TIDM68FF
RNS Number : 9085B
HBOS PLC
25 February 2011
HBOS plc
Results Announcement
For the year to 31 December 2010
Member of the Lloyds Banking Group
FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with
respect to the business, strategy and plans of HBOS plc, its
current goals and expectations relating to its future financial
condition and performance. Statements that are not historical
facts, including statements about the HBOS Group or the HBOS
Group's management's beliefs and expectations, are forward looking
statements. By their nature, forward looking statements involve
risk and uncertainty because they relate to events and depend on
circumstances that will occur in the future. The HBOS Group's
actual future business, strategy, plans and/or results may differ
materially from those expressed or implied in these forward looking
statements as a result of a variety of risks, uncertainties and
other factors, including, without limitation, UK domestic and
global economic and business conditions; the ability to derive cost
savings and other benefits, as well as the ability to integrate the
HBOS Group successfully into the Lloyds Banking Group; the ability
to access sufficient funding to meet the HBOS Group's liquidity
needs; changes to the HBOS plc's or Lloyds Banking Group plc's
credit ratings; risks concerning borrower or counterparty credit
quality; market related trends and developments; changing
demographic trends; changes in customer preferences; changes to
regulation, accounting standards or taxation, including changes to
regulatory capital or liquidity requirements; the policies and
actions of governmental or regulatory authorities in the UK, the
European Union, or jurisdictions outside the UK, including other
European countries and the US; the ability to attract and retain
senior management and other employees; requirements or limitations
imposed on the HBOS Group as a result of HM Treasury's investment
in Lloyds Banking Group plc; the ability to complete satisfactorily
the disposal of certain assets as part of the Lloyds Banking
Group's EU state aid obligations; the extent of any future
impairment charges or write-downs caused by depressed asset
valuations; exposure to regulatory scrutiny, legal proceedings or
complaints, actions of competitors and other factors. Please refer
to Lloyds Banking Group plc's latest Annual Report on Form 20-F
filed with the US Securities and Exchange Commission for a
discussion of such factors together with examples of forward
looking statements. The forward looking statements contained in
this announcement are made as at the date of this announcement, and
the HBOS Group undertakes no obligation to update any of its
forward looking statements.
CONTENTS
Page
Financial review 1
Principal risks and uncertainties 3
Condensed financial statements
Consolidated income statement 8
Consolidated statement of comprehensive income 9
Consolidated balance sheet 10
Consolidated statement of changes in equity 12
Consolidated cash flow statement 13
Notes 14
Contacts 31
FINANCIAL REVIEW
Principal activities
HBOS plc (the 'Company') together with its subsidiaries (the
'Group') provide a range of banking and financial services through
branches and offices 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.
Results
The loss before tax decreased by GBP11,037 million, or 84 per
cent, from GBP13,088 million to GBP2,051 million. This was
primarily due to an improved credit performance, with impairments
reducing by GBP10,199 million, from GBP21,077 million to GBP10,878
million.
The trading surplus increased by GBP211 million, or 2 per cent,
from GBP8,714 million to GBP8,925 million comprising GBP2,681
million increase in net interest income, a GBP3,659 million
decrease in other income, net of insurance claims, and a GBP1,189
million reduction in operating expenses.
Net interest income increased by GBP2,681 million, or 47 per
cent, from GBP5,689 million to GBP8,370 million, as margins
improved as a result of more mortgage customers moving on to, and
remaining on, standard variable-rate terms and from the decrease in
interest expense as the HBOS funding held outside of the Lloyds
Banking Group continues to mature.
Other income, net of insurance claims, excluding the GBP3,000
million subvention income received in 2009, declined by GBP659
million with reduced gains from liability management transactions,
which reduced from GBP2,514 million in 2009 to GBP359 million in
2010. Insurance premium income also decreased by GBP1,264 million
due to lower gross premium income received as a result of the
withdrawal of certain lower-return products in the second half of
2009, more than offset by insurance claims which were GBP2,170
million lower. Net fee and commission income increased by GBP31
million, or 6 per cent.
Operating expenses reduced by GBP1,189 million, or 17 per cent,
from GBP6,870 million to GBP5,681 million, reflecting integration
savings, the non-recurrence of the goodwill impairment charges
incurred in 2009, reduced staff costs, a GBP316 million pension
curtailment gain, and lower operating lease asset depreciation
charges arising from lower amounts of operating lease assets,
offset by a GBP500 million customer goodwill payments
provision.
Impairment losses decreased by GBP10,199 million, or 48 per
cent, from GBP21,077 million to GBP10,878 million. This largely
reflects the continuing slow recovery of the economy, improved
quality of new business and effective portfolio management and the
benefit of action taken in 2009, offset by significant impairments
incurred in the Group's business in Ireland. On 31 December 2010,
Bank of Scotland (Ireland) Limited (BOSI) was merged into Bank of
Scotland plc (BOS), a subsidiary of HBOS plc, by virtue of a merger
by absorption of a wholly-owned subsidiary pursuant to the
Companies (Cross-Border Mergers) Regulations 2007. As a consequence
of the merger, all of the assets and liabilities of BOSI were
transferred to BOS and BOSI was dissolved without going into
liquidation.
Loans and advances to customers decreased by GBP22,710 million,
or 6 per cent, from GBP404,075 million to GBP381,365 million
reflecting the Group's strategy to reduce assets associated with
non-relationship lending. Excluding loans to fellow group
undertakings, loans and advances reduced by GBP32,654 million, or 8
per cent.
FINANCIAL REVIEW(continued)
Customer deposits decreased by GBP15,619 million, or 7 per cent,
from GBP232,023 million to GBP216,404 million resulting in a slight
increase in the ratio of customer loans to customer deposits from
174 per cent at 31 December 2009 to 176 per cent at 31 December
2010.
Debt securities in issue decreased by GBP18,397 million, or 15
per cent, from GBP119,157 million to GBP100,760 million as funding
requirements decreased in line with reductions in asset
balances.
Shareholders' equity increased by GBP975 million from GBP24,885
million to GBP25,860 million as capital injections and gains on
available-for-sale assets and other reserves offset the Group's
loss attributable to equity shareholders of GBP2,351 million.
At the end of December 2010, the Group's capital ratios
increased with a total capital ratio on a Basel II basis of 14.1
per cent (compared to 11.3 per cent at 31 December 2009) and a tier
1 ratio of 11.4 per cent (compared to 9.1 per cent at 31 December
2009). During 2010, risk-weighted assets decreased by GBP72,032
million to GBP252,613 million. This reflects lower lending volumes
across all banking divisions, a revised assessment of retail
secured lending risk-weighted assets following improvements in the
economic outlook and changes introduced as a result of continuing
the process of integrating regulatory capital approaches which have
impacted particularly on wholesale businesses.
PRINCIPAL RISKS AND UNCERTAINTIES
At present the most significant risks faced by the Group
are:
Credit
Definition: The risk of reductions in earnings and/or value,
through financial loss, as a result of the failure of the party
with whom the Group has contracted to meet its obligations (both on
and off balance sheet).
Features: Arising in the retail, wholesale and wealth and
international operations, reflecting the risks inherent in the
Group's lending activities and to a much lesser extent in the
insurance operations in respect of investment of own funds. Adverse
changes in the credit quality of the Group's UK and/or
international borrowers and counterparties, or in their behaviour,
would be expected to reduce the value of the Group's assets and
materially increase the Group's write-downs and allowances for
impairment losses. Credit risk can be affected by a range of
factors, including, inter alia, increased unemployment, reduced
asset values, increased personal or corporate insolvency levels,
reduced corporate profits, increased interest rates or higher
tenant defaults. Over the last three years, the global banking
crisis and economic downturn has driven cyclically high bad debt
charges. These have arisen from the Group's lending to:
-- Wholesale customers (including those in wealth and
international operations): where companies continue to face
difficult business conditions, resulting in elevated corporate
default levels, illiquid commercial property markets and heightened
impairment charges. The Group has high levels of exposure in both
the UK and internationally, including Ireland, USA, and Australia.
There are particular concentrations to financial institutions and
commercial real estate, including secondary and tertiary
locations.
-- Retail customers: this portfolio will remain strongly linked
to the economic environment, with inter alia house prices falls,
unemployment increases, consumer over-indebtedness and rising
interest rates all likely to impact both secured and unsecured
retail exposures.
