TIDM68FF
RNS Number : 5071W
HBOS PLC
01 August 2018
HBOS plc
2018 Half-Year Results
Member of the Lloyds Banking Group
FORWARD LOOKING STATEMENTS
This document contains certain forward looking statements with
respect to the business, strategy, plans and / or results of the
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 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, inflation, 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 and other benefits
including, but without limitation as a result of any acquisitions,
disposals and other strategic transactions; changing customer
behaviour including consumer spending, saving and borrowing habits;
changes to borrower or counterparty credit quality; instability in
the global financial markets, including Eurozone instability,
instability as a result of the exit by the UK from the European
Union (EU) and the potential for other countries to exit the EU or
the Eurozone and the impact of any sovereign credit rating
downgrade or other sovereign financial issues; technological
changes and risks to the security of IT and operational
infrastructure, systems, data and information resulting from
increased threat of cyber and other attacks; natural, pandemic and
other disasters, adverse weather and similar contingencies outside
the 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, practices and accounting
standards or taxation, including as a result of the exit by the UK
from the EU, or a further possible referendum on Scottish
independence; changes to regulatory capital or liquidity
requirements and similar contingencies outside the 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 together with any resulting impact on the future
structure of the Group; the ability to attract and retain senior
management and other employees and meet its diversity objectives;
actions or omissions by the 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,
lending companies and digital innovators and disruptive
technologies; and exposure to regulatory or competition scrutiny,
legal, regulatory or competition proceedings, investigations or
complaints. Please refer to the latest Annual Report on Form 20-F
filed by Lloyds Banking Group plc with the US Securities and
Exchange Commission for a discussion of certain factors and risks
together with examples of forward looking statements.
Except as required by any applicable law or regulation, the
forward looking statements contained in this document are made as
of today's date, and the HBOS Group expressly disclaims any
obligation or undertaking to release publicly any updates or
revisions to any forward looking statements contained in this
document to reflect any change in the HBOS Group's expectations
with regard thereto or any change in events, conditions or
circumstances on which any such statement is based. The
information, statements and opinions contained in this document do
not constitute a public offer under any applicable law or an offer
to sell any securities or financial instruments or any advice or
recommendation with respect to such securities or financial
instruments.
CONTENTS
Page
Financial review 1
Principal risks and uncertainties 5
Condensed consolidated half-year financial statements (unaudited)
Consolidated income statement 6
Consolidated statement of comprehensive income 7
Consolidated balance sheet 8
Consolidated statement of changes in equity 10
Consolidated cash flow statement 13
Notes 14
Statement of directors' responsibilities 46
Independent review report 47
Contacts 49
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
During the half-year to 30 June 2018, the Group recorded a
profit before tax of GBP1,110 million compared with a profit before
tax in the half-year to 30 June 2017 of GBP1,705 million.
Total income decreased by GBP719 million, to GBP2,965 million in
the half-year to 30 June 2018 compared with GBP3,684 million in the
half-year to 30 June 2017, comprising a GBP174 million decrease in
net interest income and a decrease of GBP545 million in other
income.
Net interest income was GBP2,869 million in the half-year to 30
June 2018, a decrease of GBP174 million compared to GBP3,043
million in the half-year to 30 June 2017 as a result of balance
sheet reductions and continued asset pricing pressure.
Other income was GBP545 million lower at GBP96 million in the
half-year to 30 June 2018 compared to GBP641 million in the
half-year to 30 June 2017. Net fee and commission income was GBP87
million lower at GBP116 million in the half-year to 30 June 2018
compared to GBP203 million in the half-year to 30 June 2017, in
part reflecting a lower level of current account fees as a result
of changes to overdraft charging announced in July 2017, which took
effect in November. Net trading income was GBP275 million lower and
other operating income was GBP183 million lower at a deficit of
GBP20 million in the half-year to 30 June 2018 compared to income
of GBP163 million in the half-year to 30 June 2017, due to a loss
on sale of the Group Irish residential mortgage portfolio of GBP105
million; 2017 included a profit of GBP63 million on the sale of the
Group's shares in Vocalink.
Operating expenses decreased by GBP141 million to GBP1,762
million in the half-year to 30 June 2018 compared with GBP1,903
million in the half-year to 30 June 2017. There was a GBP237
million reduction in regulatory provisions partly offset by a GBP96
million increase in other operating expenses. The charge in respect
of regulatory provisions was GBP245 million compared to GBP482
million in the half-year to 30 June 2017 and comprised a charge of
GBP175 million in respect of payment protection insurance and GBP70
million in respect of other conduct issues. Other operating
expenses were GBP96 million higher at GBP1,517 million in the
half-year to 30 June 2018 compared to GBP1,421 million in the
half-year to 30 June 2017 reflecting increases in staff,
restructuring and other costs.
Credit quality across the portfolio remains strong. Impairment
losses increased by GBP17 million to GBP93 million in the half-year
to 30 June 2018 compared with GBP76 million in the half-year to 30
June 2017, reflecting the expected lower releases and write-backs.
In the current benign economic environment, the implementation of
IFRS 9 has not had a significant effect on the Group's impairment
charge.
Balance sheet and capital
A reduction in balances with fellow Lloyds Banking Group
undertakings contributed to a reduction in total assets and
liabilities. Total assets were GBP26,051 million lower at
GBP338,629 million at 30 June 2018 compared to GBP364,680 million
at 31 December 2017, and total liabilities were GBP24,923 million
lower at GBP325,758 million at 30 June 2018 compared to GBP350,681
million at 31 December 2017.
Total equity has decreased by GBP1,128 million from GBP13,999
million at 31 December 2017 to GBP12,871 million at 30 June 2018,
as dividends paid of GBP1,800 million have more than offset profits
for the period.
The Group's common equity tier 1 capital ratio increased to 12.3
per cent (31 December 2017: 11.9 per cent) and the tier 1 capital
ratio increased to 16.6 per cent (31 December 2017: 15.8 per cent)
largely due to the reduction in risk-weighted assets, partially
offset by the reduction in common equity tier 1 capital, mainly as
a result of the accrual for foreseeable dividends in respect of
2018 earnings. The total capital ratio increased to 20.0 per cent
(31 December 2017: 19.0 per cent) reflecting the reduction in risk
weighted assets and non-significant investments (the latter a
reflection of ring-fencing related restructuring activity) offset
in part by the reduction in common equity tier 1 capital and
regulatory adjustments applied to tier 2 instruments.
Risk -weighted assets reduced by GBP6,032 million, or 9 per
cent, to GBP63,318 million at 30 June 2018 compared to GBP69,350 at
31 December 2017, largely relating to the sale of the Irish
mortgage portfolio.
FINANCIAL REVIEW (continued)
Capital position at 30 June 2018
The Group's capital position as at 30 June 2018, applying CRD IV
transitional rules and IFRS 9 transitional arrangements, is set out
in the following section.
Capital ratios
At At
30 June 31 Dec
Capital resources (transitional) 2018 2017
GBPm GBPm
Common equity tier 1
Shareholders' equity per balance sheet 11,334 12,462
Adjustment to retained earnings for foreseeable dividends (1,500) (1,750)
Cash flow hedging reserve 50 (23)
Other adjustments 292 (3)
------- -------
10,176 10,686
Less: deductions from common equity tier 1
Goodwill and other intangible assets (433) (437)
Prudent valuation adjustment (42) (119)
Excess of expected losses over impairment provisions and value adjustments - (46)
Removal of defined benefit pension surplus (364) (57)
Securitisation deductions - (180)
Non-significant investments - (10)
Deferred tax assets (1,529) (1,581)
------- -------
Common equity tier 1 capital 7,808 8,256
------- -------
Additional tier 1
Additional tier 1 instruments 2,710 3,012
less: deductions from tier 1
Non-significant investments - (312)
------- -------
Total tier 1 capital 10,518 10,956
------- -------
Tier 2
Tier 2 instruments 2,030 2,547
Eligible provisions 111 247
less: deductions from tier 2
Non-significant investments - (587)
------- -------
Total tier 2 capital 2,141 2,207
------- -------
Total capital resources 12,659 13,163
------- -------
Risk-weighted assets 63,318 69,350
Common equity tier 1 capital ratio 12.3% 11.9%
Tier 1 capital ratio 16.6% 15.8%
Total capital ratio 20.0% 19.0%
FINANCIAL REVIEW (continued)
At At
30 June 31 Dec
2018 2017
GBPm GBPm
Risk-weighted assets
Foundation Internal Ratings Based (IRB) Approach 5,624 5,808
Retail IRB Approach 35,465 38,010
Other IRB Approach 1,076 3,437
------- ------
IRB Approach 42,165 47,255
Standardised Approach 6,759 7,471
------- ------
Credit risk 48,924 54,726
------- ------
Counterparty credit risk 745 995
Credit valuation adjustment risk 201 167
Operational risk 11,055 11,055
Market risk 1,353 1,608
------- ------
Underlying risk-weighted assets 62,278 68,551
Threshold risk-weighted assets 1,040 799
------- ------
Total risk-weighted assets 63,318 69,350
------- ------
PRINCIPAL RISKS AND UNCERTAINTIES
The significant risks faced by the Group which could impact the
success of delivering against the Group's long-term strategic
objectives and through which global macro-economic conditions,
on-going political uncertainty, regulatory developments and market
liquidity dynamics could manifest, are detailed below. Except where
noted, there has been no significant change to the description of
these risks or key mitigating actions disclosed in the Group's 2017
Annual Report and Accounts, with any quantitative disclosures
updated herein.
Lloyds Banking Group continues to consider and assess the
potential implications of the UK leaving the European Union and
manage related developments to assess, and if possible mitigate any
impact to its customers, colleagues and products - as well as
legal, regulatory, tax, financial and capital implications.
Credit risk - The risk that parties with whom the Group has
contracted fail to meet their financial obligations (both on and
off balance sheet). Adverse changes in the economic, geopolitical
and market environment could impact profitability due to an
increase in impairment losses, write downs and/or decrease in asset
valuations.
Regulatory and legal risk - The risks of changing legislation,
regulation, policies, voluntary codes of practice and their
interpretation in the markets in which the Group operates may have
a significant impact on the Group's operations, business prospects,
structure, costs, capital requirements and/or ability to enforce
contractual obligations.
