TIDM68FF
RNS Number : 5028Q
HBOS PLC
04 August 2010
HBOS plc
Interim Management Report
For the half-year to 30 June 2010
Member of the Lloyds Banking Group
FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with respect to the
business, strategy and plans of HBOS plc, its current goals and expectations
relating to its future financial condition and performance. Statements that are
not historical facts, including statements about the HBOS Group's or the HBOS
Group's management's beliefs and expectations, are forward looking statements.
By their nature, forward looking statements involve risk and uncertainty because
they relate to events and depend on circumstances that will occur in the future.
The HBOS Group's actual future business, strategy, plans and/or results may
differ materially from those expressed or implied in these forward looking
statements as a result of a variety of risks, uncertainties and other factors,
including, without limitation, UK domestic and global economic and business
conditions; the ability to derive cost savings and other benefits, as well as
the ability to integrate the HBOS Group successfully into the Lloyds Banking
Group; the ability to access sufficient funding to meet the HBOS Group's
liquidity needs; changes to the HBOS plc's or Lloyds Banking Group plc's credit
ratings; risks concerning borrower or counterparty credit quality; market
related trends and developments; changing demographic trends; changes in
customer preferences; changes to regulation, accounting standards or taxation,
including changes to regulatory capital or liquidity requirements; the policies
and actions of governmental or regulatory authorities in the UK, the European
Union, or jurisdictions outside the UK, including other European countries and
the US; the ability to attract and retain senior management and other employees;
requirements or limitations imposed on the HBOS Group as a result of HM
Treasury's investment in Lloyds Banking Group plc; the ability to complete
satisfactorily the disposal of certain assets as part of the Lloyds Banking
Group's EU state aid obligations; the extent of any future impairment charges or
write-downs caused by depressed asset valuations; exposure to regulatory
scrutiny, legal proceedings or complaints, actions of competitors and other
factors. Please refer to Lloyds Banking Group plc's latest Annual Report on
Form 20-F filed with the US Securities and Exchange Commission for a discussion
of such factors together with examples of forward looking statements. The
forward looking statements contained in this announcement are made as at the
date of this announcement, and the HBOS Group undertakes no obligation to update
any of its forward looking statements.
CONTENTS
+--------------------------------------------------------------+--------+
| | Page |
+--------------------------------------------------------------+--------+
| Financial review | 1 |
+--------------------------------------------------------------+--------+
| Principal risks and uncertainties | 3 |
+--------------------------------------------------------------+--------+
| Condensed interim financial statements (unaudited) | |
+--------------------------------------------------------------+--------+
| Consolidated income statement | 7 |
+--------------------------------------------------------------+--------+
| Consolidated statement of comprehensive income | 8 |
+--------------------------------------------------------------+--------+
| Consolidated balance sheet | 9 |
+--------------------------------------------------------------+--------+
| Consolidated statement of changes in equity | 11 |
+--------------------------------------------------------------+--------+
| Consolidated cash flow statement | 12 |
+--------------------------------------------------------------+--------+
| Notes | 13 |
+--------------------------------------------------------------+--------+
| Statement of directors' responsibilities | 30 |
+--------------------------------------------------------------+--------+
| Independent review report | 31 |
+--------------------------------------------------------------+--------+
| Contacts | 33 |
+--------------------------------------------------------------+--------+
FINANCIAL REVIEW
Results
The consolidated income statement on page 7 shows a loss before tax of GBP675
million and a loss attributable to equity shareholders of GBP832 million for the
half-year ended 30 June 2010.
Principal activities
HBOS plc (the Company) and its subsidiaries (together, the Group) provides a
range of banking and financial services through branches and offices in the UK
and overseas.
The Group's revenue is earned through interest and fees on a broad range of
financial services products including current and savings accounts, personal
loans, credit cards and mortgages within the retail market; loans and capital
market products to commercial, corporate and asset finance customers; life,
pensions and investment products; and private banking and asset management.
Corporate structure
On 1 January 2010 Lloyds Banking Group plc changed its group corporate structure
by transferring its holding in the Company to Lloyds TSB Bank plc which became
the immediate parent of the Group.
This transfer followed a review by management of the structure of the Lloyds
Banking Group and a programme to develop and implement a legal entity structure
that is efficient from a financial, regulatory and capital perspective.
Review of results
The Group recorded a loss before tax of GBP675 million in the six months to 30
June 2010. This represented a reduction of GBP9,676 million or 93 per cent when
compared to the loss before tax of GBP10,351 million (restated -see note 2)
recorded for the six months ended 30 June 2009. This improvement was
principally the result of a reduction in the impairment charge, which decreased
by 55 per cent or GBP6,778 million to GBP5,536 million, an increase in the
trading surplus of GBP2,305 million and a lower share of losses from joint
ventures and associates.
Net interest income increased by GBP2,437 million to GBP4,781 million as margins
improved with more mortgage customers moving onto, and staying on, standard
variable rate terms and significantly lower interest expense on debt securities
in issue and repurchase (repo) transactions.
Net trading income increased by GBP2,266 million to GBP278 million as a result
of gains arising on assets and liabilities held at fair value, reflecting
movements in market prices. These include the assets, held within the Group's
life insurance operations, that support the insurance and investment contract
liabilities.
Excluding net trading income, other income decreased by 44 per cent or GBP2,460
million to GBP3,086 million.Principally this decrease relates to the GBP2,085
million gain from capital transactions arising in the prior year. Further
decreases in other income can be attributed to a GBP560 million decrease in
insurance premium income as a result of insurance product rationalisation.
Insurance claims increased by GBP556 million to GBP929 million. This is
primarily driven by bond and property investment losses backing policyholder
liabilities in 2009 compared to more modest falls in 2010 driven by the lower
equity markets partially offset by improvements in bond and property values.
FINANCIAL REVIEW (continued)
Operating expenses decreased by GBP618 million or 21 per cent to GBP2,344
million. Excluding a pension curtailment gain of GBP425 million recognised in
the current period, operating expenses decreased by GBP193 million or 7 per cent
which was principally attributable to savings in staff costs of GBP253 million
partially offset by impairment of tangible fixed assets relating to integration
activities.
Impairment losses decreased by GBP6,778 million or 55 per cent to GBP5,536
million as a result of improved market conditions; this is in line with
expectations and generally reflects the stabilising economic environment,
although continued high levels of impairment charges were recognised in Ireland.
The Group recorded a profit of GBP56 million in respect of the sale of various
businesses during the period.
Loans and advances to customers decreased by GBP18,550 million or 5 per cent to
GBP385,525 million at 30 June 2010. Loans and advances to customers before
impairment provisions decreased by GBP15,838 million or 4 per cent to GBP409,509
million as customers continued to reduce their personal indebtedness and pay
down unsecured debts. This movement includes the transfer during the period of
certain elements of the Bank of Scotland hire purchase - asset finance portfolio
to Black Horse Finance Limited, another Lloyds Banking Group company. Customer
deposits increased by 2 per cent or GBP4,581 million to GBP236,604 million.
This includes an increase of GBP7,687 million in repos and a decrease of
GBP3,185 million attributable to the sale of BOS International Limited to
another Lloyds Banking Group company. As a result of these movements, the
customer loans to deposits ratio decreased from 174 per cent at 31 December 2009
to 163 per cent at 30 June 2010.
Loans and advances to banks, including loans to fellow group undertakings,
decreased from GBP98,524 million to GBP86,204 million while deposits from banks,
including deposits from fellow group undertakings, decreased from GBP179,064
million to GBP146,042 million principally as a result of transactional activity
with Lloyds TSB Bank plc.
Debt securities in issue decreased by GBP10,727 million or 9 per cent to
GBP108,430 million as the Group repositioned its funding through transactions
with other Lloyds Banking Group subsidiaries.
Shareholders' equity increased by GBP592 million or 2 per cent to GBP25,477
million, principally due to the issuance of shares by HBOS plc to Lloyds TSB
Bank plc as part of an internal liability management exercise, valuation gains
recorded on available-for-sale financial assets, and gains recorded on cash flow
hedges partially offset by the loss recorded in the six month period ended 30
June 2010.
The Group's total capital resources for regulatory capital purposes have
decreased by GBP490 million or 1 per cent to GBP36,272 million. The fall is
largely due to losses incurred and additional pension commitments to the final
salary pension scheme. These falls have been offset by repatriations of capital
from insurance businesses to HBOS plc during the period. Total risk-weighted
assets have decreased by GBP26,090 million or 8 per cent to GBP298,555 million
since 31 December 2009 due to a combination of lower asset volumes and
reductions in average risk weights. This resulted in the total capital ratio
increasing by 80 basis points to 12.1 per cent, while the core tier 1 ratio and
the tier 1 capital ratio have increased by 60 basis points and 30 basis points
to 8.3 per cent and 9.4 per cent respectively.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties facing the Group in the second half of
2010 are:
Economy
During the first half of 2010, the global economy has continued to recover from
the deepest recession in 80 years. The UK economy has grown in line with its
long-term average during the first half of 2010, however consumer confidence has
fallen back slightly and the recent rise in house prices has stalled.
Nevertheless, some key drivers of the Group's performance have continued to
perform better than expected, with UK corporate insolvencies falling in the last
three quarters of 2009 and, related to that, employment has held up relatively
well. Although the Group expects corporate insolvencies to rise slightly
further, the failure rate should peak at around just one third the level reached
in the 1990's recession, and consequently unemployment may rise slightly but
should already be close to its peak. The Group's central scenario is for the
modest recovery in the UK to continue - the projection of 1.3 per cent GDP
growth in 2010 and just over 2 per cent in 2011 is close to the consensus.
However the risks to this scenario are skewed to the downside. The extent to
which simultaneous fiscal tightening across Europe might undermine global and UK
growth is unclear. A 'double-dip' scenario - a second recession following
closely the one that the economy is just emerging from - would result in further
significant increases in corporate failures and unemployment into 2011.
Residential and commercial property would suffer a second period of falling
prices, tenant defaults would increase and central banks would have limited
ability to cushion the downturn.
Liquidity and funding
During the first half of 2010 liquidity and funding has remained a key area of
focus for the Group and the industry as a whole. The Group's ability to
successfully fund its balance sheet is dependent on the continued functioning of
the money and capital markets; successful right-sizing of the Lloyds Banking
Group balance sheet; the repayment of public facilities by Lloyds Banking Group
in accordance with the terms agreed; limited further deterioration in the UK's,
Lloyds Banking Group plc's and the Company's credit ratings and no significant
or sudden withdrawal of deposits. The Company is dependent upon its ultimate
parent, Lloyds Banking Group plc and Lloyds TSB Bank plc to provide capital and
funding.
The Group is reliant on both short-term wholesale funding and public and central
bank facilities to support its balance sheet. During the first half of 2010,
Lloyds Banking Group has chosen to repay a portion of the amounts drawn from
these facilities, replacing them with term debt issuance in the public and
private markets as the balance sheet is right-sized. A shortening in maturity
risk appetite of investors in the second quarter of 2010 has led to reduced
short-term money market liquidity, however, Lloyds Banking Group has funded
itself successfully with no material change in its short-term maturity profile.
