TIDMLLOY
RNS Number : 9581Z
Lloyds Banking Group PLC
13 February 2014
Lloyds Banking Group plc
2013 Results
13 February 2014
BASIS OF PRESENTATION
This report covers the results of Lloyds Banking Group plc together
with its subsidiaries (the Group) for the year ended 31 December
2013. In accordance with the Listing Rules of the UK Listing Authority,
these preliminary results have been agreed with the Company's auditors,
PricewaterhouseCoopers LLP, even though an audit opinion has not
yet been issued. The Directors have not been made aware of any
likely modification to the auditors' report to be included with
the annual report and accounts for the year ended 31 December 2013.
Statutory basis
Statutory information is set out on pages 80 to 128. However, a
number of factors have had a significant effect on the comparability
of the Group's financial position and results. As a result, comparison
on a statutory basis of the 2013 results with 2012 is of limited
benefit.
Underlying basis
In order to present a more meaningful view of business performance,
the results of the Group and divisions are presented on an underlying
basis. The key principles adopted in the preparation of the underlying
basis of reporting are described below.
* In order to reflect the impact of the acquisition of
HBOS, the following have been excluded:
* the amortisation of purchased intangible assets; and
* the unwind of acquisition-related fair value
adjustments.
* The following items, not related to acquisition
accounting, have also been excluded from underlying
profit:
* the effects of certain asset sales, liabilit * payment protection insurance provision;
y
management and volatile items;
* insurance gross up;
* volatility arising in insurance businesses;
* certain past service pensions items in respect of the
Group's defined benefit pension schemes; and
* Simplification costs;
* other regulatory provisions.
* Verde costs;
The financial statements have been restated following the implementation
of IAS 19R Employee Benefits and IFRS 10
Consolidated Financial Statements with effect from 1 January 2013.
Further details are shown on page 123.
To enable a better understanding of the Group's core business trends
and outlook, certain income statement, balance sheet and regulatory
capital information is analysed between core and non-core portfolios.
The non-core portfolios consist of businesses which deliver below-hurdle
returns, which are outside the Group's risk appetite or may be
distressed, are subscale or have an unclear value proposition,
or have a poor fit with the Group's customer strategy. The EC mandated
retail business disposal (Project Verde) is included in core portfolios.
The Group's core and non-core activities are not managed separately
and the preparation of this information requires management to
make estimates and assumptions that impact the reported income
statements, balance sheet, regulatory capital related and risk
amounts analysed as core and as non-core. The Group uses a methodology
that categorises income and expenses as non-core only where management
expect that the income or expense will cease to be earned or incurred
when the associated asset or liability is divested or run-off,
and allocates operational costs to the core portfolio unless they
are directly related to non-core activities. This results in the
reported operating costs for the non-core portfolios being less
than would be required to manage these portfolios on a stand-alone
basis. Due to the inherent uncertainty in making estimates, a different
methodology or a different estimate of the allocation might result
in a different proportion of the Group's income or expenses being
allocated to the core and non-core portfolios, different assets
and liabilities being deemed core or non-core and accordingly a
different allocation of the regulatory effects.
Unless otherwise stated income statement commentaries throughout
this document compare the year ended 31 December 2013 to the year
ended 31 December 2012, and the balance sheet analysis compares
the Group balance sheet as at 31 December 2013 to the Group balance
sheet as at 31 December 2012.
Additional pro forma disclosures: Non-core assets, risk-weighted
assets and the fully loaded CRD IV capital ratios are also presented
on a pro forma basis. The pro forma basis reflects the impact of
certain announced transactions which have yet to complete as at
the balance sheet date. As at 31 December 2013 these were the announced
sales of Heidelberger Leben, Scottish Widows Investment Partnership
and Sainsbury's Bank.
----------------------------------------------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with
respect to the business, strategy and plans of the Lloyds Banking
Group and its current goals and expectations relating to its future
financial condition and performance. Statements that are not
historical facts, including statements about the Group or the
Group's management's beliefs and expectations, are forward looking
statements. By their nature, forward looking statements involve
risk and uncertainty because they relate to future events and
circumstances that will or may occur. The Group's actual future
business, strategy, plans and/or results may differ materially from
those expressed or implied in these forward looking statements as a
result of a variety of factors, including, but not limited to, UK
domestic and global economic and business conditions; the ability
to derive cost savings and other benefits, including as a result of
the Group's Simplification programme; and to access sufficient
funding to meet the Group's liquidity needs; changes to the Group's
credit ratings; risks concerning borrower or counterparty credit
quality; instability in the global financial markets, including
Eurozone instability and the impact of any sovereign credit rating
downgrade or other sovereign financial issues; market-related risks
including changes in interest rates and exchange rates; changing
demographic and market-related trends; changes in customer
preferences; changes to laws, 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 other
jurisdictions in which the Group operates, including the US; the
implementation of Recovery and Resolution Directive and banking
reform following the recommendations made by the Independent
Commission on Banking; the ability to attract and retain senior
management and other employees; requirements or limitations imposed
on the Group as a result of HM Treasury's investment in the Group;
the ability to satisfactorily dispose of certain assets or
otherwise meet the Group's EC State aid obligations; the extent of
any future impairment charges or write-downs caused by depressed
asset valuations, market disruptions and illiquid markets; the
effects of competition and the actions of competitors, including
non-bank financial services and lending companies; exposure to
regulatory scrutiny, legal proceedings, regulatory investigations
or complaints, and other factors. Please refer to the latest Annual
Report on Form 20-F filed with the US Securities and Exchange
Commission for a discussion of certain factors together with
examples of forward looking statements. The forward looking
statements contained in this announcement are made as at the date
of this announcement, and the Group undertakes no obligation to
update any of its forward looking statements.
CONTENTS
Page
Key highlights and outlook 1
Results summary 2
Consolidated income statement 3
Balance sheet and key ratios 3
Consolidated income statement - core and non-core 4
Balance sheet and key ratios - core and non-core 4
Summary consolidated balance sheet 5
Group Chief Executive's statement 6
Group Finance Director's review of financial performance 12
Underlying basis segmental analysis 21
Underlying basis quarterly information 24
Divisional highlights
Retail 25
Commercial Banking 27
Wealth, Asset Finance and International 29
Insurance 31
Group Operations 34
Central items 34
Additional information
Reconciliation between statutory and underlying basis results 35
Banking net interest margin 36
Volatility arising in insurance businesses 36
Number of employees (full-time equivalent) 38
Remuneration 38
Risk management 39
Principal risks and uncertainties 40
Credit risk portfolio 42
Funding and liquidity management 65
Capital management 70
Statutory information 80
Primary statements
Consolidated income statement 81
Consolidated statement of comprehensive income 82
Consolidated balance sheet 83
Consolidated statement of changes in equity 85
Consolidated cash flow statement 87
Notes 88
RESULTS FOR THE FULL YEAR
Substantial strategic progress and improved performance
'Over the last three years we have reshaped, strengthened and
simplified our business to create a low-risk efficient retail and
commercial bank that is focused on our customers and on helping
Britain prosper. These results, with Group underlying profit more
than doubled to GBP6.2 billion, confirm that the Group is returning
to robust health, thanks to the commitment of our people and the
consistent execution of the strategy we set out in June 2011. We
have a strong business model and have made significant progress,
despite our legacy issues, in improving our capital position and
profitability in a sustainable way. As a result, the UK Government
started the process of returning the Group to full private
ownership.
Looking ahead, we see a range of opportunities to grow our
business with both retail and commercial customers, supported by
our revitalised Lloyds Bank and Scottish Widows brands, and the
good momentum we have in our Halifax challenger brand and in Bank
of Scotland. In 2014, we expect to make further improvements to
customer service, and to continue to grow our core loan book,
especially in SMEs, and reduce costs and risk. We also expect to
apply to the regulator in the second half of the year to restart
dividend payments at a modest level and to deliver progressive and
sustainable payments to shareholders thereafter. This will be
another important milestone on our journey to rebuild trust and
confidence in our Group.'
António Horta-Osório
Group Chief Executive
KEY HIGHLIGHTS AND OUTLOOK
In 2013, we made substantial progress on our strategy to become
the best bank for customers and to create a customer focused,
highly efficient, profitable and low risk bank:
-- Grew lending in our core business by 3 per cent to support
our customers and help Britain prosper
-- Invested in our products and services for our customers,
while further reducing costs and improving efficiency through our
Simplification programme
-- Significantly improved our financial performance, with Group
underlying profit more than doubled to GBP6.2 billion, and a
statutory profit before tax of GBP415 million
-- Substantially strengthened our balance sheet, despite a
charge for legacy business provisions totalling GBP3.5 billion,
primarily relating to legacy Payment Protection Insurance
business
-- Lowered risk by reducing non-core assets and our
international presence, and by growing our customer deposits and
reducing our reliance on funding from the wholesale markets
-- As a result, the UK Government began reducing its stake in the Group in September
Looking ahead, we expect to make further progress on the
execution of our strategic plan. We expect to:
-- Increase lending to core customers: for retail customers,
mortgage market net lending in 2014 expected to grow, supported by
our target to lend around GBP10 billion to approximately 80,000
first time buyers in 2014; for commercial customers, above market
lending growth led by strong momentum in SME lending
-- Invest in product propositions and digital capabilities
across our brands and divisions, to deliver the products our
customers need through the channels they prefer, while improving
efficiency and customer service
-- Grow our deposit base supported by our multi-brand strategy
-- Achieve a low cost of equity and funds by further reducing
costs and risk, resulting in a unique competitive position
-- Expect, prior to any dividends, to generate fully loaded CET1
capital of around 2.5 percentage points over the next two years,
and thereafter 1.5 - 2 percentage points per annum
-- Apply in the second half of 2014 to restart dividend
payments, and to move to a dividend payout ratio of at least 50 per
cent of sustainable earnings in the medium term
RESULTS SUMMARY
Substantial progress on strategic plan, enhancing service for
customers whilst helping Britain prosper
-- Continue to support the UK economy through lending to SMEs and first-time buyers with active participation in the Funding for Lending Scheme and Help to Buy
-- Core loan book now growing in all divisions; returned
mortgage lending to growth in the third quarter
-- Launched a rebranded, revitalised Lloyds Bank and returned
TSB to the high street in September
-- Further strong performance in customer service with Net
Promoter Scores increasing by 11 per cent over the year
-- Continued reduction in FCA reportable banking complaints
(excluding PPI) to 1.0 per 1,000 accounts, the lowest of any major
UK bank; Halifax now at 0.8 per 1,000 accounts
Balance sheet further strengthened and risk reduced as we
simplify the Group
-- Strong capital build despite legacy charges, with pro forma
fully loaded CET1 ratio of 10.3 per cent and core tier 1 ratio of
14.0 per cent
-- Group loan to deposit ratio improved to 113 per cent (31 Dec
2012: 121 per cent); core ratio improved to 100 per cent
-- Non-core asset reduction of GBP34.9 billion during the year,
to GBP63.5 billion, ahead of plan and GBP2.6 billion capital
accretive overall. Non-retail non-core assets reduced to GBP24.7
billion
-- Further progress in reducing our international presence with
exit from 21 countries since June 2011 now completed or announced;
target for international presence of 10 countries or fewer in 2014
already achieved
-- Strong leverage ratios of 4.1 per cent (pro forma CRD IV
basis) and 4.5 per cent (pro forma Basel III 2014 basis)
Group underlying profit and returns substantially increased;
core profit and returns further improved
-- Underlying profit increased by 140 per cent to GBP6,166 million in 2013
-- Return on risk-weighted assets increased to 2.14 per cent (2012: 0.77 per cent)
-- Underlying income of GBP18,805 million, up 2 per cent
-- Banking net interest margin increased 19 basis points to 2.12
per cent, and to 2.29 per cent in the fourth quarter
-- Costs reduced by 5 per cent to GBP9,635 million
-- Credit quality continues to improve: impairment charge
reduced by 47 per cent to GBP3,004 million; impairment charge as a
percentage of average advances improved to 0.57 per cent (2012:
1.02 per cent)
-- Core underlying profit increased by 24 per cent to GBP7,574 million
-- Core return on risk-weighted assets increased from 2.54 per
cent in 2012 to 3.26 per cent in 2013
Statutory profit before tax of GBP415 million; tangible net
asset value per share of 48.5p
-- Statutory profit before tax of GBP415 million (2012: loss of
GBP606 million) including charge for legacy PPI business of
GBP3,050 million
-- Tangible net asset value per share at 31 December 2013 48.5p
(31 Dec 2012: 51.9p); includes loss on capital accretive non-core
disposals, deferred tax write-offs, adverse reserve movements, and
legacy charges
Guidance reflects confidence in the future
-- 2014 full year Group net interest margin expected to
stabilise at around the Q4 2013 level of 2.29 per cent, excluding
impact of TSB disposal
-- Costs for 2014 are expected to be around GBP9 billion, excluding TSB running costs
-- Impairment charge as a percentage of average advances
expected to reduce to around 50 basis points for 2014
-- Run-off portfolio (non-core non-retail assets and certain
non-core retail assets) expected to reduce to c.GBP23 billion and
non-core non-retail assets to c.GBP15 billion by the end of
2014
-- Expect, prior to any dividends, to generate fully loaded CET1
capital of around 2.5 percentage points over the next two years,
and thereafter 1.5 - 2 percentage points per annum
-- Expect to apply to the PRA in the second half of 2014 to
restart dividend payments, commencing at a modest level
-- Progressive dividend policy expected thereafter moving to a
dividend payout ratio of at least 50 per cent of sustainable
earnings in the medium term
UNDERLYING BASIS CONSOLIDATED INCOME STATEMENT
2013 2012(1) Change
GBP million GBP million %
Net interest income 10,885 10,335 5
Other income 7,920 8,051 (2)
-----------
Total underlying income 18,805 18,386 2
Total costs (9,635) (10,124) 5
Impairment (3,004) (5,697) 47
-----------
Underlying profit 6,166 2,565 140
----------- -----------
Core 7,574 6,112 24
Non-core (1,408) (3,547) 60
----------- -----------
Asset sales, liability management and volatile
items (280) 2,532
Simplification and Verde costs (1,517) (1,246)
Legacy items (3,455) (4,225)
Other items (499) (232)
-----------
Profit (loss) before tax - statutory 415 (606)
Taxation (1,217) (781)
----------- -----------
Loss for the year (802) (1,387)
----------- -----------
Loss per share (1.2)p (2.1)p 0.9p
Banking net interest margin 2.12% 1.93% 19bp
Average interest-earning banking assets GBP510.9bn GBP543.3bn (6)
Cost:income ratio (excluding St. James's Place) 52.9% 55.1% (2.2)pp
Asset quality ratio(2) 0.57% 1.02% (45)bp
Return on risk-weighted assets 2.14% 0.77% 137bp
BALANCE SHEET AND KEY RATIOS
At 31 At 31
Dec Dec Change
2013 2012 %
Loans and advances to customers(3) GBP495.2bn GBP512.1bn (3)
Customer deposits(4) GBP438.3bn GBP422.5bn 4
Loan to deposit ratio(5) 113% 121% (8)pp
Total assets GBP847.0bn GBP934.2bn (9)
Wholesale funding GBP137.6bn GBP169.6bn (19)
Wholesale funding <1 year maturity GBP44.2bn GBP50.6bn (13)
Risk-weighted assets GBP263.9bn GBP310.3bn (15)
Core tier 1 capital ratio 14.0% 12.0% 2.0pp
Pro forma fully loaded common equity tier 1
ratio(6) 10.3% 8.1% 2.2pp
Pro forma fully loaded CRD IV leverage ratio
(including tier 1 instruments)(6,7) 4.1% 3.8% 0.3pp
Fully loaded common equity tier 1 ratio 10.0% 8.1% 1.9pp
Fully loaded CRD IV leverage ratio (including
tier 1 instruments)(7) 4.0% 3.8% 0.2pp
Net tangible assets per share(1) 48.5p 51.9p (3.4)p
(1) Restated to reflect the implementation of IAS 19R and IFRS 10.
See page 123.
(2) Impairment charge as a % of average advances.
(3) Excludes reverse repos of GBP0.1 billion (31 December 2012: GBP5.1
billion).
(4) Excludes repos of GBP3.0 billion (31 December 2012: GBP4.4 billion).
(5) Loans and advances to customers excluding reverse repos divided
by customer deposits excluding repos.
(6) Pro forma ratios include the benefit of the announced sales of
Heidelberger Leben, Scottish Widows Investment Partnership and
Sainsbury's Bank.
(7) Includes the full value of tier 1 instruments reported under the
prevailing rules as at 31 December 2013.
UNDERLYING BASIS CONSOLIDATED INCOME STATEMENT - CORE AND
NON-CORE
Core 2013 2012(1) Change
GBP million GBP million %
Net interest income 10,638 9,868 8
Other income 7,606 7,417 3
Total underlying income 18,244 17,285 6
Total costs (9,149) (9,254) 1
Impairment (1,521) (1,919) 21
----------- -----------
Underlying profit 7,574 6,112 24
----------- -----------
Banking net interest margin 2.49% 2.32% 17bp
Asset quality ratio 0.35% 0.44% (9)bp
Return on risk-weighted assets 3.26% 2.54% 72bp
Non-core
Net interest income 247 467 (47)
Other income 314 634 (50)
------- -------
Total underlying income 561 1,101 (49)
Total costs (486) (870) 44
Impairment (1,483) (3,778) 61
------- -------
Underlying loss (1,408) (3,547) 60
------- -------
Banking net interest margin 0.41% 0.55% (14)bp
Asset quality ratio 1.61% 3.08% (147)bp
BALANCE SHEET AND KEY RATIOS - CORE AND NON-CORE
At 31 At 31
Dec Dec
Core 2013 2012 Change
%
Loans and advances to customers(2) GBP436.9bn GBP425.3bn 3
Customer deposits(3) GBP435.6bn GBP419.1bn 4
Core loan to deposit ratio(4) 100% 101% (1)pp
Risk-weighted assets GBP224.9bn GBP237.4bn (5)
Non-core
Retail non-core assets GBP38.8bn GBP49.9bn (22)
Non-retail non-core assets GBP24.7bn GBP48.5bn (49)
Total non-core assets GBP63.5bn GBP98.4bn (35)
Risk-weighted assets GBP39.0bn GBP72.9bn (47)
(1) Restated to reflect the implementation of IAS 19R and IFRS 10.
See page 123.
(2) Excludes reverse repos of GBP0.1 billion (31 December 2012: GBP5.1
billion).
(3) Excludes repos of GBP3.0 billion (31 December 2012: GBP4.4 billion).
(4) Loans and advances to customers excluding reverse repos divided
by customer deposits excluding repos.
SUMMARY CONSOLIDATED BALANCE SHEET
At 31 Dec At 31 Dec
2013 2012(1)
Assets GBP million GBP million
Cash and balances at central banks 49,915 80,298
Trading and other financial assets at fair value
through profit or loss 142,683 160,620
Derivative financial instruments 33,125 56,557
Loans and receivables:
----------- -----------
Loans and advances to customers 495,281 517,225
Loans and advances to banks 25,365 32,757
Debt securities 1,355 5,273
----------- -----------
522,001 555,255
Available-for-sale financial assets 43,976 31,374
Other assets 55,330 50,117
----------- -----------
Total assets 847,030 934,221
----------- -----------
Liabilities
Deposits from banks 13,982 38,405
Customer deposits 441,311 426,912
Trading and other financial liabilities at fair
value through profit or loss 43,625 33,392
Derivative financial instruments 30,464 48,676
Debt securities in issue 87,102 117,253
Liabilities arising from insurance and investment
contracts 110,758 137,592
Subordinated liabilities 32,312 34,092
Other liabilities 48,140 55,318
------- -------
Total liabilities 807,694 891,640
------- -------
Total equity 39,336 42,581
------- -------
Total liabilities and equity 847,030 934,221
------- -------
(1) Restated to reflect the implementation of IAS 19R and IFRS 10.
See page 123.
GROUP CHIEF EXECUTIVE'S STATEMENT
Summary
In 2013 the Group delivered a strong performance, underpinned by
the rapid progress we have made on our strategic objectives, many
of which we have now delivered ahead of plan. Since we set these
objectives in June 2011, we have substantially reduced costs and
risk, strengthened our balance sheet and capital base and increased
investment in our core franchise, creating a unique competitive
position with a low cost of equity. We continue to be well placed
to support our customers and the UK economic recovery and to
deliver strong and sustainable returns to shareholders above our
cost of equity. As a result of this progress, we have substantially
improved our underlying performance, returned the Group to
profitability in spite of additional legacy costs and in September
the UK government began returning the Group to full private
ownership. We have also confirmed that the Board expects that it
will apply to the Prudential Regulatory Authority (PRA) in the
second half of 2014 to restart dividend payments, commencing at a
modest level.
Results overview
We delivered a substantially improved financial performance in
2013. Group underlying profit more than doubled to GBP6,166 million
when compared to 2012, reflecting improved profitability in the
core business and a significant reduction in non-core losses.
On an underlying basis, the Group net interest margin increased
19 basis points to 2.12 per cent, total costs reduced 5 per cent to
GBP9,635 million and the impairment charge fell by 47 per cent to
GBP3,004 million, more than offsetting a fall in other income,
which was down 2 per cent, mainly driven by the non-core asset
reductions made in the year, which overall were capital accretive.
As a result, the Group return on risk-weighted assets improved 137
basis points to 2.14 per cent.
We made excellent progress in our core business, where we have
returned lending to growth in all our banking divisions, and
underlying profit rose 24 per cent to GBP7,574 million. This growth
in profit was largely driven by an 8 per cent increase in net
interest income, and a 21 per cent reduction in the impairment
charge. The return on risk-weighted assets in the core business
improved by 72 basis points to 3.26 per cent.
On a statutory basis, the Group reported a profit before tax of
GBP415 million, compared to a pre-tax loss of GBP606 million in
2012. Strong performance in our core business and reduced non-core
losses were the main drivers behind the improvement which, together
with gains on the sale of government securities of GBP787 million,
was partly offset by charges of GBP3,455 million for legacy issues,
principally Payment Protection Insurance (PPI). Our statutory
result also included the costs of our Simplification programme and
preparations for the TSB disposal (together GBP1,517 million), and
losses on asset sales, including those from capital accretive
non-core asset disposals, of GBP687 million.
Strengthening the balance sheet
Over the course of 2013 we made further progress in
strengthening the balance sheet and reducing risk, while continuing
to manage down our wholesale funding.
We substantially strengthened our capital position, with our pro
forma fully loaded common equity tier 1 ratio increasing by 2.2
percentage points to 10.3 per cent, despite the additional legacy
charges during the year. This uplift was driven by capital
generation in the core business, as well as management actions
including the reshaping of our core business portfolio, the
substantial reduction of non-core assets in a capital accretive
manner and the payment of dividends of GBP2.2 billion to the Group
by the Insurance business. We reduced non-core assets by GBP34.9
billion, while at the same time releasing approximately GBP2.6
billion of capital.
The Group's funding structure and liquidity position remain
robust. We further reduced wholesale funding by GBP32.0 billion,
representing a 19 per cent decrease in the year, with the
proportion of funding with a maturity of less than a year at 32 per
cent. We continue to maintain a strong liquidity position including
GBP89.3 billion of cash and highly rated, low risk securities. The
4 per cent increase in customer deposits, together with non-core
asset reduction, drove a further improvement in the Group's loan to
deposit ratio to 113 per cent at the end of 2013 from 121 per cent
at the end of 2012, with the core loan to deposit ratio improving
to 100 per cent by the end of 2013.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
In acknowledgement of the significant progress we have made in
improving the Group's capitalisation and transforming its financial
profile, the rating agencies Fitch and Standard & Poor's
upgraded Lloyds Bank's standalone rating to 'bbb+' in September and
December 2013 respectively, and affirmed their long-term credit
ratings on Lloyds Bank at 'A'.
Legacy
Our results and capital position reflect further provisions for
legacy issues taken in 2013 totalling GBP3,455 million which had a
material effect on our statutory performance. We remain committed
to resolving these issues, while treating our customers fairly. Of
these provisions, GBP3,050 million related to PPI and GBP130
million related to the sales of interest rate hedging products to
certain small and medium-sized businesses.
We increased our provision for PPI by GBP1,800 million in the
fourth quarter principally based on revised expectations for
complaint volumes, uphold rates, and related administrative costs.
Further detail on the provisions for legacy issues is given in the
Group Finance Director's review of financial performance on page
17, and in note 24 on page 108 of this news release.
Reshaping the Group to increase our focus on the UK and our core
customers
We made a number of asset disposals during 2013, including the
sales of our shares in St. James's Place and the announced disposal
of our German life insurance operation, Heidelberger Leben. We also
continued to increase our focus on our core UK business and reduce
our international presence, completing the sales of our Australian
and Spanish banking businesses and have now exited, or announced
the exit from, 21 countries or overseas branches since June 2011.
Following completion of these exits, we will operate in nine
countries, achieving our target of operating in 10 countries or
fewer by the end of 2014.
In November 2013, we announced that we had agreed to sell our
asset management business Scottish Widows Investment Partnership
(SWIP) to Aberdeen Asset Management (Aberdeen) for a consideration
valued at the time at up to GBP660 million. We also agreed to enter
into a long-term strategic relationship with Aberdeen which is
expected to result in a stronger asset management partner for the
Group and its customers, combining Aberdeen's and SWIP's strengths
across asset classes once the sale completes, which is expected in
the first quarter of 2014.
We continue to refresh our operating structure and from the
beginning of 2014 our unified Wealth business will be integrated
into the Retail division. This will allow us to sharpen our focus
on delivering value-added Wealth services to eligible retail
customers and will represent a key growth opportunity. We have also
moved our Business Banking unit, which services approximately one
million small business customers with less complex needs, into
Retail, allowing us to draw on the collective expertise of Retail
and Commercial Banking colleagues to manage these customer
relationships in a way which leverages existing Retail
infrastructure, via branch, telephony and digital channels.
Our Asset Finance business is the foundation of a newly created
Consumer Finance division, which will also include our consumer and
corporate credit card business. Bringing these business units
together will increase management focus and allow us to capitalise
on growth opportunities, continuing our good momentum in
asset-backed lending and with the aim of growing our market
presence in credit cards. Consumer Finance will work in close
partnership with Retail and Commercial Banking to ensure we
continue to offer our customers excellent customer service.
Substantial further progress in our Simplification programme
Our Simplification programme remains central to the successful
delivery of our strategy, both in terms of realising further cost
savings and efficiencies, and in improving the products and
services we offer our customers. Through Simplification, we have
made excellent progress in improving and rationalising processes,
and reducing layers, suppliers and our non-branch property
portfolio. The ongoing programme realised approximately GBP0.6
billion in further cost savings in 2013, generating a total of
around GBP1.5 billion annual run-rate savings since inception and
having identified further opportunities we are now increasing our
target run-rate savings by a further GBP100 million to GBP2 billion
by the end of 2014. The total spent on the programme to the end of
2013 was GBP1.7 billion.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
We have now fully automated the collection of maturity
instructions from term deposit customers, reducing completion time
by approximately 85 per cent, substantially reducing error rates
and have completed the transfer of 1.7 million mortgage accounts to
a single mortgage platform. Similarly, we have made great strides
in delayering the organisation, increasing spans of control and
simplifying the Group so that 98 per cent of employees are now
within seven layers. During 2013 we also made significant progress
in reducing the number of legal entities, which are now down to
929, a reduction of over 40 per cent since the start of the
Simplification programme in 2011, and the number of Group suppliers
was further reduced by 14 per cent to 9,066 in 2013, to around half
the level at the start. Meanwhile we exited 19 non-branch
properties in 2013, reducing the overall total to 161.
All of these changes help to put us firmly on the path to being
the best bank for customers, enabling better service by making
day-to-day tasks easier and freeing up colleague time to focus on
our customers' needs.
Investing in the business
We are reinvesting a significant proportion of the savings
realised from Simplification to further improve processes and the
quality of customer interaction through branches, via the telephone
and digital channels.
In the second half of the year, we relaunched the Lloyds Bank
brand, building on its 250-year heritage of serving the people and
businesses of Britain, to take its place alongside our key high
street banking brands, Halifax and Bank of Scotland. The relaunch
of Lloyds Bank followed the separation of TSB, which has brought
another new challenger to the high street. The Group has received
an agreement in principle from the European Commission to pursue an
Initial Public Offering of TSB as planned in 2014 and to extend the
deadline for the completion of the TSB divestment to the end of
2015.
We are continuing to develop and grow our Halifax challenger
brand, including extending its geographical reach into Scotland,
and in 2013 Bank of Scotland began its first ever national campaign
targeting lending to small and
medium-sized enterprises (SMEs). In Insurance, 2014 has seen us
relaunch the Scottish Widows brand, refining its focus on providing
a more secure financial future for our customers and demonstrating
our continued commitment to be a leader in the life planning and
retirement market.
Our strong portfolio of differentiated brands underlines our
commitment to service and to helping our customers with the things
that really matter - planning for the future, enabling them to
purchase their home and protecting their families - as well as
supporting UK business. Brand revitalisation is being reinforced by
an extensive programme of branch refurbishment and investment in
telephony and digital channels. We have so far refurbished over
1,500 branches since the Strategic Review, creating bright, modern
environments incorporating screenless counters. We have also
introduced active management of our banking halls, increased
colleague training and extended opening hours at selected branches,
enhancing the overall branch banking experience for our customers.
In turn, this has resulted in a further 11 per cent improvement in
Net Promoter Scores and a fall in Group reportable banking
complaints to 1.0 per 1,000 accounts (excluding PPI). This level of
complaints represents the lowest of any major UK bank, with Halifax
leading the way amongst our brands with 0.8 complaints per 1,000
accounts, and we expect to maintain this industry leading
position.
In telephone banking, we launched a number of improvements to
our automated Interactive Voice Recognition (IVR) system in 2013,
incorporating the latest speech recognition software to get things
right first time when customers call us. With simplified menu
structures, increased service functionality and improved call
routing, nearly two-thirds of all calls are fulfilled at point of
IVR first contact.
Our digital channels go from strength to strength, with active
internet banking users now increased to over 10.5 million and
mobile banking users to more than four million, and over 1.2
billion log-ons in 2013. We have now created a new Digital,
Marketing and Customer Development function to capitalise on our
achievements to date, focusing our investment and ensuring our
success in Retail is replicated by sharing digital product
development across all divisions.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
In Commercial Banking we continue to strengthen our capabilities
and position ourselves for growth. In 2013, we launched a new
Global Transaction Banking platform to support clients in payments,
liquidity management and working capital financing, thereby
deepening our client relationships by fulfilling a broader spectrum
of their product needs.
In General Insurance, we have redesigned our claims process to
make it more efficient and simpler and as a result, the majority of
our Home Claims customers are receiving their settlements 30 per
cent faster. Customers making a claim are now looked after by a
dedicated advisor throughout the life of their claim and regular
contact is maintained.
Supporting our customers and the economic recovery
Lloyds Banking Group is the UK's largest retail and commercial
lender, and in 2013 we continued to deliver on our pledge to help
Britain prosper and support sustainable economic recovery. We were
the first bank to access funding from the government's Funding for
Lending (FLS) scheme, and are its largest lender, and committed
over GBP37 billion of gross new lending with net core growth of
GBP13 billion since the start of the scheme. We remain committed to
passing on the benefits of this low cost funding to our UK
customers.
In Retail, we helped more than 80,000 new homeowners to purchase
their first home, exceeding our target of 60,000 and advancing
mortgages totalling over GBP9.7 billion. Through our participation
in government schemes such as Help to Buy in the Halifax and Bank
of Scotland brands (now also launched under the Lloyds Bank brand
in 2014), we are providing strong support for the recovery in the
housing market, by facilitating access to mortgage financing for
creditworthy home buyers at up to 95 per cent of property purchase
values.
September 2013 saw the introduction of a new industry-wide
service to make it easier and quicker for customers to switch their
current account. Key Lloyds Banking Group brands are taking part in
this scheme, which allows customers to switch their accounts within
seven working days. During the course of the year switch-ins have
exceeded switch-outs by approximately 144,000, particularly driven
by switching into our challenger brand, Halifax. This is testament
to some of the product innovations we have implemented, including
loyalty schemes such as Halifax's Cashback Extras, and Everyday
Offers at Lloyds Bank and Bank of Scotland, recognising and
rewarding the faith placed in us by our customers to provide a
consistent, high quality service.
In Commercial Banking, we continue to strengthen our client
relationships, supporting businesses of all sizes from SMEs to
Global Corporates. We have demonstrated our focus to support
clients consistently through the economic cycle with net lending to
SMEs growing by 6 per cent in 2013 despite a market contraction of
3 per cent; committing over GBP1.3 billion to the UK manufacturing
sector by the end of September, exceeding our GBP1 billion target
three months early; and providing finance to approximately 120,000
start-up enterprises, beating our target by 20,000. In 2013 we
continued to approve eight out of 10 business loan and overdraft
applications from SMEs. Meanwhile the Hire Purchase and Leasing
team within Commercial Finance achieved record monthly lending
levels. We have further supported loan growth by launching a
partnership to deliver mobile card payment solutions to small
businesses which is cutting technology costs and opening up growth
opportunities.
For the ninth year running we were awarded the title of
'Business Bank of the Year' at the FDs' Excellence Awards, which
are supported by the Confederation of British Industry and the
Institute of Chartered Accountants in England
and Wales.