Conduct risk - Conduct risk can arise from a number of areas
including selling products to customers which do not meet their
needs; failing to deal with customers' complaints effectively; not
meeting customers' expectations; failing to promote effective
competition in the interest of customers; and exhibiting behaviours
which could impact on the integrity of the market or undermine
wider regulatory standards.
Operational risk - The Group faces significant operational risks
which may disrupt services to customers, cause reputational damage,
and result in financial loss. These include the availability,
resilience and security of the Group's core IT systems, unlawful or
inappropriate use of customer data, theft of sensitive data, fraud
and financial crime threats, and the potential for failings in the
Group's customer processes.
People risk - Key people risks include the risk that the Group
fails to maintain organisational skills, capability, resilience and
capacity levels in response to organisational, political and
external market change and evolving business needs.
Capital risk - The risk that the Group has a sub-optimal
quantity or quality of capital or that capital is inefficiently
deployed across the Group.
Funding and liquidity risk - The risk that the Group has
insufficient financial resources to meet its commitments as they
fall due.
Governance risk - Against a background of increased regulatory
focus on governance and risk management, the most significant
challenges arise from meeting the requirements to ring-fence core
UK financial services and activities from January 2019 and further
requirements under the Senior Manager and Certification Regime
(SMCR).
Market risk - The risk that the Group's capital or earnings
profile is affected by adverse market rates, in particular interest
rates and credit spreads in the banking business, and credit
spreads in the Group's defined benefit pension schemes.
Model risk - The risk of financial loss, regulatory censure,
reputational damage or customer detriment, as a result of
deficiencies in the development, application and ongoing operation
of financial models and rating systems.
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED INCOME STATEMENT
Half-year Half-year
to 30 June to 30 June
2018 2017
Note GBP million GBP million
Interest and similar income 4,276 4,466
Interest and similar expense (1,407) (1,423)
----------- -----------
Net interest income 2,869 3,043
----------- -----------
Fee and commission income 302 390
Fee and commission expense (186) (187)
----------- -----------
Net fee and commission income 2 116 203
Net trading income - 275
Other operating income (20) 163
----------- -----------
Other income 96 641
----------- -----------
Total income 2,965 3,684
----------- -----------
Regulatory provisions 11 (245) (482)
Other operating expenses (1,517) (1,421)
----------- -----------
Total operating expenses 3 (1,762) (1,903)
----------- -----------
Trading surplus 1,203 1,781
Impairment 4 (93) (76)
----------- -----------
Profit before tax 1,110 1,705
Tax expense 5 (361) (522)
----------- -----------
Profit for the period 749 1,183
----------- -----------
Profit attributable to ordinary shareholders 699 1,132
Profit attributable to non-controlling interests 50 51
----------- -----------
Profit for the period 749 1,183
----------- -----------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Half-year Half-year
to 30 June to 30 June
2018 2017
GBP million GBP million
Profit for the period 749 1,183
Other comprehensive income
Items that will not subsequently be classified to profit or loss:
Post-retirement defined benefit scheme remeasurements (note 10):
----------- -----------
Remeasurements before taxation 426 (38)
Tax (81) 7
-----------
345 (31)
Movement in revaluation reserve in respect of equity shares held at fair
value through other
comprehensive income:
----------- -----------
Change in fair value 8
Tax -
-----------
8
Items that may subsequently be classified to profit or loss:
Movement in revaluation reserve in respect of financial assets held at fair
value through
other comprehensive income - debt securities:
----------- -----------
Change in fair value (11)
Income statement transfers in respect of disposals -
Impairment 1
Tax 1
-----------
(9)
Movements in revaluation reserve in respect of available-for-sale financial
assets:
----------- -----------
Change in fair value 11
Income statement transfers in respect of disposals (116)
Income statement transfers in respect of impairments 10
Tax 11
-----------
(84)
Movement in cash flow hedging reserve:
----------- -----------
Effective portion of changes in fair value (89) (54)
Net income statement transfers (11) 15
Tax 27 10
-----------
(73) (29)
Currency translation differences (tax: nil) (1) 1
----------- -----------
Other comprehensive income for the period, net of tax 270 (143)
----------- -----------
Total comprehensive income for the period 1,019 1,040
----------- -----------
Total comprehensive income attributable to ordinary shareholders 969 989
Total comprehensive income attributable to non-controlling interests 50 51
----------- -----------
Total comprehensive income for the period 1,019 1,040
----------- -----------
CONSOLIDATED BALANCE SHEET
At At
30 June 31 Dec
2018 2017
Note GBP million GBP million
Assets
Cash and balances at central banks 2,426 2,677
Items in course of collection from banks 216 260
Financial assets at fair value through profit or loss 6 611 1,400
Derivative financial instruments 10,112 11,634
----------- -----------
Loans and advances to banks 1,180 551
Loans and advances to customers 7 263,240 268,657
Debt securities 9 137
Due from fellow Lloyds Banking Group undertakings 51,095 74,849
----------- -----------
Financial assets at amortised cost 315,524 344,194
Financial assets at fair value through other comprehensive income 1,085
Available-for-sale financial assets 937
Goodwill 325 325
Other intangible assets 108 112
Property, plant and equipment 771 823
Current tax recoverable 59 2
Deferred tax assets 1,857 1,878
Retirement benefit assets 10 439 69
Other assets 5,096 369
----------- -----------
Total assets 338,629 364,680
----------- -----------
CONSOLIDATED BALANCE SHEET (continued)
At At
30 June 31 Dec
2018 2017
Note GBP million GBP million
Equity and liabilities
Liabilities
Deposits from banks 20,845 21,183
Customer deposits 167,969 171,198
Due to fellow Lloyds Banking Group undertakings 105,594 125,541
Items in course of transmission to banks 282 269
Financial liabilities at fair value through profit or loss 104 50
Derivative financial instruments 11,238 10,631
Notes in circulation 1,140 1,313
Debt securities in issue 9 11,541 10,919
Other liabilities 460 285
Retirement benefit obligations 10 127 135
Current tax liabilities 2 518
Other provisions 1,686 2,019
Subordinated liabilities 4,770 6,620
----------- -----------
Total liabilities 325,758 350,681
----------- -----------
Equity
----------- -----------
Share capital 3,763 3,763
Other reserves 10,144 10,234
Retained profits (2,573) (1,535)
----------- -----------
Shareholders' equity 11,334 12,462
Non-controlling interests 1,537 1,537
----------- -----------
Total equity 12,871 13,999
----------- -----------
Total equity and liabilities 338,629 364,680
----------- -----------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
-------------------------------------------------
Share
capital Non-
and Other Retained controlling
premium reserves profits Total interests Total
GBP
million GBP million GBP million GBP million GBP million GBP million
Balance at 31
December 2017: 3,763 10,234 (1,535) 12,462 1,537 13,999
Adjustment for
IFRS9 and IFRS15
(note 16) - (14) (334) (348) - (348)
---------- ----------- ----------- ----------- ----------- -----------
Balance at 1
January 2018: 3,763 10,220 (1,869) 12,114 1,537 13,651
Comprehensive
income
Profit for the
period - - 699 699 50 749
Other
comprehensive
income
---------- ----------- ----------- ----------- ----------- -----------
Post retirement
defined benefit
scheme
remeasurements,
net of tax - - 345 345 - 345
Movements in
revaluation
reserve in
respect of
financial assets
held at fair
value through
other
comprehensive
income, net of
tax:
Debt
securities - (9) - (9) - (9)
Equity shares - 8 - 8 - 8
Movements in cash
flow hedging
reserve, net of
tax - (73) - (73) - (73)
Currency
translation
differences
(tax: nil) - (1) - (1) - (1)
---------- ----------- ----------- ----------- -----------
Total other
comprehensive
income - (75) 345 270 - 270
---------- ----------- ----------- ----------- ----------- -----------
Total
comprehensive
income - (75) 1,044 969 50 1,019
---------- ----------- ----------- ----------- ----------- -----------
Transactions
with owners
---------- ----------- ----------- ----------- ----------- -----------
Dividends - - (1,800) (1,800) - (1,800)
Distributions to
non-controlling
interests, net
of tax - - 14 14 (50) (36)
Capital
contribution
received - - 37 37 - 37
---------- ----------- ----------- ----------- ----------- -----------
Total
transactions
with owners - - (1,749) (1,749) (50) (1,799)
Realised gains
and losses on
equity shares
held at fair
value through
other
comprehensive
income - (1) 1 - - -
---------- ----------- ----------- ----------- ----------- -----------
Balance at 30
June 2018 3,763 10,144 (2,573) 11,334 1,537 12,871
---------- ----------- ----------- ----------- ----------- -----------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity
shareholders
Share
capital Non-
and Other Retained controlling
premium reserves profits Total interests Total
GBP GBP GBP GBP
million million GBP million million GBP million million
Balance at 1 January 2017 3,763 10,393 (858) 13,298 1,537 14,835
Comprehensive income
Profit for the period - - 1,132 1,132 51 1,183
Other comprehensive income
-------- -------- ----------- -------- ----------- --------
Post-retirement defined benefit
scheme remeasurements, net
of tax - - (31) (31) - (31)
Movements in revaluation
reserve in respect of
available-for-sale
financial assets, net of
tax - (84) - (84) - (84)
Movements in cash flow hedging
reserve, net of tax - (29) - (29) - (29)
Currency translation differences
(tax: nil) - 1 - 1 - 1
-------- -------- ----------- -------- ----------- --------
Total other comprehensive
income - (112) (31) (143) - (143)
-------- -------- ----------- -------- ----------- --------
Total comprehensive income - (112) 1,101 989 51 1,040
-------- -------- ----------- -------- ----------- --------
Transactions with owners
-------- -------- ----------- -------- ----------- --------
Dividends paid - - (2,000) (2,000) - (2,000)
Distributions to non-controlling
interests, net of tax - - 14 14 (51) (37)
Capital contribution received - - 53 53 - 53
-------- -------- ----------- -------- ----------- --------
Total transactions with owners - - (1,933) (1,933) (51) (1,984)
-------- -------- ----------- -------- ----------- --------
Balance at 30 June 2017 3,763 10,281 (1,690) 12,354 1,537 13,891
-------- -------- ----------- -------- ----------- --------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity
shareholders
Share
capital Non-
and Other Retained controlling
premium reserves profits Total interests Total
GBP GBP GBP GBP
million million GBP million million GBP million million
Balance at 1 July 2017 3,763 10,281 (1,690) 12,354 1,537 13,891
Comprehensive income
Profit for the period - - 861 861 50 911
Other comprehensive income
-------- -------- ----------- -------- ----------- --------
Post-retirement defined benefit
scheme remeasurements, net
of tax - - 129 129 - 129
Movements in revaluation reserve
in respect of available-for-sale
financial assets, net of tax - (5) - (5) - (5)
Movements in cash flow hedging
reserve, net of tax - (37) - (37) - (37)
Currency translation differences
(tax: nil) - (5) - (5) - (5)
-------- -------- ----------- -------- ----------- --------
Total other comprehensive
income - (47) 129 82 - 82
-------- -------- ----------- -------- ----------- --------
Total comprehensive income - (47) 990 943 50 993