The Group follows a through the economic cycle, relationship
based, business model with risk management processes, appetites and
experienced staff in place.
Legal and regulatory
Definition: Legal and regulatory risk is the risk of reductions
in earnings and/ or value, through financial or reputational loss,
from failing to comply with the laws, regulations or codes
applicable.
Features: Legal and regulatory exposure is driven by the
significant volume of current legislation and regulation within the
UK and overseas with which the Group has to comply, along with new
or proposed legislation and regulation which needs to be reviewed,
assessed and embedded into day-to-day operational and business
practices across the Group as a whole. This is particularly the
case in the current market environment, which is witnessing
increased levels of government and regulatory intervention in the
banking sector.
At the time of the acquisition of the Company by Lloyds Banking
Group the Office of Fair Trading (OFT) identified some competition
concerns in the UK personal current accounts and mortgages markets
for SME banking in Scotland. The OFT reiterated that it would keep
these under review and consider whether to refer any banking
markets to the Competition Commission if it identifies any
prevention, restriction or distortion of competition.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
The UK Government appointed an Independent Commission on Banking
to review possible structural measures to reform the banking system
and promote stability and competition. That commission will publish
its final report by the end of September 2011. The Treasury Select
Committee is conducting an examination of competition in retail
banking. It is too early to quantify the potential impact of these
developments on the Group.
From April 2011, lead regulation and supervision of the Group's
activities will begin transitioning from the FSA to the new
Financial Conduct Authority for conduct of business supervision and
the Prudential Regulatory Authority for capital and liquidity
supervision. In addition, from 2011, the European Banking
Authority, the European Insurance and Occupational Pensions
Authority and the European Securities and Markets Authority as new
EU Supervisory Authorities are likely to have greater influence on
regulatory approaches across the EU. These could lead to changes in
how the Group is regulated and supervised on a day-to-day
basis.
Evolving capital and liquidity requirements continue to be a
priority for the Group. In September 2010 and further clarified in
December 2010, the Basel Committee on Banking Supervision put
forward proposals for a reform package which changes the regulatory
capital and liquidity standards, the definition of 'capital',
introduces new definitions for the calculation of counterparty
credit risk and leverage ratios, additional capital buffers and
development of a global liquidity standard. Implementation of these
changes is expected to be phased in between 2012 and 2018.
The Lloyds Banking Group is currently assessing the impacts of
these regulatory developments and will participate in the
consultation and calibration processes to be undertaken by the
various regulatory bodies during 2011. The insurance operations are
progressing their plans to achieve Solvency II compliance. Lloyds
Banking Group continues to work closely with the regulatory
authorities and industry associations to ensure that it is able to
identify and respond to proposed regulatory changes and mitigate
against risks to the Group and its stakeholders.
There is a risk that certain aspects of the Group's business may
be determined by the authorities or the courts as not being
conducted in accordance with applicable laws or regulations, or
with what is fair and reasonable in their opinion. The Group may
also be liable for damages to third parties harmed by the conduct
of its business.
Liquidity and funding
Definition: Liquidity risk is defined as the risk that the Group
has insufficient financial resources to meet its commitments as
they fall due, or can only secure them at excessive cost.
Funding risk is defined as the risk that the Group does not have
sufficiently stable and diverse sources of funding or the funding
structure is inefficient.
Features: Arising in the banking business of the Group through
its retail, wholesale and wealth and international operations
reflecting the risk that the Group is unable to attract and retain
either retail, wholesale or corporate deposits or issue debt
securities. Like all major banks, the Group is dependent on
confidence in the short and longer term wholesale funding markets;
should the Group, due to exceptional circumstances, be unable to
continue to source sustainable funding and provide liquidity when
necessary, the Group's ability to fund its financial obligations
could be impacted.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
The key dependencies for successfully funding the Group's
balance sheet include the continued functioning of the money and
capital markets; successful right sizing of the Lloyds Banking
Group balance sheet; the continuation of HM Treasury and Bank of
England facilities to Lloyds Banking Group in accordance with the
terms agreed; limited further deterioration in the UK's Lloyds
Banking Group's and the Group's credit rating and no significant or
sudden withdrawal of deposits resulting in increased reliance on
wholesale funding markets. A return to the extreme market
conditions of 2008 would place a strain on the Group's ability to
meet its financial commitments.
Additionally, the Lloyds Banking Group has entered into a number
of EU state aid related obligations to achieve reductions in
certain parts of its balance sheet by the end of 2014. The
requirement to meet this deadline may result in the Group having to
provide funding to support these asset reductions and/or disposals
and may also result in a lower price being achieved.
Liquidity and funding risks are managed within a board approved
framework using a range of metrics to monitor the Group's profile
against its stated appetite and potential market conditions.
Market risk
Definition: The risk of reductions in earnings and/or value,
through financial or reputational loss, from unfavourable market
moves; including changes in, and increased volatility of, interest
rates, market-implied inflation rates, credit spreads, foreign
exchange rates, equity, property and commodity prices.
Features: Market risk is managed within a Board approved
framework using a range of metrics to monitor the Group's profile
against its stated appetite and potential market conditions.
The principal market risks are as follows:
-- There is a risk to the Group's banking income arising from
the level of interest rates and the margin of interbank rates over
central bank rates. A further banking risk arises from competitive
pressures on product terms in existing loans and deposits, which
sometimes restrict the Group in its ability to change interest
rates applying to customers in response to changes in interbank and
central bank rates.
-- The main equity market risks arise in the life assurance
companies and staff pension schemes. Credit spread risk arises in
the life assurance companies, pension schemes and banking
businesses. Equity market movements and changes in credit spreads
impact the Group's results.
-- Continuing concerns about the scale of deficits in Ireland
and southern European countries resulted in increased credit
spreads in the areas affected, and fears of contagion affected the
Euro and widened spreads between central bank and interbank
rates.
-- The Group's trading activity is relatively small and is not
considered to be a principal risk.
Insurance risk
Definition: The risk of reductions in earnings and/or value,
through financial or reputational loss, due to fluctuations in the
timing, frequency and severity of insured/underwritten events and
to fluctuations in the timing and amount of claims settlements.
Features: The major sources of insurance risk are within the
insurance businesses and the staff defined benefit pension
schemes.
Insurance risk is inherent in the insurance business and can be
affected by customer behaviour. Insurance risks accepted relate
primarily to mortality, longevity, morbidity, persistency,
expenses, property and unemployment.
The prime insurance risk carried by the Group's defined benefit
pension schemes is related to longevity.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Insurance risks typically, and longevity in particular, may
crystallise gradually over time. Actuarial assumption setting for
financial reporting and liability management requires expert
judgement as to when sufficient evidence of an emerging trend is
sufficient to require an alteration to long-run assumptions.
Customer treatment
Definition: The risk of regulatory censure and/or a reduction in
earnings/value, through financial or reputational loss, from
inappropriate or poor customer treatment.
Features: Customer treatment and how the Group manages its
customer relationships affects all aspects of the Group's
operations and is closely aligned with achievement of the Group's
strategic aim - to create deep long lasting relationships with its
customers. There is currently a high level of scrutiny regarding
the treatment of customers by financial institutions from the
press, politicians and regulatory bodies.
The FSA continues to drive focus on conduct of business
activities and has established a new approach to supervision of
Conduct Risk, replacing the previous 'Treating Customers Fairly'
initiative for retail customers. Under this new regime the FSA has
indicated that it will seek to place greater emphasis on product
governance and contract terms in general, and will seek to
intervene much earlier in the product lifecycle to prevent customer
detriment. The FSA also continues to carry out thematic reviews on
a variety of issues across the industry as a whole, for example
complaints handling. Lloyds Banking Group actively engages with the
regulatory authorities and other stakeholders on these key customer
treatment challenges, which includes for example, PPI.
The Group has policies, procedures and governance arrangements
in place to facilitate the fair treatment of customers. Since the
acquisition of HBOS, the Group has made significant progress in
aligning its approach to Treating Customers Fairly across both
heritages. In addition the Group has aligned its Treating Customers
Fairly governance and management information arrangements, with
customer impact being a key factor in assessing every integration
proposition. The Group regularly reviews its product range to
ensure that it meets regulatory requirements and is competitive in
the market place.
