TIDM68FF
RNS Number : 5429Z
HBOS PLC
16 March 2012
16 March 2012
HBOS plc
Annual Report and Accounts for the year ending 31 December
2011
In accordance with Listing Rule 9.6.1, HBOS plc has submitted
today the above document to the National Storage Mechanism.
The document will shortly be available for inspection at
www.hemscott.com/nsm.do
A copy of the document is available on the Lloyds Banking Group
plc website www.lloydsbankinggroup.com
This announcement also contains additional information for the
purposes of compliance with the Disclosure and Transparency Rules,
including principal risk factors, details of related party
transactions and a responsibility statement. This information is
extracted, in full unedited text, from the HBOS plc Annual Report
2011 (the 'Annual Report'). References to page numbers and notes to
the accounts made in the following Appendices, refer to page
numbers and notes to the accounts in the Annual Report.
-END-
For further information:
Investor Relations
Douglas Radcliffe +44 (0)20 7356 1571
Head of Operations & Reporting, Investor Relations Email:
douglas.radcliffe@ltsb-finance.co.uk
Corporate Affairs
Sarah Swailes +44 (0)20 7661 4639
Media Relations Manager, Group Communications
Email: sarah.swailes@lloydstsb.co.uk
FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with
respect to the business, strategy and plans of the Lloyds Banking
Group, its current goals and expectations relating to its future
financial condition and performance. Statements that are not
historical facts, including statements about the Group or the
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 Group's actual
future business, strategy, plans and/or results may differ
materially from those expressed or implied in these forward looking
statements as a result of a variety of risks, uncertainties and
other factors, including, without limitation, UK domestic and
global economic and business conditions; the ability to derive cost
savings and other benefits including, without limitation, as a
result of the integration of HBOS and the Group's simplification
programme; the ability to access sufficient funding to meet the
Group's liquidity needs; changes to the Group's credit ratings;
risks concerning borrower or counterparty credit quality;
instability in the global financial markets including Eurozone
instability; changing demographic and market related trends;
changes in customer preferences; changes to regulation, accounting
standards or taxation, including changes to regulatory capital or
liquidity requirements; the policies and actions of governmental or
regulatory authorities in the UK, the European Union, or
jurisdictions outside the UK, including other European countries
and the US; the ability to attract and retain senior management and
other employees; requirements or limitations imposed on the Group
as a result of HM Treasury's investment in the Group; the ability
to complete satisfactorily the disposal of certain assets as part
of the 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 the latest Annual Report on Form 20-F filed with the US
Securities and Exchange Commission for a discussion of certain
factors together with examples of forward looking statements. The
forward looking statements contained in this announcement are made
as at the date of this announcement, and the Group undertakes no
obligation to update any of its forward looking statements.
Appendix 1 - Risk Factors
The principal risks and uncertainties relating to HBOS plc are
set out on pages 8 to 14 of the Annual Report. The following is
extracted in full and unedited form from the Annual Report.
At present the significant risks faced by the Group are:
LIQUIDITY AND FUNDING
Risk Definition
Liquidity risk is defined as the risk that the Group has
insufficient financial resources to meet its commitments as they
fall due, or can only secure them at excessive cost.
Funding risk is defined as the risk that the Group does not have
sufficiently stable and diverse sources of funding or the funding
structure is inefficient.
Principal Risks
Liquidity and funding continues to remain a key area of focus
for the Group and the industry as a whole. Like all major banks,
the Group is dependent on confidence in the short and long term
wholesale funding markets. Should the Group, due to exceptional
circumstances, be unable to continue to source sustainable funding,
its ability to fund its financial obligations could be
impacted.
The combination of right-sizing the Lloyds Banking Group balance
sheet and continued development of the retail deposit base has seen
the Lloyds Banking Group's wholesale funding requirement reduce in
the past year. The progress Lloyds Banking Group has made to date
in diversifying its funding sources has further strengthened its
funding base.
During the first half of 2011 the Lloyds Banking Group
accelerated term funding initiatives and the run down of certain
non-core asset portfolios allowing a further reduction in total
government and central bank facilities. Lloyds Banking Group repaid
its remaining drawings under the Bank of England SLS scheme in full
during 2011. Outstandings under the Credit Guarantee Scheme reduced
in line with their contractual maturities, with GBP23.5 billion
remaining at end December. The outstanding amount matures during
2012.
The second half of 2011 has seen more difficult funding markets
as investor confidence was impacted by concerns over the US debt
ceiling and subsequent downgrade. This was followed by increased
fears over Eurozone sovereign debt levels, downgrades and possible
defaults and concerns are ongoing over the potential downside
effects from financial market volatility. Despite this Lloyds
Banking Group continued to fund adequately, maintaining a broadly
stable stock of primary liquid assets during the year and meeting
its regulatory liquidity ratio targets at all times.
Liquidity is managed at the aggregate Lloyds Banking Group
level, with active monitoring at both business unit and Group
level. Monitoring and control processes are in place to address
both internal and regulatory requirements. In a stress situation
the level of monitoring and reporting is increased commensurate
with the nature of the stress event.