-------- -------- ----------- -------- ----------- --------
Transactions with owners
-------- -------- ----------- -------- ----------- --------
Dividends paid - - (900) (900) - (900)
Distributions to non-controlling
interests, net of tax - - 13 13 (50) (37)
Capital contribution received - - 52 52 - 52
Total transactions with owners - - (835) (835) (50) (885)
-------- -------- ----------- -------- ----------- --------
Balance at 31 December 2017 3,763 10,234 (1,535) 12,462 1,537 13,999
-------- -------- ----------- -------- ----------- --------
CONSOLIDATED CASH FLOW STATEMENT
Half-year Half-year
to 30 June to 30 June
2018 2017
GBP million GBP million
Profit before tax 1,110 1,705
Adjustments for:
Change in operating assets 25,208 (35,046)
Change in operating liabilities (22,226) 35,682
Non-cash and other items (535) 16
Tax (paid) received (820) 29
----------- -----------
Net cash provided by operating activities 2,737 2,386
Cash flows from investing activities
----------- -----------
Purchase of financial assets (281) (194)
Proceeds from sale and maturity of financial assets 297 1,542
Purchase of fixed assets (90) (65)
Proceeds from sale of fixed assets 50 89
Disposal of businesses, net of cash disposed - 26
----------- -----------
Net cash (used in) provided by investing activities (24) 1,398
Cash flows from financing activities
----------- -----------
Dividends paid to equity shareholders (1,800) (2,000)
Dividends paid to non-controlling interests (50) (51)
Interest paid on subordinated liabilities (228) (246)
Repayment of subordinated liabilities (1,656) (760)
Capital repayment to ultimate parent company - -
----------- -----------
Net cash used in financing activities (3,734) (3,057)
----------- -----------
Effects of exchange rate changes on cash and cash equivalents - 1
----------- -----------
Change in cash and cash equivalents (1,021) 728
Cash and cash equivalents at beginning of period 2,409 3,052
----------- -----------
Cash and cash equivalents at end of period 1,388 3,780
----------- -----------
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 Net fee and commission income 22
3 Operating expenses 22
4 Impairment 23
5 Taxation 23
6 Financial assets at fair value through profit or loss 24
7 Loans and advances to customers 24
8 Allowance for impairment losses 25
9 Debt securities in issue 26
10 Post-retirement defined benefit schemes 27
11 Provisions for liabilities and charges 28
12 Contingent liabilities and commitments 30
13 Fair values of financial assets and liabilities 33
14 Related party transactions 40
15 Dividends on ordinary shares 40
16 Implementation of IFRS 9 and IFRS 15 41
17 Future accounting developments 45
18 Ultimate parent undertaking 45
19 Other information 45
1. Accounting policies, presentation and estimates
These condensed consolidated half-year financial statements as
at and for the period to 30 June 2018 have been prepared in
accordance with the Disclosure 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 2017
which were prepared in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union. Copies
of the 2017 Annual Report and Accounts are available on the Lloyds
Banking Group's website and are available upon request from
Investor Relations, Lloyds Banking Group plc, 25 Gresham Street,
London EC2V 7HN.
The directors consider that it is appropriate to continue to
adopt the going concern basis in preparing the condensed
consolidated half-year financial statements. In reaching this
assessment, the directors have considered projections for the
Group's capital and funding position.
Except as noted below, the accounting policies are consistent
with those applied by the Group in its 2017 Annual Report and
Accounts.
Changes in accounting policy
The Group has adopted IFRS 9 and IFRS 15 with effect from 1
January 2018.
(i) IFRS 9 Financial Instruments
IFRS 9 replaces IAS 39 and addresses classification, measurement
and derecognition of financial assets and liabilities, the
impairment of financial assets measured at amortised cost or fair
value through other comprehensive income and general hedge
accounting.
Impairment: IFRS 9 replaces the IAS 39 'incurred loss'
impairment approach with an 'expected credit loss' approach. The
revised approach applies to financial assets including finance
lease receivables, recorded at amortised cost or fair value through
other comprehensive income; loan commitments and financial
guarantees that are not measured at fair value through profit or
loss are also in scope. The expected credit loss approach requires
an allowance to be established upon initial recognition of an asset
reflecting the level of losses anticipated after having regard to,
amongst other things, expected future economic conditions.
Subsequently the amount of the allowance is affected by changes in
the expectations of loss driven by changes in associated credit
risk.
Classification and measurement: IFRS 9 requires financial assets
to be classified into one of the following measurement categories:
fair value through profit or loss, fair value through other
comprehensive income and amortised cost. Classification is made on
the basis of the objectives of the entity's business model for
managing its financial assets and the contractual cash flow
characteristics of the instruments. The requirements for
derecognition are broadly unchanged from IAS 39. The standard also
retains most of the IAS 39 requirements for financial liabilities
except for those designated at fair value through profit or loss
whereby that part of the fair value change attributable to the
entity's own credit risk is recorded in other comprehensive income.
The Group early adopted this requirement with effect from 1 January
2017.
1. Accounting policies, presentation and estimates (continued)
General hedge accounting: The new hedge accounting model aims to
provide a better link between risk management strategy, the
rationale for hedging and the impact of hedging on the financial
statements. The standard does not explicitly address macro hedge
accounting solutions, which are being considered in a separate IASB
project - Accounting for Dynamic Risk Management. Until this
project is finalised, the IASB has provided an accounting policy
choice to retain IAS 39 hedge accounting in its entirety or choose
to apply the IFRS 9 hedge accounting requirements. The Group has
elected to continue applying hedge accounting as set out in IAS
39.
(ii) IFRS 15 Revenue from Contracts with Customers
IFRS 15 has replaced IAS 18 Revenue and IAS 11 Construction
Contracts. The core principle of IFRS 15 is that revenue reflects
the transfer of goods or services to customers in an amount that
reflects the consideration to which an entity expects to be
entitled. The recognition of such revenue is in accordance with
five steps to: identify the contract; identify the performance
obligations; determine the transaction price; allocate the
transaction price to the performance obligations; and recognise
revenue when the performance obligations are satisfied.
Details of the impact of adoption of IFRS 9 and IFRS 15 are
provided in note 16.
The following policies will substantially replace the relevant
sections of the existing policies (D), (E) and (H) in the 2018
Annual Report and Accounts as they relate to revenue recognition,
classification and measurement and impairment. Policies that are
substantially unchanged such as accounting for borrowings, sales
and repurchase agreements, recognition and derecognition and hedge
accounting are not repeated.
(D) Revenue recognition
Interest income and expense are recognised in the income
statement for all interest-bearing financial instruments using the
effective interest method, except for those classified at fair
value through profit or loss. The effective interest method is a
method of calculating the amortised cost of a financial asset or
liability and of allocating the interest income or interest expense
over the expected life of the financial instrument. The effective
interest rate is the rate that exactly discounts the estimated
future cash payments or receipts over the expected life of the
financial instrument to the gross carrying amount of the financial
asset (before adjusting for expected credit losses) or to the
amortised cost of the financial liability, including early
redemption fees, and related penalties, and premiums and discounts
that are an integral part of the overall return. Direct incremental
transaction costs related to the acquisition, issue or disposal of
a financial instrument are also taken into account. Interest income
from non-credit impaired financial assets is recognised by applying
the effective interest rate to the gross carrying amount of the
asset; for credit impaired financial assets, the effective interest
rate is applied to the net carrying amount after deducting the
allowance for expected credit losses. Impairment policies are set
out in (H) below.
Fees and commissions receivable which are not an integral part
of the effective interest rate are recognised as income as the
services are provided. Current account and card fees are accrued
evenly over the course of the year. Loan commitment fees for loans
that are likely to be drawn down are deferred (together with
related direct costs) and recognised as an adjustment to the
effective interest rate on the loan once drawn. Where it is
unlikely that loan commitments will be drawn, loan commitment fees
are recognised over the life of the facility. Incremental costs
incurred to generate fee and commission income are charged to fees
and commissions expense as they are incurred.
Dividend income is recognised when the right to receive payment
is established.
1. Accounting policies, presentation and estimates (continued)
(E) Financial assets and liabilities
On initial recognition, financial assets are classified as
measured at amortised cost, fair value through other comprehensive
income or fair value through profit or loss, depending on the
Group's business model for managing the financial assets and
whether the cash flows represent solely payments of principal and
interest. The Group assesses its business models at a portfolio
level based on its objectives for the relevant portfolio, how the
performance of the portfolio is managed and reported, and the
frequency of asset sales. Financial assets with embedded
derivatives are considered in their entirety when considering their
cash flow characteristics. The Group reclassifies financial assets
when and only when its business model for managing those assets
changes.
Equity investments are measured at fair value through profit or
loss unless the Group elects at initial recognition to account for
the instruments at fair value through other comprehensive income.
For these investments, dividends are recognised in profit or loss
but fair value gains and losses are not subsequently reclassified
to profit or loss following derecognition of the investment.
(1) Financial assets measured at amortised cost
Financial assets that are held to collect contractual cash flows
where those cash flows represent solely payments of principal and
interest are measured at amortised cost. A basic lending
arrangement results in contractual cash flows that are solely
payments of principal and interest on the principal amount
outstanding. Where the contractual cash flows introduce exposure to
risks or volatility unrelated to a basic lending arrangement such
as changes in equity prices or commodity prices, the payments do
not comprise solely principal and interest. Financial assets
measured at amortised cost are predominantly loans and advances to
customers and banks together with certain debt securities. Loans
and advances are initially recognised when cash is advanced to the
borrower at fair value inclusive of transaction costs. Interest
income is accounted for using the effective interest method (see
(D) above).
Financial liabilities are measured at amortised cost, except for
trading liabilities and other financial liabilities designated at
fair value through profit or loss on initial recognition which are
held at fair value.