In Insurance, we have seen excellent growth in our Corporate
Pensions area, stimulated by the market changes as a result of the
Retail Distribution Review and the support we are giving to our
customers in managing the transition to
auto-enrolment. We also launched an enhanced annuity product in
both the intermediary and direct channels, expanding our offering,
while enabling our retail bank customers to secure a higher
retirement income via a new online comparison tool. We continue to
enhance our market-leading bancassurance protection proposition as
we look to address the UK population's protection gap. In 2013, we
addressed the protection needs of 200,000 new customers and paid
out around GBP200 million in claims to existing customers. In
General Insurance, in the aftermath of the October and December
storms, our Home Claims teams worked hard to offer seamless service
at a distressing time for many of our customers.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
Within Asset Finance, we were pleased to announce a partnership
between our Black Horse business and Jaguar Land Rover which will
see us provide lending facilities to over 200 motor dealerships to
cover vehicle stock and personal finance to customers seeking to
purchase a car. Black Horse also enabled customers to make payments
via mobile devices this year. Within Wealth, we also now provide
better support and faster advice through a newly inaugurated
Private Banking client centre while harnessing the latest customer
relationship management technology, halving the time from initial
contact to customer interview.
Regulation
2013 was an important year for the UK's supervisory framework
for financial services companies, with two new bodies coming into
existence in April, the PRA and the Financial Conduct Authority,
replacing the FSA. While uncertainty remains in relation to the
impact of many reforms affecting our industry, both in the UK and
from abroad, there is now greater clarity on regulatory capital
requirements. Our simplified, low risk, UK focused model is closely
aligned to the new regulatory landscape, and with the reshaping we
have undertaken, we are better positioned than ever to adapt to the
changes we may face in the future and conduct our day-to-day
business in a way that puts our customers' needs first. We also
continue to work with the relevant authorities on the evolution of
regulation connected to the Financial Services (Banking Reform)
Act, although we expect the majority of our operations to be within
the ring fence which this legislation will create when it comes
into effect at the start of 2019.
Colleagues
Our success relies on the dedication of colleagues, the service
they provide to our customers and the long-term partnerships they
build with them. Our stated aim of becoming the best bank for
customers would not be possible without their talent and hard work.
I would like to personally thank all colleagues for their
tremendous efforts that have enabled us to move further and faster
towards our goals in 2013.
I would also like to take this opportunity to thank our
Chairman, Sir Winfried Bischoff, who will retire from the Group in
April 2014. His stewardship and guidance, in a challenging
operating environment both from a regulatory and economic
perspective, have been invaluable. I look forward to working
closely with Lord Blackwell, who will take over as Chairman from
April, on the next steps in the evolution of the Group.
We are committed to attracting, retaining and developing our
people. In 2013, over 51,000 Lloyds Banking Group customer facing
colleagues achieved the Chartered Banker Foundation Standard for
Professional Bankers. This Standard enables bankers to demonstrate
to colleagues and customers that they have the knowledge and skills
to perform their role, that they take responsibility for acting
ethically and professionally, and that they adhere to the Chartered
Banker Code of Professional Conduct to deliver the best outcomes
for our customers.
Colleague feedback is highly valued and in 2013, Community Bank
and Telephone Banking colleagues made almost 3,000 suggestions,
contributing towards a culture of continuous improvement and
innovation, enabling us to deliver more tangible enhancements to
our customer offering. Also vital are our Back to the Floor days
which take our senior leaders from the wider Group back into the
branches and operational centres to experience our services and
processes first hand, giving them important insights into how
improvements are being implemented.
Our 2013 Colleague Survey had the highest ever participation
rate, reaching over 75 per cent. There were improvements in scores
across all key categories and we compare favourably with other UK
companies. Notably the Employee Engagement Index (EEI), which shows
the extent to which colleagues feel motivated to contribute to the
success of the Group, and are willing to apply discretionary effort
to help the business succeed, rose to 64 per cent, 16 points higher
than in 2012. Meanwhile, the Performance Excellence Index (PEI),
which shows how strongly colleagues believe the Group is committed
to delivering, and continuously improving, high quality products
and services to customers, rose to 76 per cent, 8 points higher
than in 2012. There are many factors that influence these scores;
the ongoing delivery of our strategy, the achievement of key
milestones, together with the recent start of our return to full
private ownership, have all contributed to the improvement in
engagement.
GROUP CHIEF EXECUTIVE'S STATEMENT (continued)
I am also delighted to have announced, as part of our Helping
Britain Prosper Plan, that we are moving towards a target of 40 per
cent of our most senior roles being held by women by 2020. We do
recognise however, that there is more to be done on our journey to
being the best bank for customers and amongst the best-rated
companies in the UK by
our colleagues.
I am proud that, amongst many other accolades received during
the year, we were named 'Best Bank (UK)' at the 2013 Euromoney
Awards and 'Bank of the Year' at The Banker's 2013 Awards. These
awards reflect the strong capabilities and diligence of our people
who continue to support the delivery of our strategy.
Dividends
In the second half of 2013, the Group commenced discussions with
the PRA on the timetable and conditions for resuming dividend
payments. Given the progress the Group has made in substantially
strengthening its capital position and improving its financial
performance, the PRA has now confirmed that it will consider the
Group's applications to make dividend payments in line with its
normal procedures for other banks.
In the light of this, and subject to a return to sustainable
profitability and there being no major unexpected changes in the
Group's business outlook or regulatory requirements, the Board
expects that it will apply to the PRA in the second half of 2014 to
restart dividend payments, commencing at a modest level. The Board
expects thereafter to have a progressive dividend policy with the
aim of moving, over the medium term, to a dividend payout ratio of
at least 50 per cent of sustainable earnings.
Outlook
We have made further substantial progress in 2013 on our
strategy to be the best bank for customers. We delivered a
significantly improved financial performance while increasing
investment in our core franchise and people, strengthening our
balance sheet and capital position, reducing costs and risk, and
addressing legacy issues.
The progress we have made means we have a simpler, more
efficient, lower risk business, which given the additional
investments we are making, is well placed to serve our customers
and to help Britain prosper. We therefore remain confident in the
Group's prospects, despite continued regulatory uncertainty, and in
our ability to generate strong and sustainable returns for our
shareholders.
António Horta-Osório
Group Chief Executive
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
Overview
In 2013, we significantly improved the Group's profitability and
further strengthened our capital position, while improving margins,
and reducing costs and non-core assets as we simplified and
de-risked the business. Income grew as funding costs fell, core
lending increased and we benefited from gains on the sales of
shares in St. James's Place. This growth in income, combined with
lower operating costs and impairments resulted in an increase in
core underlying profits to GBP7.6 billion. The Group also returned
its lending to core corporate customers to growth in the first half
of 2013, and to mortgage customers in the second half, while
non-core asset reductions continued to be capital accretive
overall, with underlying losses from the non-core portfolio
declined significantly.
Significantly improved Group underlying and statutory
profitability
Group underlying profit more than doubled, increasing by
GBP3,601 million to GBP6,166 million compared to 2012. The return
on risk-weighted assets improved to 2.14 per cent from 0.77 per
cent, driven by increased earnings and by risk-weighted asset
reductions, predominantly in the non-core business. Core underlying
profit before tax grew 24 per cent to GBP7,574 million, primarily
reflecting reduced impairment charges and stronger net interest
income.
Underlying income grew by 2 per cent to GBP18,805 million,
including the gain of GBP540 million from the sales of shares in
St. James's Place. Excluding the gain on sales and income from St.
James's Place (together St. James's Place effects), total
underlying income was unchanged with a stronger contribution from
net interest income offsetting a reduction in other income. Group
net interest income improved by 5 per cent to GBP10,885 million as
a result of improved net interest margin and growth in core lending
volumes. Other income decreased by 6 per cent excluding St. James's
Place effects, primarily as a result of non-core disposals made
during the course of the year.
We maintained our focus on cost control and efficiency, with
total costs falling by 5 per cent to GBP9,635 million, in line with
the upgraded guidance given in the first quarter of 2013. The
impairment charge improved by 47 per cent to GBP3,004 million,
driven by the reduction in non-core assets and the sustained
improvement in Group asset quality.
Core underlying profit improved to GBP7,574 million from
GBP6,112 million and the return on risk-weighted assets increased
to 3.26 per cent from 2.54 per cent. Excluding St. James's Place
effects, the return on risk-weighted assets was 3.00 per cent. Core
underlying income increased 6 per cent to GBP18,244 million, and by
4 per cent excluding St. James's Place effects given improved net
interest income from core loan growth and higher margins. The core
net interest margin increased by 17 basis points to 2.49 per cent,
driven mainly by improved deposit margins. Core other income
increased 3 per cent to GBP7,606 million but excluding St. James's
Place effects was down 2 per cent reflecting current economic
conditions and the regulatory environment.
Core costs decreased by 1 per cent, driven by further savings
from the Simplification programme and the deconsolidation of St.
James's Place, partially offset by additional staff related costs
and inflation. The core impairment charge decreased 21 per cent to
GBP1,521 million with the reduction primarily attributable to
Commercial Banking impairments, which reduced by 40 per cent
year-on-year reflecting better quality new business and lower
defaults due to the low interest rate environment.
Non-core losses reduced by 60 per cent to GBP1,408 million
year-on-year, largely as a result of the reduction in non-core
assets which was also the primary driver of the 61 per cent
reduction in the impairment charge to GBP1,483 million.
The Group statutory profit before tax of GBP415 million for 2013
compared to a pre-tax loss of GBP606 million in 2012, driven by the
improvement in underlying profit and a lower provision for legacy
issues of GBP3,455 million compared to the GBP4,225 million charge
in 2012. In 2013 the Group was subject to a higher effective tax
rate than the UK statutory rate primarily due to an additional tax
charge arising from the impacts on the net deferred tax asset of
the reduction in the UK Corporation tax rate, the disposal of our
Australian operation and policyholder tax. The loss after tax was
GBP802 million and the loss per share was 1.2p, compared to the
loss per share of 2.1p in 2012.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
(continued)
Lower risk, stronger balance sheet with core loan growth and a
substantially enhanced capital position
We have now substantially completed our work to transform the
balance sheet, by strengthening our funding, liquidity and capital
position, and reducing non-core assets, and we returned core
corporate and mortgage lending to growth
in 2013.
We reduced non-core assets by GBP34.9 billion to GBP63.5 billion
during the year, with non-retail non-core assets reduced to GBP24.7
billion. Non-core asset reductions continue to be capital accretive
overall and, together with core underlying profit generation and
management actions, resulted in a considerable strengthening of our
capital ratios. The Group's pro forma fully loaded CRD IV common
equity tier 1 ratio improved to 10.3 per cent from 8.1 per cent at
31 December 2012, in spite of theadditional legacy charges, changes
to pension accounting following the implementation of IAS 19R and
other statutory items.
Core loans and advances grew by GBP11.6 billion or 3 per cent to
GBP436.9 billion, primarily driven by increases in Commercial
Banking and Wealth, Asset Finance and International. We also
returned Retail secured lending to growth, as expected in the third
quarter and delivered GBP1.9 billion of further loan growth in our
core book in the fourth quarter.
Underlying income
Total Core
-------------------------------- --------------------------------
2013 2012 Change 2013 2012 Change
GBP million GBP million % GBP million GBP million %
Net interest income 10,884 10,331 5 10,637 9,864 8
Other income 7,259 7,726 (6) 6,945 7,092 (2)
----------- ----------- ----------- -----------
Total underlying income
excluding St. James's
Place 18,143 18,057 - 17,582 16,956 4
St. James's Place 662 329 662 329
----------- ----------- ----------- -----------
Total underlying income 18,805 18,386 2 18,244 17,285 6
----------- ----------- ----------- -----------
Banking net interest
margin 2.12% 1.93% 19bp 2.49% 2.32% 17bp
Average interest-earning
banking assets GBP510.9bn GBP543.3bn (6) GBP420.5bn GBP423.7bn (1)
Loan to deposit ratio 113% 121% (8)pp 100% 101% (1)pp
Group underlying income increased by 2 per cent to GBP18,805
million and, excluding St. James's Place effects, was broadly
unchanged at GBP18,143 million, with strong growth in net interest
income offsetting the reduction in other income. The growth in core
income more than offset the decline in non-core income which
resulted from the continued reduction of non-core assets.
Net interest income (excluding St. James's Place effects)
increased by 5 per cent to GBP10,884 million in 2013, and grew for
the fourth successive quarter. The growth reflected increased core
lending and the improved net interest margin, partly offset by
reduced net interest income from the smaller non-core asset
portfolio.
The improvement in Group net interest margin to 2.12 per cent
for the full year, and to 2.29 per cent in the fourth quarter, was
principally driven by a strong performance in deposit margin, which
more than offset a small decline in asset margin and an 8 basis
points reduction from repositioning our government bond portfolio.
The net interest margin also benefited, relative to our
expectations at the beginning of the year, from the effect of
repositioning our structural hedge. This repositioning is now
largely complete and provides the Group with a greater level of
protection from changes in net interest income from movements in
interest rates.
Core net interest income increased 8 per cent principally as a
result of the significant improvement in margin.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
(continued)
Other income excluding St. James's Place fell by 6 per cent to
GBP7,259 million, reflecting the significant reduction in
non-core assets and lower sales of bancassurance and protection
products in the core business, partly as a result of changes in our
product offering following implementation of the Retail
Distribution Review (RDR). Around GBP400 million of the decline in
other income excluding St. James's Place related to businesses sold
in the year.
Total costs
2013 2012 Change
GBP million GBP million %
Core 9,149 9,254 1
Non-core 486 870 44
----------- -----------
Total costs 9,635 10,124 5
----------- -----------
Cost:income ratio 51.2% 55.1% (3.9)pp
Simplification savings annual run-rate 1,457 847
Total costs fell by 5 per cent to GBP9,635 million driven by
around GBP600 million of savings from Simplification initiatives,
and the effect of disposals in the year, partly offset by staff
related costs and inflation. Total costs include a bank levy charge
of GBP238 million (2012: GBP179 million). We continue to expect
costs in 2014 to reduce to around GBP9 billion, excluding TSB
running costs.
Core costs fell 1 per cent to GBP9,149 million driven by strong
cost management, benefits from the Simplification programme and the
deconsolidation of St. James's Place from the beginning of April.
These reductions were partly offset by additional staff related
costs, inflation and the increase in the bank levy. Non-core costs
fell 44 per cent due to the significant reduction in non-core
assets.
The Group continues to make good progress on Simplification,
improving service for customers through more streamlined end-to-end
processes, and, among other initiatives, centralising support
functions, reducing layers of management and rationalising its
supplier base. We continue to reinvest a part of these savings in
the core business.
At 31 December 2013, we had achieved annual run-rate cost
savings of GBP1,457 million from our initiatives to simplify the
Group, an increase of GBP610 million since 31 December 2012. We
have now increased our expectations for annual
run-rate cost savings from the Simplification programme at the
end of 2014 from GBP1.9 billion to GBP2.0 billion.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
(continued)
Impairment
2013 2012 Change
GBP million GBP million %
Core 1,521 1,919 21
Non-core 1,483 3,778 61
----------- -----------
Total impairment charge 3,004 5,697 47
----------- -----------
2013 2012 Change
% %
Asset quality ratio:
Core 0.35 0.44 (9)bp
Non-core 1.61 3.08 (147)bp
Group 0.57 1.02 (45)bp
Impaired loans as a % of closing advances:
Core 2.6 3.0 (0.4)pp
Non-core 30.0 32.1 (2.1)pp
Group 6.3 8.6 (2.3)pp
Provisions as a % of impaired loans:
Core 40.6 41.2 (0.6)pp
Non-core 54.8 50.7 4.1pp
Group 50.1 48.2 1.9pp
The impairment charge reduced by 47 per cent to GBP3,004 million
reflecting the improved credit quality of the core portfolio,
continued prudent management of impaired loans and a further
reduction in non-core assets. The asset quality ratio improved by
45 basis points to 0.57 per cent, and is now within the target
range for the Group set out in our Strategic Review of 50 to 60
basis points. The core asset quality ratio remains low at 0.35 per
cent.
The 21 per cent decrease in the core impairment charge to
GBP1,521 million was primarily driven by lower impairment in
Commercial Banking, which was down 40 per cent compared to 2012
given the improvement in the economic environment together with
higher releases in 2013 compared to the same period in 2012. The
significant improvement in the non-core impairment charge of 61 per
cent compared to 2012 reflected reductions in the Corporate Real
Estate and Irish portfolios following asset disposals.
Impaired loans as a percentage of closing advances reduced
substantially to 6.3 per cent, from 8.6 per cent at 31 December
2012, driven by the reduced non-core portfolio and improvements in
both the Retail and Commercial Banking portfolios. Provisions as a
percentage of impaired loans increased from 48.2 per cent at 31
December 2012 to 50.1 per cent.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
(continued)
Statutory profit
Statutory profit before tax was GBP415 million compared to a
pre-tax loss of GBP606 million in 2012. Further detail on the
reconciliation of underlying to statutory results is included on
page 35.
2013 2012(1)
GBP million GBP million
Underlying profit 6,166 2,565
Asset sales, liability management and volatile
items:
----------- -----------
Asset sales (687) (660)
Sale of government securities 787 3,207
Liability management (142) (229)
Own debt volatility (221) (270)
Other volatile items (457) (478)
Volatility arising in insurance businesses 668 312
Fair value unwind (228) 650
----------- -----------
(280) 2,532
Simplification and Verde costs
----------- -----------
Simplification costs (830) (676)
Verde costs (687) (570)
----------- -----------
(1,517) (1,246)
Legacy items:
----------- -----------
Payment protection insurance provision (3,050) (3,575)
Other regulatory provisions (405) (650)
----------- -----------
(3,455) (4,225)
Other items:
----------- -----------
Past service pensions (charge) credit (104) 250
Amortisation of purchased intangibles (395) (482)
----------- -----------
(499) (232)
----------- -----------
Profit (loss) before tax - statutory 415 (606)
Taxation (1,217) (781)
----------- -----------
Loss for the year (802) (1,387)
----------- -----------
Loss per share (1.2)p (2.1)p
(1) Restated to reflect the implementation of IAS 19R and IFRS 10.
See page 123.
Asset sales, liability management and volatile items
Asset sales included gains on the sale of government securities
of GBP787 million (2012: GBP3,207 million) and a net loss of GBP687
million (after a related fair value unwind benefit of GBP1,384
million), principally from the significant reduction in
non-core assets. Despite net losses in the year, non-core
disposals were capital accretive in aggregate contributing to the
GBP2.6 billion of capital generated by non-core reduction. The
level of net losses from asset sales incurred in 2013 is not
expected to be repeated in 2014.
The Group's statutory profit before tax is affected by insurance
volatility caused by movements in financial markets generating a
variance against expected returns, and policyholder interests
volatility which primarily reflects the gross up of policyholder
tax included in the Group tax charge. The statutory result included
GBP668 million of positive insurance and policyholder interests
volatility (2012: positive volatility of GBP312 million),
reflecting the rise in equity markets in the period.
Simplification and Verde costs
Simplification programme costs in 2013 were GBP830 million and
the total spent on the programme to the end of 2013 was GBP1,691
million.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
(continued)
This had delivered annual run-rate cost savings of GBP1,457
million by December 2013. Our expectations for annual
run-rate cost savings by the end of 2014 have now increased from
GBP1.9 billion to GBP2.0 billion. We now expect the total costs to
be around GBP2.5 billion by the end of 2014, of which GBP2.4
billion is anticipated to be directly expensed through the profit
and loss account.
The Group continues to progress the European Commission (EC)
mandated business disposal (Verde), with an Initial Public Offering
(IPO) planned for mid-2014. Subject to meeting a number of
criteria, this plan has been agreed in principle by the EC but
remains subject to final regulatory and EC approval. The Project
Verde branches were rebranded in September 2013, and now operate as
TSB as a separate business within the Lloyds Banking Group. The
costs of building TSB were GBP687 million in the year and, from
inception to the end of December 2013, have totalled GBP1,468
million. We expect to complete the build of TSB at a cost in 2014
of around GBP200 million with further dual running and transaction
costs of around GBP150 million.
PPI
The Group made a further provision in the fourth quarter for
expected PPI costs of GBP1,800 million, which brought the amount
provided in 2013 for PPI to GBP3,050 million, and the total amount
provided to GBP9,825 million. Total costs incurred in the three
months to 31 December 2013 were GBP687 million, including GBP165
million of administration costs, and as at 31 December 2013,
GBP2,807 million of the total provision remained unutilised.
The volume of PPI complaints continues to fall. Average monthly
complaint volumes (excluding complaints where no PPI was held)
reduced to approximately 37,000 in the fourth quarter of 2013, and
were 24 per cent below volumes in the third quarter, and 56 per
cent below the fourth quarter of 2012. While fourth quarter volumes
fell in line with our revised end of third quarter expectations,
following further statistical modelling and the results of the most
recent customer survey, we are now forecasting a slower decline in
future volumes than previously expected. The additional provision
taken in the fourth quarter is based on the assumption that we will
receive approximately a further 550,000 complaints. Together with
an increase in administrative costs, this revised forecast for
future complaint volumes accounts for approximately GBP1.1 billion
of the GBP1.8 billion additional provision taken in the fourth
quarter.
A revision of our forecasts for uphold rates and response rates
to proactive mailings together account for approximately GBP0.4
billion of the increased provision, and reflect forecast rates
above our recent experience. The Group has also increased its
estimates for remediation costs, which principally relate to the
re-review of previously defended complaints, and this accounts for
approximately GBP0.3 billion of the increased provision.
Since the commencement of the PPI redress programme in 2011 we
estimate we have contacted, settled or provided for approximately
40 per cent of the policies sold since 2000, covering both
customer-initiated complaints and actual and expected proactive
mailings undertaken by the Group. The proactive mailings arise from
a detailed Past Business Review, carried out by the Group as agreed
with the Financial Conduct Authority (FCA), as a result of which
the Group is contacting customers identified as having the highest
likelihood of required redress. These mailings are expected to be
substantially complete by the end of the first half of 2014. In
terms of customer-initiated complaints, the fourth quarter monthly
average run-rate of approximately 37,000 complaints is around 70
per cent below its peak and complaints have declined in each of the
last six quarters.
The total amount provided for PPI represents our best estimate
of the likely future costs, albeit a number of risks and
uncertainties remain, in particular complaint volumes, uphold
rates, average redress costs, the scope and cost of proactive
mailings and remediation, and the outcome of the FCA Enforcement
Team investigation. The cost of these factors could differ
materially from our estimates, with the risk that a further
provision could be required.
Other provisions
A further provision of GBP130 million was made in the fourth
quarter relating to the sale of interest rate hedging products to
certain small and medium-sized businesses. This brings the amount
provided to GBP530 million, of which GBP218 million relates to
administration costs. As at 31 December 2013, GBP368 million of the
total provision remained unutilised.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
(continued)
In the course of its business, the Group is engaged in
discussions with the PRA, FCA and other UK and overseas regulators
and governmental authorities on a range of matters; a provision is
held against the costs expected to be incurred. In 2013 these
provisions were increased by a further GBP200 million, in respect
of matters affecting the Retail, Commercial and Wealth and Asset
Finance businesses, bringing the total amount to GBP300 million, of
which GBP75 million had been utilised at 31 December 2013. This
includes a fine of GBP28 million from the FCA following an
investigation into its historic systems and controls governing
legacy incentive schemes for branch advisors.
Other provisions also included GBP75 million recognised in the
first half of 2013 for claims relating to policies issued by
Clerical Medical Insurance Group Limited in Germany, bringing the
total provision to GBP400 million, of which GBP246 million remains
unutilised at 31 December 2013.
Other items
The Group recognised a charge for other statutory items of
GBP499 million in the period, compared to a charge of GBP232
million in 2012. This comprises a charge for the amortisation of
intangible assets of GBP395 million, and a charge of GBP104 million
as a result of changes to early retirement and commutation factors
in two of the Group's principal defined benefit schemes (2012:
GBP250 million gain related to a change in policy in respect of
discretionary pension increases).
Taxation
The tax charge for 2013 was GBP1,217 million. This reflected a
higher effective tax rate than the UK statutory rate primarily due
to an additional tax charge arising from the impact on the net
deferred tax asset of the reductions in UK corporation tax rate to
21 per cent from 1 April 2014 and 20 per cent from 1 April 2015;
the write-down of a deferred tax asset in respect of Australian
trading losses following the sale of our Australian operations; and
policyholder taxes. We expect the effective tax rate in future
periods will be in the range of 20-25 per cent, subject to
policyholder tax and any possible effect from disposals such as
Verde.
Risk-weighted assets and capital ratios
At 31 Dec At 31 Dec(1) Change
2013 2012 %
Core risk-weighted assets GBP224.9bn GBP237.4bn (5)
Non-core risk-weighted assets GBP39.0bn GBP72.9bn (47)
Total risk-weighted assets GBP263.9bn GBP310.3bn (15)
Core tier 1 capital ratio 14.0% 12.0% 2.0pp
Tier 1 capital ratio 14.5% 13.8% 0.7pp
Total capital ratio 20.8% 17.3% 3.5pp
Pro forma fully loaded risk-weighted
assets(2) GBP271.9bn GBP321.1bn (15)
Pro forma fully loaded common equity
tier 1 ratio(2) 10.3% 8.1% 2.2pp
Pro forma fully loaded CRD IV leverage
ratio(2,3) 4.1% 3.8% 0.3pp
Pro forma fully loaded Basel III leverage
ratio (2014 rules)(2,3,4) 4.5%
Fully loaded risk-weighted assets GBP271.1bn GBP321.1bn (16)
Fully loaded common equity tier 1 ratio 10.0% 8.1% 1.9pp
Fully loaded CRD IV leverage ratio(3) 4.0% 3.8% 0.2pp
Fully loaded Basel III leverage ratios
(2014 rules)(3,4) 4.4%
(1) Comparatives have not been restated to reflect the implementation
of IAS 19R and IFRS 10.
(2) Pro forma ratios include the benefit of the announced sales of
Heidelberger Leben, Scottish Widows Investment Partnership and
Sainsbury's Bank.
(3) Includes the full value of tier 1 instruments reported under the
prevailing rules as at 31 December 2013.
(4) Estimated in accordance with January 2014 revised Basel III leverage
ratio framework.
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
(continued)
We have significantly strengthened the Group's capital ratios in
the year. The Group's pro forma fully loaded common equity tier 1
(CET1) ratio has increased to 10.3 per cent from 8.1 per cent at 31
December 2012. The improvement was driven by capital generation in
the core business, the decrease in risk-weighted assets from
non-core asset reductions, improving economic conditions and a
number of management actions. These management actions included the
disposal of St. James's Place, the announced disposals of Scottish
Widows Investment Partnership and Heidelberger Leben, the sale of a
US residential mortgage-backed security (RMBS) portfolio and a
number of overseas businesses as well as dividends of GBP2.2
billion from the Insurance business to the Group. This improvement
in the capital ratio was partially offset by charges for legacy
items, losses on disposal of non-core assets, and other statutory
items including the effects of changes to pension accounting and
the costs of Simplification and Verde.
The Group's total capital ratio under prevailing rules improved
to 20.8 per cent, with GBP25.4 billion of tier 1 and tier 2
securities contributing to the GBP54.8 billion capital base.
The Group's pro forma fully loaded CRD IV leverage ratio,
including tier 1 capital, increased to 4.1 per cent from 3.8 per
cent at the end of 2012 and to 3.4 per cent from 3.1 per cent
excluding tier 1 capital. In January 2014 the Basel Committee
published a revised Basel III definition of leverage ratio, and we
anticipate that CRD IV will be amended in due course to align with
this definition. As at 31 December 2013 the Group's pro forma Basel
III leverage ratio was 4.5 per cent including tier 1 capital, and
3.8 per cent excluding tier 1 capital. Both of these ratios exceed
the Basel Committee's proposed minimum of 3 per cent applicable
from 2018.
Given its improved capital strength the Group will no longer
seek to fund the payment of coupons on certain hybrid capital
securities through the issuance of equity.
In addition, the PRA has now confirmed that it will consider the
Group's application to make dividend payments in line with its
normal procedures for other banks. In arriving at this assessment,
the PRA considered the Group's financial plans including any
actions contained therein. The PRA's assessment was made in the
context of previous announcements as to UK regulatory capital
targets and expectations, including the PRA's news release on
capital standards issued on 29 November 2013. Subject to a return
to sustainable profitability and there being no major unexpected
changes in the Group's business outlook or regulatory requirements,
the Board expects that it will apply to the PRA in the second half
of 2014 to restart dividend payments.
Funding and liquidity
At 31 Dec At 31 Dec Change
2013 2012(1) %
Core loans and advances to customers(2) GBP436.9bn GBP425.3bn 3
Funded assets GBP510.2bn GBP538.7bn (5)
Non-core assets GBP63.5bn GBP98.4bn (35)
Non-retail non-core assets GBP24.7bn GBP48.5bn (49)
Customer deposits(3) GBP438.3bn GBP422.5bn 4
Wholesale funding GBP137.6bn GBP169.6bn (19)
Wholesale funding <1 year maturity GBP44.2bn GBP50.6bn (13)
Of which money-market funding <1 year
maturity(4) GBP21.3bn GBP25.0bn (15)
Loan to deposit ratio 113% 121% (8)pp
Core loan to deposit ratio 100% 101% (1)pp
Primary liquid assets GBP89.3bn GBP87.6bn 2
(1) Restated to reflect the implementation of IAS 19R and IFRS 10.
See page 123.
(2) Excludes reverse repos of GBP0.1 billion (31 December 2012: GBP5.1
billion).
(3) Excludes repos of GBP3.0 billion (31 December 2012: GBP4.4 billion)
(all core).
(4) Excludes balances relating to margins of GBP2.2 billion (31 December
2012: GBP4.5 billion) and settlement accounts of GBP1.3 billion
(31 December 2012: GBP1.5 billion).
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
(continued)
During 2013, lending to core customers increased by GBP11.6
billion to GBP436.9 billion with all banking divisions returning to
growth. Customer deposits grew by GBP15.8 billion to GBP438.3
billion, with the core loan to deposit ratio improving to 100 per
cent. The Group loan to deposit ratio also improved, falling to 113
per cent, reflecting the reduction in the
non-core asset portfolio and associated wholesale funding.
Non-core assets were GBP63.5 billion at December 2013, 35 per
cent lower than at the end of 2012. Non-core asset reductions
included GBP6.6 billion in Australia as well as GBP6.7 billion in
UK commercial real estate and GBP2.7 billion in the shipping
portfolio. The higher risk non-retail element of the portfolio
reduced by GBP23.8 billion, or 49 per cent, in the year to GBP24.7
billion, and is expected to reduce to around GBP15 billion by the
end of 2014. The average risk weighting of the non-core portfolio
reduced from 74 per cent to 61 per cent. Non-core asset reductions
continue to be capital accretive overall, releasing approximately
GBP2.6 billion of capital in the year.
The non-core portfolio now poses substantially less risk to the
Group. As a result, approximately GBP31 billion of retail
non-core assets including our UK and Dutch mortgage portfolios
and the majority of the UK Asset Finance business will be
reabsorbed into the core business, with the remaining non-core
assets managed in a separate run-off unit. We will no longer report
on a core/non-core basis in 2014, but will continue to report
separately on those assets that remain in
run-off.
The Group's wholesale funding requirement has reduced given the
reduction in non-core assets and continued growth in customer
deposits in the year. Together these have enabled us to reduce
wholesale funding by GBP32 billion and, as reported at the half
year, repay the full amount of the Long Term Refinancing Operation
funding from the European Central Bank of EUR13.5 billion ahead of
schedule. The Group has so far committed over GBP37 billion of
gross new lending to British customers under the Funding for
Lending Scheme (FLS) with drawings under the scheme amounting to
GBP8 billion as at the end of 2013. The Group will continue to have
a modest wholesale funding requirement and we anticipate that in
2014 this will be in the range of GBP5-10 billion of public
issuance, while the Group's aggregate usage of wholesale funding is
expected to further reduce in 2014.
The Group's liquidity position remains strong, with primary
liquid assets of GBP89.3 billion at 31 December 2013 (31 December
2012: GBP87.6 billion). Primary liquid assets represent
approximately 4.2 times our money-market funding with a maturity of
less than one year, and are approximately 2.0 times our short-term
wholesale funding, providing a substantial buffer in the event of
market dislocation. In addition to primary liquid assets, the Group
has significant secondary liquidity holdings of GBP105.4 billion
(31 December 2012: GBP117.1 billion). Total liquid assets represent
approximately 4.4 times our wholesale funding with a maturity of
less than one year.
The Liquidity Coverage Ratio (LCR) is expected to become the
Pillar 1 standard for liquidity in the UK in 2015, and the PRA has
the ability to impose firm-specific liquidity requirements. The
European Commission is to adopt further legislation by 30 June 2014
to specify the definition, calibration, calculation, and phase-in
of the LCR for implementation in 2015. The Group expects to meet
the new requirements ahead of the implementation dates.
The significant reduction of non-core assets and the balance
sheet strengthening undertaken in the year supports the Group in
becoming a lower risk bank with a stronger and more sustainable
earnings outlook.
Conclusion
The Group has delivered improvements in underlying profits and
core returns with growth in core lending, underlying income and net
interest margin, and further reductions in costs and impairments.
The continued progress in reducing balance sheet risk and the
strengthening of the Group's capital ratios leaves us well
positioned to continue growing our core business as we support the
UK economic recovery.