The Lloyds Banking Group carries out stress testing of its
liquidity position against a range of scenarios, including those
prescribed by the FSA. Lloyds Banking Group's liquidity risk
appetite is also calibrated against a number of stressed liquidity
metrics.
Lloyds Banking Group's stress testing framework considers these
factors, including the impact of a range of economic and liquidity
stress scenarios over both short and longer term horizons. Internal
stress testing results at 31 December 2011 show that Lloyds Banking
Group has liquidity resources representing more than 130 per cent
of modelled outflows from all wholesale funding sources, corporate
deposits and rating dependent contracts under the Group's severe
liquidity stress scenario. In 2011, Lloyds Banking Group has
maintained its liquidity levels in excess of the ILG regulatory
minimum (FSA's Individual Liquidity Adequacy Standards) at all
times. Funding projections show Lloyds Banking Group will achieve
the proposed Basel 3 liquidity and funding requirements in advance
of expected implementation dates.
Lloyds Banking Group's stress testing shows that further credit
rating downgrades may reduce investor appetite for some of the
Group's liability classes and therefore funding capacity. In the
fourth quarter of 2011, Lloyds Banking Group experienced downgrades
in its long-term rating of between one and two notches from three
of the major rating agencies. The impact that Lloyds Banking Group
experienced following the downgrades were consistent with the
Group's modelled outcomes based on the stress testing framework.
Lloyds Banking Group has materially reduced its wholesale funding
in recent years and operates a well diversified funding platform
which together lessen the impact of stress events.
Lloyds Banking Group's borrowing costs and issuance in the
capital markets are dependent on a number of factors, and increased
cost or reduction of capacity could materially adversely affect the
Group's results of operations, financial condition and prospects.
In particular, reduction in the credit rating of Lloyds Banking
Group or deterioration in the capital markets' perception of the
Group's financial resilience, could significantly increase its
borrowing costs and limit its issuance capacity in the capital
markets. The impact on the Lloyds Banking Group's funding cost is
subject to a number of assumptions and uncertainties and is
therefore impossible to quantify precisely.
The downgrades that Lloyds Banking Group experienced in the
fourth quarter of 2011, did not significantly change its borrowing
costs, reduce its issuance capacity or require significant
collateral posting. Lloyds Banking Group notes the recent
announcements from Moody's placing the ratings of 114 European
financial institutions, including Lloyds Banking Group, on review
for downgrade. Even in the case of a simultaneous two notch
downgrade from all rating agencies, the Group would remain
investment grade.
At 31 December, Lloyds Banking Group had GBP202 billion of
highly liquid unencumbered assets in its liquidity portfolio which
are available to meet cash and collateral outflows. This liquidity
is available for deployment at immediate notice, subject to
complying with regulatory requirements, and is a key component of
the Group's liquidity management process.
Mitigating Actions
The Group takes many mitigating actions with respect to this
principal risk, key examples include:
Lloyds Banking Group has maintained its liquidity levels in
excess of the ILG regulatory minimum (FSA's Individual Liquidity
Adequacy Standards) at all times. Funding projections show that
Lloyds Banking Group will achieve the proposed Basel III liquidity
and funding metrics in advance of expected implementation dates.
The Liquidity Coverage Ratio (LCR) is due to be implemented on 1
January 2015 and the Net Stable Funding Ratio (NSFR) has a 1
January 2018 implementation date. The European Commission released
its proposal for implementing Basel III into Europe (CRDIV) in July
2011 and we note that discussions over the final detail are
ongoing.
The Group carries out monthly stress testing of its liquidity
position against a range of scenarios, including those prescribed
by the FSA. The Group's liquidity risk appetite is also calibrated
against a number of stressed liquidity metrics.
The key dependencies on successfully funding the Lloyds Banking
Group's balance sheet include the continued functioning of the
money and capital markets; successful right-sizing of Lloyds
Banking Group's balance sheet; the repayment of the government
Credit Guarantee Scheme facilities in accordance with the agreed
terms; no more than limited further deterioration in the UK's and
Lloyds Banking Group's credit rating; and no significant or sudden
withdrawal of deposits resulting in increased reliance on money
markets. Additionally, Lloyds Banking Group has entered into a
number of EU state aid related obligations to achieve reductions in
certain parts of its balance sheet by the end of 2014. These are
assumed within Lloyds Banking Group's funding plan. The requirement
to meet this deadline may result in the Lloyds Banking Group having
to provide funding to support these asset reductions and/or
disposals and may also result in a lower price being achieved.
CREDIT
Risk Definition
The risk of reductions in earnings and/or value, through
financial loss, as a result of the failure of the party with whom
the Group has contracted to meet its obligations (both on and off
balance sheet).
