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| Name | Symbol | Market | Type |
|---|---|---|---|
| Lloyds Bk. | LSE:94WP | London | Medium Term Loan |
| Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0 | - |
From Jul 2019 to Jul 2024
TIDM94WP
RNS Number : 5351F
Lloyds Bank PLC
28 July 2016
Lloyds Bank plc
Half-Year Management Report
For the half-year to 30 June 2016
Member of the Lloyds Banking Group
FORWARD LOOKING STATEMENTS
This document contains certain forward looking statements with respect to the business, strategy and plans of Lloyds Bank Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Lloyds Bank 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 the plans, objectives, expectations, estimates and intentions expressed in such forward looking statements made by the Lloyds Bank 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 (including low or negative rates), exchange rates, stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Lloyds Bank Group's or Lloyds Banking Group plc's credit ratings; the ability to derive cost savings; 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, the exit by the UK from the European Union (EU) and the potential for one or more 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 cyber security; natural, pandemic and other disasters, adverse weather and similar contingencies outside the Lloyds Bank 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, accounting standards or taxation, including as a result of an exit by the UK from the EU, a further possible referendum on Scottish independence; changes to regulatory capital or liquidity requirements and similar contingencies outside the Lloyds Bank 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; the ability to attract and retain senior management and other employees; requirements or limitations on the Lloyds Bank Group or Lloyds Banking Group plc as a result of HM Treasury's investment in Lloyds Banking Group plc; actions or omissions by the Lloyds Bank Group's directors, management or employees including industrial action; changes to the Lloyds Bank Group's post-retirement defined benefit scheme obligations; the provision of banking operations services to TSB Banking Group plc; 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 Lloyds Bank Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; 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 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 Lloyds Bank Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements. 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
Hot Features
Premium
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 13
Notes 14
Statement of directors' responsibilities 42
Independent review report 43
Contacts 45
FINANCIAL REVIEW
Principal activities
Lloyds Bank plc (the Bank) and its subsidiaries (together, the Group) provide a wide range of banking and financial services in the UK and overseas.
The Group's revenue is earned through interest and fees on a broad range of financial services products including current and savings accounts, personal loans, credit cards and mortgages within the retail market; loans and capital market products to commercial, corporate and asset finance customers; life, pensions and investment products; general insurance; and private banking and asset management.
Review of results
The Group recorded a profit before tax of GBP1,003 million for the half year to 30 June 2016, a decrease of GBP413 million compared with the profit before tax of GBP1,416 million for the half year to 30 June 2015.
Total income, net of insurance claims, decreased by GBP2,161 million, or 24 per cent, to GBP6,859 million for the half year to 30 June 2016 from GBP9,020 million in the half year to 30 June 2015.
Net interest income decreased by GBP233 million, or 4 per cent, to GBP4,982 million in the half year to 30 June 2016 compared with GBP5,215 million in the same period in 2015. This was due in part to an increase of GBP165 million in the charge within net interest income for amounts allocated to unit holders in Open-Ended Investment Companies, from GBP357 million in the half year to 30 June 2015 to GBP522 million in the half year to 30 June 2016, as a result of higher investment returns in 2016. Excluding this charge from both periods, and the GBP192 million net interest income of TSB from the comparative period, net interest income was GBP124 million, or 2 per cent, higher at GBP5,504 million in the half year to 30 June 2016 compared with GBP5,380 million in the same period in 2015. The net interest margin on the Group's relationship lending and similar assets improved, offsetting a small reduction in average interest-earning assets, which principally related to lending outside of the Group's risk appetite as well as in the mortgages and larger corporate portfolios, only partly offset by growth in other personal finance and SME lending. The improvement in margin reflected lower deposit and wholesale funding costs and a one-off credit to net interest income related to the credit card portfolio more than offsetting pressure on asset prices.
Other income increased by GBP5,184 million to GBP11,987 million in the half year to 30 June 2016, compared with GBP6,803 million in the same period in 2015, due mainly to a GBP3,794 million increase in net trading income, reflecting higher income from the insurance businesses driven by the impact of market conditions on policyholder assets. These market movements, together with the increase in insurance premium income, were largely offset in the Group's income statement by a GBP7,112 million increase in the insurance claims expense, and the impact on net interest income of amounts allocated to unit holders in Open-Ended Investment Companies. Insurance premium income was GBP2,798 million higher at GBP4,212 million compared with GBP1,414 million in the half year to 30 June 2015; underlying premium income of GBP3,373 million in 2015 having been offset by a charge of GBP1,959 million relating to the recapture by a third party insurer of a portfolio of policies previously reassured with the Group. Excluding this item from the comparable period, the insurance premium income of GBP4,212 million in the half year to 30 June 2016 was GBP839 million, or 25 per cent, higher as a result of increased bulk annuity business.
Net fee and commission income was GBP170 million, or 17 per cent, lower at GBP821 million in the half year to 30 June 2016 compared with GBP991 million in the half year to 30 June 2015, principally as a result of the disposal of TSB and reduced levels of card and current account fees.
Other operating income was GBP1,238 million lower at a deficit of GBP315 million in the half year to 30 June 2016 compared with income of GBP923 million in the half year to 30 June 2015. In the half year to 30 June 2016 the Group realised a gain of GBP484 million arising on the sale of its investment in Visa Europe Limited, there was a GBP152 million increase in liability management gains and an improvement in income from the movement in value of in-force insurance business; however these items were more than offset by a loss of GBP993 million arising on transactions related to Lloyds Banking Group's tender offers and redemptions in respect of its Enhanced Capital Notes which completed in March 2016 and a loss of GBP1,026 million which arose pursuant to a restructuring of the Bank's capital instruments in June 2016.
FINANCIAL REVIEW (continued)
There was a total regulatory provisions charge of GBP460 million in the half-year to 30 June 2016 compared to GBP1,835 million in the same period in 2015, of which GBP445 million (half-year to 30 June 2015: GBP1,835 million) was in expenses and GBP15 million (half-year to 30 June 2015: GBPnil) was recognised within income. No further provision has been taken for PPI, where complaint levels over the first half have been around 8,500 per week on average, broadly in line with expectations. The Group's current PPI provision reflects the Group's interpretation of the Financial Conduct Authority's (FCA) consultation paper regarding a potential time bar and the Plevin case and conclusion by mid-2018. The Group awaits the FCA's final decision however, should the time bar be longer than the proposed two years or the FCA's final decision be significantly delayed, then the Group may need to reassess its provision. The total charge of GBP460 million related to a range of other conduct issues and included GBP215 million in respect of arrears related activities on secured and unsecured retail products, GBP70 million in respect of complaints relating to packaged bank accounts and GBP50 million related to insurance products sold in Germany. In addition there were a number of smaller additions to existing conduct risk provisions totalling GBP125 million across all divisions.
Other operating expenses decreased by GBP559 million, or 10 per cent, to GBP5,049 million in the half year to 30 June 2016 compared with GBP5,608 million in the half year to 30 June 2015; although the half year to 30 June 2015 included a charge of GBP665 million relating to the disposal of TSB, adjusting for which costs were GBP106 million, or 2 per cent, higher at GBP5,049 million in the half year to 30 June 2016 compared with GBP4,943 million in the same period in 2015 as savings from the Group's restructuring initiatives have been more than offset by the impact of annual pay increases, higher levels of operating lease depreciation following continued growth in the Lex Autolease business and higher levels of restructuring costs.
Impairment losses increased by GBP201 million to GBP362 million in the half year to 30 June 2016 compared with GBP161 million in the half year to 30 June 2015. The impairment charge in respect of loans and receivables was GBP50 million, or 28 per cent, higher at GBP229 million in the half year to 30 June 2016 compared to GBP179 million in the same period in 2015. Credit quality remains good and the increased charge is largely due to a reduction in the level of provision releases and lower write-backs from debt sales. In addition, there was an impairment charge of GBP146 million in respect of certain equity investments in the Group's available-for-sale portfolio.
The tax charge for the half year to 30 June 2016 was GBP253 million (half year to 30 June 2015: GBP330 million), representing an effective tax rate of 25 per cent. The effective tax rate reflects the impact of tax exempt gains and capital losses not previously recognised.
Total assets were GBP33,153 million or 4 per cent, higher at GBP851,057 million at 30 June 2016, compared with GBP817,904 million at 31 December 2015. Cash and balances at central banks were GBP14,982 million, or 26 per cent, higher at GBP73,399 million compared to GBP58,417 million at 31 December 2015, as the Group made use of favourable opportunities for the placing of funds; and derivative assets were GBP18,435 million, or 64 per cent, higher at GBP47,357 million compared to GBP28,922 million at 31 December 2015, as a result of increased market activity at the end of June 2016 and movements in exchange rates. Loans and advances to customers decreased by GBP2,142 million from GBP455,175 million at 31 December 2015 to GBP453,033 million at 30 June 2016; growth in unsecured personal finance and SME lending was more than offset by reductions in larger corporate lending, mortgage balances, as the Group concentrates on protecting margin in the current market, and in the portfolio of lending which is outside of the Group's risk appetite. Customer deposits increased by GBP4,953 million to GBP423,279 million compared with GBP418,326 million at 31 December 2015 following growth in corporate and SME deposits. Shareholders' equity decreased by GBP335 million, or 1 per cent, from GBP46,962 million at 31 December 2015 to GBP46,627 million at 30 June 2016 as the retained profit for the period of GBP687 million and the positive impact of other reserve movements, in particular in relation to the cash flow hedging reserve, were more than offset by total dividend payments on ordinary shares in the period of GBP2,430 million.
The Group's transitional common equity tier 1 capital ratio decreased to 14.5 per cent at the end of June 2016 from 15.2 per cent at the end of December 2015, primarily reflecting dividend payments in the period. The transitional total capital ratio was 21.7 per cent (31 December 2015: 22.2 per cent).