People
Definition: The risk of reductions in earnings and/or value,
through financial or reputational loss, from inappropriate
colleague actions and behaviour, industrial action, legal action in
relation to people, or health and safety issues. Loss can also be
incurred through failure to recruit, retain, train, reward and
incentivise appropriately skilled staff to achieve business
objectives and through failure to take appropriate action as a
result of staff underperformance.
Features: The Group aims to attract, retain, and develop high
calibre talent. Failure to do so presents a significant risk to
delivering the Group's overall strategy and is affected by a range
of factors including:
-- Ongoing regulatory and public interest in remuneration
practices
-- Delivery of the Lloyds Banking Group's integration
commitments, and
-- Uncertainty about EU State Aid requirements and the
Independent Commission on Banking's proposals for banking
reform.
The Group's remuneration arrangements encourage compliant and
appropriate behaviour from colleagues, in line with group policies,
values and short and long term people risk priorities. The Group
has continued to work closely with regulators, and seeks to ensure
full compliance with our obligations. However, there is recognition
that international consensus must be achieved to avoid UK
institutions being significantly disadvantaged in attracting and
retaining the highest calibre talent.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
The Group continues to manage union relationships actively and
the majority of colleagues are now on harmonised Terms and
Conditions. There is strong ongoing commitment to support and
retain colleagues throughout a period of significant integration
and organisational change. Active monitoring of the Colleague
Engagement Survey, allows the Group to understand engagement
levels. These continue to increase and are now exceeding industry
benchmarking for high performing organisations.
The Group is closely engaged with the UK Government and
regulators on reform proposals, and with the EU on disposal
arrangements, to influence and manage colleague uncertainty.
Integration
Definition: The risk that the Group fails to realise the
business growth opportunities, revenue benefits, cost synergies,
operational efficiencies and other benefits anticipated from, or
incurs unanticipated costs and losses associated with, the
acquisition of HBOS plc by Lloyds TSB Group plc.
Features: The integration of the two heritage organisations
continues to be one of the largest integration challenges that has
been seen in the UK financial services industry. While there
continue to be delivery risks to the programme, not least the risk
of new regulatory requirements which may have an effect on
resourcing, the Group is now two years into the integration
programme and has a fully developed and functioning governance
framework to manage these risks. There is a clear understanding of
the phased deliverables to ensure effective delivery through to
2012.
CONSOLIDATED INCOME STATEMENT
2010 2009(1)
Note GBP million GBP million
Interest and similar income 18,061 18,456
Interest and similar expense (9,691) (12,767)
----------- -----------
Net interest income 8,370 5,689
----------- -----------
Fee and commission income 1,480 1,492
Fee and commission expense (964) (1,007)
----------- -----------
Net fee and commission income 516 485
Net trading income 9,095 8,859
Insurance premium income 3,649 4,913
Subvention income - 3,000
Other operating income 2,127 3,959
----------- -----------
Other income 2 15,387 21,216
----------- -----------
Total income 23,757 26,905
Insurance claims (9,151) (11,321)
----------- -----------
Total income, net of insurance claims 14,606 15,584
Operating expenses 3 (5,681) (6,870)
----------- -----------
Trading surplus 8,925 8,714
Impairment 4 (10,878) (21,077)
Share of results of joint ventures and
associates (98) (725)
Loss before tax (2,051) (13,088)
Taxation 5 (264) 2,698
----------- -----------
Loss for the year (2,315) (10,390)
----------- -----------
Profit attributable to non-controlling
interests 36 101
Loss attributable to equity shareholders (2,351) (10,491)
----------- -----------
Loss for the year (2,315) (10,390)
----------- -----------
(1) Restated - see note 1.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
2010 2009(1)
GBP million GBP million
Loss for the year (2,315) (10,390)
Other comprehensive income
Movements in revaluation reserve in respect of
available-for-sale financial assets:
Change in fair value 205 2,588
Income statement transfers in respect of
disposals (52) 3
Income statement transfers in respect of
impairment 641 1,479
Other income statement transfers (62) (147)
Taxation (231) (1,048)
----------- -----------
501 2,875
Movement in cash flow hedging reserve:
----------- -----------
Effective portion of changes in fair value of
hedging derivatives (781) (613)
Net income statement transfers 1,378 895
Taxation (174) (79)
----------- -----------
423 203
Currency translation differences:
----------- -----------
Currency translation differences, before tax (204) 5
Taxation - (4)
----------- -----------
(204) 1
----------- -----------
Other comprehensive income for the year, net
of tax 720 3,079
----------- -----------
Total comprehensive income for the year (1,595) (7,311)
----------- -----------
Total comprehensive income attributable to
non-controlling interests 36 101
Total comprehensive income attributable to equity
shareholders (1,631) (7,412)
----------- -----------
Total comprehensive income for the year (1,595) (7,311)
----------- -----------
(1) Restated - see note 1.
CONSOLIDATED BALANCE SHEET
As at As at As at
31 December 31 December 1 January
2010 2009(1) 2009(1)
Note GBP million GBP million GBP million
Assets
Cash and balances at
central banks 2,375 2,905 2,502
Items in course of
collection from banks 319 534 445
Trading and other
financial assets at fair
value through profit or
loss 6 103,086 101,908 89,691
Derivative financial
instruments 30,000 30,919 51,810
Loans and receivables:
------------ ------------ -----------
Loans and advances to
banks 65,170 98,524 16,796
Loans and advances to
customers 7 381,365 404,075 450,421
Debt securities 23,632 31,468 39,053
------------ ------------ -----------
470,167 534,067 506,270
Available-for-sale
financial assets 13,843 21,591 28,048
Investment properties 3,356 2,417 3,045
Investments in joint
ventures and associates 428 393 1,161
Goodwill 850 850 1,556
Value of in-force
business 3,171 2,986 3,284
Other intangible assets 74 97 117
Tangible fixed assets 3,482 5,103 5,810
Current tax recoverable 64 495 983
Deferred tax assets 4,062 4,724 2,832
Retirement benefit assets 11 152 67 46
Other assets 6,323 10,127 7,208
------------ ------------ -----------
Total assets 641,752 719,183 704,808
------------ ------------ -----------
(1) Restated - see note 1.