George Culmer
Group Finance Director
UNDERLYING BASIS - SEGMENTAL ANALYSIS
Wealth, Group
Asset Operations
Commercial Finance and Central
2013 Retail Banking and Int'l Insurance items Group
GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 7,536 2,426 870 (103) 156 10,885
Other income 1,410 2,708 1,809 2,236 113 8,276
Insurance claims - - - (356) - (356)
------- ---------- ---------- --------- ------------ -------
Total underlying income 8,946 5,134 2,679 1,777 269 18,805
Total costs (4,096) (2,392) (1,991) (687) (469) (9,635)
Impairment (1,101) (1,167) (730) - (6) (3,004)
----------
Underlying profit (loss) 3,749 1,575 (42) 1,090 (206) 6,166
Banking net interest
margin 2.23% 1.95% 2.20% 2.12%
Asset quality ratio 0.32% 0.83% 1.79% 0.57%
Return on risk-weighted
assets 4.11% 1.04% (0.13)% 2.14%
Key balance sheet items
at 31 Dec 2013 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Loans and advances
to customers(1) 341.9 126.4 24.2 2.7 495.2
Customer deposits(2) 269.0 123.5 45.8 - 438.3
------- ---------- ---------- ------------ -------
Total customer balances 610.9 249.9 70.0 2.7 933.5
------- ---------- ---------- ------------ -------
Risk-weighted assets 85.7 138.5 25.9 13.8 263.9
2012
GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 7,195 2,206 799 (78) 213 10,335
Other income 1,462 2,932 2,043 2,294 (315) 8,416
Insurance claims - - - (365) - (365)
------- ------- ------- ----- ----- --------
Total underlying income 8,657 5,138 2,842 1,851 (102) 18,386
Total costs (4,199) (2,516) (2,291) (744) (374) (10,124)
Impairment (1,270) (2,946) (1,480) - (1) (5,697)
-------
Underlying profit (loss) 3,188 (324) (929) 1,107 (477) 2,565
Banking net interest
margin 2.08% 1.58% 1.65% 1.93%
Asset quality ratio 0.36% 1.85% 3.12% 1.02%
Return on risk-weighted
assets 3.21% (0.18)% (2.31)% 0.77%
Key balance sheet items
at 31 Dec 2012 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Loans and advances
to customers(1) 343.3 134.7 33.4 0.7 512.1
Customer deposits(2) 260.8 109.7 51.9 0.1 422.5
------- ------- ------- ----- --------
Total customer balances 604.1 244.4 85.3 0.8 934.6
------- ------- ------- ----- --------
Risk-weighted assets 95.5 165.2 36.2 13.4 310.3
(1) Excludes reverse repos.
(2) Excludes repos.
UNDERLYING BASIS - CORE BUSINESS
Wealth, Group
Asset Operations
Commercial Finance and Central
2013 Retail Banking and Int'l Insurance items Group
GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 7,525 2,444 574 (107) 202 10,638
Other income 1,400 2,480 1,748 2,221 113 7,962
Insurance claims - - - (356) - (356)
------- ---------- ---------- --------- ------------ -------
Total underlying income 8,925 4,924 2,322 1,758 315 18,244
Total costs (4,092) (2,307) (1,658) (670) (422) (9,149)
Impairment (1,059) (424) (32) - (6) (1,521)
Underlying profit (loss) 3,774 2,193 632 1,088 (113) 7,574
Banking net interest
margin 2.40% 2.53% 8.91% 2.49%
Asset quality ratio 0.33% 0.39% 0.50% 0.35%
Return on risk-weighted
assets 4.55% 1.74% 6.67% 3.26%
Key balance sheet items
at 31 Dec 2013 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Loans and advances
to customers(1) 318.2 109.5 6.5 2.7 436.9
Customer deposits(2) 269.0 121.0 45.6 - 435.6
------- ---------- ---------- ------------ -------
Total customer balances 587.2 230.5 52.1 2.7 872.5
------- ---------- ---------- ------------ -------
Risk-weighted assets 78.8 123.3 9.0 13.8 224.9
2012
GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 7,163 2,242 312 (87) 238 9,868
Other income 1,446 2,442 1,964 2,245 (315) 7,782
Insurance claims - - - (365) - (365)
------- ------- ------- ----- ----- -------
Total underlying income 8,609 4,684 2,276 1,793 (77) 17,285
Total costs (4,193) (2,232) (1,795) (710) (324) (9,254)
Impairment (1,192) (704) (22) - (1) (1,919)
Underlying profit (loss) 3,224 1,748 459 1,083 (402) 6,112
Banking net interest
margin 2.25% 2.22% 5.90% 2.32%
Asset quality ratio 0.37% 0.67% 0.45% 0.44%
Return on risk-weighted
assets 3.60% 1.36% 5.07% 2.54%
Key balance sheet items
at 31 Dec 2012 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Loans and advances
to customers (1) 317.3 102.0 5.3 0.7 425.3
Customer deposits(2) 260.8 107.2 51.0 0.1 419.1
------- ------- ------- ----- -------
Total customer balances 578.1 209.2 56.3 0.8 844.4
------- ------- ------- ----- -------
Risk-weighted assets 86.6 127.8 9.6 13.4 237.4
(1) Excludes reverse repos.
(2) Excludes repos.
UNDERLYING BASIS - NON-CORE BUSINESS
Wealth, Group
Asset Operations
Commercial Finance and Central
2013 Retail Banking and Int'l Insurance items Group
GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 11 (18) 296 4 (46) 247
Other income 10 228 61 15 - 314
Total underlying income 21 210 357 19 (46) 561
Total costs (4) (85) (333) (17) (47) (486)
Impairment (42) (743) (698) - - (1,483)
Underlying (loss)
profit (25) (618) (674) 2 (93) (1,408)
Banking net interest
margin 0.07% 0.14% 0.92% 0.41%
Asset quality ratio 0.17% 2.32% 2.03% 1.61%
Key balance sheet
items
at 31 Dec 2013 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Total non-core assets 23.7 21.3 18.2 0.3 - 63.5
Risk-weighted assets 6.9 15.2 16.9 39.0
2012 GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 32 (36) 487 9 (25) 467
Other income 16 490 79 49 - 634
Total underlying income 48 454 566 58 (25) 1,101
Total costs (6) (284) (496) (34) (50) (870)
Impairment (78) (2,242) (1,458) - - (3,778)
----- ------- ------- ----- ----- -------
Underlying (loss)
profit (36) (2,072) (1,388) 24 (75) (3,547)
Banking net interest
margin 0.12% 0.35% 1.13% 0.55%
Asset quality ratio 0.29% 4.28% 3.42% 3.08%
Key balance sheet
items
at 31 Dec 2012 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Total non-core assets 26.0 43.0 28.9 0.5 - 98.4
Risk-weighted assets 8.9 37.4 26.6 72.9
UNDERLYING BASIS - QUARTERLY INFORMATION
Quarter Quarter Quarter Quarter Quarter
ended ended ended ended ended
31 Dec 30 Sept 30 June 31 Mar 31 Dec
2013 2013 2013 2013 2012
GBPm GBPm GBPm GBPm GBPm
Group
Net interest income 2,918 2,761 2,653 2,553 2,545
Other income 1,991 1,879 1,984 2,422 2,040
Insurance claims (123) (85) (62) (86) (30)
------- -------- -------- ------- -------
Total underlying income 4,786 4,555 4,575 4,889 4,555
Total underlying income
excl. SJP 4,672 4,537 4,525 4,409 4,448
Total costs (2,525) (2,361) (2,341) (2,408) (2,587)
Impairment (521) (670) (811) (1,002) (1,278)
------- -------- -------- ------- -------
Underlying profit 1,740 1,524 1,423 1,479 690
------- -------- -------- ------- -------
Banking net interest
margin 2.29% 2.17% 2.06% 1.96% 1.94%
Asset quality ratio 0.40% 0.51% 0.57% 0.80% 0.96%
Return on risk-weighted
assets 2.55% 2.14% 1.93% 1.96% 0.87%
Core
Net interest income 2,896 2,711 2,579 2,452 2,487
Other income 1,971 1,803 1,923 2,265 1,932
Insurance claims (123) (85) (62) (86) (30)
------- ------- ------- ------- -------
Total underlying income 4,744 4,429 4,440 4,631 4,389
Total underlying income
excl. SJP 4,630 4,411 4,390 4,151 4,282
Total costs (2,429) (2,252) (2,199) (2,269) (2,341)
Impairment (290) (324) (416) (491) (568)
------- ------- ------- ------- -------
Underlying profit 2,025 1,853 1,825 1,871 1,480
------- ------- ------- ------- -------
Banking net interest
margin 2.64% 2.54% 2.43% 2.34% 2.33%
Asset quality ratio 0.23% 0.32% 0.34% 0.51% 0.50%
Return on risk-weighted
assets 3.55% 3.19% 3.11% 3.20% 2.47%
Non-core
Net interest income 22 50 74 101 58
Other income 20 76 61 157 108
Total underlying income 42 126 135 258 166
Total costs (96) (109) (142) (139) (246)
Impairment (231) (346) (395) (511) (710)
----- ----- ----- ----- -----
Underlying loss (285) (329) (402) (392) (790)
----- ----- ----- ----- -----
Banking net interest
margin 0.40% 0.41% 0.37% 0.44% 0.37%
Asset quality ratio 1.29% 1.41% 1.62% 2.03% 2.80%
DIVISIONAL HIGHLIGHTS
RETAIL
Progress against strategic initiatives
-- Significant progress made in our strategy to be the best bank
for customers in the UK with continued focus on meeting the needs
of our customers through investment in our products, service and
distribution.
-- Further enhancements delivered to simplify the business with
customers now benefitting from improvements to everyday services
resulting in service scores increasing 11 per cent and complaints
down to 1.0 per 1,000 accounts (excluding PPI), the lowest of any
major UK bank.
-- The iconic Lloyds Bank brand re-launched and revitalised; and
TSB created as a new challenger bank on the
High Street.
-- Continued innovation and investment to refresh our core
product range, launching new propositions such as the Lloyds Bank
and Bank of Scotland Loyalty Loan, Help to Buy, the Lloyds Bank
Choice Rewards credit card and our seven-day switching service,
with particularly strong net 'switcher in' performance being
delivered by our challenger brand, Halifax.
-- New everyday banking propositions launched featuring cashback
services that help customers to make more of their money whilst
rewarding loyalty.
-- Continued development of our multi-channel offering,
including enhancements to our digital proposition. Active online
customer base now over 10.5 million, with over four million
customers regularly using our mobile
banking services.
-- Exceeded lending commitment to new-to-market buyers, helping
one-in-four to buy their first home and exceeding our first time
buyer lending target of 60,000 new mortgages by over 20,000 at
year-end. In 2014, we have committed to lend around GBP10 billion
to approximately 80,000 first-time buyer customers.
-- Core loan book returned to growth in the third quarter,
supported by strong performance in our mortgage portfolio.
-- Continued to support local communities, through our
contribution to Group programmes and the personal commitment of
colleagues involved in helping local organisations and
charities.
Financial performance
-- Underlying profit increased 18 per cent to GBP3,749 million,
driven by improved margins, reduced costs and
favourable impairments.
-- Return on risk-weighted assets increased to 4.11 per cent
from 3.21 per cent in 2012, driven primarily by favourable income
and continuing effective credit risk management.
-- Net interest incomeincreased 5 per cent. Margin performance
was strong, increasing 15 basis points to 2.23 per cent in 2013
from 2.08 per cent in 2012, driven by improved deposit mix and a
favourable funding environment, more than offsetting reduced
lending rates.
-- Other income down 4 per cent, with lower income from
bancassurance and protection following the Retail Distribution
Review in 2012, partially offset by the benefit of a revised
commission arrangement in relation to the home
insurance book.
-- Total costs down 2 per cent to GBP4,096 million, primarily as
a result of the Simplification programme and ongoing cost
management activity.
-- Impairment reduced 13 per cent to GBP1,101 million, with the
unsecured book remaining stable and secured charges decreasing
largely due to lower impaired loan balances.
Balance sheet
-- Loans and advances to customers were broadly in line with
2012 at GBP341.9 billion. Gross new mortgage lending increased
GBP10.7 billion to GBP36.9 billion, contributing to core lending
balances returning to growth in the third quarter, increasing
further in the fourth quarter.
-- Customer deposits increased 3 per cent to GBP269.0 billion.
Relationship balances (including Lloyds, Halifax, BoS and TSB
branded Personal Current Accounts) increased 6 per cent in 2013,
ahead of market growth, driven by the effect of our strong product
offerings, particularly in the Lloyds Bank brand.
-- Risk-weighted assets decreased by GBP9.8 billion to GBP85.7
billion driven by improving house prices and an improvement in the
credit quality of retail assets.
RETAIL (continued)
2013 2012(1) Change
GBPm GBPm %
Net interest income 7,536 7,195 5
Other income 1,410 1,462 (4)
------- -------
Total underlying income 8,946 8,657 3
Total costs (4,096) (4,199) 2
Impairment (1,101) (1,270) 13
------- -------
Underlying profit 3,749 3,188 18
------- -------
Banking net interest margin 2.23% 2.08% 15bp
Asset quality ratio 0.32% 0.36% (4)bp
Return on risk-weighted assets 4.11% 3.21% 90bp
At At
31 Dec 31 Dec
Key balance sheet items 2013 2012 Change
GBPbn GBPbn %
Loans and advances to customers(2) 341.9 343.3 -
Customer deposits(3) 269.0 260.8 3
------- -------
Total customer balances 610.9 604.1 1
------- -------
Risk-weighted assets 85.7 95.5 (10)
Core Non-core
------------------------ --------------------
2013 2012(1) Change 2013 2012 Change
GBPm GBPm % GBPm GBPm %
Net interest income 7,525 7,163 5 11 32 (66)
Other income 1,400 1,446 (3) 10 16 (38)
------- ------- ----- -----
Total underlying income 8,925 8,609 4 21 48 (56)
Total costs (4,092) (4,193) 2 (4) (6) 33
Impairment (1,059) (1,192) 11 (42) (78) 46
------- ------- ----- -----
Underlying profit (loss) 3,774 3,224 17 (25) (36) 31
------- ------- ----- -----
Banking net interest
margin 2.40% 2.25% 15bp 0.07% 0.12% (5)bp
Asset quality ratio 0.33% 0.37% (4)bp 0.17% 0.29% (12)bp
Return on risk-weighted
assets 4.55% 3.60% 95bp
At At At At
31 Dec 31 Dec 31 Dec 31 Dec
Key balance sheet items 2013 2012 Change 2013 2012 Change
GBPbn GBPbn % GBPbn GBPbn %
Loans and advances to
customers(2) 318.2 317.3 - 23.7 26.0 (9)
Customer deposits(3) 269.0 260.8 3 - - -
------- ------- ------- -------
Total customer balances 587.2 578.1 2 23.7 26.0 (9)
------- ------- ------- -------
Total non-core assets 23.7 26.0 (9)
Risk-weighted assets 78.8 86.6 (9) 6.9 8.9 (22)
(1) Restated.
(2) Excludes reverse repos.
(3) Excludes repos.
COMMERCIAL BANKING
Progress against strategic initiatives
-- Continue to execute our strategy to be the best bank for clients.
-- Reshaped our Small and Medium-sized Enterprises (SME) and Mid
Markets segments to better serve client needs and improved
relationship returns in Global Corporates and Financial
Institutions through our continued focus on capital
optimisation.
-- Strengthened the balance sheet and funding position:
increasing the volume and quality of deposits within Transaction
Banking; and de-risking the balance sheet by reducing non-core
assets by 50 per cent and risk-weighted assets by 59 per cent,
particularly in Corporate Real Estate and European exposures.
-- Continued to invest in our core infrastructure, with ongoing
benefits from the Simplification programme and tight cost
management enabling significant upgrades to deliver scalability and
functionality in our Transaction Banking and Markets
businesses.
-- Simplified our geographic footprint by exiting Spain and
Australia as we focus on our UK and UK-linked clients, in addition
to improving service delivery to frontline staff and end-to-end
client support by streamlining infrastructure
and processes.
-- Played a prominent role in supporting the UK economywhilst
maintaining a prudent risk appetite: net growth in SME lending of 6
per cent in the last 12 months, against market contraction of 3 per
cent; 80 per cent acceptance rate on SME loan and overdraft
applications; supported approximately 120,000 business start-ups;
committed over GBP36 billion to UK customers through Funding for
Lending since the start of the scheme; committed over GBP1.3
billion to UK manufacturing in the year to end September 2013,
ahead of target; and helped clients access GBP8 billion of
non-bank lending.
-- Played a leading role in the development of the UK retail
bond market, becoming a market maker on the London Stock Exchange
for retail bond investors, providing the market with continuous
pricing in bonds and gilts.
-- Awarded Business Bank of the Year at the FD's Excellence Awards for the ninth year in a row.
Financial performance
-- Returned to profitability with underlying profit of GBP1,575
million driven by the significant reduction in impairments as a
result of lower charges across the core and non-core portfolios,
increased core income partially offset by lower
non-core income from our capital accretive asset reduction
strategy.
-- Core underlying income grew by 5 per cent to GBP4,924 million
driven by SME, Mid Markets and Financial Institutions underpinned
by strong performances in Transaction Banking and LDC and a
resilient performance in Financial Markets and Capital Markets
products. Income continues to be well balanced across the four
client segments.
-- Core underlying profit increased by 25 per cent to GBP2,193
million due to increased income and lower impairment charges. Core
return on risk-weighted assets increased by 38 basis points to 1.74
per cent.
-- Core net interest margin increased 31 basis points through
disciplined pricing of new business, in addition to reduced funding
costs driven by increased high quality deposits which contributed
to a reduction in the Group's requirement for wholesale
funding.
-- Core asset quality ratio improved 28 basis points reflecting
better quality origination with the low interest rate environment
helping to maintain defaults at a lower level. Non-core asset
quality ratio decreased 196 basis points reflecting disciplined
management and deleveraging of the portfolio.
Balance sheet
-- Core lending increased by 7 per cent driven by a 6 per cent
increase in SME, and a strong performance in Mid Markets and Global
Corporates resulting in an 8 per cent increase in Other Commercial
Banking. This has been achieved whilst reducing risk-weighted
assets resulting in improved capital efficiency.
-- Core customer deposits increased by 13 per cent, with
increases in all client segments and growth in high quality
deposits reflecting the strength of the customer franchise.
-- Core risk-weighted assets decreased 4 per cent as a result of
selective participation, specifically in Global Corporates, in
addition to active portfolio management across all client segments
to reduce risk-weighted assets in the lending and Financial Markets
businesses.
-- Non-core loans and advances to customers decreased by GBP15.8
billion, as a result of the Group's capital accretive asset
reduction strategy.
COMMERCIAL BANKING (continued)
2013 2012(1) Change
GBPm GBPm %
Net interest income 2,426 2,206 10
Other income 2,708 2,932 (8)
------- -------
Total underlying income 5,134 5,138 -
Total costs (2,392) (2,516) 5
Impairment (1,167) (2,946) 60
------- -------
Underlying profit (loss) 1,575 (324)
------- -------
Banking net interest margin 1.95% 1.58% 37bp
Asset quality ratio 0.83% 1.85% (102)bp
Return on risk-weighted assets 1.04% (0.18)% 122bp
At At
31 Dec 31 Dec
Key balance sheet items 2013 2012 Change
GBPbn GBPbn %
Loans and advances to customers(2) 126.4 134.7 (6)
Debt securities and available-for-sale
financial assets 4.1 9.5 (57)
------- -------
130.5 144.2 (10)
------- -------
Customer deposits(3) 123.5 109.7 13
Risk-weighted assets 138.5 165.2 (16)
Core Non-core
------------------------ -----------------------
2013 2012(1) Change 2013 2012 Change
GBPm GBPm % GBPm GBPm %
Net interest income 2,444 2,242 9 (18) (36) 50
Other income 2,480 2,442 2 228 490 (53)
------- ------- ----- -------
Total underlying income 4,924 4,684 5 210 454 (54)
Total costs (2,307) (2,232) (3) (85) (284) 70
Impairment (424) (704) 40 (743) (2,242) 67
------- ------- ----- -------
Underlying profit (loss) 2,193 1,748 25 (618) (2,072) 70
------- ------- ----- -------
Banking net interest
margin 2.53% 2.22% 31bp 0.14% 0.35% (21)bp
Asset quality ratio 0.39% 0.67% (28)bp 2.32% 4.28% (196)bp
Return on risk-weighted
assets 1.74% 1.36% 38bp
At At At At
31 Dec 31 Dec 31 Dec 31 Dec
Key balance sheet items 2013 2012 Change 2013 2012 Change
GBPbn GBPbn % GBPbn GBPbn %
SME(4) 28.2 26.6 6
Other(5) 81.3 75.4 8
------- -------
Loans and advances to
customers(2) 109.5 102.0 7 16.9 32.7 (48)
Customer deposits(3) 121.0 107.2 13 2.5 2.5 -
------- ------- ------- -------
Total customer balances 230.5 209.2 10 19.4 35.2 (45)
------- ------- ------- -------
Total non-core assets 21.3 43.0 (50)
Risk-weighted assets 123.3 127.8 (4) 15.2 37.4 (59)
(1) Restated.
(2) Excludes reverse repos.
(3) Excludes repos.
(4) SME comprises clients with turnover of up to GBP25 million in
line with lending data supplied by the Bank of England.
(5) Includes Mid Markets, Global Corporates, Financial Institutions
and Other.
WEALTH, ASSET FINANCE AND INTERNATIONAL
Progress against strategic initiatives
-- International presence reduced to nine countries, achieving
our target of fewer than 10 by the end of 2014.
-- Wealth improved client service and accessibility through a
new Private Banking Client Centre and the roll out of a new point
of sale system.
-- Asset Finance continued to invest in infrastructure and
growth initiatives, resulting in 3.2 per cent fleet growth for Lex
Autolease and a 28.6 per cent increase in new business volumes for
Black Horse motor finance.
-- Reinforced the focus on our banking businesses through the
announced sale of Scottish Widows Investment Partnership and the
sales of shares in St. James's Place.
-- Total cost reductions of 13 per cent driven by simplification
initiatives and disposals enabled reinvestment for future growth
opportunities.
Financial performance
-- Losses reduced by 95 per cent to GBP42 million driven by
lower impairments in non-core, mainly in Ireland, and strong
profitable growth in the core business.
-- Core underlying profits increased by 38 per cent to GBP632
million (86 per cent excluding St. James's Place) driven by strong
income growth in Wealth and Asset Finance, and cost savings.
-- Core return on risk-weighted assets increased from 5.07 per
cent to 6.67 per cent, largely as a result of repricing of
liabilities.
-- Net interest income in the core business increased by 84 per
cent driven by strong and improving margins in Wealth and in the
Online Deposits businesses within Asset Finance, and by growth in
Black Horse motor finance volumes.
-- Core margin improved by 301 basis points from 5.90 per cent
to 8.91 per cent driven by deposit pricing.
-- Core other income (excluding St. James's Place and other
disposals from the International portfolio) was broadly flat with
growth in Asset Finance and new Wealth revenue streams offset by a
reduction in trail income following implementation of the Retail
Distribution Review.
-- Total cost reductions of 13 per cent (8 per cent excluding
St. James's Place). Savings from the run-down of non-core
businesses, from simplification of the organisational structure in
both Wealth and Asset Finance, and optimisation of our direct
channel customer service in Wealth, enabled investment in building
our customer propositions in
UK Wealth and Asset Finance.
-- Impairment charges reduced by GBP750 million to GBP730
million, including a reduction of GBP637 million in the Irish
portfolio.
Balance sheet
-- Core loans and advances to customers increased by 23 per cent
driven mainly by Asset Finance as a result of continued growth in
UK motor finance business.
-- Non-core assets reduced by 37 per cent following the sale of
our Australian Asset Finance and Spanish retail businesses, and
other reductions in our non-core portfolio mainly within
Ireland.
-- Customer deposits reduced by 12 per cent, driven byreductions
in our international footprint within Wealth, and attrition in
customer balances within Online Deposits, mainly driven by deposit
repricing.
-- Risk-weighted assets reduced by 28 per cent driven by sales
and repayments of non-core assets within Asset Finance and
Ireland.
-- Funds under management (excluding St. James's Place and other
disposals from the International portfolio) have grown by 2 per
cent largely as a result of stronger equity markets.
WEALTH, ASSET FINANCE AND INTERNATIONAL (continued)
Excluding St. James's
Place
-------------------------
2013 2012(1) Change 2013 2012(1) Change
GBPm GBPm % GBPm GBPm %
Net interest income 870 799 9 869 795 9
Other income 1,809 2,043 (11) 1,688 1,718 (2)
------- ------- ------- -------
Total underlying income 2,679 2,842 (6) 2,557 2,513 2
Total costs (1,991) (2,291) 13 (1,947) (2,123) 8
Impairment (730) (1,480) 51 (730) (1,480) 51
------- ------- ------- -------
Underlying loss (42) (929) 95 (120) (1,090) 89
------- ------- ------- -------
Underlying profit (loss) by
business:
Wealth 338 302 12 260 141 84
Asset Finance 505 322 57 505 322 57
International (885) (1,553) 43 (885) (1,553) 43
------- ------- ------- -------
(42) (929) 95 (120) (1,090) 89
------- ------- ------- -------
Banking net interest margin 2.20% 1.65% 55bp 2.20% 1.65% 55bp
Asset quality ratio 1.79% 3.12% (133)bp 1.79% 3.12% (133)bp
Return on risk-weighted assets (0.13)% (2.31)% 218bp (0.38)% (2.71)% (233)bp
At 31 At 31
Dec Dec
Key balance sheet items 2013 2012 Change
GBPbn GBPbn %
Loans and advances to customers(2) 24.2 33.4 (28)
Customer deposits(2) 45.8 51.9 (12)
Operating lease assets 2.8 2.8
----- -----
Total customer balances 72.8 88.1 (17)
----- -----
Risk-weighted assets 25.9 36.2 (28)
Core Non-core
------------------------ -----------------------
2013 2012(1) Change 2013 2012 Change
GBPm GBPm % GBPm GBPm %
Net interest income 574 312 84 296 487 (39)
Other income 1,748 1,964 (11) 61 79 (23)
------- ------- ----- -------
Total underlying income 2,322 2,276 2 357 566 (37)
Total costs (1,658) (1,795) 8 (333) (496) 33
Impairment (32) (22) (45) (698) (1,458) 52
------- ------- ----- -------
Underlying profit (loss) 632 459 38 (674) (1,388) (51)
------- ------- ----- -------
Underlying profit excluding
St. James's Place(3) 554 298 86
Banking net interest margin 8.91% 5.90% 301bp 0.92% 1.13% (21)bp
Asset quality ratio 0.50% 0.45% 5bp 2.03% 3.42% (139)bp
Return on risk-weighted assets 6.67% 5.07% 160bp
At At At At
31 Dec 31 Dec 31 Dec 31 Dec
Key balance sheet items 2013 2012 Change 2013 2012 Change
GBPbn GBPbn % GBPbn GBPbn %
Loans and advances to customers(2) 6.5 5.3 23 17.7 28.1 (37)
Customer deposits(2) 45.6 51.0 (11) 0.2 0.9 (78)
Operating lease assets 2.8 2.7 4 - 0.1
------- ------- ------- -------
Total customer balances 54.9 59.0 (7) 17.9 29.1 (38)
------- ------- ------- -------
Total non-core assets 18.2 28.9 (37)
Risk-weighted assets 9.0 9.6 (6) 16.9 26.6 (36)
Funds under management 151.8 188.6 (20) - 0.5
(1) Restated.
(2) Excludes reverse repos on loans and advances and excluding repos
on deposits.
(3) The gain relating to the sales of shares in St. James's Place
is included in Central items.
INSURANCE
Progress against strategic initiatives
-- Insurance is a core part of Lloyds Banking Group and has
delivered underlying profits in excess of GBP1 billion for each of
the last five years, enabling the payment of a total of GBP5.1
billion of dividends to the Group since 2009.
-- The Insurance business is focused on four key markets:
Pensions, Protection, Annuities and Home Insurance, where we
believe it can leverage its position as part of the Group with over
30 million retail customers, rich customer transaction data,
centres of best practice and top quality brands.
-- In Pensions, where we have over 1 million individual
customers and a significant number of Corporate customers
representing more than 1 million employees, we have so far
supported almost 300 major employers, representing about 60,000
employees, through auto enrolment, including many of the 17 per
cent of FTSE 350 companies
who have their corporate pension arrangements with Scottish
Widows, and we expect this to increase significantly
in 2014.
-- In Protection, we continued to progress development of our
intermediary proposition, leveraging our platform and capabilities
to extend this to our wealthier customers.
-- In Annuities, we began the delivery of our enhanced annuity
proposition, including extending this offering into the
intermediary channel and continued to support our annuity strategy
with the acquisition of attractive, higher yielding assets to match
long duration liabilities.
-- In Home Insurance, we invested in our proposition to improve
customer focus, for instance the introduction of a dedicated claims
advisor to each claimant has resulted in significantly faster
claims settlement.
-- We increased the focus on our UK business following the
agreed sale of our German life insurance business Heidelberger
Leben.
-- Following the agreed sale of Scottish Widows Investment
Partnership to Aberdeen Asset Management we look forward to the
long term strategic relationship that we will enter into with
Aberdeen and the potential benefits for our customers.
-- Capitalising on one of the most recognised brands in our
market sector, we relaunched the Scottish Widows brand in February
2014, demonstrating our continued commitment to being a leader in
the life planning and retirement market.
Financial performance
-- Underlying profit down 2 per cent to GBP1,090 million, due to
changes in intra group commission arrangements and the continued
run-off legacy creditor books within General Insurance, net of
lower costs and increased profit in UK Life and Pensions existing
business reflecting the net benefit from a number of assumption
changes. Return on equity up from 12 per cent to 13 per cent.
-- Generated GBP692 million of operating cash net of GBP285
million of cash invested in writing new business.
-- Costs improved by 8 per cent, reflecting the benefits of
simplifying our business model and processes.
-- IFRS new business margin reduced to 2.6 per cent due to
changes in the basis of taxation of life protection business.
-- Total UK LP&I sales down 1 per cent to GBP9,934 million
primarily due to the Group's decision to stop providing investment
advice to retail customers with savings below GBP100,000. Corporate
pensions grew by 21 per cent, reflecting the strength of our
proposition and the conversion of pipeline generated in the run up
to implementation of the Retail Distribution Review.
-- General Insurance Gross Written Premiums down by 8 per cent
to GBP1,307 million reflecting the effect of the closed creditor
book and as a result of our focus on value rather than volume on
the home insurance portfolio.
Capital
-- The strong underlying profitability and capitalisation of the
Insurance business has enabled us to remit GBP2.2 billion of
dividends to the Group during 2013 whilst maintaining a strong
capital base.
-- The estimated capital surplus for Pillar 1 is GBP2.9 billion
(Scottish Widows plc, GBP3.9 billion in 2012) and for IGD is GBP2.7
billion (Insurance Group, GBP3.7 billion in 2012) with the decrease
reflecting dividends paid during the year.
INSURANCE (continued)
2013 2012(1) Change
GBPm GBPm %
Net interest income (103) (78) (32)
Other income 2,236 2,294 (3)
Insurance claims (356) (365) 2
----- -------
Total underlying income 1,777 1,851 (4)
Total costs (687) (744) 8
-----
Underlying profit 1,090 1,107 (2)
----- -------
Operating cash generation 692 849 (18)
UK Life IFRS new business margin 2.6% 3.2% (60)bp
UK Life, pensions and investment sales
(PVNBP) 9,934 10,005 (1)
General Insurance total GWP 1,307 1,419 (8)
General Insurance combined ratio 77% 72% 5pp
Return on equity(2) 13% 12% 1pp
(1) Restated.
(2) 'Return on Equity' is the underlying profit less tax at the prevailing
UK Corporation tax rate divided by the average amount of the Group's
equity attributable to the Insurance business.
Profit by product group
2013 2012
-------------------------------------------------------------- -------
Pensions Protection General
& investments & annuities Insurance Other(1) Total Total
GBPm GBPm GBPm GBPm GBPm GBPm
New business income 276 139 - 16 431 519
Existing business income 599 132 - 92 823 791
Assumption changes and
experience variances (158) 302 - (78) 66 (31)
General Insurance income
net of claims - - 457 - 457 572
-------------- ------------ ----------- ---------- ------- -------
Total underlying income 717 573 457 30 1,777 1,851
Total costs (360) (128) (160) (39) (687) (744)
-------------- ------------ ----------- ---------- ------- -------
Underlying profit (loss)
2013 357 445 297 (9) 1,090 1,107
-------------- ------------ ----------- ---------- ------- -------
Underlying profit 2012(2) 404 289 409 5 1,107
(1) 'Other' includes the results of the European business in addition
to income from return on free assets, interest expense and certain
provisions.
(2) Full 2012 comparator tables for the profit and cash disclosures
can be found on the Lloyds Banking Group investor site.
New business income reduced by GBP88 million to GBP431 million
driven by reduced protection and annuities new business income
following changes to the basis of taxation on the life protection
business in January 2013. Pensions and investments new business
income increased slightly with a strong performance in corporate
pensions being largely offset by reduced investments volumes
following the Group's decision to stop providing investment advice
to retail customers with savings below GBP100,000.
Existing business income increased by GBP32 million largely due
to increased income from protection and annuities which benefited
from the increased returns on higher yielding assets. Pensions and
investments existing business income increased slightly with
increased income in pensions being largely offset by reduced income
on the declining savings and investments portfolio.
INSURANCE (continued)
Underlying profit in the protection and annuities business
included a benefit of GBP302 million largely as a result of changes
to long-term mortality and investment return assumptions which
included the benefits of investing in higher yielding assets to
match long duration liabilities. This was partly offset by a charge
of GBP158 million in the pensions and investments business driven
primarily by a revision of pensions lapse assumptions and allowance
for the impact of the Office of Fair Trading review on fairness of
legacy pension charges.