FINANCIAL REVIEW (continued)
Capital ratios
At At
30 June 31 Dec
Capital resources (transitional) 2016 2015(1)
GBPm GBPm
Common equity tier 1
Shareholders' equity per balance
sheet 46,627 46,962
Adjustment to retained earnings for
foreseeable dividends (911) (1,427)
Deconsolidation of insurance entities(1) 1,307 578
Adjustment for own credit 25 67
Cash flow hedging reserve (2,925) (915)
Other adjustments (890) (433)
43,233 44,832
Less: deductions from common equity
tier 1
Goodwill and other intangible assets (1,627) (1,719)
Excess of expected losses over impairment
provisions and value adjustments - (270)
Removal of defined benefit pension
surplus (818) (721)
Securitisation deductions (220) (169)
Significant investments(1) (3,990) (4,001)
Deferred tax assets (4,198) (3,911)
-------- --------
Common equity tier 1 capital 32,380 34,041
-------- --------
Additional tier 1
Additional tier 1 instruments 7,108 4,761
Less: deductions from tier 1
Significant investments (1,288) (1,177)
Total tier 1 capital 38,200 37,625
-------- --------
Tier 2
Tier 2 instruments 11,620 13,562
Eligible provisions 114 221
Less: deductions from tier 2
Significant investments (1,509) (1,756)
-------- --------
Total tier 2 capital 10,225 12,027
-------- --------
Total capital resources 48,425 49,652
-------- --------
Risk-weighted assets 223,411 224,020
Common equity tier 1 capital ratio 14.5% 15.2%
Tier 1 capital ratio 17.1% 16.8%
Total capital ratio 21.7% 22.2%
(1) The presentation of the deconsolidation of the
Group's insurance entities has been amended at
June 2016 with comparative figures restated accordingly.
FINANCIAL REVIEW (continued)
Capital ratios (continued)
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Risk-weighted assets
Foundation Internal Ratings Based
(IRB) Approach 68,753 68,990
Retail IRB Approach 64,387 63,912
Other IRB Approach 18,274 18,661
-------- -------
IRB Approach 151,414 151,563
Standardised Approach 20,268 20,443
Credit risk 171,682 172,006
-------- -------
Counterparty credit risk 9,159 7,981
Contributions to the default fund
of a central counterparty 466 488
Credit valuation adjustment risk 1,101 1,684
Operational risk 26,123 26,123
Market risk 2,922 3,775
-------- -------
Underlying risk-weighted assets 211,453 212,057
Threshold risk-weighted assets 11,958 11,963
-------- -------
Transitional risk-weighted assets 223,411 224,020
-------- -------
Principal risks and uncertainties
The most 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, 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 2015 Annual Report and Accounts, with any quantitative disclosures updated herein.
Lloyds Banking Group has already considered many of the potential implications following the UK's vote to leave the European Union and will now develop this work in greater detail to assess the impact to its customers, colleagues and products - as well as all legal, regulatory, tax, finance and capital implications.
Credit risk - The risk that customers to whom we have lent money or other counterparties with whom we have contracted, fail to meet their financial obligations, resulting in loss to the Group. Adverse changes in the economic and market environment or the credit quality of the Group's counterparties and customers could reduce asset values and potentially increase write-downs and allowances for impairment losses, thereby adversely impacting profitability.
Conduct risk - The Group faces significant potential conduct risks, including selling products which do not meet customer needs, failing to deal with complaints effectively and exhibiting behaviours which do not meet market or regulatory standards.
Market risk - The risk that the Group's capital or earnings profile is affected by adverse market movements, in particular interest rates and credit spreads in the Banking business, credit spread and equity in the Insurance business, and credit spreads in the Group's Defined Benefit Pension Schemes.
Operational risk - Significant operational risks which may result in financial loss, disruption or damage to the reputation of the Group, including the availability, resilience and security of core IT systems and the potential for failings in customer processes.
Capital risk - The risk that the Group has a sub-optimal amount 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, or can only secure them at excessive cost.
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 can have a significant impact on the Group, including its operations, business prospects, structure, costs and/or capital requirements and ability to enforce contractual obligations.
Governance risk - Against a background of increased regulatory focus on governance and risk management, the most significant challenges arise from the embedding of the Senior Managers and Certification Regime (SM&CR) and the requirement to ring-fence core UK financial services and activities from January 2019.
People risk - Key people risks include the risk that the Group fails to lead responsibly in an increasingly competitive marketplace, particularly with the introduction of the SM&CR in 2016. This may dissuade capable individuals from taking up senior positions within the industry.
Insurance risk - Key insurance risks within the Insurance business are longevity, persistency and property insurance. Longevity risk is increasing following entry into the bulk annuity market at the end of 2015. Longevity is also the key insurance risk in the Group's Defined Benefit Pension Schemes.
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED INCOME STATEMENT
Half-year Half-year
to 30 to 30
June June
2016 2015
Note GBP million GBP million
Interest and similar income 8,538 9,050
Interest and similar expense (3,556) (3,835)
----------- -----------
Net interest income 4,982 5,215
----------- -----------
Fee and commission income 1,502 1,598
Fee and commission expense (681) (607)
----------- -----------
Net fee and commission income 821 991
Net trading income 7,269 3,475
Insurance premium income 4,212 1,414
Other operating income (315) 923
----------- -----------
Other income 11,987 6,803
----------- -----------
Total income 16,969 12,018
Insurance claims (10,110) (2,998)
----------- -----------
Total income, net of insurance
claims 6,859 9,020
----------- -----------
Regulatory provisions 11 (445) (1,835)
Other operating expenses (5,049) (5,608)
----------- -----------
Total operating expenses 3 (5,494) (7,443)
----------- -----------
Trading surplus 1,365 1,577
Impairment 4 (362) (161)
Profit before tax 1,003 1,416
Taxation 5 (253) (330)
----------- -----------
Profit for the period 750 1,086
----------- -----------
Profit attributable to ordinary
shareholders 686 1,035
Profit attributable to other equity
shareholders(1) 1 -
----------- -----------
Profit attributable to equity
holders 687 1,035
Profit attributable to non-controlling
interests 63 51
Profit for the period 750 1,086
----------- -----------
(1) The profit after tax attributable to other equity
holders of GBP1 million (half-year to 30 June 2015:
GBPnil) is offset in reserves by a tax credit attributable
to ordinary shareholders of GBPnil (half-year to
30 June 2015: GBPnil).
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (UNAUDITED) (continued)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Half-year Half-year
to 30 to 30
June June
2016 2015
GBP million GBP million
Profit for the period 750 1,086
Other comprehensive income:
Items that will not subsequently
be reclassified to profit or loss:
Post-retirement defined benefit scheme
remeasurements (note 9):
----------- -----------
Remeasurements before taxation (267) (302)
Taxation 40 60
----------- -----------
(227) (242)
Items that may subsequently be reclassified
to profit or loss:
Movements in revaluation reserve
in respect of available-for-sale
financial assets:
----------- -----------
Change in fair value 184 (16)
Income statement transfers in respect
of disposals (574) (49)
Income statement transfers in respect
of impairment 146 -
Taxation 152 -
----------- -----------
(92) (65)
Movement in cash flow hedging reserve:
----------- -----------
Effective portion of changes in fair
value 2,968 (403)
Net income statement transfers (223) (508)
Taxation (735) 181
----------- -----------
2,010 (730)
Currency translation differences
(tax: nil) (20) 27
----------- -----------
Other comprehensive income for the
period, net of tax 1,671 (1,010)
----------- -----------
Total comprehensive income for the
period 2,421 76
----------- -----------
Total comprehensive income attributable
to ordinary shareholders 2,357 25
Total comprehensive income attributable
to other equity holders 1 -
----------- -----------
Total comprehensive income attributable
to equity holders 2,358 25
Total comprehensive income attributable
to non-controlling interests 63 51
Total comprehensive income for the
period 2,421 76
----------- -----------
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (UNAUDITED) (continued)
CONSOLIDATED BALANCE SHEET
At At
30 June 31 Dec
2016 2015
Note GBP million GBP million
Assets
Cash and balances at central banks 73,399 58,417
Items in course of collection
from banks 904 697
Trading and other financial assets
at fair value through profit or
loss 6 146,622 141,149
Derivative financial instruments 47,357 28,922
Loans and receivables:
----------- -----------
Loans and advances to banks 25,958 25,117
Loans and advances to customers 7 453,033 455,175
Debt securities 3,996 4,191
Due from fellow Lloyds Banking
Group undertakings 2,440 11,045
----------- -----------
485,427 495,528
Available-for-sale financial assets 35,860 33,032
Held-to-maturity investments 21,500 19,808
Goodwill 2,016 2,016
Value of in-force business 4,749 4,596
Other intangible assets 1,719 1,838
Property, plant and equipment 12,940 12,979
Current tax recoverable 33 44
Deferred tax assets 3,341 4,018
Retirement benefit assets 9 1,022 901
Other assets 14,168 13,959
----------- -----------
Total assets 851,057 817,904
----------- -----------
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (UNAUDITED) (continued)
CONSOLIDATED BALANCE SHEET (continued)
At At
30 June 31 Dec
2016 2015
Note GBP million GBP million
Equity and liabilities
Liabilities
Deposits from banks 23,162 16,925
Customer deposits 423,279 418,326
Due to fellow Lloyds Banking Group
undertakings 2,108 5,926
Items in course of transmission
to banks 780 717
Trading and other financial liabilities
at fair value through profit or
loss 52,094 51,863
Derivative financial instruments 42,860 26,347
Notes in circulation 1,090 1,112
Debt securities in issue 8 88,758 82,056
Liabilities arising from insurance
contracts and participating
investment contracts 88,386 80,317
Liabilities arising from non-participating
investment contracts 19,353 22,777
Other liabilities 32,071 30,197
Retirement benefit obligations 9 592 365
Current tax liabilities 474 298
Deferred tax liabilities 36 33
Other provisions 4,346 5,687
Subordinated liabilities 21,392 27,605
----------- -----------
Total liabilities 800,781 770,551
Equity
----------- -----------
Share capital 1,574 1,574
Share premium account 37,373 35,533
Other reserves 7,885 5,987
