TIDM68FF
RNS Number : 5361F
HBOS PLC
28 July 2016
HBOS plc
Half-Year Management Report
For the half-year to 30 June 2016
Member of the Lloyds Banking Group
FORWARD LOOKING STATEMENTS
This document contains certain forward looking statements with
respect to the business, strategy and plans of the HBOS Group and
its current goals and expectations relating to its future financial
condition and performance. Statements that are not historical
facts, including statements about the HBOS Group's or its
directors' and/or management's beliefs and expectations, are
forward looking statements. By their nature, forward looking
statements involve risk and uncertainty because they relate to
events and depend upon circumstances that will or may occur in the
future. Factors that could cause actual business, strategy, plans
and/or results (including but not limited to the payment of
dividends) to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward
looking statements made by the HBOS Group or on its behalf include,
but are not limited to: general economic and business conditions in
the UK and internationally; market related trends and developments;
fluctuations in interest rates (including low or negative rates),
exchange rates, stock markets and currencies; the ability to access
sufficient sources of capital, liquidity and funding when required;
changes to the HBOS Group's or Lloyds Banking Group plc's or Lloyds
Bank plc's credit ratings; the ability to derive cost savings;
changing customer behaviour including consumer spending, saving and
borrowing habits; changes to borrower or counterparty credit
quality; instability in the global financial markets, including
Eurozone instability, the exit by the UK from the European Union
(EU) and the potential for one or more other countries to exit the
EU or the Eurozone and the impact of any sovereign credit rating
downgrade or other sovereign financial issues; technological
changes and risks to cyber security; natural, pandemic and other
disasters, adverse weather and similar contingencies outside the
HBOS Group's or Lloyds Banking Group plc's or Lloyds Bank plc's
control; inadequate or failed internal or external processes or
systems; acts of war, other acts of hostility, terrorist acts and
responses to those acts, geopolitical, pandemic or other such
events; changes in laws, regulations, accounting standards or
taxation, including as a result of an exit by the UK from the EU, a
further possible referendum on Scottish independence; changes to
regulatory capital or liquidity requirements and similar
contingencies outside the HBOS Group's or Lloyds Banking Group
plc's or Lloyds Bank plc's control; the policies, decisions and
actions of governmental or regulatory authorities or courts in the
UK, the EU, the US or elsewhere including the implementation and
interpretation of key legislation and regulation; the ability to
attract and retain senior management and other employees;
requirements or limitations on Lloyds Banking Group plc, Lloyds
Bank plc and the HBOS Group as a result of HM Treasury's investment
in Lloyds Banking Group plc; actions or omissions by the HBOS
Group's directors, management or employees including industrial
action; changes to the HBOS Group's post-retirement defined benefit
scheme obligations; the extent of any future impairment charges or
write-downs caused by, but not limited to, depressed asset
valuations, market disruptions and illiquid markets; the value and
effectiveness of any credit protection purchased by the HBOS Group;
the inability to hedge certain risks economically; the adequacy of
loss reserves; the actions of competitors, including non-bank
financial services and lending companies; and exposure to
regulatory or competition scrutiny, legal, regulatory or
competition proceedings, investigations or complaints. Please refer
to the latest Annual Report on Form 20-F filed by Lloyds Banking
Group plc with the US Securities and Exchange Commission for a
discussion of certain factors together with examples of forward
looking statements. Except as required by any applicable law or
regulation, the forward looking statements contained in this
document are made as of today's date, and the HBOS Group expressly
disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward looking statements. The
information, statements and opinions contained in this document do
not constitute a public offer under any applicable law or an offer
to sell any securities or financial instruments or any advice or
recommendation with respect to such securities or financial
instruments.
CONTENTS
Page
Financial review 1
Principal risks and uncertainties 5
Condensed consolidated half-year financial
statements (unaudited)
Consolidated income statement 6
Consolidated statement of comprehensive income 7
Consolidated balance sheet 8
Consolidated statement of changes in equity 10
Consolidated cash flow statement 13
Notes 14
Statement of directors' responsibilities 38
Independent review report 39
Contacts 41
FINANCIAL REVIEW
Principal activities
HBOS plc (the Company) and its subsidiaries (together, the
Group) provide a wide range of banking and financial services in
the UK and overseas.
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; and private banking.
Review of results
The Group recorded a profit before tax of GBP2,245 million for
the half year to 30 June 2016, an increase of GBP637 million
compared with the profit before tax of GBP1,608 million for the
half year to 30 June 2015.
Total income increased by GBP201 million, or 5 per cent, to
GBP4,038 million for the half year to 30 June 2016 from GBP3,837
million in the half year to 30 June 2015.
Net interest income decreased by GBP156 million, or 5 per cent,
to GBP3,251 million in the half year to 30 June 2016 compared with
GBP3,407 million in the same period in 2015.
Other income increased by GBP357 million to GBP787 million in
the half year to 30 June 2016, compared with GBP430 million in the
same period in 2015, due mainly to a GBP528 million increase in
other operating income more than offsetting a GBP136 million
decrease in net trading income.
Net fee and commission income was GBP35 million, or 14 per cent,
lower at GBP213 million in the half year to 30 June 2016 compared
with GBP248 million in the half year to 30 June 2015, reduced
levels of card and current account fees were more than offset by
increases in other fees receivable, however fees and commission
expense was GBP56 million, or 39 per cent, higher at GBP198 million
in the half year to 30 June 2016 compared to GBP142 million in the
first half of 2015.
Other operating income was GBP528 million higher at GBP535
million in the half year to 30 June 2016 compared with GBP7 million
in the half year to 30 June 2015, largely due to a gain of GBP435
million arising on a restructuring of capital instruments within
the Lloyds Banking Group.
There was a regulatory provisions charge of GBP149 million in
the half-year to 30 June 2016 compared to GBP547 million in the
same period in 2015. No further provision has been taken for PPI,
where complaint levels over the first half have been broadly in
line with expectations. The Group's current PPI provision reflects
the Group's interpretation of the Financial Conduct Authority's
(FCA) consultation paper regarding a potential time bar and the
Plevin case and conclusion by mid-2018. The Group awaits the FCA's
final decision however, should the time bar be longer than the
proposed two years or the FCA's final decision be significantly
delayed, then the Group may need to reassess its provision. There
was a charge of GBP149 million to cover a range of other conduct
issues, of which GBP139 million was in respect of arrears related
activities on secured and unsecured retail products.
Other operating expenses increased by GBP29 million, or 2 per
cent, to GBP1,620 million in the half year to 30 June 2016 compared
with GBP1,591 million in the half year to 30 June 2015 as
reductions in staff costs and premises and equipment costs were
more than offset by increases in other expenses.
Impairment losses decreased by GBP67 million to GBP24 million in
the half year to 30 June 2016 compared with GBP91 million in the
half year to 30 June 2015. The impairment charge in respect of
loans and receivables was GBP65 million lower at GBP33 million in
the half year to 30 June 2016 compared to GBP98 million in the same
period in 2015.
The tax charge for the half year to 30 June 2016 was GBP562
million (half year to 30 June 2015: GBP309 million), representing
an effective tax rate of 25 per cent. The effective tax rate
reflects the impact of the bank surcharge.
FINANCIAL REVIEW (continued)
Total assets were GBP2,504 million or 1 per cent, higher at
GBP338,506 million at 30 June 2016, compared with GBP336,002
million at 31 December 2015, largely due to a GBP5,094 million
increase in derivative assets as a result of market conditions at
the end of June 2016. Loans and advances to customers decreased by
GBP1,402 million from GBP270,837 million at 31 December 2015 to
GBP269,435 million at 30 June 2016. Customer deposits decreased by
GBP4,408 million to GBP185,638 million compared with GBP190,046
million at 31 December 2015. Shareholders' equity decreased by
GBP467 million, or 3 per cent, from GBP13,944 million at 31
December 2015 to GBP13,477 million at 30 June 2016 as the retained
profit for the period of GBP1,683 million was more than offset by
the negative impact of other reserve movements, in particular in
relation to post-retirement defined benefit scheme remeasurements,
and total dividend payments in the period of GBP2,000 million.
The Group's transitional common equity tier 1 capital ratio
increased to 11.9 per cent at the end of June 2016 from 11.1 per
cent at the end of December 2015, primarily reflecting lower
foreseeable dividends offset by the increase in risk-weighted
assets. The transitional total capital ratio was 19.6 per cent (31
December 2015: 19.4 per cent).
FINANCIAL REVIEW (continued)
Capital ratios
At At
30 June 31 Dec
Capital resources (transitional) 2016 2015
GBPm GBPm
Common equity tier 1
Shareholders' equity per balance
sheet 13,477 13,944
Adjustment to retained earnings for
foreseeable dividends (1,000) (2,000)
Cash flow hedging reserve (270) (169)
Other adjustments (147) (71)
12,060 11,704
Less: deductions from common equity
tier 1
Goodwill and other intangible assets (420) (425)
Excess of expected losses over impairment
provisions and value adjustments (36) (174)
Removal of defined benefit pension
surplus (282) (540)
Securitisation deductions (184) (166)
Non-significant investments (62) (28)
Deferred tax assets (1,591) (1,606)
-------- -------
Common equity tier 1 capital 9,485 8,765
-------- -------
Additional tier 1
Additional tier 1 instruments 3,314 3,617
less: deductions from tier 1
Non-significant investments (288) (300)
Total tier 1 capital 12,511 12,082
-------- -------
Tier 2
Tier 2 instruments 3,426 3,534
Eligible provisions 261 322
less: deductions from tier 2
Non-significant investments (542) (566)
Total tier 2 capital 3,145 3,290
-------- -------
Total capital resources 15,656 15,372
-------- -------
Risk-weighted assets 79,974 79,154
Common equity tier 1 capital ratio 11.9% 11.1%
Tier 1 capital ratio 15.6% 15.3%
Total capital ratio 19.6% 19.4%
FINANCIAL REVIEW (continued)
Capital ratios (continued)
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Risk-weighted assets
Foundation Internal Ratings Based
(IRB) Approach 9,149 10,456
Retail IRB Approach 39,251 37,626
Other IRB Approach 5,512 5,598
-------- -------
IRB Approach 53,912 53,680
Standardised Approach 8,619 8,674
-------- -------
Credit risk 62,531 62,354
-------- -------
Counterparty credit risk 1,926 1,785
Contributions to the default fund
of a central counterparty - 1
Credit valuation adjustment risk 441 313
Operational risk 11,958 11,958
Market risk 2,453 1,580
-------- -------
Underlying risk-weighted assets 79,309 77,991
Threshold risk-weighted assets 665 1,163
-------- -------
Transitional risk-weighted assets 79,974 79,154
-------- -------
PRINCIPAL RISKS AND UNCERTAINTIES
The most significant risks faced by the Group which could impact
the success of delivering against the Group's long-term strategic
objectives and through which global macro-economic, regulatory
developments and market liquidity dynamics could manifest, are
detailed below. Except where noted, there has been no significant
change to the description of these risks or key mitigating actions
disclosed in the Group's 2015 Annual Report and Accounts, with any
quantitative disclosures updated herein.