(2) Financial assets measured at fair value through other
comprehensive income
Financial assets that are held to collect contractual cash flows
and for subsequent sale, where the assets' cash flows represent
solely payments of principal and interest, are recognised in the
balance sheet at their fair value, inclusive of transaction costs.
Gains and losses arising from changes in fair value are recognised
directly in other comprehensive income, until the financial asset
is either sold or matures, at which time the cumulative gain or
loss previously recognised in other comprehensive income is
recognised in the income statement other than in respect of equity
shares, for which the cumulative revaluation amount is transferred
directly to profit and loss reserves. Interest calculated using the
effective interest method and foreign exchange gains and losses on
assets denominated in foreign currencies are recognised in the
income statement. In addition, the Group recognises a charge for
expected credit losses in the income statement (see (H) below). As
the asset is measured at fair value, the charge does not adjust the
carrying value of the asset, it is reflected in other comprehensive
income.
1. Accounting policies, presentation and estimates (continued)
(3) Financial instruments measured at fair value through profit
or loss
Financial assets are classified at fair value through profit or
loss where they do not meet the criteria to be measured at
amortised cost or fair value through other comprehensive income or
where they are designated at fair value through profit or loss to
reduce an accounting mismatch. Derivatives are carried at fair
value.
The assets backing the insurance and investment contracts issued
by the Group do not meet the criteria to be measured at amortised
cost or fair value through other comprehensive income as they are
managed on a fair value basis and accordingly are measured at fair
value through profit or loss. Similarly, trading securities, which
are debt securities and equity shares acquired principally for the
purpose of selling in the short term or which are part of a
portfolio which is managed for short-term gains, do not meet these
criteria and are also measured at fair value through profit or
loss. Financial assets measured at fair value through profit or
loss are recognised in the balance sheet at their fair value. Fair
value gains and losses together with interest coupons and dividend
income are recognised in the income statement within net trading
income in the period in which they occur.
Financial liabilities are measured at fair value through profit
or loss where they are trading liabilities or where they are
designated at fair value through profit or loss in order to reduce
an accounting mismatch; where the liabilities are part of a group
of liabilities (or assets and liabilities) which is managed, and
its performance evaluated, on a fair value basis; or where the
liabilities contain one or more embedded derivatives that
significantly modify the cash flows arising under the contract and
would otherwise need to be separately accounted for. Financial
liabilities measured at fair value through profit or loss are
recognised in the balance sheet at their fair value. Fair value
gains and losses are recognised in the income statement within net
trading income in the period in which they occur, except that gains
and losses attributable to changes in own credit risk are
recognised in other comprehensive income.
The fair values of assets and liabilities traded in active
markets are based on current bid and offer prices respectively. If
the market is not active the Group establishes a fair value by
using valuation techniques. The fair values of derivative financial
instruments are adjusted where appropriate to reflect credit risk
(via credit valuation adjustments (CVAs), debit valuation
adjustments (DVAs) and funding valuation adjustments (FVAs)),
market liquidity and other risks.
1. Accounting policies, presentation and estimates (continued)
(H) Impairment of financial assets
The impairment charge in the income statement includes the
change in expected credit losses and certain fraud costs. Expected
credit losses are recognised for loans and advances to customers
and banks, other financial assets held at amortised cost, financial
assets measured at fair value through other comprehensive income,
and certain loan commitments and financial guarantee contracts.
Expected credit losses are calculated by using an appropriate
probability of default, adjusted to take into account a range of
possible future economic scenarios, and applying this to the
estimated exposure of the Group at the point of default after
taking into account the value of any collateral held or other
mitigants of loss and including the impact of discounting using the
effective interest rate.
At initial recognition, allowance (or provision in the case of
some loan commitments and financial guarantees) is made for
expected credit losses resulting from default events that are
possible within the next 12 months (12-month expected credit
losses). In the event of a significant increase in credit risk,
allowance (or provision) is made for expected credit losses
resulting from all possible default events over the expected life
of the financial instrument (lifetime expected credit losses).
Financial assets where 12-month expected credit losses are
recognised are considered to be Stage 1; financial assets which are
considered to have experienced a significant increase in credit
risk are in Stage 2; and financial assets which have defaulted or
are otherwise considered to be credit impaired are allocated to
Stage 3.
An assessment of whether credit risk has increased significantly
since initial recognition considers the change in the risk of
default occurring over the remaining expected life of the financial
instrument. The assessment is unbiased, probability-weighted and
uses forward-looking information consistent with that used in the
measurement of expected credit losses. In determining whether there
has been a significant increase in credit risk, the Group uses a
quantitative test based on relative and absolute PD movements
linked to internal credit ratings together with qualitative
indicators such as watchlists and other indicators of historic
delinquency. However, unless identified at an earlier stage, the
credit risk of financial assets is deemed to have increased
significantly when more than 30 days past due. Where the credit
risk subsequently improves such that it no longer represents a
significant increase in credit risk since origination, the asset is
transferred back to Stage 1.
Assets are transferred to Stage 3 when they have defaulted or
are otherwise considered to be credit impaired. IFRS 9 contains a
rebuttable presumption that default occurs no later than when a
payment is 90 days past due. The Group uses this 90 day backstop
for all its products except for UK mortgages. For UK mortgages, the
Group has assumed a backstop of 180 days past due as mortgage
exposures more than 90 days past due, but less than 180 days,
typically show high cure rates and this aligns to the Group's risk
management practices.
In certain circumstances, the Group will renegotiate the
original terms of a customer's loan, either as part of an ongoing
customer relationship or in response to adverse changes in the
circumstances of the borrower. In the latter circumstances, the
loan will remain classified as either Stage 2 or Stage 3 until
there is sufficient evidence to demonstrate a significant reduction
in the risk of non-payment of future cash flows. Renegotiation may
also lead to the loan and associated allowance being derecognised
and a new loan being recognised initially at fair value.
A loan or advance is normally written off, either partially or
in full, against the related allowance when the proceeds from
realising any available security have been received or there is no
realistic prospect of recovery and the amount of the loss has been
determined. Subsequent recoveries of amounts previously written off
decrease the amount of impairment losses recorded in the income
statement. For both secured and unsecured retail balances, the
write-off takes place only once an extensive set of collections
processes has been completed, or the status of the account reaches
a point where policy dictates that continuing concessions are no
longer appropriate. For commercial lending, a write-off occurs if
the loan facility with the customer is restructured, the asset is
under administration and the only monies that can be received are
the amounts estimated by the administrator, the underlying assets
are disposed and a decision is made that no further settlement
monies will be received, or external evidence (for example, third
party valuations) is available that there has been an irreversible
decline in expected cash flows.
1. Accounting policies, presentation and estimates (continued)
Future accounting developments
Details of those IFRS pronouncements which will be relevant to
the Group but which will not be effective at 31 December 2018 and
which have not been applied in preparing these condensed
consolidated half-year financial statements are set out in note
17.
Critical accounting estimates and judgements
The preparation of the Group's financial statements requires
management to make judgements, estimates and assumptions that
impact the application of accounting policies and the reported
amounts of assets, liabilities, income and expenses. Due to the
inherent uncertainty in making estimates, actual results reported
in future periods may include amounts which differ from those
estimates. Estimates, judgements and assumptions are continually
evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be
reasonable under the circumstances. Other than in relation to the
implementation of IFRS 9, there have been no significant changes in
the basis upon which estimates have been determined, compared to
that applied at 31 December 2017.
The calculation of the Group's expected credit loss (ECL)
allowances and provisions against loan commitments and guarantees
under IFRS 9 requires the Group to make a number of judgements,
assumptions and estimates. The most significant are set out
below.
Definition of default
The probability of default (PD) of an exposure, both over a 12
month period and over its lifetime, is a key input to the
measurement of the ECL allowance. Default has occurred when there
is evidence that the customer is experiencing significant financial
difficulty which is likely to affect the ability to repay amounts
due.
The definition of default adopted by the Group is described in
(H) Impairment of financial assets above. This definition is
aligned to the regulatory definition of default used by the Group
for capital and regulatory reporting except that the Group has made
the decision to treat forborne non-performing past term interest
only mortgages as credit impaired.
As noted in (H) Impairment of financial assets, the Group has
rebutted the presumption in IFRS 9 that default occurs no later
than when a payment is 90 days past due. The impact on the Group's
ECL allowance of assuming a backstop of 180 days past due for UK
mortgages is not material.
Lifetime of an exposure
To derive the PDs necessary to calculate the ECL allowance it is
necessary to estimate the expected life of each financial
instrument. A range of approaches has been adopted across different
product groupings including the full contractual life and taking
into account behavioural factors such as early repayments and
refinancing. For Retail assets, the Group has defined the lifetime
for each product by analysing the time taken for all losses to be
observed and for a material proportion of the assets to fully
resolve through either closure or write-off. For revolving
products, the Group has considered the losses beyond the
contractual term over which the Group is exposed to credit risk.
For Commercial overdraft facilities, the average behavioural life
has been used. Changes to the assumed expected lives of the
Commercial assets could have a material effect on the ECL allowance
recognised by the Group.
1. Accounting policies, presentation and estimates (continued)
Significant increase in credit risk (SICR)
Performing assets are classified as either Stage 1 or Stage 2.
An ECL allowance equivalent to 12 months expected losses is
established against assets in Stage 1; assets classified as Stage 2
carry an ECL allowance equivalent to lifetime expected losses.
Assets are transferred from Stage 1 to Stage 2 when there has been
an SICR since initial recognition. As described in (H) Impairment
of financial assets above, the Group uses a quantitative test
together with qualitative indicators and a backstop of 30 days past
due for determining whether there has been a SICR. The setting of
precise trigger points combined with risk indicators requires
judgement. The use of different trigger points may have a material
impact upon the size of the ECL allowance.
For Retail, a deterioration of four grades for credit cards,
personal loans or overdrafts, or three grades for personal
mortgages, or two grades for asset finance accounts, would trigger
a transfer to Stage 2. For Commercial a doubling of PD with a
minimum increase in PD of 1 per cent and a resulting change in the
underlying grade would trigger a transfer.
Forward looking information
The measurement of expected credit losses is required to reflect
an unbiased probability-weighted range of possible future
outcomes.
