- ----------------- ----------- ------- ---------- Total equity and liabilities 823,030 (197) (733) 3 822,103 --------- ----------------- ----------- ------- ---------- 18. Implementation of IFRS 9 and IFRS 15 (continued)
Reclassifications
IFRS Balance sheet line IFRS 9 Measurement 9 Net item category In Out allocation reclassification GBPm GBPm GBPm Financial assets Financial assets at FVTPL FVTPL 14,447 (1,139) FVOCI 13,308 Derivative assets FVTPL (Der) (360) FVTPL (360) Loans and advances --------- ------------------ * Banks AC (90) FVOCI (2,364) (2,274) FVTPL - Customers AC (10,474) FVTPL (10,474) - Debt securities AC (329) FVOCI (329) --------- ------------------ (13,167) (13,167) Financial assets at FVOCI FVOCI 42,591 - 42,591 Available-for-sale assets (684) FVTPL (41,033) FVOCI --------- (41,717) (41,717) Other assets AC (655) FVTPL (655) Financial liabilities Financial liabilities at FVTPL FVTPL 48 48 Debt securities in issue AC (48) FVTPL (48) --------- ------------ Total 57,086 (57,086) - ------- --------- ------------------
Remeasurements
There has been a pre-tax charge of GBP229 million (GBP207 million net of tax) arising from the reclassification of financial assets and liabilities to fair value through profit or loss and fair value through other comprehensive income and consequent remeasurement to fair value.
IFRS 15 Revenue from Contracts with Customers
The Group has adopted IFRS 15 from 1 January 2018 and in nearly all cases the Group's existing accounting policy was consistent with the requirements of IFRS 15; however, certain income streams within the Group's car leasing business are now deferred, resulting in an additional GBP14 million being recognised as deferred income at 1 January 2018 with a corresponding debit of GBP11 million, net of tax, to shareholders' equity. As permitted by the transition options under IFRS 15, comparative figures for the prior year have not been restated. The impact of adoption of IFRS 15 on the current period is not material.
19. Future accounting developments
The following pronouncements are not applicable for the year ending 31 December 2018 and have not been applied in preparing these interim financial statements. Save as disclosed below, the impact of these accounting changes is still being assessed by the Group and reliable estimates cannot be made at this stage.
With the exception of IFRS 16 Leases, as at 31 July 2018 these pronouncements are awaiting EU endorsement.
IFRS 16 Leases
IFRS 16 replaces IAS 17 Leases and is effective for annual periods beginning on or after 1 January 2019.
IFRS 16 requires lessees to recognise a right of use asset and a liability for future payments arising from a lease contract. Lessees will recognise a finance charge on the liability and a depreciation charge on the asset which could affect the timing of the recognition of expenses on leased assets. This change will mainly impact the properties that the Group currently accounts for as operating leases. Finance systems will need to be changed to reflect the new accounting rules and disclosures. Lessor accounting requirements remain aligned to the current approach under IAS 17.
Minor amendments to other accounting standards
The IASB has issued a number of minor amendments to IFRSs effective 1 January 2019 (including IFRIC 23 Uncertainty over Income Tax Treatments). These revised requirements are not expected to have a significant impact on the Group.
20. Ultimate parent undertaking
The Bank's ultimate parent undertaking and controlling party is Lloyds Banking Group plc which is incorporated in Scotland. Lloyds Banking Group plc has published consolidated accounts for the year to 31 December 2017 and copies may be obtained from Investor Relations, Lloyds Banking Group, 25 Gresham Street, London EC2V 7HN and available for download from www.lloydsbankinggroup.com.
21. Other information
The financial information in these condensed consolidated half-year financial statements does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2017 have been delivered to the Registrar of Companies. The auditors' report on those accounts was unqualified, did not include an emphasis of matter paragraph and did not include a statement under section 498 of the Companies Act 2006.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors listed below (being all the directors of Lloyds Bank plc) confirm that to the best of their knowledge these condensed consolidated half-year financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as adopted by the European Union, and that the half-year results herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:
-- an indication of important events that have occurred during the six months ended 30 June 2018 and their impact on the condensed consolidated half-year financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
-- material related party transactions in the six months ended 30 June 2018 and any material changes in the related party transactions described in the last annual report.
Signed on behalf of the board by
António Horta-Osório
Group Chief Executive
31 July 2018
Lloyds Bank plc board of directors:
António Horta-Osório (Group Chief Executive)
George Culmer (Chief Financial Officer)
Juan Colombás (Chief Risk Officer)
Lord Blackwell (Chairman)
Anita Frew (Deputy Chairman)
Alan Dickinson
Simon Henry
Lord Lupton CBE
Deborah McWhinney
Nicholas Prettejohn
Stuart Sinclair
Sara Weller CBE
INDEPENDENT REVIEW REPORT TO LLOYDS BANK PLC
Report on the condensed consolidated half-year financial statements
Our conclusion
We have reviewed Lloyds Bank plc's condensed consolidated half-year financial statements (the "interim financial statements") in the 2018 half-year results of Lloyds Bank plc (the "Bank") for the six month period ended 30 June 2018. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated balance sheet as at 30 June 2018;
-- the consolidated income statement and consolidated statement of comprehensive income for the period then ended;
-- the consolidated cash flow statement for the period then ended; -- the consolidated statement of changes in equity for the period then ended; and -- the explanatory notes to the interim financial statements.
The interim financial statements included in the 2018 half-year results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The 2018 half-year results, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the 2018 half-year results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial statements in the 2018 half-year results based on our review. This report, including the conclusion, has been prepared for and only for the Bank for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the 2018 half-year results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
31 July 2018
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Douglas Radcliffe
Group Investor Relations Director
020 7356 1571
douglas.radcliffe@finance.lloydsbanking.com
Edward Sands
Director of Investor Relations
020 7356 1585
edward.sands@lloydsbanking.com
Nora Thoden
Director of Investor Relations
020 7356 2334
andrew.downey@finance.lloydsbanking.com
CORPORATE AFFAIRS
Grant Ringshaw
Director of Media Relations
020 7356 2362
grant.ringshaw@lloydsbanking.com
Matt Smith
Head of Corporate Media
020 7356 3522
matt.smith@lloydsbanking.com
Copies of this news release may be obtained from Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN. The full news release can also be found on the Group's website - www.lloydsbankinggroup.com.
Registered office: Lloyds Banking Group plc, The Mound, Edinburgh, EH1 1YZ
Registered in Scotland No. 95000
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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August 01, 2018 08:14 ET (12:14 GMT)
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