Lloyds Banking Group has already considered many of the
potential implications following the UK's vote to leave the
European Union and will now develop this work in greater detail to
assess the impact to its customers, colleagues and products - as
well as all legal, regulatory, tax, finance and capital
implications.
Credit risk - The risk that customers to whom we have lent money
or other counterparties with whom we have contracted, fail to meet
their financial obligations, resulting in loss to the Group.
Adverse changes in the economic and market environment or the
credit quality of the Group's counterparties and customers could
reduce asset values and potentially increase write-downs and
allowances for impairment losses, thereby adversely impacting
profitability.
Conduct risk - The Group faces significant potential conduct
risks, including selling products which do not meet customer needs,
failing to deal with complaints effectively and exhibiting
behaviours which do not meet market or regulatory standards.
Market risk - The risk that the Group's capital or earnings
profile is affected by adverse market movements, in particular
interest rates and credit spreads in the Banking business and
credit spreads in the Group's Defined Benefit Pension Schemes.
Operational risk - Significant operational risks which may
result in financial loss, disruption or damage to the reputation of
the Group, including the availability, resilience and security of
core IT systems and the potential for failings in customer
processes.
Capital risk - The risk that the Group has a sub-optimal amount
or quality of capital or that capital is inefficiently deployed
across the Group.
Funding and liquidity risk - The risk that the Group has
insufficient financial resources to meet its commitments as they
fall due, or can only secure them at excessive cost.
Regulatory and legal risk - The risks of changing legislation,
regulation, policies, voluntary codes of practice and their
interpretation in the markets in which the Group operates can have
a significant impact on the Group, including its operations,
business prospects, structure, costs and/or capital requirements
and ability to enforce contractual obligations.
Governance risk - Against a background of increased regulatory
focus on governance and risk management, the most significant
challenges arise from the embedding of the Senior Managers and
Certification Regime (SM&CR) and the requirement to ring-fence
core UK financial services and activities from January 2019.
People risk - Key people risks include the risk that the Group
fails to lead responsibly in an increasingly competitive
marketplace, particularly with the introduction of the SM&CR in
2016. This may dissuade capable individuals from taking up senior
positions within the industry.
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED INCOME STATEMENT
Half-year Half-year
to 30 to 30
June June
2016 2015(1)
Note GBP million GBP million
Interest and similar income 4,999 5,309
Interest and similar expense (1,748) (1,902)
----------- -----------
Net interest income 3,251 3,407
----------- -----------
Fee and commission income 411 390
Fee and commission expense (198) (142)
----------- -----------
Net fee and commission income 213 248
Net trading income 39 175
Other operating income 535 7
----------- -----------
Other income 787 430
----------- -----------
Total income 4,038 3,837
Regulatory provisions 9 (149) (547)
Other operating expenses (1,620) (1,591)
----------- -----------
Total operating expenses 2 (1,769) (2,138)
----------- -----------
Trading surplus 2,269 1,699
Impairment 3 (24) (91)
Profit before tax 2,245 1,608
Taxation 4 (562) (309)
----------- -----------
Profit for the period 1,683 1,299
----------- -----------
Profit attributable to ordinary
shareholders 1,632 1,299
Profit attributable to other
equity holders(2) 51 -
----------- -----------
Profit attributable to equity
holders 1,683 1,299
Profit attributable to non-controlling
interests - -
----------- -----------
Profit for the period 1,683 1,299
----------- -----------
(1) Restated - see note 1.
(2) The profit after tax attributable to other equity
holders of GBP51 million (half-year to 30 June
2015: GBPnil) is offset in reserves by a tax credit
attributable to ordinary shareholders of GBP14
million (half-year to 30 June 2015: GBPnil).
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
(UNAUDITED) (continued)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Half-year Half-year
to 30 to 30
June June
2016 2015(1)
GBP million GBP million
Profit for the period 1,683 1,299
Other comprehensive income
Items that will not subsequently
be reclassified to profit or loss:
Post-retirement defined benefit scheme
remeasurements (note 8):
----------- -----------
Remeasurements before taxation (349) (171)
Taxation 66 34
----------- -----------
(283) (137)
Items that may subsequently be reclassified
to profit or loss:
Movements in revaluation reserve
in respect of available-for-sale
financial assets:
Change in fair value 92 (16)
Income statement transfers in respect
of disposals (48) (34)
Income statement transfers in respect
of impairment 1 9
Taxation (20) 2
----------- -----------
25 (39)
Movements in cash flow hedging reserve:
----------- -----------
Effective portion of changes in fair
value 302 154
Net income statement transfers (165) (320)
Taxation (37) 33
----------- -----------
100 (133)
Currency translation differences
(tax: nil) (4) 12
----------- -----------
Other comprehensive income for the
period, net of tax (162) (297)
----------- -----------
Total comprehensive income for the
period 1,521 1,002
----------- -----------
Total comprehensive income attributable
to ordinary shareholders 1,470 1,002
Total comprehensive income attributable
to other equity holders 51 -
----------- -----------
Total comprehensive income attributable
to equity holders 1,521 1,002
Total comprehensive income attributable
to non-controlling interests - -
----------- -----------
Total comprehensive income for the
period 1,521 1,002
----------- -----------
(1) Restated - see note 1.
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
(UNAUDITED) (continued)
CONSOLIDATED BALANCE SHEET
At At
30 June 31 Dec
2016 2015
Note GBP million GBP million
Assets
Cash and balances at central banks 2,372 2,481
Items in course of collection
from banks 260 172
Trading and other financial assets
at fair value through profit or
loss 5 3,834 5,828
Derivative financial instruments 20,020 14,926
Loans and receivables:
----------- -----------
Loans and advances to banks 987 691
Loans and advances to customers 6 269,435 270,837
Debt securities 167 182
Due from fellow Lloyds Banking
Group undertakings 33,529 31,560
----------- -----------
304,118 303,270
Available-for-sale financial assets 3,700 4,557
Goodwill 325 325
Other intangible assets 97 102
Property, plant and equipment 1,148 1,192
Current tax recoverable 9 -
Deferred tax assets 1,706 1,941
Retirement benefit assets 8 353 675
Other assets 564 533
----------- -----------
Total assets 338,506 336,002
----------- -----------
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
(UNAUDITED) (continued)
CONSOLIDATED BALANCE SHEET (continued)
At At
30 June 31 Dec
2016 2015
Note GBP million GBP million
Equity and liabilities
Liabilities
Deposits from banks 2,904 1,541
Customer deposits 185,638 190,046
Due to fellow Lloyds Banking Group
undertakings 82,787 80,047
Items in course of transmission
to banks 384 342
Trading and other financial liabilities
at fair value through profit or
loss 2,476 4,415
Derivative financial instruments 17,260 12,744
Notes in circulation 1,090 1,112
Debt securities in issue 7 18,628 18,492
Other liabilities 1,229 1,046
Retirement benefit obligations 8 187 188
Current tax liabilities 764 345
Other provisions 1,561 1,899
Subordinated liabilities 8,584 8,304
----------- -----------
Total liabilities 323,492 320,521
Equity
----------- -----------
Share capital 3,763 3,763
Share premium account - -
Other reserves 10,600 10,479
Retained profits (886) (298)
----------- -----------
Shareholders' equity 13,477 13,944
Other equity instruments 1,500 1,500
----------- -----------
Total equity excluding non-controlling
interests 14,977 15,444
Non-controlling interests 37 37
----------- -----------
Total equity 15,014 15,481
----------- -----------
Total equity and liabilities 338,506 336,002
----------- -----------
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
(UNAUDITED) (continued)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity
shareholders
----------------------------------------
Share
capital Other Non-
and Other Retained equity controlling
premium reserves profits Total instruments interests Total
GBP GBP GBP GBP GBP
million million million million GBP million GBP million million
Balance at
1 January 2016 3,763 10,479 (298) 13,944 1,500 37 15,481
Comprehensive
income
Profit for
the period - - 1,683 1,683 - - 1,683
Other comprehensive
income
-------- --------- -------- -------- ------------ ------------ --------
Post-retirement
defined benefit
scheme remeasurements,
net of tax - - (283) (283) - - (283)
Movements in
revaluation
reserve in
respect of
available-for-sale
financial assets,
net of tax - 25 - 25 - - 25
Movements in
cash flow hedging
reserve, net
of tax - 100 - 100 - - 100
Currency translation
differences
(tax: nil) - (4) - (4) - - (4)
-------- --------- -------- -------- ------------ ------------ --------
Total other
comprehensive
income - 121 (283) (162) - - (162)
-------- --------- -------- -------- ------------ ------------ --------
Total comprehensive
income - 121 1,400 1,521 - - 1,521
-------- --------- -------- -------- ------------ ------------ --------
Transactions
with owners
-------- --------- -------- -------- ------------ ------------ --------
Dividends paid - - (2,000) (2,000) - - (2,000)
Distributions
on other equity
instruments,
net of tax - - (37) (37) - - (37)
Capital contribution
received - - 49 49 - - 49
Total transactions
with owners - - (1,988) (1,988) - - (1,988)
-------- --------- -------- -------- ------------ ------------ --------
Balance at
30 June 2016 3,763 10,600 (886) 13,477 1,500 37 15,014
-------- --------- -------- -------- ------------ ------------ --------
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
(UNAUDITED) (continued)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity
shareholders
----------------------------------------
Share
capital Other Non-
and Other Retained equity controlling
premium reserves profits Total instruments interests Total
GBP GBP GBP GBP GBP
million million million million GBP million GBP million million
Balance at
1 January 2015 22,418 10,737 (9,437) 23,718 - 37 23,755
Comprehensive
income
Profit for
the period(1) - - 1,299 1,299 - - 1,299
Other comprehensive
income
-------- --------- -------- -------- ------------ ------------ --------
Post-retirement
defined benefit
scheme remeasurements,
net of tax - - (137) (137) - - (137)
Movements in
revaluation
reserve in
respect of
available-for-sale
financial assets,
net of tax - (39) - (39) - - (39)
Movements in
cash flow hedging
reserve, net
of tax - (133) - (133) - - (133)
Currency translation
differences
(tax: nil) - 12 - 12 - - 12
-------- --------- -------- -------- ------------ ------------ --------
Total other
comprehensive
income - (160) (137) (297) - - (297)
-------- --------- -------- -------- ------------ ------------ --------
Total comprehensive
income - (160) 1,162 1,002 - - 1,002
-------- --------- -------- -------- ------------ ------------ --------
Transactions
with owners
-------- --------- -------- -------- ------------ ------------ --------
Capital contribution
received - - 82 82 - - 82
Capital restructuring(2) (18,655) - 18,655 - - - -
-------- --------- -------- -------- ------------ ------------ --------
Total transactions
with owners (18,655) - 18,737 82 - - 82
-------- --------- -------- -------- ------------ ------------ --------
Balance at
30 June 2015(1) 3,763 10,577 10,462 24,802 - 37 24,839
-------- --------- -------- -------- ------------ ------------ --------
(1) Restated - see note 1.