Retained profits (205) 3,868
----------- -----------
Shareholders' equity 46,627 46,962
Other equity instruments 10 3,217 -
----------- -----------
Total equity excluding non-controlling
interests 49,844 46,962
Non-controlling interests 432 391
----------- -----------
Total equity 50,276 47,353
----------- -----------
Total equity and liabilities 851,057 817,904
----------- -----------
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (UNAUDITED) (continued)
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
GBP GBP GBP GBP GBP GBP GBP
million million million million million million million
Balance at 1
January 2016 37,107 5,987 3,868 46,962 - 391 47,353
Comprehensive
income
Profit for the
period - - 687 687 - 63 750
Other comprehensive
income
-------- --------- -------- -------- ------------ ------------ --------
Post-retirement
defined benefit
scheme remeasurements,
net of tax - - (227) (227) - - (227)
Movements in
revaluation
reserve in respect
of available-for-sale
financial assets,
net of tax - (92) - (92) - - (92)
Movements in
cash flow hedging
reserve, net
of tax - 2,010 - 2,010 - - 2,010
Currency translation
differences
(tax: nil) - (20) - (20) - - (20)
-------- --------- -------- -------- ------------ ------------ --------
Total other
comprehensive
income - 1,898 (227) 1,671 - - 1,671
-------- --------- -------- -------- ------------ ------------ --------
Total comprehensive
income - 1,898 460 2,358 - 63 2,421
-------- --------- -------- -------- ------------ ------------ --------
Transactions
with owners
-------- --------- -------- -------- ------------ ------------ --------
Dividends - - (2,430) (2,430) - (2) (2,432)
Distributions
on other equity
instruments,
net of tax - - (1) (1) - - (1)
Redemption of
preference shares 1,840 - (1,840) - - - -
Capital contributions
received - - 143 143 - - 143
Return of capital
contributions - - (405) (405) - - (405)
Issue of Additional
Tier 1 securities
(note 10) - - - - 3,217 - 3,217
Changes in
non-controlling
interests - - - - - (20) (20)
-------- --------- -------- -------- ------------ ------------ --------
Total transactions
with owners 1,840 - (4,533) (2,693) 3,217 (22) 502
-------- --------- -------- -------- ------------ ------------ --------
Balance at 30
June 2016 38,947 7,885 (205) 46,627 3,217 432 50,276
-------- --------- -------- -------- ------------ ------------ --------
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (UNAUDITED) (continued)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity
shareholders
---------------------------------------
Share
capital Non-
and Other Retained controlling
premium reserves profits Total interests Total
GBP GBP GBP GBP GBP GBP
million million million million million million
Balance at 1 January
2015 37,107 6,842 4,828 48,777 1,213 49,990
Comprehensive income
Profit for the
period - - 1,035 1,035 51 1,086
Other comprehensive
income
-------- --------- -------- -------- ------------ --------
Post-retirement
defined benefit
scheme remeasurements,
net of tax - - (242) (242) - (242)
Movements in revaluation
reserve in respect
of available-for-sale
financial assets,
net of tax - (65) - (65) - (65)
Movements in cash
flow hedging reserve,
net of tax - (730) - (730) - (730)
Currency translation
differences (tax:
nil) - 27 - 27 - 27
-------- --------- -------- -------- ------------ --------
Total other comprehensive
income - (768) (242) (1,010) - (1,010)
-------- --------- -------- -------- ------------ --------
Total comprehensive
income - (768) 793 25 51 76
-------- --------- -------- -------- ------------ --------
Transactions with
owners
-------- --------- -------- -------- ------------ --------
Dividends - - (540) (540) (10) (550)
Capital contributions
received - - 221 221 - 221
Return of capital
contributions - - (431) (431) - (431)
Value of employee
services - - 1 1 - 1
Adjustment on sale
of TSB Banking
Group plc (TSB) - - - - (825) (825)
Other changes in
non-controlling
interests - - - - 1 1
-------- --------- -------- -------- ------------ --------
Total transactions
with owners - - (749) (749) (834) (1,583)
-------- --------- -------- -------- ------------ --------
Balance at 30 June
2015 37,107 6,074 4,872 48,053 430 48,483
-------- --------- -------- -------- ------------ --------
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (UNAUDITED) (continued)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity
shareholders
---------------------------------------
Share
capital Non-
and Other Retained controlling
premium reserves profits Total interests Total
GBP GBP GBP GBP GBP GBP
million million million million million million
Balance at 1 July
2015 37,107 6,074 4,872 48,053 430 48,483
Comprehensive income
(Loss) profit for
the period - - (372) (372) 45 (327)
Other comprehensive
income
-------- --------- -------- -------- ------------ --------
Post-retirement
defined benefit
scheme remeasurements,
net of tax - - 27 27 - 27
Movements in revaluation
reserve in respect
of available-for-sale
financial assets,
net of tax - (304) - (304) - (304)
Movements in cash
flow hedging reserve,
net of tax - 288 - 288 - 288
Currency translation
differences,
net of tax - (71) - (71) - (71)
-------- --------- -------- -------- ------------ --------
Total other comprehensive
income - (87) 27 (60) - (60)
-------- --------- -------- -------- ------------ --------
Total comprehensive
income - (87) (345) (432) 45 (387)
-------- --------- -------- -------- ------------ --------
Transactions with
owners
-------- --------- -------- -------- ------------ --------
Dividends - - (540) (540) (42) (582)
Capital contribution
received - - 50 50 - 50
Return of capital
contributions - - (169) (169) - (169)
Other changes in
non-controlling
interests - - - - (42) (42)
-------- --------- -------- -------- ------------ --------
Total transactions
with owners - - (659) (659) (84) (743)
-------- --------- -------- -------- ------------ --------
Balance as at 31
December 2015 37,107 5,987 3,868 46,962 391 47,353
-------- --------- -------- -------- ------------ --------
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (UNAUDITED) (continued)
CONSOLIDATED CASH FLOW STATEMENT
Half-year Half-year
to 30 to 30
June June
2016 2015
GBP million GBP million
Profit before tax 1,003 1,416
Adjustments for:
Change in operating assets (10,042) 26,094
Change in operating liabilities 33,262 10
Non-cash and other items 7,202 (5,656)
Tax received 105 (30)
----------- -----------
Net cash provided by (used in) operating
activities 31,530 21,834
Cash flows from investing activities
Purchase of financial assets (3,441) (12,358)
Proceeds from sale and maturity of
financial assets 2,729 14,838
Purchase of fixed assets (1,820) (1,564)
Proceeds from sale of fixed assets 909 526
Acquisition of businesses, net of
cash acquired (6) -
Disposal of businesses, net of cash
disposed 5 (4,282)
----------- -----------
Net cash used in investing activities (1,624) (2,840)
Cash flows from financing activities
----------- -----------
Dividends paid to ordinary shareholders (2,430) (540)
Distributions on other equity instruments (1) -
Dividends paid to non-controlling
interests (2) (10)
Return of capital contribution (405) (431)
Issue of Additional Tier 1 securities 3,217 -
Interest paid on subordinated liabilities (1,262) (1,525)
Proceeds from issue of subordinated
liabilities 2,753 -
Repayment of subordinated liabilities (12,407) (2,068)
Repayments to parent company (4,585) -
Change in non-controlling interests (5) 1
Net cash used in financing activities (15,127) (4,573)
Effects of exchange rate changes
on cash and cash equivalents 15 (2)
----------- -----------
Change in cash and cash equivalents 14,794 14,419
Cash and cash equivalents at beginning
of period 71,953 65,147
----------- -----------
Cash and cash equivalents at end
of period 86,747 79,566
----------- -----------
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. Included within cash and cash equivalents at 30 June 2016 is GBP12,613 million (30 June 2015: GBP11,377 million; 31 December 2015: GBP13,545 million) held within the Group's life funds, which is not immediately available for use in the business.
NOTES
Page
1 Accounting policies, presentation and estimates 15
2 Segmental analysis 16
3 Operating expenses 19
4 Impairment 19
5 Taxation 20
6 Trading and other financial assets at fair 20
value through profit or loss
7 Loans and advances to customers 21
8 Debt securities in issue 21
9 Post-retirement defined benefit schemes 22
10 Other equity instruments 23
11 Provisions for liabilities and charges 23
12 Contingent liabilities and commitments 27
13 Fair values of financial assets and liabilities 30
14 Related party transactions 37
15 Dividends on ordinary shares 39
16 Future accounting developments 39
17 Ultimate parent undertaking 41
18 Other information 41
1. Accounting policies, presentation and estimates
These condensed consolidated half-year financial statements as at and for the period to 30 June 2016 have been prepared in accordance with the Disclosure Rules 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 2015 which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Copies of the 2015 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,
The accounting policies are consistent with those applied by the Group in its 2015 Annual Report and Accounts.
Future accounting developments
Details of those IFRS pronouncements which will be relevant to the Group but which will not be effective at 31 December 2016 and which have not been applied in preparing these condensed consolidated half-year financial statements are set out in note 16.
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. There have been no significant changes in the basis upon which estimates have been determined, compared to that applied at 31 December 2015.
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 reviews the Group's performance by considering that of the Lloyds Banking Group.
The segmental results and comparatives are presented on an underlying basis, the basis reviewed by the chief operating decision maker. The effects of the redemption of the Group's Enhanced Capital Notes, asset sales, volatile items, the insurance grossing adjustment, liability management, restructuring costs, TSB dual-running costs, the charge relating to the TSB disposal, conduct provisions, the amortisation of purchased intangible assets and the unwind of acquisition-related fair value adjustments are excluded in arriving at underlying profit.
The Group's activities are organised into four financial reporting segments: Retail; Commercial Banking; Consumer Finance and Insurance. The Group's unsecured personal lending portfolio, previously part of Retail, is now managed by Consumer Finance and elements of the Group's business in the Channel Islands and the Isle of Man were transferred from Retail to Commercial Banking; comparatives have been restated accordingly. There has been no other change to the descriptions of these segments as provided in note 4 to the Group's financial statements for the year ended 31 December 2015.
2. Segmental analysis (continued)
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 2015.