General Insurance income reduced by GBP115 million to GBP457
million primarily due to a GBP77 million impact of a revised
commission arrangement with Retail on the home insurance portfolio
in addition to the continued run off of legacy books.
Operating cash generation
In line with emerging industry practice we have introduced an
operating cash generation reporting metric. Operating cash is used
to fund new business generating future cash, to pay dividends to
Group, or is retained within the business to provide security for
policyholders and achieve our strategic objectives. For the
majority of products writing new business results in an outflow of
cash for new business origination and set up costs (including
commission). This cash outflow is recouped in subsequent years.
However some products, where the policyholder's initial investment
covers the cost of setting up the policy, do not require new
business funding.
Operating cash generation is derived from underlying profit by
removing the effect of movements in intangible
(non-cash) items and assumption changes. Intangible items
include the value of in-force life business, deferred acquisition
costs and deferred income reserves.
2013 2012
---------------------------------------------------------- -------
Pensions Protection General
& investments & annuities Insurance Other Total Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cash invested in
new business (261) (3) - (21) (285) (264)
Cash generated from
existing business 485 139 - 56 680 704
Cash generated from
General Insurance - - 374 - 374 409
Change in intra group
commission terms - - (77) - (77) -
-------------- ------------ ---------- ------- ------- -------
Operating cash generation 224 136 297 35 692 849
Intangibles and other
adjustments 133 309 - (44) 398 258
-------------- ------------ ---------- ------- ------- -------
Underlying profit
(loss) before tax 357 445 297 (9) 1,090 1,107
-------------- ------------ ---------- ------- ------- -------
Operating cash generation
2012 223 184 409 33
The Insurance business generated GBP692 million of cash in 2013,
GBP157 million lower than the prior year. The reduction was due to
the change in intra group commission arrangements, the run-off of
the legacy creditor book, and a slight increase in cash invested in
new business, largely due to lower protection new business
income.
The increase in intangibles is driven by the beneficial impact
of assumption changes.
GROUP OPERATIONS
2013 2012(1)
GBPm GBPm
Total underlying income 6 30
Direct costs:
------- -------
Information technology (1,172) (1,171)
Operations (825) (822)
Property (876) (892)
Support functions (92) (93)
------- -------
(2,965) (2,978)
------- -------
Result before recharges to divisions (2,959) (2,948)
Total net recharges to divisions 2,902 2,897
------- -------
Underlying loss (57) (51)
------- -------
(1) 2012 comparative figures have been amended to reflect the effect
of the continuing consolidation of operations across the Group.
To ensure a fair comparison of the 2013 performance, 2012 direct
costs have been restated with an equivalent offsetting increase
in recharges to divisions.
-- Group Operations supports the Group by providing high quality
services and delivering investment project capability through
Information Technology (IT), Operations (including Customer Service
and Global Payments) as well as Property and Sourcing. Achieving
excellent service availability and high standards is a key part of
our strategy to be the best bank for customers.
-- Incremental cost savings of 6 per cent have been achieved
through Simplification and tight cost control actions such as
sourcing, the centralisation, automation and re-engineering of
end-to-end processes, and consolidation and rationalisation of
property and IT. These savings are offset by higher costs of
supplying investment projects and the impact of regulatory costs
and inflation.
-- Information Technology savings were offset by increased costs
from delivering Group Strategic Initiatives, such as Transaction
Banking Transformation and Digital Transformation, which generate
income and cost benefits in other Divisions.
-- Operations costs increased slightly from 2012 to 2013 with
enhancements to our customer services processes and regulatory and
compliance activities, in areas such as Global Payments, offset by
Simplification savings. This includes delivering Industry Accounts
Switchers, Global Anti Money Laundering and Foreign Account Tax
Compliance Act projects serving the rest of the Group.
-- Group Property costs decreased by 2 per cent as we continued
to consolidate the Group's property portfolio with savings
offsetting the costs of rebranding the Branch network.
-- We continue to streamline our internal operations and have
reduced the number of suppliers by a further 1,467 this year,
bringing the total down from over 18,000 at the start of
Simplification to 9,066, well ahead of our original target of
10,000 by the end of 2014.
CENTRAL ITEMS
2013 2012
GBPm GBPm
Total underlying income (expense) 263 (132)
Total costs (406) (293)
Impairment (6) (1)
----- -----
Underlying loss (149) (426)
----- -----
-- Central items include income and expenditure not recharged to
divisions, including the costs of certain central and head office
functions.
-- Total underlying income in 2013 includes the GBP540 million
gain on the sales of shares in St. James's Place.
-- Total costs in 2013 include the bank levy of GBP238 million (2012: GBP179 million).
.
ADDITIONAL INFORMATION
1. Reconciliation between statutory and underlying basis results
The tables below set out the reconciliation from the statutory
results to the underlying basis results, the principles of which
are set out on the inside front cover.
Removal of:
---------------------------------------------------------------
Acquisition Volatility
Lloyds related arising Legal
Banking and in Insurance and
Group other insurance gross regulatory Fair value Underlying
2013 statutory items(1) businesses up provisions(2) unwind basis
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest
income 7,338 (14) - 2,930 - 631 10,885
Other income,
net of
insurance
claims 11,140 460 (668) (3,074) - 62 7,920
--------------
Total
underlying
income 18,478 446 (668) (144) - 693 18,805
Operating
expenses(3) (15,322) 2,041 - 144 3,455 47 (9,635)
Impairment (2,741) 249 - - - (512) (3,004)
---------- ----------- ----------- --------- -------------- ---------- ----------
Profit (loss) 415 2,736 (668) - 3,455 228 6,166
---------- ----------- ----------- --------- -------------- ---------- ----------
Removal of:
--------------------------------------------------------------
Acquisition Volatility
Lloyds related arising Legal
Banking and in Insurance and
Group other insurance gross regulatory Fair value Underlying
2012 statutory(4) items(5) businesses up(4) provisions(2) unwind basis
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest
income 7,718 (199) (8) 2,587 - 237 10,335
Other income,
net of
insurance
claims 12,799 (1,691) (304) (2,760) 50 (43) 8,051
Total
underlying
income 20,517 (1,890) (312) (173) 50 194 18,386
Operating
expenses(3) (15,974) 1,478 - 173 4,175 24 (10,124)
Impairment (5,149) 320 - - - (868) (5,697)
------------ ----------- ----------- --------- ------------- ---------- ----------
Profit (loss) (606) (92) (312) - 4,225 (650) 2,565
------------ ----------- ----------- --------- ------------- ---------- ----------
(1) Comprises the effects of asset sales (gain of GBP100 million),
volatile items (loss of GBP678 million), liability management (loss
of GBP142 million), Simplification costs related to severance,
IT and business costs of implementation (GBP830 million), EC mandated
retail business disposal costs (GBP687 million), the past service
pensions charge (GBP104 million) and the amortisation of purchased
intangibles (GBP395 million).
(2) Comprises the payment protection insurance provision of GBP3,050
million (2012: GBP3,575 million) and other regulatory provisions
of GBP405 million (2012: GBP650 million).
(3) On an underlying basis, this is described as total costs.
(4) Restated to reflect the implementation of IAS 19 and IFRS 10. See
page 123.
(5) Comprises the effects of asset sales (gain of GBP2,547 million),
volatile items (loss of GBP748 million), liability management (loss
of GBP229 million), Simplification costs (GBP676 million), EC mandated
retail business disposal costs (GBP570 million), the past service
pensions credit (GBP250 million) and the amortisation of purchased
intangibles (GBP482 million).
ADDITIONAL INFORMATION (continued)
2. Banking net interest margin
Banking net interest margin is calculated by dividing banking
net interest income by average interest-earning banking assets. A
reconciliation of banking net interest income to Group net interest
income showing the items that are excluded in determining banking
net interest income follows:
2013 2012
GBPm GBPm
Banking net interest income - underlying basis 10,841 10,480
Insurance division (103) (78)
Other net interest income (including trading
activity) 147 (67)
------- -------
Group net interest income - underlying basis 10,885 10,335
Fair value unwind (631) (237)
Banking volatility and liability management gains 14 199
Insurance gross up (2,930) (2,587)
Volatility arising in insurance businesses - 8
------- -------
Group net interest income - statutory 7,338 7,718
------- -------
Average interest-earning banking assets are calculated gross of
related impairment allowances, and relate solely to customer and
product balances in the banking businesses on which interest is
earned or paid.
3. Volatility arising in insurance businesses
The Group's statutory result before tax is affected by insurance
volatility caused by movements in financial markets, and
policyholder interests volatility, which primarily reflects the
gross up of policyholder tax included in the Group tax charge.
In 2013 the Group's statutory result before tax included
positive insurance and policyholder interests volatility totalling
GBP668 million compared to positive volatility of GBP312 million in
2012.
Volatility comprises the following:
2013 2012
GBPm GBPm
Insurance volatility 218 189
Policyholder interests volatility(1) 564 143
----- ----
Total volatility 782 332
Insurance hedging arrangements (114) (20)
Total 668 312
----- ----
(1) Includes volatility relating to the Group's interest in St. James's
Place.
Insurance volatility
The Group's Insurance business has policyholder liabilities that
are supported by substantial holdings of investments, including
equities, property and fixed interest investments, all of which are
subject to variations in their value. The value of the liabilities
does not move exactly in line with changes in the value of the
investments, yet IFRS requires that the changes in both the value
of the liabilities and investments be reflected within the income
statement. As these investments are substantial and movements in
their value can have a significant impact on the profitability of
the Group, management believes that it is appropriate to disclose
the division's results on the basis of an expected return in
addition to results based on the actual return.
ADDITIONAL INFORMATION (continued)
3. Volatility arising in insurance businesses(continued)
The expected gross investment returns used to determine the
normalised profit of the business, which are based on prevailing
market rates and published research into historical investment
return differentials, are set out below:
United Kingdom 2013 2012
% %
Investments backing annuity liabilities 3.83 3.89
Equities and property 5.58 5.48
UK Government bonds 2.58 2.48
Corporate bonds 3.18 3.08
A review of investment strategy in the Group's Insurance
business has resulted in investment being made in a wider range of
assets. Expected investment returns in 2013 include appropriate
returns for these assets. The 2013 rates also reflect the move to
swap rates as the basis for calculations.
The impact on the results due to the actual return on these
investments differing from the expected return (based upon economic
assumptions made at the beginning of the year, adjusted for
significant changes in asset mix) is included within insurance
volatility. Changes in market variables also affect the realistic
valuation of the guarantees and options embedded within the
with-profits funds, the value of the in-force business and the
value of shareholders' funds.
The positive insurance volatility during 2013 in the Insurance
division was GBP218 million, primarily reflecting the favourable
performance of equity investments in the period relative to the
expected return. This has been partially offset by an increase in
the long-term level of market implied inflation and lower cash
returns compared to long-term expectations.
Policyholder interests volatility
The application of accounting standards results in the
introduction of other sources of significant volatility into the
pre-tax profits of the life, pensions and investments business. In
order to provide a clearer representation of the performance of the
business, and consistent with the way in which it is managed,
adjustments are made to remove this volatility from underlying
profits. The effect of these adjustments is separately disclosed as
policyholder interests volatility.
The most significant of these additional sources of volatility
is policyholder tax. Accounting standards require that tax on
policyholder investment returns should be included in the Group's
tax charge rather than being offset against the related income. The
result is, therefore, to either increase or decrease profit before
tax with a related change in the tax charge. Timing and measurement
differences exist between provisions for tax and charges made to
policyholders. Consistent with the normalised approach taken in
respect of insurance volatility, differences in the expected levels
of the policyholder tax provision and policyholder charges are
adjusted through policyholder interests volatility.
In 2013, the statutory results before tax included a credit to
other income which relates to policyholder interests volatility
totalling GBP564 million (2012: GBP143 million) relating to the
rise in equity markets in the period.
Insurance hedging arrangements
To protect against deterioration in equity market conditions and
the consequent negative impact on the value of in-force business on
the Group balance sheet, the Group purchased put option contracts
in 2012 financed by selling some upside potential from equity
market movements. These expired in 2013 and the charge booked in
2013 on these contracts was GBP9 million. New protection was
acquired in 2013 to replace the expired contracts. On a
mark-to-market valuation basis a loss of GBP105 million was
recognised in relation to the new contracts in 2013.
ADDITIONAL INFORMATION (continued)
4. Number of employees (full-time equivalent)
2013 2012
Retail 40,276 41,460
Commercial Banking 7,718 8,051
Wealth, Asset Finance and International 6,960 9,131
Insurance 2,373 2,293
Group Operations 21,602 23,666
Central items 12,386 12,490
------- -------
91,315 97,091
Agency staff (full-time equivalent) (2,338) (4,303)
------- -------
Total number of employees (full-time equivalent) 88,977 92,788
------- -------
5. Remuneration
As part of the Group's goal to be the Best Bank for Customers,
we reward our colleagues in a way that recognises the very highest
expectations in respect of conduct and customer treatment and we
continue to be mindful of both the economic environment and views
of our stakeholders as we manage our fixed and variable
remuneration costs.
We continue to forge strong links between performance, risk
management and reward. Sound risk management underpins our
remuneration policies and practices, manifested through our use of
economic profit, amongst other metrics, to measure performance and
in the determination of remuneration levels.
The Group's bonus pool has been determined by reference to risk
adjusted performance, affordability and the views of key
stakeholders. Material adjustments have been made to the pool in
2013 (as in 2012) to reflect the impacts of legacy items. The bonus
pool as a percentage of pre-bonus underlying profit before tax has
reduced from 12 per cent in 2012 to 6 per cent.
The Long Term Incentive Plan (LTIP) remains a core part of our
reward strategy to ensure we deliver strong and sustainable returns
for shareholders and align with the Group's strategic direction and
its goals over the medium term.
Bonus awards are 100 per cent deferred for Executive Directors
and they are required to retain any shares vesting from LTIP awards
made since 2012 for a further two years (after deductions for tax
and national insurance). For other employees, cash bonus awards are
limited to GBP2,000, with any bonus over GBP2,000 subject to share
based deferral and performance adjustment.
A summary of our approach to variable remuneration in 2013 is
shown below:
-- Discretionary annual bonus pool of GBP395 million (2012:
GBP365 million) representing 6 per cent of pre-bonus underlying
profit before tax (2012: 12 per cent), with underlying profit
before tax increasing 140 per cent.
-- Annual performance award to Group Chief Executive of GBP1.7
million in shares, subject to additional performance conditions and
deferred until 2019.
-- Total bonus as a percentage of underlying revenues is
approximately 2 per cent, in line with 2012 levels.
-- Approximately 78 per cent of the total Group bonus pool is deferred into shares.
RISK MANAGEMENT
Page
Principal risks and uncertainties 40
Credit risk 40
Conduct risk 40
Market risk 40
Operational risk 40
Funding and liquidity 41
Capital risk 41
Regulatory risk 41
State aid 41
Credit risk portfolio 42
Funding and liquidity management 65
Capital management 70
The income statement numbers in this section are presented on an
underlying basis.
PRINCIPAL RISKS AND UNCERTAINTIES
The most significant risks faced by the Group which could impact
on the success of delivering against the Group's
long-term strategic objectives together with key mitigating
actions are outlined below.
Credit risk
Principal risks
As a provider of credit facilities to personal and commercial
customers, together with financial institutions and Sovereigns, any
adverse changes in the economic and market environment we operate
in, or the credit quality and/or behaviour of our borrowers and
counterparties would reduce the value of our assets and increase
our write-downs and allowances for impairment losses, adversely
impacting profitability.
Mitigating actions
-- Credit policy incorporating prudent lending criteria aligned
with the Board approved risk appetite to effectively manage credit
risk.
-- Clearly defined levels of authority ensure we lend
appropriately and responsibly with separation of origination and
sanctioning activities.
-- Robust credit processes and controls including
well-established committees to ensure distressed and impaired loans
are identified, considered and controlled with independent credit
risk assurance.
Conduct risk
Principal risks
As a major financial services provider we face significant
conduct risk, including selling products to customers which do not
meet their needs; failing to deal with customers' complaints
effectively; not meeting customer expectations; and exhibiting
behaviours which do not meet market or regulatory standards.
Mitigating actions
-- Customer focused conduct strategy implemented to ensure
customers are at the heart of everything we do.
-- Product approval, review process and outcome testing
supported by conduct management information.
-- Clearer customer accountabilities for colleagues, including
rewards with customer-centric metrics.
Market risk
Principal risks
We face a number of key market risks including interest rate
risk across the Banking and Insurance businesses. However, our most
significant market risk is from the Defined Benefit Pension Schemes
where asset and liability movements impact on our capital
position.
Mitigating actions
-- A rates hedging programme is in place to reduce liability risk.
-- Board approved pensions risk appetite covering interest rate,
credit spreads and equity risks.
-- Credit assets and alternative assets are being purchased by
the schemes as the equities are sold.
-- Stress and scenario testing.
Operational risk
Principal risks
We face a number of key operational risks including fraud losses
and failings in our customer processes. The availability,
resilience and security of our core IT systems is the most
significant.
Mitigating actions
-- Continually review IT system architecture to ensure systems
are resilient, readily available for our customers and secure from
cyber attack.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
-- Implement actions from IT resilience review conducted in 2013
to reflect enhanced demands on IT both in terms of customer and
regulator expectations.
Funding and liquidity
Principal risks
Our funding and liquidity position is supported by a significant
and stable customer deposit base. However, a deterioration in
either our or the UK's credit rating or sudden and significant
withdrawal of customer deposits could adversely impact our funding
and liquidity position.
Mitigating actions
-- Hold a large pool of liquid primary assets to meet cash and collateral outflows.
-- Maintain a further large pool of secondary assets which can
be used to access Central Bank liquidity facilities.
-- Stress test the Group's liquidity position against a range of scenarios.
Capital risk
Principal risks
Our future capital position is potentially at risk from adverse
financial performance and the introduction of higher capital
requirements for distinct risks, sectors or as a consequence of
specific UK regulatory requirements. For example in 2013, the PRA
introduced significant additional capital requirements on an
adjusted basis that major UK banks are required to meet.
Mitigating actions
-- Close monitoring of actual capital ratios to ensure that we
comply with current regulatory capital requirements and are well
positioned to meet future requirements.
-- Internal stress testing results to evidence sufficient levels
of capital adequacy for the Group under various scenarios.
-- We can accumulate additional capital in a variety of ways
including raising equity via a rights issue or debt exchange and by
raising tier 1 and tier 2 capital.
Regulatory risk
Principal risks
Due to the nature of the industry we operate in we have to
comply with a complex and demanding regulatory change agenda.
Regulatory initiatives we have been working on in 2013 include CRD
IV, Mortgage Market Review, Dodd-Frank and Foreign Account Tax
Compliance Act 2010. The sanctions for failing to comply far
outweigh the costs of implementation.
Mitigating actions
-- The Legal, Regulatory and Mandatory Change Committee ensures
we drive forward activity to develop plans for regulatory changes
and tracks progress against those plans.
-- Continued investment in our people, processes and IT systems
is enabling us to meet our regulatory commitments.
State aid
Principal risks
HM Treasury currently holds 32.7 per cent of the Group's share
capital. We continue to operate without government interference in
the day-to-day management decisions, however there is a risk that a
change in government priorities could result in the current
framework agreement being replaced, leading to interference in the
operations of the Group. Failure to meet the EU State aid
commitments arising from this government support could lead to
sanctions.
Mitigating actions
-- Most EU State aid commitments now met with the divestment of
the rebranded (TSB) retail banking business outstanding.
-- Now progressing the divestment of TSB through an Initial
Public Offering, subject to regulatory and European Commission
approval, to ensure best value for our shareholders and certainty
for our customers and colleagues.
-- The divested business, rebranded TSB, has operated as a
separate business within Lloyds Banking Group since September
2013.
CREDIT RISK PORTFOLIO
-- Impairment charge decreased by 47 per cent to GBP3,004
million in the year to 31 December 2013, continuing the improvement
seen in 2012. The impairment charge has decreased across all
divisions.
-- The impairment charge as a percentage of average loans and
advances to customers improved to 0.57 per cent compared to 1.02
per cent at 31 December 2012.
-- Impaired loans as a percentage of closing advances reduced to
6.3 per cent at 31 December 2013, from 8.6 per cent at 31 December
2012, driven by improvements in Retail and Commercial Banking and
reflecting reductions in both the core and non-core books.
Impairment charge by division
2013 2012 Change
GBPm GBPm %
Retail:
----- -----
Secured 253 377 33
Unsecured 848 893 5
----- -----
1,101 1,270 13
Commercial Banking 1,167 2,946 60
Wealth, Asset Finance and International:
----- -----
Wealth 18 23 22
Ireland 608 1,245 51
Other International 33 76 57
Asset Finance 71 136 48
----- -----
730 1,480 51
Central items 6 1
----- -----
Total impairment charge 3,004 5,697 47
----- -----
Impairment charge as a % of
average advances 0.57% 1.02% (45)bp
Total impairment charge comprises:
2013 2012 Change
GBPm GBPm %
Loans and advances to customers 2,988 5,654 47
Debt securities classified
as loans and receivables 1 15 93
Available-for-sale financial
assets 15 37 59
Other credit risk provisions -- (9)
----- -----
Total impairment charge 3,004 5,697 47
----- -----
CREDIT RISK PORTFOLIO (continued)
2013 2012 Change
GBPm GBPm %
Core impairment charge by division
Retail:
----- -----
Secured 218 304 28
Unsecured 841 888 5
----- -----
1,059 1,192 11
Commercial Banking 424 704 40
Wealth, Asset Finance and International:
----- -----
Wealth 18 23 22
Asset Finance 14 (1)
----- -----
32 22 (45)
Central items 6 1
----- -----
Core impairment charge 1,521 1,919 21
----- -----
Core impairment charge as a % of average
advances 0.35% 0.44% (9)bp
2013 2012 Change
GBPm GBPm %
Non-core impairment charge by division
Retail:
----- -----
Secured 35 73 52
Unsecured 7 5 (40)
----- -----
42 78 46
Commercial Banking 743 2,242 67
Wealth, Asset Finance and International:
----- -----
Ireland 608 1,245 51
Other International 33 76 57
Asset Finance 57 137 58
----- -----
698 1,458 52
----- -----
Non-core impairment charge 1,483 3,778 61
----- -----
Non-core impairment charge as a % of
average advances 1.61% 3.08% (147)bp
CREDIT RISK PORTFOLIO (continued)
Impaired loans and provisions
Impaired Impairment
loans as provision
Loans and % as % of
advances Impaired of closing Impairment impaired
Group to customers loans advances provisions(1) loans(2)
GBPm GBPm % GBPm %
At 31 December 2013
Retail
------------- -------- --------------
Secured 323,107 5,641 1.7 1,472 26.1
Unsecured 21,566 1,546 7.2 578 86.9
------------- -------- --------------
344,673 7,187 2.1 2,050 32.5
Commercial Banking 132,602 14,714 11.1 6,415 43.6
Wealth, Asset Finance
and International
------------- -------- --------------
Wealth 3,218 349 10.8 70 20.1
Ireland 15,374 9,324 60.6 6,718 72.1
Other International 7,146 212 3.0 108 50.9
Asset Finance 5,712 473 8.3 346 73.2
------------- -------- --------------
31,450 10,358 32.9 7,242 69.9
Reverse repos and other
items 2,779 - -
------------- -------- --------------
Total gross lending 511,504 32,259 6.3 15,707 50.1
-------- --------------
Impairment provisions (15,707)
Fair value adjustments(3) (516)
-------------
Total Group 495,281
-------------
At 31 December 2012
Retail
------------- -------- --------------
Secured 323,862 6,321 2.0 1,616 25.6
Unsecured 22,698 1,999 8.8 719 82.6
------------- -------- --------------
346,560 8,320 2.4 2,335 32.5
Commercial Banking 144,770 23,965 16.6 9,984 41.7
Wealth, Asset Finance
and International
------------- -------- --------------
Wealth 4,325 284 6.6 73 25.7
Ireland 19,531 12,501 64.0 8,574 68.6
Other International 9,171 299 3.3 212 70.9
Asset Finance 9,900 924 9.3 594 64.3
------------- -------- --------------
42,927 14,008 32.6 9,453 67.5
Reverse repos and other
items 5,814 - -
------------- -------- --------------
Total gross lending 540,071 46,293 8.6 21,772 48.2
-------- --------------
Impairment provisions (21,772)
Fair value adjustments(3) (1,074)
-------------
Total Group 517,225
-------------
(1) Impairment provisions include collective unimpaired provisions.
(2) Impairment provisions as a percentage of impaired loans are calculated
excluding retail unsecured loans in recoveries
(31 December 2013: GBP881 million, 31 December 2012: GBP1,129
million).
(3) The fair value adjustments relating to loans and advances were
those required to reflect the HBOS assets in the Group's consolidated
financial records at their fair value and took into account both
the expected losses and market liquidity at the date of acquisition.
The unwind relating to future impairment losses requires significant
management judgement to determine its timing which includes an
assessment of whether the losses incurred in the current period
were expected at the date of the acquisition and assessing whether
the remaining losses expected at the date of the acquisition will
still be incurred. The element relating to market liquidity unwinds
to the income statement over the estimated expected lives of the
related assets (until 2014 for wholesale loans and 2018 for retail
loans) although if an asset is written-off or suffers previously
unexpected impairment then this element of the fair value will
no longer be considered a timing difference (liquidity) but permanent
(impairment). The fair value unwind in respect of impairment losses
incurred was GBP512 million for the period ended 31 December 2013
(31 December 2012: GBP868 million). The fair value unwind in respect
of loans and advances is expected to continue to decrease in future
years as fixed-rate periods on mortgages expire, loans are repaid
or written-off, and will reduce to zero over time.
CREDIT RISK PORTFOLIO (continued)
Impaired loans and provisions (continued)
Impaired Impairment
loans as provision
Loans and % as
advances Impaired of closing Impairment % of impaired
Core to customers Loans advances provisions(1) loans(2)
GBPm GBPm % GBPm %
At 31 December 2013
Retail
------------- -------- --------------
Secured 299,085 4,327 1.4 1,158 26.8
Unsecured 21,435 1,492 7.0 576 87.1
------------- -------- --------------
320,520 5,819 1.8 1,734 34.8
Commercial Banking 111,883 5,131 4.6 2,441 47.6
Wealth, Asset Finance
and International
------------- -------- --------------
Wealth 3,218 349 10.8 70 20.1
Asset Finance 3,392 57 1.7 29 50.9
------------- -------- --------------
6,610 406 6.1 99 24.4
Reverse repos and other
items 2,779 - -
------------- -------- --------------
Total core gross lending 441,792 11,356 2.6 4,274 40.6
-------- --------------
Impairment provisions (4,274)
Fair value adjustments (552)
-------------
Total core 436,966
-------------
At 31 December 2012
Retail
------------- -------- --------------
Secured 297,902 4,793 1.6 1,251 26.1
Unsecured 22,156 1,900 8.6 706 82.8
------------- -------- --------------
320,058 6,693 2.1 1,957 34.7
Commercial Banking 104,867 5,907 5.6 2,866 48.5
Wealth, Asset Finance
and International
------------- -------- --------------
Wealth 4,325 284 6.6 73 25.7
Asset Finance 1,090 67 6.1 12 17.9
------------- -------- --------------
5,415 351 6.5 85 24.2
Reverse repos and other
items 5,814 - -
------------- -------- --------------
Total core gross lending 436,154 12,951 3.0 4,908 41.2
-------- --------------
Impairment provisions (4,908)
Fair value adjustments (778)
-------------
Total core 430,468
-------------
(1) Impairment provisions include collective unimpaired provisions.
(2) Impairment provisions as a percentage of impaired loans are calculated
excluding retail unsecured loans in recoveries (31 December 2013:
GBP831 million, 31 December 2012: GBP1,047 million).
CREDIT RISK PORTFOLIO (continued)
Impaired loans and provisions (continued)
Impaired Impairment
loans as provision
Loans and % as % of
advances Impaired of closing Impairment impaired
Non-core to customers loans advances provisions(1) loans(2)
GBPm GBPm % GBPm %
At 31 December 2013
Retail
------------- -------- --------------
Secured 24,022 1,314 5.5 314 23.9
Unsecured 131 54 41.2 2 50.0
------------- -------- --------------
24,153 1,368 5.7 316 24.0
Commercial Banking
------------- -------- --------------
Corporate Real Estate and
other corporate(3) 11,571 8,131 70.3 3,320 40.8
Specialist Finance(4) 9,017 1,368 15.2 565 41.3
Other 131 84 64.1 89
------------- -------- --------------
20,719 9,583 46.3 3,974 41.5
Wealth, Asset Finance and
International
------------- -------- --------------
Ireland 15,374 9,324 60.6 6,718 72.1
Other International 7,146 212 3.0 108 50.9
Asset Finance 2,320 416 17.9 317 76.2
------------- -------- --------------
24,840 9,952 40.1 7,143 71.8
Reverse repos and other
items - -
------------- -------- --------------
Total non-core gross lending 69,712 20,903 30.0 11,433 54.8
-------- --------------
Impairment provisions (11,433)
Fair value adjustments 36
-------------
Total non-core 58,315
-------------
At 31 December 2012
Retail
------------- -------- --------------
Secured 25,960 1,528 5.9 365 23.9
Unsecured 542 99 18.3 13 76.5
------------- -------- --------------
26,502 1,627 6.1 378 24.5
Commercial Banking
------------- -------- --------------
Corporate Real Estate and
other corporate(3) 21,777 14,447 66.3 5,411 37.5
Specialist Finance(4) 15,488 2,935 19.0 1,235 42.1
Other 2,638 676 25.6 472 69.8
------------- -------- --------------
39,903 18,058 45.3 7,118 39.4
Wealth, Asset Finance and
International
------------- -------- --------------
Wealth - - -
Ireland 19,531 12,501 64.0 8,574 68.6
Other International 9,171 299 3.3 212 70.9
Asset Finance 8,810 857 9.7 582 67.9
------------- -------- --------------
37,512 13,657 36.4 9,368 68.6
Reverse repos and other
items - - -
------------- -------- --------------
Total non-core gross lending 103,917 33,342 32.1 16,864 50.7
-------- --------------
Impairment provisions (16,864)
Fair value adjustments (296)
-------------
Total non-core 86,757
-------------
(1) Impairment provisions include collective unimpaired provisions.
(2) Impairment provisions as a percentage of impaired loans are calculated
excluding retail unsecured loans in recoveries (31 December 2013:
GBP50 million; 31 December 2012: GBP82 million).
(3) Includes the Corporate Real Estate BSU portfolio which is now
managed with other Corporate (including non-core good book Corporate
Real Estate) assets which were previously disclosed in Other.
(4) Includes the specialised lending portfolio which is now managed
with the Specialist Finance assets which were previously disclosed
in Other.
CREDIT RISK PORTFOLIO (continued)
Retail
-- Impairment charge decreased by 13 per cent to GBP1,101
million primarily driven by a reduction in impaired loans in the
secured portfolio.
-- Impairment charge,as an annualised percentage of average
loans and advances to customers improved to 0.32 per cent in 2013
from 0.36 per cent in 2012.
-- Overall value of assets entering arrears in 2013 was lower in
both unsecured and secured lending compared to 2012.
-- Non-core portfolio represented 7 per cent of total retail
assets at 31 December 2013 and primarily comprised of specialist
mortgages, which is closed to new business and has been in run-off
since 2009.
The Retail division's loans and advances to customers are
analysed in the following table:
At 31 Dec At 31 Dec
2013 2012
GBPm GBPm
Secured:
--------- ---------
Mainstream 246,586 248,735
Buy to let 52,791 49,568
Specialist 23,730 25,559
--------- ---------
323,107 323,862
Unsecured:
--------- ---------
Credit cards 9,373 9,465
Personal loans 9,595 10,523
Overdrafts 2,598 2,710
21,566 22,698
--------- ---------
Total gross lending 344,673 346,560
--------- ---------
Secured lending
Impairment
The impairment charge decreased by GBP124 million to GBP253
million compared with 2012. The annualised impairment charge as a
percentage of average loans and advances to customers was 0.08 per
cent compared to 0.12 per cent in 2012. Impairment provisions were
GBP1,472 million at 31 December 2013 compared to GBP1,616 million
at 31 December 2012. Impaired loans have fallen for four
consecutive years and were GBP5,641 million at 31 December 2013
compared to GBP6,321 million at 31 December 2012. As a result of
this continued trend in 2013, impairment provisions as a percentage
of impaired loans increased to 26.1 per cent from 25.6 per cent at
31 December 2012.
The impairment provisions held against secured assets reflect
the Group's view of appropriate allowances for incurred losses. The
Group holds appropriate impairment provisions for customers who are
experiencing financial difficulty, either on a forbearance
arrangement or who may be able to maintain their repayments only
whilst interest rates remain low.
Arrears
The value of mortgages greater than three months in arrears
(excluding repossessions) decreased by GBP819 million to GBP8,818
million at 31 December 2013 compared to GBP9,637 million at 31
December 2012.
CREDIT RISK PORTFOLIO (continued)
Retail (continued)
Mortgages greater than three months in arrears (excluding
repossessions)
Total mortgage Total mortgage
Number of cases accounts % Value of loans(1) balances %
----------------- ---------------- ------------------- ----------------
At 31 December 2013 2012 2013 2012 2013 2012 2013 2012
Cases Cases % % GBPm GBPm % %
Mainstream 52,687 55,905 2.1 2.2 5,898 6,287 2.4 2.5
Buy to let 6,338 7,306 1.3 1.6 869 1,033 1.6 2.1
Specialist 11,870 13,262 7.3 7.6 2,051 2,317 8.6 9.1
-------- ------- --------- --------
Total 70,895 76,473 2.3 2.4 8,818 9,637 2.7 3.0
-------- ------- --------- --------
(1) Value of loans represents total book value of mortgages more than
three months in arrears.