(2) During the half-year to 30 June 2015, the Company
reduced its share premium account by Special Resolution
which was confirmed by an Order of the Court of
Session, Scotland on 11 June 2015. The balance
on the share premium account of GBP18,655 million
was transferred to retained profits.
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
(UNAUDITED) (continued)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity
shareholders
----------------------------------------
Share
capital Other Non-
and Other Retained equity controlling
premium reserves profits Total instruments interests Total
GBP GBP GBP GBP GBP
million million million million GBP million GBP million million
At 1 July 2015(1) 3,763 10,577 10,462 24,802 - 37 24,839
Comprehensive
income
Profit for
the period - - 712 712 - - 712
Other comprehensive
income
-------- --------- -------- -------- ------------ ------------ --------
Post-retirement
defined benefit
scheme remeasurements,
net of tax - - 21 21 - - 21
Movements in
revaluation
reserve in
respect of
available-for-sale
financial assets,
net of tax - 26 - 26 - - 26
Movements in
cash flow hedging
reserve, net
of tax - (182) - (182) - - (182)
Currency translation
differences
(tax: nil) - 58 - 58 - - 58
-------- --------- -------- -------- ------------ ------------ --------
Total other
comprehensive
income - (98) 21 (77) - - (77)
-------- --------- -------- -------- ------------ ------------ --------
Total comprehensive
income - (98) 733 635 - - 635
-------- --------- -------- -------- ------------ ------------ --------
Transactions
with owners
-------- --------- -------- -------- ------------ ------------ --------
Dividends paid - - (11,500) (11,500) - - (11,500)
Capital contribution
received - - 7 7 - - 7
Issue of Additional
Tier 1 securities - - - - 1,500 - 1,500
Total transactions
with owners - - (11,493) (11,493) 1,500 - (9,993)
-------- --------- -------- -------- ------------ ------------ --------
Balance at
31 December
2015 3,763 10,479 (298) 13,944 1,500 37 15,481
-------- --------- -------- -------- ------------ ------------ --------
(1) Restated - see note 1.
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
(UNAUDITED) (continued)
CONSOLIDATED CASH FLOW STATEMENT
Half-year Half-year
to 30 to 30
June June
2016 2015(1)
GBP million GBP million
Profit before tax 2,245 1,608
Adjustments for:
Change in operating assets (2,216) 11,877
Change in operating liabilities 4,274 (13,063)
Non-cash and other items (1,370) 449
Tax received 95 167
----------- -----------
Net cash provided by operating activities 3,028 1,038
Cash flows from investing activities
Purchase of available-for-sale financial
assets (235) (6,673)
Proceeds from sale and maturity of
available-for-sale financial assets 1,455 7,411
Purchase of fixed assets (56) (56)
Proceeds from sale of fixed assets 24 23
Disposal of businesses, net of cash
disposed 5 11
----------- -----------
Net cash provided by investing activities 1,193 716
Cash flows from financing activities
----------- -----------
Dividends paid to equity shareholders (2,000) -
Distributions on other equity instruments (51) -
Interest paid on subordinated liabilities (246) (536)
Repayment of subordinated liabilities (586) (976)
Capital repayment to ultimate parent
company (1,198) -
----------- -----------
Net cash used in financing activities (4,081) (1,512)
Effects of exchange rate changes
on cash and cash equivalents 13 (1)
Change in cash and cash equivalents 153 241
Cash and cash equivalents at beginning
of period 2,392 4,839
----------- -----------
Cash and cash equivalents at end
of period 2,545 5,080
----------- -----------
(1) Restated - see note 1.
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 Operating expenses 16
3 Impairment 16
4 Taxation 17
5 Trading and other financial assets at fair 17
value through profit or loss
6 Loans and advances to customers 18
7 Debt securities in issue 18
8 Post-retirement defined benefit schemes 19
9 Provisions for liabilities and charges 20
10 Contingent liabilities and commitments 22
11 Fair values of financial assets and liabilities 25
12 Related party transactions 33
13 Dividends on ordinary shares 35
14 Future accounting developments 35
15 Ultimate parent undertaking 37
16 Other information 37
1. Accounting policies, presentation and estimates
These condensed consolidated half-year financial statements as
at and for the period to 30 June 2016 have been prepared in
accordance with the Disclosure Rules and Transparency Rules of the
Financial Conduct Authority (FCA) and with International Accounting
Standard 34 (IAS 34), Interim Financial Reporting as adopted by the
European Union and comprise the results of HBOS plc (the Company)
together with its subsidiaries (the Group). They do not include all
of the information required for full annual financial statements
and should be read in conjunction with the Group's consolidated
financial statements as at and for the year ended 31 December 2015
which were prepared in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union. Copies
of the 2015 Annual Report and Accounts are available on the Lloyds
Banking Group's website and are available upon request from
Investor Relations, Lloyds Banking Group plc, 25 Gresham Street,
London EC2V 7HN.
The directors consider that it is appropriate to continue to
adopt the going concern basis in preparing the condensed
consolidated half-year financial statements. In reaching this
assessment, the directors have considered projections for the
Group's capital and funding position.
The accounting policies are consistent with those applied by the
Group in its 2015 Annual Report and Accounts.
During the second half of 2015 the Company identified an error
in a subsidiary's accounting for an intra-group hedging transaction
and the correcting entries were applied retrospectively, increasing
retained earnings at 1 January 2015 by GBP490 million. The Group's
income statement for the half-year to 30 June 2015 shown in these
half-year financial statements has been restated; the effect having
been to decrease interest expense by GBP123 million and to increase
the tax charge by GBP19 million.
Future accounting developments
Details of those IFRS pronouncements which will be relevant to
the Group but which will not be effective at 31 December 2016 and
which have not been applied in preparing these condensed
consolidated half-year financial statements are set out in note
14.
Critical accounting estimates and judgements
The preparation of the Group's financial statements requires
management to make judgements, estimates and assumptions that
impact the application of accounting policies and the reported
amounts of assets, liabilities, income and expenses. Due to the
inherent uncertainty in making estimates, actual results reported
in future periods may include amounts which differ from those
estimates. Estimates, judgements and assumptions are continually
evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be
reasonable under the circumstances. There have been no significant
changes in the basis upon which estimates have been determined,
compared to that applied at 31 December 2015.
2. Operating expenses
Half-year Half-year
to 30 to 30
June June
2016 2015
GBPm GBPm
Administrative expenses:
Staff costs 769 784
Premises and equipment 121 125
Other expenses 641 596
--------- ---------
1,531 1,505
Depreciation and amortisation 89 86
--------- ---------
Total operating expenses, excluding
regulatory provisions 1,620 1,591
Regulatory provisions:
--------- ---------
Payment protection insurance provision
(note 9) - 341
Other regulatory provisions (note
9) 149 206
--------- ---------
149 547
--------- ---------
Total operating expenses 1,769 2,138
--------- ---------
3. Impairment
Half-year Half-year
to 30 to 30
June June
2016 2015
GBPm GBPm
Impairment losses on loans and receivables:
--------- ---------
Loans and advances to customers 33 100
Debt securities classified as loans
and receivables - (2)
--------- ---------
Impairment losses on loans and receivables 33 98
Other credit risk provisions (9) (7)
Total impairment charged to the income
statement 24 91
--------- ---------
4. Taxation
A reconciliation of the tax charge that would result from
applying the standard UK corporation tax rate to the profit before
tax to the actual tax charge is given below:
Half-year Half-year
to 30 to 30
June June
2016 2015(1)
GBPm GBPm
Profit before tax 2,245 1,608
--------- ---------
Tax charge thereon at UK corporation
tax rate of 20 per cent
(2015: 20.25 per cent) (449) (326)
Factors affecting tax charge:
Impact of bank surcharge (151) -
Differences in UK corporation tax
rates 12 15
Disallowed items (61) (28)
Non-taxable items 80 7
Overseas tax rate differences (1) 1
Gains exempted or covered by capital
losses 16 24
Adjustments in respect of previous
years (9) (2)
Other items 1 -
--------- ---------
Tax charge (562) (309)
--------- ---------
(1) Restated - see note 1.