Principal Risks
Arising in the retail, wholesale, commercial and wealth and
international operations, reflecting the risks inherent in the
Group's lending activities and, to a much lesser extent in the
Insurance operations in respect of investment of own funds. Adverse
changes in the credit quality of the Group's UK and/or
international borrowers and counterparties, or in their behaviour,
would be expected to reduce the value of the Group's assets and
materially increase the Group's write-downs and allowances for
impairment losses. Credit risk can be affected by a range of
factors, including, inter alia, increased unemployment, reduced
asset values, lower consumer spending, increased personal or
corporate insolvency levels, reduced corporate profits, increased
interest rates or higher tenant defaults. Over the last four years,
the global banking crisis and economic downturn has driven
cyclically high bad debt charges. These have arisen from the
Group's lending to:
- Wholesale customers (including those in wealth and
international): where companies continue to face difficult business
conditions. Impairment levels have reduced materially since the
peak of the economic downturn and more aggressive risk appetite in
the HBOS businesses when elevated corporate default levels and
illiquid commercial property markets resulted in heightened
impairment charges. The reduction in public sector spending is
deepening and exports are failing to offset domestic weakness. The
possibility of further economic weakness remains. Financial market
instability represents an additional downside risk. The Group has
exposure in both the UK and internationally, including Europe,
Ireland, USA and Australia, particularly in commercial real estate
lending, where we have a high level of lending secured on secondary
and tertiary assets.
- Retail customers: This portfolio will remain strongly linked
to the economic environment, with inter alia house price falls,
unemployment increases, consumer over-indebtedness and rising
interest rates possible impacts to the secured and unsecured retail
exposures.
Mitigating Actions
The Group takes many mitigating actions with respect to this
principal risk, key examples being that the Group follows a
relationship based business model with risk management processes,
appetites and experienced staff in place.
Regulatory
Risk Definition
Regulatory risk is the risk of reductions in earnings and/ or
value, through financial or reputational loss, from failing to
comply with the applicable laws, regulations or codes.
Principal Risks
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. This is particularly the case in the current market
environment, which continues to witness high levels of government
and regulatory intervention in the banking sector.
Lloyds Banking Group faces increased political and regulatory
scrutiny as a result of the Group's perceived size and systemic
importance following the acquisition of HBOS Group.
Independent Commission on Banking
The Government appointed an independent Commission on Banking
(ICB) to review possible measures to reform the banking system and
promote stability and competition. The ICB published its final
report on September 2011 putting forward recommendations to require
ring-fencing of the retail activities of banks from their
investment banking activities and additional capital requirements
beyond those required under current drafts of the Capital
Requirements Directive IV. The Report also makes recommendations in
relation to the competitiveness of the UK banking market, including
enhancing the competition remit of the new Financial Conduct
Authority (FCA), implementing a new industry-wide switching
solution by September 2013, and improving transparency. The ICB,
which following the final report was disbanded, had the authority
only to make recommendations, which the Government could choose to
accept or reject.
The ICB specifically recommended in relation to Lloyds Banking
Group's EU mandated branch disposal (Project Verde), that, to
create a strong challenger in the UK banking market, the entity
which results from the divestiture should have a share of the
personal current account (PCA) market of at least 6 per cent
(although this does not need to arise solely from the current
accounts acquired from the Company) and a funding position at least
as strong as its peers. The ICB did not specify a definitive
timeframe for the divested entity to achieve a 6 per cent market
share of PCAs but recommended that a market investigation should be
carefully considered by competition authorities if 'a strong and
effective challenger' has not resulted from Lloyd Banking Group's
divestiture by 2015. The ICB did not recommend explicitly that
Lloyds Banking Group should increase the size of the Project Verde
disposal agreed with the European Commission but recommended that
the Government prioritise the emergence of a strong new challenger
over reducing market concentration through a 'substantially
enhanced' divestiture by Lloyds Banking Group.
The Government published its response to the ICB recommendations
on 19 December 2011. The Government supported the recommendation
that an entity with a larger share of the PCA market than the 4.6
per cent originally proposed might produce a more effective
competitor. In relation to Lloyds Banking Group's announcement that
it was to pursue exclusive negotiations with the Co-operative
Group, the Government commented that such a transaction would
deliver a significant enhancement of the PCA market share, with the
share divested by Lloyds Banking Group combining with the
Co-operative Group's existing share to create a competitor with
approximately 7-8 per cent. The Government also stated that the
execution of the divestment is a commercial matter, and it has no
intention of using its shareholding to deliver an enhancement.
New Regulatory Regime
On 27 January 2012, the Government published the Financial
Services Bill. The proposed new UK regulatory architecture will see
the transition of regulatory and supervisory powers from the FSA to
the new Financial Conduct Authority (FCA) and Prudential Regulatory
Authority (PRA). The PRA will be responsible for supervising banks,
building societies and other large firms. The FCA will focus on
consumer protection and market regulation. The Bill is also
proposing new responsibilities and powers for the FCA. The most
noteworthy are the proposed greater powers for the FCA in relation
to competition and the proposal to widen its scope to include
consumer credit. The Bill is expected to take effect in early
2013.
In April 2011, the FSA commenced an internal reorganisation as a
first step in a process towards the formal transition of regulatory
and supervisory powers from the FSA to the new FCA and PRA in 2013.
Until this time the responsibility for regulating and supervising
the activities of the subsidiaries will remain with the FSA. On 2
April the FSA will introduce a new 'twin peaks' model and the
intention is to move the FSA as close as possible to the new style
of regulation outlined in the Bill. There will be two independent
groups of supervisors for banks, insurers and major investment
firms covering prudential and conduct. (All other firms (those not
dual regulated) will be solely supervised by the conduct
supervisors).