CONSOLIDATED BALANCE SHEET
As at As at As at
31 December 31 December 1 January
2010 2009(1) 2009(1)
Note GBP million GBP million GBP million
Equity and liabilities
Liabilities
Deposits from banks 143,137 179,064 97,150
Customer deposits 216,404 232,023 237,449
Items in course of
transmission to banks 251 495 521
Trading liabilities 18,786 27,372 18,851
Derivative financial
instruments 25,075 25,801 38,905
Notes in circulation 1,074 981 957
Debt securities in issue 10 100,760 119,157 188,448
Liabilities arising from
insurance contracts and
participating investment
contracts 40,076 39,234 36,873
Liabilities arising from
non-participating
investment contracts 35,136 30,614 29,057
Unallocated surplus within
insurance businesses 321 772 551
Other liabilities 16,561 17,474 12,151
Retirement benefit
obligations 11 100 467 562
Current tax liabilities 134 29 58
Deferred tax liabilities 47 208 227
Other provisions 806 258 147
Subordinated liabilities 12 16,674 19,078 30,119
------------ ------------ -----------
Total liabilities 615,342 693,027 692,026
Equity
------------ ------------ -----------
Share capital 13 3,763 3,763 1,550
Share premium account 14 18,655 16,056 6,709
Other reserves 14 8,857 8,137 (4,551)
Retained profits 14 (5,415) (3,071) 7,774
------------ ------------ -----------
Shareholders' equity 25,860 24,885 11,482
Non-controlling interests 550 1,271 1,300
------------ ------------ -----------
Total equity 26,410 26,156 12,782
------------ ------------ -----------
Total equity and
liabilities 641,752 719,183 704,808
------------ ------------ -----------
(1) Restated - see note 1.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
----------------------------------------
Share capital Non-
and Other Retained controlling
premium reserves profits Total interests Total
GBP GBP GBP GBP
million million million GBP million GBP million million
Balances as at 1
January 2009:
As previously
stated 8,259 (5,616) 8,839 11,482 1,300 12,782
Prior year
adjustment(1) - 1,065 (1,065) - - -
------- -------- -------- ----------- ----------- --------
Restated 8,259 (4,551) 7,774 11,482 1,300 12,782
Comprehensive
income
(Loss) profit for
the year - - (10,491) (10,491) 101 (10,390)
Other comprehensive
income
------- -------- -------- ----------- ----------- --------
Movements in
revaluation
reserve in respect
of
available-for-sale
financial assets,
net of tax - 2,875 - 2,875 - 2,875
Movements in cash
flow hedging
reserve, net of
tax - 203 - 203 - 203
Currency
translation
differences, net
of tax - 1 - 1 - 1
------- -------- -------- ----------- ----------- --------
Total other
comprehensive
income - 3,079 - 3,079 - 3,079
------- -------- -------- ----------- ----------- --------
Total comprehensive
income - 3,079 (10,491) (7,412) 101 (7,311)
------- -------- -------- ----------- ----------- --------
Transactions with
owners
------- -------- -------- ----------- ----------- --------
Dividends - - (355) (355) (95) (450)
Issue of ordinary
and preference
shares 15,827 9,468 - 25,295 - 25,295
Redemption of
preference shares (4,267) - - (4,267) - (4,267)
Purchase/sale of
treasury shares - - 36 36 - 36
Capital redemption
reserve - 141 (141) - - -
Employee share
option plans:
Value of
employee
services - - 106 106 - 106
Extinguishment of
non-controlling
interests - - - - (35) (35)
------- -------- -------- ----------- ----------- --------
Total transactions
with owners 11,560 9,609 (354) 20,815 (130) 20,685
------- -------- -------- ----------- ----------- --------
Balance at 31
December 2009(1) 19,819 8,137 (3,071) 24,885 1,271 26,156
Comprehensive
income
(Loss) profit for
the year - - (2,351) (2,351) 36 (2,315)
Other comprehensive
income
------- -------- -------- ----------- ----------- --------
Movements in
revaluation
reserve in respect
of
available-for-sale
financial assets,
net of tax - 501 - 501 - 501
Movements in cash
flow hedging
reserve, net of
tax - 423 - 423 - 423
Currency
translation
differences, net
of tax - (204) - (204) - (204)
------- -------- -------- ----------- ----------- --------
Total other
comprehensive
income - 720 - 720 - 720
------- -------- -------- ----------- ----------- --------
Total comprehensive
income - 720 (2,351) (1,631) 36 (1,595)
------- -------- -------- ----------- ----------- --------
Transactions with
owners
------- -------- -------- ----------- ----------- --------
Dividends - - - - (24) (24)
Issue of ordinary
shares 2,599 - - 2,599 - 2,599
Employee share
option plans:
Value of
employee
services - - 7 7 - 7
Extinguishment of
non-controlling
interests - - - - (733) (733)
Total transactions
with owners 2,599 - 7 2,606 (757) 1,849
------- -------- -------- ----------- ----------- --------
Balance as at 31
December 2010 22,418 8,857 (5,415) 25,860 550 26,410
------- -------- -------- ----------- ----------- --------
(1) Restated - see note 1.
CONSOLIDATED CASH FLOW STATEMENT
2010 2009(1)
GBP million GBP million
Loss before tax (2,051) (13,088)
Adjustments for:
Change in operating assets 57,056 (48,706)
Change in operating liabilities (70,686) 21,845
Non-cash and other items 5,624 20,508
Tax received (paid) 486 289
----------- -----------
Net cash (used in) operating activities (9,571) (19,152)
Cash flows from investing activities
----------- -----------
Purchase of available-for-sale financial assets (1,561) (10,944)
Proceeds from sale and maturity of
available-for-sale financial assets 10,293 16,442
Purchase of fixed assets (1,277) (275)
Proceeds from sale of fixed assets 1,021 687
Acquisition of businesses, net of cash acquired (65) (314)
Disposal of businesses, net of cash disposed 2,783 259
----------- -----------
Net cash provided by investing activities 11,194 5,855
Cash flows from financing activities
----------- -----------
Dividends paid to equity shareholders - (355)
Dividends paid to non-controlling interests (24) (95)
Interest paid on subordinated liabilities (809) (1,302)
Share redemption - (4,267)
Proceeds from issue of ordinary shares - 25,295
Proceeds from disposal of own shares - 36
Repayment of subordinated liabilities (331) (8,178)
Repayment of capital to non-controlling
interests - (35)
----------- -----------
Net cash (used in) provided by financing
activities (1,164) 11,099
Effects of exchange rate changes on cash and
cash equivalents - 46
----------- -----------
Change in cash and cash equivalents 459 (2,152)
Cash and cash equivalents at beginning of year 9,084 11,236
----------- -----------
Cash and cash equivalents at end of year 9,543 9,084
----------- -----------
(1) Restated.
Cash and cash equivalents comprise cash and balances at central
banks (excluding mandatory deposits) and amounts due from banks
with a maturity of less than three months.
NOTES
Page
1 Accounting policies, presentation and estimates 15
2 Other income 18
3 Operating expenses 19
4 Impairment 19
5 Taxation 20
Trading and other financial assets at fair value through
6 profit or loss 20
7 Loans and advances to customers 21
8 Allowance for impairment losses on loans and receivables 21
9 Securitisations and covered bonds 22
10 Debt securities in issue 23
11 Retirement benefit obligations 23
12 Subordinated liabilities 23
13 Share capital 24
14 Reserves 24
15 Contingent liabilities and commitments 25
16 Capital ratios 28
17 Related party transactions 29
18 Events after the balance sheet date 30
19 Ultimate parent undertaking 30
20 Other information 30
1. Accounting policies, presentation and estimates
These financial statements as at and for the year to 31 December
2010 have been prepared in accordance with the Listing Rules of the
Financial Services Authority relating to Preliminary Results. They
do not include all of the information that will be included in the
full annual financial statements. The Group's consolidated
financial statements as at and for the year ended 31 December 2010
have been prepared in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union as
applied in accordance with the provisions of the Companies Act
2006. Copies of the 2010 annual report and accounts will be
available from 30 March 2011, will be published on the Lloyds
Banking Group's website and will be available upon request from
Group Secretariat, Lloyds Banking Group plc, 25 Gresham Street,
London EC2V 7HN.
The going concern of the Group is dependent on successfully
funding its balance sheet and maintaining adequate levels of
capital. In order to satisfy themselves that the Group has adequate
resources to continue to operate for the foreseeable future, the
directors have considered a number of key dependencies which are
set out in the Principal risks and uncertainties section under
Liquidity and funding on page 4 and additionally have considered
projections for the Group's capital and funding position. Taking
all of these factors into account, the directors consider that it
is appropriate to continue to adopt the going concern basis in
preparing the Group's financial statements.
Accounting policies
The accounting policies are consistent with those applied by the
Group in its 2009 annual report and accounts except as described
below.
During 2010, the International Financial Reporting
Interpretations Committee clarified the treatment of amounts
previously recognised in equity in respect of assets that were
transferred from the available-for-sale category to the loans and
receivables category. When an impairment loss is recognised in
respect of such transferred financial assets, the unamortised
balance of any available-for-sale reserve that remains in equity
should be transferred to the income statement and recorded as part
of the impairment loss. The Group has changed its accounting policy
to reflect this clarification. Under the Group's previous
accounting policy, when such a transferred financial asset became
impaired, not all of the unamortised amounts previously transferred
to equity were recycled to the income statement and therefore
continued to be accreted over the expected remaining life of the
financial asset. The change in policy is applied retrospectively
and the effect on the Group has been to reduce retained profits and
increase available-for-sale reserves by GBP1,065 million at 1
January 2009; shareholders' equity is unchanged. The effect on the
year ended 31 December 2009 has been to increase the impairment
charge by GBP937 million; increase net interest income by GBP186
million; and increase other income by GBP39 million and increase
available-for-sale reserves by GBP512 million. These financial
statements and capital ratios have been restated accordingly.
Critical accounting estimates and judgements
The preparation of the Group's financial statements requires
management to make judgements, estimates and assumptions in
applying the accounting policies that affect the reported amounts
of assets, liabilities, income and expenses. Due to the inherent
uncertainty in making estimates, actual results reported in future
periods may be based upon 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.