In accordance with IAS 34, the Group's income tax expense for
the half-year to 30 June 2016 is based on the best estimate of the
weighted-average annual income tax rate expected for the full
financial year. The tax effects of one-off items are not included
in the weighted-average annual income tax rate, but are recognised
in the relevant period.
The Finance (No. 2) Act 2015 introduced an additional surcharge
of 8 per cent on banking profits from 1 January 2016.
On 16 March 2016, the Government announced a reduction in the
corporation tax rate applicable from 1 April 2020 to 17 per cent
and a further restriction to the amount of banks' profits that can
be offset by carried forward losses for the purposes of calculating
corporation tax liabilities from 50 per cent to 25 per cent. The
proposed reduction in the rate of corporation tax and the further
bank loss relief restriction are expected to be enacted, and
accounted for, in the second half of 2016.
5. Trading and other financial assets at fair value through profit or loss
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Trading assets 2,459 4,230
Other financial assets at fair value
through profit or loss:
-------- -------
Debt securities 1,256 1,372
Equity shares 119 226
-------- -------
1,375 1,598
-------- -------
Total trading and other financial
assets at fair value through profit
or loss 3,834 5,828
-------- -------
6. Loans and advances to customers
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Agriculture, forestry and fishing 594 596
Energy and water supply 155 237
Manufacturing 372 624
Construction 1,818 1,570
Transport, distribution and hotels 2,753 3,227
Postal and communications 299 217
Property companies 6,726 7,107
Financial, business and other services 3,353 3,392
Personal:
Mortgages 245,038 245,900
Other 10,420 10,191
Lease financing 528 546
Hire purchase 69 40
-------- -------
272,125 273,647
Allowance for impairment losses on
loans and advances to customers (2,690) (2,810)
-------- -------
Total loans and advances to customers 269,435 270,837
-------- -------
Loans and advances to customers include advances securitised
under the Group's securitisation and covered bond programmes.
7. Debt securities in issue
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Medium-term notes issued 1,761 1,882
Covered bonds 11,240 10,168
Securitisation notes 5,563 6,417
18,564 18,467
Amounts due to fellow Lloyds Banking
Group undertakings 64 25
Total debt securities in issue 18,628 18,492
-------- -------
The notes issued by the Group's securitisation and covered bond
programmes are held by external parties and by subsidiaries of the
Group.
Securitisation programmes
At 30 June 2016, external parties held GBP5,563 million (31
December 2015: GBP6,417 million) and the Group's subsidiaries held
GBP18,526 million (31 December 2015: GBP19,208 million) of total
securitisation notes in issue of GBP24,089 million (31 December
2015: GBP25,625 million). The notes are secured on loans and
advances to customers and debt securities classified as loans and
receivables amounting to GBP36,199 million (31 December 2015:
GBP35,807 million), the majority of which have been sold by
subsidiary companies to bankruptcy remote structured entities. The
structured entities are consolidated fully and all of these loans
are retained on the Group's balance sheet.
7. Debt securities in issue (continued)
Covered bond programmes
At 30 June 2016, external parties held GBP11,240 million (31
December 2015: GBP10,168 million) and the Group's subsidiaries held
GBP3,601 million (31 December 2015: GBP4,197 million) of total
covered bonds in issue of GBP14,841 million (31 December 2015:
GBP14,365 million). The bonds are secured on certain loans and
advances to customers that have been assigned to bankruptcy remote
limited liability partnerships. These loans are retained on the
Group's balance sheet.
Cash deposits of GBP5,147 million (31 December 2015: GBP5,801
million) which support the debt securities issued by the structured
entities, the term advances related to covered bonds and other
legal obligations are held by the Group.
8. Post-retirement defined benefit schemes
The Group's post-retirement defined benefit scheme obligations
are comprised as follows:
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Defined benefit pension schemes:
Fair value of scheme assets 14,860 12,854
Present value of funded obligations (14,600) (12,275)
-------- --------
Net pension scheme asset 260 579
Other post-retirement schemes (94) (92)
-------- --------
Net retirement benefit asset 166 487
-------- --------
Recognised on the balance sheet as:
Retirement benefit assets 353 675
Retirement benefit obligations (187) (188)
-------- --------
Net retirement benefit asset 166 487
-------- --------
The movement in the Group's net post-retirement defined benefit
scheme asset during the period was as follows:
GBPm
At 1 January 2016 487
Income statement charge (59)
Employer contributions 87
Remeasurement (349)
-----
At 30 June 2016 166
-----
8. Post-retirement defined benefit schemes (continued)
The principal assumptions used in the valuations of the defined
benefit pension scheme were as follows:
At At
30 June 31 Dec
2016 2015
% %
Discount rate 2.80 3.87
Rate of inflation:
Retail Prices Index 2.73 2.99
Consumer Price Index 1.73 1.99
Rate of salary increases 0.00 0.00
Weighted-average rate of increase
for pensions in payment 2.44 2.58
9. Provisions for liabilities and charges
Payment protection insurance
The Group made provisions totalling GBP4,521 million since 2011
against the costs of paying redress to customers in respect of past
sales of PPI policies, including the related administrative
expenses.
No additional charge has been made in the first half of
2016.
As at 30 June 2016, GBP839 million or 19 per cent of the total
provision remained unutilised relating predominantly to reactive
complaints and associated administration costs.
Total cash payments were GBP371 million in the first half of
2016 which included remediation. The re-review of previously
handled cases is now complete.
On 26 November 2015, the Financial Conduct Authority (FCA)
published a consultation paper (CP15/39: Rules and guidance on
payment protection insurance complaints) proposing (i) the
introduction of a deadline by which consumers would need to make
their PPI complaints including an FCA led communications campaign,
and (ii) rules and guidance about how firms should handle PPI
complaints in light of the Supreme Court's decision in Plevin v
Paragon Personal Finance Limited [2014] UKSC 61 (Plevin). The Group
awaits the FCA's final decision and should the time bar be longer
than the proposed two years or the FCA's final decision be
significantly delayed, then the Group may need to reassess its
provision.
In 2015, the Group increased the total expected reactive
complaints (including complaints falling under the Plevin rules and
guidance) in light of the FCA proposals. There is no change in the
total expected reactive complaints in 2016.
Monthly complaint trends could vary significantly, given they
are likely to be impacted by a number of factors including
seasonality, the potential impact of the FCA's proposed
communication campaign as well as changes in the regulation of
CMCs.
The provision includes an estimate to cover redress that would
be payable under the FCA's proposed new rules and guidance in light
of Plevin.
9. Provisions for liabilities and charges (continued)
The total amount provided for PPI represents the Group's best
estimate of the likely future cost. However a number of risks and
uncertainties remain in particular with respect to future volumes.
The cost could differ materially from the Group's estimates and the
assumptions underpinning them, and could result in a further
provision being required. There is significant uncertainty around
the impact of the proposed FCA media campaign, CMC and customer
activity and the deadline for PPI complaints may be later than
originally expected.
Key sensitivities are as follows(1) :
- the number of customer initiated complaints received: an
increase of 50,000 from the level assumed would increase the
provision by GBP95 million;
- average uphold rate per policy: an increase of one percentage
point in this assumption would increase the provision by GBP12
million;
- average redress paid per upheld policy: an increase of GBP100
in this assumption would increase the provision by GBP50
million.
All sensitivities are influenced by a proportion
of complaints falling under the Plevin rules and
(1) guidance.
Other regulatory provisions
Interest rate hedging products
In June 2012, a number of banks, including the Lloyds Banking
Group, reached agreement with the FSA (now FCA) to carry out a
review of sales made since 1 December 2001 of interest rate hedging
products (IRHP) to certain small and medium-sized businesses. As at
30 June 2016 the Lloyds Banking Group had identified 1,739 sales of
IRHPs to customers within scope of the agreement with the FCA which
have opted in and are being reviewed and, where appropriate,
redressed. The Lloyds Banking Group agreed that it would provide
redress to any in-scope customers where appropriate. The Lloyds
Banking Group continues to review the remaining cases within the
scope of the agreement with the FCA and has met all of the
regulator's requirements to date.
By the end of 2015, the Group had charged a total of GBP216
million in respect of redress and related administration costs for
in-scope customers. An additional GBP3 million has been provided in
the half-year to 30 June 2016 raising the total amount provided to
GBP219 million. As at 30 June 2016, the Group has utilised GBP208
million (31 December 2015: GBP200 million), with GBP11 million (31
December 2015: GBP16 million) of the provision remaining.
Arrears handling related activities
Following a review of the Lloyds Banking Group's secured and
unsecured arrears handling activities, the Lloyds Banking Group has
put in place a number of actions to further improve its handling of
customers in these areas. As a result, the Group has provided an
additional GBP139 million in the first half of 2016 (bringing the
total provision to GBP254 million), for the costs of identifying
and rectifying certain arrears management fees and activities. As
at 30 June 2016, the unutilised provision was GBP254 million (31
December 2015: GBP115 million).
Other legal actions and regulatory matters
In the course of its business, the Lloyds Banking Group is
engaged in discussions with the PRA, FCA and other UK and overseas
regulators and other governmental authorities on a range of
matters. The Lloyds Banking Group also receives complaints and
claims from customers in connection with its past conduct and,
where significant, provisions are held against the costs expected
to be incurred as a result of the conclusions reached. In the
half-year to 30 June 2016, the Group charged an additional GBP7
million.
At 30 June 2016, provisions for other legal actions and
regulatory matters of GBP308 million (31 December 2015: GBP317
million) remained unutilised, principally in relation to the sale
of bancassurance products and packaged bank accounts and other
Retail provisions.