In addition, the European Banking Authority, the European
insurance and Occupational Pensions Authority and the European
securities and Markets Authority as new EU Supervisory Authorities
are likely to have greater influence on regulatory matters across
the EU.
Capital and Liquidity
Evolving capital and liquidity requirements continue to be a
priority for Lloyds Banking Group. The Basel Committee on Banking
Supervision has put forward proposals for a reform package which
changes the regulatory capital and liquidity standards, the
definition of 'capital', introduces new definitions for the
calculation of counterparty credit risk and leverage ratios,
additional capital buffers and development of a global liquidity
standard. Implementation of these changes is expected to be phased
in between 2013 and 2018.
Anti Bribery
The Bribery Act 2010 came fully into force on 1 July 2011. It
enhances previous laws on bribery and is supported by some detailed
guidance issued by the Ministry of Justice on the steps a business
needs to take to embed 'adequate procedures' to prevent bribery. A
company convicted of failing to have 'adequate procedures' to
prevent bribery could receive an unlimited fine. The Group operates
a group-wide Anti-Bribery Policy, applicable to all of its
businesses, operations and employees, which incorporates the
requirements of the UK Bribery Act 2010.
Sanctions
The Group takes very seriously its responsibilities for
complying with legal and regulatory sanctions requirements in all
the jurisdictions in which it operates. In order to assist
adherence to relevant economic sanctions legislation, the Group has
enhanced its internal compliance processes including those
associated with customer and payment screening. The Group has
continued the delivery of a programme of staff training regarding
policies and procedures for detecting and preventing economic
sanctions non-compliance.
US Regulation
Significant regulatory initiatives from the US impacting the
Group include the Dodd-Frank Act (which imposes specific
requirements for systemic risk oversight, securities market conduct
and oversight, bank capital standards, arrangements for the
liquidation of failing systemically significant financial
institutions and restrictions to the ability of banks to engage in
proprietary trading activities known as the 'Volcker Rule'). The
Act will have both business and operational implications for the
Group within and beyond the US. In addition the Foreign Account Tax
Compliance Act (FATCA) requires non-US financial institutions to
enter into disclosure agreements with the US Treasury and all
non-financial non-US entities to report and or certify their
ownership of US assets in foreign accounts or be subject to 30 per
cent withholding tax.
European Regulation
At a European level, the pace of regulatory reform has increased
with a number of new directives or changes to existing directives
planned in the next 12 months including a revised Markets in
Financial Instruments Directive, Transparency Directive, Insurance
Mediation Directive and a Fifth Undertakings in Collective
Investments in Transferable Securities Directive as well as a
proposed Directive regulating Packaged Retail Investment
Products.
Mitigating Actions
The Group takes many mitigating actions with respect to this
principal risk, key examples include:
Independent Commission on Banking
Lloyds Banking Group continues to play a constructive role in
the debate with the government and other stakeholders on all issues
under consideration in relation to the ICB's recommendations.
New Regulatory Regime
Lloyds Banking Group continues to work closely with the
regulatory authorities and industry associations to ensure that it
is able to identify and respond to regulatory changes and mitigate
against risks to the Group and its stakeholders.
Capital and Liquidity
Lloyds Banking Group is continuously assessing the impacts of
regulatory developments which could have a material effect on the
Group and is progressing its plans to implement regulatory changes
and directives through change management programmes.
Anti Bribery
The Group has no appetite for bribery and explicitly prohibits
the payment, offer, acceptance or request of a bribe, including
'facilitation payments'.
The Group has enhanced its internal compliance processes
including those associated with payment screening, colleague
training and hospitality.
US and European Regulation
Lloyds Banking Group is continuously assessing the impacts of
regulatory developments which could have a material effect on the
Group and is progressing with its plans to implement regulatory
changes and directives through change management programmes. The
Group is also continuing to progress its plans to achieve Solvency
II compliance.
MARKET RISK
Risk Definition
The risk of reductions in earnings and/or value, through
financial or reputational loss, from unfavourable market moves;
including changes in, and increased volatility of, interest rates,
market-implied inflation rates, credit spreads, foreign exchange
rates, equity, property and commodity prices.
Principal Risks
The Group has a number of Market risks, the principal ones
being:
- There is a risk to the Group's banking income arising from the
level of interest rates and the margin of interbank rates over
central bank rates. A further banking risk arises from competitive
pressures on product terms in existing loans and deposits, which
sometimes restrict the Group in its ability to change interest
rates applying to customers in response to changes in interbank and
central bank rates.
- Equity market movements and changes in credit spreads impact
the Group's results.
- The main equity market risks arise in the life assurance
companies and staff pension schemes.
- Credit spread risk arises in the life assurance companies,
pension schemes and banking businesses.
Continuing concerns about the fiscal position in Eurozone
countries resulted in increased credit spreads in the areas
affected, and fears of contagion affected the Euro and widened
spreads between central bank and interbank rates.
Mitigating Actions
The Group takes many mitigating actions with respect to this
principal risk, key examples include:
Market risk is managed within a Lloyds Banking Board approved
framework using a range of metrics to monitor against stated
appetite and potential market conditions.