Total
Other income,
income, net Profit
Net net of (loss) Inter-
Half-year to 30 June interest of insurance insurance before External segment
2016 income claims claims tax revenue revenue
GBPm GBPm GBPm GBPm GBPm GBPm
Underlying basis
Retail 3,296 558 3,854 1,548 4,333 (479)
Commercial Banking 1,306 982 2,288 1,236 2,137 151
Consumer Finance 994 658 1,652 690 1,942 (290)
Insurance (80) 921 841 446 300 541
Other 266 (26) 240 241 163 77
Group 5,782 3,093 8,875 4,161 8,875 -
-------- --------
Reconciling items:
Insurance grossing
adjustment (423) 519 96 -
Enhanced Capital
Notes(1) - (790) (790) (790)
Asset sales, volatile
items and liability
management(2) 20 624 644 500
Volatility relating
to the insurance
business - (372) (372) (372)
Restructuring costs(3) - - - (307)
Other conduct provisions - (15) (15) (460)
Amortisation of purchased
intangibles - - - (168)
Fair value unwind (154) 36 (118) (110)
Removal of impact
of other entities
in the Lloyds Banking
Group(4) (243) (1,218) (1,461) (1,451)
Group - statutory 4,982 1,877 6,859 1,003
--------- ------------- ---------- -------
(1) The loss relating to the ECNs was GBP790 million,
representing the write-off of the embedded derivative
and the premium paid on redemption of the remaining
notes.
(2) Comprises (i) gains on disposals of assets which
are not part of normal business operations (GBP335
million); (ii) the net effect of banking volatility
and net derivative valuation adjustments (gain
of GBP19 million); and (iii) the results of liability
management exercises (gains of GBP146 million).
(3) Principally comprises the severance costs related
to phase II of the Simplification programme.
(4) This reflects the inclusion in the results reviewed
by the chief operating decision maker of the Bank's
fellow subsidiary undertakings and its parent undertaking,
Lloyds Banking Group plc.
2. Segmental analysis (continued)
Total
Other income,
income, net Profit
Net net of (loss) Inter-
Half-year to interest of insurance insurance before External segment
30 June 2015 income claims claims tax revenue revenue
GBPm GBPm GBPm GBPm GBPm GBPm
Underlying basis
Retail(1) 3,364 554 3,918 1,603 4,194 (276)
Commercial Banking(1) 1,266 1,027 2,293 1,212 1,850 443
Consumer Finance(1) 1,005 678 1,683 756 1,889 (206)
Insurance (73) 1,025 952 584 1,241 (289)
Other 153 (31) 122 228 (206) 328
Group 5,715 3,253 8,968 4,383 8,968 -
-------- --------
Reconciling items:
Insurance grossing
adjustment (241) 287 46 -
TSB income 192 31 223 -
Enhanced Capital
Notes - (390) (390) (390)
Asset sales,
volatile items
and liability
management(2) 26 6 32 35
Volatility relating
to the insurance
business - 18 18 18
Simplification
costs - - - (32)
TSB build and
dual running
costs - - - (85)
Charge relating
to the TSB disposal - 5 5 (660)
Payment protection
insurance provision - - - (1,400)
Other conduct
provisions - - - (435)
Amortisation
of purchased
intangibles - - - (164)
Fair value unwind (200) 105 (95) (77)
Removal of impact
of other entities
in the Lloyds
Banking Group(3) (277) 490 213 223
Group - statutory 5,215 3,805 9,020 1,416
--------- ------------- ---------- -------
(1) Restated, see page 15.
(2) Comprises (i) losses on disposals of assets which
are not part of normal business operations (GBP52
million); (ii) the net effect of banking volatility
and net derivative valuation adjustments (gains
of GBP93 million); and (iii) the results of liability
management exercises (losses of GBP6 million).
(3) This reflects the inclusion in the results reviewed
by the chief operating decision maker of the Bank's
fellow subsidiary undertakings and its parent undertaking,
Lloyds Banking Group plc.
2. Segmental analysis (continued)
At At
30 June 31 Dec
Segment external assets 2016 2015(1)
GBPm GBPm
Retail 302,851 307,887
Commercial Banking 201,259 178,838
Consumer Finance 39,176 36,501
Insurance 147,718 143,217
Other 157,228 140,245
Total Group 848,232 806,688
-------- --------
Lloyds Bank Group statutory 851,057 817,904
Impact of other entities in the Lloyds
Banking Group (2,825) (11,216)
-------- --------
Segment external assets as above 848,232 806,688
-------- --------
Segment customer deposits
Retail 271,293 273,719
Commercial Banking 141,426 131,998
Consumer Finance 9,086 11,082
Other 1,474 1,527
Total Group and Lloyds Bank Group
statutory 423,279 418,326
-------- --------
Segment external liabilities
Retail 276,001 278,933
Commercial Banking 249,367 226,106
Consumer Finance 13,964 15,462
Insurance 141,318 137,233
Other 118,644 101,974
Total Group 799,294 759,708
-------- --------
Lloyds Bank Group statutory 800,781 770,551
Impact of other entities in the Lloyds
Banking Group (1,487) (10,843)
-------- --------
Segment external liabilities as above 799,294 759,708
-------- --------
(1) Restated, see page 15.
3. Operating expenses
Half-year Half-year
to 30 to 30
June June
2016 2015
GBPm GBPm
Administrative expenses:
Staff costs 2,462 2,410
Premises and equipment 353 360
Other expenses 1,068 1,830
--------- ---------
3,883 4,600
Depreciation and amortisation 1,166 1,008
Total operating expenses, excluding
regulatory provisions 5,049 5,608
Regulatory provisions:
--------- ---------
Payment protection insurance provision
(note 11) - 1,400
Other regulatory provisions(1) (note
11) 445 435
--------- ---------
445 1,835
Total operating expenses 5,494 7,443
--------- ---------
(1) In addition, regulatory provisions of GBP15 million
(half-year to 30 June 2015: GBPnil) have been charged
against income.
4. Impairment
Half-year Half-year
to 30 to 30
June June
2016 2015
GBPm GBPm
Impairment losses on loans and receivables:
--------- ---------
Loans and advances to customers 229 181
Debt securities classified as loans
and receivables - (2)
--------- ---------
Impairment losses on loans and receivables 229 179
Impairment of available-for-sale
financial assets 146 -
Other credit risk provisions (13) (18)
Total impairment charged to the income
statement 362 161
--------- ---------
5. Taxation
A reconciliation of the tax charge that would result from applying the standard UK corporation tax rate to the profit before tax to the actual tax charge is given below:
Half-year Half-year
to 30 to 30
June June
2016 2015
GBPm GBPm
Profit before tax 1,003 1,416
--------- ---------
Tax charge thereon at UK corporation tax rate of 20 per
cent (2015: 20.25 per cent) (201) (287)
Factors affecting tax (charge) credit:
Impact of bank surcharge (59) -
Differences in UK corporation tax rates 2 7
Disallowed items (122) (86)
Non-taxable items 95 49
Overseas tax rate differences (6) (8)
Gains exempted or covered by capital losses 8 47
Policyholder tax (34) (39)
Tax losses not previously recognised 49 -
Adjustments in respect of previous periods 10 (14)
Effect of results in joint ventures and associates - -
Other items 5 1
--------- ---------
Tax charge (253) (330)
--------- ---------
In accordance with IAS 34, the Group's income tax expense for the half-year to 30 June 2016 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.
The Finance (No. 2) Act 2015 introduced an additional surcharge of 8 per cent on banking profits from 1 January 2016.
On 16 March 2016, the Government announced a reduction in the corporation tax rate applicable from 1 April 2020 to 17 per cent and a further restriction to the amount of banks' profits that can be offset by carried forward losses for the purposes of calculating tax liabilities from 50 per cent to 25 per cent. The proposed reduction in the rate of corporation tax and the further bank loss relief restriction are expected to be enacted, and accounted for, in the second half of 2016.
6. Trading and other financial assets at fair value through profit or loss
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Trading assets 45,034 42,670
Other financial assets at fair value
through profit or loss:
-------- -------
Treasury and other bills 64 74
Debt securities 39,101 37,330
Equity shares 62,423 61,075
-------- -------
101,588 98,479
-------- -------
Total trading and other financial
assets at fair value through profit
or loss 146,622 141,149
-------- -------
Included in the above is GBP95,611 million (31 December 2015: GBP91,096 million) of assets relating to the insurance businesses.
7. Loans and advances to customers
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Agriculture, forestry and fishing 7,047 6,924
Energy and water supply 3,129 3,247
Manufacturing 6,394 5,953
Construction 5,736 4,952
Transport, distribution and hotels 13,272 13,526
Postal and communications 2,581 2,563
Property companies 32,213 32,228
Financial, business and other services 41,959 43,072
Personal:
Mortgages 309,338 312,877
Other 20,443 20,579
Lease financing 2,792 2,751
Hire purchase 10,862 9,536
-------- -------
455,766 458,208
Allowance for impairment losses on
loans and advances to customers (2,733) (3,033)
-------- -------
Total loans and advances to customers 453,033 455,175
-------- -------
Loans and advances to customers include advances securitised under the Group's securitisation and covered bond programmes.
8. Debt securities in issue
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Medium-term notes issued 31,074 29,329
Covered bonds 31,873 27,200
Certificates of deposit 11,592 11,101
Securitisation notes 7,091 7,763
Commercial paper 7,128 6,663
Total debt securities in issue 88,758 82,056
-------- -------
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 2016, external parties held GBP7,091 million (31 December 2015: GBP7,763 million) and the Group's subsidiaries held GBP27,804 million (31 December 2015: GBP29,303 million) of total securitisation notes in issue of GBP34,895 million (31 December 2015: GBP37,066 million). The notes are secured on loans and advances to customers and debt securities classified as loans and receivables amounting to GBP56,336 million (31 December 2015: GBP58,090 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.
8. Debt securities in issue (continued)
Covered bond programmes
At 30 June 2016, external parties held GBP31,873 million (31 December 2015: GBP27,200 million) and the Group's subsidiaries held GBP3,601 million (31 December 2015: GBP4,197 million) of total covered bonds in issue of GBP35,474 million (31 December 2015: GBP31,397 million). The bonds are secured on certain loans and advances to customers that have been assigned to bankruptcy remote limited liability partnerships. These loans are retained on the Group's balance sheet.