1. Accounting policies, presentation and estimates
(continued)
The nature of the significant judgements made by management in
applying the accounting policies and the key sources of estimation
uncertainty applied by the Group in these financial statements are
the same as those applied by the Group in its 2009 annual report
and accounts.
New accounting pronouncements
The Group has adopted the following new standards and amendments
to standards which became effective for financial years beginning
on or after 1 January 2010. None of these standards or amendments
has had a material impact on these financial statements.
(i) IFRS 3 Business Combinations. This revised standard applies
prospectively to business combinations from 1 January 2010. The
revised standard continues to require the use of the acquisition
method of accounting for business combinations. All payments to
purchase a business are to be recorded at fair value at the
acquisition date, some contingent payments are subsequently
remeasured at fair value through income, goodwill may be calculated
based on the parent's share of net assets or it may include
goodwill related to the non-controlling interest, and all
transaction costs are expensed (other than those in relation to the
issuance of debt instruments or share capital).
(ii) IAS 27 Consolidated and Separate Financial Statements.
Requires the effects of all transactions with non-controlling
interests to be recorded in equity if there is no change in
control; any remaining interest in an investee is remeasured to
fair value in determining the gain or loss recognised in profit or
loss where control over the investee is lost.
(iii) IFRIC 17 Distributions of Non-cash Assets to Owners.
Provides accounting guidance for non-reciprocal distributions of
non-cash assets to owners (and those in which owners may elect to
receive a cash alternative).
(iv) Amendment to IAS 39 Financial Instruments: Recognition and
Measurement - 'Eligible Hedged Items'. Clarifies how the principles
underlying hedge accounting should be applied in particular
situations.
(v) Improvements to IFRSs (issued April 2009). Sets out minor
amendments to IFRS standards as part of the annual improvements
process.
Future accounting developments
The following pronouncements will be relevant to the Group but
were not effective at 31 December 2010 and have not been applied in
preparing these consolidated financial statements. The full impact
of these accounting changes is currently being assessed by the
Group.
(i) Amendment to IAS 32 Financial Instruments: Presentation -
Classification of Rights Issues. Requires rights issues denominated
in a currency other than the functional currency of the issuer to
be classified as equity regardless of the currency in which the
exercise price is denominated. The amendment is effective for
annual periods beginning on or after 1 February 2010.
(ii) Improvements to IFRSs (issued May 2010). Sets out minor
amendments to IFRS standards as part of the annual improvements
process. The effective dates vary on a standard by standard basis
but none are effective any earlier than annual periods beginning on
or after 1 July 2010.
1. Accounting policies, presentation and estimates
(continued)
(iii) IFRIC 19 Extinguishing Financial Liabilities with Equity
Instruments. Clarifies that when an entity renegotiates the terms
of its debt with the result that the liability is extinguished by
the debtor issuing its own equity instruments to the creditor, a
gain or loss is recognised in the income statement representing the
difference between the carrying value of the financial liability
and the fair value of the equity instruments issued; the fair value
of the financial liability is used to measure the gain or loss
where the fair value of the equity instruments cannot be reliably
measured. This interpretation is effective for annual periods
beginning on or after 1 July 2010 and is consistent with the
Group's existing accounting policy.
(iv) Amendment to IFRIC 14 Prepayments of a Minimum Funding
Requirement. Applies when an entity is subject to minimum funding
requirements in respect of its defined benefit plans and makes an
early payment of contributions to cover those requirements and
permits such an entity to treat the benefit of such an early
payment as an asset. The amendment is effective for annual periods
beginning on or after 1 January 2011.
(v) IAS 24 Related Party Disclosures. Simplifies the definition
of a related party and provides a partial exemption from the
disclosure requirements for related party transactions with
government related entities. The revised standard is effective for
annual periods beginning on or after 1 January 2011.
(vi) Amendments to IFRS 7 Financial Instruments Disclosures -
Disclosures - Transfers of Financial Assets. Requires additional
disclosures in respect of risk exposures arising from transferred
financial assets. The amendment is effective for annual periods
beginning on or after 1 July 2011.
(vii) Amendments to IAS 12 Income Taxes - Deferred Tax: Recovery
of Underlying Assets. Introduces a rebuttable presumption that
investment property measured at fair value is recovered entirely
through sale and that deferred tax in respect of such investment
property is recognised on that basis. The amendment is effective
for annual periods beginning on or after 1 January 2012.
(viii) IFRS 9 Financial Instruments. Replaces those parts of IAS
39 Financial Instruments: Recognition and Measurement relating to
the classification, measurement and derecognition of financial
assets and liabilities. Requires financial assets to be classified
into two measurement categories, fair value and amortised cost, on
the basis of the objectives of the entity's business model for
managing its financial assets and the contractual cash flow
characteristics of the instrument. The available-for-sale financial
asset and held-to-maturity investment categories in the existing
IAS 39 will be eliminated. The requirement for financial
liabilities and derecognition are broadly unchanged from IAS
39.
IFRS 9 is the initial stage of the project to replace IAS 39.
Future stages are expected to result in amendments to IFRS 9 to
deal with changes to the impairment of financial assets measured at
amortised cost and hedge accounting. Until all stages of the
replacement project are complete, it is not possible to determine
the overall impact on the financial statements of the replacement
of IAS 39. The effective date of the standard is annual periods
beginning on or after 1 January 2013.
At the date of this report, IFRS 9, the Amendments to IFRS 7 and
the Amendments to IAS 12 are awaiting EU endorsement.
The ultimate parent undertaking, Lloyds Banking Group plc,
produces consolidated accounts which set out the basis of the
segments through which it manages performance and allocates
resources across the consolidated Lloyds Banking Group.
2. Other income
2010 2009(1)
GBPm GBPm
Fee and commission income:
------ -------
Current account fees 343 329
Credit and debit card fees 203 212
Other fees and commissions 934 951
------ -------
1,480 1,492
Fee and commission expense (964) (1,007)
------ -------
Net fee and commission income 516 485
Net trading income 9,095 8,859
Insurance premium income 3,649 4,913
Subvention income(2) - 3,000
------ -------
Gains on capital transactions(3) 359 2,514
Other 1,768 1,445
------ -------
Other operating income 2,127 3,959
Total other income 15,387 21,216
------ -------
(1) Restated - see note 1.
(2) During the year ended 31 December 2009, Bank of Scotland plc received
a payment of GBP3,000 million from its then fellow subsidiary Lloyds
TSB Bank plc, to support its financial and reputational position
and to facilitate the ongoing integration of the group's banking
operations.
(3) During 2010 and 2009, as part of the Lloyds Banking Group's management
of capital, the Group exchanged certain existing subordinated debt
securities for new securities. In 2010 these exchanges resulted
in a gain on extinguishment of the existing liabilities of GBP359
million (2009: GBP2,514 million), being the difference between
the carrying amount of the securities extinguished and the fair
value of the new securities together with related fees and costs.
3. Operating expenses
2010 2009
GBPm GBPm
Administrative expenses:
Staff costs excluding curtailment gain 2,460 3,106
Curtailment gain(1) (316) -
----- -----
Total staff costs 2,144 3,106
Premises and equipment 521 441
Customer goodwill payments provision 500 -
Other expenses 1,586 1,385
----- -----
4,751 4,932
Depreciation and amortisation:
----- -----
Tangible fixed assets 839 1,087
Amortisation of acquired value of in force non-participating
investment contracts 12 53
Intangible assets 27 34
878 1,174
Impairment of tangible fixed assets 52 -
Goodwill impairment - 764
----- -----
Total operating expenses 5,681 6,870
----- -----
(1) Following changes by the Group to the terms of its UK defined
benefit pension schemes, all future increases to pensionable salary
will be capped each year at the lower of: the Retail Prices Index
inflation; each employee's actual percentage increase in pay;
and 2 per cent of pensionable pay. In addition to this, during
the second half of the year there was a change in commutation
factors in certain defined benefit schemes. The combined effect
of these changes is a reduction in the Group's unrecognised actuarial
losses of GBP64 million, resulting in a net curtailment gain of
GBP316 million and a reduction in the balance sheet liability.