Market Risk is reported regularly to appropriate committees.
The Group's trading activity is small relative to our peers and
is not considered to be a principal risk.
CUSTOMER TREATMENT
Risk Definition
The risk of regulatory censure and/or a reduction in
earnings/value, through financial or reputational loss, from
inappropriate or poor customer treatment.
Principal Risks
Customer treatment and how the Group manages its customer
relationships affect all aspects of the Group's operations and are
closely aligned with achievement of Lloyds Banking Group's
strategic vision to be the best bank for customers. As a provider
of a wide range of financial services products and numerous
distribution channels to an extremely broad and varied customer
base, we face significant conduct risks, such as: products or
services not meeting the needs of our customers; sales processes
which could result in selling products to customers which do not
meet their needs; failure to deal with a customer's complaint
effectively where we have got it wrong and not met customer
expectations.
There remains a high level of scrutiny regarding the treatment
of customers by financial institutions from regulatory bodies, the
press and politicians. The FSA in particular continues to drive
focus on conduct of business activities through its supervision
activity.
There is a risk that certain aspects of the Group's business may
be determined by regulatory bodies or the courts as not being
conducted in accordance with applicable laws or regulations, or
fair and reasonable in their opinion. The Group may also be liable
for damages to third parties harmed by the conduct of its
business.
Mitigating Actions
The Group takes many mitigating actions with respect to this
principal risk, key examples include:
Lloyds Banking Group's Conduct Risk Strategy and supporting
framework have been designed to support our vision and strategic
aim to put the customer at the heart of everything we do. Lloyds
Banking Group have developed and implemented a framework to enable
us to deliver for our customers, which is supported by Policies and
Standards in key areas, including product governance, sales,
responsible lending, customers in financial difficulties, claims
and complaints handling.
Lloyds Banking Group actively engages with regulatory bodies and
other stakeholders in developing its understanding of current
customer treatment concerns.
PEOPLE
Risk Definition
The risk of reductions in earnings or value through financial or
reputational loss arising from ineffectively leading colleagues
responsibly and proficiently, managing people resource, supporting
and developing colleague talent, or meeting regulatory obligations
related to our people.
Principal Risks
The quality and effectiveness of our people are fundamental to
its success. Consequently, the Group's management of material
people risks is critical to deliver against its long-term strategic
objectives. Over the next year the Group's ability to manage people
risks successfully may be affected by the following key
drivers:
- Lloyds Banking Group's continuing structural consolidation and
the sale of part of our branch network under Project Verde may
result in disruption to our ability to lead and manage our people
effectively
- The continually changing, more rigorous regulatory environment
may impact people strategy, remuneration practices and
retention
- Macroeconomic conditions and negative media attention on the
banking sector may impact retention, colleague sentiment and
engagement.
Mitigating Actions
The Group takes many mitigating actions with respect to this
principal risk, key examples include:
- Strong focus on leadership and colleague engagement, through
delivery of strategies to attract, retain and develop high calibre
staff together with implementation of rigorous succession
planning
- A continued focus on people risk management across the
Group
- Ensuring compliance with regulatory requirements related to
Approved Persons and the FSA Remuneration Code, and embedding
compliant and appropriate colleague behaviours in line with Group
policies, values and people risk priorities
- Strengthening risk management culture and capability across
the Group, together with further embedding of risk objectives in
the colleague performance and reward process.
INSURANCE RISK
Risk Definition
The risk of reductions in earnings and/or value, through
financial or reputational loss, due to fluctuations in the timing,
frequency and severity of insured/underwritten events and to
fluctuations in the timing and amount of claims settlements.
Principal Risks
The major sources of insurance risk are within the insurance
businesses and the Group's defined benefit staff pension schemes
('pension schemes'). Insurance risk is inherent in the insurance
business and can be affected by customer behaviour. Insurance risks
accepted relate primarily to mortality, longevity, morbidity,
persistency, expenses, property and unemployment. The primary
insurance risk of the Group's pension schemes is related to
longevity.
Insurance risk within the insurance businesses has the potential
to significantly impact the earnings and capital position of the
Insurance Division of the Group. For the Group's pension schemes,
insurance risk could significantly increase the cost of pension
provision and impact the balance sheet of the Group.
Mitigating Actions
The Group takes many mitigating actions with respect to this
principal risk, key examples include:
Insurance risk is reported regularly to appropriate committees
and boards.
Actuarial assumptions are reviewed in line with experience and
in-depth reviews are conducted regularly. Longevity assumptions for
the Group's pension schemes are reviewed annually together with
other IFRS assumptions. Expert judgement is required.
Insurance risk is controlled by robust processes including
underwriting, pricing-to-risk, claims management, reinsurance and
other risk mitigation techniques.
State funding and state aid
HM Treasury currently holds approximately 40.2 per cent of
Lloyds Banking Group plc's ordinary share capital. United Kingdom
Financial Investments Limited (UKFI) as manager of HM Treasury's
shareholding continues to operate in line with the framework
document between UKFI and HM Treasury managing the investment in
Lloyds Banking Group plc on a commercial basis without interference
in day-to-day management decisions. There is a risk that a change
in Government priorities could result in the framework currently in
place being replaced leading to interference in the operations of
the Group, although there have been no indications that the
Government intends to change the existing operating
arrangements.