The stock of repossessions decreased to 2,229 cases at 31
December 2013 compared to 2,438 cases at 31 December 2012.
Secured loan to value analysis
The average indexed loan to value (LTV) on the mortgage
portfolio at 31 December 2013 decreased to 52.8 per cent compared
with 56.4 per cent at 31 December 2012. The average LTV for new
mortgages and further advances written in 2013 was 63.6 per cent
compared with 62.6 per cent in 2012. The percentage of closing
loans and advances with an indexed LTV in excess of 100 per cent
decreased to 5.2 per cent at 31 December 2013, compared with 11.7
per cent at 31 December 2012.
Actual and average LTVs across the Retail mortgage
portfolios
Buy to
At 31 December 2013 Mainstream let Specialist(1) Total
% % % %
Less than 60% 37.0 20.4 20.1 33.1
60% to 70% 16.9 21.3 15.7 17.5
70% to 80% 19.8 26.0 19.3 20.8
80% to 90% 14.7 15.1 20.1 15.1
90% to 100% 7.1 11.1 14.3 8.3
Greater than 100% 4.5 6.1 10.5 5.2
---------- ------ ------------- -----
Total 100.0 100.0 100.0 100.0
---------- ------ ------------- -----
Average loan to value:(2)
Stock of residential mortgages 49.5 66.9 66.2 52.8
New residential lending 63.6 64.0 n/a 63.6
Impaired mortgages 66.6 90.1 80.8 71.6
Buy to
At 31 December 2012 Mainstream let Specialist(1) Total
%% %%
Less than 60% 31.9 12.8 14.7 27.6
60% to 70% 12.8 12.9 9.7 12.6
70% to 80% 18.3 26.2 17.2 19.4
80% to 90% 16.6 16.5 19.1 16.8
90% to 100% 10.5 15.4 18.5 11.9
Greater than 100% 9.9 16.2 20.8 11.7
---------- ------ ------------- -----
Total 100.0 100.0 100.0 100.0
---------- ------ ------------- -----
Average loan to value:(2)
Stock of residential mortgages 52.7 73.6 72.6 56.4
New residential lending 62.3 64.5 n/a 62.6
Impaired mortgages 72.2 99.3 88.1 78.3
(1) Specialist lending is closed to new business and is in run-off.
(2) Average loan to value is calculated as total loans and advances
as a percentage of the total collateral of these loans and advances.
CREDIT RISK PORTFOLIO (continued)
Retail (continued)
Unsecured lending
Impairment
In 2013 the impairment charge on unsecured loans and advances to
customers reduced by GBP45 million compared with 2012. The
annualised impairment charge as a percentage of average loans and
advances to customers increased to 3.80 per cent in 2013 from 3.73
per cent in 2012.
Impaired loans have decreased by GBP453 million since 31
December 2012 to GBP1,546 million at 31 December 2013 which
represented 7.2 per cent of closing loans and advances to
customers, compared with 8.8 per cent at 31 December 2012. The
reduction in impaired loans is a result of the Group's prudent risk
appetite and ongoing effective portfolio management. Retail's
exposure to revolving credit products has been actively managed to
ensure that it is appropriate to customers' changing financial
circumstances.
Impairment provisions decreased by GBP141 million, compared with
31 December 2012. This reduction was driven by fewer assets
entering arrears and recoveries assets being written down to the
present value of future expected cash flows. Impairment provisions
as a percentage of impaired loans in collections increased to 86.9
per cent at 31 December 2013 from 82.6 per cent at 31 December
2012.
Forbearance
The Group operates a number of schemes to assist borrowers who
are experiencing financial stress. The material elements of these
schemes through which the Group has granted a concession, whether
temporarily or permanently, are set out below.
Types of forbearance
The Group classifies the treatments offered to retail customers
who have experienced financial difficulty into the following
categories:
- Reduced contractual monthly payment: a temporary account
change to assist customers through periods of financial difficulty
where arrears do not accrue at the original contractual payments,
for example temporary interest only arrangements and short-term
payment holidays granted in collections. Any arrears existing at
the commencement of the arrangement are retained.
- Reduced payment arrangements: a temporary arrangement for
customers in financial distress where arrears accrue at the
contractual payment, for example short-term arrangements to
pay.
- Term extensions: a permanent account change for customers in
financial distress where the overall term of the mortgage is
extended, resulting in a lower contractual monthly payment.
- Repair: a permanent account change used to repair a customer's
position when they have emerged from financial difficulty, for
example capitalisation of arrears.
Forbearance identification and classification
The Group has applied revised forbearance definitions based upon
principles developed through the British Bankers' Association. As a
result of this, forbearance data for 2012 has been restated to
reflect the new definitions. The restated data for 2012 shows
overall forbearance balances to be higher than previous financial
statements as the balances now include accounts which are no longer
on a forbearance treatment, but where the exposure is known to be,
or may still be, in financial difficulty.
The Group classifies a retail account as forborne at the time a
customer in financial difficulty is granted a concession. Accounts
are classified as forborne only for the period of time which the
exposure is known to be, or may still be, in financial difficulty.
Where temporary forbearance is granted, exit criteria are applied
to include accounts until they are known to no longer be in
financial difficulty. Details of the exit criteria are shown in the
analysis below.
CREDIT RISK PORTFOLIO (continued)
Retail (continued)
Where the treatment involves a permanent change to the
contractual basis of the customer's account such as a
capitalisation of arrears or term extension, the Group classifies
the balance as forborne for a period of 24 months, after which no
distinction is made between these accounts and others where no
change has been made.
Secured lending
At 31 December 2013, retail secured loans and advances currently
or recently subject to forbearance were 2.0 per cent (31 December
2012: 2.9 per cent) of total retail secured loans and advances. The
Group no longer offers temporary interest only as a forbearance
treatment to secured retail lending customers in financial
difficulty, which is the primary driver of the reduction in
forbearance balances in 2013. Further analysis of the forborne loan
balances is set out below:
Impairment provisions
Total loans and Total current as % of loans
advances which and recent forborne and advances which
are currently loans and advances are currently
At 31 December or recently forborne which are impaired(1) or recently forborne
----------------------- ------------------------ -----------------------
2013 2012(2) 2013 2012(2) 2013 2012(2)
GBPm GBPm GBPm GBPm % %
Temporary forbearance
arrangements
--------- ------------ -------- --------------
Reduced contractual
monthly payment(3) 995 4,514 226 538 4.0 2.5
Reduced payment arrangements(4) 1,376 1,412 160 320 3.2 4.0
--------- ------------ -------- --------------
2,371 5,926 386 858 3.5 2.8
--------- ------------ -------- --------------
Permanent treatments
Repair and term extensions(5) 4,008 3,565 305 289 3.4 3.9
Total 6,379 9,491 691 1,147 3.4 3.2
--------- ------------ -------- --------------
Included in the total
above:
Temporary arrangements
currently on treatment 1,100 3,103 179 516 3.4 3.7
Permanent treatments
within last 12 months 2,187 1,913 78 90 3.1 4.3
(1) GBP5,688 million of current and recent forborne loans and advances
were not impaired at 31 December 2013 (31 December 2012: GBP8,344
million).
(2) Restated to reflect the change in forbearance probation periods.
Previously only temporary arrangements in place at the year end
and permanent changes commenced during the year were shown.
(3) Includes temporary interest only arrangements and short-term payment
holidays granted in collections where the customer is currently
benefitting from the treatment and where the concession has ended
within the previous six months (temporary interest only) and previous
12 months (short-term payment holidays).
(4) Includes customers who had an arrangement to pay less than the
contractual amount at 31 December or where an arrangement ended
within the previous three months.
(5) Includes capitalisation of arrears and term extensions which commenced
during the previous 24 months and remaining as customers at the
year end.
Collective impairment assessment of retail secured loans subject
to forbearance
Loans which are forborne are grouped with other assets with
similar risk characteristics and assessed collectively for
impairment as described below. The loans are not considered as
impaired loans unless they meet the Group's definition of an
impaired asset.
The Group's approach is to ensure that provisioning models,
supported by management judgement, appropriately reflect the
underlying loss risk of exposures. The Group uses sophisticated
behavioural scoring to assess customers' credit risk.
CREDIT RISK PORTFOLIO (continued)
Retail (continued)
The underlying behavioural scorecards consider many different
characteristics of customer behaviour, both static and dynamic,
from internal sources and also from credit bureaux data, including
characteristics that may identify when a customer has been in
arrears on products held with other firms. Hence, these models take
a range of potential indicators of customer financial distress into
account.
The performance of such models is monitored and challenged on an
ongoing basis, in line with the Group's model governance policies.
The models are also regularly recalibrated to reflect up to date
customer behaviour and market conditions. Specifically, regular
detailed analysis of modelled provision outputs is undertaken to
demonstrate that the risk of forbearance or other similar
activities is recognised, that the outcome period adequately
captures the risk and that the underlying risk is appropriately
reflected. Where this is not the case, additional provisions are
applied to capture the risk.
Unsecured lending
At 31 December 2013, UK retail unsecured loans and advances
currently or recently subject to forbearance were 2.6 per cent (31
December 2012: 3.9 per cent) of total UK retail unsecured loans and
advances of GBP21,566 million (31 December 2012: GBP22,698
million). Further analysis of the forborne loan balances is set out
below:
Impairment provisions
Total loans and Total current as % of loans
advances which and recent forborne and advances
are currently loans and advances which are currently
At 31 December or recently forborne which are impaired(1) or recently forborne
----------------------- ------------------------ -----------------------
2013 2012(2) 2013 2012(2) 2013 2012(2)
GBPm GBPm GBPm GBPm % %
Temporary forbearance
arrangements
-------- ------------- -------- --------------
Reduced contractual
monthly payment(3) 260 339 230 324 39.2 48.8
Reduced payment arrangements(4) 104 194 86 150 51.7 49.3
-------- ------------- -------- --------------
364 533 316 474 42.8 49.0
-------- ------------- -------- --------------
Permanent treatments
Repair and term extensions(5) 201 350 79 176 9.9 10.4
Total 565 883 395 650 31.1 33.7
-------- ------------- -------- --------------
Included in the total
above:
Temporary arrangements
currently on treatment 265 388 262 383 45.0 51.6
Permanent treatments
within last 12 months 90 208 38 110 13.2 11.8
(1) GBP170 million of current and recent forborne loans and advances
were not impaired at 31 December 2013
(31 December 2012: GBP233 million).
(2) Restated to reflect the change in forbearance probation periods.
Previously only temporary arrangements in place at the year end
and permanent changes commenced during the year were shown.
(3) Includes repayment plans and short-term payment holidays granted
in collections where the customer is currently benefitting from
the treatment and where the concession has ended within the previous
six months.
(4) Includes customers who had an arrangement to pay less than the
contractual amount at 31 December or where an arrangement ended
within the previous six months.
(5) Includes capitalisation of arrears and term extensions which
commenced during the previous 24 months and remaining as customers
at the year end.
CREDIT RISK PORTFOLIO (continued)
Retail (continued)
Collective impairment assessment of UK retail unsecured loans
and advances subject to forbearance
Credit risk provisioning for the UK retail unsecured portfolio
is undertaken on a purely collective basis. The approach used is
based on segmented cash flow models, divided into two primary
streams for loans judged to be impaired and those that are not.
Accounts subject to repayment plans and collections refinance loans
are among those considered to be impaired.
For exposures that are judged to be impaired, provisions are
determined through modelling the expected cure rates, write-off
propensity and cash flows with segments explicitly relating to
repayment plans and refinance loans treatments. Payments of less
than the monthly contractual amount are reflected in reduced cash
flow forecasts when calculating the impairment allowance for these
accounts.
The outputs of the models are monitored and challenged on an
ongoing basis. The models are run monthly meaning that current
market conditions and customer processes are reflected in the
output. Where the risks identified are not captured in the
underlying models, appropriate additional provisions are made.
CREDIT RISK PORTFOLIO (continued)
Commercial Banking
-- Impairment charge decreased by 60 per cent to GBP1,167
million, driven by lower charges mainly in the non-core portfolio,
reflecting continued proactive management and deleveraging. Charges
also reduced significantly in the core portfolio reflecting better
quality origination, together with higher releases in 2013 compared
to the same period in 2012.
-- The overall quality of the core Commercial Banking portfolio
remains good with the Group's prudent through the cycle approach to
risk appetite, and the continuing low interest rate environment
helping to maintain defaults at a relatively low level. New
business is of good quality and better than the back book
average.
-- The impairment charge as a percentage of average loans and
advances improved to 0.83 per cent from 1.85 per cent in 2012. Core
impairment charge as an annualised percentage of average loans and
advances to customers improved to 0.39 per cent compared to 0.67
per cent in 2012.
-- Non-core now represents 15.6 per cent of total loans and
advances to customers compared to 27.6 per cent at 31 December
2012, reflecting the improved mix of the portfolio overall.
Core
Core impaired loans decreased by GBP776 million to GBP5,131
million compared with GBP5,907 million at 31 December 2012 and as a
percentage of closing loans and advances to customers decreased to
4.6 per cent from 5.6 per cent at 31 December 2012. The core
impairment charge has reduced to GBP424 million in 2013 compared to
GBP704 million in 2012, reflecting better quality origination and
higher releases, with the low interest rate environment helping to
maintain defaults at a relatively lower level.
At 31 December 2013 GBP112 billion of gross loans and advances
to customers in the Commercial Banking core portfolio are segmented
across four different coverage segments.
SME
SME serves business customers with turnover up to GBP25 million.
Impaired loans decreased by GBP399 million to GBP2,271 million
compared with GBP2,670 million at 31 December 2012. The impairment
charge has reduced to GBP188 million in 2013 compared to GBP259
million in 2012 reflecting stable or improved portfolio credit
quality across all key metrics.
The SME portfolio continues to grow within prudent and
consistent credit risk appetite parameters with net lending
increasing 6 per cent year-on-year. These results reflect the
Group's continuing commitment to support the UK economy and
government schemes such as Funding for Lending and Enterprise
Finance Guarantee.
SME's control and monitoring activities have continued to play a
fully effective role in identifying and supporting customers
showing early signs of financial stress. As part of this, our
dedicated SME Business Support function continues to work with
customers through their difficulties.
Mid Markets
Mid Markets serves business customers with turnover of GBP25
million to GBP750 million. The business remains predominantly
UK-focused and is closely linked to the performance of the domestic
economy. Impaired loans decreased by GBP261 million to GBP1,591
million compared with GBP1,852 million at 31 December 2012. The
impairment charge has reduced to GBP157 million in 2013 compared to
GBP238 million in 2012. Overall credit quality has remained
stable
during 2013.
CREDIT RISK PORTFOLIO (continued)
Commercial Banking (continued)
The real estate business within the Group's Mid Markets
portfolio is focused predominantly on unquoted private real estate
portfolios. Credit quality continues to improve and the number of
new non-performing customers continues to reduce. New business
propositions are being written under robust policy parameters and
in line with agreed risk appetite, with particular focus on
cashflow. Tenant default is an area of potential focus particularly
when the lending is supported by secondary or tertiary assets.
Global Corporates
Global Corporates is a coverage business operating across the
UK, Europe and North America and is responsible for the overall
management of relationships with major corporate clients. Impaired
loans increased slightly by GBP37 million to GBP1,173 million
compared with GBP1,136 million at 31 December 2012. The impairment
charge has reduced to GBP75 million in 2013 compared to GBP195
million in 2012.
The core portfolio related to trading companies continues to be
predominantly Investment Grade focused; the overall portfolio asset
quality remains good; and corporate balance sheets generally remain
conservatively structured following a period of de-leveraging
through the downturn.
The real estate business within the Group's Global Corporate
portfolio is focused on the larger end of the UK property market
with a bias to the quoted public listed companies and funds sector.
Portfolio credit quality remains strong being underpinned by
seasoned management teams with proven asset management skills
generating predictable cash flows from their income producing
portfolios.
Financial Institutions
Commercial Banking maintains relationships with a number of
major UK and International Finance Institutions, which are
predominantly investment grade rated. These relationships are
either client focused or held to support the Group's funding,
liquidity and general hedging requirements. The impairment charge
in Financial Institutions remained low at GBP4 million.
Trading exposures continue to be predominantly short-term and/or
collateralised with inter bank activity mainly undertaken with
strong investment grade counterparties. While conditions in the
Eurozone stabilized during 2013, the Group continues to adopt a
conservative stance maintaining close portfolio scrutiny and
oversight. Detailed contingency plans are in place and exposures to
financial institutions domiciled in peripheral Eurozone countries
are kept modest and managed within tight risk parameters. Overall,
portfolio credit quality remains good and outlook is stable.
The majority of funding and risk management activity is
transacted with investment grade counterparties including Sovereign
central banks and much of it is on a collateralised basis, such as
repos and swaps facing a Central Counterparty (CCP). Bilateral
derivative transactions with Financial Institution counterparties
are typically collateralised under a credit support annex in
conjunction with the ISDA Master Agreement. The Group continues to
consolidate its counterparty risk via CCP's as part of an ongoing
move to reduce bilateral counterparty risk by clearing standardised
derivative contracts.
Non-core
Non-core impaired loans decreased by GBP8,475 million to
GBP9,583 million compared with GBP18,058 million at 31 December
2012 and as a percentage of closing loans and advances to customers
increased to 46.3 per cent from 45.3 per cent at 31 December 2012.
The non-core impairment charge has reduced to GBP743 million in
2013 compared to GBP2,242 million in 2012, reflecting the continued
deleveraging.
The non-core portfolio includes elements of the Corporate Real
Estate and Specialist Finance portfolios which are classified as
non-core.
CREDIT RISK PORTFOLIO (continued)
Commercial Banking (continued)
Non-core Corporate Real Estate and other Corporate
Loans and advances to customers include the non-core Corporate
Real Estate Business Support Unit (BSU) portfolio. Following
successful asset reduction progress, this portfolio is now managed
together with European Assets and other Corporate assets previously
disclosed as Other non-core.
The impairment charge in this portfolio fell to GBP522 million
compared to GBP1,453 million in 2012. The fall in the impairment
charge reflects lower gross charges on a reduced portfolio,
favourable market movements on impaired derivatives and the
continuing proactive management enabling some write backs on
previously impaired loans.
The portfolio has reduced significantly ahead of expectations
primarily due to the momentum on various deleveraging strategies
including consensual asset sales by customers, loan sales and asset
disposals which totalled GBP7.4 billion (net book value) in the
year. The non-core Corporate Real Estate BSU element of the
portfolio reduced from GBP15.7 billion to GBP8.9 billion during
2013 and there was considerable progress on the European exposure
within this portfolio where loan balances fell from GBP3.7 billion
to GBP0.7 billion.
Non-core Specialist Finance
Loans and advances to customers include the non-core Acquisition
Finance (leverage lending) portfolio which falls into non-core
since it is outside the Group's risk appetite, and the non-core
Asset Based Finance portfolios (which include Ship Finance,
Aircraft Finance and Infrastructure). Total gross loans and
advances reduced by GBP6.5 billion, from GBP15.5 billion to GBP9.0
billion as at 31 December 2013 mainly due to disposals of GBP4.5
billion (net book value).
Ship Finance gross drawn lending (excluding leasing) totalled
GBP1,074 million (net GBP965 million) as at 31 December 2013. This
portfolio still suffers some stress due to volatile asset values
and ongoing financial restructures. As a consequence, impairment
charges are running at similar levels to those experienced in 2012,
however continued strategic disposals through 2013 have materially
de-risked the residual portfolio.
Secured loan to value analysis for UK Direct Real Estate
lending
The Group classifies Direct Real Estate as exposure which is
directly supported by cash flows from property activities, as
opposed to trading activities (such as hotels, care homes and
housebuilders). The Group manages its exposures to Direct Real
Estate across a number of different coverage segments.
Core UK Direct Real Estate
Approximately three quarters of loans and advances relate to
commercial real estate with the remainder mostly residential real
estate. A large element of the residential exposure is to
professional landlords in the Group's SME business where
performance has been good. Approximately two thirds of the core
commercial real estate portfolio was originated under heritage
Lloyds TSB credit risk criteria. The Group's risk appetite requires
it to look first at the underlying cash flows as part of credit
assessment, alongside key requirements for good quality
counterparties and a well spread tenant profile.
Non-core UK Direct Real Estate
The Group considers this portfolio to be appropriately provided
for after taking into account the value of the collateral held. In
the case of impaired UK direct real estate exposures (over GBP5
million) there is a net property collateral shortfall of
approximately GBP0.1 billion. This figure excludes benefits of
credit mitigants such as cross collateralisation and cross
guarantees. The Group makes use of a variety of methodologies to
assess the value of property collateral, where external valuations
are not available. These include use of market indexes, models and
subject matter
expert judgement.
CREDIT RISK PORTFOLIO (continued)
Commercial Banking (continued)
Loan to value ratios (indexed or actual if within last 12
months) for the Group's largest transactions (over GBP5 million)
are detailed in the table below.
LTVs - UK Direct Real Estate
Core
loans and advances Non-core
At 31 December 2013 (gross) loans and advances(gross)
--------------------- ----------------------------
GBPm % GBPm %
Exposures > GBP5 million:
-------------
Less than 60% 4,444 42 437 7
61% to 70% 2,182 21 268 4
71% to 80% 1,159 11 145 2
81% to 100% 407 4 1,896 29
101% to 125% 385 4 766 12
More than 125% 571 5 2,961 46
Unsecured 1,342 13 23 -
------------- ------ ------------------ --------
10,490 100 6,496 100
------ --------
Exposures < GBP5 million 9,280 1,143
------------- ------------------
Total 19,770 7,639
------------- ------------------
At 31 December 2012(1)
Exposures > GBP5 million:
-------------
Less than 60% 3,722 35 703 7
61% to 70% 1,785 17 292 3
71% to 80% 2,028 19 886 9
81% to 100% 1,282 12 2,188 21
101% to 125% 393 4 1,398 14
More than 125% 563 5 4,405 43
Unsecured 849 8 332 3
------------- ------ ------------------ --------
10,622 100 10,204 100
------ --------
Exposures < GBP5 million 8,976 1,727
------------- ------------------
Total 19,598 11,931
------------- ------------------
(1) Restated to reflect a change in methodology from registered address
of borrower to location of underlying collateral.
Acquisition (Leverage) Finance lending
Core Acquisition Finance
Gross drawn lending totalled GBP2,128 million (net GBP2,111
million) as at 31 December 2013. The portfolio comprises leveraged
financing facilities made available, predominantly, to UK borrowers
owned by private equity sponsors. The majority of transactions have
been structured in the past three years and all are in line with
the Group's risk appetite. Refinancing risk is not considered a
material issue for the portfolio due to the relatively young
vintage of the book and conservative risk parameters.
Non-core Acquisition Finance
Gross drawn lending totalled GBP836 million (net GBP667 million)
as at 31 December 2013. Impairment charges in the
non-core Acquisition Finance portfolio continue to decline
significantly, reflecting further material reductions in the size
of the portfolio and stabilising market conditions. Disposals of
GBP1,566 million (net book value) were achieved during 2013.
CREDIT RISK PORTFOLIO (continued)
Commercial Banking (continued)
Forbearance
A key factor in determining whether the Group treats a
commercial customer as forborne is the granting of a concession to
a borrower who is in financial difficulty.
Loans that have been renegotiated and/or restructured for solely
commercial reasons, where there is no financial difficulty would
not be treated as forborne. The Group does not believe the concept
of forbearance attaches to the trading book where assets are marked
to market daily.
The Group recognises that forbearance alone is not necessarily
an indicator of impaired status but is a trigger point for the
review of the customer's credit profile. The Group grants
forbearance when it believes that there is a realistic prospect of
the customer continuing to be able to repay all facilities in full.
If there is any concern over future cash flows and the Group
incurring a loss, then forborne loans will be classified as
impaired in accordance with the Group's impairment policy.
Recovery can sometimes be through improvement in market or
economic conditions, or the customer may benefit from access to
alternative sources of liquidity such as an equity injection. These
can be especially relevant in real estate or other asset backed
transactions where a fire sale of assets in a weak market may be
unattractive.
Depending on circumstances and when operated within robust
parameters and controls, the Group believes forbearance can help
support the customer in the short to medium-term.
Therefore the Group expects to have unimpaired forborne assets
within its portfolios, although as noted below, these are
specifically controlled and managed. Unimpaired forborne assets are
included in calculating the overall collective unimpaired
provision, and which uses the historical observed default rate of
the portfolio as a whole as part of
its calculation.
Types of forbearance
Forbearance treatments may include changes to:
-- Contractual payment terms (for example loan extensions, or
changes to debt servicing terms), and
-- Non-payment contractual terms (for example covenant
amendments or waivers) where the modifications enable default to be
avoided.
The four main types of forbearance concessions to commercial
customers in financial difficulty are set out below:
- Covenants: This includes temporary and permanent waivers,
amendment or resetting of non-payment contractual covenants
(including LTV and interest cover). The granting of this type of
concession in itself would not result in the loan being classified
as impaired;
- Extensions/Alterations: This includes extension and/or
alteration of repayment terms to a level outside of market or the
Group's risk appetite due to the customer's inability to make
existing contractual repayment terms; amendments to an interest
rate to a level considered outside of market or the Group's risk
appetite, or other amendments such as changes to debt servicing
arrangements;
- Forgiveness: This includes debt for equity swaps or partial
debt forgiveness. This type of forbearance will always give rise to
impairment; and
- Multiple type of forbearance (a mixture of the above three).
Where a concession is granted to an obligor that is not in
financial difficulty or the risk profile is considered within
current risk appetite, the concession would not be considered to be
an act of forbearance.
CREDIT RISK PORTFOLIO (continued)
Commercial Banking (continued)
A number of options are available to the Group where a customer
is facing financial difficulty, and each case is treated depending
on its own specific circumstances.
The Group's strategy and offer of forbearance is largely
dependent on the individual situation and early identification,
control and monitoring are key in order to support the customer and
protect the Group. Concessions are often provided to help the
customer with their day to day liquidity and working capital.
Forbearance identification and classification
The Group's policy is to treat all impaired assets in Commercial
Banking as having been granted some form of forbearance. Impaired
loans and advances can only exist in Business Support/ Global Non
Core (or Customer Support for smaller SME customers). Unimpaired
forborne loans and advances exist both in the good book and in
Business Support/Global Non Core.
All non-retail loans and advances in Commercial Banking are
reviewed at least annually by the independent Risk Division. As
part of our long established Credit Risk Classification system,
every loan and advance in the good book is categorised as either
'good' or 'watchlist'.
The watchlist is further categorised depending on the current
and expected credit risk attaching to the obligor and the
transaction. All watchlist names are reviewed by the Business and
Risk at least once a month, and the classification is updated if
required.
Any concession requested by an obligor is carefully reviewed and
must be approved by the independent Risk Division. As part of the
review, Risk will determine if financial difficulty is observed. If
so, then it is policy that any off market concession granted,
including where outside Group appetite (that would not be
considered in the normal course of business) is automatically
treated as forbearance and the classification is amended from
'good' to 'watchlist', and subject to monthly reviews. For the
avoidance of doubt, however, where the concession is granted to an
obligor that it is not in financial difficulty or the risk profile
is considered within current risk appetite, the concession would
not be considered to be an act of forbearance.
Any event that has an adverse or potentially adverse impact on
the ability of the customer to repay in full is likely to result in
the asset being impaired and, if required, an impairment allowance
recognised. If this results in an identification of impairment, the
obligor is immediately transferred to Business Support and will be
treated as an impaired asset. If not, then Risk will determine if
the obligor should stay in the good book (categorised as
watchlist), or transfer to Business Support for more intensive
monitoring.
All reviews (whether in the good book or Business Support/Global
Non Core) include analysis of latest financial information, a
consideration of the market and sector the obligor operates in,
performance against plan and revised terms and conditions granted
as part of the forbearance concession.
Exit from forbearance classification
An obligor where forbearance has been granted will remain
treated and recorded as forborne until it evidences acceptable
performance over a period of time. This period will depend on a
number of factors such as whether the obligor is trading in line
with its revised plan, it is operating within the new terms and
conditions (including observation to revised covenants and
contractual payments), its financial performance is stable or
improving, and there are no undue concerns over its future
performance. As a minimum, this period is currently expected to be
at least 12 months following a forbearance event (during 2014, the
minimum cure period will be reviewed again in conjunction with
regulatory requirements). However, notwithstanding this, the
overriding requirement is that the financial difficulty previously
seen has been removed, and the performance has stabilised.
CREDIT RISK PORTFOLIO (continued)
Commercial Banking (continued)
Once an obligor evidences acceptable performance over a period
of time, the Group would expect that it could be returned to the
mainstream good classification and they would no longer be
considered forborne. It is important to note that such a decision
can be made only by the independent Risk Division.
Currently, the exception to this 12 month minimum period is
where a permanent structural cure is made (for example, this could
be an injection of new collateral security or partial repayment of
debt to restore an LTV back to within the covenant). In this case,
the obligor may be removed from the forbearance category once the
permanent cure has
been made.
Further analysis of the forborne loan balance is set out
below:
Impairment provisions
Total loans and as % of loans
advances which and advances
are forborne which are forborne
----------------- -----------------------
At 31 December 2013 2012 2013 2012
GBPm GBPm % %
Impaired 14,714 23,965 43.6 41.7
Unimpaired 6,221 9,027 - -
Total 20,935 32,992 30.6 30.3
-------- -------
All impaired assets are considered forborne. At 31 December
2013, GBP6,221 million (31 December 2012: GBP9,027 million) of its
unimpaired assets are also considered forborne as a result of
proactive management of cases to help customers in financial
difficulties. Of this figure, GBP3,789 million was classified as
non-core, with the remaining GBP2,432 million classified as
core.
The table below sets out the Group's largest unimpaired forborne
loans and advances to commercial customers (exposures over GBP5
million) as at 31 December 2013 by type of forbearance, together
with a breakdown on which exposures are classified as Direct Real
Estate:
Other
Direct industry
Real Estate sector Total
At 31 December 2013 GBPm GBPm GBPm
Type of unimpaired forbearance
UK(1) exposures > GBP5 million
------------ --------- -----
Covenants 1,555 842 2,397
Extensions 200 343 543
Multiple 23 380 403
------------ --------- -----
1,778 1,565 3,343
Exposures < GBP5 million and other non-UK(1) 2,878
-----
Total 6,221
-----
(1) Based on location of the office recording the transaction.
CREDIT RISK PORTFOLIO (continued)
Wealth, Asset Finance and International
-- Impairment charge was GBP730 million, 51 per cent lower than
2012. The improvement was primarily driven by the
Irish portfolio.
-- In the Irish wholesale portfolios 88.3 per cent (31 December
2012: 85.2 per cent) is now impaired with an impairment provisions
as a percentage of impaired loans of 73.1 per cent (31 December
2012: 68.0 per cent), primarily reflecting continued deterioration
in the Irish commercial property market. Net exposure in Ireland
wholesale has fallen to GBP3.4 billion (31 December 2012: GBP5.4
billion).
-- In the Irish retail mortgage portfolio, impairment provisions
as a percentage of impaired loans decreased to 63.4 per cent (31
December 2012: 71.2 per cent), driven by the sale of a portfolio of
non performing mortgages.
International
Ireland
The Group continues to reduce its exposure to Ireland with gross
loans and advances reducing by GBP4,157 million during 2013 mainly
due to disposals, write-offs and net repayments.
Total impaired loans decreased by GBP3,177 million, or 25 per
cent to GBP9,324 million compared with GBP12,501 million at 31
December 2012. The reduction was driven primarily by commercial
real estate and corporate loans. Impaired loans as a percentage of
closing loans and advances decreased to 60.6 per cent compared to
64.0 per cent at December 2012. Continuing weakness in the Irish
real estate markets resulted in a further increase in Ireland
wholesale coverage in 2013 to 73.1 per cent.
Impairment charges decreased by GBP637 million to GBP608 million
compared to 2012. The impairment charge as an annualised percentage
of average loans and advances to customers improved to 3.28 per
cent from 5.53 per cent
in 2012.
Ireland retail loans and advances to customers decreased to
GBP5,944 million in 2013 from GBP6,656 million at 31 December 2012.
Impaired loans as a percentage of loans and advances decreased to
16.9 per cent from 23.0 per cent at 31 December 2012. In the Irish
retail mortgage portfolio impairment provisions as a percentage of
impaired loans decreased to 63.4 per cent (from 71.2 per cent at 31
December 2012). These decreases have all been driven by the sale of
a portfolio of non performing mortgages.
The most significant contribution to impaired loans in Ireland
is the Commercial Real Estate portfolio. 92.3 per cent of the
portfolio is now impaired compared to 90.7 per cent at 31 December
2012. The impairment provisions as a percentage of impaired loans
increased in the year to 74.2 per cent from 69.9 per cent at 31
December 2012 reflecting the continued deterioration in commercial
real estate prices in Ireland.