Lloyds Banking Group has also entered into a number of EU state aid related
obligations to achieve reductions in certain parts of its balance sheet by the
end of 2014. The requirement to meet this deadline may result in the Lloyds
Banking Group having to provide funding to support these asset reductions and/or
disposals which may also result in a lower price being achieved.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Credit risk
The Group has seen a significant reduction in impairments in the first half of
2010, following the stabilisation of the wholesale portfolios and good retail
affordability and performance; its total impairment charge levels have reduced
in the first half of 2010 compared with both the first half of 2009 and the
second half of 2009.
The Group remains cautious about the economic outlook, and in particular a
'double dip' recession is a key downside risk for the UK economy and
consequently the Group. Notwithstanding the improved performance in the first
half of the year, the Group's wholesale portfolios continue to be closely
monitored, with robust and proactive risk management in place to help ensure
timely risk mitigating actions. The Group retains some material single obligor
concentrations on weaker credits, which are likely to continue to show
vulnerability with the potential for increased impairments. Whilst a high
percentage of real estate and real estate related investment lending is in the
wholesale portfolio, sustainability of cash flow has been key to the relative
resilience seen in the investment market to date. However, the portfolio
remains sensitive to a rise in tenant defaults which could impact debt service
capability. This could be exacerbated by price falls in the secondary and
tertiary assets held in the real estate investment lending portfolio.
The Group expects further stress within certain portfolios as domestically
focused names suffer the effects of reduced public sector expenditure, tighter
working capital requirements and a weak recovery in demand. Under the Group's
economic assumptions, 2010 is expected to continue to be difficult for these
portfolios. Some early warning signs of asset deterioration are already evident
in some portfolios (for example increasing delinquencies and adverse credit risk
rating migrations). Refinancing will be a key issue with significant maturities
due in the next few years, especially in the Group's real estate and real estate
related portfolios as well as for leveraged loans.
Concerns also exist over the outlook for the Eurozone following the Greek crisis
and subsequent contagion to Spain, Portugal and Ireland. This adds further
uncertainty in asset valuations and could impede asset disposals. However, the
Group has limited exposure to the weaker Eurozone economies and is monitoring
them closely.
Market risk
Market uncertainty has continued during the first half of 2010. Equity markets
have been volatile. Concerns about the scale of deficits in Ireland and
southern European countries resulted in increased credit spreads in the areas
affected, and fears of contagion impacted the Euro and widened spreads between
official and interbank interest rates.
The environment will continue to be uncertain and the Group will continue to
take opportunities to reduce exposures where appropriate. In the period Lloyds
Banking Group has hedged some of the equity market risk that arises from the
life assurance business and continues to carefully manage risks arising from its
pension schemes.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Legal and regulatory risk
The Financial Services Act 2010 received Royal Assent on 8 April 2010. The Act
establishes a new consumer financial education body, amends the Financial
Services and Markets Act to provide the FSA with a new financial stability
statutory objective, gives the FSA powers to make rules on remuneration
arrangements, short selling, living wills, consumer redress schemes, and extends
its enforcement powers. In addition, the UK Government has announced plans to
give the Bank of England macro- and micro-prudential supervisory powers over UK
regulated banks and to create a new Customer Protection and Markets Authority to
take over the FSA's conduct of business supervisory role, together with certain
other duties from the FSA and other bodies. The Act and the Bank of England's
proposed new supervisory powers could have significant ramifications for the
FSA's approach to regulating the Group, particularly regarding the setting of
capital and liquidity requirements and also conduct of business regulations.
Evolving capital and liquidity requirements continue to be monitored by the
Group. In December 2009, the Basel Committee on Banking Supervision proposed a
capital and liquidity reform package (Basel III) which would present a number of
challenges to the Group. The UK Government has announced that a bank levy will
be imposed on large UK banks and foreign banks operating in the UK from 1
January 2011 and has appointed an independent commission to review possible
structural reforms to the banking system. The Treasury Select Committee has
also announced its intention to conduct an examination of competition in retail
banking and the future of free banking. It is too early to quantify the
potential impact of these developments on the Group.
The Group may also be subject to legal and regulatory proceedings and Financial
Ombudsman and other complaints brought against it in the UK High Court and
elsewhere, and in jurisdictions outside the UK. The outcome of any
investigation, proceeding or complaint is inherently uncertain.
A number of changes in regulation will come into effect in the short term that
will affect the Group including implementation of new reverse stress testing
requirements, the 31 December 2010 delivery deadline for the Single Customer
View implementation and the EU's proposed changes to bank remuneration rules.
The Group may also be subject to increased EU supervisory influence via the
Committee of European Banking Supervisors, the Committee of European Insurance
and Occupational Pensions Supervisors and the Committee of European Securities
Regulators. From 2011 these bodies will become new EU Supervisory Authorities -
the European Banking Authority, the European Insurance and Occupational Pensions
Authority and the European Securities and Markets Authority respectively.
The Group is currently assessing the impacts of these regulatory developments
and is working closely with the Tripartite Authorities and industry associations
so that it continues to identify and respond to regulatory and legislative
changes.
Customer treatment
The FSA continues to drive focus on conduct of business activities and has
established a new approach to supervision of Conduct Risk, particularly in
relation to retail customers, in which they will seek to place greater emphasis
on product governance. The FSA also published its review of Complaints Handling
in Banking Groups in April 2010 in which they have identified a number of
concerns across the industry and has indicated that they will complete a
thematic review on the sale of packaged current accounts in the third quarter of
2010.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
People
In the first half of 2010, as integration has continued, the Group has
proactively managed the relationship with staff. The Group has published
revised proposals to harmonise employee terms and conditions across the Group
and is consulting with the various representative unions.
State aid
Lloyds Banking Group has made a number of undertakings to HM Treasury regarding
both capital and funding support, including additional lending to certain
mortgage and business sectors, corporate governance and staff remuneration.
In addition Lloyds Banking Group is subject to European state aid obligations in
line with the restructuring plan agreed with HM Treasury and the EU College of
Commissioners in November 2009, which is designed to support the long term
viability of the Lloyds Banking Group and address any competition distortions
arising from the benefits of state aid.
CONDENSED INTERIM FINANCIAL STATEMENTS (unaudited)
CONSOLIDATED INCOME STATEMENT
+-----------------------------------------------+------+-+-----------+-+-----------+
| | | | Half-year | | Half-year |
| | | | | | |
| | | | to 30 | | to 30 |
| | | | June | | June |
| | | | 2010 | | 2009(1) |
+-----------------------------------------------+------+-+-----------+-+-----------+
| | Note | | GBP | | GBP |
| | | | million | | million |
+-----------------------------------------------+------+-+-----------+-+-----------+
| | | | | | |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Interest and similar income | | | 9,037 | | 9,798 |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Interest and similar expense | | | (4,256) | | (7,454) |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Net interest income | | | 4,781 | | 2,344 |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Fee and commission income | | | 766 | | 784 |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Fee and commission expense | | | (569) | | (543) |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Net fee and commission income | | | 197 | | 241 |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Net trading income | | | 278 | | (1,988) |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Insurance premium income | | | 1,987 | | 2,547 |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Other operating income | | | 902 | | 2,758 |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Other income | 3 | | 3,364 | | 3,558 |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Total income | | | 8,145 | | 5,902 |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Insurance claims | | | (929) | | (373) |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Total income, net of insurance claims | | | 7,216 | | 5,529 |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Operating expenses | 4 | | (2,344) | | (2,962) |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Trading surplus | | | 4,872 | | 2,567 |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Impairment | 5 | | (5,536) | | (12,314) |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Share of results of joint ventures and | | | (67) | | (508) |
| associates | | | | | |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Profit (loss) on sale of businesses | 6 | | 56 | | (96) |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Loss before tax | | | (675) | | (10,351) |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Taxation | 7 | | (99) | | 2,701 |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Loss for the period | | | (774) | | (7,650) |
+-----------------------------------------------+------+-+-----------+-+-----------+
| | | | | | |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Profit attributable to non-controlling | | | 58 | | 48 |
| interests | | | | | |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Loss attributable to equity shareholders | | | (832) | | (7,698) |
+-----------------------------------------------+------+-+-----------+-+-----------+
| Loss for the period | | | (774) | | (7,650) |
+-----------------------------------------------+------+-+-----------+-+-----------+
| | | | | | |
+-----------------------------------------------+------+-+-----------+-+-----------+
(1) Restated - see note 2.
CONDENSED INTERIM FINANCIAL STATEMENTS (unaudited)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
+---------------------------------------------------+---+---------+--+---------+
| | Half-year | Half-year |
| | to 30 June | |
| | | to 30 |
| | 2010 | June |
| | | 2009(1) |
+---------------------------------------------------+-------------+------------+
| | | GBP | | GBP |
| | | million | | million |
+---------------------------------------------------+---+---------+--+---------+
| | | | | |
+---------------------------------------------------+---+---------+--+---------+
| Loss for the period | | (774) | | (7,650) |
+---------------------------------------------------+---+---------+--+---------+
| Other comprehensive income: | | | | |
+---------------------------------------------------+---+---------+--+---------+
| Movements in revaluation reserve in respect of | | | | |
| available-for-sale financial | | | | |
| assets: | | | | |
+---------------------------------------------------+---+---------+--+---------+
| Change in fair value | | 232 | | 1,180 |
+---------------------------------------------------+---+---------+--+---------+
| Transferred to income statement in respect | | (112) | | 15 |
| of disposals | | | | |
+---------------------------------------------------+---+---------+--+---------+
| Transferred to income statement in respect | | 38 | | 1,459 |
| of impairment | | | | |
+---------------------------------------------------+---+---------+--+---------+
| Taxation | | (46) | | (729) |
+---------------------------------------------------+---+---------+--+---------+
| | | 112 | | 1,925 |
+---------------------------------------------------+---+---------+--+---------+
| Movement in cash flow hedging reserve: | | | | |
+---------------------------------------------------+---+---------+--+---------+
| Effective portion of changes in fair value | (413) | | (1,855) |
| taken to other comprehensive income | | | |
+-------------------------------------------------------+---------+--+---------+
| Net transfers to the income statement | | 689 | | 1,984 |
+---------------------------------------------------+---+---------+--+---------+
| Taxation | | (77) | | (36) |
+---------------------------------------------------+---+---------+--+---------+
| | | 199 | | 93 |
+---------------------------------------------------+---+---------+--+---------+
| Currency translation differences | | (15) | | (49) |
+---------------------------------------------------+---+---------+--+---------+
| Other comprehensive income for the period, net of | | 296 | | 1,969 |
| tax | | | | |
+---------------------------------------------------+---+---------+--+---------+
| Total comprehensive income for the period | | (478) | | (5,681) |
+---------------------------------------------------+---+---------+--+---------+
| | | | | |
+---------------------------------------------------+---+---------+--+---------+
| Total comprehensive income attributable to | | 58 | | 48 |
| non-controlling interests | | | | |
+---------------------------------------------------+---+---------+--+---------+
| Total comprehensive income attributable to equity | | (536) | | (5,729) |
| shareholders | | | | |
+---------------------------------------------------+---+---------+--+---------+
| Total comprehensive income for the period | | (478) | | (5,681) |
+---------------------------------------------------+---+---------+--+---------+
| | | | | |
+---------------------------------------------------+---+---------+--+---------+
(1) Restated - see note 2.