Lloyds Banking Group made a number of undertakings to HM
Treasury arising from the capital and funding support, including
the provision of additional lending to certain mortgage and
business sectors for the two years to 28 February 2011, and other
matters relating to corporate governance and colleague
remuneration. The lending commitments were subject to prudent
commercial lending and pricing criteria, the availability of
sufficient funding and sufficient demand from creditworthy
customers. These lending commitments were delivered in full in the
second year.
The subsequent agreement (known as 'Merlin') between five major
UK banks (including Lloyds Banking Group) and the Government in
relation to gross business lending capacity in the 2011 calendar
year was subject to a similar set of criteria. Lloyds Banking Group
delivered in full its share of the commitments by the five banks,
both in respect of lending to Small and Medium Sized Enterprises
(SMEs) and in respect of overall gross business lending. Lloyds
Banking Group has made a unilateral lending pledge for 2012 as part
of its publicly announced SME charter.
In addition, Lloyds Banking Group is subject to European state
aid obligations in line with the Restructuring Plan agreed with HM
Treasury and the EU College of Commissioners in November 2009,
which is designed to support the long-term viability of the Group
and remedy any distortion of competition and trade in the European
Union (EU) arising from the State aid given to Lloyds Banking
Group.
This has placed a number of requirements on the Lloyds Banking
Group including an asset reductions target from a defined pool of
assets by the end of 2014 and the disposal of a certain portion of
its retail business by the end of November 2013. In June 2011
Lloyds Banking Group issued an Information Memorandum to potential
bidders of this retail banking business, which the European
Commission confirmed met the requirements to commence the formal
sale process for the sale no later than 30 November 2011. On 14
December 2011 Lloyds Banking Group announced that having reviewed
the formal offers made, its preferred option was for a direct sale
and that it was entering into exclusive discussions with The
Co-operative Group. Lloyds Banking Group is also continuing to
progress an Initial Public Offering (IPO) in parallel. Lloyds
Banking Group continues to work closely with the EU Commission, HM
Treasury and the Monitoring Trustee appointed by the EU Commission
to ensure the successful implementation of the Restructuring
Plan.
Appendix 2 - Related Party Transactions
The following statements regarding related party transactions of
HBOS plc are set out on pages 82 to 84 of the Annual Report. The
following is extracted in full and unedited form from the Annual
Report.
51 Related party transactions
Key management personnel
Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the
activities of an entity. At 31 December 2011, the Group's key
management personnel are the members of the Lloyds Banking Group
plc group executive committee together with its non-executive
directors.
The table below details, on an aggregated basis, key management
personnel compensation. The compensation of key management
personnel has been allocated to the Company on an estimated
basis.
2011 2010
GBPm GBPm
----- -----
Compensation
Salaries and other short-term benefits 6 4
Post-employment benefits - 1
Share-based payments 6 4
----- -----
Total compensation 12 9
----- -----
The aggregate of the emoluments of the directors was GBP4.3
million (2010: GBP5.3 million). The total for the highest paid
director (Antonio Horta-Osorio) was GBP2,061,000,(2010: (J E
Daniels) GBP1,286,000).
2011 2010
million million
-------- --------
Share options over Lloyds Banking Group plc shares
At 1 January 6 2
Granted, including certain adjustments(1) (includes
entitlement of appointed directors) 20 4
Exercised/lapsed (includes entitlements of former
director) (4) -
-------- --------
At 31 December 22 6
-------- --------
(1) 2010 includes adjustments, using a standard HMRC formula,
to negate the dilutionary impact of the Lloyds Banking Group's
2009 capital raising activities.
2011 2010
million million
-------- --------
Share incentive plans settled in Lloyds Banking
Group plc shares
At 1 January 56 19
Granted, including certain adjustments(1) (includes
entitlements of appointed directors) 35 39
Exercised/lapsed (includes 31 million entitlements
of former directors) (33) (2)
-------- --------
At 31 December 58 56
-------- --------
(1) 2010 includes adjustments, using a standard HMRC formula, to
negate the dilutionary impact of the Lloyds Banking Group's 2009
capital raising activities.
The tables below detail, on an aggregated basis, balances
outstanding at the year end and related income and expense,
together with information relating to other transactions between
the Lloyds Banking Group and its key management personnel:
2011 2010
GBPm million
----- --------
Loans
At 1 January 3 2
Advanced (includes loans of appointed directors) 1 2
Repayments (includes loans of former directors) (1) (1)
----- --------
At 31 December 3 3
----- --------
The loans are on both a secured and unsecured basis and are
expected to be settled in cash. The loans attracted interest rates
of between 1.09 per cent and 27.5 per cent in 2011 (2010: 0.50 per
cent and 17.90 per cent).
No provisions have been recognised in respect of loans given to
key management personnel (2010: GBPnil).
2011 2010
GBPm million
----- --------
Deposits
At 1 January 4 4
Placed (includes deposits of appointed directors) 17 12
Withdrawn (includes deposits of former directors) (15) (12)
----- --------
At 31 December 6 4
----- --------
Deposits placed by key management personnel attracted interest
rates of up to 5 per cent in 2011 (2010: 4.25 per cent).