In order to do this the Group uses a model to project a number
of key variables to generate in excess of 2,000 possible future
economic scenarios. These are ranked according to severity of loss
and four scenarios are selected to represent the full loss
distribution; a central scenario which reflects the assumptions
used for medium-term planning purposes, an upside and a downside
scenario and a severe downside scenario. Each scenario receives a
30 per cent weighting except for the severe downside scenario which
is weighted at 10 per cent. These scenarios are used to produce a
weighted average PD for each product grouping which is used to
determine stage allocation and calculate the related ECL
allowance.
The choice of alternative scenarios and probability weighting is
a combination of quantitative analysis and judgemental assessments,
designed to ensure that the full range of possible outcomes and
material non-linearity are captured. The key UK economic
assumptions made by the Lloyds Banking Group as at 30 June 2018 are
shown below:
Severe
Base Case Upside Downside Downside
% % % %
Interest rate 1.43 2.29 0.90 0.65
Unemployment rate 4.8 4.0 5.7 7.1
House price growth 2.7 6.5 (2.9) (5.6)
CRE price growth 0.5 9.0 (5.3) (8.1)
2. Net fee and commission income
Half-year Half-year
to 30 to 30
June June
2018 2017
GBPm GBPm
Fee and commission income:
--------- ---------
Current accounts 96 114
Credit and debit card fees 114 117
Other 92 159
--------- ---------
Total fee and commission income 302 390
Fee and commission expense (186) (187)
--------- ---------
Net fee and commission income 116 203
--------- ---------
3. Operating expenses
Half-year Half-year
to 30 June to 30 June
2018 2017
GBPm GBPm
Administrative expenses
Staff costs 744 718
Premises and equipment 141 129
Other expenses 552 488
---------- ----------
1,437 1,335
Depreciation and amortisation 80 86
---------- ----------
Total operating expenses, excluding regulatory provisions 1,517 1,421
Regulatory provisions:
---------- ----------
Payment protection insurance provision (note 11) 175 216
Other regulatory provisions (note 11) 70 266
---------- ----------
245 482
---------- ----------
Total operating expenses 1,762 1,903
---------- ----------
4. Impairment
Half-year Half-year
to 30 to 30
June June
2018 2017
GBPm GBPm
Loans and advances to customers 108 76
Debt securities - (4)
--------- ---------
Financial assets at amortised cost 108 72
Undrawn balances (16) (2)
Financial assets at fair value through other
comprehensive income (2017: available-for-sale
financial assets) 1 6
--------- ---------
Total impairment charged to the income statement 93 76
--------- ---------
5. Taxation
In accordance with IAS 34, the Group's income tax expense for
the half-year to 30 June 2018 is based on the best estimate of the
weighted-average annual income tax rate expected for the full
financial year. The tax effects of one-off items are not included
in the weighted-average annual income tax rate, but are recognised
in the relevant period.
An explanation of the relationship between tax expense and
accounting profit is set out below:
Half-year Half-year
to 30 June to 30 June
2018 2017
GBPm GBPm
Profit before tax 1,110 1,705
----------- -----------
UK corporation tax thereon at 19 per cent (2017: 19.25 per cent) (211) (328)
Impact of surcharge on banking profits (99) (147)
Non-deductible costs: conduct charges (33) (79)
Other non-deductible costs (8) (7)
Non-taxable income 7 13
Tax-exempt gains on disposals 1 18
Recognition of losses that arose in prior years (14) -
Remeasurement of deferred tax due to rate changes - (7)
Differences in overseas tax rates - (5)
Adjustments in respect of prior years (4) 19
Tax effect of share of results of joint ventures - 1
----------- -----------
Tax expense (361) (522)
----------- -----------
--
6. Financial assets at fair value through profit or loss
At At
30 June 31 Dec
2018 2017
GBPm GBPm
Trading assets - -
Other financial assets at fair value through profit or loss:
------- ------
Loans and advances to customers 495 -
Debt securities 40 1,350
Equity shares 76 50
------- ------
611 1,400
------- ------
Financial assets at fair value through profit or loss 611 1,400
------- ------
7. Loans and advances to customers
At At
30 June 31 Dec
2018 2017
GBPm GBPm
Agriculture, forestry and fishing 666 643
Energy and water supply 113 156
Manufacturing 256 266
Construction 1,252 1,248
Transport, distribution and hotels 2,937 2,868
Information and communication 175 272
Property companies 4,395 4,894
Financial, business and other services 1,878 2,415
Personal:
Mortgages 242,941 247,117
Other 10,447 10,573
Leasing 189 198
Hire purchase 149 132
------- -------
Gross loans and advances to customers 265,398 270,782
Allowance for impairment losses on loans and advances to customers (note 8) (2,158) (2,125)
------- -------
Total loans and advances to customers 263,240 268,657
------- -------
Loans and advances to customers include advances securitised
under the Group's securitisation and covered bond programmes (see
note 9).
8. Allowance for impairment losses
Stage 1 Stage 2 Stage 3 Total
In respect of drawn balances GBPm GBPm GBPm GBPm
Balance at 31 December 2017 2,136
Adjustment for IFRS 9 (note 16) 363
------- ------- ------- -----
Balance at 1 January 2018 163 1,076 1,260 2,499
Exchange and other adjustments 9 (2) (60) (53)
Advances written off - - (387) (387)
Recoveries of advances written off in previous years - - 8 8
Charge to the income statement 2 (155) 261 108
------- ------- ------- -----
174 919 1,082 2,175
In respect of undrawn balances
------- ------- ------- -----
Balance at 31 December 2017 3
Adjustment for IFRS 9 (note 16) 84
------- ------- ------- -----
Balance at 1 January 2018 37 50 - 87
Exchange and other adjustments - (3) 4 1
Charge to the income statement (9) (20) 13 (16)
------- ------- ------- -----
28 27 17 72
------- ------- ------- -----
At 30 June 2018 202 946 1,099 2,247
------- ------- ------- -----
In respect of:
------- ------- ------- -----
Loans and advances to customers (note 7) 166 919 1,073 2,158
Amounts due from fellow Lloyds Banking Group undertakings 8 - - 8
Debt securities - - 9 9
------- ------- ------- -----
Drawn balances 174 919 1,082 2,175
Provisions in relation to loan commitments and financial
guarantees 28 27 17 72
------- ------- ------- -----
Total allowance for impairment losses 202 946 1,099 2,247
------- ------- ------- -----
9. Debt securities in issue
30 June 2018 31 December 2017
At fair At fair
value value
through At through At
profit or amortised Total profit or amortised Total
loss cost loss cost
GBPm GBPm GBPm GBPm GBPm GBPm
Medium-term notes issued - 1,141 1,141 - 1,182 1,182
Covered bonds - 6,033 6,033 - 6,740 6,740
Securitisation notes 54 4,367 4,421 - 2,997 2,997
--------- --------- ------ ----------- --------- ------
Total debt securities in issue 54 11,541 11,595 - 10,919 10,919
--------- --------- ------ ----------- --------- ------
The notes issued by the Group's securitisation and covered bond
programmes are held by external parties and by subsidiaries of the
Group.
Securitisation programmes
At 30 June 2018, external parties held GBP4,421 million (31
December 2017: GBP2,997 million) and the Group's subsidiaries held
GBP15,304 million (31 December 2017: GBP14,954 million) of total
securitisation notes in issue of GBP19,725 million (31 December
2017: GBP17,951 million). The notes are secured on loans and
advances to customers and debt securities classified as loans and
receivables amounting to GBP23,328 million (31 December 2017:
GBP25,226 million), the majority of which have been sold by
subsidiary companies to bankruptcy remote structured entities. The
structured entities are consolidated fully and all of these loans
are retained on the Group's balance sheet.
Covered bond programmes
At 30 June 2018, external parties held GBP6,033 million (31
December 2017: GBP6,740 million) and the Group's subsidiaries held
GBP700 million (31 December 2017: GBP700 million) of total covered
bonds in issue of GBP6,733 million (31 December 2017: GBP7,440
million). The bonds are secured on certain loans and advances to
customers amounting to GBP8,506 million (31 December 2017: GBP9,153
million) that have yet to be assigned to bankruptcy remote limited
liability partnerships. These loans are retained on the Group's
balance sheet.
Cash deposits of GBP1,732 million (31 December 2017: GBP1,712
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.
10. Post-retirement defined benefit schemes
The Group's post-retirement defined benefit scheme obligations
are comprised as follows:
At At
30 June 31 Dec
2018 2017
GBPm GBPm
Defined benefit pension schemes:
Fair value of scheme assets 14,829 15,305
Present value of funded obligations (14,477) (15,330)
-------- --------
Net pension scheme asset (liability) 352 (25)
Other-post retirement schemes (40) (41)
-------- --------
Net retirement benefit asset (liability) 312 (66)
-------- --------
Recognised on the balance sheet as:
Retirement benefit assets 439 69
Retirement benefit obligations (127) (135)
-------- --------
Net retirement benefit asset (liability) 312 (66)
-------- --------
The movement in the Group's net post-retirement defined benefit
scheme (liability) asset during the period was as follows:
GBPm
Liability at 1 January 2018 (66)
Income statement charge (102)
Employer contributions 54
Remeasurement 426
-----
Asset at 30 June 2018 312
-----
The principal assumptions used in the valuations of the defined
benefit pension scheme were as follows:
At At
30 June 31 Dec
2018 2017
% %
Discount rate 2.78 2.59
Rate of inflation:
Retail prices index 3.11 3.20
Consumer prices index 2.06 2.15
Rate of salary increases 0.00 0.00
Weighted-average rate of increase for pensions in payment 2.97 2.93
11. Provisions for liabilities and charges
Vacant
Provisions Payment Other leasehold
for Protection regulatory property
commitments Insurance provisions & Other Total
GBPm GBPm GBPm GBPm GBPm
Balance at 31
December 2017 3 947 807 262 2,019
Adjustment for
IFRS 9 84 84
------------- ------
Balance at 1 January
2018 87 2,103
Exchange and other
adjustments 1 (1) 1 (7) (6)
Provisions applied - (399) (224) (42) (665)
Charge/(release)
for the year (16) 175 70 25 254
------------- ------------ ------------ ----------- ------
At 30 June 2018 72 722 654 238 1,686
------------- ------------ ------------ ----------- ------
Payment protection insurance
The Group increased the provision for PPI costs by a further
GBP175 million in the half year to 30 June 2018, of which GBP135
million was in the second quarter, bringing the total amount
provided to GBP5,448 million.