CONDENSED INTERIM FINANCIAL STATEMENTS (unaudited)
CONSOLIDATED BALANCE SHEET
+-------------------------------------------------------+------+-+----------+-+----------+
| | | | As at | | As at |
| | | | 30 | | 31 Dec |
| | | | June | | |
| | | | 2010 | | 2009 |
+-------------------------------------------------------+------+-+----------+-+----------+
| | Note | | GBP | | GBP |
| | | | million | | million |
+-------------------------------------------------------+------+-+----------+-+----------+
| | | | | | |
+-------------------------------------------------------+------+-+----------+-+----------+
| Assets | | | | | |
+-------------------------------------------------------+------+-+----------+-+----------+
| Cash and balances at central banks | | | 2,408 | | 2,905 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Items in the course of collection from banks | | | 839 | | 534 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Trading and other financial assets at fair value | 8 | | 99,567 | | 101,908 |
| through profit or loss | | | | | |
+-------------------------------------------------------+------+-+----------+-+----------+
| Derivative financial instruments | | | 36,965 | | 30,919 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Loans and receivables: | | | | | |
+-------------------------------------------------------+------+-+----------+-+----------+
| Loans and advances to fellow group undertakings | | | 74,198 | | 88,620 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Loans and advances to other banks | | | 12,006 | | 9,904 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Loans and advances to banks | | | 86,204 | | 98,524 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Loans and advances to customers | 9 | | 385,525 | | 404,075 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Debt securities | | | 26,686 | | 31,468 |
+-------------------------------------------------------+------+-+----------+-+----------+
| | | | 498,415 | | 534,067 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Available-for-sale financial assets | | | 17,060 | | 21,591 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Investment properties | | | 2,692 | | 2,417 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Investments in joint ventures and associates | | | 418 | | 393 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Goodwill | | | 850 | | 850 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Value of in-force business | | | 2,783 | | 2,986 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Other intangible assets | | | 74 | | 97 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Tangible fixed assets | | | 4,733 | | 5,103 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Current tax recoverable | | | 238 | | 495 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Deferred tax assets | | | 4,804 | | 4,724 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Retirement benefit asset | | | 91 | | 67 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Other assets | | | 6,504 | | 10,127 |
+-------------------------------------------------------+------+-+----------+-+----------+
| Total assets | | | 678,441 | | 719,183 |
+-------------------------------------------------------+------+-+----------+-+----------+
CONDENSED INTERIM FINANCIAL STATEMENTS (unaudited)
CONSOLIDATED BALANCE SHEET (continued)
+----------------------------------------------+---------+-+----------+-+----------+
| | | | As at | | As at |
| | | | 30 | | 31 Dec |
| | | | June | | |
| | | | 2010 | | 2009(1) |
+----------------------------------------------+---------+-+----------+-+----------+
| Equity and liabilities | Note | | GBP | | GBP |
| | | | million | | million |
+----------------------------------------------+---------+-+----------+-+----------+
| | | | | | |
+----------------------------------------------+---------+-+----------+-+----------+
| Liabilities | | | | | |
+----------------------------------------------+---------+-+----------+-+----------+
| Deposits from fellow group undertakings | | | 121,487 | | 149,519 |
+----------------------------------------------+---------+-+----------+-+----------+
| Deposits from other banks | | | 24,555 | | 29,545 |
+----------------------------------------------+---------+-+----------+-+----------+
| Deposits from banks | | | 146,042 | | 179,064 |
+----------------------------------------------+---------+-+----------+-+----------+
| Customer deposits | | | 236,604 | | 232,023 |
+----------------------------------------------+---------+-+----------+-+----------+
| Items in the course of transmission to banks | | | 525 | | 495 |
+----------------------------------------------+---------+-+----------+-+----------+
| Trading and other financial liabilities at | | | 24,203 | | 27,372 |
| fair value through profit or loss | | | | | |
+----------------------------------------------+---------+-+----------+-+----------+
| Derivative financial instruments | | | 31,872 | | 25,801 |
+----------------------------------------------+---------+-+----------+-+----------+
| Notes in circulation | | | 999 | | 981 |
+----------------------------------------------+---------+-+----------+-+----------+
| Debt securities in issue | 12 | | 108,430 | | 119,157 |
+----------------------------------------------+---------+-+----------+-+----------+
| Liabilities arising from insurance contracts | | | 37,875 | | 39,234 |
| and participating | | | | | |
| investment contracts | | | | | |
+----------------------------------------------+---------+-+----------+-+----------+
| Liabilities arising from non-participating | | | 30,252 | | 30,614 |
| investment contracts | | | | | |
+----------------------------------------------+---------+-+----------+-+----------+
| Unallocated surplus within insurance | | | 666 | | 772 |
| businesses | | | | | |
+----------------------------------------------+---------+-+----------+-+----------+
| Other liabilities | | | 15,593 | | 17,474 |
+----------------------------------------------+---------+-+----------+-+----------+
| Retirement benefit obligations | | | 63 | | 467 |
+----------------------------------------------+---------+-+----------+-+----------+
| Current tax liabilities | | | 29 | | 29 |
+----------------------------------------------+---------+-+----------+-+----------+
| Deferred tax liabilities | | | 194 | | 208 |
+----------------------------------------------+---------+-+----------+-+----------+
| Other provisions | | | 245 | | 258 |
+----------------------------------------------+---------+-+----------+-+----------+
| Subordinated liabilities | 13 | | 18,789 | | 19,078 |
+----------------------------------------------+---------+-+----------+-+----------+
| Total liabilities | | | 652,381 | | 693,027 |
+----------------------------------------------+---------+-+----------+-+----------+
| | | | | | |
+----------------------------------------------+---------+-+----------+-+----------+
| Equity | | | | | |
+----------------------------------------------+---------+-+----------+-+----------+
| Share capital | 14 | | 3,763 | | 3,763 |
+----------------------------------------------+---------+-+----------+-+----------+
| Share premium account | 14, 15 | | 17,181 | | 16,056 |
+----------------------------------------------+---------+-+----------+-+----------+
| Other reserves | 15 | | 8,433 | | 8,137 |
+----------------------------------------------+---------+-+----------+-+----------+
| Retained profits | 15 | | (3,900) | | (3,071) |
+----------------------------------------------+---------+-+----------+-+----------+
| Shareholders' equity | | | 25,477 | | 24,885 |
+----------------------------------------------+---------+-+----------+-+----------+
| Non-controlling interests | | | 583 | | 1,271 |
+----------------------------------------------+---------+-+----------+-+----------+
| Total equity | | | 26,060 | | 26,156 |
+----------------------------------------------+---------+-+----------+-+----------+
| Total equity and liabilities | | | 678,441 | | 719,183 |
+----------------------------------------------+---------+-+----------+-+----------+
| | | | | | |
+----------------------------------------------+---------+-+----------+-+----------+
(1) Restated - see note 2.
CONDENSED INTERIM FINANCIAL STATEMENTS (unaudited)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| | Attributable to equity shareholders | | | | |
+--------------------------+--------------------------------------------------------------------------+----------+-------------+----------+---------+
| Share | | Other | | Retained | | Total | | Non- | | Total |
| capital and | | | | | | | | controlling | | |
| premium | | reserves | | profits | | | | | | |
| | | | | | | | | interests | | |
+------------------------------------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| | GBP | | GBP | | GBP | | GBP | | GBP | | GBP |
| | million | | million | | million | | million | | million | | million |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Balance at 1 January | | | | | | | | | | | |
| 2009: | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| As previously | 8,259 | | (5,616) | | 8,839 | | 11,482 | | 1,300 | | 12,782 |
| stated | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Prior year | - | | 1,065 | | (1,065) | | - | | - | | - |
| adjustment (note 2) | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Restated | 8,259 | | (4,551) | | 7,774 | | 11,482 | | 1,300 | | 12,782 |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Total comprehensive | - | | 1,969 | | (7,698) | | (5,729) | | 48 | | (5,681) |
| income(1) | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Dividends | - | | - | | (52) | | (52) | | (53) | | (105) |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Issue of ordinary and | 6,871 | | 9,468 | | - | | 16,339 | | - | | 16,339 |
| preference shares | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Purchase/sale of | - | | - | | (48) | | (48) | | - | | (48) |
| treasury shares | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Employee share option | | | | | | | | | | | |
| schemes: | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Value of employee | - | | - | | 106 | | 106 | | - | | 106 |
| services | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Balance at 30 June | 15,130 | | 6,886 | | 82 | | 22,098 | | 1,295 | | 23,393 |
| 2009(1) | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Total comprehensive | - | | 1,110 | | (2,793) | | (1,683) | | 53 | | (1,630) |
| income(1) | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Dividends | - | | - | | (303) | | (303) | | (42) | | (345) |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Issue of ordinary shares | 8,956 | | - | | - | | 8,956 | | - | | 8,956 |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Redemption of preference | (4,267) | | - | | - | | (4,267) | | - | | (4,267) |
| shares | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Capital redemption | - | | 141 | | (141) | | - | | - | | - |
| reserve | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Purchase/sale of | - | | - | | 84 | | 84 | | - | | 84 |
| treasury shares | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Extinguishment of | - | | - | | - | | - | | (35) | | (35) |
| non-controlling | | | | | | | | | | | |
| interests | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Balance at 31 December | 19,819 | | 8,137 | | (3,071) | | 24,885 | | 1,271 | | 26,156 |
| 2009(1) | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Total comprehensive | - | | 296 | | (832) | | (536) | | 58 | | (478) |
| income | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Dividends | - | | - | | - | | - | | (6) | | (6) |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Issue of ordinary shares | 1,125 | | - | | - | | 1,125 | | - | | 1,125 |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Employee share option | | | | | | | | | | | |
| schemes: | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Value of employee | - | | - | | 3 | | 3 | | - | | 3 |
| services | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Extinguishment of | - | | - | | - | | - | | (740) | | (740) |
| non-controlling | | | | | | | | | | | |
| interests | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| Balance at 30 June 2010 | 20,944 | | 8,433 | | (3,900) | | 25,477 | | 583 | | 26,060 |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
| | | | | | | | | | | | |
+--------------------------+---------+----------+----------+----------+----------+----------+---------+----------+-------------+----------+---------+
(1) Restated - see note 2.