10. Contingent liabilities and commitments
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the Group
is not directly involved in the on-going investigations and
litigation (as described below) which involve card schemes such as
Visa and MasterCard. However, the Group is a member of Visa and
MasterCard and other card schemes.
- The European Commission continues to pursue certain
competition investigations into MasterCard and Visa probing,
amongst other things, MIFs paid in respect of cards issued outside
the EEA;
- Litigation continues in the English Courts against both Visa
and MasterCard. This litigation has been brought by several
retailers who are seeking damages for allegedly 'overpaid' MIFs.
From publicly available information, it is understood these damages
claims are running to different timescales with respect to the
litigation process. It is also possible that new claims may be
issued. Judgment in the Sainsbury's v MasterCard case was handed
down on 14 July 2016. Sainsbury's is entitled to recover
approximately GBP69 million (plus interest) in damages from
MasterCard. It is unclear whether MasterCard will seek to appeal
the judgment. However, the judgment considers a number of important
matters that are likely to influence the conduct of ongoing (and
future) litigation in relation to both Visa and MasterCard.
- Any ultimate impact on the Group of the above investigations
and the litigation against Visa and MasterCard remains uncertain at
this time.
Visa Inc completed its acquisition of Visa Europe on 21 June
2016. The Group's share of the sale proceeds comprised cash
consideration of approximately GBP330 million (of which
approximately GBP300 million was received on completion of the sale
and GBP30 million is deferred for three years) and preferred stock,
which the Group measures at fair value. The preferred stock is
convertible into Class A Common Stock of Visa Inc or its equivalent
upon the occurrence of certain events. As part of this transaction,
the Group and certain other UK banks also entered into a Loss
Sharing Agreement (LSA) with Visa Inc, which clarifies the
allocation of liabilities between the parties should the litigation
referred to above result in Visa Inc being liable for damages
payable by Visa Europe. Visa Inc only has recourse to the LSA once
more than EUR1 billion of losses relating to UK domestic MIFs have
arisen or once the total value of the preferred stock issued by
Visa to certain UK banks on completion has been reduced to zero.
This would be effected by a downward adjustment to the conversion
ratio. In determining the fair value of the preferred stock, the
Group includes adjustments for both the stock's illiquidity and the
potential for changes in the conversion ratio. The maximum amount
of liability to which the Group may be subject under the LSA is
capped at the cash consideration which was received by the Group at
completion. Visa Inc may also have recourse to a general indemnity,
currently in place under Visa Europe's Operating Regulations, for
damages claims concerning inter or intra-regional MIF setting
activities.
LIBOR and other trading rates
In July 2014, the Lloyds Banking Group announced that it had
reached settlements totalling GBP217 million (at 30 June 2014
exchange rates) to resolve with UK and US federal authorities
legacy issues regarding the manipulation several years ago of
Lloyds Banking Group companies' submissions to the British Bankers'
Association (BBA) London Interbank Offered Rate (LIBOR) and
Sterling Repo Rate. The Lloyds Banking Group continues to cooperate
with various other government and regulatory authorities, including
the Serious Fraud Office, the Swiss Competition Commission, and a
number of US State Attorneys General, in conjunction with their
investigations into submissions made by panel members to the bodies
that set LIBOR and various other interbank offered rates.
10. Contingent liabilities and commitments (continued)
Certain Lloyds Banking Group companies, together with other
panel banks, have also been named as defendants in private
lawsuits, including purported class action suits, in the US in
connection with their roles as panel banks contributing to the
setting of US Dollar, Japanese Yen and Sterling LIBOR. The
lawsuits, which contain broadly similar allegations, allege
violations of the Sherman Antitrust Act, the Racketeer Influenced
and Corrupt Organizations Act and the Commodity Exchange Act, as
well as various state statutes and common law doctrines. Certain of
the plaintiffs' claims, including those asserted under US
anti-trust laws, have been dismissed by the US Federal Court for
Southern District of New York (the District Court). The New York
Federal Court of Appeal overturned the District Court's dismissal
of plaintiffs' antitrust claims in May 2016. The anti-trust claims
have now been revived. An application to dismiss these claims for
lack of personal jurisdiction will be made following the positive
November 2015 decision which dismissed OTC and exchange-based
plaintiffs' claims against the Group for lack of personal
jurisdiction.
Certain Lloyds Banking Group companies are also named as
defendants in UK based claims raising LIBOR manipulation
allegations in connection with interest rate hedging products.
It is currently not possible to predict the scope and ultimate
outcome on the Lloyds Banking Group of the various outstanding
regulatory investigations not encompassed by the settlements, any
private lawsuits or any related challenges to the interpretation or
validity of any of the Lloyds Banking Group's contractual
arrangements, including their timing and scale.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS) is the UK's
independent statutory compensation fund of last resort for
customers of authorised financial services firms and pays
compensation if a firm is unable or likely to be unable to pay
claims against it. The FSCS is funded by levies on the authorised
financial services industry. Each deposit-taking institution
contributes towards the FSCS levies in proportion to their share of
total protected deposits on 31 December of the year preceding the
scheme year, which runs from 1 April to 31 March.
Following the default of a number of deposit takers in 2008, the
FSCS borrowed funds from HM Treasury to meet the compensation costs
for customers of those firms. At 31 March 2016, the end of the
latest FSCS scheme year for which it has published accounts, the
principal balance outstanding on these loans was GBP15,655 million
(31 March 2015: GBP15,797 million). Although it is anticipated that
the substantial majority of this loan will be repaid from funds the
FSCS receives from asset sales, surplus cash flow or other
recoveries in relation to the assets of the firms that defaulted,
any shortfall will be funded by deposit-taking participants of the
FSCS. The amount of future levies payable by the Group depends on a
number of factors including the amounts recovered by the FSCS from
asset sales, the Group's participation in the deposit-taking market
at 31 December, the level of protected deposits and the population
of deposit-taking participants.
Tax authorities
The Group provides for potential tax liabilities that may arise
on the basis of the amounts expected to be paid to tax authorities
including open matters where Her Majesty's Revenue and Customs
(HMRC) adopt a different interpretation and application of tax law.
The Lloyds Banking Group has an open matter in relation to a claim
for group relief of losses incurred in its former Irish banking
subsidiary, which ceased trading on 31 December 2010. In 2013 HMRC
informed the Lloyds Banking Group that their interpretation of the
UK rules, permitting the offset of such losses, denies the claim;
if HMRC's position is found to be correct management estimate that
this would result in an increase in current tax liabilities of
approximately GBP600 million and a reduction in the Lloyds Banking
Group's deferred tax asset of approximately GBP400 million (overall
impact on the HBOS Group of approximately GBP350 million). The
Lloyds Banking Group does not agree with HMRC's position and,
having taken appropriate advice, does not consider that this is a
case where additional tax will ultimately fall due. There are a
number of other open matters on which the Group is in discussion
with HMRC; none of these is expected to have a material impact on
the financial position of the Group.
10. Contingent liabilities and commitments (continued)
Residential mortgage repossessions
In August 2014, the Northern Ireland High Court handed down
judgment in favour of the borrowers in relation to three
residential mortgage test cases, concerning certain aspects of the
Lloyds Banking Group's practice with respect to the recalculation
of contractual monthly instalments of customers in arrears. The FCA
is actively engaged with the industry in relation to these
considerations. The Lloyds Banking Group will respond as
appropriate to this and any investigations, proceedings, or
regulatory action that may in due course be instigated as a result
of these issues.
The Financial Conduct Authority's announcement on time-barring
for PPI complaints and Plevin v Paragon Personal Finance
Limited
On 26 November 2015 the FCA issued a Consultation Paper on the
introduction of a deadline by which consumers would need to make
their PPI complaints or else lose their right to have them assessed
by firms or the Financial Ombudsman Service, and proposed rules and
guidance concerning the handling of PPI complaints in light of the
Supreme Court's decision in Plevin v Paragon Personal Finance
Limited [2014] UKSC 61 (Plevin). The next step is for the FCA to
issue a policy statement. The Financial Ombudsman Service is also
considering the implications of Plevin for PPI complaints. The
implications of potential time-barring and the Plevin decision in
terms of the scope of any court proceedings or regulatory action
remain uncertain.
Mortgage arrears handling activities
On 26 May 2016, the Lloyds Banking Group was informed that an
enforcement team at the FCA had commenced an investigation in
connection with the Lloyds Banking Group's mortgage arrears
handling activities. This investigation is ongoing and it is
currently not possible to make a reliable assessment of the
liability, if any, that may result from the investigation.
Other legal actions and regulatory matters
In addition, during the ordinary course of business the Group is
subject to other complaints and threatened or actual legal
proceedings (including class or group action claims) brought by or
on behalf of current or former employees, customers, investors or
other third parties, as well as legal and regulatory reviews,
challenges, investigations and enforcement actions, both in the UK
and overseas. All such material matters are periodically
reassessed, with the assistance of external professional advisers
where appropriate, to determine the likelihood of the Group
incurring a liability. In those instances where it is concluded
that it is more likely than not that a payment will be made, a
provision is established to management's best estimate of the
amount required at the relevant balance sheet date. In some cases
it will not be possible to form a view, for example because the
facts are unclear or because further time is needed properly to
assess the merits of the case, and no provisions are held in
relation to such matters. However the Group does not currently
expect the final outcome of any such case to have a material
adverse effect on its financial position, operations or cash
flows.
10. Contingent liabilities and commitments (continued)
Contingent liabilities and commitments arising from the banking
business
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Contingent liabilities
Performance bonds and other transaction-related
contingencies 78 90
Other items serving as direct credit
substitutes 20 15
Total contingent liabilities 98 105
-------- -------
Commitments
Forward asset purchases and forward
deposits placed 7 23
Undrawn formal standby facilities,
credit lines and other commitments
to lend:
Less than 1 year original maturity:
-------- -------
Mortgage offers made 9,561 9,092
Other commitments 21,810 21,099
-------- -------
31,371 30,191
1 year or over original maturity 3,424 3,992
-------- -------
Total commitments 34,802 34,206
-------- -------
Of the amounts shown above in respect of undrawn formal standby
facilities, credit lines and other commitments to lend, GBP13,458
million (31 December 2015: GBP13,592 million) was irrevocable.