4. Impairment
2010 2009(1)
GBPm GBPm
Impairment losses on loans and receivables:
------ -------
Loans and advances to customers 10,786 18,231
Debt securities classified as loans and receivables (19) 1,284
------ -------
Impairment losses on loans and receivables (note
8) 10,767 19,515
Impairment of available-for-sale financial assets 100 1,557
Other credit risk provisions 11 5
------ -------
Total impairment charged to the income statement 10,878 21,077
------ -------
(1) Restated - see note 1.
5. Taxation
A reconciliation of the credit that would result from applying
the standard UK corporation tax rate to the loss before tax to the
tax credit is given below:
2010 2009
GBPm GBPm
Loss before tax (2,051) (13,088)
------- --------
Tax credit thereon at UK corporation tax rate of
28 per cent (2009: 28 per cent) 574 3,665
Factors affecting credit:
UK corporation tax rate change (119) -
Goodwill impairment - (214)
Disallowed and non-taxable items 48 604
Overseas tax rate differences 109 (437)
Gains exempted or covered by capital losses 54 10
Policyholder interests (109) (141)
Adjustments in respect of previous periods 112 (79)
Impairment of financial instruments 36 13
Effect of profit (loss) in joint ventures and
associates (27) (200)
Losses surrendered for no payment (421) -
Tax losses where no deferred tax provided (526) (488)
Other items 5 (35)
------- --------
Tax (charge) credit on loss on ordinary activities (264) 2,698
------- --------
6. Trading and other financial assets at fair value through
profit or loss
2010 2009
GBPm GBPm
Trading assets 23,751 27,611
Other financial assets at fair value through
profit or loss:
------- -------
Loans and advances to banks - 635
Debt securities 18,560 17,328
Equity shares 60,775 56,334
------- -------
79,335 74,297
------- -------
103,086 101,908
------- -------
Included in the above is GBP81,013 million (2009: GBP74,040
million) relating to the insurance business.
7. Loans and advances to customers
2010 2009
GBPm GBPm
Agriculture, forestry and fishing 602 772
Energy and water supply 1,145 1,129
Manufacturing 3,881 6,836
Construction 6,983 11,169
Transport, distribution and hotels 23,232 21,496
Postal and communications 1,032 1,449
Property companies 58,092 65,144
Financial, business and other services 32,029 36,352
Personal:
Mortgages 246,690 252,745
Other 16,974 19,518
Lease financing 4,458 4,990
Hire purchase 1,358 3,486
Due from fellow Group undertakings 10,205 261
Total loans and advances to customers before allowance
for impairment losses 406,681 425,347
Allowance for impairment losses on loans and
advances (note 8) (25,316) (21,272)
-------- --------
Total loans and advances to customers 381,365 404,075
-------- --------
Loans and advances to customers include advances securitised
under the Group's securitisation and covered bonds programmes.
Further details are given in note 9.
8. Allowance for impairment losses on loans and receivables
2010 2009
GBPm GBPm
Balance at 1 January 23,272 11,616
Exchange and other adjustments 411 (10)
Disposal of subsidiary undertakings (149) -
Advances written off (7,376) (7,494)
Recoveries of advances written off in previous
years 57 36
Unwinding of discount (375) (391)
Charge to the income statement (note 4) 10,767 19,515
Balance at 31 December 26,607 23,272
------- -------
In respect of:
Loans and advances to customers 25,316 21,272
Debt securities 1,291 2,000
------- -------
Balance at 31 December 26,607 23,272
------- -------
9. Securitisations and covered bonds
The Group's principal securitisation and covered bond
programmes, together with the balances of the loans subject to
these arrangements and the carrying value of the notes in issue at
31 December, are listed in the table below.
2010 2009
---------------------- ----------------------
Gross Gross
assets Notes in assets Notes in
securitised issue securitised issue
GBPm GBPm GBPm GBPm
Securitisation programmes
------------ -------- ------------ --------
UK residential mortgages 102,801 83,367 104,257 95,228
US residential
mortgage-backed
securities 7,197 7,221 7,897 7,897
Irish residential
mortgages 6,061 6,191 6,522 6,585
Credit card receivables 7,372 3,856 5,155 2,699
Dutch residential
mortgages 4,551 4,415 4,812 4,834
Personal loans 3,012 2,011 3,730 2,613
Commercial loans 667 633 928 976
Motor vehicle loans 926 975 443 470
------------ ------------
132,587 108,669 133,744 121,302
------------ ------------
Less held by the Group (78,686) (87,359)
-------- --------
Total securitisation
programmes (note 10) 29,983 33,943
-------- --------
Covered bond programmes
Residential
mortgage-backed 55,032 44,271 61,537 49,644
Social housing
loan-backed 3,377 2,400 3,407 2,976
------------ -------- ------------ --------
58,409 46,671 64,944 52,620
------------ ------------
Less held by the Group (17,239) (23,060)
-------- --------
Total covered bond
programmes (note 10) 29,432 29,560
-------- --------
Total securitisation and covered bond
programmes 59,415 63,503
-------- --------
Securitisation programmes
Loans and advances to customers and debt securities classified
as loans and receivables include loans securitised under the
Group's securitisation programmes, the majority of which have been
sold by subsidiary companies to bankruptcy remote special purpose
entities (SPEs). As the SPEs are funded by the issue of debt on
terms whereby the majority of the risks and rewards of the
portfolio are retained by the subsidiary, the SPEs are consolidated
fully and all of these loans are retained on the Group's balance
sheet, with the related notes in issue included within debt
securities in issue. In addition to the SPEs detailed above, the
Group sponsors two conduit programmes, Grampian and Landale.
Covered bond programmes
Certain loans and advances to customers have been assigned to
bankruptcy remote limited liability partnerships to provide
security to issues of covered bonds by the Group. The Group retains
all of the risks and rewards associated with these loans and the
partnerships are consolidated fully with the loans retained on the
Group's balance sheet and the related covered bonds in issue
included within debt securities in issue.
Cash deposits of GBP25,139 million (31 December 2009: GBP24,271
million) held by the Group are restricted in use to repayment of
the debt securities issued by the SPEs, covered bonds issued by
Bank of Scotland plc and other legal obligations.
10. Debt securities in issue
2010 2009
GBPm GBPm
Medium-term notes issued 26,963 36,455
Covered bonds (note 9) 29,432 29,560
Certificates of deposit 3,062 6,413
Securitisation notes (note 9) 29,983 33,943
Commercial paper 11,320 12,786
Total debt securities in issue 100,760 119,157
------- -------
11. Retirement benefit obligations
2010 2009
GBPm GBPm
Defined benefit pension schemes
Present value of funded obligations (8,382) (8,276)
Fair value of scheme assets 8,483 7,442
------- -------
Net defined benefit pension scheme surplus (deficit) 101 (834)
Unrecognised actuarial losses 7 488
------- -------
Net recognised defined benefit pension scheme
surplus (deficit) 108 (346)
Other post-retirement benefit schemes (56) (54)
------- -------
Total amounts recognised in the balance sheet 52 (400)
------- -------
Amounts recognised in the balance sheet:
Retirement benefit assets 152 67
Retirement benefit obligations (100) (467)
------- -------
Total amounts recognised in the balance sheet 52 (400)
------- -------
The net recognised amount in respect of retirement benefit
obligations reduced by GBP452 million from a liability of GBP400
million to an asset of GBP52 million reflecting, in particular, the
pension curtailment gain of GBP316 million recognised in the year
(see note 3).
12. Subordinated liabilities
The movement in subordinated liabilities during the year was as
follows:
GBPm
At 1 January 2010 19,078
Repurchases and redemptions during the year (331)
Foreign exchange and other movements (2,073)
-------
At 31 December 2010 16,674
-------
As discussed in note 2, the Group took part in a number of
capital management exercises; these exercises involved the
redemption of certain subordinated liabilities.
13. Share capital
As discussed in note 2, the Group took part in a number of
capital management exercises; these exercises involved the issuance
by HBOS plc of 2,599,504 ordinary shares.