CONDENSED INTERIM FINANCIAL STATEMENTS (unaudited)
CONSOLIDATED CASH FLOW STATEMENT
+---------------------------------------------------+-+-----------+-+-----------+
| | | Half-year | | Half-year |
| | | | | |
| | | to 30 | | to 30 |
| | | June | | June |
| | | 2010 | | 2009(1) |
+---------------------------------------------------+-+-----------+-+-----------+
| | | GBP | | GBP |
| | | million | | million |
+---------------------------------------------------+-+-----------+-+-----------+
| | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Loss before tax | | (675) | | (10,351) |
+---------------------------------------------------+-+-----------+-+-----------+
| Adjustments for: | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Change in operating assets | | 2,262 | | 359 |
+---------------------------------------------------+-+-----------+-+-----------+
| Change in operating liabilities | | (38,461) | | 6,005 |
+---------------------------------------------------+-+-----------+-+-----------+
| Non-cash and other items | | 2,067 | | 2,491 |
+---------------------------------------------------+-+-----------+-+-----------+
| Tax (paid) received | | (43) | | 84 |
+---------------------------------------------------+-+-----------+-+-----------+
| Net cash used in operating activities | | (34,850) | | (1,412) |
+---------------------------------------------------+-+-----------+-+-----------+
| | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Cash flows from investing activities | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Purchase of available-for-sale financial assets | | (563) | | (7,261) |
+---------------------------------------------------+-+-----------+-+-----------+
| Proceeds from sale and maturity of | | 4,413 | | 8,250 |
| available-for-sale financial assets | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Purchase of fixed assets | | (524) | | (439) |
+---------------------------------------------------+-+-----------+-+-----------+
| Proceeds from sale of fixed assets | | 711 | | 368 |
+---------------------------------------------------+-+-----------+-+-----------+
| Acquisition of businesses, net of cash acquired | | (39) | | (95) |
+---------------------------------------------------+-+-----------+-+-----------+
| Disposal of businesses, net of cash disposed | | 247 | | 130 |
+---------------------------------------------------+-+-----------+-+-----------+
| Net cash provided by investing activities | | 4,245 | | 953 |
+---------------------------------------------------+-+-----------+-+-----------+
| | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Cash flows from financing activities | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Dividends paid to equity shareholders | | - | | (52) |
+---------------------------------------------------+-+-----------+-+-----------+
| Dividends paid to non-controlling interests | | (6) | | (53) |
+---------------------------------------------------+-+-----------+-+-----------+
| Interest paid on subordinated liabilities | | (485) | | (960) |
+---------------------------------------------------+-+-----------+-+-----------+
| Proceeds from issue of ordinary shares | | - | | 13,500 |
+---------------------------------------------------+-+-----------+-+-----------+
| Proceeds from issue of preference shares | | - | | 2,839 |
+---------------------------------------------------+-+-----------+-+-----------+
| Purchase of own shares | | - | | (15) |
+---------------------------------------------------+-+-----------+-+-----------+
| Repayment of subordinated liabilities | | - | | (5,090) |
+---------------------------------------------------+-+-----------+-+-----------+
| Net cash (used in) provided by financing | | (491) | | 10,169 |
| activities | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Effects of exchange rate changes on cash and cash | | 41 | | 86 |
| equivalents | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Change in cash and cash equivalents | | (31,055) | | 9,796 |
+---------------------------------------------------+-+-----------+-+-----------+
| Cash and cash equivalents at beginning of period | | 82,477 | | 12,103 |
+---------------------------------------------------+-+-----------+-+-----------+
| Cash and cash equivalents at end of period | | 51,422 | | 21,899 |
+---------------------------------------------------+-+-----------+-+-----------+
| | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
(1) Restated - see note 2.
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 | Basis of preparation | 14 |
+----+------------------------------------------------------------+------+
| 2 | Accounting policies, presentation and estimates | 14 |
+----+------------------------------------------------------------+------+
| 3 | Other income | 17 |
+----+------------------------------------------------------------+------+
| 4 | Operating expenses | 17 |
+----+------------------------------------------------------------+------+
| 5 | Impairment | 18 |
+----+------------------------------------------------------------+------+
| 6 | Profit (loss) on sale of businesses | 18 |
+----+------------------------------------------------------------+------+
| 7 | Taxation | 18 |
+----+------------------------------------------------------------+------+
| 8 | Trading and other financial assets at fair value through | 19 |
| | profit or loss | |
+----+------------------------------------------------------------+------+
| 9 | Loans and advances to customers | 19 |
+----+------------------------------------------------------------+------+
| 10 | Allowance for impairment losses on loans and receivables | 20 |
+----+------------------------------------------------------------+------+
| 11 | Securitisation and covered bonds | 21 |
+----+------------------------------------------------------------+------+
| 12 | Debt securities in issue | 22 |
+----+------------------------------------------------------------+------+
| 13 | Subordinated liabilities | 22 |
+----+------------------------------------------------------------+------+
| 14 | Share capital | 22 |
+----+------------------------------------------------------------+------+
| 15 | Reserves | 23 |
+----+------------------------------------------------------------+------+
| 16 | Contingent liabilities and commitments | 24 |
+----+------------------------------------------------------------+------+
| 17 | Capital ratios | 25 |
+----+------------------------------------------------------------+------+
| 18 | Legal and regulatory matters | 26 |
+----+------------------------------------------------------------+------+
| 19 | Related party transactions | 28 |
+----+------------------------------------------------------------+------+
| 20 | June 2010 Budget statement | 28 |
+----+------------------------------------------------------------+------+
| 21 | Events after the balance sheet date | 29 |
+----+------------------------------------------------------------+------+
| 22 | Ultimate parent undertaking | 29 |
+----+------------------------------------------------------------+------+
| 23 | Other information | 29 |
+----+------------------------------------------------------------+------+
1. Basis of preparation
The directors consider that it is appropriate to continue to adopt the going
concern basis in preparing the condensed interim financial statements. In
reaching this assessment, the directors have considered projections for the
Group's capital and funding position and have had regard to the factors set out
in Principal Risks and Uncertainties: Liquidity and funding on page 3. The
Company is dependent upon its ultimate parent, Lloyds Banking Group plc, and
Lloyds TSB Bank plc to provide capital and funding.
2. Accounting policies, presentation and estimates
These condensed interim financial statements as at and for the half-year to 30
June 2010 have been prepared in accordance with the Disclosure and Transparency
Rules of the Financial Services Authority and with International Accounting
Standard (IAS) 34 Interim Financial Reporting, as adopted by the European Union.
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 2009 which were
prepared in accordance with International Financial Reporting Standards (IFRS)
as adopted by the European Union. Copies of the 2009 annual report and accounts
can be found on the Lloyds Banking Group's website, www.lloydsbankinggroup.com,
or are available upon request from Group Secretariat, Lloyds Banking Group plc,
25 Gresham Street, London EC2V 7HN.
Accounting policies
The accounting policies are consistent with those applied by the Group in its
2009 annual report and accounts, except as described below.
During 2010, the International Financial Reporting Interpretations Committee
clarified the treatment of amounts previously recognised in equity in respect of
assets that were transferred from the available-for-sale category to the loans
and receivables category. When an impairment loss is recognised in respect of
such transferred financial assets, the unamortised balance of any
available-for-sale reserve that remains in equity should be transferred to the
income statement and recorded as part of the impairment loss.
The Group has changed its accounting policy to reflect this clarification. Under
the Group's previous accounting policy, when such a transferred financial asset
became impaired, not all of the unamortised amounts previously transferred to
equity were recycled to the income statement and therefore continued to be
accreted over the expected remaining life of the financial asset. The change is
applied retrospectively and the effect has been to reduce retained profits and
increase available-for-sale reserves by GBP1,065 million at 1 January 2009;
shareholders' equity is unchanged. The effect on the first half of 2009 has
been to increase the impairment charge by GBP937 million (year ended 31 December
2009: increase GBP937 million); increase net interest income by GBP78 million
(year ended 31 December 2009: increase GBP186 million); and increase
available-for-sale reserve by GBP618 million (year ended 31 December 2009:
increase GBP512 million). There has been no impact on other income in the first
half of 2009 (full year ended 31 December 2009: increase of GBP39 million). The
financial statements and capital ratios have been restated accordingly.
In addition, and as reported in the Report and Accounts at 31 December 2009,
interest and similar income and interest and similar expense have been restated
in the half year to 30 June 2009, for certain derivative income amounts
available for offset onto a net basis (GBP1,466 million).
2.Accounting policies, presentation and estimates (continued)
The preparation of interim 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 be based upon amounts which differ from those estimates.
Estimates, judgements and assumptions are continually evaluated and are based on
historical experience and other factors, including expectations of future events
that are believed to be reasonable under the circumstances. There have been no
significant changes in the basis upon which estimates have been determined,
compared to those applied at 31 December 2009.
In accordance with IAS 34, the Group's income tax expense for the six months
ended 30 June 2010 is based on the best estimate of the weighted-average annual
income tax rate expected for the full financial year. This best estimate does
not take into account the impact of changes announced in the June 2010 UK Budget
which were not substantively enacted by 30 June 2010.
In accordance with IAS 19 Employee Benefits and the Group's normal practice, the
valuation of the Group's pension schemes will be formally updated at the year
end. During the first half of 2010, the Group's defined benefit pension
obligation was adjusted to reflect the effect of changes in the terms of the
Group's pension schemes (see note 4). However, no adjustment has been made to
the valuation at 30 June 2010.
New accounting pronouncements
The Group has adopted the following new standards and amendments to standards
which became effective for financial years beginning on or after 1 January 2010.
None of these standards or amendments have had a material impact on these
condensed interim financial statements.
(i) IFRS 3 Business Combinations. The revised standard continues to require the
use of the acquisition method of accounting for business combinations. All
payments to purchase a business are to be recorded at fair value at the
acquisition date, some contingent payments are subsequently remeasured at fair
value through income, goodwill may be calculated based on the parent's share of
net assets or it may include goodwill related to the non-controlling interest,
and all transaction costs are expensed.
(ii) IAS 27 Consolidated and Separate Financial Statements. Requires the
effects of all transactions with non-controlling interests to be recorded in
equity if there is no change in control; any remaining interest in an investee
is re-measured to fair value in determining the gain or loss recognised in
profit or loss where control over the investee is lost.
(iii) IFRIC 17 Distributions of Non-cash Assets to Owners. Provides accounting
guidance for non-reciprocal distributions of non-cash assets to owners (and
those in which owners may elect to receive a cash alternative).
(iv) Amendment to IAS 39 Financial Instruments: Recognition and Measurement -
'Eligible Hedged Items'. Clarifies how the principles underlying hedge
accounting should be applied in particular situations.
(v) Improvements to IFRSs (issued April 2009). Sets out minor amendments to
IFRS standards as part of the annual improvements process.
Future accounting developments
The following pronouncements will be relevant to the Group but are not
applicable for the year ending 31 December 2010 and have not been applied in
preparing these condensed interim financial statements. The full impact of
these accounting changes is currently being assessed by the Group.
2.Accounting policies, presentation and estimates (continued)
(i) IFRS 9 Financial Instruments. Replaces those parts of IAS 39 Financial
Instruments: Recognition and Measurement dealing with the classification and
measurement of financial assets. Requires financial assets to be classified
into two measurement categories, fair value and amortised cost, on the basis of
the objectives of the entity's business model for managing its financial assets
and the contractual cash flow characteristics of the instrument.
Available-for-sale financial asset and held-to-maturity categories in the
existing IAS 39 will be eliminated.
IFRS 9 is the initial stage of the project to replace IAS 39. Future stages
are expected to result in amendments to IFRS 9 to deal with changes to the
classification and measurement of financial liabilities, impairment of financial
assets measured at amortised cost and hedge accounting. Until all stages of the
replacement project are complete, it is not possible to determine the overall
impact on the financial statements of the replacement of IAS 39. The effective
date of the standard is annual periods beginning on or after 1 January 2013.
(ii) Amendment to IAS 32 Financial instruments: Presentation - 'Classification
of Rights Issues'. Requires rights issues denominated in a currency other than
the functional currency of the issuer to be classified as equity regardless of
the currency in which the exercise price is denominated. The amendment is
effective for annual periods beginning on or after 1 February 2010.