Cash deposits of GBP8,783 million (31 December 2015: GBP8,383 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.
9. Post-retirement defined benefit schemes
The Group's post-retirement defined benefit scheme obligations are comprised as follows:
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Defined benefit pension schemes:
Fair value of scheme assets 43,752 37,639
Present value of funded obligations (43,117) (36,903)
-------- --------
Net pension scheme asset 635 736
Other post-retirement schemes (205) (200)
-------- --------
Net retirement benefit asset 430 536
-------- --------
Recognised on the balance sheet as:
Retirement benefit assets 1,022 901
Retirement benefit obligations (592) (365)
----- -----
Net retirement benefit asset 430 536
----- -----
The movement in the Group's net post-retirement defined benefit scheme liability during the period was as follows:
GBPm
At 1 January 2016 536
Income statement charge (136)
Employer contributions 297
Remeasurement (267)
-----
At 30 June 2016 430
-----
The principal assumptions used in the valuations of the defined benefit pension scheme were as follows:
At At
30 June 31 Dec
2016 2015
% %
Discount rate 2.80 3.87
Rate of inflation:
Retail Prices Index 2.73 2.99
Consumer Price Index 1.73 1.99
Rate of salary increases 0.00 0.00
Weighted-average rate of increase
for pensions in payment 2.44 2.58
10. Other equity instruments
In June 2016 the Bank issued GBP3,217 million of Sterling, Dollar and Euro Additional Tier 1 (AT1) securities to Lloyds Banking Group plc. The AT1 securities are fixed rate resetting or floating rate Perpetual Subordinated Permanent Write-Down Securities with no fixed maturity or redemption date.
The principal terms of the AT1 securities are described below:
-- The securities rank behind the claims against the Bank of unsubordinated creditors on a Winding-Up.
-- The fixed rate reset securities bear a fixed rate of interest until the first call date. After the initial call date, in the event that they are not redeemed, the fixed rate reset AT1 securities will bear interest at rates fixed periodically in advance. The floating rate AT1 securities will be reset quarterly both prior to and following the first call date.
-- Interest on the securities will be due and payable only at the sole discretion of the Bank and the Bank may at any time elect to cancel any Interest Payment (or any part thereof) which would otherwise be payable on any Interest Payment Date. There are also certain restrictions on the payment of interest as specified in the terms.
-- The securities are undated and are repayable, at the option of the Bank, in whole at the first call date, or at any Interest Payment date thereafter. In addition, the AT1 securities are repayable, at the option of the Bank, in whole for certain regulatory or tax reasons. Any repayments require the prior consent of the Prudential Regulation Authority.
-- The securities will be subject to a Permanent Write Down should the fully Loaded Common Equity Tier 1 ratio of the Bank fall below 7.0 per cent.
11. Provisions for liabilities and charges
Payment protection insurance
The Group has made provisions totalling GBP16,025 million since 2011 against the costs of paying redress to customers in respect of past sales of PPI policies, including the related administrative expenses.
No additional charge has been made in the first half of 2016.
As at 30 June 2016, GBP1,950 million or 12 per cent of the total provision remained unutilised relating predominantly to reactive complaints and associated administration costs.
Total cash payments were GBP1,508 million in the first half of 2016 which included remediation. The re-review of previously handled cases is now complete.
On 26 November 2015, the Financial Conduct Authority (FCA) published a consultation paper (CP15/39: Rules and guidance on payment protection insurance complaints) proposing (i) the introduction of a deadline by which consumers would need to make their PPI complaints including an FCA led communications campaign, and (ii) rules and guidance about how firms should handle PPI complaints in light of the Supreme Court's decision in Plevin v Paragon Personal Finance Limited [2014] UKSC 61 (Plevin). The Group awaits the FCA's final decision and should the time bar be longer than the proposed two years or the FCA's final decision be significantly delayed, then the Group may need to reassess its provision.
In 2015, the Group increased the total expected reactive complaints to 4.7 million (including complaints falling under the Plevin rules and guidance) in light of the FCA proposals, equivalent to approximately 10,000 complaints per week through to a time bar of mid-2018. There is no change in the total expected reactive complaints, with approximately 1.1 million still to be received.
11. Provisions for liabilities and charges (continued)
The volume of complaints during the first half of 2016 was marginally lower than the prior year, at around 8,500 per week; this is broadly in line with the Group's expectations.
Monthly complaint trends could vary significantly, given they are likely to be impacted by a number of factors including seasonality, the potential impact of the FCA's proposed communication campaign as well as changes in the regulation of Claims Management Companies (CMCs).
The provision includes an estimate to cover redress that would be payable under the FCA's proposed new rules and guidance in light of Plevin.
Average monthly
reactive
(including
Plevin)
complaint Quarter-on-quarter Year-on-year
Quarter volume* % %
Q1 2014 42,259 13% (31%)
Q2 2014 39,426 (7%) (27%)
Q3 2014 40,624 3% (18%)
Q4 2014 35,910 (12%) (4%)
Q1 2015 37,791 5% (11%)
Q2 2015 36,957 (2%) (6%)
Q3 2015 37,586 2% (7%)
Q4 2015 33,998 (10%) (5%)
Q1 2016 37,293 10% (1%)
Q2 2016 37,222 (0%) 1%
*Net complaints - i.e. exclude claims where no PPI policy was held
Sensitivities
The Group estimates that it has sold approximately 16 million policies since 2000. These include policies that were not mis-sold. Since the commencement of the PPI redress programme in 2011 the Group estimates that it has contacted, settled or provided for 49 per cent of the policies sold since 2000, covering both customer-initiated complaints and actual and PBR mailings undertaken by the Group.
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 in particular with respect to future volumes. The cost could differ materially from the Group's estimates and the assumptions underpinning them, and could result in a further provision being required. There is significant uncertainty around the impact of the proposed FCA media campaign, CMC and customer activity and the deadline for PPI complaints may be later than originally expected.
11. Provisions for liabilities and charges (continued)
Key metrics and sensitivities are highlighted in the table below:
To date
unless
Sensitivities(1) noted Future Sensitivity
------------------------------ -------- -------- -------------
Customer initiated complaints
since origination (m)(2) 3.6 1.1 0.1 = GBP180m
Average uphold rate per
policy(3) 74% 89% 1% = GBP35m
Average redress per upheld GBP100
policy4 GBP1,700 GBP1,250 = GBP145m
Administrative expenses 1 case
(GBPm) 3,005 450 = GBP400
(1) All sensitivities exclude claims where no PPI policy
was held.
(2) Sensitivity includes complaint handling costs.
Future volume includes complaints falling into
the Plevin rules and guidance. As a result, the
sensitivity per 100,000 complaints includes cases
where the average redress would be lower than historical
trends.
(3) The percentage of complaints where the Group finds
in favour of the customer excluding PBR. The 74
per cent uphold rate per policy is based on the
six months to 30 June 2016. Future uphold rate
and sensitivities are influenced by a proportion
of complaints falling under the Plevin rules and
guidance which would otherwise be defended. As
a result, the future uphold rate is higher than
historical trends.
(4) The amount that is paid in redress in relation
to a policy found to have been mis-sold, comprising,
where applicable, the refund of premium, compound
interest charged and interest at 8 per cent per
annum. Actuals are based on the six months to 30
June 2016. Future average redress is influenced
by expected compensation payments for complaints
falling under the Plevin rules and guidance, which
have lower average redress than non Plevin cases.
Other regulatory provisions
Customer claims in relation to insurance branch business in Germany
The Group continues to receive claims in Germany from customers relating to policies issued by Clerical Medical Investment Group Limited (subsequently renamed Scottish Widows Limited). The Group recognised provisions totalling GBP545 million during the period to 31 December 2015.
The German industry-wide issue regarding notification of contractual 'cooling off' periods has continued to lead to an increasing number of claims in 2016. Accordingly a provision increase of GBP50 million was recognised in the half-year to 30 June 2016 giving a total provision of GBP595 million; the remaining unutilised provision as at 30 June 2016 is GBP143 million (31 December 2015: GBP124 million).
The validity of the claims facing the Group depends upon the facts and circumstances in respect of each claim. As a result the ultimate financial effect, which could be significantly different from the current provision, will be known only once all relevant claims have been resolved.
Interest rate hedging products
In June 2012, a number of banks, including the Lloyds Banking Group, reached agreement with the FSA (now FCA) to carry out a review of sales made since 1 December 2001 of interest rate hedging products (IRHP) to certain small and medium-sized businesses. As at 30 June 2016 the Lloyds Banking Group had identified 1,739 sales of IRHPs to customers within scope of the agreement with the FCA which have opted in and are being reviewed and, where appropriate, redressed. The Lloyds Banking Group agreed that it would provide redress to any in-scope customers where appropriate. The Lloyds Banking Group continues to review the remaining cases within the scope of the agreement with the FCA and has met all of the regulator's requirements to date.
By the end of 2015, the Group had charged a total of GBP720 million in respect of redress and related administration costs for in-scope customers. An additional GBP10 million has been provided in the half-year to 30 June 2016 raising the total amount provided to GBP730 million. As at 30 June 2016, the Group has utilised GBP701 million (31 December 2015: GBP652 million), with GBP29 million (31 December 2015: GBP68 million) of the provision remaining.
11. Provisions for liabilities and charges (continued)
Arrears handling related activities
Following a review of the Lloyds Banking Group's secured and unsecured arrears handling activities, the Lloyds Banking Group has put in place a number of actions to further improve its handling of customers in these areas. As a result, the Group has provided an additional GBP215 million in the first half of 2016 (bringing the total provision to GBP351 million), for the costs of identifying and rectifying certain arrears management fees and activities. As at 30 June 2016, the unutilised provision was GBP346 million (31 December 2015: GBP136 million).
Other 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 Lloyds Banking Group also receives complaints and claims from customers in connection with its past conduct and, where significant, provisions are held against the costs expected to be incurred as a result of the conclusions reached. In the half-year to 30 June 2016, the Group charged an additional GBP119 million in respect of matters within the Retail division and GBP66 million in respect of the Commercial Banking, Consumer Finance and Insurance divisions.