14. Reserves
Other reserves
-----------------------------------
Cash Merger
Share Available- flow and Retained
premium for-sale hedging other Total profits
GBPm GBPm GBPm GBPm GBPm GBPm
---------- ------- -------
At 1 January
2010:
As previously
stated 16,056 (2,972) (840) 10,372 6,560 (1,494)
Prior year
adjustment(1) - 1,577 - - 1,577 (1,577)
-------- ---------- ------- ------- ----- --------
Restated 16,056 (1,395) (840) 10,372 8,137 (3,071)
Issue of ordinary
and preference
shares 2,599 - - - - -
Loss for the
year - - - - - (2,351)
Employee share
option schemes:
Value of
employee
services - - - - - 7
Change in fair
value of
available-for-sale
assets (net of
tax) - 501 - - 501 -
Change in fair
value of hedging
derivatives
(net of tax) - - 423 - 423 -
Transfers to
income statement
(net of tax) - - - - - -
Exchange and
other adjustments - - - (204) (204) -
---------- ------- ------- -----
At 31 December
2010 18,655 (894) (417) 10,168 8,857 (5,415)
-------- ---------- ------- ------- ----- --------
(1) See note 1.
15. Contingent liabilities and commitments
Unarranged overdraft charges
In April 2007, the Office of Fair Trading (OFT) commenced an
investigation into the fairness of personal current accounts and
unarranged overdraft charges. At the same time, it commenced a
market study into wider questions about competition and price
transparency in the provision of personal current accounts.
The Supreme Court of the United Kingdom published its judgment
in respect of the fairness of unarranged overdraft charges on
personal current accounts on 25 November 2009, finding in favour of
the litigant banks. On 22 December 2009, the OFT announced that it
will not continue its investigation into the fairness of these
charges. The Group is working with the regulators to ensure that
outstanding customer complaints are concluded as quickly as
possible and anticipates that most cases in the county courts will
be discontinued. The Group expects that some customers will argue
that despite the test case ruling they are entitled to a refund of
unarranged overdraft charges on the basis of other legal arguments
or challenges. It is not practicable to quantify the claims. The
Group is robustly defending any such complaints or claims and does
not expect any such complaints or claims to have a material adverse
effect on the Group.
The OFT however continued to discuss its concerns in relation to
the personal current account market with the banks, consumer groups
and other organisations under the auspices of its Market Study into
personal current accounts. In October 2009, the OFT published
voluntary initiatives agreed with the industry and consumer groups
to improve transparency of the costs and benefits of personal
current accounts and improvements to the switching process. On 16
March 2010 the OFT published a further update announcing several
further voluntary industry wide initiatives to improve a customer's
ability to control whether they used an unarranged overdraft and to
assist those in financial difficulty. However, in light of the
progress it noted in the unarranged overdraft market since July
2007 and the progress it expects to see over the next two years, it
has decided to take no further action at this time and will review
the unarranged overdraft market again in 2012.
Interchange fees
The European Commission has adopted a formal decision finding
that an infringement of European Commission competition laws has
arisen from arrangements whereby MasterCard issuers charged a
uniform fallback interchange fee in respect of cross-border
transactions in relation to the use of a MasterCard or Maestro
branded payment card. The European Commission has required that the
fee be reduced to zero for relevant cross-border transactions
within the European Economic Area. This decision has been appealed
to the General Court of the European Union (the General Court).
Lloyds TSB Bank plc and Bank of Scotland plc (along with certain
other MasterCard issuers) have successfully applied to intervene in
the appeal in support of MasterCard's position that the
arrangements for the charging of a uniform fallback interchange fee
are compatible with European Commission competition laws.
MasterCard has announced that it has reached an understanding with
the European Commission on a new methodology for calculating intra
European Economic Area multi-lateral interchange fees on an interim
basis pending the outcome of the appeal. Meanwhile, the European
Commission and the UK's OFT are pursuing investigations with a view
to deciding whether arrangements adopted by other payment card
schemes for the levying of uniform fallback interchange fees in
respect of domestic and/or cross-border payment transactions also
infringe European Commission and/or UK competition laws. As part of
this initiative, the OFT will also intervene in the General Court
appeal supporting the European Commission's position and Visa
reached an agreement with the European Commission to reduce the
level of interchange for cross-border debit card transactions to
the interim levels agreed by MasterCard. The ultimate impact of the
investigations on the Group can only be known at the conclusion of
these investigations and any relevant appeal proceedings.
15. Contingent liabilities and commitments (continued)
Payment protection insurance
There has been extensive scrutiny of the Payment Protection
Insurance (PPI) market in recent years.
In October 2010, the UK Competition Commission (Competition
Commission) confirmed its decision to prohibit the active sale of
PPI by a distributor to a customer within 7 days of a sale of
credit. This followed the completion of its formal investigation
into the supply of PPI services (other than store card PPI) to
non-business customers in the UK in January 2009 and a referral of
the proposed prohibition to the Competition Appeal Tribunal.
Following an earlier decision to stop selling single premium PPI
products, the Group ceased to offer PPI products to its customers
in July 2010.
On 1 July 2008, the Financial Ombudsman Service (FOS) referred
concerns regarding the handling of PPI complaints to the Financial
Services Authority (FSA) as an issue of wider implication. On 29
September 2009 and 9 March 2010, the FSA issued consultation papers
on PPI complaints handling. The FSA proposed new guidance on the
fair assessment of a complaint and the calculation of redress and a
new rule requiring firms to reassess historically rejected
complaints. The FSA published its Policy Statement on 10 August
2010, setting out a new set of rules for PPI complaints handling
and redress which had to be implemented by 1 December 2010.
On 8 October 2010, the British Bankers Association (BBA), the
principal trade association for the UK banking and financial
services sector, filed an application for permission to seek
judicial review against the FSA and the FOS. The BBA is seeking an
order quashing the FSA Policy Statement and an order quashing the
decision of the FOS to determine PPI sales in accordance with the
guidance published on its website in November 2008. The Judicial
Review hearing was held in late January 2011 and the judgment
(which may be subject to appeal) is expected shortly.
This legal challenge has affected the implementation of the
Policy Statement, since the challenge has called into question the
standards to be applied when assessing PPI complaints. As a result
of that challenge, a large number of complaints cannot be decided
until the outcome of the legal challenge is clear and
implemented.
The ultimate impact on the Group of the FSA's complaints
handling policy (if implemented in full) and the FOS's most recent
approach to PPI complaints could be material to the Group's
financial position, although the precise effect can only be
assessed once the legal proceedings have been finally determined
and the steps the Group may be required to take identified and
implemented. In addition, it is not practicable to quantify the
potential financial impact of the implementation of the Policy
Statement given the material uncertainties around, for example,
applicable time periods, the extent of application of root cause
analysis, the treatment of evidence and the ultimate emergence
period for complaints, driven in large part by the activities of
the claims management companies, all of which will significantly
affect complaints volumes, uphold rates and redress costs. No
provision has been made in these financial statements to reflect
implementation of the FSA's complaints handling policy in its
current form.
Following concerns expressed by the FSA, it announced in its
statement on 29 September 2009 that several firms had agreed to
carry out reviews of past sales of single premium loan protection
insurance. The Group has agreed in principle that it will undertake
a review in relation to sales of single premium loan protection
insurance made through its branch network since 1 July 2007. The
precise details of the review are still being discussed with the
FSA. The ultimate impact on the Group of any review could be
material but can only be known at the conclusion of these
discussions.
15. Contingent liabilities and commitments (continued)
European Union gender directive
An opt-out clause to the European Union Gender Directive
currently permits insurers to take gender into account as a risk
factor when pricing contracts. In March 2011, the European Court of
Justice is expected to rule on whether this infringes fundamental
European rights for equal treatment. If the European Court of
Justice rules that the opt-out clause does infringe such rights, it
could alter the market and alter prices for insurance products to a
significant extent. As at 31 December 2010, no provision has been
made for the potential costs of rectifying contracts in existence
at 31 December 2010, should this ultimately be required. The
ultimate impact on the Group can only be known following the
European Court of Justice's ruling. However, the Group does not
expect the final outcome of this matter to have a material adverse
effect on its financial position.
Other legal proceedings and regulatory matters
In the course of its business, the Group is engaged in
discussions with the FSA in relation to a range of conduct of
business matters, especially in relation to retail products
including packaged bank accounts, mortgages, structured products
and pensions. The Group is keen to ensure that any regulatory
concerns regarding product governance or contract terms are
understood and addressed. The ultimate impact on the Group of these
discussions can only be known at the conclusion of such
discussions.