(iii) IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments.
Clarifies that when an entity renegotiates the terms of its debt with the result
that the liability is extinguished by the debtor issuing its own equity
instruments to the creditor, a gain or loss is recognised in the income
statement representing the difference between the carrying value of the
financial liability and the fair value of the equity instruments issued; the
fair value of the financial liability is used to measure the gain or loss where
the fair value of the equity instruments cannot be reliably measured. The
interpretation is effective for annual periods beginning on or after 1 July 2010
and is consistent with the Group's accounting policy.
(iv) Improvements to IFRSs (issued May 2010). Sets out minor amendments to IFRS
standards as part of the annual improvements process. The effective dates vary
on a standard by standard basis but none are effective any earlier than annual
periods beginning on or after 1 July 2010.
(v) Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement.
Applies when an entity is subject to minimum funding requirements and makes an
early payment of contributions to cover those requirements and permits such an
entity to treat the benefit of such an early payment as an asset. The amendment
is effective for annual periods beginning on or after 1 January 2011.
(vi) IAS 24 Related Party Disclosures. The revised standard simplifies the
definition of a related party and provides a partial exemption from the
disclosure requirements for government related entities. The revised standard
is effective for annual periods beginning on or after 1 January 2011.
At the date of this report, IFRS 9 and Improvements to IFRSs (issued May 2010)
are awaiting EU endorsement.
The ultimate parent undertaking, Lloyds Banking Group plc, produces consolidated
accounts which set out the basis of the segments through which it manages
performance and allocates resources across the consolidated Lloyds Banking
Group.
Other matters
No significant events, other than those disclosed within this document, have
occurred between 30 June 2010 and the date of approval of these condensed
interim financial statements.
3. Other income
+---------------------------------------------------+-+-----------+-+------------+
| | | Half-year | | Half-year |
| | | | | to 30 June |
| | | to 30 | | |
| | | June | | 2009 |
| | | 2010 | | |
+---------------------------------------------------+-+-----------+-+------------+
| | | GBPm | | GBPm |
+---------------------------------------------------+-+-----------+-+------------+
| | | | | |
+---------------------------------------------------+-+-----------+-+------------+
| Fee and commission income: | | | | |
+---------------------------------------------------+-+-----------+-+------------+
| Current account fees | | 125 | | 182 |
+---------------------------------------------------+-+-----------+-+------------+
| Credit and debit card fees | | 112 | | 125 |
+---------------------------------------------------+-+-----------+-+------------+
| Other fees and commissions | | 529 | | 477 |
+---------------------------------------------------+-+-----------+-+------------+
| | | 766 | | 784 |
+---------------------------------------------------+-+-----------+-+------------+
| Fee and commission expense | | (569) | | (543) |
+---------------------------------------------------+-+-----------+-+------------+
| Net fee and commission income | | 197 | | 241 |
+---------------------------------------------------+-+-----------+-+------------+
| Net trading income | | 278 | | (1,988) |
+---------------------------------------------------+-+-----------+-+------------+
| Insurance premium income | | 1,987 | | 2,547 |
+---------------------------------------------------+-+-----------+-+------------+
| Gains on capital transactions | | 103 | | 2,085 |
+---------------------------------------------------+-+-----------+-+------------+
| Other | | 799 | | 673 |
+---------------------------------------------------+-+-----------+-+------------+
| Other operating income | | 902 | | 2,758 |
+---------------------------------------------------+-+-----------+-+------------+
| Total other income | | 3,364 | | 3,558 |
+---------------------------------------------------+-+-----------+-+------------+
4. Operating expenses
+---------------------------------------------------+-+-----------+-+------------+
| | | Half-year | | Half-year |
| | | | | to 30 June |
| | | to 30 | | |
| | | June | | 2009 |
| | | 2010 | | |
+---------------------------------------------------+-+-----------+-+------------+
| | | GBPm | | GBPm |
+---------------------------------------------------+-+-----------+-+------------+
| | | | | |
+---------------------------------------------------+-+-----------+-+------------+
| Administrative expenses: | | | | |
+---------------------------------------------------+-+-----------+-+------------+
| Staff costs excluding curtailment gain | | 1,308 | | 1,561 |
+---------------------------------------------------+-+-----------+-+------------+
| Curtailment gain(1) | | (425) | | - |
+---------------------------------------------------+-+-----------+-+------------+
| Premises and equipment | | 250 | | 191 |
+---------------------------------------------------+-+-----------+-+------------+
| Other expenses | | 683 | | 572 |
+---------------------------------------------------+-+-----------+-+------------+
| | | 1,816 | | 2,324 |
+---------------------------------------------------+-+-----------+-+------------+
| Depreciation and amortisation: | | | | |
+---------------------------------------------------+-+-----------+-+------------+
| Tangible assets | | 130 | | 131 |
+---------------------------------------------------+-+-----------+-+------------+
| Intangible assets | | 13 | | 19 |
+---------------------------------------------------+-+-----------+-+------------+
| Acquired value of in-force non-participating | | 10 | | 34 |
| investment contracts | | | | |
+---------------------------------------------------+-+-----------+-+------------+
| Operating lease assets | | 323 | | 425 |
+---------------------------------------------------+-+-----------+-+------------+
| | | 476 | | 609 |
+---------------------------------------------------+-+-----------+-+------------+
| Impairment of tangible fixed assets | | 52 | | - |
+---------------------------------------------------+-+-----------+-+------------+
| Goodwill impairment | | - | | 29 |
+---------------------------------------------------+-+-----------+-+------------+
| Total operating expenses | | 2,344 | | 2,962 |
+---------------------------------------------------+-+-----------+-+------------+
| | | | | |
+---------------------------------------------------+-+-----------+-+------------+
(1) During the first half of 2010, the Group implemented a change to the
terms of its principal UK defined benefit pension schemes. As a result of this
change all future increases to pensionable salary will be capped each year at
the lower of: Retail Prices Index inflation; each employee's actual percentage
increase in pay; and 2 per cent of pensionable pay.
The effect of this change was to reduce the Group's retirement benefit
obligations recognised on the balance sheet by GBP425 million with a
corresponding curtailment gain recognised in the income statement.
5. Impairment
+---------------------------------------------------+-+-----------+-+-----------+
| | | Half-year | | Half-year |
| | | | | |
| | | to 30 | | to 30 |
| | | June | | June |
| | | 2010 | | 2009(1) |
+---------------------------------------------------+-+-----------+-+-----------+
| | | GBPm | | GBPm |
+---------------------------------------------------+-+-----------+-+-----------+
| | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Impairment losses on: | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Loans and advances to customers | | 5,551 | | 10,053 |
+---------------------------------------------------+-+-----------+-+-----------+
| Debt securities classified as loans and | | (58) | | 828 |
| receivables | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Impairment losses on loans and receivables (note | | 5,493 | | 10,881 |
| 10) | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Impairment of available-for-sale financial assets | | 43 | | 1,428 |
+---------------------------------------------------+-+-----------+-+-----------+
| Other credit risk provisions | | - | | 5 |
+---------------------------------------------------+-+-----------+-+-----------+
| Total impairment charged to the income statement | | 5,536 | | 12,314 |
+---------------------------------------------------+-+-----------+-+-----------+
| | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
(1) Restated - see note 2.
6. Profit (loss) on sale of businesses
+---------------------------------------------------+-+-----------+-+-----------+
| | | Half-year | | Half-year |
| | | | | |
| | | to 30 | | to 30 |
| | | June | | June |
| | | 2010 | | 2009 |
+---------------------------------------------------+-+-----------+-+-----------+
| | | GBPm | | GBPm |
+---------------------------------------------------+-+-----------+-+-----------+
| | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Profit on sale of Employee Equity Solutions | | 21 | | - |
| business | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Profit on sale of BOS International Limited | | 16 | | - |
+---------------------------------------------------+-+-----------+-+-----------+
| Profit on sale of Bank of Scotland Portfolio | | 12 | | - |
| Management Service business | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Profit on sale of esure | | 7 | | - |
+---------------------------------------------------+-+-----------+-+-----------+
| Loss on sale of Bank of Western Australia Limited | | - | | (96) |
| and | | | | |
| St. Andrews Australia Pty Limited | | | | |
+---------------------------------------------------+-+-----------+-+-----------+
| Total profit (loss) on sale of businesses | | 56 | | (96) |
+---------------------------------------------------+-+-----------+-+-----------+
7. Taxation
A reconciliation of the tax (charge) credit that would result from applying the
standard UK corporation tax rate to the loss before tax to the tax (charge)
credit is given below:
+---------------------------------------------------+-+-----------+-+------------+
| | | Half-year | | Half-year |
| | | | | to 30 June |
| | | to 30 | | |
| | | June | | 2009(1) |
| | | 2010 | | |
+---------------------------------------------------+-+-----------+-+------------+
| | | GBPm | | GBPm |
+---------------------------------------------------+-+-----------+-+------------+
| | | | | |
+---------------------------------------------------+-+-----------+-+------------+
| Loss before tax | | (675) | | (10,351) |
+---------------------------------------------------+-+-----------+-+------------+
| Tax credit thereon at UK corporation tax rate of | | 189 | | 2,898 |
| 28% (2009: 28%) | | | | |
+---------------------------------------------------+-+-----------+-+------------+
| Factors affecting (charge) credit: | | | | |
+---------------------------------------------------+-+-----------+-+------------+
| Disallowed and non-taxable items | | 94 | | 492 |
+---------------------------------------------------+-+-----------+-+------------+
| Overseas tax rate differences | | (244) | | (134) |
+---------------------------------------------------+-+-----------+-+------------+
| Gains exempted or covered by capital losses | | 13 | | - |
+---------------------------------------------------+-+-----------+-+------------+
| Policyholder interests | | 7 | | (6) |
+---------------------------------------------------+-+-----------+-+------------+
| Adjustments in respect of previous periods | | (32) | | (44) |
+---------------------------------------------------+-+-----------+-+------------+
| Effect of loss in joint ventures and | | (19) | | (143) |
| associates | | | | |
+---------------------------------------------------+-+-----------+-+------------+
| Tax losses where no deferred tax recognised | | (89) | | (353) |
+---------------------------------------------------+-+-----------+-+------------+
| Other items | | (18) | | (9) |
+---------------------------------------------------+-+-----------+-+------------+
| Tax (charge) credit | | (99) | | 2,701 |
+---------------------------------------------------+-+-----------+-+------------+
| | | | | |
+---------------------------------------------------+-+-----------+-+------------+
(1) Restated - see note 2.
8. Trading and other financial assets at fair value through profit or loss
+---------------------------------------------------+-+---------+-+----------+
| | | As at | | As at |
| | | 30 | | 31 Dec |
| | | June | | |
| | | 2010 | | 2009 |
+---------------------------------------------------+-+---------+-+----------+
| | | GBPm | | GBPm |
+---------------------------------------------------+-+---------+-+----------+
| | | | | |
+---------------------------------------------------+-+---------+-+----------+
| Trading assets | | 28,235 | | 27,611 |
+---------------------------------------------------+-+---------+-+----------+
| Other financial assets at fair value through | | | | |
| profit or loss: | | | | |
+---------------------------------------------------+-+---------+-+----------+
| Loans and advances to banks | | - | | 635 |
+---------------------------------------------------+-+---------+-+----------+
| Debt securities | | 18,744 | | 17,328 |
+---------------------------------------------------+-+---------+-+----------+
| Equity shares | | 52,588 | | 56,334 |
+---------------------------------------------------+-+---------+-+----------+
| | | 71,332 | | 74,297 |
+---------------------------------------------------+-+---------+-+----------+
| | | 99,567 | | 101,908 |
+---------------------------------------------------+-+---------+-+----------+
Included in the above is GBP70,921 million (2009: GBP74,041 million) relating to
the insurance business.