At 30 June 2016, provisions for other legal actions and regulatory matters of GBP627 million (31 December 2015: GBP677 million) remained unutilised, principally in relation to the sale of bancassurance products and packaged bank accounts and other Retail provisions.
12. Contingent liabilities and commitments
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the Group is not directly involved in the on-going 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 certain competition investigations into MasterCard and Visa probing, amongst other things, MIFs paid in respect of cards issued outside the EEA;
- Litigation continues in the English Courts against both Visa and MasterCard. This litigation has been brought by several retailers who are seeking damages for allegedly 'overpaid' MIFs. From publicly available information, it is understood these damages claims are running to different timescales with respect to the litigation process. It is also possible that new claims may be issued. Judgment in the Sainsbury's v MasterCard case was handed down on 14 July 2016. Sainsbury's is entitled to recover approximately GBP69 million (plus interest) in damages from MasterCard. It is unclear whether MasterCard will seek to appeal the judgment. However, the judgment considers a number of important matters that are likely to influence the conduct of ongoing (and future) litigation in relation to both Visa and MasterCard.
- Any ultimate impact on the Group of the above investigations and the litigation against Visa and MasterCard remains uncertain at this time.
Visa Inc completed its acquisition of Visa Europe on 21 June 2016. The Group's share of the sale proceeds comprised cash consideration of approximately GBP330 million (of which approximately GBP300 million was received on completion of the sale and GBP30 million is deferred for three years) and preferred stock, which the Group measures at fair value. The preferred stock is convertible into Class A Common Stock of Visa Inc or its equivalent upon the occurrence of certain events. 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. Visa Inc only has recourse to the LSA once more than EUR1 billion of losses relating to UK domestic MIFs have arisen or once the total value of the preferred stock issued by Visa to certain UK banks on completion has been reduced to zero. This would be effected by a downward adjustment to the conversion ratio. In determining the fair value of the preferred stock, the Group includes adjustments for both the stock's illiquidity and the potential for changes in the conversion ratio. 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, currently in place under Visa Europe's Operating Regulations, for damages claims concerning inter or intra-regional MIF setting activities.
12. Contingent liabilities and commitments (continued)
LIBOR and other trading rates
In July 2014, the Lloyds Banking 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 Lloyds Banking Group companies' submissions to the British Bankers' Association (BBA) London Interbank Offered Rate (LIBOR) and Sterling Repo Rate. The Lloyds Banking Group continues to cooperate with various other government and regulatory authorities, including the Serious Fraud Office, 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 Lloyds Banking 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. The lawsuits, which contain broadly similar allegations, allege violations of the Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act and the Commodity Exchange Act, as well as various state statutes and common law doctrines. Certain of the plaintiffs' claims, including those asserted under US anti-trust laws, have been dismissed by the US Federal Court for Southern District of New York (the District Court). The New York Federal Court of Appeal overturned the District Court's dismissal of plaintiffs' antitrust claims in May 2016. The anti-trust claims have now been revived. An application to dismiss these claims for lack of personal jurisdiction will be made following the positive November 2015 decision which dismissed OTC and exchange-based plaintiffs' claims against the Group for lack of personal jurisdiction.
Certain Lloyds Banking Group companies are also named as defendants in UK based claims raising LIBOR manipulation allegations in connection with interest rate hedging products.
It is currently not possible to predict the scope and ultimate outcome on the Lloyds Banking 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 Lloyds Banking Group's contractual arrangements, including their timing and scale.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS) is the UK's independent statutory compensation fund of last resort for customers of authorised financial services firms and pays compensation if a firm is unable or likely to be unable to pay claims against it. The FSCS is funded by levies on the authorised financial services industry. Each deposit-taking institution contributes towards the FSCS levies in proportion to their share of total protected deposits on 31 December of the year preceding the scheme year, which runs from 1 April to 31 March.
Following the default of a number of deposit takers in 2008, the FSCS borrowed funds from HM Treasury to meet the compensation costs for customers of those firms. At 31 March 2016, the end of the latest FSCS scheme year for which it has published accounts, the principal balance outstanding on these loans was GBP15,655 million (31 March 2015: GBP15,797 million). Although it is anticipated that the substantial majority of this loan will be repaid from funds the FSCS receives from asset sales, surplus cash flow or other recoveries in relation to the assets of the firms that defaulted, any shortfall will be funded by deposit-taking participants of the FSCS. The amount of future levies payable by the Group depends on a number of factors including the amounts recovered by the FSCS from asset sales, the Group's participation in the deposit-taking market at 31 December, the level of protected deposits and the population of deposit-taking participants.
12. Contingent liabilities and commitments (continued)
Tax authorities
The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to tax authorities including open matters where Her Majesty's Revenue and Customs (HMRC) adopt a different interpretation and application of tax law. 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, permitting 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 GBP600 million and a reduction in the Lloyds Banking Group's deferred tax asset of approximately GBP400 million (overall impact on the Lloyds Bank Group of GBP950 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; none of these 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 Lloyds Banking 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. The Lloyds Banking Group will respond as appropriate to this and any investigations, proceedings, or regulatory action that may in due course be instigated as a result of these issues.
The Financial Conduct Authority's announcement on time-barring for PPI complaints and Plevin v Paragon Personal Finance Limited
On 26 November 2015 the FCA issued a Consultation Paper on the introduction of a deadline by which consumers would need to make their PPI complaints or else lose their right to have them assessed by firms or the Financial Ombudsman Service, and proposed rules and guidance concerning the handling of PPI complaints in light of the Supreme Court's decision in Plevin v Paragon Personal Finance Limited [2014] UKSC 61 (Plevin). The next step is for the FCA to issue a policy statement. The Financial Ombudsman Service is also considering the implications of Plevin for PPI complaints. The implications of potential time-barring and the Plevin decision in terms of the scope of any court proceedings or regulatory action remain uncertain.
Mortgage arrears handling activities
On 26 May 2016, the Lloyds Banking Group was informed that an enforcement team at the FCA had commenced an investigation in connection with the Lloyds Banking 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.
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. 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.
12. Contingent liabilities and commitments (continued)
Contingent liabilities and commitments arising from the banking business
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Contingent liabilities
Acceptances and endorsements 130 52
Other:
-------- -------
Other items serving as direct credit
substitutes 516 458
Performance bonds and other transaction-related
contingencies 2,007 2,123
-------- -------
2,523 2,581
-------- -------
Total contingent liabilities 2,653 2,633
-------- -------
Commitments
Documentary credits and other short-term
trade-related transactions - -
Forward asset purchases and forward
deposits placed 772 421
Undrawn formal standby facilities,
credit lines and other commitments
to lend:
Less than 1 year original maturity:
-------- -------
Mortgage offers made 10,490 9,995
Other commitments 63,295 57,809
-------- -------
73,785 67,804
1 year or over original maturity 39,553 44,691
-------- -------
Total commitments 114,110 112,916
-------- -------
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, GBP62,358 million (31 December 2015: GBP63,086 million) was irrevocable.
13. 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 49 to the Group's 2015 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 2015 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.
31 December
30 June 2016 2015
----------------- -----------------
Carrying Fair Carrying Fair
value value value value
GBPm GBPm GBPm GBPm
Financial assets
Trading and other financial
assets at fair value
through profit or loss 146,622 146,622 141,149 141,149
Derivative financial
instruments 47,357 47,357 28,922 28,922
Loans and receivables:
-------- ------- -------- -------
Loans and advances to
banks 25,958 25,979 25,117 25,130
Loans and advances to
customers 453,033 453,520 455,175 454,797
Debt securities 3,996 3,882 4,191 4,107
Due from fellow Lloyds
Banking Group undertakings 2,440 2,440 11,045 11,045
-------- ------- -------- -------
485,427 485,821 495,528 495,079
Available-for-sale financial
instruments 35,860 35,860 33,032 33,032
Held-to-maturity- investments 21,500 22,804 19,808 19,851
Financial liabilities
Deposits from banks 23,162 23,177 16,925 16,934
Customer deposits 423,279 423,824 418,326 418,512
Due to fellow Lloyds
Banking Group undertakings 2,108 2,108 5,926 5,926
Trading and other financial
liabilities at fair
value through profit
or loss 52,094 52,094 51,863 51,863
Derivative financial
instruments 42,860 42,860 26,347 26,347
Debt securities in issue 88,758 91,402 82,056 85,093
Liabilities arising
from non-participating
investment contracts 19,353 19,353 22,777 22,777
Subordinated liabilities 21,392 22,597 27,605 29,996
13. 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 Level Level
1 2 3 Total
GBPm GBPm GBPm GBPm
At 30 June 2016
Trading and other financial
assets at fair value
through profit or
loss:
Loans and advances
to customers - 33,625 - 33,625
Loans and advances
to banks - 2,387 - 2,387
Debt securities 22,797 23,057 2,263 48,117
Equity shares 60,887 34 1,508 62,429
Treasury and other
bills 64 - - 64
------- ------- ----- -------
Total trading and other
financial assets at
fair value through
profit or loss 83,748 59,103 3,771 146,622
------- ------- ----- -------
Available-for-sale
financial assets:
Debt securities 27,210 7,406 50 34,666
Equity shares 451 14 729 1,194
Total available-for-sale
financial assets 27,661 7,420 779 35,860
------- ------- ----- -------
Derivative financial
instruments 63 45,749 1,545 47,357
------- ------- ----- -------
Total financial assets
carried at fair value 111,472 112,272 6,095 229,839
------- ------- ----- -------
At 31 December 2015
Trading and other financial
assets at fair value
through profit or
loss:
Loans and advances
to customers - 30,109 - 30,109
Loans and advances
to banks - 3,065 - 3,065
Debt securities 20,919 22,513 3,389 46,821
Equity shares 59,061 292 1,727 61,080
Treasury and other
bills 74 - - 74
------- ------- ----- -------
Total trading and other
financial assets at
fair value through
profit or loss 80,054 55,979 5,116 141,149
------- ------- ----- -------
Available-for-sale
financial assets:
Debt securities 25,266 6,518 55 31,839
Equity shares 43 521 629 1,193
Total available-for-sale
financial assets 25,309 7,039 684 33,032
------- ------- ----- -------
Derivative financial
instruments 43 27,955 924 28,922
------- ------- ----- -------
Total financial assets
carried at fair value 105,406 90,973 6,724 203,103
------- ------- ----- -------
13. Fair values of financial assets and liabilities (continued)
Financial liabilities
Level Level Level
1 2 3 Total
GBPm GBPm GBPm GBPm
At 30 June 2016
Trading and other financial
liabilities at fair
value
through profit or
loss:
Liabilities held at
fair value through
profit or loss - 9,443 2 9,445
Trading liabilities 2,687 39,962 - 42,649
----- ------ ----- ------
Total trading and other
financial liabilities
at fair value through
profit or loss 2,687 49,405 2 52,094
----- ------ ----- ------
Derivative financial
instruments 97 41,433 1,330 42,860
----- ------ ----- ------
Total financial liabilities
carried at fair value 2,784 90,838 1,332 94,954
----- ------ ----- ------
At 31 December 2015
Trading and other financial
liabilities at fair
value
through profit or
loss:
Liabilities held at
fair value through
profit or loss - 7,878 1 7,879
Trading liabilities 4,153 39,831 - 43,984
----- ------ ----- ------
Total trading and other
financial liabilities
at fair value through
profit or loss 4,153 47,709 1 51,863
----- ------ ----- ------
Derivative financial
instruments 41 25,583 723 26,347
----- ------ ----- ------
Total financial liabilities
carried at fair value 4,194 73,292 724 78,210
----- ------ ----- ------
Financial guarantees are recognised at fair value on initial recognition and are classified as level 3; the balance is not material.