The charge in the second quarter is largely driven by a
potentially higher total volume of complaints and associated
administration costs due to higher reactive complaint volumes
received over the past six months and ongoing volatility.
At 30 June 2018 a provision of GBP722 million remained
unutilised relating to complaints and associated administration
costs. Total cash payments were GBP399 million during the six
months to 30 June 2018.
The total amount provided for PPI represents the Group's best
estimate of the likely future cost. However a number of risks and
uncertainties remain including with respect to future volumes. The
cost could differ from the Group's estimates and the assumptions
underpinning them, and could result in a further provision being
required. There is also uncertainty around the impact of the
regulatory changes, FCA media campaign and Claims Management
Company and customer activity, and potential additional remediation
arising from the continuous improvement of the Group's operational
practices.
For every additional 1,000 reactive complaints per week from
July 2018 through to the industry deadline of the end of August
2019, the Group would expect an additional charge of GBP140
million.
Other provisions for legal actions and regulatory matters
In the course of its business, the Group is engaged in
discussions with the PRA, FCA and other UK and overseas regulators
and other governmental authorities on a range of matters. The Group
also receives complaints in connection with its past conduct and
claims brought by or on behalf of current and former employees,
customers, investors and other third parties and is subject to
legal proceedings and other legal actions. Where significant,
provisions are held against the costs expected to be incurred in
relation to these matters and matters arising from related internal
reviews. During the six months to 30 June 2018 the Group charged a
further GBP70 million in respect of legal actions and other
regulatory matters, the unutilised balance at 30 June 2018 was
GBP654 million (31 December 2017: GBP807 million). The most
significant items are as follows.
Arrears handling related activities
The Group has provided an additional GBP22 million (bringing the
total provided to date to GBP422 million), for the costs of
identifying and rectifying certain arrears management fees and
activities. Following a review of the Group's arrears handling
activities, Lloyds Banking Group has put in place a number of
actions to improve further its handling of customers in these areas
and has made good progress in reimbursing mortgage arrears fees to
the 565,000 impacted customers.
11. Provisions for liabilities and charges (continued)
Packaged bank accounts
In the half-year to 30 June 2018, the Group provided an
additional GBP4 million in respect of complaints relating to
alleged mis-selling of packaged bank accounts raising the total
amount provided to GBP195 million. A number of risks and
uncertainties remain in particular with respect to future
volumes.
HBOS Reading - customer review
The Group is undertaking a review into a number of customer
cases from the former HBOS Impaired Assets Office based in Reading.
This review follows the conclusion of a criminal trial in which a
number of individuals, including two former HBOS employees, were
convicted of conspiracy to corrupt, fraudulent trading and
associated money laundering offences which occurred prior to the
acquisition of HBOS by Lloyds Banking Group in 2009. The Group
provided GBP100 million in the year to 31 December 2017 and is in
the process of paying compensation to the victims of the fraud for
economic losses as well as ex-gratia payments and awards for
distress and inconvenience. The review is ongoing and at 30 June
2018, the Group had made offers to 64 customers, which represents
more than 85 per cent of the customers in the review.
12. Contingent liabilities and commitments
Interchange fees
With respect to multi-lateral interchange fees (MIFs), Lloyds
Banking Group is not directly involved in the ongoing
investigations and litigation (as described below) which involve
card schemes such as Visa and MasterCard. However, Lloyds Banking
Group is a member of Visa and MasterCard and other card
schemes.
- The European Commission continues to pursue competition
investigations against MasterCard and Visa probing, amongst other
things, MIFs paid in respect of cards issued outside the EEA;
- Litigation brought by retailers continues in the English
Courts against both Visa and MasterCard.
- Any ultimate impact on Lloyds Banking Group of the above
investigations and litigation against Visa and MasterCard remains
uncertain at this time.
Visa Inc completed its acquisition of Visa Europe on 21 June
2016. As part of this transaction, the Group and certain other UK
banks also entered into a Loss Sharing Agreement (LSA) with Visa
Inc, which clarifies the allocation of liabilities between the
parties should the litigation referred to above result in Visa Inc
being liable for damages payable by Visa Europe. The maximum amount
of liability to which Lloyds Banking Group may be subject under the
LSA is capped at the cash consideration which was received by
Lloyds Banking Group at completion. Visa Inc may also have recourse
to a general indemnity, previously in place under Visa Europe's
Operating Regulations, for damages claims concerning inter or
intra-regional MIF setting activities.
LIBOR and other trading rates
In July 2014, 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.
Lloyds Banking Group continues to cooperate with various other
government and regulatory authorities, including the Swiss
Competition Commission, and a number of US State Attorneys General,
in conjunction with their investigations into submissions made by
panel members to the bodies that set LIBOR and various other
interbank offered rates.
Certain 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 and the
Australian BBSW Reference Rate. Certain of the plaintiffs' claims,
including those in connection with USD and JPY LIBOR, have been
dismissed by the US Federal Court for Southern District of New York
(subject to one appeal), and decisions are awaited on Lloyds
Banking Group's motions to dismiss the Sterling LIBOR and BBSW
claims.
Certain Lloyds Banking Group companies are also named as
defendants in (i) UK based claims; and (ii) in a Dutch class
action, each raising LIBOR manipulation allegations. A number of
the claims against Lloyds Banking Group in relation to the alleged
mis-sale of interest rate hedging products also include allegations
of LIBOR manipulation.
It is currently not possible to predict the scope and ultimate
outcome on 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.
UK shareholder litigation
In August 2014, Lloyds Banking Group and a number of former
directors were named as defendants in a claim by a number of
claimants who held shares in Lloyds TSB Group plc (LTSB) prior to
the acquisition of HBOS plc, alleging breaches of duties in
relation to information provided to shareholders in connection with
the acquisition and the recapitalisation of LTSB. The defendants
refute all claims made. A trial commenced in the English High Court
on 18 October 2017 and concluded on 5 March 2018 with judgment to
follow. It is currently not possible to determine the ultimate
impact on the Group (if any).
12. Contingent liabilities and commitments (continued)
Tax authorities
The Lloyds Banking Group has an open matter in relation to a
claim for group relief of losses incurred in its former Irish
banking subsidiary, which ceased trading on 31 December 2010. In
2013 HMRC informed the Lloyds Banking Group that their
interpretation of the UK rules which allow the offset of such
losses denies the claim. If HMRC's position is found to be correct
management estimate that this would result in an increase in
current tax liabilities of approximately GBP650 million (including
interest) and a reduction in the Lloyds Banking Group's deferred
tax asset of approximately GBP350 million (overall impact on the
Group of 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 which is expected to have
a material impact on the financial position of the Group.
Residential mortgage repossessions
In August 2014, the Northern Ireland High Court handed down
judgment in favour of the borrowers in relation to three
residential mortgage test cases concerning certain aspects of
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 and has published Guidance on the treatment of
customers with mortgage payment shortfalls. The Guidance covers
remediation for mortgage customers who may have been affected by
the way firms calculate these customers' monthly mortgage
instalments. Lloyds Banking Group is implementing the Guidance and
has now contacted most of the affected customers with any remaining
customers being contacted during 2018.
Mortgage arrears handling activities
On 26 May 2016, Lloyds Banking Group was informed that an
enforcement team at the FCA had commenced an investigation in
connection with 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. In these circumstances, specific
disclosure in relation to a contingent liability will be made where
material. However the Group does not currently expect the final
outcome of any such case to have a material adverse effect on its
financial position, operations or cash flows.
12. Contingent liabilities and commitments (continued)
Contingent liabilities and commitments arising from the banking
business
At At
30 June 31 Dec
2018 2017
GBPm GBPm
Contingent liabilities
Acceptances and endorsements 1 1
Other:
------- ------
Other items serving as direct credit substitutes 37 18
Performance bonds and other transaction-related contingencies 70 68
------- ------
107 86
------- ------
Total contingent liabilities 108 87
------- ------
Commitments
Documentary credits and other short-term trade-related transactions 1 -
Forward asset purchases and forward deposits placed 27 31
Undrawn formal standby facilities, credit lines and other commitments to lend:
Less than 1 year original maturity:
------- ------
Mortgage offers made 11,439 9,847
Other commitments 22,540 21,961
------- ------
33,979 31,808
1 year or over original maturity 2,709 2,937
------- ------
Total commitments 36,716 34,776
------- ------
Of the amounts shown above in respect of undrawn formal standby
facilities and other commitments to lend, GBP14,762 million (2017:
GBP13,452 million) was irrevocable.
13. Fair values of financial assets and liabilities
The valuations of financial instruments have been classified
into three levels according to the quality and reliability of
information used to determine those fair values. Note 39 to the
Group's 2017 financial statements describes the definitions of the
three levels in the fair value hierarchy.
Valuation control framework
Key elements of the valuation control framework, which covers
processes for all levels in the fair value hierarchy including
level three 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 three portfolios
Transfers out of level three portfolios arise when inputs that
could have a significant impact on the instrument's valuation
become market observable; conversely, transfers into the portfolios
arise when consistent sources of data cease to be available.
Valuation methodology
For level two and level three portfolios, there is no
significant change to what was disclosed in the Group's 2017 Annual
Report and Accounts in respect of the valuation methodology
(techniques and inputs) applied to such portfolios.
The table below summarises the carrying values of financial
assets and liabilities presented on the Group's balance sheet. The
fair values presented in the table are at a specific date and may
be significantly different from the amounts which will actually be
paid or received on the maturity or settlement date.
30 June 2018 31 December 2017
-------------------------- --------------------------
Carrying value Fair value Carrying value Fair value
GBPm GBPm GBPm GBPm
Financial assets
Financial assets at fair value through profit or
loss 611 611 1,400 1,400
Derivative financial instruments 10,112 10,112 11,634 11,634
Loans and advances to banks 1,180 1,190 551 546
Loans and advances to customers 263,240 265,124 268,657 270,542
Debt securities 9 9 137 136
Due from fellow Lloyds Banking Group
undertakings 51,095 51,095 74,849 74,849
-------------- ---------- -------------- ----------
Financial assets at amortised cost 315,524 317,418 344,194 346,073
Financial assets at fair value through other
comprehensive income 1,085 1,085
Available-for-sale financial assets 937 937
Financial liabilities
Deposits from banks 20,845 20,833 21,183 21,178
Customer deposits 167,969 167,664 171,198 170,905
Due to fellow Lloyds Banking Group undertakings 105,594 105,594 125,541 125,541
Financial liabilities at fair value through profit
or loss 104 104 50 50
Derivative financial instruments 11,238 11,238 10,631 10,631
Debt securities in issue 11,541 11,589 10,919 11,001
Subordinated liabilities 4,770 4,768 6,620 6,560
13. Fair values of financial assets and liabilities (continued)
The carrying amount of the following financial instruments is a
reasonable approximation of fair value: cash and balances at
central banks, items in the course of collection from banks, items
in course of transmission to banks and notes in circulation.