9. Loans and advances to customers
+---------------------------------------------------+-+----------+-+----------+
| | | As at | | As at |
| | | 30 | | 31 Dec |
| | | June | | |
| | | 2010 | | 2009 |
+---------------------------------------------------+-+----------+-+----------+
| | | GBPm | | GBPm |
+---------------------------------------------------+-+----------+-+----------+
| | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Agriculture, forestry and fishing | | 800 | | 772 |
+---------------------------------------------------+-+----------+-+----------+
| Energy and water supply | | 995 | | 1,129 |
+---------------------------------------------------+-+----------+-+----------+
| Manufacturing | | 5,310 | | 6,836 |
+---------------------------------------------------+-+----------+-+----------+
| Construction | | 10,224 | | 11,169 |
+---------------------------------------------------+-+----------+-+----------+
| Transport, distribution and hotels | | 23,307 | | 21,496 |
+---------------------------------------------------+-+----------+-+----------+
| Postal and telecommunications | | 1,419 | | 1,449 |
+---------------------------------------------------+-+----------+-+----------+
| Property companies | | 60,486 | | 65,144 |
+---------------------------------------------------+-+----------+-+----------+
| Financial, business and other services | | 35,981 | | 36,613 |
+---------------------------------------------------+-+----------+-+----------+
| Personal: | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Mortgages | | 249,182 | | 252,745 |
+---------------------------------------------------+-+----------+-+----------+
| Other | | 15,040 | | 19,518 |
+---------------------------------------------------+-+----------+-+----------+
| Lease financing | | 4,682 | | 4,990 |
+---------------------------------------------------+-+----------+-+----------+
| Hire purchase | | 2,083 | | 3,486 |
+---------------------------------------------------+-+----------+-+----------+
| | | 409,509 | | 425,347 |
+---------------------------------------------------+-+----------+-+----------+
| Allowance for impairment losses on loans and | | (23,984) | | (21,272) |
| advances (note 10) | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Total loans and advances to customers | | 385,525 | | 404,075 |
+---------------------------------------------------+-+----------+-+----------+
Loans and advances to customers include advances securitised under the Group's
securitisation and covered bond programmes. Further details are given in note
11.
10. Allowance for impairment losses on loans and receivables
+---------------------------------------------------+-+-----------+--+---------+
| | | Half-year | | Year |
| | | | | ended |
| | | to 30 | | 31 Dec |
| | | June | | |
| | | 2010 | | 2009 |
+---------------------------------------------------+-+-----------+--+---------+
| | | GBPm | | GBPm |
+---------------------------------------------------+-+-----------+--+---------+
| | | | | |
+---------------------------------------------------+-+-----------+--+---------+
| Balance at 1 January | | 23,272 | | 11,616 |
+---------------------------------------------------+-+-----------+--+---------+
| Exchange and other adjustments | | 3 | | (10) |
+---------------------------------------------------+-+-----------+--+---------+
| Advances written off | | (2,903) | | (7,494) |
+---------------------------------------------------+-+-----------+--+---------+
| Recoveries of advances written off in previous | | 29 | | 36 |
| periods | | | | |
+---------------------------------------------------+-+-----------+--+---------+
| Unwinding of discount | | (153) | | (391) |
+---------------------------------------------------+-+-----------+--+---------+
| Charge for the half-year to 30 June | | 5,493 | | 10,881 |
+---------------------------------------------------+-+-----------+--+---------+
| Charge for the half-year to 31 December | | | | 8,634 |
+---------------------------------------------------+-+-----------+--+---------+
| Charge to the income statement | | 5,493 | | 19,515 |
+---------------------------------------------------+-+-----------+--+---------+
| Disposal of subsidiary undertakings | | (89) | | - |
+---------------------------------------------------+-+-----------+--+---------+
| Balance at end of period | | 25,652 | | 23,272 |
+---------------------------------------------------+-+-----------+--+---------+
| | | | | |
+---------------------------------------------------+-+-----------+--+---------+
| In respect of: | | | | |
+---------------------------------------------------+-+-----------+--+---------+
| Loans and advances to customers | | 23,984 | | 21,272 |
+---------------------------------------------------+-+-----------+--+---------+
| Debt securities | | 1,668 | | 2,000 |
+---------------------------------------------------+-+-----------+--+---------+
| Balance at end of period | | 25,652 | | 23,272 |
+---------------------------------------------------+-+-----------+--+---------+
11. Securitisation and covered bonds
The Group's principal securitisation and covered bond programmes, together with
the balances of the loans subject to notes in issue at 30 June 2010, are listed
below.
+---------+-+------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| | | As at 30 June 2010 | | As at 31 December 2009 |
+---------+--------------------------+-------------------------------------------+----------+-----------------------------------+
| | | Gross | | Notes | | Gross | | Notes |
| | | assets | | in | | assets | | in |
| | | securitised | | issue | | | | issue |
| | | | | | | securitised | | |
| | | | | | | | | |
+---------+--------------------------+---------------------+----------+----------+----------+-------------+----------+----------+
| Securitisation programmes | | GBPm | | GBPm | | GBPm | | GBPm |
+------------------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| | | | | | | | | | |
+---------+--------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| UK residential mortgages | | 104,497 | | 82,632 | | 104,257 | | 95,228 |
+------------------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| US residential mortgage-backed securities | 7,971 | | 7,997 | | 7,897 | | 7,897 |
+-----------------------------------------------+----------+----------+----------+----------+-------------+----------+----------+
| Irish residential mortgages | | 5,889 | | 6,008 | | 6,522 | | 6,585 |
+------------------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| Credit card receivables | | 4,913 | | 2,168 | | 5,155 | | 2,699 |
+------------------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| Dutch residential mortgages | | 4,275 | | 4,364 | | 4,812 | | 4,834 |
+------------------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| Personal loans | | 3,327 | | 2,613 | | 3,730 | | 2,613 |
+------------------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| Commercial loans | | 813 | | 811 | | 928 | | 976 |
+------------------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| Motor vehicle loans | | 338 | | 361 | | 443 | | 470 |
+------------------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| | | | 132,023 | | 106,954 | | 133,744 | | 121,302 |
+---------+--------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| Less held by the Group | | | | (76,204) | | | | (87,359) |
+------------------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| Total securitisation programmes | | | | 30,750 | | | | 33,943 |
| (note 12) | | | | | | | | |
+------------------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| | | | | | | | | |
+------------------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| Covered bond programmes | | | | | | | | |
+------------------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
| Residential mortgage-backed | 58,407 | | 47,968 | | 61,537 | | 49,644 |
+-----------------------------------------------+----------+----------+----------+----------+-------------+----------+----------+
| Social housing loan-backed | 3,363 | | 2,543 | | 3,407 | | 2,976 |
+-----------------------------------------------+----------+----------+----------+----------+-------------+----------+----------+
| | | 61,770 | | 50,511 | | 64,944 | | 52,620 |
+-----------+-----------------------------------+----------+----------+----------+----------+-------------+----------+----------+
| Less held by the Group | | | (22,361) | | | | (23,060) |
+-----------------------------------------------+----------+----------+----------+----------+-------------+----------+----------+
| Total covered bond programmes (note 12) | | | 28,150 | | | | 29,560 |
+-----------------------------------------------+----------+----------+----------+----------+-------------+----------+----------+
| Total securitisations and covered bond programmes | | 58,900 | | | | 63,503 |
+----------------------------------------------------------+----------+----------+----------+-------------+----------+----------+
| | | | | | | | | | | |
+---------+-+------------------------+----------+----------+----------+----------+----------+-------------+----------+----------+
Securitisation programmes
Loans and advances to customers and debt securities classified as loans and
receivables include advances securitised under the Group's securitisation
programmes, the majority of which have been sold by subsidiary companies to
bankruptcy remote special purpose entities (SPEs). As the SPEs are funded by
the issue of debt on terms whereby the majority of the risks and rewards of the
portfolio are retained by the subsidiary, the SPEs are consolidated fully and
all of these loans are retained on the Group's balance sheet, with the related
notes in issue included within debt securities in issue. In addition to the
securitisations detailed above, the Group sponsors two conduit programmes,
Grampian and Landale.
Covered bond programmes
Certain loans and advances to customers have been assigned to bankruptcy remote
limited liability partnerships to provide security to issues of covered bonds by
the Group. The Group retains all of the risks and rewards associated with these
loans and the partnerships are consolidated fully with the loans retained on the
Group's balance sheet, the related covered bonds in issue are included within
debt securities in issue.
Cash deposits of GBP24,205 million (31 December 2009: GBP24,271 million) held by
the Group are restricted in use to repayment of the debt securities issued by
the SPEs, covered bonds issued by Bank of Scotland plc and other legal
obligations.
11. Securitisation and covered bonds (continued)
The Group has purchased the loan notes in issue relating to certain issuances
for GBP98,565 million (31 December 2009: GBP110,419 million); the mortgage and
other assets securitised through these transactions were GBP117,844 million (31
December 2009: GBP129,900 million). These transactions do not lead to any
derecognition of the assets as the Group has retained all of the risks and
rewards associated with the assets.
12. Debt securities in issue
+---------------------------------------------------+-+----------+-+----------+
| | | As at | | As at |
| | | 30 | | 31 |
| | | June | | Dec |
| | | 2010 | | 2009 |
+---------------------------------------------------+-+----------+-+----------+
| | | GBPm | | GBPm |
+---------------------------------------------------+-+----------+-+----------+
| | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Certificates of deposit | | 4,746 | | 6,413 |
+---------------------------------------------------+-+----------+-+----------+
| Medium-term notes | | 30,295 | | 36,455 |
+---------------------------------------------------+-+----------+-+----------+
| Covered bonds (note 11) | | 28,150 | | 29,560 |
+---------------------------------------------------+-+----------+-+----------+
| Commercial paper | | 14,489 | | 12,786 |
+---------------------------------------------------+-+----------+-+----------+
| Securitisation notes (note 11) | | 30,750 | | 33,943 |
+---------------------------------------------------+-+----------+-+----------+
| | | 108,430 | | 119,157 |
+---------------------------------------------------+-+----------+-+----------+
Included within commercial paper above is GBP11,230 million (2009: GBP9,330
million) issued by the Grampian conduit and GBP107 million (2009: GBP138
million) issued by the Landale conduit.