11. Fair values of financial assets and liabilities
The valuations of financial instruments have been classified
into three levels according to the quality and reliability of
information used to determine those fair values. Note 43 to the
Group's 2015 financial statements describes the definitions of the
three levels in the fair value hierarchy.
Valuation control framework
Key elements of the valuation control framework, which covers
processes for all levels in the fair value hierarchy including
level 3 portfolios, include model validation (incorporating
pre-trade and post-trade testing), product implementation review
and independent price verification. Formal committees meet
quarterly to discuss and approve valuations in more judgemental
areas.
Transfers into and out of level 3 portfolios
Transfers out of level 3 portfolios arise when inputs that could
have a significant impact on the instrument's valuation become
market observable; conversely, transfers into the portfolios arise
when consistent sources of data cease to be available.
11. Fair values of financial assets and liabilities (continued)
Valuation methodology
For level 2 and level 3 portfolios, there is no significant
change to what was disclosed in the Group's 2015 Annual Report and
Accounts in respect of the valuation methodology (techniques and
inputs) applied to such portfolios.
The table below summarises the carrying values of financial
assets and liabilities presented on the Group's balance sheet. The
fair values presented in the table are at a specific date and may
be significantly different from the amounts which will actually be
paid or received on the maturity or settlement date.
31 December
30 June 2016 2015
----------------- -----------------
Carrying Fair Carrying Fair
value value value value
GBPm GBPm GBPm GBPm
Financial assets
Trading and other financial
assets at fair value
through profit or loss 3,834 3,834 5,828 5,828
Derivative financial
instruments 20,020 20,020 14,926 14,926
Loans and receivables:
-------- ------- -------- -------
Loans and advances to
banks 987 979 691 691
Loans and advances to
customers 269,435 271,149 270,837 272,000
Debt securities 167 145 182 160
Due from fellow Lloyds
Banking Group undertakings 33,529 33,529 31,560 31,560
-------- ------- -------- -------
304,118 305,802 303,270 304,411
Available-for-sale financial
instruments 3,700 3,700 4,557 4,557
Financial liabilities
Deposits from banks 2,904 2,904 1,541 1,541
Customer deposits 185,638 185,233 190,046 189,764
Due to fellow Lloyds
Banking Group undertakings 82,787 82,787 80,047 80,047
Trading and other financial
liabilities at fair
value through profit
or loss 2,476 2,476 4,415 4,415
Derivative financial
instruments 17,260 17,260 12,744 12,744
Debt securities in issue 18,628 18,411 18,492 18,159
Subordinated liabilities 8,584 7,793 8,304 7,970
The carrying amount of the following financial instruments is a
reasonable approximation of fair value: cash and balances at
central banks, items in the course of collection from banks, items
in course of transmission to banks and notes in circulation.
The Group manages valuation adjustments for its derivative
exposures on a net basis; the Group determines their fair values on
the basis of their net exposures. In all other cases, fair values
of financial assets and liabilities measured at fair value are
determined on the basis of their gross exposures.
11. Fair values of financial assets and liabilities (continued)
The following tables provide an analysis of the financial assets
and liabilities of the Group that are carried at fair value in the
Group's consolidated balance sheet, grouped into levels 1 to 3
based on the degree to which the fair value is observable.
Financial assets
Level Level Level
1 2 3 Total
GBPm GBPm GBPm GBPm
At 30 June 2016
Trading and other financial
assets at fair value
through profit or
loss:
Loans and advances
to customers - 2,354 - 2,354
Debt securities 105 1,256 - 1,361
Equity shares - - 119 119
Total trading and other
financial assets at
fair value through
profit or loss 105 3,610 119 3,834
----- ------ ----- ------
Available-for-sale
financial assets:
Debt securities 108 3,125 - 3,233
Equity shares - 8 459 467
Total available-for-sale
financial assets 108 3,133 459 3,700
----- ------ ----- ------
Derivative financial
instruments - 19,340 680 20,020
----- ------ ----- ------
Total financial assets
carried at fair value 213 26,083 1,258 27,554
----- ------ ----- ------
At 31 December 2015
Trading and other financial
assets at fair value
through profit or
loss:
Loans and advances
to customers - 4,230 - 4,230
Debt securities - 1,372 - 1,372
Equity shares - - 226 226
----- ------ ----- ------
Total trading and other
financial assets at
fair value through
profit or loss - 5,602 226 5,828
----- ------ ----- ------
Available-for-sale
financial assets:
Debt securities 96 4,083 - 4,179
Equity shares 1 38 339 378
Total available-for-sale
financial assets 97 4,121 339 4,557
----- ------ ----- ------
Derivative financial
instruments - 14,584 342 14,926
----- ------ ----- ------
Total financial assets
carried at fair value 97 24,307 907 25,311
----- ------ ----- ------
11. Fair values of financial assets and liabilities (continued)
Financial liabilities
Level Level Level
1 2 3 Total
GBPm GBPm GBPm GBPm
At 30 June 2016
Trading and other financial
liabilities at fair
value
through profit or
loss:
Liabilities held at
fair value through
profit or loss - - 2 2
Trading liabilities 23 2,451 - 2,474
----- ------ ----- ------
Total trading and other
financial liabilities
at fair value through
profit or loss 23 2,451 2 2,476
----- ------ ----- ------
Derivative financial
instruments - 17,196 64 17,260
----- ------ ----- ------
Total financial liabilities
carried at fair value 23 19,647 66 19,736
----- ------ ----- ------
At 31 December 2015
Trading and other financial
liabilities at fair
value
through profit or
loss:
Liabilities held at
fair value through
profit or loss - - 1 1
Trading liabilities - 4,414 - 4,414
----- ------ ----- ------
Total trading and other
financial liabilities
at fair value through
profit or loss - 4,414 1 4,415
----- ------ ----- ------
Derivative financial
instruments - 12,706 38 12,744
----- ------ ----- ------
Total financial liabilities
carried at fair value - 17,120 39 17,159
----- ------ ----- ------
Financial guarantees are recognised at fair value on initial
recognition and are classified as level 3; the balance is not
material.
11. Fair values of financial assets and liabilities (continued)
Movements in level 3 portfolio
The tables below analyse movements in the level 3 financial
assets portfolio.
Trading
and other
financial Total
assets financial
at fair assets
value Available- carried
through for-sale at
profit financial Derivative fair
or loss assets assets value
GBPm GBPm GBPm GBPm
At 1 January 2016 226 339 342 907
Exchange and other adjustments 1 6 42 49
Gains (losses) recognised
in the income statement
within other income (15) - 296 281
Gains recognised in
other comprehensive
income within the revaluation
reserve in respect of
available-for-sale financial
assets - 39 - 39
Purchases - 48 - 48
Sales (93) (4) - (97)
Transfers into the level
3 portfolio - 31 - 31
---------- ---------- ---------- ----------
At 30 June 2016 119 459 680 1,258
---------- ---------- ---------- ----------
Gains (losses) recognised
in the income statement
within other income
relating to those assets
held at 30 June 2016 (12) - 296 284
Trading
and other
financial Total
assets financial
at fair assets
value Available- carried
through for-sale at
profit financial Derivative fair
or loss assets assets value
GBPm GBPm GBPm GBPm
At 1 January 2015 172 270 522 964
Exchange and other adjustments 1 - (30) (29)
Gains recognised in
the income statement
within other income 62 - 19 81
Gains recognised in
other comprehensive
income within the revaluation
reserve in respect of
available-for-sale financial
assets - 1 - 1
Purchases - 38 - 38
Sales (33) (6) (49) (88)
Transfers out of the
level 3 portfolio - - (36) (36)
---------- ---------- ---------- ----------
At 30 June 2015 202 303 426 931
---------- ---------- ---------- ----------
Gains recognised in
the income statement
within other income
relating to those assets
held at 30 June 2015 26 - 19 45
11. Fair values of financial assets and liabilities (continued)
Movements in level 3 portfolio
The tables below analyse movements in the level 3 financial
liabilities portfolio.
Trading
and other
financial Total
liabilities financial
at liabilities
fair value carried
through at
profit Derivative fair
or loss liabilities value
GBPm GBPm GBPm
At 1 January 2016 1 38 39
Exchange and other adjustments - 2 2
Losses recognised in the income
statement within other income 1 24 25
At 30 June 2016 2 64 66
------------ ------------ ------------
Losses recognised in the income
statement within other income
relating to those liabilities
held at 30 June 2016 1 24 25
Trading
and other
financial Total
liabilities financial
at liabilities
fair value carried
through at
profit Derivative fair
or loss liabilities value
GBPm GBPm GBPm
At 1 January 2015 5 101 106
Exchange and other adjustments - (3) (3)
Gains recognised in the income
statement within other income - (3) (3)
Redemptions (4) (43) (47)
At 30 June 2015 1 52 53
------------ ------------ ------------
Gains recognised in the income
statement within other income
relating to those liabilities
held at 30 June 2015 - (3) (3)
11. Fair values of financial assets and liabilities (continued)
The tables below set out the effects of reasonably possible
alternative assumptions for categories of level 3 financial assets
and financial liabilities.