In addition, during the ordinary course of business the Group is
subject to other threatened and actual legal proceedings (which may
include class action lawsuits brought on behalf of customers,
shareholders or other third parties), regulatory investigations,
regulatory challenges and enforcement actions, both in the UK and
overseas. All such material matters are periodically reassessed,
with the assistance of external professional advisors 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 to
settle the obligation at the relevant balance sheet date. In some
cases it will not be possible to form a view, either because the
facts are unclear or because further time is needed properly to
assess the merits of the case and no provisions are held against
such matters. However the Group does not currently expect the final
outcome of any such matter to have a material adverse effect on its
financial position.
Contingent liabilities and commitments arising from the banking
business
2010 2009
GBPm GBPm
Contingent liabilities
Acceptances and endorsements 1 5
Other:
------ ------
Other items serving as direct credit substitutes 103 99
Performance bonds and other transaction-related
contingencies 568 1,263
------ ------
671 1,362
------ ------
Total contingent liabilities 672 1,367
------ ------
Commitments
Documentary credits and other short-term trade-related
transactions 2 69
Undrawn formal standby facilities, credit lines
and other commitments to lend:
Less than 1 year original maturity:
------ ------
Mortgage offers made 6,875 6,188
Other commitments 32,144 30,148
------ ------
39,019 36,336
1 year or over original maturity 17,323 17,673
------ ------
Total commitments 56,344 54,078
------ ------
16. Capital ratios
2010 2009(1)
GBPm GBPm
Capital resources
Core tier 1
Ordinary share capital and reserves 25,860 24,885
Regulatory post-retirement benefit adjustments (583) 252
Available-for-sale revaluation reserve 894 1,395
Cash flow hedging reserve 417 840
Other items 280 212
------- -------
26,868 27,584
Less: deductions from core tier 1
Goodwill and other intangible assets (949) (1,040)
Other deductions (132) (1,475)
------- -------
Core tier 1 capital 25,787 25,069
Innovative tier 1 capital instruments
Preferred securities 3,057 4,361
Less: deductions from tier 1
Other deductions (25) -
------- -------
Total tier 1 capital 28,819 29,430
------- -------
Tier 2
Available-for-sale revaluation reserve in respect
of equities 343 22
Undated subordinated debt 731 2,319
Eligible provisions 1,776 1,669
Dated subordinated debt 9,550 10,314
Less: deductions from tier 2
Other deductions (157) (1,475)
------- -------
Total tier 2 capital 12,243 12,849
------- -------
Supervisory deductions
Unconsolidated investments - life (4,344) (4,757)
- other (1,091) (760)
------- -------
Total supervisory deductions (5,435) (5,517)
------- -------
Total capital resources 35,627 36,762
------- -------
Risk-weighted assets 252,613 324,645
Core tier 1 ratio 10.2% 7.7%
Tier 1 capital ratio 11.4% 9.1%
Total capital ratio 14.1% 11.3%
(1) Restated to reflect a prior year adjustment to available-for-sale
revaluation reserve (see note 1).
17. Related party transactions
The Group transacts with other Lloyds Banking Group companies
during the ordinary course of business. Details of transactions and
outstanding balances as at and for the year ended 31 December 2010
are set out below:
2010
GBPm
Balances
Derivative financial instruments 1,437
Loans and advances to banks 55,053
Loans and advances to customers 10,205
Other assets 4,241
Deposits from banks 131,133
Customer deposits 16,489
Derivative financial instruments 1,853
Other liabilities 5,831
Subordinated liabilities 312
HM Treasury
In January 2009, HM Treasury became a related party of Lloyds
Banking Group plc, the Company's ultimate parent company, following
its subscription for ordinary shares issued under a placing and
open offer. As at 31 December 2010, HM Treasury held a 41 per cent
interest (December 2009: 43 per cent) in the Lloyds Banking Group
plc's ordinary share capital and consequently HM Treasury remained
a related party of the Company and its subsidiaries throughout
2010.
Capital transactions
During 2010 there were no further subscriptions by HM Treasury
for the Lloyds Banking Group plc's ordinary or preference share
capital, with the decline in the percentage of ordinary shares held
by HM Treasury reflecting the issuance by Lloyds Banking Group plc
of ordinary shares.
Lending commitments
On 23 March 2010, Lloyds Banking Group plc entered into a deed
poll in favour of HM Treasury, the Department for Business,
Innovation and Skills and the Departments for Communities and Local
Government confirming its lending commitments for the 12 month
period commencing 1 March 2010. Lloyds Banking Group plc agreed,
subject to, amongst other things, sufficient customer demand, to
provide gross new lending to UK businesses of GBP44,000 million and
to adjust the undertakings (but not the level of lending agreed in
2009) given in connection with lending to homeowners for the 12
month period. This additional lending is expressed to be subject to
the Group's prevailing commercial terms and conditions (including
pricing and risk assessment) and, in relation to mortgage lending,
the Group's standard credit and other acceptance criteria.
Credit Guarantee Scheme
HM Treasury launched the Credit Guarantee Scheme in October 2008
as part of a range of measures announced by the UK Government
intended to ease the turbulence in the UK banking system. It
charges a commercial fee for the guarantee of new short and
medium-term debt issuance. The fee payable to HM Treasury on
guaranteed issues is based on a per annum rate of 50 basis points
plus the median five-year credit default swap spread. At 31
December 2010, the Group had GBP6,030 million (2009: GBP8,725
million) of debt issued under the Credit Guarantee Scheme. During
2010, the Group redeemed GBP2,695 million of bonds. The Group's
income statement includes fees of GBP89 million (2009: GBP236
million) payable to HM Treasury in respect of guaranteed funding.
There were no other material transactions between the Group and HM
Treasury during 2010 that were not made in the ordinary course of
business or that were unusual in their nature or conditions.
18. Events after the balance sheet date
The Lloyds Banking Group has been in discussion with the FSA
regarding the application of an interest variation clause in
certain Bank of Scotland plc variable rate mortgage contracts where
the wording in the offer documents received by certain customers
had the potential to cause confusion. The relevant mortgages were
written between 2004 and 2007 by Bank of Scotland plc under the
'Halifax' brand. In February 2011, the Group reached agreement with
the FSA in relation to initiating a customer review and contact
programme and making goodwill payments to affected customers. In
order to make these goodwill payments, Bank of Scotland plc has
applied for a Voluntary Variation of Permission to carry out the
customer review and contact programme to bring it within section
404F(7) of FSMA 2000. The Group has made a provision of GBP500
million in relation to this programme.
19. Ultimate parent undertaking
HBOS plc's ultimate parent undertaking and controlling party is
Lloyds Banking Group plc which is incorporated in Scotland. Lloyds
Banking Group plc will produce consolidated accounts for the year
ended 31 December 2010, copies may be obtained from the Group
Secretariat, Lloyds Banking Group, 25 Gresham Street, London EC2V
7HN or downloaded via www.lloydsbankinggroup.com.
20. Other information
The financial information included in this news release does not
constitute statutory accounts within the meaning of section 434 of
the Companies Act 2006. Statutory accounts for the year ended 31
December 2010 were approved by the directors on 24 February 2011
and will be delivered to the Registrar of Companies following
publication on 30 March. The auditors' report on these accounts was
unqualified and did not include a statement under sections 498(2)
(accounting records or returns inadequate or accounts not agreeing
with records and returns) or 498(3) (failure to obtain necessary
information and explanations) of the Companies Act 2006.
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Kate O'Neill
Managing Director, Investor Relations
020 7356 3520
email: kate.o'neill@ltsb-finance.co.uk
Michael Oliver
Director of Investor Relations
020 7356 2167
email: michael.oliver@ltsb-finance.co.uk
Charles King
Director of Investor Relations
020 7356 3537
email: charles.king@ltsb-finance.co.uk
MEDIA
Brigitte Trafford
Group Communications Director
020 7356 1849
email: brigitte.trafford@lloydsbanking.com
Mark Elliott
Head of Media, City
020 7356 1164
email: mark.elliott2@lloydsbanking.com
Registered office: HBOS plc, The Mound, Edinburgh EH1 1YZ
Registered in Scotland no. SC218813
This information is provided by RNS
The company news service from the London Stock Exchange
END
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