At 31 December 2011, the Group did not provide any guarantees in
respect of key management personnel (2010: none).
At 31 December 2011, transactions, arrangements and agreements
entered into by the Lloyds Banking Group's banking subsidiaries
with directors and connected persons of the Group included amounts
outstanding in respect of loans and credit card transactions of
GBP3 million with four directors and three connected persons.
(2010: GBP2 million with six directors and four connected
persons).
Balances and transactions with fellow Lloyds Banking Group
undertakings
Balances and transactions between members of the HBOS group
In accordance with IAS 27, transactions and balances between the
Company and its subsidiary undertakings, and between those
subsidiary undertakings, have all been eliminated on consolidation
and thus are not reported as related party transactions of the
Group.
The Company has a significant number of transactions with
various of its subsidiary undertakings; these are included on the
balance sheet of the Company as follows:
2011 2010
GBPm GBPm
------ -------
Assets, included within:
Amounts owed by Group entities 36,607 41,818
Derivative financial instruments 1,857 2,061
------ -------
38,464 43,879
------ -------
Liabilities, included within:
Amounts owed to Group entities 27,509 33,749
Subordinated liabilities 3,035 -
------ ------
30,544 33,749
------ ------
Due to the size and volume of transactions passing through these
accounts, it is neither practical nor meaningful to disclose
information on gross inflows and outflows. During 2011 the Company
earned interest income on the above asset balances of GBP1,539
million (2010: GBP1,551 million) and incurred interest expense on
the above liability balances of GBP654 million (2010: GBP573
million).
Balances and transactions with Lloyds Banking Group plc and
fellow subsidiaries of the Lloyds Banking Group
The Company and its subsidiaries have balances due to and from
the Company's ultimate parent company, Lloyds Banking Group plc,
and fellow subsidiaries of the Lloyds Banking Group. These are
included on the balance sheet as follows:
Group Company
---------------- -------------
2011 2010 2011 2011
GBPm GBPm GBPm GBPm
------- ------- ------ -----
Assets included within:
Derivative financial instruments 4,196 1,437 - -
Loans and receivables:
Loans and advances to banks 85,800 55,053 - -
Loans and advances to customers 11,698 10,205 8,611 7,869
Trading and other financial assets at
fair value through profit or loss 7,515 3,475 - -
Other 2,681 766 2,160 -
------- ------- ------ -----
111,890 70,936 10,771 7,869
------- ------- ------ -----
Liabilities included within:
Deposits from banks 144,502 131,133 - -
Customer deposits 16,460 16,489 7,394 7,862
Derivative financial instruments 6,703 1,853 - -
Subordinated liabilities 272 312 18 273
Trading financial liabilities 6,690 3,294 - -
Other liabilities 1,559 2,537 345 -
------- ------- ------ -----
176,186 155,618 7,757 8,135
------- ------- ------ -----
These balances include Lloyds Banking Group plc's banking
arrangements and, due to the size and volume of transactions
passing through these accounts, it is neither practical nor
meaningful to disclose information on gross inflows and outflows.
During 2011 the Group earned GBP920 million and the Company earned
GBP103 million of interest income on the above asset balances
(2010: Group GBP658 million; Company GBP32 million); the Group
incurred GBP1,974 million and the Company incurred GBP200 million
of interest expense on the above liability balances (2010: Group
GBP1,249 million; Company GBP245 million).
In July 2011, as a result of a restructuring of the insurance
operations of the Lloyds Banking Group, the life, pensions and
general insurance subsidiaries of the Group were sold to fellow
subsidiaries of the Lloyds Banking Group. Further details are
provided in note 14.
UK Government
In January 2009, the UK Government through HM Treasury became a
related party of Lloyds Banking Group plc, the Bank's ultimate
parent company, following its subscription for ordinary shares
issued under a placing and open offer. As at 31 December 2011, HM
Treasury held a 40.2 per cent (31 December 2010: 40.6 per cent)
interest in Lloyds Banking Group plc's ordinary share capital and
consequently HM Treasury remained a related party of the Company
during the year ended 31 December 2011.
From 1 January 2011, in accordance with IAS 24 (Revised), UK
Government-controlled entities became related parties of the Group.
The Group regards the Bank of England and entities controlled by
the UK Government, including The Royal Bank of Scotland Group plc,
Northern Rock (Asset Management) plc and Bradford & Bingley
plc, as related parties.
Since 31 December 2010, the Group has had the following
significant transactions with the UK Government or UK
Government-related entities:
Government and central bank facilities
During the year ended 31 December 2011, the Lloyds Banking Group
participated in a number of schemes operated by the UK Government
and central banks and made available to eligible banks and building
societies.