At 30 June 2016
---------------------------------------
Effect of reasonably
possible alternative
assumptions(1)
-----------------------------
Significant
Valuation unobservable Carrying Favourable Unfavourable
technique(s) inputs Range(2) value changes changes
GBPm GBPm GBPm
Trading and other financial assets
at fair value through profit
or loss:
Underlying
asset/net
Equity asset value
and venture (incl.
capital property
investments prices)(3) n/a n/a 119 5 (13)
------------------ -------------- ------------------ --------
119
--------
Available for sale
financial assets 459 27 (30)
Derivative financial
assets:
Interest Option Interest
rate pricing rate
derivatives model volatility 2%/115% 680 7 (3)
-------------- ------------------
680
--------
Financial assets carried
at fair value 1,258
--------
Trading and other financial liabilities
at fair value through profit
or loss 2 - -
Derivative financial
liabilities:
Option
Interest pricing Interest
rate derivatives model rate volatility 2%/115% 64 - -
-------------- ------------------ --------
64
--------
Financial liabilities
carried at fair value 66
--------
(1) Where the exposure to an unobservable input is
managed on a net basis, only the net impact is
shown in the table.
(2) The range represents the highest and lowest inputs
used in the level 3 valuations.
(3) Underlying asset/net asset values represent fair
value.
11. Fair values of financial assets and liabilities (continued)
At 31 December 2015
---------------------------------------
Effect of reasonably
possible alternative
assumptions(1)
-----------------------------
Significant
Valuation unobservable Carrying Favourable Unfavourable
technique(s) inputs Range(2) value changes changes
GBPm GBPm GBPm
Trading and other financial assets
at fair value through profit
or loss:
Underlying
asset/net
Equity asset value
and venture (incl.
capital property
instruments prices)(3) n/a n/a 226 21 (26)
------------------ -------------- --------------- -------- --------
226
--------
Available for sale
financial assets 339 25 (27)
Derivative financial
assets:
Interest Option Interest
rate pricing rate
derivatives model volatility 1%/63% 342 3 (1)
-------------- --------------- --------
342
--------
Financial assets carried
at fair value 907
--------
Trading and other financial liabilities
at fair value through profit
or loss 1 - -
Derivative financial
liabilities:
Option Interest
Interest pricing rate
rate derivatives model volatility 1%/63% 38 - -
-------------- --------------- --------
38
--------
Financial liabilities carried
at fair value 39
--------
(1) Where the exposure to an unobservable input is
managed on a net basis, only the net impact is
shown in the table.
(2) The range represents the highest and lowest inputs
used in the level 3 valuations.
(3) Underlying asset/net asset values represent fair
value.
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt
securities, unlisted equity investments and derivatives are
unchanged from those described in the Group's 2015 financial
statements.
Reasonably possible alternative assumptions
Valuation techniques applied to many of the Group's level 3
instruments often involve the use of two or more inputs whose
relationship is interdependent. The calculation of the effect of
reasonably possible alternative assumptions included in the table
above reflects such relationships and are unchanged from those
described in the Group's 2015 financial statements.
12. Related party transactions
Balances and transactions with Lloyds Banking Group plc and
fellow Lloyds Banking Group undertakings
The Company and its subsidiaries have balances due to and from
the Company's ultimate parent company, Lloyds Banking Group plc,
and fellow Lloyds Banking Group undertakings. These are included on
the balance sheet as follows:
At At
30 June 31 Dec
2016 2015
GBPm GBPm
Assets
Derivative financial instruments 12,147 9,206
Loans and receivables: Due from fellow
Lloyds Banking Group undertakings 33,529 31,560
Trading and other financial assets
at fair value through profit or loss 3,610 5,602
Liabilities
Due to fellow Lloyds Banking Group
undertakings 82,787 80,047
Derivative financial instruments 13,288 9,507
Subordinated liabilities 366 465
Trading and other financial liabilities
at fair value through profit or loss 2,437 4,112
Debt securities in issue 241 598
During the half-year to 30 June 2016 the Group earned GBP144
million (half-year ended 30 June 2015: GBP201 million) of interest
income and incurred GBP900 million (half-year ended 30 June 2015:
GBP897 million, as restated - see note 1) of interest expense on
balances and transactions with Lloyds Banking Group plc and fellow
Lloyds Banking Group undertakings.
In addition, during the half-year to 30 June 2016 the Group
incurred expenditure of GBP41 million (half-year ended 30 June
2105: GBP14 million) on behalf of fellow Lloyds Banking Group
undertakings which was recharged to those undertakings; and fellow
Lloyds Banking Group undertakings incurred expenditure of GBP409
million (half-year ended 30 June 2015: GBP272 million) on behalf of
the Group which has been recharged to the Group.
UK government
In January 2009, the UK government through HM Treasury became a
related party of the Lloyds Banking Group plc, the Company's
ultimate parent undertaking, following its subscription for
ordinary shares issued under a placing and open offer. As at 30
June 2016, HM Treasury held an interest of 9.1 per cent in the
Lloyds Banking Group plc's ordinary share capital, with its
interest having fallen below 20 per cent on 11 May 2015. As a
consequence of HM Treasury no longer being considered to have a
significant influence, it ceased to be a related party of Lloyds
Banking Group plc and therefore of the Group, for IAS 24 purposes
at that date.
In accordance with IAS 24, UK government-controlled entities
were related parties of the Group until 11 May 2015. The Group also
regarded the Bank of England and entities controlled by the UK
government, including The Royal Bank of Scotland Group plc (RBS),
NRAM plc and Bradford & Bingley plc, as related parties.
The Lloyds Banking Group has participated in a number of schemes
operated by the UK government and central banks and made available
to eligible banks and building societies.
National Loan Guarantee Scheme
The Lloyds Banking Group participates in the UK government's
National Loan Guarantee Scheme, providing eligible UK businesses
with discounted funding based on the Lloyds Banking Group's
existing lending criteria. Eligible businesses who have taken up
the funding benefit from a 1 per cent discount on their funding
rate for a pre-agreed period of time.
12. Related party transactions (continued)
Funding for Lending
The Funding for Lending Scheme represents a further source of
cost effective secured term funding available to the Lloyds Banking
Group. The initiative supports a broad range of UK based customers,
focussing primarily on providing small businesses with cheaper
finance to invest and grow. In November 2015, the Bank of England
announced that the deadline for banks to draw down their borrowing
allowance would be extended for a further two years until 31
January 2018. At 30 June 2016, the Lloyds Banking Group had drawn
down GBP33.1 billion (31 December 2015: GBP32.1 billion) under the
Scheme.
Enterprise Finance Guarantee Scheme
The Lloyds Banking Group participates in the Enterprise Finance
Guarantee Scheme which supports viable businesses with access to
lending where they would otherwise be refused a loan due to a lack
of lending security. The Department for Business, Innovation and
Skills provides the lender with a guarantee of up to 75 per cent of
the capital of each loan subject to the eligibility of the
customer. As at 30 June 2016, the Lloyds Banking Group had offered
6,647 loans to customers, worth over GBP568 million. Under the most
recent renewal of the terms of the scheme, Lloyds Bank plc and Bank
of Scotland plc, on behalf of the Lloyds Banking Group, contracted
with The Secretary of State for Business, Innovation and
Skills.
Help to Buy
The Help to Buy Scheme is a scheme promoted by the UK government
and is aimed to encourage participating lenders to make mortgage
loans available to customers who require higher loan-to-value
mortgages. Halifax and Lloyds are currently participating in the
Scheme whereby customers borrow between 90 per cent and 95 per cent
of the purchase price. In return for the payment of a commercial
fee, HM Treasury has agreed to provide a guarantee to the lender to
cover a proportion of any loss made by the lender. GBP3,383 million
of outstanding loans at 30 June 2016 (31 December 2015: GBP3,133
million) had been advanced under this scheme.
Business Growth Fund
The Lloyds Banking Group has invested GBP222 million (31
December 2015: GBP176 million) in the Business Growth Fund (under
which an agreement was entered into with RBS amongst others) and,
as at 30 June 2016, carries the investment at a fair value of
GBP216 million (31 December 2015: GBP170 million).
Big Society Capital
The Lloyds Banking Group has invested GBP38 million (31 December
2015: GBP36 million) in the Big Society Capital Fund under which an
agreement was entered into with RBS amongst others and, as at 30
June 2016, carries the investment at a fair value of GBP37 million
(31 December 2015: GBP33 million).
Housing Growth Partnership
The Lloyds Banking Group has invested GBP11 million (31 December
2015: GBP4 million) and has committed to invest up to a further
GBP39 million into the Housing Growth Partnership under which an
agreement was entered into with the Homes and Communities
Agency.
Central bank facilities
In the ordinary course of business, the Lloyds Banking Group may
from time to time access market-wide facilities provided by central
banks.
Other government-related entities
Other than the transactions referred to above, there were no
significant transactions with the UK government and UK
government-controlled entities (including UK government-controlled
banks) during the year that were not made in the ordinary course of
business or that were unusual in their nature or conditions.
Other related party transactions
Other related party transactions for the half-year to 30 June
2016 are similar in nature to those for the year ended 31 December
2015.
13. Dividends on ordinary shares
The Company paid a dividend of GBP2,000 million on 12 May 2016;
the Company paid dividends of GBP7,000 million on 17 September 2015
and GBP4,500 million on 15 December 2015.
14. Future accounting developments
The following pronouncements are not applicable for the year
ending 31 December 2016 and have not been applied in preparing
these financial statements. Save as disclosed below, the full
impact of these accounting changes is being assessed by the Group.
As at 27 July 2016, these pronouncements are awaiting EU
endorsement.
IFRS 9 Financial Instruments
IFRS 9 replaces IAS 39 Financial Instruments: Recognition and
Measurement.
Classification and Measurement
IFRS 9 requires financial assets to be classified into one of
three measurement categories, fair value through profit or loss,
fair value through other comprehensive income and amortised cost,
on the basis of the objectives of the entity's business model for
managing its financial assets and the contractual cash flow
characteristics of the instruments.
The Group has undertaken an assessment to determine the
potential impact of changes in classification and measurement of
financial assets. The adoption of IFRS 9 is unlikely to result in a
significant change to current asset measurement bases, however, the
final impact will be dependent on the facts and circumstances that
exist on 1 January 2018.
IFRS 9 retains most of the existing requirements for financial
liabilities. However, for financial liabilities designated at fair
value through profit or loss, gains or losses attributable to
changes in own credit risk may be presented in other comprehensive
income. This change is expected to be immaterial to the Group.