Ireland impairment charge
2013 2012 Change
GBPm GBPm %
Retail (26) 108
Commercial real estate 219 739 70
Corporate 415 398 (4)
---- -----
Total 608 1,245 51
---- -----
CREDIT RISK PORTFOLIO (continued)
Wealth, Asset Finance and International (continued)
Ireland impaired loans and provisions
Impaired Impairment
loans as provision
Loans and % as
advances Impaired of closing Impairment % of impaired
At 31 December 2013 to customers loans advances provisions loans
GBPm GBPm % GBPm %
Retail 5,944 1,002 16.9 638 63.7
Commercial real estate 5,512 5,087 92.3 3,775 74.2
Corporate 3,918 3,235 82.6 2,305 71.3
------------- -------- -----------
Total 15,374 9,324 60.6 6,718 72.1
------------- -------- -----------
At 31 December 2012
Retail 6,656 1,534 23.0 1,111 72.4
Commercial real estate 7,408 6,720 90.7 4,695 69.9
Corporate 5,467 4,247 77.7 2,768 65.2
------------- -------- -----------
Total 19,531 12,501 64.0 8,574 68.6
------------- -------- -----------
Commercial Real Estate lending in Ireland: secured loan to value
analysis
Loan to value ratios (indexed or actual if within last 18
months) for the Group's largest transactions (over EUR5 million)
are detailed in the table below. The Group considers this portfolio
to be appropriately provided for after taking into account the
provisions held for each transaction and the value of the
collateral held. In the case of impaired Ireland commercial real
estate exposures (over EUR5 million) there is a net property
collateral shortfall of approximately GBP0.2 billion. This figure
excludes benefits of credit mitigants such as cross
collateralisation and cross guarantees. The Group makes use of a
variety of methodologies to assess the value of property
collateral, where external valuations are not available. These
include use of market indexes, models and subject matter expert
judgement.
At 31 December 2013 At 31 December 2012
--------------------- ---------------------
GBPm % GBPm %
Gross exposures > EUR5 million:
------------
Less than 60% 84 2 119 2
61% to 70% 11 - 20 -
71% to 80% 15 - 27 -
81% to 100% 88 2 165 3
101% to 125% 81 2 182 3
More than 125% 3,555 83 4,927 81
Unsecured 440 11 674 11
------------ ------- ------------ -------
4,274 100 6,114 100
------- -------
Gross exposures < EUR5 million 1,238 1,294
------------ ------------
Total 5,512 7,408
------------ ------------
CREDIT RISK PORTFOLIO (continued)
Wealth, Asset Finance and International (continued)
Other International
Total impaired loans decreased to GBP212 million at 31 December
2013 compared to GBP299 million at 31 December 2012 driven by the
sale of the Spain retail portfolio. In the Netherlands impairment
provisions as a percentage of impaired loans increased to 52.3 per
cent from 51.9 per cent at 31 December 2012.
Asset Finance
United Kingdom: the impairment charge in the year to 2013
reduced by 53 per cent to GBP57 million (of which GBP43 million
related to non-core assets) compared with GBP121 million in the
year to 2012, driven by continued strong credit management and
further improved credit quality. The retail portfolio saw fewer
customers failing to meet their payment arrangements resulting in a
lower proportion of people falling into arrears. The retail
impairments also benefited from debt sale activity during the
course of the year. The number of defaults in all areas of the
commercial and corporate lending book was low relative to the last
three years, reflecting effective previous and ongoing credit
risk
management actions.
Australia: the portfolio was fully disposed of in the second
half of 2013.
Forbearance
The Group operates a number of schemes to assist borrowers who
are experiencing financial stress. For retail customers, the Group
classifies forbearance treatments into the categories shown for
Retail division. For commercial customers, the Group classifies
forbearance treatments in line with Commercial Banking division.
Details of these treatments are shown on pages 49 and 57
respectively.
CREDIT RISK PORTFOLIO (continued)
Wealth, Asset Finance and International (continued)
Secured retail lending - Ireland
At 31 December 2013, Irish secured loans and advances subject to
current or recent forbearance were 12.2 per cent (31 December 2012:
12.3 per cent) of total Irish retail secured loans and advances.
Further analysis of the forborne loan balances is set out
below:
Impairment provisions
Total loans and Total current as % of loans
advances which and recent forborne and advances which
are currently loans and advances are currently
At 31 December or recently forborne which are impaired(1) or recently forborne
----------------------- ------------------------ -----------------------
2013 2012(2) 2013 2012(2) 2013 2012(2)
GBPm GBPm GBPm GBPm % %
Temporary forbearance
arrangements
-------- ------------- -------- --------------
Reduced contractual
monthly payment - - - - - -
Reduced payment arrangements(3) 254 385 227 336 49.8 45.2
-------- ------------- -------- --------------
254 385 227 336 49.8 45.2
-------- ------------- -------- --------------
Permanent treatments
Repair and term extensions(4) 473 430 102 71 14.4 27.9
Total 727 815 329 407 26.7 36.1
-------- ------------- -------- --------------
Included in the total
above:
Temporary arrangements
currently on treatment 224 300 43 32 13.9 30.1
Permanent treatments
within last 12 months 196 272 174 232 50.0 44.5
(1) GBP398 million of current and recent forborne loans and advances were not impaired at 31 December
2013
(31 December 2012: GBP408 million).
(2) The 2012 numbers have been restated to reflect the change in forbearance probation periods.
Previously only temporary arrangements in place at the year end and permanent changes commenced
during the year were shown.
(3) Includes customers who had an arrangement to pay less than the contractual amount at 31 December
or where an arrangement ended within the previous three months.
(4) Includes capitalisation of arrears and term extensions which commenced during the previous
24 months and remaining as customers at the year end.
CREDIT RISK PORTFOLIO (continued)
Wealth, Asset Finance and International (continued)
Asset Finance retail lending
Asset Finance operates a number of retail portfolios including
Black Horse Motor Finance as well as a number of portfolios closed
to new business and currently in run-off. The reduction in the
level of forborne loans in 2013 was driven by the continuing
run-off and sale of non-core portfolios. The table below includes
both the open and closed retail portfolios in the Asset Finance
business. For temporary forbearance arrangements, it includes
accounts that are currently on a forbearance treatment. For
permanent forbearance treatments, it includes capitalisation of
arrears which commenced during the previous 12 months.
Impairment provisions
Total loans and Total forborne as % of loans
advances which loans and advances and advances which
are forborne which are impaired(1) are forborne
----------------- ------------------------ -----------------------
At 31 December 2013 2012 2013 2012 2013 2012
GBPm GBPm GBPm GBPm % %
Reduced contractual
monthly payment 209 328 192 301 62.8 58.0
Reduced payment arrangements 63 112 56 102 24.9 24.8
Repair 5 7 1 2 2.3 1.6
Total 277 447 249 405 53.2 48.8
-------- ------- ----------- -----------
(1) GBP28 million of forborne loans and advances were not impaired at 31 December 2013 (31 December
2012: GBP42 million).
Ireland wholesale
All loans and advances in Ireland wholesale (whether impaired or
unimpaired) are treated as forborne and all assets are classified
as non-core.
Impairment provisions
Total loans and as % of loans
advances which and advances
are forborne which are forborne
----------------- -----------------------
At 31 December 2013 2012 2013 2012
GBPm GBPm % %
Impaired 8,322 10,967 73.1 68.0
Unimpaired 1,108 1,908 - -
Total 9,430 12,875 64.5 58.0
------- --------
FUNDING AND LIQUIDITY MANAGEMENT
The transformation of the Group's funding position has been
substantially completed. The continued run down of the non-core
asset portfolios and the growth in customer deposits has
strengthened the Group's funding position and reduced exposure to
wholesale funding. The Group is now in a position where the core
loan book is fully funded by core deposits (core loan to deposit
ratio 100 per cent). This strong funding position has enabled the
Group to undertake a number of funding related actions during the
course of the year. In May 2013 the Group repaid in full the
remaining EUR3.5 billion of outstanding Long Term Refinancing
Operation (LTRO) funding from the European Central Bank having
earlier repaid EUR10 billion in February 2013. In addition to this,
during 2013 the Group repaid other term funding totalling GBP12.6
billion early.
In 2009 the Group entered into a number of EU State aid related
obligations one of which was reductions in certain parts of its
balance sheet by the end of 2014. The Group achieved the asset
reduction commitment ahead of the mandated completion date and has
received formal confirmation that it has been released from this
commitment from the European Commission.
Market conditions continued to improve during 2013 along with
investor confidence in the UK economy. The Group has experienced
reduced term issuance costs and spreads on outstanding issuance
have remained significantly narrower than previous years. As well
as improved market conditions, rating changes for the Group were
positive. A report from Standard & Poor's published on 3
December 2013 affirmed the Lloyds Bank 'A / A-1' long / short-term
rating and revised upwards the stand alone rating from 'bbb' to
'bbb+'. The ratings action was reflective of, in the opinion of
Standard & Poor's, a strengthened capital position and stronger
prospects for Lloyds Bank's statutory earnings.
The combination of a strong balance sheet and access to a wide
range of funding markets, including government schemes, provides
the Group with a broad range of options with respect to funding the
balance sheet in the future.
Group funding sources
Total funded assets reduced by GBP28.5 billion to GBP510.2
billion. This reduction enabled the Group to make changes in
wholesale funding which reduced by GBP32.0 billion to GBP137.6
billion, with the volume with a residual maturity less than one
year reducing to GBP44.2 billion (GBP50.6 billion at 31 December
2012). The Group's term funding ratio (wholesale funding with a
remaining life of over one year as a percentage of total wholesale
funding) reduced to 68 per cent (70 per cent at 31 December 2012)
as expected in line with maturities of wholesale term funding and
limited term wholesale issuance in 2013.
The Group core loan to deposit ratio improved to 100 per cent
from 101 per cent at 31 December 2012. The Group loan to deposit
ratio has improved to 113 per cent compared with 121 per cent at 31
December 2012, driven by strong deposit growth and non-core asset
reduction. Excluding reverse repos and repos, loans and advances to
customers reduced by GBP16.9 billion, customer deposits increased
by GBP15.8 billion, and there was a continued reduction in non-core
assets (31 December 2013: GBP63.5 billion; 31 December 2012:
GBP98.4 billion).
FUNDING AND LIQUIDITY MANAGEMENT (continued)
Group funding position
At 31 Dec At 31 Dec
2013 2012(1) Change
GBPbn GBPbn %
Funding requirement
Loans and advances to customers(2) 495.2 512.1 (3)
Loans and advances to banks(3) 5.1 12.5 (59)
Debt securities 1.4 5.3 (74)
Reverse repurchase agreements 0.2 -
Available-for-sale financial assets
- secondary(4) 4.4 5.3 (17)
Cash balances(5) 3.9 3.5 11
--------- ---------
Funded assets 510.2 538.7 (5)
Other assets(6) 248.6 302.2 (18)
--------- ---------
758.8 840.9 (10)
On balance sheet primary liquidity assets(7)
--------- ---------
Reverse repurchase agreements 0.1 5.8 (98)
Balances at central banks - primary(5) 46.0 76.8 (40)
Available-for-sale financial assets
- primary 39.6 26.1 52
Trading and fair value through profit
and loss 3.1 (9.4)
Repurchase agreements (0.6) (5.9) (90)
--------- ---------
88.2 93.4 (6)
Total Group assets 847.0 934.3 (9)
Less: Other liabilities(6) (227.5) (277.8) (18)
--------- ---------
Funding requirement 619.5 656.5 (6)
--------- ---------
Funded by
Customer deposits(8) 438.3 422.5 4
Wholesale funding(9) 137.6 169.6 (19)
--------- ---------
575.9 592.1 (3)
Repurchase agreements 4.3 21.8 (80)
Total equity 39.3 42.6 (8)
--------- ---------
Total funding 619.5 656.5 (6)
--------- ---------
(1) Restated to reflect the implementation of IAS 19R and IFRS 10.
See page 123.
(2) Excludes GBP0.1 billion (31 December 2012: GBP5.1 billion) of reverse
repurchase agreements.
(3) Excludes GBP20.1 billion (31 December 2012: GBP19.6 billion) of
loans and advances to banks within the Insurance business and GBP0.2
billion (31 December 2012: GBP0.7 billion) of reverse repurchase
agreements.
(4) Secondary liquidity assets comprise a diversified pool of highly
rated unencumbered collateral (including retained issuance).
(5) Cash balances and balances at central banks - primary are combined
in the Group's balance sheet.
(6) Other assets and other liabilities primarily include balances in
the Group's Insurance business and the fair value of derivative
assets and liabilities.
(7) Primary liquidity assets are PRA eligible liquid assets including
UK Gilts, US Treasuries, Euro AAA government debt and unencumbered
cash balances held at central banks.
(8) Excluding repurchase agreements of GBP3.0 billion (31 December
2012: GBP4.4 billion).
(9) The Group's definition of wholesale funding aligns with that used
by other international market participants; including interbank
deposits, debt securities in issue and subordinated liabilities.
FUNDING AND LIQUIDITY MANAGEMENT (continued)
Reconciliation of Group funding figure to the balance sheet
Included
in Fair value
funding and other
analysis accounting Balance
At 31 December 2013 (above) Repos methods sheet
GBPbn GBPbn GBPbn GBPbn
Deposits from banks 12.1 1.9 - 14.0
Debt securities in issue 91.6 - (4.5) 87.1
Subordinated liabilities 33.9 - (1.6) 32.3
--------- -----
Total wholesale funding 137.6 1.9
Customer deposits 438.3 3.0 - 441.3
--------- -----
Total 575.9 4.9
--------- -----
Included
in Fair value
funding and other
analysis accounting Balance
At 31 December 2012(1) (above) Repos methods sheet
GBPbn GBPbn GBPbn GBPbn
Deposits from banks 15.1 23.3 - 38.4
Debt securities in issue 120.4 - (3.1) 117.3
Subordinated liabilities 34.1 - - 34.1
--------- -----
Total wholesale funding 169.6 23.3
Customer deposits 422.5 4.4 - 426.9
--------- -----
Total 592.1 27.7
--------- -----
(1) Restated to reflect the implementation of IAS 19R and IFRS 10.
See page 123.
Analysis of 2013 total wholesale funding by residual
maturity
Nine Total Total
Less One Three Six months One Two More at at
than to to to to to to than 31 31
one three six nine one two five five Dec Dec
month months months months year years years years 2013 2012
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Deposit from
banks 9.5 0.6 0.3 - 0.7 0.3 0.2 0.5 12.1 15.1
Debt securities
in issue:
----- -----
Certificates of
deposit 1.0 3.4 2.4 1.3 0.9 - - - 9.0 10.7
Commercial
paper 2.3 2.0 0.4 - 0.1 - - - 4.8 7.9
Medium-term
notes(1) 0.8 0.4 1.8 0.1 2.2 5.7 9.5 8.6 29.1 34.6
Covered bonds 0.9 - 0.7 - 3.0 3.3 8.8 12.7 29.4 38.7
Securitisation 2.8 - 0.9 - 3.3 7.7 4.6 - 19.3 28.5
----- ------ ------- ------- ------- ------ ------ ------ ----- -----
7.8 5.8 6.2 1.4 9.5 16.7 22.9 21.3 91.6 120.4
Subordinated
liabilities 0.3 0.3 0.6 0.6 0.6 3.3 5.9 22.3 33.9 34.1
----- ------ ------- ------- ------- ------ ------ ------ ----- -----
Total wholesale
funding(2) 1 17.6 6.7 7.1 2.0 10.8 20.3 29.0 44.1 137.6 169.6
----- ------ ------- ------- ------- ------ ------ ------ ----- -----
(1) Medium-term notes include funding from the National Loan Guarantee
Scheme (31 December 2013: GBP1.4 billion; 31 December 2012: GBP1.4
billion).
(2) The Group's definition of wholesale funding aligns with that used
by other international market participants; including interbank
deposits, debt securities in issue and subordinated liabilities.
FUNDING AND LIQUIDITY MANAGEMENT (continued)
Analysis of 2013 term issuance
Other
Sterling US Dollar Euro currencies Total
GBPbn GBPbn GBPbn GBPbn GBPbn
Securitisation - 0.5 - - 0.5
Medium-term notes - 0.6 1.3 - 1.9
Private placements(1) 0.1 0.4 1.3 0.1 1.9
-------- --------- ----- ----------- -----
Total issuance 0.1 1.5 2.6 0.1 4.3
-------- --------- ----- ----------- -----
Private placements include structured bonds and term repurchase
(1) agreements (repos).
Term issuance for 2013 totalled GBP4.3 billion with the majority
across medium-term notes and private placements. Utilisation of the
UK government's Funding for Lending Scheme (FLS) has further
underlined the Group's support to the UK economic recovery, and the
Group remains committed to passing the benefits of this low cost
funding on to its customers. The Group drew down GBP3.0 billion in
2012 and GBP5.0 billion in 2013 under the FLS scheme. A further
GBP2.2 billion was drawn in January 2014, which under the FLS
rules, counts as funding from the 2013 scheme capacity.
Encumbered assets
The Board monitors and manages total balance sheet encumbrance
via a risk appetite metric. During 2013 the Group had term issuance
of GBP0.5 billion from securitisations and covered bonds.
Maturities have led to a reduction in externally held notes from
residential mortgage backed securitisations and covered bond
issuance. Total notes issued externally from secured programmes
(asset backed securities and covered bonds) have fallen from
GBP68.7 billion (assets encumbered GBP103.2 billion, pro rated by
programme) at 31 December 2012 to GBP49.3 billion (assets
encumbered GBP81.2 billion, pro rated by programme) at 31 December
2013.
FUNDING AND LIQUIDITY MANAGEMENT (continued)
Liquidity portfolio
At 31 December 2013, the Group had GBP89.3 billion (31 December
2012: GBP87.6 billion) of highly liquid unencumbered assets in its
primary liquidity portfolio which are available to meet cash and
collateral outflows and PRA regulatory requirements, as illustrated
in the table below. In addition the Group had GBP105.4 billion
(2012: GBP117.1 billion) of secondary liquidity which is eligible
for use in a range of central bank or similar facilities. This
liquidity is managed as a single pool in the centre and is under
the control of the function charged with managing the liquidity of
the Group. It is available for deployment at immediate notice,
subject to complying with regulatory requirements, and is a key
component of the Group's liquidity management process.
At 31 Dec At 31 Dec Average Average
Primary liquidity 2013 2012 2013 2012
GBPbn GBPbn GBPbn GBPbn
Central bank cash deposits 46.0 76.8 69.4 78.3
Government bonds 43.3 10.8 28.2 21.1
--------- --------- ------- -------
Total 89.3 87.6 97.6 99.4
--------- --------- ------- -------
At 31 Dec At 31 Dec Average Average
Secondary liquidity 2013 2012 2013 2012
GBPbn GBPbn GBPbn GBPbn
High-quality ABS/covered bonds(1) 1.4 2.8 2.0 2.1
Credit institution bonds(1) 0.4 3.4 1.2 2.8
Corporate bonds(1) 0.1 0.1 0.1 0.1
Own securities (retained issuance) 22.1 44.9 33.3 50.2
Other securities 4.3 5.0 4.8 8.3
Other(2) 77.1 60.9 75.2 49.8
--------- --------- ------- -------
Total 105.4 117.1 116.6 113.3
--------- --------- ------- -------
Total liquidity 194.7 204.7
--------- ---------
(1) Assets rated A- or above.
(2) Includes other central bank eligible assets.
Primary liquid assets of GBP89.3 billion represent approximately
4.2 times (3.5 times at 31 December 2012) the Group's money market
funding less than one year maturity (excluding derivative
collateral margins and settlement accounts) and are approximately
2.0 times (1.7 times at 31 December 2012) all wholesale funding
less than one year maturity, and thus provides a substantial buffer
in the event of continued market dislocation.
In addition to primary liquidity holdings the Group has
significant secondary liquidity holdings providing access to
liquidity facilities at a number of central banks which the Group
routinely makes use of as part of its normal liquidity management
practices. Future use of such facilities will be based on prudent
liquidity management and economic considerations, having regard for
external market conditions. The Group considers diversification
across geography, currency, markets and tenor when assessing
appropriate holdings of primary and secondary liquid assets and
expects to see some transition from primary to secondary assets
over the course of 2014.
The Group notes that the Liquidity Coverage Ratio (LCR) will
become the Pillar I standard for liquidity in the UK in 2015, and
that the PRA has the ability to impose firm specific liquidity
requirements. The European Commission is to adopt further
legislation by 30 June 2014 to specify the definition, calibration,
calculation and phase-in of the LCR for implementation in 2015. The
Group expects to meet the new requirements ahead of the
implementation dates.
CAPITAL MANAGEMENT
The Group made significant progress in further strengthening its
capital position in 2013 through its strongly capital generative
strategy, including capital-efficient profit generation in the core
business, the release of capital through
non-core asset disposals and the successful delivery of
management actions.
-- Core tier 1 ratio, based on the capital regulations as at 31
December 2013, increased 2.0 percentage points from 12.0 per cent
to 14.0 per cent.
-- Pro forma fully loaded CET1 ratio under the CRD IV rules
increased 2.2 percentage points from 8.1 per cent to 10.3 per cent
whilst the ratio excluding pro forma impacts increased to 10.0 per
cent.
-- Pro forma fully loaded CRD IV leverage ratio including tier 1
instruments was 4.1 per cent and was 3.4 per cent when including
only CET1 capital resources. Excluding the pro forma impacts, the
fully loaded ratio including tier 1 instruments was 4.0 per cent
and 3.4 per cent when including only CET1 capital resources.
-- Under the January 2014 revised Basel lll leverage ratio
framework, the Group's fully loaded leverage ratio is estimated to
improve significantly to 4.5 per cent on a pro forma basis
including tier 1 instruments, and 3.8 per cent including only CET1
capital resources.
-- These leverage ratios comfortably exceed the 3 per cent
minimum requirement recommended by the Basel Committee, which is
scheduled for implementation in 2018.
Over the course of 2013 there have been significant regulatory
developments in the area of capital and the related management. The
principal changes relate to the finalisation of CRD IV and
subsequent consultation and finalisation of PRA requirements for
their implementation in the UK and the 2013 announcements that
major UK banks are expected to meet specific targets on an adjusted
basis for CET1 and leverage ratios. The Group notes the final
statements from the PRA on the implementation of capital
requirements in the UK and will continue to work with the regulator
to ensure that the Group continues to meet the regulator's capital
expectations. The Group continuously evaluates the efficiency of
its capital structure, management of which may result in
significant one-off charges or gains, and its capital structure's
alignment with the regulatory framework. With the adoption of CRD
IV, the Group is considering opportunities to raise new Additional
tier 1 securities which would rank senior to ordinary shares, and
be automatically convertible into ordinary shares if the Group's
common equity tier 1 ratio fell below a specified trigger
point.
Capital position at 31 December 2013
The Group's capital position applying prevailing rules as at 31
December 2013 is set out in the following section. Additionally,
information about the Group's capital position on a CRD IV basis is
set out on page 74.
CAPITAL MANAGEMENT (continued)
At 31 Dec At 31 Dec
Capital resources 2013 2012(2)
GBPm GBPm
Core tier 1
Shareholders' equity per balance sheet 38,989 43,999
Non-controlling interests per balance sheet 347 685
Regulatory adjustments:
Regulatory adjustments to non-controlling interests (315) (628)
Adjustment for own credit 185 217
Defined benefit pension adjustment (78) (1,438)
Unrealised reserve on available-for-sale debt
securities 750 (343)
Unrealised reserve on available-for-sale equity
investments (135) (56)
Cash flow hedging reserve 1,055 (350)
Other items 452 33
41,250 42,119
Less: deductions from core tier 1
Goodwill (2,016) (2,016)
Intangible assets (1,799) (2,091)
50 per cent excess of expected losses over impairment
provisions (373) (636)
50 per cent of securitisation positions (71) (183)
Core tier 1 capital 36,991 37,193
Non-controlling preference shares(1) 1,060 1,568
Preferred securities(1) 3,982 4,039
Less: deductions from tier 1
50 per cent of material holdings (3,859) (46)
Total tier 1 capital 38,174 42,754
--------- ---------
Tier 2
Undated subordinated debt 1,825 1,828
Dated subordinated debt 18,567 19,886
Unrealised gains on available-for-sale equity
investments provisions 135 56
Eligible provisions 359 977
Less: deductions from tier 2
50 per cent excess of expected losses over impairment
provisions (373) (636)
50 per cent of securitisation positions (71) (183)
50 per cent of material holdings (3,859) (46)
--------- ---------
Total tier 2 capital 16,583 21,882
--------- ---------
Supervisory deductions
Unconsolidated investments - life - (10,104)
- general insurance and other - (929)
--------- ---------
Total supervisory deductions - (11,033)
--------- ---------
Total capital resources 54,757 53,603
--------- ---------
Risk-weighted assets 263,850 310,299
Core tier 1 capital ratio 14.0% 12.0%
Tier 1 capital ratio 14.5% 13.8%
Total capital ratio 20.8% 17.3%
(1) Covered by existing grandfathering provisions.
(2) 31 December 2012 comparatives have not been restated to reflect
the implementation of IAS 19R and IFRS 10.
CAPITAL MANAGEMENT (continued)
The movements in core tier 1, tier 1, tier 2 and total capital
in the period are shown below:
Movements in capital
Core tier Supervisory Total
1 Tier 1 Tier 2 deductions capital
GBPm GBPm GBPm GBPm GBPm
At 31 December 2012(1) 37,193 5,561 21,882 (11,033) 53,603
Loss attributable to ordinary
shareholders (838) - - - (838)
Share issuance 510 - - - 510
Pension movements:
Implementation of IAS 19R(2) (1,258) - - - (1,258)
Deduction of pension asset 515 - - - 515
Movement through other comprehensive
income (108) - - - (108)
Goodwill and intangible
assets deductions 292 - - - 292
Excess of expected losses
over impairment provisions 263 - 263 - 526
Change in treatment of
material holdings - (5,517) (5,516) 11,033 -
Material holdings deduction - 1,704 1,703 - 3,407
Eligible provisions - - (618) - (618)
Subordinated debt movements:
Foreign exchange - 40 98 - 138
New issuances - - - - -
Repurchases, redemptions,
amortisation and other - (605) (1,420) - (2,025)
Other movements 422 - 191 - 613
--------- ------- ------- ----------- --------
At 31 December 2013 36,991 1,183 16,583 - 54,757
--------- ------- ------- ----------- --------
(1) 31 December 2012 comparatives have not been restated to reflect
the implementation of IAS 19R and IFRS 10.
(2) Includes the impact to other comprehensive income and movement
in the retirement benefit asset.
Core tier 1 capital resources have decreased by GBP202 million
in the period largely driven by movements relating to defined
benefit pension schemes and attributable loss, partially offset by
share issuances and reductions in excess expected losses and
intangible assets. The movements relating to pension schemes
primarily reflect the impact of the adoption of amendments to IAS
19, whereby valuation impacts relating to Group defined benefit
schemes flow through other comprehensive income, partially offset
by a reduction in the regulatory deduction of the defined benefit
pension scheme asset.
Tier 1 and tier 2 capital resources have reduced primarily due
to the reallocation of unconsolidated investments in Life and
General Insurance businesses, which were previously deducted as
supervisory deductions from total capital, to become deductions
from tier 1 capital (50 per cent of the total) and tier 2 capital
(also 50 per cent).
The material holdings deduction from capital, predominantly
relating to the Group's investment in its Insurance businesses, has
reduced by GBP3,407 million during the period reflecting payment by
the Insurance businesses to the banking group of dividends
totalling GBP2,155 million, elements of the Group's subordinated
debt holdings in the Insurance businesses that have been repaid
following the issuance of external subordinated debt in the period
and the disposal of the Group's holding in St. James's Place.
CAPITAL MANAGEMENT (continued)
At 31 Dec At 31 Dec
Risk-weighted assets 2013 2012
GBPm GBPm
Divisional analysis of risk-weighted assets:
Retail 85,677 95,470
Commercial Banking 138,541 165,209
Wealth, Asset Finance and International 25,886 36,167
Group Operations and Central items 13,746 13,453
--------- ---------
263,850 310,299
--------- ---------
Risk type analysis of risk-weighted assets:
Foundation Internal Ratings Based (IRB) approach 82,870 80,612
Retail IRB approach 85,139 91,445
Other IRB approach 9,221 12,396
--------- ---------
IRB approach 177,230 184,453
Standardised approach 41,150 73,665
--------- ---------
Credit risk 218,380 258,118
Counterparty credit risk 7,794 12,848
Operational risk 26,594 27,939
Market risk 11,082 11,394
--------- ---------
Total risk-weighted assets 263,850 310,299
--------- ---------
Retail risk-weighted assets reduced by GBP9.8 billion in the
year primarily due to improvements in credit quality due to
effective portfolio management and the impact of positive
macroeconomic factors, including favourable movements in UK house
prices.
The reductions of risk-weighted assets of GBP26.7 billion in
Commercial Banking and GBP10.3 billion in Wealth, Asset Finance and
International primarily reflect further non-core asset reduction,
the move to slotting models for Commercial Real Estate (CRE)
businesses and the impact of macroeconomic factors.
The reduction in Standardised approach risk-weighted assets is
largely due to the roll-out of new IRB approaches, predominantly
the implementation of slotting models in the UK and Ireland, and
non-core disposals.
Counterparty credit risk-weighted assets reduced from GBP12.8
billion to GBP7.8 billion. Contributing to this reduction are
mark-to-market changes, management actions and migration of
portfolios to the Foundation IRB approach.
Risk-weighted assets movement by key driver GBPbn GBPbn
At 31 December 2012 310.3
Management of the balance sheet (1.8)
Disposals (20.7)
External economic factors (15.4)
Model and methodology changes 3.2
Regulatory policy changes (5.4)
Other 0.4
------
Credit risk-weighted asset movement (39.7)
Counterparty credit risk-weighted asset movement (5.1)
Operational risk-weighted asset movement (1.3)
Market risk-weighted asset movement (0.3)
At 31 December 2013 263.9
------
CAPITAL MANAGEMENT (continued)
The risk-weighted asset movements table provides an analysis of
the movement in risk-weighted assets in 2013 and an insight in to
the key drivers of the movements in credit risk risk-weighted
assets over the course of the year as follows:
-- Management of the balance sheet includes risk-weighted asset
movements arising from new lending and asset run-off. During 2013
there was a small risk-weighted asset reduction of GBP1.8 billion
in this category.
-- Disposals include risk-weighted asset reductions arising from
the sale of assets, portfolios and businesses. Disposals reduced
risk-weighted assets by GBP20.7 billion, primarily reflecting
non-core disposals in Commercial Banking and Wealth, Asset Finance
and International.
-- External economic factors captures movements driven by
changes in the economic environment. The reduction in
risk-weighted assets of GBP15.4 billion is mainly due to changes
in underlying credit quality, favourable house price movements, and
non-core exposures moving into default under the Foundation IRB
approach.
-- Model and methodology changes include the movement in
risk-weighted assets arising from new model implementation, model
enhancement and changes in credit risk approach applied to certain
portfolios. Model and methodology changes increased risk-weighted
assets by GBP3.2 billion.
-- Regulatory policy changes represent changes required by
regulatory authorities. Substantially all of the GBP5.4 billion
reduction is due to the implementation of slotting models relating
to Commercial Real Estate and other exposures in the UK and
Ireland.
Within the categories above, risk-weighted asset movements can
arise as a result of credit risk exposures becoming adjustments to
capital resources, through expected losses, rather than being
risk-weighted.
CRD IV Capital and leverage information
The data in the following tables represents estimates reflecting
the Group's interpretation of the CRD IV rules published on 27 June
2013 via the Official Journal of the European Union (including
amendments made to the Regulation via the Corrigenda published on
30 November 2013) and the PRA policy statement PS7/13 issued on 19
December 2013. The actual capital ratios under CRD IV may differ as
the final rules are assessed in their entirety, related technical
standards are finalised and other guidance is issued by the
relevant regulatory bodies.
A number of final draft CRD IV implementing and regulatory
technical standards have already been issued by the European
Banking Authority (EBA) with a number of other draft standards
currently being taken through respective consultation processes.
The Group has not reflected the impact of these draft standards in
its CRD IV estimates, though it does not currently believe that
these would make a material difference to the capital position
outlined below.
Capital position on a CRD IV basis
The Group's capital position at 31 December 2013 is shown in the
table below calculated on the following three bases; firstly the
current prevailing regulatory framework; secondly applying the CRD
IV rules including the transitional arrangements that have been in
place from 1 January 2014; and thirdly on a fully loaded basis.
The transitional arrangements reflect the requirements of policy
statement PS7/13, issued by the PRA on 19 December 2013. This
differs from the Group's previously published statements, which
allowed for the transitional phasing of CET1 deductions consistent
with the FSA's previous policy guidance. This has resulted in a
material reduction in the transitional CET1 capital bringing this
close to the fully loaded position.