13. 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.
Trading
and other
financial Total
assets financial
at fair assets
value Available- carried
through for-sale at
profit financial Derivative fair
or loss assets assets value
GBPm GBPm GBPm GBPm
At 1 January 2016 5,116 684 924 6,724
Exchange and other adjustments 6 1 61 68
Gains recognised in
the income statement
within other income 317 - 547 864
Gains recognised in
other comprehensive
income within the revaluation
reserve in respect of
available-for-sale financial
assets - 248 - 248
Purchases 335 204 6 545
Sales (2,031) (494) (35) (2,560)
Transfers into the level
3 portfolio 187 136 45 368
Transfers out of the
level 3 portfolio (159) - (3) (162)
---------- ---------- ---------- ----------
At 30 June 2016 3,771 779 1,545 6,095
---------- ---------- ---------- ----------
Gains recognised in
the income statement
within other income
relating to those assets
held at 30 June 2016 373 - 635 1,008
Trading
and other
financial Total
assets financial
at fair assets
value Available- carried
through for-sale at
profit financial Derivative fair
or loss assets assets value
GBPm GBPm GBPm GBPm
At 1 January 2015 5,104 270 2,126 7,500
Exchange and other adjustments (1) - (45) (46)
Losses recognised in
the income statement
within other income (61) - (143) (204)
Gains recognised in
other comprehensive
income within the revaluation
reserve in respect of
available-for-sale financial
assets - 1 - 1
Purchases 785 38 182 1,005
Sales (649) (6) (105) (760)
Transfers into the level
3 portfolio 20 - - 20
Transfers out of the
level 3 portfolio (48) - (37) (85)
---------- ---------- ---------- ----------
At 30 June 2015 5,150 303 1,978 7,431
---------- ---------- ---------- ----------
Losses recognised in
the income statement
within other income
relating to those assets
held at 30 June 2015 (39) - (143) (182)
13. Fair values of financial assets and liabilities (continued)
The tables below analyse movements in the level 3 financial liabilities portfolio.
Trading
and other
financial Total
liabilities financial
at liabilities
fair value carried
through at
profit Derivative fair
or loss liabilities value
GBPm GBPm GBPm
At 1 January 2016 1 723 724
Exchange and other adjustments - 43 43
Losses recognised in the income
statement within other income 1 606 607
Additions - 10 10
Redemptions - (52) (52)
At 30 June 2016 2 1,330 1,332
------------ ------------ ------------
Losses recognised in the income
statement within other income
relating to those liabilities
held at 30 June 2016 1 592 593
Trading
and other
financial Total
liabilities financial
at liabilities
fair value carried
through at
profit Derivative fair
or loss liabilities value
GBPm GBPm GBPm
At 1 January 2015 5 1,456 1,461
Exchange and other adjustments - (33) (33)
Gains recognised in the income
statement within other income - (100) (100)
Additions - 124 124
Redemptions (4) (102) (106)
Transfers out of the level
3 portfolio - (12) (12)
At 30 June 2015 1 1,333 1,334
------------ ------------ ------------
Gains recognised in the income
statement within other income
relating to those liabilities
held at 30 June 2015 - (100) (100)
13. 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 2016
---------------------------------------
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 venture
capital Market Earnings
investments approach multiple 0.3/16.6 2,280 73 (80)
------------------ -------------- ------------------ --------
Unlisted
equities
and debt Underlying
securities, asset/net
property asset value
partnerships (incl.
in the property
life funds prices)(3) n/a n/a 1,310 - (21)
------------------ -------------- ------------------ --------
Other 181
------------------------------------------------------ -------- --------
3,771
--------
Available for sale
financial assets 779
Derivative financial
assets:
Option Interest
Interest pricing rate
rate derivatives model volatility 2%/115% 1,545 17 (24)
------------------ -------------- ------------------ -------- --------
1,545
--------
Financial assets carried
at fair value 6,095
--------
Trading and other financial liabilities
at fair value through profit
or loss 2
Derivative financial
liabilities:
Option
Interest pricing Interest
rate derivatives model rate volatility 2%/115% 1,330
------------------ -------------- ------------------ -------- --------
1,330
--------
Financial liabilities carried
at fair value 1,332
--------
(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.
13. Fair values of financial assets and liabilities (continued)
At 31 December 2015
---------------------------------------
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 venture
capital Market Earnings
investments approach multiple 1/17.5 2,279 72 (72)
------------------ -------------- ------------------ --------
Unlisted
equities
and debt Underlying
securities, asset/net
property asset value
partnerships (incl.
in the property
life funds prices)(3) n/a n/a 2,538 - (48)
------------------ -------------- ------------------ --------
Other 299
------------------------------------------------------ -------- --------
5,116
--------
Available for sale
financial assets 684
Derivative financial
assets:
Option
Interest pricing Interest
rate derivatives model rate volatility 1%/63% 924 20 (19)
------------------ -------------- ------------------ -------- --------
924
--------
Financial assets carried
at fair value 6,724
--------
Trading and other financial liabilities
at fair value through profit
or loss 1
Derivative financial
liabilities:
Option
Interest pricing Interest
rate derivatives model rate volatility 1%/63% 723
------------------ -------------- ------------------ -------- --------
723
--------
Financial liabilities carried
at fair value 724
--------
(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 2015 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 2015 financial statements.
14. 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
2016 2015
GBPm GBPm
Assets
Loans and receivables: Due from fellow
Lloyds Banking Group undertakings 2,440 11,045
Trading and other financial assets
at fair value through profit or loss 37 9
Liabilities
Due to fellow Lloyds Banking Group
undertakings 2,108 5,926
Derivative financial instruments 484 46
Subordinated liabilities 3,288 10,890
During the half-year to 30 June 2016 the Group earned GBP59 million (half-year to 30 June 2015: GBP66 million) of interest income and incurred GBP443 million (half-year to 30 June 2015: GBP561 million) of interest expense on balances and transactions with Lloyds Banking Group plc and fellow Group undertakings.
UK government
In January 2009, the UK government through HM Treasury became a related party of the Lloyds Banking Group plc, the Bank's parent company, following its subscription for ordinary shares issued under a placing and open offer. As at 30 June 2016, HM Treasury held an interest of 9.1 per cent in the Lloyds Banking Group plc's ordinary share capital, with its interest having fallen below 20 per cent on 11 May 2015. As a consequence of HM Treasury no longer being considered to have a significant influence, it ceased to be a related party of Lloyds Banking Group plc and therefore of the Group, for IAS 24 purposes at that date.
In accordance with IAS 24, UK government-controlled entities were related parties of the Group until 11 May 2015. The Group also regarded the Bank of England and entities controlled by the UK government, including The Royal Bank of Scotland Group plc (RBS), NRAM plc and Bradford & Bingley plc, as related parties.
The Lloyds Banking Group has participated in a number of schemes operated by the UK government and central banks and made available to eligible banks and building societies.
National Loan Guarantee Scheme
The Lloyds Banking Group participates in the UK government's National Loan Guarantee Scheme, providing eligible UK businesses with discounted funding based on the Lloyds Banking Group's existing lending criteria. Eligible businesses who have taken up the funding benefit from a 1 per cent discount on their funding rate for a pre-agreed period of time.
Funding for Lending
The Funding for Lending Scheme represents a further source of cost effective secured term funding available to the Lloyds Banking Group. The initiative supports a broad range of UK based customers, focussing primarily on providing small businesses with cheaper finance to invest and grow. In November 2015, the Bank of England announced that the deadline for banks to draw down their borrowing allowance would be extended for a further two years until 31 January 2018. At 30 June 2016, the Lloyds Banking Group had drawn down GBP33.1 billion (31 December 2015: GBP32.1 billion) under the Scheme.
14. Related party transactions (continued)
Enterprise Finance Guarantee Scheme
The Lloyds Banking Group participates in the Enterprise Finance Guarantee Scheme which supports viable businesses with access to lending where they would otherwise be refused a loan due to a lack of lending security. The Department for Business, Innovation and Skills provides the lender with a guarantee of up to 75 per cent of the capital of each loan subject to the eligibility of the customer. As at 30 June 2016, the Lloyds Banking Group had offered 6,647 loans to customers, worth over GBP568 million. Under the most recent renewal of the terms of the scheme, Lloyds Bank plc and Bank of Scotland plc, on behalf of the Lloyds Banking Group, contracted with The Secretary of State for Business, Innovation and Skills.