13. Subordinated liabilities
The movement in subordinated liabilities during the period was as follows:
+---------------------------------------------------+-+--------+-+-----------+
| | | | | Half-year |
| | | | | |
| | | | | to 30 |
| | | | | June |
| | | | | 2010 |
+---------------------------------------------------+-+--------+-+-----------+
| | | | | GBPm |
+---------------------------------------------------+-+--------+-+-----------+
| At 1 January 2010 | | | | 19,078 |
+---------------------------------------------------+-+--------+-+-----------+
| Repurchases and redemptions during the period | | | | (632) |
+---------------------------------------------------+-+--------+-+-----------+
| Foreign exchange and other movements | | | | 343 |
+---------------------------------------------------+-+--------+-+-----------+
| At 30 June 2010 | | | | 18,789 |
+---------------------------------------------------+-+--------+-+-----------+
There have been no issuances of subordinated debt during the period.
14. Share capital
During the period the Company issued 1,125,297 GBP0.25 ordinary shares to Lloyds
TSB Bank plc at GBP1,000 per share creating GBP281,324 of share capital and
GBP1,125 million of share premium.
15. Reserves
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| | | | Other reserves | | |
+--------------------+----------+---------+-----------------------------------------------------------------------------------+----------+----------+
| | | Share | Available- | | Cash | | Merger | | | | Retained |
| | | premium | for-sale | | flow | | | | Total | | |
| | | | reserve | | hedging | | and | | | | profits |
| | | | | | | | other | | | | |
| | | | | | reserve | | reserves | | | | |
| | | | | | | | | | | | |
+--------------------+----------+---------+--------------------+----------+---------+----------+----------+----------+--------+----------+----------+
| | | GBPm | | GBPm | | GBPm | | GBPm | | GBPm | | GBPm |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| | | | | | | | | | | | | |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| At 1 January | | | | | | | | | | | | |
| 2010: | | | | | | | | | | | | |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| As | | 16,056 | | (2,972) | | (840) | | 10,372 | | 6,560 | | (1,494) |
| previously | | | | | | | | | | | | |
| stated | | | | | | | | | | | | |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| Prior year | - | | 1,577 | | - | | - | | 1,577 | | (1,577) |
| adjustment(1) | | | | | | | | | | | |
+-------------------------------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| Restated | | 16,056 | | (1,395) | | (840) | | 10,372 | | 8,137 | | (3,071) |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| Issue of ordinary shares | 1,125 | | - | | - | | - | | - | | - |
+-------------------------------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| Loss for the | | - | | - | | - | | - | | - | | (832) |
| period | | | | | | | | | | | | |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| Employee | | | | | | | | | | | | |
| share option | | | | | | | | | | | | |
| schemes: | | | | | | | | | | | | |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| Value of | | - | | - | | - | | - | | - | | 3 |
| employee | | | | | | | | | | | | |
| services | | | | | | | | | | | | |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| Change in | | - | | 166 | | - | | - | | 166 | | - |
| fair value of | | | | | | | | | | | | |
| available-for-sale | | | | | | | | | | | | |
| assets (net of | | | | | | | | | | | | |
| tax) | | | | | | | | | | | | |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| Change in | | - | | - | | (298) | | - | | (298) | | - |
| fair value of | | | | | | | | | | | | |
| hedging | | | | | | | | | | | | |
| derivatives | | | | | | | | | | | | |
| (net of tax) | | | | | | | | | | | | |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| Transfers to | | - | | (54) | | 497 | | - | | 443 | | - |
| income | | | | | | | | | | | | |
| statement | | | | | | | | | | | | |
| (net of tax) | | | | | | | | | | | | |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| Exchange and | | - | | - | | - | | (15) | | (15) | | - |
| other | | | | | | | | | | | | |
| adjustments | | | | | | | | | | | | |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| At 30 June | | 17,181 | | (1,283) | | (641) | | 10,357 | | 8,433 | | (3,900) |
| 2010 | | | | | | | | | | | | |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
| | | | | | | | | | | | | |
+--------------------+----------+---------+----------+---------+----------+---------+----------+----------+----------+--------+----------+----------+
(1) See note 2.
16. Contingent liabilities and commitments
+---------------------------------------------------+-+---------+-+---------+
| | | As at | | As at |
| | | 30 | | 31 Dec |
| | | June | | |
| | | 2010 | | 2009 |
+---------------------------------------------------+-+---------+-+---------+
| | | GBPm | | GBPm |
+---------------------------------------------------+-+---------+-+---------+
| | | | | |
+---------------------------------------------------+-+---------+-+---------+
| Contingent liabilities | | | | |
+---------------------------------------------------+-+---------+-+---------+
| Acceptances and endorsements | | 2 | | 5 |
+---------------------------------------------------+-+---------+-+---------+
| Other: | | | | |
+---------------------------------------------------+-+---------+-+---------+
| Other items serving as direct credit | | 105 | | 99 |
| substitutes | | | | |
+---------------------------------------------------+-+---------+-+---------+
| Performance bonds and other | | 534 | | 1,263 |
| transaction-related contingencies | | | | |
+---------------------------------------------------+-+---------+-+---------+
| | | 639 | | 1,362 |
+---------------------------------------------------+-+---------+-+---------+
| Total contingent liabilities | | 641 | | 1,367 |
+---------------------------------------------------+-+---------+-+---------+
| | | | | |
+---------------------------------------------------+-+---------+-+---------+
| Commitments | | | | |
+---------------------------------------------------+-+---------+-+---------+
| Documentary credits and other short-term trade | | 40 | | 69 |
| related transactions | | | | |
+---------------------------------------------------+-+---------+-+---------+
| Undrawn formal standby facilities, credit lines | | | | |
| and other commitments to lend: | | | | |
+---------------------------------------------------+-+---------+-+---------+
| Less than 1 year original maturity: | | | | |
+---------------------------------------------------+-+---------+-+---------+
| Mortgage offers | | 6,240 | | 6,188 |
+---------------------------------------------------+-+---------+-+---------+
| Other commitments | | 26,189 | | 30,148 |
+---------------------------------------------------+-+---------+-+---------+
| | | 32,429 | | 36,336 |
+---------------------------------------------------+-+---------+-+---------+
| 1 year or over original maturity | | 13,657 | | 17,673 |
+---------------------------------------------------+-+---------+-+---------+
| Total commitments | | 46,126 | | 54,078 |
+---------------------------------------------------+-+---------+-+---------+
17. Capital ratios
+---------------------------------------------------+-+----------+-+----------+
| | | As at | | As at |
| | | 30 | | 31 Dec |
| | | June | | |
| | | 2010 | | 2009(1) |
+---------------------------------------------------+-+----------+-+----------+
| | | GBPm | | GBPm |
+---------------------------------------------------+-+----------+-+----------+
| | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Capital resources | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Core tier 1 | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Ordinary share capital and reserves | | 25,477 | | 24,885 |
+---------------------------------------------------+-+----------+-+----------+
| Available-for-sale revaluation reserve | | 1,283 | | 1,395 |
+---------------------------------------------------+-+----------+-+----------+
| Cashflow hedging reserve | | 641 | | 840 |
+---------------------------------------------------+-+----------+-+----------+
| Regulatory post-retirement benefit adjustments | | (532) | | 252 |
+---------------------------------------------------+-+----------+-+----------+
| Other items | | 290 | | 212 |
+---------------------------------------------------+-+----------+-+----------+
| | | 27,159 | | 27,584 |
+---------------------------------------------------+-+----------+-+----------+
| | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Deductions from core tier 1 | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Goodwill and other intangible assets | | (948) | | (1,040) |
+---------------------------------------------------+-+----------+-+----------+
| Excess expected loss | | (879) | | (920) |
+---------------------------------------------------+-+----------+-+----------+
| Other deductions | | (434) | | (555) |
+---------------------------------------------------+-+----------+-+----------+
| | | (2,261) | | (2,515) |
+---------------------------------------------------+-+----------+-+----------+
| | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Core tier 1 capital | | 24,898 | | 25,069 |
+---------------------------------------------------+-+----------+-+----------+
| | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Innovative tier 1 capital | | 3,059 | | 4,361 |
+---------------------------------------------------+-+----------+-+----------+
| Total tier 1 capital | | 27,957 | | 29,430 |
+---------------------------------------------------+-+----------+-+----------+
| | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Tier 2 | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Available-for-sale revaluation reserve in respect | | 237 | | 22 |
| of equities | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Undated subordinated debt | | 2,398 | | 2,319 |
+---------------------------------------------------+-+----------+-+----------+
| Eligible provisions | | 1,728 | | 1,669 |
+---------------------------------------------------+-+----------+-+----------+
| Dated subordinated debt | | 9,945 | | 10,314 |
+---------------------------------------------------+-+----------+-+----------+
| | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Deductions from tier 2 | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Excess expected loss | | (879) | | (920) |
+---------------------------------------------------+-+----------+-+----------+
| Other deductions | | (434) | | (555) |
+---------------------------------------------------+-+----------+-+----------+
| Total tier 2 capital | | 12,995 | | 12,849 |
+---------------------------------------------------+-+----------+-+----------+
| | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Supervisory deductions | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Unconsolidated investments: | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Life | | (4,061) | | (4,757) |
+---------------------------------------------------+-+----------+-+----------+
| Other | | (619) | | (760) |
+---------------------------------------------------+-+----------+-+----------+
| Total supervisory deductions | | (4,680) | | (5,517) |
+---------------------------------------------------+-+----------+-+----------+
| Total capital resources | | 36,272 | | 36,762 |
+---------------------------------------------------+-+----------+-+----------+
| | | | | |
+---------------------------------------------------+-+----------+-+----------+
| Risk-weighted assets(2) | | 298,555 | | 324,645 |
+---------------------------------------------------+-+----------+-+----------+
| Core tier 1 ratio(2) | | 8.3% | | 7.7% |
+---------------------------------------------------+-+----------+-+----------+
| Tier 1 capital ratio(2) | | 9.4% | | 9.1% |
+---------------------------------------------------+-+----------+-+----------+
| Total capital ratio(2) | | 12.1% | | 11.3% |
+---------------------------------------------------+-+----------+-+----------+
| | | | | |
+---------------------------------------------------+-+----------+-+----------+
(1) Restated to reflect a prior year adjustment to available-for-sale
revaluation reserve (see note 2).
(2) Outside the scope of PricewaterhouseCoopers LLP's independent review
report.
18. Legal and regulatory matters
Interchange fees
The European Commission has adopted a formal decision finding that an
infringement of European Commission competition laws has arisen from
arrangements whereby MasterCard issuers charged a uniform fallback interchange
fee in respect of cross border transactions in relation to the use of a
MasterCard or Maestro branded payment card. The European Commission has
required that the fee be reduced to zero for relevant cross-border transactions
within the European Economic Area. This decision has been appealed to the
General Court of the European Union (the General Court). Lloyds TSB Bank plc
and Bank of Scotland plc (along with certain other MasterCard issuers) have
successfully applied to intervene in the appeal in support of MasterCard's
position that the arrangements for the charging of a uniform fallback
interchange fee are compatible with European Commission competition laws.
MasterCard has announced that it has reached an understanding with the European
Commission on a new methodology for calculating intra European Economic Area
multi-lateral interchange fees on an interim basis pending the outcome of the
appeal. Meanwhile, the European Commission and the UK's Office of Fair Trading
(OFT) are pursuing investigations with a view to deciding whether arrangements
adopted by other payment card schemes for the levying of uniform fallback
interchange fees in respect of domestic and/or cross-border payment transactions
also infringe European Commission and/or UK competition laws. As part of this
initiative, the OFT will also intervene in the General Court appeal supporting
the European Commission position and Visa reached an agreement with the European
Commission to reduce the level of interchange for cross-border debit card
transactions to the interim levels agreed by MasterCard. The ultimate impact of
the investigations on the Group can only be known at the conclusion of these
investigations and any relevant appeal proceedings.