Special liquidity scheme and credit guarantee scheme
The Bank of England's UK Special Liquidity Scheme was launched
in April 2008 to allow financial institutions to swap temporarily
illiquid assets for treasury bills, with fees charged based on the
spread between 3-month LIBOR and the 3-month gilt repo rate. The
scheme will operate for up to three years after the end of the
drawdown period (30 January 2009) at the Bank of England's
discretion. At 31 December 2011, the Lloyds Banking Group did not
utilise the Special Liquidity 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
charged a commercial fee for the guarantee of new short and medium
term debt issuance. The fee payable to HM Treasury on guaranteed
issues was based on a per annum rate of 50 basis points plus the
median five-year credit default swap spread. The drawdown window
for the Credit Guarantee Scheme closed for new issuance at the end
of February 2010. At 31 December 2011, the Lloyds Banking Group had
GBP23.5 billion of debt in issue under the Credit Guarantee Scheme
(31 December 2010: GBP45.4 billion). During the year, fees of GBP28
million paid to HM Treasury in respect of guaranteed funding were
included in the Lloyds Banking Group's income statement.
Lending commitments
The formal lending commitments entered into in connection with
the Group's proposed participation in the Government Asset
Protection Scheme have now expired and in February 2011, Lloyds
Banking Group plc (together with Barclays, Royal Bank of Scotland,
HSBC and Santander) announced, as part of the 'Project Merlin'
agreement with HM Treasury, its capacity and willingness to
increase business lending (including to small and medium sized
enterprises) during 2011.
Business Growth Fund
In May 2011 the Lloyds Banking Group agreed, together with The
Royal Bank of Scotland plc (and three other non-related parties),
to subscribe for shares in the Business Growth Fund plc which is
the company created to fulfil the role of the Business Growth Fund
as set out in the British Bankers' Association's Business Taskforce
Report of October 2010. During 2011 the Lloyds Banking Group has
incurred sunk costs of GBP4 million which have been
written-off.
As at 31 December 2011, the Lloyds Banking Group's investment in
the Business Growth Fund was GBP20 million.
Other government-related entities
Other than the transactions referred to above, there were no
other significant transactions with the UK Government and UK
Government controlled entities (including UK Government-controlled
banks) during the period that were not made in the ordinary course
of business or that were unusual in their nature or conditions.
Other related party disclosures
Pension Funds
At 31 December 2011 there were customer deposits of GBP32
million (2010: GBP35 million) and investment and insurance contract
liabilities of GBP383 million (2010: GBP850 million) related to the
Group's pension arrangements. During 2011, the Group sold at fair
value certain non-government bonds, equities and alternative assets
to Lloyds TSB Group Pension Scheme No 1 for GBP79 million and to
Lloyds TSB Group Pension Scheme No 2 for GBP43 million.
Open Ended Investment Companies
The Group manages 30 (2010: 291) Open Ended Investment Companies
(OEICs), and of these 22 (2010: 65) are consolidated. The Group
invested GBP649 million (2010: GBP613 million) and redeemed GBP393
million (2010: GBP239 milllion) in the unconsolidated OEICs during
the year and had investments, at fair value, of GBP933 million
(2010: GBP4,317 million) at 31 December. The Group earned fees of
GBP65 million from the unconsolidated OEICs (2010: GBP42
million).
Joint Ventures and Associates
The Group provides both administration and processing services
to its principal joint venture, Sainsbury's Bank plc. The amounts
receivable by the Group during the year were GBP21 million (2010:
GBP31 million), of which GBP10 million is outstanding at the year
end (2010: GBP8 million). At 31 December 2011, Sainsbury's Bank plc
also had balances with the Group that were included in loans and
advances to banks of GBP1,173 million (2010: GBP1,277 million)
deposits by banks of GBP780 million (2010: GBP1,358 million) and
trading liabilities of GBP340 million (2010: nil).
At 31 December 2011 there were loans and advances to customers
of GBP5,185 million (2010: GBP5,660 million) outstanding and
balances within customer deposits of GBP88 million (2010: GBP151
million) relating to joint ventures and associates.
The Group has a number of associates held by its venture capital
business that it accounts for at fair value through profit or loss.
At 31 December 2011, these companies had total assets of
approximately GBP7,330 million (2010: GBP4,713 million), total
liabilities of approximately GBP6,528 million (2010: GBP4,199
million) and for the year ended 31 December 2011 had turnover of
approximately GBP3,950 million (2010: GBP744 million) and made a
net loss of approximately GBP86 million (2010: net profit of GBP164
million). In addition, the Group has provided GBP4,588 million
(2010: GBP1,406 million) of financing to these companies on which
it received GBP27 million (2010: GBP19 million) of interest income
in the year.
Taxation
Group relief was surrendered for no payment, as per note 15.
Appendix 3 - Directors' Responsibility Statement
The following statement is extracted from page 5 of the Annual
Report. This statement relates solely to the Annual Report and is
not connected to the extracted information set out in this
announcement or the 2011 Results News Release dated 24 February
2011.
Each of the current directors, whose names are shown on page 6
of this annual report, confirms that, to the best of his or her
knowledge:
- the financial statements, which have been prepared in
accordance with IFRSs as adopted by the European Union, give a true
and fair view of the assets, liabilities and financial position of
the Company and Group and the profit or loss of the Group;
- the business review includes a fair review of the development
and performance of the business and the position of the Company and
Group; and
- the principal risks and uncertainties faced by the Company and
the Group are set out on pages 8 to 14.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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