Help to Buy
The Help to Buy Scheme is a scheme promoted by the UK government and is aimed to encourage participating lenders to make mortgage loans available to customers who require higher loan-to-value mortgages. Halifax and Lloyds are currently participating in the Scheme whereby customers borrow between 90 per cent and 95 per cent of the purchase price. In return for the payment of a commercial fee, HM Treasury has agreed to provide a guarantee to the lender to cover a proportion of any loss made by the lender. GBP3,383 million of outstanding loans at 30 June 2016 (31 December 2015: GBP3,133 million) had been advanced under this scheme.
Business Growth Fund
The Lloyds Banking Group has invested GBP222 million (31 December 2015: GBP176 million) in the Business Growth Fund (under which an agreement was entered into with RBS amongst others) and, as at 30 June 2016, carries the investment at a fair value of GBP216 million (31 December 2015: GBP170 million).
Big Society Capital
The Lloyds Banking Group has invested GBP38 million (31 December 2015: GBP36 million) in the Big Society Capital Fund under which an agreement was entered into with RBS amongst others and, as at 30 June 2016, carries the investment at a fair value of GBP37 million (31 December 2015: GBP33 million).
Housing Growth Partnership
The Lloyds Banking Group has invested GBP11 million (31 December 2015: GBP4 million) and has committed to invest up to a further GBP39 million into the Housing Growth Partnership under which an agreement was entered into with the Homes and Communities Agency.
Central bank facilities
In the ordinary course of business, the Lloyds Banking Group may from time to time access market-wide facilities provided by central banks.
Other government-related entities
Other than the transactions referred to above, there were no significant transactions with the UK government and UK government-controlled entities (including UK government-controlled banks) during the year that were not made in the ordinary course of business or that were unusual in their nature or conditions.
Other related party transactions
Other related party transactions for the half-year to 30 June 2016 are similar in nature to those for the year ended 31 December 2015.
15. Dividends on ordinary shares
The Bank paid a dividend of GBP2,430 million on 12 May 2016; the Bank paid dividends of GBP540 million on 14 May 2015 and a further GBP540 million on 23 September 2015.
16. Future accounting developments
The following pronouncements are not applicable for the year ending 31 December 2016 and have not been applied in preparing these financial statements. Save as disclosed below, the full impact of these accounting changes is being assessed by the Group. As at 27 July 2016, these pronouncements are awaiting EU endorsement.
IFRS 9 Financial Instruments
IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement.
Classification and Measurement
IFRS 9 requires financial assets to be classified into one of three measurement categories, fair value through profit or loss, fair value through other comprehensive income and amortised cost, on the basis of the objectives of the entity's business model for managing its financial assets and the contractual cash flow characteristics of the instruments.
The Group has undertaken an assessment to determine the potential impact of changes in classification and measurement of financial assets. The adoption of IFRS 9 is unlikely to result in a significant change to current asset measurement bases, however, the final impact will be dependent on the facts and circumstances that exist on 1 January 2018.
IFRS 9 retains most of the existing requirements for financial liabilities. However, for financial liabilities designated at fair value through profit or loss, gains or losses attributable to changes in own credit risk may be presented in other comprehensive income. This change is expected to be immaterial to the Group.
Impairment
IFRS 9 also replaces the existing 'incurred loss' impairment approach with an expected credit loss approach, resulting in earlier recognition of credit losses. The IFRS 9 impairment model has three stages. Entities are required to recognise a 12 month expected loss allowance on initial recognition (stage 1) and a lifetime expected loss allowance when there has been a significant increase in credit risk (stage 2). The assessment of whether a significant increase in credit risk has occurred is a key aspect of the IFRS 9 methodology and involves quantitative and qualitative measures and therefore requires considerable management judgement. Stage 3 requires objective evidence that an asset is credit-impaired, which is similar to the guidance on incurred losses in IAS 39. Loan commitments and financial guarantees not measured at fair value through profit or loss are also in scope.
IFRS 9 requires the use of more forward looking information including reasonable and supportable forecasts of future economic conditions. The need to consider multiple economic scenarios and how they could impact the loss allowance is a subjective feature of the IFRS 9 impairment model. The final methodology for multiple economic scenarios is still under development, however, economic scenarios are likely to consider the Group's five year operating plan and stress testing scenarios. Appropriate governance and oversight will be established around the process. It is important that the linkage between expected credit losses, economic scenarios, and stress testing is understood and transparent.
These changes may result in a material increase in the Group's balance sheet provisions for credit losses and may therefore negatively impact the Group's regulatory capital position. The extent of any increase in provisions will depend upon, amongst other things, the composition of the Group's lending portfolios and forecast economic conditions at the date of implementation. The requirement to transfer assets between stages and to incorporate forward looking data into the expected credit loss calculation, including multiple economic scenarios, is likely to result in impairment charges being more volatile when compared to the current IAS 39 impairment model.
16. Future accounting developments (continued)
Hedge Accounting
The hedge accounting requirements of IFRS 9 are more closely aligned with risk management practices and follow a more principle-based approach than IAS 39, however, there is an option to maintain the existing IAS 39 hedge accounting rules until the IASB completes its project on macro hedging. The Group currently expects to continue applying IAS 39 hedge accounting in accordance with this accounting policy choice.
Transition
IFRS 9 is effective for annual periods beginning on or after 1 January 2018 with no requirement to restate prior periods. If comparative periods are not restated, at the date of initial application, any difference between the carrying amount of financial assets and the change in loss allowance shall be recognised in opening retained earnings.
IFRS 9 implementation programme
The Group has an established IFRS 9 programme to ensure a high quality implementation in compliance with the standard and regulatory guidance. The programme involves Finance and Risk functions across the Group with Divisional and Group steering committees providing oversight. The key responsibilities of the programme include defining IFRS 9 methodology and accounting policy, development of expected loss models, identifying data and system requirements, and establishing an appropriate operating model and governance framework.
Impairment methodologies have been documented and, in addition to IFRS 9, assessed against the expectations of the Basel Committee on Banking Supervision paper 'Guidance on Credit Risk and Accounting for Expected Credit Losses', and the Global Public Policy Committee paper 'The implementation of IFRS 9 impairment requirements by banks'.
The build phase of the programme is underway for the core credit risk models. Systems, processes and model testing will take place in 2017 to embed the changes, enhance business readiness and help improve the understanding of the new impairment models. The programme is progressing in line with its delivery plans.
For all material portfolios, IFRS 9 expected credit loss calculation will leverage the systems, data and models used to calculate regulatory expected credit losses. IFRS 9 expected credit loss models will use the three key input parameters for the computation of expected loss: probability of default; loss given default; and exposure at default.
However, given the conservatism inherent in the regulatory expected losses calculation, a number of adjustments to these components must be made to ensure compliance with IFRS 9 requirements.
IFRS 9 models differ from the regulatory models in a number of conceptual ways, for example stage 2 assets under IFRS 9, for which there has been a significant increase in credit risk, carry a lifetime expected loss amount; whereas regulatory models generate 12 month expected losses for non-defaulted loans, even though they may have experienced a significant increase in credit risk. In addition, different assets are in scope for each reporting base. As a result, the size of the regulatory expected losses should not be taken as a proxy for the size of the loss allowance under IFRS 9.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 replaces IAS 18 Revenue and IAS 11 Construction Contracts. Financial instruments, leases and insurance contracts are out of scope and so this standard is not currently expected to have a significant impact on the Group's profitability.
IFRS 15 is effective for annual periods beginning on or after 1 January 2018.
IFRS 16 Leases
On 13 January 2016 the IASB issued IFRS 16 to replace IAS 17 Leases. IFRS 16 requires lessees to recognise a right of use asset and a liability for future payments arising from a lease contract. Lessor accounting requirements remain aligned to the current approach under IAS 17.
16. Future accounting developments (continued)
IFRS 16 is effective for annual periods beginning on or after 1 January 2019.
Amendments to IAS 7 Statement of Cash Flows, IAS 12 Income Taxes and IFRS 2 Share-based Payment
During 2016, the IASB has issued amendments to IAS 7 Statement of Cash Flows which require additional disclosure about an entity's financing activities, IAS 12 Income Taxes which clarify when a deferred tax asset should be recognised for unrealised losses and IFRS 2 Share-based Payment which provide guidance on accounting for cash and certain net-settled schemes. These revised requirements, which are effective for annual periods beginning on or after 1 January 2017 for IAS 7 and IAS 12 and 1 January 2018 for IFRS 2, are not expected to have a significant impact on the Group.
17. 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 2015 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.
18. 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 2015 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 management report 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 2016 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 2016 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
27 July 2016
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
Nicholas Luff
Deborah McWhinney
Nicholas Prettejohn
Stuart Sinclair
Anthony Watson CBE
Sara Weller CBE
INDEPENT 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 2016 half-year management report of Lloyds Bank plc for the six month period ended 30 June 2016. 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 Rules and Transparency Rules 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 2016; -- the consolidated income statement for the six months ended 30 June 2016 -- the consolidated statement of comprehensive income for the six months ended 30 June 2016; -- the consolidated cash flow statement for the six months ended 30 June 2016; -- the consolidated statement of changes in equity for the six months ended 30 June 2016; and -- the explanatory notes to the interim financial statements.
The interim financial statements included in the 2016 half-year management report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules 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 2016 half-year management report, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the 2016 half-year management report in accordance with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial statements in the 2016 half-year management report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Rules and Transparency Rules 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.
INDEPENDENT REVIEW REPORT TO LLOYDS BANK PLC (continued)
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 Ireland) 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 2016 half-year management report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
27 July 2016
Notes:
(a) The maintenance and integrity of the Lloyds Banking Group plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Douglas Radcliffe
Group Investor Relations Director
020 7356 1571
douglas.radcliffe@finance.lloydsbanking.com
Mike Butters
Director of Investor Relations
020 7356 1187
mike.butters@finance.lloydsbanking.com
Andrew Downey
Director of Investor Relations
020 7356 2334
andrew.downey@finance.lloydsbanking.com
CORPORATE AFFAIRS
Ed Petter
Group Media Relations Director
020 8936 5655
ed.petter@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 company news service from the London Stock Exchange
END
IR PGUGCMUPQGUR
(END) Dow Jones Newswires
July 28, 2016 07:10 ET (11:10 GMT)
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