Unarranged overdraft charges
In April 2007, the OFT commenced an investigation into the fairness of personal
current accounts and unarranged overdraft charges. At the same time, it
commenced a market study into wider questions about competition and price
transparency in the provision of personal current accounts.
The Supreme Court of the United Kingdom published its judgment in respect of the
fairness of unarranged overdraft charges on personal current accounts on 25
November 2009, finding in favour of the litigant banks. On 22 December 2009,
the OFT announced that it will not continue its investigation into the fairness
of these charges. The Group is working with the regulators to ensure that
outstanding customer complaints are concluded as quickly as possible and
anticipates that most cases in the county courts will be discontinued. The
Group expects that some customers will argue that despite the test case ruling
they are entitled to a refund of unarranged overdraft charges on the basis of
other legal arguments or challenges. The Group is robustly defending any such
complaints or claims and does not expect any such complaints or claims to have a
material effect on the Group.
The OFT however continued to discuss its concerns in relation to the personal
current account market with the banks, consumer groups and other organisations
under the auspices of its Market Study into personal current accounts. In
October 2009, the OFT published voluntary initiatives agreed with the industry
and consumer groups to improve transparency of the costs and benefits of
personal current accounts and improvements to the switching process. On 16
March 2010 the OFT published a further update announcing several further
voluntary industry wide initiatives to improve a customer's ability to control
whether they used an unarranged overdraft and to assist those in financial
difficulty. However, in light of the progress it noted in the unarranged
overdraft market since July 2007 and the progress it expects to see over the
next two years, it has decided to take no further action at this time and will
review the unarranged overdraft market again in 2012.
18. Legal and regulatory matters (continued)
Payment protection insurance
In January 2009, the UK Competition Commission (Competition Commission)
completed its formal investigation into the supply of Payment Protection
Insurance (PPI) services (except store card PPI) to non-business customers in
the UK and published its final report setting out its remedies including a
prohibition on the active sale of PPI by a distributor to a customer within
seven days of the distributor's sale of credit to that customer. Prior to this
the Group had made the commercial decision to sell only regular monthly premium
PPI to its personal loan customers. Recently the Group ceased to offer PPI
products to customers although some existing applications will be honoured for a
limited period.
On 16 October 2009, the Competition Appeal Tribunal referred the proposed
prohibition back to the Competition Commission. On 14 May 2010, the Competition
Commission published its provisional decision retaining in almost all material
aspects the proposed point of sale prohibition. A final decision is expected in
due course and Lloyds Banking Group continues to liaise with the Competition
Commission on this issue.
On 1 July 2008, the Financial Ombudsman Service referred concerns regarding the
handling of PPI complaints to the FSA as an issue of wider implication. The
Group has been working with other industry members and trade associations in
preparing an industry response to address regulatory concerns regarding the
handling of PPI complaints.
On 29 September 2009, the FSA issued a consultation paper on PPI complaints
handling. The FSA has escalated its regulatory activity in relation to past PPI
sales generally and has proposed new guidance on the fair assessment of a
complaint and the calculation of redress and a new rule requiring firms to
reassess historically rejected complaints. On 9 March 2010, the FSA issued a
further consultation paper on this area, the consultation period for which
closed on 22 April (the Group has responded to this consultation). The FSA's
proposals are materially the same, although it has placed the new rule requiring
firms to reassess historically rejected claims on hold for the present. The
ultimate impact on the Group of the FSA's complaints handling proposals can only
be known on the publication of the FSA's final rules.
The statement on 29 September 2009 also announced that several firms had agreed
to carry out reviews of past sales of single premium loan protection insurance.
The Group has agreed in principle that it will undertake a review in relation to
sales of single premium loan protection insurance made through its branch
network since 1 July 2007. The precise details of the review are still being
discussed with the FSA. The ultimate impact on the Group of any review can only
be known at the conclusion of these discussions.
18. Legal and regulatory matters (continued)
Other legal actions
In the ordinary course of its business, the Group is engaged in discussions with
the FSA in relation to a range of conduct of business matters, especially in
relation to retail products including packaged bank accounts, mortgages,
structured products and pensions. The Group is keen to ensure that any
regulatory concerns regarding product governance or contract terms are
understood and addressed. The ultimate impact on the Group of these discussions
can only be known at the conclusion of such discussions.
In addition, during the ordinary course of business the Group is subject to
other threatened and actual legal proceedings, regulatory investigations,
regulatory challenges and enforcement actions, both in the UK and overseas. All
such material matters are periodically reassessed, with the assistance of
external professional 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 to settle the
obligation at the relevant balance sheet date. In some cases it will not be
possible to form a view, either because the facts are unclear or because further
time is needed properly to assess the merits of the matter and no provisions are
held against such cases. However the Group does not currently expect the final
outcome of any such case to have a material adverse effect on its financial
position.
19. Related party transactions
There have been no material changes to the related party transactions during the
interim period under review.
There were no material transactions between the Group and HM Treasury during the
half-year ended 30 June 2010 that were not made in the ordinary course of
business or that are unusual in their nature or conditions.
20. June 2010 Budget statement
A number of the measures announced in the UK Government's June 2010 Budget
statement will affect the Group.
The Finance (No. 2) Act 2010 includes legislation to reduce the main rate of
corporation tax from 28 per cent to 27 per cent with effect from 1 April 2011.
The legislation was substantively enacted in July 2010 and, as a result it is
expected that the Group's deferred tax asset will reduce by approximately GBP140
million in the second half of the year, resulting in a charge to the income
statement of approximately GBP110 million and a charge to other comprehensive
income of approximately GBP30 million. In addition, following the triggering of
relevant tax variation clauses, the reduction in future rental income within the
Group's leasing business will result in an additional charge to the income
statement which is not expected to be material.
The proposed further reductions in the rate of corporation tax by 1 per cent per
annum to 24 per cent by 1 April 2014 are expected to be enacted separately each
year starting in 2011. The effect of these further changes upon the Group's
deferred tax balances and leasing business cannot be reliably quantified at this
stage.
The Government also announced its intention to introduce a bank levy from 1
January 2011. HM Treasury has commenced a consultation to seek views on the
detailed implementation of the bank levy prior to drafting legislation to effect
the proposed change. At this stage in the process it is not possible to
reliably quantify the impact of the introduction of the bank levy on the Group.
21. Events after the balance sheet date
On 5 July 2010, Lloyds Banking Group plc announced that, subject to regulatory
approval and certain other conditions, the sale of a portfolio of private equity
investments held by the Bank of Scotland Integrated Finance business to a new
joint venture. The Group will retain an interest in the private equity
investments through a holding of approximately 30 per cent in the joint venture
vehicle. The sale is expected to complete in the third quarter of 2010 and
values the portfolio at a small premium to the current book value. The impact
of the sale on the Group's results is not expected to be material.
22. Ultimate parent undertaking
The Company'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 2009 and
copies may be obtained from Group Secretariat, Lloyds Banking Group plc, 25
Gresham Street, London EC2V 7HN or downloaded via www.lloydsbankinggroup.com.
23. Other information
The financial information included in this news release does not constitute
statutory accounts within the meaning of section 434 of the Companies Act 2006.
Statutory accounts for the year ended 31 December 2009 were approved by the
directors on 25 February 2010 and were delivered to the Registrar of Companies
following publication on 26 March 2010. The auditors' report on these accounts
was unqualified, did not contain an emphasis of matter paragraph and did not
include any 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 interim financial statements have
been prepared in accordance with International Accounting Standard 34, Interim
Financial Reporting, as adopted by the European Union. The interim management
report includes a fair review of the information required by DTR 4.2.7R, namely:
· an indication of important events that have occurred during the six
months ended 30 June 2010 and their impact on the condensed interim financial
statements, and a description of the principal risks and uncertainties for the
remaining six months of the financial year.
Signed on behalf of the board by
J Eric Daniels
Chief Executive
3 August 2010
HBOS plc board of directors:
Sir Winfried Bischoff
J Eric Daniels
Sir Julian Horn-Smith
Archie G Kane
Lord Leitch
Glen R Moreno
David L Roberts
T Timothy Ryan, Jr
Martin A Scicluna
G Truett Tate
Tim J W Tookey
Anthony Watson
Helen A Weir
INDEPENDENT REVIEW REPORT TO HBOS PLC
Introduction
We have been engaged by the Company to review the condensed interim financial
statements in the interim management report for the six months ended 30 June
2010, which comprise the consolidated income statement, consolidated statement
of comprehensive income, consolidated balance sheet, consolidated statement of
changes in equity, consolidated cash flow statement and related notes. We have
read the other information contained in the interim management report and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed interim financial
statements.
Directors' responsibilities
The interim management report is the responsibility of, and has been approved
by, the directors. The directors are responsible for preparing the interim
management report in accordance with the Disclosure and Transparency Rules of
the United Kingdom's Financial Services Authority.
As disclosed in note 2, the annual financial statements of the Group are
prepared in accordance with International Financial Reporting Standards as
adopted by the European Union. The condensed interim financial statements
included in the interim management report have been prepared in accordance with
International Accounting Standard 34, 'Interim Financial Reporting', as adopted
by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed
interim financial statements in the interim management report based on our
review. This report, including the conclusion, has been prepared for and only
for the Company for the purpose of the Disclosure and Transparency Rules of the
Financial Services Authority and for no other purpose. We do not, in producing
this report, 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.
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information
Performed by the Independent Auditor of the Entity' issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK and Ireland) and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly,
we do not express an audit opinion.
INDEPENDENT REVIEW REPORT TO HBOS PLC (continued)
Conclusion
Based on our review, nothing has come to our attention that causes us to believe
that the condensed interim financial statements in the interim management report
for the six months ended 30 June 2010 are not prepared, in all material
respects, in accordance with International Accounting Standard 34 as adopted by
the European Union and the Disclosure and Transparency Rules of the United
Kingdom's Financial Services Authority.
PricewaterhouseCoopers LLP
Chartered Accountants
Edinburgh
3 August 2010
Notes:
(a) The maintenance and integrity of the Lloyds Banking Group website is
the responsibility of the directors; the work carried out by the auditors does
not involve consideration of these matters and, accordingly, the auditors accept
no responsibility for any changes that may have occurred to the financial
statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in other
jurisdictions.
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Kate O'Neill
Managing Director, Investor Relations
020 7356 3520
email: kate.o'neill@ltsb-finance.co.uk
Michael Oliver
Director of Investor Relations
020 7356 2167
email: michael.oliver@ltsb-finance.co.uk
MEDIA
Brigitte Trafford
Group Communications Director
020 7356 1008
email: brigitte.trafford@lloydsbanking.com
Mark Elliott
Head of Media, City
020 7356 2493
email: mark.elliott2@lloydsbanking.com
Registered office: HBOS plc, The Mound, Edinburgh EH1 1YZ
Registered in Scotland no. SC218813
This information is provided by RNS
The company news service from the London Stock Exchange
END
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