CAPITAL MANAGEMENT (continued)
Capital position on CRD IV basis
Prevailing
rules as
at 31 Dec Transitional Fully loaded
At 31 December 2013 2013 CRD IV rules CRD IV rules
GBPm GBPm GBPm
Core/common equity tier 1 (CET1)
Shareholders' equity per balance sheet 38,989 38,989 38,989
Adjustment for insurance equity(1) - (1,917) (1,917)
Regulatory adjustments:
Non-controlling interests 32 - -
Unrealised reserves on available-for-sale
assets 615 - -
Other adjustments 1,614 1,295 1,295
---------- ------------- -------------
41,250 38,367 38,367
less: deductions from core/common equity
tier 1
Goodwill and other intangible assets(1) (3,815) (1,979) (1,979)
Excess of expected losses over impairment
provisions (373) (866) (866)
Securitisation deductions (71) (141) (141)
Significant investments(1) - (2,909) (3,185)
Deferred tax assets - (5,025) (5,155)
Core/common equity tier 1 capital 36,991 27,447 27,041
---------- ------------- -------------
Pro forma core/common equity tier 1
capital(2) n/a 28,218 27,925
---------- ------------- -------------
Additional tier 1 (AT1)
Additional tier 1 instruments 5,042 4,486 -
less: deductions from tier 1
Significant investments (3,859) (677) -
Total tier 1 capital 38,174 31,256 27,041
---------- ------------- -------------
Pro forma total tier 1 capital(2) n/a 32,027 27,925
---------- ------------- -------------
Tier 2
Tier 2 instruments 20,392 19,870 15,636
Unrealised gain on available-for-sale
equity investments 135 - -
Eligible provisions 359 349 349
less: deductions from tier 2
Excess of expected losses over impairment
provisions (373) - -
Securitisation deductions (71) - -
Significant investments (3,859) (1,015) (1,692)
---------- ------------- -------------
Total capital resources 54,757 50,460 41,334
---------- ------------- -------------
Pro forma total capital resources(2) n/a 51,231 42,218
---------- ------------- -------------
Risk-weighted assets 263,850 272,092 271,078
Risk-weighted assets - pro forma(2) n/a 272,641 271,908
Core/common equity tier 1 capital ratio 14.0% 10.1% 10.0%
Tier 1 capital ratio 14.5% 11.5% 10.0%
Total capital ratio 20.8% 18.5% 15.2%
Pro forma core/common equity tier 1
capital ratio(2) n/a 10.3% 10.3%
Pro forma tier 1 capital ratio(2) n/a 11.7% 10.3%
Pro forma total capital ratio(2) n/a 18.8% 15.5%
31 December 2012(3)
Core/common equity tier 1 capital ratio 12.0% 11.6% 8.1%
Tier 1 capital ratio 13.8% 11.6% 8.1%
Total capital ratio 17.3% 16.7% 11.3%
(1) Removal of post-acquisition reserves impacts for Insurance business
as under CRD IV, as implemented by PRA policy statement PS7/13,
the deduction for significant investments in the equity of financial
sector entities is based on cost of investment where previously
this was based on net asset value. The overall impact of this
change on the CRD IV ratios is negligible.
(2) Includes the benefits of the announced sales of Heidelberger Leben,
Scottish Widows Investment Partnership and Sainsbury's Bank.
(3) 31 December 2012 comparatives have not been restated to reflect
the implementation of IAS 19R and IFRS 10.
CAPITAL MANAGEMENT (continued)
The movements in the transitional CRD IV common equity tier 1,
tier 1, tier 2 and total capital positions in the period are shown
below:
Movements in capital
Common
equity Additional Total
tier 1 Tier 1 Tier 2 capital
GBPm GBPm GBPm GBPm
At 31 December 2012(1) 37,385 - 16,424 53,809
Update to transitional phasing
and treatment of insurance (10,979) 3,846 2,748 (4,385)
Loss attributable to ordinary
shareholders (838) - - (838)
Share issuance 510 - - 510
Pension movements:
Implementation of IAS 19R(2) (1,258) - - (1,258)
Deduction of pension asset 515 - - 515
Movement through other comprehensive
income (108) - - (108)
Available-for-sale reserve (1,014) - - (1,014)
Deferred tax asset 82 - - 82
Goodwill and intangible assets
deductions 292 - - 292
Excess of expected losses over
impairment provisions 406 - - 406
Significant investment deduction 2,075 486 729 3,290
Eligible provisions - - 349 349
Subordinated debt movements:
Grandfathering(3) - (557) 172 (385)
Restructuring to ensure CRD
IV compliance - - 932 932
Foreign exchange - (49) (102) (151)
Repurchases, redemptions and
other - 83 (2,048) (1,965)
Other movements 379 - - 379
-------- ---------- ------- --------
At 31 December 2013 27,447 3,809 19,204 50,460
-------- ---------- ------- --------
Pro forma impacts(4) 771 - - 771
-------- ---------- ------- --------
Pro forma at 31 December 2013(4) 28,218 3,809 19,204 51,231
-------- ---------- ------- --------
(1) 31 December 2012 comparatives have not been restated to reflect
the implementation of IAS 19R and IFRS 10.
(2) Includes the impact to other comprehensive income and the movement
in the retirement benefit asset.
(3) Includes movement from 90% to 80% grandfathering and adjustment
due to further clarification of grandfathering rules.
(4) Includes the benefits of the announced sales of Heidelberger Leben,
Scottish Widows Investment Partnership and Sainsbury's Bank.
Common equity tier 1 capital resources have decreased by
GBP9,938 million in the period, GBP9,167 million on a pro forma
basis. This is substantially due to a GBP10,979 million adjustment
relating to updated transitional phasing, reflecting PRA policy
statement PS7/13 which has accelerated the phasing in of deductions
(including deferred tax, significant investments and excess
expected losses) to CET1 bringing this close to the fully loaded
position. Movements in CET1 capital include those reflected under
prevailing rules at 31 December 2013 on page 72. Incremental to
these are increases largely driven by the GBP2,155 million in
dividends from the Insurance business partially offset by negative
valuation movements on available for sale assets.
Total capital resources have decreased by GBP3,349 million in
the period, GBP2,578 million on a pro forma basis. Excluding the
impact of updated transitional phasing, total capital increased by
GBP1,036 million, largely reflecting movements in the CET1
resources described above.
CAPITAL MANAGEMENT (continued)
Leverage ratio
The Basel III reforms include the introduction of a leverage
ratio framework designed to reinforce risk based capital
requirements with a simple, transparent, non-risk based 'backstop'
measure. The leverage ratio is defined as tier 1 capital divided by
the exposure measure. The Basel Committee will test the proposed 3
per cent minimum requirement for the leverage ratio and have
proposed that final calibrations, and any further adjustments to
the definition of the leverage ratio will be completed by 2017,
with a view to migrating to a Pillar 1 treatment on 1 January
2018.
In line with previous reporting periods, the PRA has asked the
Group to publish a leverage ratio on a fully loaded CRD IV basis,
with the exposure measure adjusted to reflect the basis of the
original December 2010 Basel III leverage ratio framework, as
interpreted through guidance released in July 2012.
In addition to the calculation basis specified by the PRA, the
Group's leverage ratio at 31 December 2013 is shown in the table
below on a final CRD IV rules basis and estimated in accordance
with the revised Basel III leverage ratio framework issued on 12
January 2014. In each case the ratio is presented on a
'transitional', 'fully loaded' and 'fully loaded including tier 1
instruments' basis. The inclusion of tier 1 instruments for the
latter basis refers to the full recognition of tier 1 instruments
that will become ineligible once the transitional phase has
elapsed.
CAPITAL MANAGEMENT (continued)
Leverage ratio on a CRD IV basis
Fully loaded
(including
tier 1
At 31 December 2013 Transitional Fully loaded instruments)(1)
GBPm GBPm GBPm
CRD IV rules
Total tier 1 capital
Common equity tier 1 capital 27,447 27,041 27,041
Tier 1 subordinated debt 4,486 - 5,042
Tier 1 deductions (677) - -
------------ ------------ ----------------
Total tier 1 capital 31,256 27,041 32,083
------------ ------------ ----------------
Pro forma total tier 1 capital(2) 32,027 27,925 32,967
Exposure measure
Total statutory balance sheet assets 847,030 847,030 847,030
Adjustment for insurance assets (84,302) (83,401) (83,401)
Removal of accounting value for derivatives
and securities financing transactions (61,686) (61,686) (61,686)
Exposure value for derivatives 24,598 24,598 24,598
Exposure value for securities financing
transactions 6,700 6,700 6,700
Off-balance sheet items 79,927 79,927 79,927
Other regulatory adjustments (10,308) (10,437) (10,437)
------------ ------------ ----------------
Total exposure 801,959 802,731 802,731
------------ ------------ ----------------
Pro forma total exposure(2) 809,090 813,055 813,055
------------ ------------ ----------------
Leverage ratio 3.9% 3.4% 4.0%
Pro forma leverage ratio(2) 4.0% 3.4% 4.1%
Leverage ratio at 31 December 2012(3) 4.4% 3.1% 3.8%
Basel III December 2010 rules(4) :
Leverage ratio 3.3% 3.9%
Pro forma leverage ratio(2) 3.4% 4.0%
Basel III January 2014 rules(5) :
Leverage ratio 3.7% 4.4%
Pro forma leverage ratio(2) 3.8% 4.5%
(1) Includes the full value of tier 1 instruments reported under the
prevailing rules as at 31 December 2013. These instruments will
become ineligible for inclusion in tier 1 capital over the transitional
period.
(2) Includes the benefits of the announced sales of Heidelberger Leben,
Scottish Widows Investment Partnership and Sainsbury's Bank.
(3) 31 December 2012 comparatives have not been restated to reflect
the implementation of IAS19R and IFRS10.
(4) Exposure measure determined in accordance with the original December
2010 Basel III leverage ratio framework as interpreted through
the July 2012 Basel III Quantitative Impact Study instructions
and related guidance and as required by the PRA.
(5) Exposure measure estimated in accordance with the January 2014
revised Basel III leverage ratio framework.
CAPITAL MANAGEMENT (continued)
In order to ensure that the capital and exposure components of
the ratio are measured consistently CRD IV requires the assets of
the Insurance entities included in the Group's statutory
consolidated balance sheet to be excluded from the exposure measure
in proportion to the element of the investment in the Group's
Insurance businesses that is excluded from tier 1 capital. Under
the January 2014 revised Basel III leverage ratio framework only
the proportion of the investment in the Group's Insurance
businesses not deducted from tier 1 capital is included in the
exposure measure.
Leverage ratio exposure values for derivatives and securities
financing transactions have been calculated in accordance with the
methodologies prescribed by the relevant rules applied.
Off-balance sheet items primarily consist of undrawn credit
facilities, including facilities that may be cancelled
unconditionally at any time without notice. The leverage ratio
exposure value for off-balance sheet items is determined by
applying set credit conversion factors to the nominal values of the
items, based on the classification of the item. On a CRD IV basis a
credit conversion factor of 10 per cent is applied to
unconditionally cancellable items, with remaining
off-balance sheet items predominantly attracting a 100 per cent
credit conversion factor. Under the January 2014 revised Basel III
leverage ratio framework, the credit conversion factors applied to
off-balance sheet items follow those prescribed by Standardised
credit risk rules, subject to a floor of 10 per cent.
Other regulatory adjustments consist of other balance sheet
assets that are required under CRD IV to be deducted from tier 1
capital. The removal of these assets from the exposure measure
ensures consistency is maintained between the capital and exposure
components of the ratio.
The Group's ratios under the various bases presented exceed the
Basel Committee's minimum ratio of 3 per cent which it is proposed
should become a Pillar 1 requirement by 1 January 2018.
STATUTORY INFORMATION
Page
Condensed consolidated financial statements (unaudited)
Consolidated income statement 81
Consolidated statement of comprehensive income 82
Consolidated balance sheet 83
Consolidated statement of changes in equity 85
Consolidated cash flow statement 87
Notes
1 Accounting policies, presentation and estimates 88
2 Segmental analysis 90
3 Other income 94
4 Operating expenses 95
5 Impairment 96
6 Taxation 97
7 Loss per share 98
8 Disposal groups 98
9 Trading and other financial assets at fair value through 99
profit or loss
10 Derivative financial instruments 100
11 Loans and advances to customers 101
12 Allowance for impairment losses on loans and receivables 101
13 Securitisations and covered bonds 102
14 Debt securities classified as loans and receivables 103
15 Available-for-sale financial assets 103
16 Other assets 103
17 Customer deposits 104
18 Debt securities in issue 104
19 Other liabilities 104
20 Post-retirement defined benefit schemes 105
21 Subordinated liabilities 106
22 Share capital 107
23 Reserves 107
24 Provisions for liabilities and charges 108
25 Contingent liabilities and commitments 111
26 Fair values of financial assets and liabilities 114
27 Related party transactions 121
28 Restatement of prior period information 123
29 Future accounting developments 128
30 Other information 128
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED INCOME STATEMENT
2013 2012(1)
Note GBP million GBP million
Interest and similar income 21,163 23,548
Interest and similar expense (13,825) (15,830)
----------- -----------
Net interest income 7,338 7,718
----------- -----------
Fee and commission income 4,119 4,650
Fee and commission expense (1,385) (1,444)
----------- -----------
Net fee and commission income 2,734 3,206
Net trading income 16,467 15,005
Insurance premium income 8,197 8,284
Other operating income 3,249 4,700
----------- -----------
Other income 3 30,647 31,195
----------- -----------
Total income 37,985 38,913
Insurance claims (19,507) (18,396)
----------- -----------
Total income, net of insurance
claims 18,478 20,517
----------- -----------
Regulatory provisions (3,455) (4,175)
Other operating expenses (11,867) (11,799)
----------- -----------
Total operating expenses 4 (15,322) (15,974)
----------- -----------
Trading surplus 3,156 4,543
Impairment 5 (2,741) (5,149)
-----------
Profit (loss) before tax 415 (606)
Taxation 6 (1,217) (781)
----------- -----------
Loss for the year (802) (1,387)
----------- -----------
Profit attributable to non-controlling
interests 36 84
Loss attributable to equity shareholders (838) (1,471)
----------- -----------
Loss for the year (802) (1,387)
----------- -----------
Basic loss per share 7 (1.2)p (2.1)p
Diluted loss per share 7 (1.2)p (2.1)p
(1) Restated - see notes 1 and 28.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
2013 2012(1)
GBP million GBP million
Loss for the year (802) (1,387)
Other comprehensive income
Items that will not subsequently be
reclassified to profit or loss:
Post-retirement defined benefit scheme
remeasurements (note 20):
----------- -----------
Remeasurements before taxation (136) (2,136)
Taxation 28 491
----------- -----------
(108) (1,645)
Items that may subsequently be reclassified
to profit or loss:
Movements in revaluation reserve in
respect of available-for-sale financial
assets:
----------- -----------
Adjustment on transfers from held-to-maturity
portfolio - 1,168
Change in fair value (680) 900
Income statement transfers in respect
of disposals (629) (3,547)
Income statement transfers in respect
of impairment 18 42
Other income statement transfers - 169
Taxation 277 339
----------- -----------
(1,014) (929)
Movements in cash flow hedging reserve:
----------- -----------
Effective portion of changes in fair
value (1,229) 116
Net income statement transfers (550) (92)
Taxation 374 1
----------- -----------
(1,405) 25
Currency translation differences (tax:
nil) (6) (14)
----------- -----------
Other comprehensive income for the year,
net of tax (2,533) (2,563)
----------- -----------
Total comprehensive income for the year (3,335) (3,950)
----------- -----------
Total comprehensive income attributable
to non-controlling interests 36 82
Total comprehensive income attributable
to equity shareholders (3,371) (4,032)
----------- -----------
Total comprehensive income for the year (3,335) (3,950)
----------- -----------
(1) Restated - see notes 1 and 28.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
CONSOLIDATED BALANCE SHEET
At At
31 December 31 December
2013 2012(1)
Assets Note GBP million GBP million
Cash and balances at central banks 49,915 80,298
Items in course of collection from banks 1,007 1,256
Trading and other financial assets at fair
value through profit or loss 9 142,683 160,620
Derivative financial instruments 10 33,125 56,557
Loans and receivables:
------------ ------------
Loans and advances to banks 25,365 32,757
Loans and advances to customers 11 495,281 517,225
Debt securities 14 1,355 5,273
------------ ------------
522,001 555,255
Available-for-sale financial assets 15 43,976 31,374
Investment properties 4,864 5,405
Goodwill 2,016 2,016
Value of in-force business 5,335 6,800
Other intangible assets 2,279 2,792
Tangible fixed assets 7,570 7,342
Current tax recoverable 31 354
Deferred tax assets 5,104 4,913
Retirement benefit assets 20 98 741
Other assets 16 27,026 18,498
------------ ------------
Total assets 847,030 934,221
------------ ------------
(1) Restated - see notes 1 and 28.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
CONSOLIDATED BALANCE SHEET (continued)
At At
31 December 31 December
2013 2012(1)
Equity and liabilities Note GBP million GBP million
Liabilities
Deposits from banks 13,982 38,405
Customer deposits 17 441,311 426,912
Items in course of transmission to banks 774 996
Trading and other financial liabilities
at fair value through profit or loss 43,625 33,392
Derivative financial instruments 10 30,464 48,676
Notes in circulation 1,176 1,198
Debt securities in issue 18 87,102 117,253
Liabilities arising from insurance contracts
and
participating investment contracts 82,777 82,953
Liabilities arising from non-participating
investment contracts 27,590 54,372
Unallocated surplus within insurance businesses 391 267
Other liabilities 19 40,607 46,793
Retirement benefit obligations 20 1,096 1,905
Current tax liabilities 147 138
Deferred tax liabilities 3 327
Other provisions 4,337 3,961
Subordinated liabilities 21 32,312 34,092
------------ ------------
Total liabilities 807,694 891,640
Equity
------------ ------------
Share capital 22 7,145 7,042
Share premium account 23 17,279 16,872
Other reserves 23 10,477 12,902
Retained profits 23 4,088 5,080
------------ ------------
Shareholders' equity 38,989 41,896
Non-controlling interests 347 685
------------ ------------
Total equity 39,336 42,581
------------ ------------
Total equity and liabilities 847,030 934,221
------------ ------------
(1) Restated - see notes 1 and 28.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
----------------------------------------------------
Share capital Non-
and Other Retained controlling
premium reserves profits Total interests Total
GBP million GBP million GBP million GBP million GBP million GBP million
Balance at 1 January
2013
As previously reported 23,914 12,902 7,183 43,999 685 44,684
Restatement (see notes
1 and 28) - - (2,103) (2,103) - (2,103)
------------- ----------- ----------- ----------- ------------ -----------
Restated 23,914 12,902 5,080 41,896 685 42,581
Comprehensive income
(Loss) profit for
the year - - (838) (838) 36 (802)
Other comprehensive
income
------------- ----------- ----------- ----------- ------------ -----------
Post-retirement defined
benefit scheme remeasurements,
net of tax - - (108) (108) - (108)
Movements in revaluation
reserve in respect
of available-for-sale
financial assets, net
of tax - (1,014) - (1,014) - (1,014)
Movements in cash
flow hedging reserve,
net of tax - (1,405) - (1,405) - (1,405)
Currency translation
differences (tax:
nil) - (6) - (6) - (6)
------------- ----------- ----------- ----------- ------------ -----------
Total other comprehensive
income - (2,425) (108) (2,533) - (2,533)
------------- ----------- ----------- ----------- ------------ -----------
Total comprehensive
income - (2,425) (946) (3,371) 36 (3,335)
------------- ----------- ----------- ----------- ------------ -----------
Transactions with
owners
------------- ----------- ----------- ----------- ------------ -----------
Dividends - - - - (25) (25)
Issue of ordinary
shares 510 - - 510 - 510
Movement in treasury
shares - - (480) (480) - (480)
Value of employee services:
Share option schemes - - 142 142 - 142
Other employee award
schemes - - 292 292 - 292
Change in non-controlling
interests - - - - (349) (349)
------------- ----------- ----------- ----------- ------------ -----------
Total transactions
with owners 510 - (46) 464 (374) 90
------------- ----------- ----------- ----------- ------------ -----------
Balance at 31 December
2013 24,424 10,477 4,088 38,989 347 39,336
------------- ----------- ----------- ----------- ------------ -----------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity shareholders
--------------------------------------------------
Share
capital Non-
and Other Retained controlling
premium reserves profits Total interests Total
GBP million GBP million GBP million GBP million GBP million GBP million
Balance at 1 January
2012
As originally reported 23,422 13,818 8,680 45,920 674 46,594
Restatement (see notes
1 and 28) - - (414) (414) - (414)
----------- ----------- ----------- ----------- ------------ -----------
Restated 23,422 13,818 8,266 45,506 674 46,180
Comprehensive income
(Loss) profit for
the year - - (1,471) (1,471) 84 (1,387)
Other comprehensive
income
----------- ----------- ----------- ----------- ------------ -----------
Post-retirement defined
benefit scheme remeasurements,
net of tax - - (1,645) (1,645) - (1,645)
Movements in revaluation
reserve
in respect of available-for-sale
financial assets,
net of tax - (927) - (927) (2) (929)
Movements in cash
flow hedging reserve,
net of tax - 25 - 25 - 25
Currency translation
differences (tax:
nil) - (14) - (14) - (14)
----------- ----------- ----------- ----------- ------------ -----------
Total other comprehensive
income - (916) (1,645) (2,561) (2) (2,563)
----------- ----------- ----------- ----------- ------------ -----------
Total comprehensive
income - (916) (3,116) (4,032) 82 (3,950)
----------- ----------- ----------- ----------- ------------ -----------
Transactions with
owners
----------- ----------- ----------- ----------- ------------ -----------
Dividends - - - - (56) (56)
Issue of ordinary
shares 492 - - 492 - 492
Movement in treasury
shares - - (407) (407) - (407)
Value of employee
services:
Share option schemes - - 81 81 - 81
Other employee award
schemes - - 256 256 - 256
Change in non-controlling
interests - - - - (15) (15)
----------- ----------- ----------- ----------- ------------ -----------
Total transactions
with owners 492 - (70) 422 (71) 351
----------- ----------- ----------- ----------- ------------ -----------
Balance at 31 December
2012 23,914 12,902 5,080 41,896 685 42,581
----------- ----------- ----------- ----------- ------------ -----------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
CONSOLIDATED CASH FLOW STATEMENT
2013 2012(1)
GBP million GBP million
Profit (loss) before tax 415 (606)
Adjustments for:
Change in operating assets 17,117 47,805
Change in operating liabilities (44,270) (46,153)
Non-cash and other items 11,231 2,081
Tax (paid) received (24) (78)
----------- -----------
Net cash (used in) provided by operating
activities (15,531) 3,049
Cash flows from investing activities
----------- -----------
Purchase of financial assets (36,959) (22,050)
Proceeds from sale and maturity of financial
assets 21,552 37,664
Purchase of fixed assets (2,982) (3,003)
Proceeds from sale of fixed assets 2,090 2,595
Acquisition of businesses, net of cash
acquired (6) (11)
Disposal of businesses, net of cash
disposed 696 37
-----------
Net cash (used in) provided by investing
activities (15,609) 15,232
Cash flows from financing activities
----------- -----------
Dividends paid to non-controlling interests (25) (56)
Interest paid on subordinated liabilities (2,451) (2,577)
Proceeds from issue of subordinated
liabilities 1,500 -
Proceeds from issue of ordinary shares 350 170
Repayment of subordinated liabilities (2,442) (664)
Change in non-controlling interests - 23
----------- -----------
Net cash used in financing activities (3,068) (3,104)
Effects of exchange rate changes on
cash and cash equivalents (53) (8)
----------- -----------
Change in cash and cash equivalents (34,261) 15,169
Cash and cash equivalents at beginning
of year 101,058 85,889
----------- -----------
Cash and cash equivalents at end of
year 66,797 101,058
----------- -----------
(1) Restated - see notes 1 and 28.
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.
1. Accounting policies, presentation and estimates
This preliminary statement as at and for the year to 31 December
2013 has been prepared in accordance with the Listing Rules of the
Financial Conduct Authority (FCA) relating to Preliminary
Announcements and comprises the unaudited results of Lloyds Banking
Group plc (the Company) together with its subsidiaries (the Group).
It does not include all of the information required for full annual
financial statements. Copies of the 2013 annual report and accounts
will be published on the Group's website and will be available upon
request from Investor Relations, Lloyds Banking Group plc, 25
Gresham Street, London EC2V 7HN, in March 2014.
The British Bankers' Association's (BBA's) Code for Financial
Reporting Disclosure (the Disclosure Code) sets out disclosure
principles together with supporting guidance in respect of the
financial statements of UK banks. The Group has adopted the
Disclosure Code and these financial statements have been prepared
in compliance with the Disclosure Code's principles. Terminology
used in these financial statements is consistent with that used in
the Group's 2012 annual report and accounts where a glossary of
terms can be found.
The directors consider that it is appropriate to continue to
adopt the going concern basis in preparing the 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: Funding and liquidity on page 41.
The accounting policies are consistent with those applied by the
Group in its 2012 annual report and accounts except as described
below.
On 1 January 2013 the Group adopted the following new accounting
standards and amendments to standards:
IFRS 10 Consolidated Financial Statements
IFRS 10 supersedes IAS 27 Consolidated and Separate Financial
Statements and SIC-12 Consolidation - Special Purpose Entities and
establishes the principles for when the Group controls another
entity and is therefore required to consolidate the other entity in
the Group's financial statements. Under IFRS 10, the Group controls
an entity when it is exposed to, or has rights to, variable returns
from its involvement with the entity and has the ability to affect
those returns through the exercise of power. As a result, the Group
consolidates certain entities that were not previously consolidated
and no longer consolidates certain entities which were previously
consolidated; principally in relation to Open-Ended Investment
Companies.
The Group has applied IFRS 10 retrospectively and restated its
comparatives in accordance with the transitional provisions
included in the standard. These provisions require the Group to
re-assess its control conclusions as at 1 January 2013 and restate
its comparative information, applying the revised assessment in
2012 to the extent that the relevant investments were held in that
year. Details of the impact of these restatements are provided in
note 28.
IAS 19R: Amendments to IAS 19 Employee Benefits
IAS 19R prescribes the accounting and disclosure by employers
for employee benefits. Actuarial gains and losses (remeasurements)
arising from the valuation of defined benefit pension schemes are
no longer permitted to be deferred using the corridor approach and
must be recognised immediately in other comprehensive income. In
addition, IAS 19R also replaces interest cost and expected return
on plan assets with a net interest amount that is calculated by
applying the discount rate to the net defined benefit liability
(asset). IAS 19R has been applied retrospectively and comparative
figures restated accordingly. Details of the impact of these
restatements are provided in note 28.
1. Accounting policies, presentation and estimates (continued)
The Group updates the valuations of its post-retirement defined
benefit schemes at 31 December each year. In addition, at each
interim reporting date the Group reviews the assumptions used to
calculate the net defined benefit obligation and updates its
balance sheet carrying value where that value would otherwise
differ materially from a valuation based on those revised
assumptions.
The impact of the implementation of IAS19R on the Group's
results for 2013 has been to decrease other operating expenses by
GBP28 million and increase profit before tax by the same amount.
The impact on the balance sheet at 31 December 2013 has been to
decrease the net retirement benefit asset by GBP2,817 million, to
increase deferred tax assets by GBP648 million and to reduce
shareholders' equity by GBP2,169 million.
IFRS 13 Fair value measurement
IFRS 13 has been applied with effect from 1 January 2013. IFRS
13 defines fair value as the price that would be received to sell
an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date in
the principal or, in its absence, the most advantageous market to
which the Group has access at that date. IFRS 13 requires that the
fair value of a non-financial asset is determined based on the
highest and best use of the asset, and that the fair value of a
liability reflects its non-performance risk. These changes had no
significant impact on the measurement of the Group's assets and
liabilities.
Amendments to IAS 1Presentation of Financial Statements -
'Presentation of Items of Other Comprehensive Income'
The amendments to IAS 1 require entities to group items
presented in other comprehensive income on the basis of whether
they may potentially be reclassified to profit or loss
subsequently. The statement of other comprehensive income in these
financial statements has been revised to reflect the new
requirements.
Amendments to IFRS 7 Financial Instruments: Disclosures -
'Disclosures - Offsetting Financial Assets and Financial
Liabilities'
The amendments to IFRS 7 require entities to disclose
information to enable users of the financial statements to evaluate
the effect or potential effect of netting arrangements on the
balance sheet. These disclosures will be made in the Group's
financial statements for the year ended 31 December 2013.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 requires an entity to disclose information that enables
users of financial statements to evaluate the nature of, and risks
associated with, its interests in other entities and the effects of
those interests on its financial position, financial performance
and cash flows. These disclosures will be made in the Group's
financial statements for the year ended 31 December 2013.
Future accounting developments
Details of those IFRS pronouncements which will be relevant to
the Group but which were not effective at 31 December 2013 and
which have not been applied in preparing these financial statements
are set out in note 29.
Critical accounting estimates and judgements
The preparation of the Group's financial statements requires
management to make judgements, estimates and assumptions that
impact the application of accounting policies and the reported
amounts of assets, liabilities, income and expenses. Due to the
inherent uncertainty in making estimates, actual results reported
in future periods may include amounts which differ from those
estimates. Estimates, judgements and assumptions are continually
evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be
reasonable under the circumstances. There have been no significant
changes in the basis upon which estimates have been determined,
compared to that applied at 31 December 2012.
2. Segmental analysis
Lloyds Banking Group provides a wide range of banking and
financial services in the UK and in certain locations overseas.
The Group Executive Committee (GEC) has been determined to be
the chief operating decision maker for the Group. The Group's
operating segments reflect its organisational and management
structures. GEC reviews the Group's internal reporting based around
these segments in order to assess performance and allocate
resources. This assessment includes a consideration of each
segment's net interest revenue and consequently the total interest
income and expense for all reportable segments is presented on a
net basis. The segments are differentiated by the type of products
provided, by whether the customers are individuals or corporate
entities and by the geographical location of
the customer.
The segmental results and comparatives are presented on an
underlying basis, the basis reviewed by the chief operating
decision maker. Previously the results of the Group's segments had
been reviewed on a management basis and the Group's segmental
analysis was presented accordingly. The effects of asset sales,
volatile items and liability management as well as the fair value
unwind line are excluded in arriving at underlying profit.
The Group's activities were organised into four financial
reporting segments during 2013: Retail; Commercial Banking; Wealth,
Asset Finance and International; and Insurance.
Comparative figures have been restated accordingly for the
accounting policy changes explained in note 1.
Retail offers a broad range of retail financial service products
in the UK, including current accounts, savings, personal loans,
credit cards and mortgages. It is also a major general insurance
and bancassurance distributor, selling a wide range of long-term
savings, investment and general insurance products.
Commercial Banking provides banking and related services for all
UK and multinational business clients, from small and medium-sized
enterprises to major corporate and financial institutions.
Wealth, Asset Finance and International gives increased focus
and momentum to the Group's private banking and asset management
activities, closely co-ordinates the management of its
international businesses and also encompasses the Asset Finance
business. Wealth comprises the Group's private banking, wealth and
asset management businesses in the UK and overseas. International
comprises retail businesses, principally in Continental Europe.
Insurance provides long-term savings, protection and investment
products distributed through bancassurance, intermediary and direct
channels in the UK. It is also a distributor of home insurance in
the UK with products sold through the retail branch network, direct
channels and strategic corporate partners. The business consists of
Life, Pensions and Investments UK; Life, Pensions and Investments
Europe; and General Insurance.
Other includes the costs of managing the Group's technology
platforms, branch and head office property estate, operations
(including payments, banking operations and collections) and
sourcing, the costs of which are predominantly recharged to the
other divisions. It also reflects other items not recharged to the
divisions, including UK bank levy and Financial Services
Compensation Scheme costs.
2. Segmental analysis (continued)
Inter-segment services are generally recharged at cost, with the
exception of the internal commission arrangements between the UK
branch and other distribution networks and the insurance product
manufacturing businesses within the Group, where a profit margin is
also charged. Inter-segment lending and deposits are generally
entered into at market rates, except that non-interest bearing
balances are priced at a rate that reflects the external yield that
could be earned on such funds.
For the majority of those derivative contracts entered into by
business units for risk management purposes, the business unit
recognises the net interest income or expense on an accrual
accounting basis and transfers the remainder of the movement in the
fair value of the derivative to the central group segment where the
resulting accounting volatility is managed where possible through
the establishment of hedge accounting relationships. Any change in
fair value of the hedged instrument attributable to the hedged risk
is also recorded within the central group segment. This allocation
of the fair value of the derivative and change in fair value of the
hedged instrument attributable to the hedged risk avoids accounting
asymmetry in segmental results and leads to accounting volatility
in the central group segment where it
is managed.
Other Total
income, income, Profit
Net net of net of (loss) Inter-
interest insurance insurance before External segment
2013 income claims claims tax revenue revenue
GBPm GBPm GBPm GBPm GBPm GBPm
Underlying basis
Retail 7,536 1,410 8,946 3,749 10,478 (1,532)
Commercial Banking 2,426 2,708 5,134 1,575 4,410 724
Wealth, Asset Finance
and International 870 1,809 2,679 (42) 2,451 228
Insurance (103) 1,880 1,777 1,090 2,459 (682)
Other 156 113 269 (206) (993) 1,262
--------- ---------- ---------- ------- -------- --------
Group 10,885 7,920 18,805 6,166 18,805 -
-------- --------
Reconciling items:
Insurance grossing
adjustment (2,930) 3,074 144 -
Asset sales, volatile
items and liability
management(1) 14 (460) (446) (720)
Volatility arising
in insurance businesses - 668 668 668
Simplification costs - - - (830)
EC mandated retail
business disposal
costs - - - (687)
Payment protection
insurance provision - - - (3,050)
Other regulatory
provisions - - - (405)
Past service cost - - - (104)
Amortisation of
purchased intangibles - - - (395)
Fair value unwind (631) (62) (693) (228)
Group - statutory 7,338 11,140 18,478 415
--------- ---------- ---------- -------
(1) Includes (i) gains or losses on disposals of assets, including
centrally held government bonds, which are not part of normal business
operations; (ii) the net effect of banking volatility, changes
in the fair value of the equity conversion feature of the Group's
Enhanced Capital Notes and net derivative valuation adjustments;
and (iii) the results of liability management exercises.