The Group manages valuation adjustments for its derivative
exposures on a net basis; the Group determines their fair values on
the basis of their net exposures. In all other cases, fair values
of financial assets and liabilities measured at fair value are
determined on the basis of their gross exposures.
The following tables provide an analysis of the financial assets
and liabilities of the Group that are carried at fair value in the
Group's consolidated balance sheet, grouped into levels one to
three based on the degree to which the fair value is
observable.
Financial assets
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 30 June 2018
Financial assets at fair value through profit or loss:
Loans and advances to customers - 495 - 495
Loans and advances to banks - - - -
Debt securities - 40 - 40
Equity shares - 11 65 76
------- ------- ------- ------
Total financial assets at fair value through profit or loss - 546 65 611
------- ------- ------- ------
Financial assets at fair value through other comprehensive income:
Debt securities 114 831 128 1,073
Equity shares - 5 7 12
------- ------- ------- ------
Total financial assets at fair value through other comprehensive income 114 836 135 1,085
------- ------- ------- ------
Derivative financial instruments - 10,112 - 10,112
------- ------- ------- ------
Total financial assets carried at fair value 114 11,494 200 11,808
------- ------- ------- ------
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 31 December 2017
Financial assets at fair value
through profit or loss:
Loans and advances to customers - - - -
Debt securities - 1,350 - 1,350
Equity shares - - 50 50
------- ------- ------- ------
Total financial assets at
fair value through profit
or loss - 1,350 50 1,400
------- ------- ------- ------
Available-for-sale financial
assets:
Debt securities 116 786 - 902
Equity shares - 15 20 35
------- ------- ------- ------
Total available-for-sale financial
assets 116 801 20 937
------- ------- ------- ------
Derivative financial instruments - 11,214 420 11,634
------- ------- ------- ------
Total financial assets carried
at fair value 116 13,365 490 13,971
------- ------- ------- ------
13. Fair values of financial assets and liabilities (continued)
Financial liabilities
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 30 June 2018
Financial liabilities at fair value through profit or loss:
Liabilities held at fair value through profit or loss - 54 - 54
Trading liabilities - 50 - 50
------- ------- ------- ------
Total financial liabilities at fair value through profit or loss - 104 - 104
------- ------- ------- ------
Derivative financial instruments - 11,238 - 11,238
------- ------- ------- ------
Total financial liabilities carried at fair value - 11,342 - 11,342
------- ------- ------- ------
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 31 December 2017
Trading and other financial liabilities at fair value
through profit or loss:
Liabilities held at fair value through profit or loss - - - -
Trading liabilities - 50 - 50
------- ------- ------- ------
Total trading and other financial liabilities at fair
value through profit or loss - 50 - 50
------- ------- ------- ------
Derivative financial instruments - 10,577 54 10,631
------- ------- ------- ------
Total financial liabilities carried at fair value - 10,627 54 10,681
------- ------- ------- ------
13. Fair values of financial assets and liabilities (continued)
Movements in level three portfolio
The tables below analyse movements in the level 3 financial
assets portfolio.
Total
Financial Financial financial
assets at assets at assets
fair fair Available- carried
value through value through for-sale at
profit or other comprehensive financial Derivative fair
loss income assets assets value
GBPm GBPm GBPm GBPm GBPm
Balance at 31 December
2017 50 20 420 490
Adjustment for IFRS
9 (note 16) 12 7 (20) (1)
-------------- -------------------- ---------- ---------- ----------
Balance at 1 January
2018 62 7 489
Exchange and other adjustments 1 - - 1
Gains (losses) recognised
in the income statement
within other income 2 - (2) -
Losses recognised in
other comprehensive
income within the revaluation
reserve in respect of
financial assets at
fair value through other
comprehensive income - - - -
Purchases - - - -
Sales - - (418) (418)
Transfers into the level
3 portfolio - 128 - 128
Transfers out of the -
level 3 portfolio - - -
-------------- -------------------- ---------- ---------- ----------
At 30 June 2018 65 135 - 200
-------------- -------------------- ---------- ---------- ----------
Gains (losses) recognised
in the income statement
within other income
relating to those assets
held at 30 June 2018 9 - (2) 7
Trading
and other Total
financial
assets Available- financial
at fair for-sale assets
carried
value through financial Derivative at
profit or
loss assets assets fair value
GBPm GBPm GBPm GBPm
At 1 January 2017 119 469 583 1,171
Exchange and other adjustments - (1) 13 12
Gains (losses) recognised
in the income statement within
other income 17 - (137) (120)
Losses recognised in other
comprehensive income within
the revaluation reserve in
respect of available-for-sale
financial assets - (101) - (101)
Purchases - 24 - 24
Sales (6) (20) - (26)
Transfers into the level 3
portfolio - - (44) (44)
------------- ---------- ---------- ----------
At 30 June 2017 130 371 415 916
------------- ---------- ---------- ----------
Gains (losses) recognised
in the income statement within
other income relating to those
assets held at 30 June 2017 19 - (137) (118)
13. Fair values of financial assets and liabilities (continued)
Movements in level three portfolio
The tables below analyse movements in the level three financial
liabilities portfolio.
Financial Total
liabilities at financial
fair value liabilities
through Derivative carried at
profit or loss liabilities fair value
GBPm GBPm GBPm
At 1 January 2018 - 54 54
Exchange and other adjustments - - -
Losses (gains) recognised in the income statement within other
income - - -
Redemptions - (54) (54)
Transfers out of the level three portfolio - - -
--------------- ------------ ------------
At 30 June 2018 - - -
--------------- ------------ ------------
Gains recognised in the income statement within other income
relating to those liabilities
held at 30 June 2018 - - -
Trading and
other
financial Total
liabilities financial
at liabilities
fair value carried
through profit Derivative at
or loss liabilities fair value
GBPm GBPm GBPm
At 1 January 2017 2 57 59
Gains recognised in the income statement
within other income (2) (7) (9)
----------------- ------------ --------------
At 30 June 2017 - 50 50
----------------- ------------ --------------
Gains recognised in the income statement
within other income relating to those
liabilities held at 30 June 2017 - (7) (7)
13. Fair values of financial assets and liabilities (continued)
The tables below set out the effects of reasonably possible
alternative assumptions for categories of level 3 financial assets
and financial liabilities.
At 30 June 2018
----------------------------------
Effect of reasonably
possible alternative
assumptions(1)
------------------------
Significant
Valuation unobservable Carrying Favourable Unfavourable
technique(s) inputs Range(2) value changes changes
GBPm GBPm GBPm
Financial assets at fair value through profit
or loss:
Underlying
asset/net
Equity and asset value
venture capital (incl. property
investments prices)(3) n/a n/a 65 6 (6)
------------------ ------------------ --------------- ------- --------
65
--------
Financial assets at fair value through
other comprehensive income 135 4 (4)
Financial assets carried at fair
value 200
--------
(1) Where the exposure to an unobservable input is managed on a net
basis, only the net impact is shown in the table.
(2) The range represents the highest and lowest inputs used in the
level 3 valuations.
(3) Underlying asset/net asset values represent fair value.
13. Fair values of financial assets and liabilities (continued)
At 31 December 2017
----------------------------------
Effect of reasonably
possible alternative
assumptions(1)
------------------------
Significant
Valuation unobservable Carrying Favourable Unfavourable
technique(s) inputs Range(2) value changes changes
GBPm GBPm GBPm
Trading and other financial assets at fair value
through profit or loss:
Underlying
asset/net
Equity and asset
venture value (incl.
capital property
investments prices)(3) n/a n/a 50 5 (5)
--------------- ---------------- ------------- -------- --------
50
--------
Available for sale financial assets 20 1 (1)
Derivative financial assets:
Interest
Interest rate Option pricing rate
derivatives model volatility 9%/94% 420 1 (2)
--------------- ---------------- ------------- -------- --------
420
--------
Financial assets carried at fair
value 490
--------
Derivative financial
liabilities:
Interest
Interest rate Option pricing rate
derivatives model volatility 9%/94% 54 - -
--------------- ---------------- ------------- -------- --------
54
--------
Financial liabilities carried at
fair value 54
--------
(1) Where the exposure to an unobservable input is managed on a net
basis, only the net impact is shown in the table.
(2) The range represents the highest and lowest inputs used in the
level 3 valuations.
(3) Underlying asset/net asset values represent fair value.
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt
securities, unlisted equity investments and derivatives are
unchanged from those described in the Group's 2017 financial
statements.
Reasonably possible alternative assumptions
Valuation techniques applied to many of the Group's level three
instruments often involve the use of two or more inputs whose
relationship is interdependent. The calculation of the effect of
reasonably possible alternative assumptions included in the table
above reflects such relationships and are unchanged from those
described in the Group's 2017 financial statements.
14. 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
2018 2017
GBPm GBPm
Assets
Derivative financial instruments 6,552 6,808
Due from fellow Lloyds Banking Group undertakings 51,087 74,849
Financial assets at fair value through profit
or loss 46 1,350
Liabilities
Due to fellow Lloyds Banking Group undertakings 105,594 125,541
Derivative financial instruments 8,624 7,765
Subordinated liabilities 175 179
Debt securities in issue 83 78
During the half-year to 30 June 2018 the Group earned GBP175
million (half-year ended 30 June 2017: GBP156 million) of interest
income and incurred GBP884 million (half-year ended 30 June 2017:
GBP804 million) 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 2018 the Group
incurred expenditure of GBP33 million (half-year ended 30 June
2017: GBP39 million) on behalf of fellow Lloyds Banking Group
undertakings which was recharged to those undertakings; and fellow
Lloyds Banking Group undertakings incurred expenditure of GBP349
million (half-year ended 30 June 2017: GBP277 million) on behalf of
the Group which has been recharged to the Group.