Impairment
IFRS 9 also replaces the existing 'incurred loss' impairment
approach with an expected credit loss approach, resulting in
earlier recognition of credit losses. The IFRS 9 impairment model
has three stages. Entities are required to recognise a 12 month
expected loss allowance on initial recognition (stage 1) and a
lifetime expected loss allowance when there has been a significant
increase in credit risk (stage 2). The assessment of whether a
significant increase in credit risk has occurred is a key aspect of
the IFRS 9 methodology and involves quantitative and qualitative
measures and therefore requires considerable management judgement.
Stage 3 requires objective evidence that an asset is
credit-impaired, which is similar to the guidance on incurred
losses in IAS 39. Loan commitments and financial guarantees not
measured at fair value through profit or loss are also in
scope.
IFRS 9 requires the use of more forward looking information
including reasonable and supportable forecasts of future economic
conditions. The need to consider multiple economic scenarios and
how they could impact the loss allowance is a subjective feature of
the IFRS 9 impairment model. The final methodology for multiple
economic scenarios is still under development, however, economic
scenarios are likely to consider the Group's five year operating
plan and stress testing scenarios. Appropriate governance and
oversight will be established around the process. It is important
that the linkage between expected credit losses, economic
scenarios, and stress testing is understood and transparent.
These changes may result in a material increase in the Group's
balance sheet provisions for credit losses and may therefore
negatively impact the Group's regulatory capital position. The
extent of any increase in provisions will depend upon, amongst
other things, the composition of the Group's lending portfolios and
forecast economic conditions at the date of implementation. The
requirement to transfer assets between stages and to incorporate
forward looking data into the expected credit loss calculation,
including multiple economic scenarios, is likely to result in
impairment charges being more volatile when compared to the current
IAS 39 impairment model.
14. Future accounting developments (continued)
Hedge Accounting
The hedge accounting requirements of IFRS 9 are more closely
aligned with risk management practices and follow a more
principle-based approach than IAS 39, however, there is an option
to maintain the existing IAS 39 hedge accounting rules until the
IASB completes its project on macro hedging. The Group currently
expects to continue applying IAS 39 hedge accounting in accordance
with this accounting policy choice.
Transition
IFRS 9 is effective for annual periods beginning on or after 1
January 2018 with no requirement to restate prior periods. If
comparative periods are not restated, at the date of initial
application, any difference between the carrying amount of
financial assets and the change in loss allowance shall be
recognised in opening retained earnings.
IFRS 9 implementation programme
The Group has an established IFRS 9 programme to ensure a high
quality implementation in compliance with the standard and
regulatory guidance. The programme involves Finance and Risk
functions across the Group with Divisional and Group steering
committees providing oversight. The key responsibilities of the
programme include defining IFRS 9 methodology and accounting
policy, development of expected loss models, identifying data and
system requirements, and establishing an appropriate operating
model and governance framework.
Impairment methodologies have been documented and, in addition
to IFRS 9, assessed against the expectations of the Basel Committee
on Banking Supervision paper 'Guidance on Credit Risk and
Accounting for Expected Credit Losses', and the Global Public
Policy Committee paper 'The implementation of IFRS 9 impairment
requirements by banks'.
The build phase of the programme is underway for the core credit
risk models. Systems, processes and model testing will take place
in 2017 to embed the changes, enhance business readiness and help
improve the understanding of the new impairment models. The
programme is progressing in line with its delivery plans.
For all material portfolios, IFRS 9 expected credit loss
calculation will leverage the systems, data and models used to
calculate regulatory expected credit losses. IFRS 9 expected credit
loss models will use the three key input parameters for the
computation of expected loss: probability of default; loss given
default; and exposure at default.
However, given the conservatism inherent in the regulatory
expected losses calculation, a number of adjustments to these
components must be made to ensure compliance with IFRS 9
requirements.
IFRS 9 models differ from the regulatory models in a number of
conceptual ways, for example stage 2 assets under IFRS 9, for which
there has been a significant increase in credit risk, carry a
lifetime expected loss amount; whereas regulatory models generate
12 month expected losses for non-defaulted loans, even though they
may have experienced a significant increase in credit risk. In
addition, different assets are in scope for each reporting base. As
a result, the size of the regulatory expected losses should not be
taken as a proxy for the size of the loss allowance under IFRS
9.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 replaces IAS 18 Revenue and IAS 11 Construction
Contracts. Financial instruments, leases and insurance contracts
are out of scope and so this standard is not currently expected to
have a significant impact on the Group's profitability.
IFRS 15 is effective for annual periods beginning on or after 1
January 2018.
IFRS 16 Leases
On 13 January 2016 the IASB issued IFRS 16 to replace IAS 17
Leases. IFRS 16 requires lessees to recognise a right of use asset
and a liability for future payments arising from a lease contract.
Lessor accounting requirements remain aligned to the current
approach under IAS 17.
IFRS 16 is effective for annual periods beginning on or after 1
January 2019.
14. Future accounting developments (continued)
Amendments to IAS 7 Statement of Cash Flows, IAS 12 Income Taxes
and IFRS 2 Share-based Payment
During 2016, the IASB has issued amendments to IAS 7 Statement
of Cash Flows which require additional disclosure about an entity's
financing activities, IAS 12 Income Taxes which clarify when a
deferred tax asset should be recognised for unrealised losses and
IFRS 2 Share-based Payment which provide guidance on accounting for
cash and certain
net-settled schemes. These revised requirements, which are
effective for annual periods beginning on or after 1 January 2017
for IAS 7 and IAS 12 and 1 January 2018 for IFRS 2, are not
expected to have a significant impact on the Group.
15. 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 has published consolidated accounts for the year
ended 31 December 2015 and copies may be obtained from Investor
Relations, Lloyds Banking Group, 25 Gresham Street, London EC2V 7HN
and are available for download from www.lloydsbankinggroup.com.
16. Other information
The financial information included in these condensed
consolidated interim financial statements does not constitute
statutory accounts within the meaning of section 434 of the
Companies Act 2006. Statutory accounts for the year ended 31
December 2015 have been delivered to the Registrar of Companies.
The auditors' report on those accounts was unqualified, did not
include an emphasis of matter paragraph and did not include a
statement under section 498 of the Companies Act 2006.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors listed below (being all the directors of HBOS plc)
confirm that to the best of their knowledge these condensed
consolidated half-year financial statements have been prepared in
accordance with International Accounting Standard 34, Interim
Financial Reporting, as adopted by the European Union, and that the
half-year management report herein includes a fair review of the
information required by DTR 4.2.7R and DTR 4.2.8R, namely:
-- an indication of important events that have occurred during
the six months ended 30 June 2016 and their impact on the condensed
consolidated half-year financial statements, and a description of
the principal risks and uncertainties for the remaining six months
of the financial year; and
-- material related party transactions in the six months ended
30 June 2016 and any material changes in the related party
transactions described in the last annual report.
Signed on behalf of the board by
António Horta-Osório
Group Chief Executive
27 July 2016
HBOS plc board of directors:
Lord Blackwell (Chairman)
António Horta-Osório (Group Chief Executive)
George Culmer (Chief Financial Officer)
Juan Colombás (Chief Risk Officer)
Anita Frew (Deputy Chairman)
Alan Dickinson
Simon Henry
Nicholas Luff
Deborah McWhinney
Nicholas Prettejohn
Stuart Sinclair
Anthony Watson CBE
Sara Weller CBE
INDEPENDENT REVIEW REPORT TO HBOS PLC
Report on the condensed consolidated half-year financial
statements
Our conclusion
We have reviewed HBOS plc's condensed consolidated half-year
financial statements (the "interim financial statements") in the
2016 half-year management report of HBOS plc for the six month
period ended 30 June 2016. Based on our review, nothing has come to
our attention that causes us to believe that the interim financial
statements are not prepared, in all material respects, in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union and the
Disclosure Rules and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated balance sheet as at 30 June 2016;
-- the consolidated income statement for the six months ended 30 June 2016
-- the consolidated statement of comprehensive income for the six months ended 30 June 2016;
-- the consolidated cash flow statement for the six months ended 30 June 2016;
-- the consolidated statement of changes in equity for the six months ended 30 June 2016; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the 2016 half-year
management report have been prepared in accordance with
International Accounting Standard 34, 'Interim Financial
Reporting', as adopted by the European Union and the Disclosure
Rules and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
As disclosed in note 1 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The 2016 half-year management report, including the interim
financial statements, is the responsibility of, and has been
approved by, the directors. The directors are responsible for
preparing the 2016 half-year management report in accordance with
the Disclosure Rules and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the 2016 half-year management report based
on our review. This report, including the conclusion, has been
prepared for and only for the company for the purpose of complying
with the Disclosure Rules and Transparency Rules of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
INDEPENDENT REVIEW REPORT TO HBOS PLC (continued)
What a review of interim financial statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK and
Ireland) and, consequently, does not enable us to obtain assurance
that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit
opinion.
We have read the other information contained in the 2016
half-year management report and considered whether it contains any
apparent misstatements or material inconsistencies with the
information in the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
27 July 2016
Notes:
(a) The maintenance and integrity of the Lloyds Banking Group
plc website is the responsibility of the directors; the work
carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for
any changes that may have occurred to the interim financial
statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Douglas Radcliffe
Group Investor Relations Director
020 7356 1571
douglas.radcliffe@finance.lloydsbanking.com
Mike Butters
Director of Investor Relations
020 7356 1187
mike.butters@finance.lloydsbanking.com
Andrew Downey
Director of Investor Relations
020 7356 2334
andrew.downey@finance.lloydsbanking.com
CORPORATE AFFAIRS
Ed Petter
Group Media Relations Director
020 8936 5655
ed.petter@lloydsbanking.com
Matt Smith
Head of Corporate Media
020 7356 3522
matt.smith@lloydsbanking.com
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
IR LLFSIDSITFIR
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