In May 2018, the Company's subsidiary, Bank of Scotland plc,
sold the element of its commercial banking businesses required to
be transferred in order to ensure compliance with the Ring-fencing
legislation to Lloyds Bank Corporate Markets plc, a fellow Lloyds
Banking Group undertaking, for a total consideration of GBP2.3
billion; no profit or loss arose on transfer.
Other related party transactions
Other related party transactions for the half-year to 30 June
2018 are similar in nature to those for the year ended 31 December
2017.
15. Dividends on ordinary shares
The directors have approved an interim dividend of GBP1,500
million which will be paid in the second half of 2018.
The company paid a dividend of GBP1,800 million on 16 May 2018;
the company paid dividends of GBP2,000 million on 11 May 2017 and
GBP900 million on 22 September 2017.
16. Implementation of IFRS 9 and IFRS 15
IFRS 9 Financial Instruments
The Group adopted IFRS 9 from 1 January 2018. In accordance with
the transition requirements of IFRS 9, comparative information for
2017 has not been restated and transitional adjustments have been
accounted for through retained earnings as at 1 January 2018, the
date of initial application; and as a result shareholders' equity
reduced by GBP348 million, driven by the effects of additional
impairment provisions following the implementation of the expected
credit loss methodology and fair value adjustments following the
reclassification of certain financial assets to be measured at fair
value rather than amortised cost. It is not practicable to quantify
the impact of adoption of IFRS 9 in the results for the current
period.
The following table summarises the impact of the transitional
adjustment on the Group's loss allowances at 1 January 2018:
IAS 39 allowance Transitional IFRS 9 loss
at 31 December adjustment allowance
2017 in loss allowance at 1 January
2018
GBPm GBPm GBPm
Loans and advances to customers 2,125 342 2,467
Debt securities 11 - 11
Items due from other Lloyds
Banking Group undertakings - 21 21
---------------- ------------------ --------------
Drawn balances 2,136 363 2,499
Provisions for undrawn commitments
and financial guarantees 3 84 87
---------------- ------------------ --------------
Total loss allowance 2,139 447 2,586
---------------- ------------------ --------------
There were no impacts on the Group's loss allowances as a result
of changes in the measurement category of financial assets at 1
January 2018.
16. Implementation of IFRS 9 and IFRS 15 (continued)
The following table summarises the adjustments arising on the
adoption of IFRS 9 to the Group's balance sheet as at 1 January
2018.
Adjusted
As at 31 as at
December Classification 1 January
2017 and measurement Impairment 2018
GBPm GBPm GBPm GBPm
Assets
Cash and balances at central
banks 2,677 - - 2,677
Items in course of collection
from banks 260 - - 260
Financial assets at fair value
through profit or loss 1,400 811 - 2,211
Derivative financial instruments 11,634 (360) - 11,274
Loans and advances to banks 551 - - 551
Loans and advances to customers 268,657 (442) (342) 267,873
Debt securities 137 (128) - 9
Due from fellow Lloyds Banking
Group undertakings 74,849 - (21) 74,828
--------- ---------------- ---------- ----------
Financial assets at amortised
cost 344,194 (570) (363) 343,261
Financial assets at fair value
through other comprehensive income 1,033 - 1,033
Available-for-sale financial
assets 937 (937) -
Goodwill 325 - - 325
Other intangible assets 112 - - 112
Property, plant and equipment 823 - - 823
Current tax recoverable 2 - - 2
Deferred tax assets 1,878 20 112 2,010
Retirement benefit assets 69 - - 69
Other assets 369 - - 369
--------- ---------------- ---------- ----------
Total assets 364,680 (3) (251) 364,426
--------- ---------------- ---------- ----------
16. Implementation of IFRS 9 and IFRS 15 (continued)
Adjusted
As at 31 as at
December Classification 1 January
2017 and measurement Impairment 2018
GBPm GBPm GBPm GBPm
Equity and liabilities
Liabilities
Deposits from banks 21,183 - - 21,183
Customer deposits 171,198 - - 171,198
Due to fellow Lloyds Banking
Group undertakings 125,541 - - 125,541
Items in course of transmission
to banks 269 - - 269
Financial liabilities at fair
value through profit or loss 50 58 - 108
Derivative financial instruments 10,631 - - 10,631
Notes in circulation 1,313 - - 1,313
Debt securities in issue 10,919 (48) - 10,871
Other liabilities 285 - - 285
Retirement benefit obligations 135 - - 135
Current tax liabilities 518 - - 518
Other provisions 2,019 - 84 2,103
Subordinated liabilities 6,620 - - 6,620
--------- ---------------- ---------- ----------
Total liabilities 350,681 10 84 350,775
Equity
Shareholders' equity 12,462 (13) (335) 12,114
Non-controlling interests 1,537 - - 1,537
--------- ---------------- ---------- ----------
Total equity 13,999 (13) (335) 13,651
--------- ---------------- ---------- ----------
Total equity and liabilities 364,680 (3) (251) 364,426
--------- ---------------- ---------- ----------
16. Implementation of IFRS 9 and IFRS 15 (continued)
Reclassifications
IFRS
Balance sheet line IFRS 9 Measurement 9 Net
item category In Out allocation reclassification
GBPm GBPm GBPm
Financial assets
Financial assets
at FVTPL FVTPL 823 - FVOCI 823
Derivative assets FVTPL (Der) (360) FVTPL (360)
Loans and advances
-------- ------------------
- Customers AC (442) FVTPL (442)
- Debt securities AC (128) FVOCI (128)
-------- ------------------
(570) (570)
Financial assets
at FVOCI FVOCI 1,044 - 1,044
Available-for-sale
assets (21) FVTPL (21)
(916) FVOCI (916)
-------- ------------------
(937) (937)
Financial liabilities
Financial liabilities
at FVTPL FVTPL 48 48
Debt securities in
issue AC (48) FVTPL (48)
-------- ------------
Total 1,915 (1,915) -
------ -------- ------------------
There has been a pre-tax charge of GBP33 million (GBP13 million
net of tax) arising from the reclassification of financial assets
and liabilities to fair value through profit or loss and fair value
through other comprehensive income and consequent remeasurement to
fair value.
IFRS 15 revenue from contracts with customers
The Group has adopted IFRS 15 from 1 January 2018. The Group's
existing accounting policy was consistent with the requirements of
IFRS 15 and consequently, the Group recognised no transitional
adjustment as at 1 January 2018. There has been no impact of the
adoption of IFRS 15 on the Group's results for the current
period.
17. Future accounting developments
The following pronouncements are not applicable for the year
ending 31 December 2018 and have not been applied in preparing
these interim financial statements. Save as disclosed below, the
impact of these accounting changes is still being assessed by the
Group and reliable estimates cannot be made at this stage.
With the exception of IFRS 16 Leases, as at 31 July 2018 these
pronouncements are awaiting EU endorsement.
IFRS 16 Leases
IFRS 16 replaces IAS 17 Leases and is effective for annual
periods beginning on or after 1 January 2019.
IFRS 16 requires lessees to recognise a right of use asset and a
liability for future payments arising from a lease contract.
Lessees will recognise a finance charge on the liability and a
depreciation charge on the asset which could affect the timing of
the recognition of expenses on leased assets. This change will
mainly impact the properties that the Group currently accounts for
as operating leases. Finance systems will need to be changed to
reflect the new accounting rules and disclosures. Lessor accounting
requirements remain aligned to the current approach under IAS
17.
Minor amendments to other accounting standards
The IASB has issued a number of minor amendments to IFRSs
effective 1 January 2019 (including IFRIC 23 Uncertainty over
Income Tax Treatments). These revised requirements are not expected
to have a significant impact on the Group.
18. 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 2017 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.
19. Other information
The financial information included in these condensed
consolidated half-year financial statements does not constitute
statutory accounts within the meaning of section 434 of the
Companies Act 2006. Statutory accounts for the year ended 31
December 2017 have been delivered to the Registrar of Companies.
The auditors' report on those accounts was unqualified, did not
include an emphasis of matter paragraph and did not include a
statement under section 498 of the Companies Act 2006.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors listed below (being all the directors of 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 results herein includes a fair review of the information
required by DTR 4.2.7R and DTR 4.2.8R, namely:
-- an indication of important events that have occurred during
the six months ended 30 June 2018 and their impact on the condensed
consolidated half-year financial statements, and a description of
the principal risks and uncertainties for the remaining six months
of the financial year; and
-- material related party transactions in the six months ended
30 June 2018 and any material changes in the related party
transactions described in the last annual report.
Signed on behalf of the board by
António Horta-Osório
Group Chief Executive
31 July 2018
HBOS plc board of directors:
António Horta-Osório (Group Chief Executive)
George Culmer (Chief Financial Officer)
Juan Colombás (Chief Risk Officer)
Lord Blackwell (Chairman)
Anita Frew (Deputy Chairman)
Alan Dickinson
Simon Henry
Lord Lupton CBE
Deborah McWhinney
Nicholas Prettejohn
Stuart Sinclair
Sara Weller CBE
INDEPENDENT REVIEW REPORT TO 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
2018 half-year results of HBOS plc (the "Company") for the six
month period ended 30 June 2018. Based on our review, nothing has
come to our attention that causes us to believe that the interim
financial statements are not prepared, in all material respects, in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated balance sheet as at 30 June 2018;
-- the consolidated income statement and consolidated statement
of comprehensive income for the period then ended;
-- the consolidated cash flow statement for the period then ended;
-- the consolidated statement of changes in equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the 2018 half-year
results have been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting', as adopted
by the European Union and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
As disclosed in note 1 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The 2018 half-year results, including the interim financial
statements, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the 2018
half-year results in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the 2018 half-year results based on our
review. This report, including the conclusion, has been prepared
for and only for the Company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the 2018
half-year results and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
31 July 2018
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Douglas Radcliffe
Group Investor Relations Director
020 7356 1571
douglas.radcliffe@finance.lloydsbanking.com
Edward Sands
Director of Investor Relations
020 7356 1585
edward.sands@lloydsbanking.com
Nora Thoden
Director of Investor Relations
020 7356 1580
nora.thoden@lloydsbanking.com
CORPORATE AFFAIRS
Grant Ringshaw
Director of Media Relations
020 7356 2362
grant.ringshaw@lloydsbanking.com
Matt Smith
Head of Corporate Media
020 7356 3522
matt.smith@lloydsbanking.com
Registered office: HBOS plc, The Mound, Edinburgh EH1 1YZ
Registered in Scotland no. SC218813
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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