2. Segmental analysis (continued)
Total
Other income,
income, net Profit
Net net of (loss) Inter-
interest of insurance insurance before External segment
2012(1) income claims claims tax revenue revenue
GBPm GBPm GBPm GBPm GBPm GBPm
Underlying basis
Retail 7,195 1,462 8,657 3,188 10,951 (2,294)
Commercial Banking 2,206 2,932 5,138 (324) 4,070 1,068
Wealth, Asset Finance
and International 799 2,043 2,842 (929) 2,835 7
Insurance (78) 1,929 1,851 1,107 2,497 (646)
Other 213 (315) (102) (477) (1,967) 1,865
--------- ------------- ---------- ------- -------- --------
Group 10,335 8,051 18,386 2,565 18,386 -
-------- --------
Reconciling items:
Insurance grossing
adjustment (2,587) 2,760 173 -
Asset sales, volatile
items and liability
management(2) 199 1,691 1,890 1,570
Volatility arising
in insurance businesses 8 304 312 312
Simplification costs - - - (676)
EC mandated retail
business disposal
costs - - - (570)
Past service pensions
credit - - - 250
Payment protection
insurance provision - - - (3,575)
Other regulatory
provisions - (50) (50) (650)
Amortisation of
purchased intangibles - - - (482)
Fair value unwind (237) 43 (194) 650
Group - statutory 7,718 12,799 20,517 (606)
--------- ------------- ---------- -------
(1) Restated - see notes 1 and 28.
(2) Includes (i) gains or losses on disposals of assets, including
centrally held government bonds, which are not part of normal business
operations; (ii) the net effect of banking volatility, changes
in the fair value of the equity conversion feature of the Group's
Enhanced Capital Notes and net derivative valuation adjustments;
and (iii) the results of liability management exercises.
2. Segmental analysis (continued)
At At
31 December 31 December
Segment external assets 2013 2012(1)
GBPm GBPm
Retail 345,037 346,030
Commercial Banking 255,459 314,090
Wealth, Asset Finance and International 30,987 77,884
Insurance 155,656 152,583
Other 59,891 43,634
------------ ------------
Total Group 847,030 934,221
------------ ------------
Segment customer deposits
Retail 268,974 260,838
Commercial Banking 126,534 114,115
Wealth, Asset Finance and International 45,772 51,885
Other 31 74
------------ ------------
Total Group 441,311 426,912
------------ ------------
Segment external liabilities
Retail 287,610 287,631
Commercial Banking 225,985 249,097
Wealth, Asset Finance and International 47,879 92,686
Insurance 149,757 143,695
Other 96,463 118,531
------------ ------------
Total Group 807,694 891,640
------------ ------------
(1) Restated - see notes 1 and 28.
3. Other income
2013 2012(1)
GBPm GBPm
Fee and commission income:
------- -------
Current account fees 973 1,008
Credit and debit card fees 984 941
Other fees and commissions 2,162 2,701
------- -------
4,119 4,650
Fee and commission expense (1,385) (1,444)
------- -------
Net fee and commission income 2,734 3,206
Net trading income 16,467 15,005
Insurance premium income 8,197 8,284
------- -------
Gains on sale of available-for-sale
financial assets 629 3,547
Liability management(2) (142) (338)
Other(3) 2,762 1,491
------- -------
Other operating income 3,249 4,700
------- -------
Total other income 30,647 31,195
------- -------
(1) Restated - see notes 1 and 28.
(2) Losses of GBP142 million arose in 2013 on transactions undertaken
as part of the Group's management of wholesale funding and capital;
this compares to a gain of GBP59 million relating to the exchange
of certain capital securities for other subordinated debt instruments
(a related gain of GBP109 million was also recognised in net interest
income) and losses of GBP397 million on the buy-back of other debt
securities in 2012.
(3) During 2013 the Group completed a number of disposals of assets
and businesses, including:
* On 15 March 2013 the Group completed the sale of 102
million shares in St James's Place plc, reducing the
Group's holding in that company to approximately 37
per cent. As a result of that reduction in holding
the Group ceased to consolidate St James's Place plc
in its accounts, instead accounting for the residual
investment as an associate. The Group realised a gain
of GBP394 million on the sale of those shares and the
fair valuation of the Group's residual stake.
Subsequently, on 29 May 2013 the Group completed the
sale of a further 77 million shares, generating a
profit of GBP39 million and on 13 December 2013
completed the sale of the remainder of its holding,
generating a profit of GBP107 million.
* On 31 May 2013, the Group sold a portfolio of US RMBS
(residential mortgage backed securities) for a cash
consideration of GBP3.3 billion, realising a profit
of GBP538 million.
* On 30 June 2013 the Group disposed of its Spanish
retail banking operations, including Lloyds Bank
International S.A.U and Lloyds Investment España
SGIIC S.A.U, to Banco Sabadell, S.A. realising a loss
of GBP256 million.
* On 31 December 2013, the Group completed the sale of
its Australian operations (which principally comprise
Capital Finance Australia Limited, a provider of
motor and equipment asset finance, and BOS
International (Australia) Limited, a corporate
lending business) generating a profit on sale of
GBP49 million.
* On 21 August 2013 the Group announced the sale of its
German life insurance business, Heidelberger
Lebensversicherung AG, with the sale expected to
complete in the first quarter of 2014; an impairment
of GBP382 million has been recognised in the year
ended 31 December 2013.
4. Operating expenses
2013 2012(1)
GBPm GBPm
Administrative expenses
Staff costs:
------ -------
Salaries 3,331 3,411
Performance based compensation 473 395
Social security costs 385 383
Pensions and other post-retirement benefit
schemes:
Past service charges (credits)(2) 104 (250)
Other 654 589
------ -------
758 339
Restructuring costs 111 217
Other staff costs 783 746
------ -------
5,841 5,491
Premises and equipment:
------ -------
Rent and rates 467 488
Hire of equipment 15 17
Repairs and maintenance 178 174
Other 310 270
------ -------
970 949
Other expenses:
------ -------
Communications and data processing 1,169 1,082
Advertising and promotion 313 314
Professional fees 425 550
UK bank levy 238 179
Other 971 1,108
------ -------
3,116 3,233
------
9,927 9,673
Depreciation and amortisation 1,940 2,126
Total operating expenses, excluding regulatory
provisions 11,867 11,799
Regulatory provisions:
------ -------
Payment protection insurance provision (note
24) 3,050 3,575
Other regulatory provisions (note 24) 405 600
------ -------
3,455 4,175
------
Total operating expenses 15,322 15,974
------ -------
(1) Restated - see notes 1 and 28.
(2) The Group has agreed certain changes to early retirement and commutation
factors in two of its principal defined benefit pension schemes,
resulting in a cost of GBP104 million recognised in the Group's
income statement in 2013. During 2012, following a review of policy
in respect of discretionary pension increases in relation to the
Group's defined benefit pension schemes, increases in certain schemes
are now linked to the Consumer Price Index rather than the Retail
Price Index. The impact of this change was a reduction in the Group's
defined benefit obligation of GBP258 million, recognised in the
Group's income statement in 2012, net of a charge of GBP8 million
in respect of one of the Group's smaller schemes.
4. Operating expenses (continued)
Performance-based compensation
The table below analyses the Group's performance-based
compensation costs (excluding branch-based sales incentives)
between those relating to the current performance year and those
relating to earlier years.
2013 2012
GBPm GBPm
Performance-based compensation expense comprises:
Awards made in respect of the year ended 31 December 394 362
Awards made in respect of earlier years 79 33
---- ----
473 395
---- ----
Performance-based compensation expense deferred
until later years comprises:
Awards made in respect of the year ended 31 December 47 37
Awards made in respect of earlier years 30 15
---- ----
77 52
---- ----
Performance-based awards expensed in 2013 include cash awards
amounting to GBP126 million (2012: GBP128 million).
5. Impairment
2013 2012
GBPm GBPm
Impairment losses on loans and receivables:
----- -----
Loans and advances to customers 2,725 5,125
Debt securities classified as loans
and receivables 1 (4)
----- -----
Impairment losses on loans and receivables
(note 12) 2,726 5,121
Impairment of available-for-sale financial
assets 15 37
Other credit risk provisions - (9)
----- -----
Total impairment charged to the income
statement 2,741 5,149
----- -----
6. Taxation
A reconciliation of the tax (charge) credit that would result
from applying the standard UK corporation tax rate to the profit
(loss) before tax, to the actual tax charge, is given below:
2013 2012(1)
GBPm GBPm
Profit (loss) before tax 415 (606)
------- -------
Tax (charge) credit thereon at UK corporation
tax rate of 23.25 per cent
(2012: 24.5 per cent) (96) 148
Factors affecting tax (charge) credit:
UK corporation tax rate change (594) (320)
Disallowed items (167) (186)
Non-taxable items 132 240
Overseas tax rate differences (116) 75
Gains exempted or covered by capital
losses 57 36
Policyholder tax (251) (144)
Further factors affecting the life business:(2)
Derecognition of deferred tax on policyholder
tax credit - (583)
Taxation of certain insurance assets
arising on transition to new tax regime - (221)
Changes to the taxation of pension business:
Policyholder tax cost - (182)
Shareholder tax benefit - 206
Deferred tax on losses no longer recognised
following sale of Australian operations (348) -
Tax losses where no deferred tax recognised - (25)
Deferred tax on Australian tax losses
not previously recognised 60 12
Adjustments in respect of previous years 97 135
Effect of results of joint ventures
and associates 9 23
Other items - 5
-------
Tax charge (1,217) (781)
------- -------
(1) Restated - see notes 1 and 28.
(2) The Finance Act 2012 introduced a new UK tax regime for the taxation
of life insurance companies which took effect from 1 January 2013.
The new regime, combined with current economic forecasts, had a
number of impacts on the 2012 tax charge.
The Finance Act 2013 (the Act) was substantively enacted on 2
July 2013. The Act further reduced the main rate of corporation tax
to 21 per cent with effect from 1 April 2014 and 20 per cent with
effect from 1 April 2015. The change in the main rate of
corporation tax from 23 per cent to 20 per cent has resulted in a
reduction in the Group's net deferred tax asset at 31 December 2013
of GBP636 million, comprising the GBP594 million charge included in
the income statement and a GBP42 million charge included in
equity.
7. Loss per share
2013 2012(1)
Basic
Loss attributable to equity shareholders GBP(838)m GBP(1,471)m
Weighted average number of ordinary
shares in issue 71,009m 69,841m
Loss per share (1.2)p (2.1)p
Fully diluted
Loss attributable to equity shareholders GBP(838)m GBP(1,471)m
Weighted average number of ordinary
shares in issue 71,009m 69,841m
Loss per share (1.2)p (2.1)p
(1) Restated - see notes 1 and 28.
8. Disposal groups
Disposal groups are classified as held for sale if the Group
will recover the carrying amount principally through a sale
transaction rather than through continuing use and a sale is
considered highly probable. The Group completed the sale of its
joint venture interest in Sainsbury's Bank on 31 January 2014 and
expects to complete the announced sales of its international
private banking operations in Monaco and Gibraltar, its German
insurance business and Scottish Widows Investment Partnership, its
asset management business, in the next 12 months. The assets and
liabilities associated with these operations are therefore
classified as held-for-sale disposal groups at 31 December 2013 and
included within other assets and other liabilities
respectively.
At At
31 December 31 December
2013 2012
GBPm GBPm
Other assets (note 16)
Assets of disposal groups classified as held
for sale 7,988 194
Other liabilities (note 19)
Liabilities of disposal groups classified as
held for sale 7,302 214
Disposal groups classified as held for sale are measured at the
lower of carrying amount and fair value less costs to sell. The
Group has recognised an impairment of GBP382 million relating to
disposal groups classified as held for sale
during 2013.
At 31 December 2012, the Group's Uruguayan branch business, its
branch remittance business in Japan and its portfolio management
business in Luxembourg were classified as held-for-sale; these
sales completed in 2013.
8. Disposal groups (continued)
The major classes of assets and liabilities of the disposal
groups are as follows:
At At
31 December 31 December
2013 2012
GBPm GBPm
Assets
Cash and balances at central banks - 82
Trading and other financial assets at fair value
through profit or loss 5,040 -
Loans and advances to banks 101 7
Loans and advances to customers 244 84
Available-for-sale financial assets - 27
Value of in-force business 1,017 -
Other 1,968 20
Provision for impairment of the disposal groups (382) (26)
------------ ------------
7,988 194
------------ ------------
Liabilities
Customer deposits 307 185
Liabilities arising from insurance contracts
and participating investment contracts 4,901 -
Deferred tax liabilities 282 -
Other 1,812 29
------------ ------------
7,302 214
------------ ------------
9. Trading and other financial assets at fair value through profit or loss
At At
31 December 31 December
2013 2012(1)
GBPm GBPm
Trading assets 37,350 23,345
Other financial assets at fair value through
profit or loss:
------------ ------------
Treasury and other bills 54 56
Loans and advances to customers 27 34
Debt securities 38,853 47,738
Equity shares 66,399 89,447
------------ ------------
105,333 137,275
------------ ------------
Total trading and other financial assets at fair
value through profit or loss 142,683 160,620
------------ ------------
(1) Restated - see notes 1 and 28.
Included in the above is GBP101,185 million (31 December 2012:
GBP134,537 million) of assets relating to the insurance
businesses.
10. Derivative financial instruments
31 December 2013 31 December 2012(1)
--------------------------- ---------------------------
Fair value Fair value Fair value Fair value
of assets of liabilities of assets of liabilities
GBPm GBPm GBPm GBPm
Hedging
Derivatives designated as fair
value hedges 5,100 1,497 6,903 2,128
Derivatives designated as cash
flow hedges 1,687 3,021 4,668 4,470
6,787 4,518 11,571 6,598
---------- --------------- ---------- ---------------
Trading and other
Exchange rate contracts 4,686 5,671 3,712 3,887
Interest rate contracts 18,479 18,607 37,785 36,537
Credit derivatives 208 190 94 343
Embedded equity conversion
feature 1,212 - 1,421 -
Equity and other contracts 1,753 1,478 1,974 1,311
---------- --------------- ---------- ---------------
26,338 25,946 44,986 42,078
---------- --------------- ---------- ---------------
Total recognised derivative
assets/liabilities 33,125 30,464 56,557 48,676
---------- --------------- ---------- ---------------
(1) Restated - see notes 1 and 28.
The Group reduces exposure to credit risk by using master
netting agreements and by obtaining cash collateral. Of the
derivative assets of GBP33,125 million at 31 December 2013 (31
December 2012: GBP56,557 million), GBP19,479 million (31 December
2012: GBP38,158 million) are available for offset under master
netting arrangements. These do not meet the criteria under IAS 32
to enable derivative assets to be presented net of these balances.
Of the remaining derivative assets of GBP13,646 million (31
December 2012: GBP18,399 million), cash collateral of GBP3,188
million (31 December 2012: GBP5,429 million) was held and a further
GBP2,372 million (31 December 2012: GBP1,387 million) was due from
Organisation for Economic Co-operation and Development (OECD)
banks.
The embedded equity conversion feature of GBP1,212 million (31
December 2012: GBP1,421 million) reflects the value of the equity
conversion feature contained in the Enhanced Capital Notes issued
by the Group in 2009; the loss of GBP209 million arising from the
change in fair value in 2013 (2012: gain of GBP249 million) is
included within net trading income.
11. Loans and advances to customers
At At
31 December 31 December
2013 2012
GBPm GBPm
Agriculture, forestry and fishing 6,051 5,531
Energy and water supply 4,414 3,321
Manufacturing 7,650 8,530
Construction 7,024 7,526
Transport, distribution and hotels 22,294 26,568
Postal and communications 2,364 1,397
Property companies 44,277 52,388
Financial, business and other services 44,807 49,190
Personal:
Mortgages 335,611 337,879
Other 23,230 28,334
Lease financing 4,435 6,477
Hire purchase 5,090 5,334
------------ ------------
507,247 532,475
Allowance for impairment losses on loans and
advances (note 12) (11,966) (15,250)
------------ ------------
Total loans and advances to customers 495,281 517,225
------------ ------------
Loans and advances to customers include advances securitised
under the Group's securitisation and covered bond programmes.
Further details are given in note 13.
12. Allowance for impairment losses on loans and receivables
Year ended Year ended
31 December 31 December
2013 2012
GBPm GBPm
Opening balance 15,459 19,022
Exchange and other adjustments 291 (388)
Adjustment on disposal of businesses (176) -
Advances written off (6,314) (8,780)
Recoveries of advances written off in
previous years 456 858
Unwinding of discount (351) (374)
Charge to the income statement (note
5) 2,726 5,121
------------ ------------
Balance at end of year 12,091 15,459
------------ ------------
In respect of:
Loans and advances to banks - 3
Loans and advances to customers (note
11) 11,966 15,250
Debt securities (note 14) 125 206
------------ ------------
Balance at end of year 12,091 15,459
------------ ------------
13. Securitisations and covered bonds
The Group's principal securitisation and covered bond
programmes, together with the balances of the loans subject to
these arrangements and the carrying value of the notes in issue,
are listed in the table below.
31 December 2013 31 December 2012
----------------------- ----------------------
Loans and Loans and
advances Notes in advances Notes in
securitised issue securitised issue
Securitisation programmes(1) GBPm GBPm GBPm GBPm
UK residential mortgages 55,998 36,286 80,125 57,285
US residential mortgage-backed
securities - - 185 221
Commercial loans 10,931 11,259 15,024 14,110
Irish residential mortgages - - 5,189 3,509
Credit card receivables 6,314 3,992 6,974 3,794
Dutch residential mortgages 4,381 4,508 4,547 4,682
Personal loans 2,729 750 4,412 2,000
PPP/PFI and project finance loans 525 106 688 104
Motor vehicle loans - - 1,039 1,086
------------ ------------
80,878 56,901 118,183 86,791
------------ ------------
Less held by the Group (38,288) (58,732)
-------- --------
Total securitisation programmes
(note 18) 18,613 28,059
-------- --------
Covered bond programmes
------------ -------- ------------ --------
Residential mortgage-backed 59,576 36,473 91,420 64,593
Social housing loan-backed 2,536 1,800 2,927 2,400
------------ -------- ------------ --------
62,112 38,273 94,347 66,993
------------ ------------
Less held by the Group (7,606) (26,320)
-------- --------
Total covered bond programmes
(note 18) 30,667 40,673
-------- --------
Total securitisation and covered
bond programmes 49,280 68,732
-------- --------
(1) Includes securitisations utilising a combination of external funding
and credit default swaps.
Securitisation programmes
Loans and advances to customers and debt securities classified
as loans and receivables include loans securitised under the
Group's securitisation programmes, the majority of which have been
sold by subsidiary companies to bankruptcy remote structured
entities. As the structured entities 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 structured entities
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 (note 18).
Covered bond programmes
Certain loans and advances to customers have been assigned to
bankruptcy remote limited liability partnerships to provide
security to issues of covered bonds by the Group. The Group retains
all of the risks and rewards associated with these loans and the
partnerships are consolidated fully with the loans retained on the
Group's balance sheet and the related covered bonds in issue
included within debt securities in issue (note 18).
Cash deposits of GBP13,500 million (31 December 2012: GBP19,691
million) held by the Group are restricted in use to repayment of
the debt securities issued by the structured entities, the term
advances relating to covered bonds and other
legal obligations.
13. Securitisations and covered bonds (continued)
Asset-backed conduits
In addition to the structured entities detailed above, the Group
sponsors three asset-backed conduits: Argento, Cancara and
Grampian, which invest in debt securities (notes 14 and 15) and
client receivables (note 11).
14. Debt securities classified as loans and receivables
Debt securities classified as loans and receivables
comprise:
At At
31 December 31 December
2013 2012
GBPm GBPm
Asset-backed securities:
Mortgage-backed securities 333 3,927
Other asset-backed securities 740 1,150
Corporate and other debt securities 407 402
------------ ------------
1,480 5,479
Allowance for impairment losses (note 12) (125) (206)
------------ ------------
Total 1,355 5,273
------------ ------------
15. Available-for-sale financial assets
At At
31 December 31 December
2013 2012
GBPm GBPm
Asset-backed securities 2,178 2,284
Other debt securities:
------------ ------------
Bank and building society certificates of deposit 208 188
Government securities 38,290 25,555
Corporate and other debt securities 1,855 1,848
------------ ------------
40,353 27,591
Equity shares 570 528
Treasury and other bills 875 971
Total 43,976 31,374
------------ ------------
16. Other assets
2013 2012(1)
GBPm GBPm
Assets arising from reinsurance contracts
held 732 2,320
Deferred acquisition and origination costs 130 774
Settlement balances 2,904 1,332
Corporate pension asset 9,984 6,353
Investments in joint ventures and associates 101 313
Assets of disposal groups (note 8) 7,988 194
Other assets and prepayments 5,187 7,212
------ -------
Total other assets 27,026 18,498
------ -------
(1) Restated - see notes 1 and 28.
17. Customer deposits
At At
31 December 31 December
2013 2012
GBPm GBPm
Non-interest bearing current accounts 40,802 36,909
Interest bearing current accounts 77,789 65,202
Savings and investment accounts 265,422 261,573
Liabilities in respect of securities sold under
repurchase agreements 2,978 4,433
Other customer deposits 54,320 58,795
------------ ------------
Total 441,311 426,912
------------ ------------
18. Debt securities in issue
31 December 2013 31 December 2012(1)
------------------------------- -----------------------------
At fair
value At fair
through value
profit At through At
or amortised profit amortised
loss cost Total or loss cost Total
GBPm GBPm GBPm GBPm GBPm GBPm
Medium-term notes
issued 5,267 23,921 29,188 5,700 29,537 35,237
Covered bonds (note
13) - 30,667 30,667 - 40,673 40,673
Certificates of deposit - 8,866 8,866 - 11,087 11,087
Securitisation notes
(note 13) - 18,613 18,613 - 28,059 28,059
Commercial paper - 5,035 5,035 - 7,897 7,897
5,267 87,102 92,369 5,700 117,253 122,953
-------- ---------- ------- -------- ---------- -------
(1) Restated - see notes 1 and 28.
19. Other liabilities
2013 2012(1)
GBPm GBPm
Settlement balances 3,358 2,040
Unitholders' interest in Open Ended Investment
Companies 22,219 33,651
Liabilities of disposal groups (note 8) 7,302 214
Other creditors and accruals 7,728 10,888
------ -------
Total other liabilities 40,607 46,793
------ -------
(1) Restated - see notes 1 and 28.
20. Post-retirement defined benefit schemes
The Group's post-retirement defined benefit scheme obligations
are comprised as follows:
At At
31 December 31 December
2013 2012(1)
GBPm GBPm
Defined benefit pension schemes:
- Fair value of scheme assets 32,568 30,367
- Present value of funded obligations (33,355) (31,324)
------------ ------------
- Net pension scheme liability (787) (957)
Other post-retirement defined benefit schemes (211) (207)
------------ ------------
Net retirement benefit liability (998) (1,164)
------------ ------------
Recognised on the balance sheet as:
Retirement benefit assets 98 741
Retirement benefit obligations (1,096) (1,905)
------- -------
Net retirement benefit liability (998) (1,164)
------- -------
(1) Restated - see notes 1 and 28.
The movement in the Group's net post-retirement defined benefit
scheme liability during the year was as follows:
GBPm
At 1 January 2013
As previously reported 1,567
Restatement (see notes 1 and 28) (2,731)
-------
Restated (1,164)
Exchange and other adjustments (6)
Income statement charge (503)
Employer contributions 811
Remeasurement (136)
-------
At 31 December 2013 (998)
-------
20. Post-retirement defined benefit schemes (continued)
The charge to the income statement in respect of pensions and
other post-retirement benefit schemes is comprised
as follows:
2013 2012
GBPm GBPm
Past service cost (credit) (note 4) 104 (250)
Current service cost 399 360
---- -----
Defined benefit pension schemes 503 110
Defined contribution schemes 255 229
---- -----
Total charge to the income statement (note 4) 758 339
---- -----
The principal assumptions used in the valuations of the defined
benefit pension scheme were as follows:
At At
31 December 31 December
2013 2012
% %
Discount rate 4.60 4.60
Rate of inflation:
Retail Prices Index 3.30 2.90
Consumer Price Index 2.30 2.00
Rate of salary increases 2.00 2.00
Weighted-average rate of increase for pensions
in payment 2.80 2.70
The application of the revised assumptions as at 31 December
2013 to the Group's principal post-retirement defined benefit
schemes has resulted in a remeasurement of GBP136 million which has
been recognised in other comprehensive income, net of deferred tax
of GBP28 million.
21. Subordinated liabilities
The Group's subordinated liabilities are comprised as
follows:
At At
31 December 31 December
2013 2012
GBPm GBPm
Preference shares 876 1,385
Preferred securities 4,301 4,394
Undated subordinated liabilities 1,916 1,927
Enhanced Capital Notes 8,938 8,947
Dated subordinated liabilities 16,281 17,439
------------
Total subordinated liabilities 32,312 34,092
------------ ------------
The movement in subordinated liabilities during the year was as
follows:
2013 2012
GBPm GBPm
Opening balance 34,092 35,089
New issues during the year 1,500 128
Repurchases and redemptions during the
year (2,442) (857)
Foreign exchange and other movements (838) (268)
------- ------
At end of year 32,312 34,092
------- ------
22. Share capital
Movements in share capital during the year were as follows:
Number
of shares
(million) GBPm
Ordinary shares of 10p each
At 1 January 2013 70,343 7,034
Issued in the year (see below) 1,025 103
At 31 December 2013 71,368 7,137
---------- -----
Limited voting ordinary shares of 10p each
At 1 January and 31 December 2013 81 8
Total share capital 7,145
-----
Of the shares issued in the year, 713 million shares were issued
in relation to the payment of coupons on certain hybrid capital
securities; the remaining 312 million shares issued were in respect
of employee share schemes.
23. Reserves
Other reserves
-----------------------------------------
Share Available- Cash flow Merger Retained
premium for-sale hedging and other Total profits
GBPm GBPm GBPm GBPm GBPm GBPm
---------- --------- ----------
At 1 January
2013
As previously
reported 16,872 399 350 12,153 12,902 7,183
Restatement (see
notes 1 and 28) - - - - - (2,103)
-------- ---------- --------- ---------- ------ --------
Restated 16,872 399 350 12,153 12,902 5,080
Issue of ordinary
shares 407 - - - - -
Loss for the
year - - - - - (838)
Post-retirement
defined benefit
scheme remeasurements
(net of tax) - - - - - (108)
Movement in treasury
shares - - - - - (480)
Value of employee
services:
Share option
schemes - - - - - 142
Other employee
award schemes - - - - - 292
Change in fair
value of available-for-sale
assets (net of
tax) - (591) - - (591) -
Change in fair
value of hedging
derivatives
(net of tax) - - (909) - (909) -
Transfers to
income statement
(net of tax) - (423) (496) - (919) -
Exchange and
other - - - (6) (6) -
---------- --------- ----------
At 31 December
2013 17,279 (615) (1,055) 12,147 10,477 4,088
-------- ---------- --------- ---------- ------ --------
24. Provisions for liabilities and charges
Payment protection insurance
Following the unsuccessful legal challenge by the BBA against
the Financial Services Authority (FSA) and the Financial Ombudsman
Service (FOS), the Group made provisions totalling GBP6,775 million
in 2011 and 2012 against the costs of paying redress to customers
in respect of past sales of PPI policies, including the related
administrative expenses.
During 2013 average monthly customer initiated complaints have
continued to fall. Good progress has also been made in the planned
proactive mailings. There have been some adverse trends (as
detailed below), and a further GBP3,050 million has been added to
the provision, of which GBP500 million was at the half year; GBP750
million in the third quarter and GBP1,800 million at the year end.
This brings the total amount provided to GBP9,825 million, of which
approximately GBP2,090 million relates to anticipated
administrative expenses. As at 31 December 2013, GBP2,807 million
of the provision remained unutilised (29 per cent of total
provision) relative to an average monthly spend including
administration costs in the last six months of GBP230 million. The
increase of GBP3,050 million in 2013, and the overall provision, is
underpinned by the following drivers:
-- Volumes of customer initiated complaints (after excluding
complaints from customers where no PPI policy was held) - at 31
December 2012, the provision assumed a total of 2.3 million
complaints would be received. Average monthly volumes in 2013
decreased by 54 per cent compared to 2012, and fourth quarter
volumes fell in line with the Group's revised end third quarter
expectations. However, following further statistical modelling and
the results of a customer survey, the Group is now forecasting a
slower decline in future volumes than previously expected. A
further provision of GBP870 million was therefore made during the
year to reflect this. Approximately 2.5 million complaints have
been received to date, with the provision assuming approximately
550,000 in the future compared to an average run-rate of
approximately 37,000 per month in the last three months. The table
below details the historical complaint trends.
Average monthly complaint volumes - reactive
Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013
109,893 130,752 110,807 84,751 61,259 54,086 49,555 37,457
-- Proactive Mailing resulting from Past Business Reviews (PBR)
- the Group is proactively mailing customers where it has been
identified that there was a risk of potential mis-sale. During the
year, further groups of customers have been added to the proactive
mailing exercise increasing the scope to 2.8 million policies,
including approximately 300,000 additional policies in the second
half. This, combined with higher than expected response rates from
customers covered by the proactive mailing, resulted in a further
provision of GBP470 million for the full year to reflect the
additional cost incurred to date and in relation to future
mailings.
-- Uphold rates - average uphold rates per policy have increased
from 61 per cent during the first half to 80 per cent for the last
six months, with an average of 81 per cent in the fourth quarter.
This reflects the impact of changes to the complaint handling
policy, in part following consultation with the Financial Conduct
Authority (FCA) and feedback from the FOS. In addition to this,
there was a greater proportion of proactive mailing complaints
received during the period for which uphold rates are higher. The
provision assumes a slightly higher uphold rate going forward to
allow for further embedding of complaint handling policy changes.
The impact of higher uphold rates has resulted in a GBP335 million
increase to the provision.
-- Average redress- the average redress paid per policy has been
relatively stable, but remains higher than expected by
approximately GBP160 per policy due to the product and age mix of
the complaints. This has resulted in an additional provision of
GBP135 million.
-- Re-review of previously handled cases - previously reviewed
complaints are being assessed to ensure consistency with the
current complaint handling policy. At 31 December 2012 the expected
level of re-review was minimal. During 2013, and most notably in
the fourth quarter, this has increased to approximately 590,000
cases at an estimated cost of GBP460 million.
24. Provisions for liabilities and charges (continued)
-- Expenses - given the update to volume related assumptions,
the Group has also increased its estimate for administrative
expenses which comprise complaint handling costs and costs arising
from cases subsequently referred to the FOS, by GBP780 million.
An Enforcement Team of the FCA is investigating the Group's
governance of third party suppliers and potential failings in the
PPI complaint handling process. A provision of GBP50 million has
been made in respect of the likely administration costs of
responding to the FCA's inquiries. It is not possible at this stage
to make any assessment of what, if any, additional liability may
result from the investigation.
Since the commencement of the PPI redress programme in 2011 the
Group estimates that it has contacted, settled or provided for
approximately 40 per cent of the policies sold since 2000, covering
both customer-initiated complaints and actual and expected
proactive mailings undertaken by the Group. The total amount
provided for PPI represents the Group's best estimate of the likely
future costs, albeit a number of risks and uncertainties remain, in
particular complaint volumes, uphold rates, average redress paid,
the scope and cost of proactive mailings and remediation, and the
outcome of the FCA Enforcement Team investigation. The cost of
these factors could differ materially from the Group's estimates
and the assumptions underpinning them and could result in a further
provision being required.
Key metrics and sensitivities are highlighted in the table
below:
To date unless
Sensitivities(1) noted Future Sensitivity
----------------------------------- --------------- --------- --------------
Customer initiated complaints
since origination (m) 2.5 0.5 0.1 = GBP200m
Proactive Mailing: - number
of policies (m) (2) 1.66 1.19 0.1 = GBP45m
- response rate(3) 37% 31% 1% = GBP20m
Average uphold rate per policy(4) 80% 83% 1% = GBP15m
Average redress paid per upheld GBP100 =
policy(5) GBP1,600 GBP1,600 GBP110m
1 Case =
Remediation cases (k) 21 569 GBP770
1 Case =
Administrative expenses (GBPm) 1,410 680 GBP500
FOS Referral Rate(6) 35% 36% 1%= GBP4m
FOS Overturn Rate(7) 49% 33% 1%= GBP2m
(1) All sensitivities exclude claims where no PPI policy was held.
(2) To date volume includes customer initiated complaints.
(3) Metric has been adjusted to include mature mailings only, and exclude
expected customer initiated complaints. Future response rates are
expected to be lower than experienced to date as mailings to higher
risk customers have been prioritised.
(4) The percentage of complaints where the Group finds in favour of
the customer. This is a blend of proactive and customer initiated
complaints. The 80 per cent uphold rate is based on the latest
six months to December 2013.
(5) The amount that is paid in redress in relation to a policy found
to have been mis-sold, comprising, where applicable, the refund
of premium, compound interest charged and interest at 8 per cent
per annum. Actuals are based on six months to December 2013.
The accumulation of interest on future redress is expected to
be offset by the mix shifting away from more expensive cases.
(6) The percentage of cases reviewed by the Group that are subsequently
referred to the FOS by the customer. A complaint is considered
mature when six months have elapsed since initial decision. Actuals
are based on decisions made by the Group during January to June
2013 and subsequently referred to the FOS.
(7) The percentage of complaints referred where the FOS arrive at a
different decision to the Group. Actuals are based on six months
to December 2013. The future overturn rate is expected to be lower
due to changes in the case review process implemented during 2013
which has resulted in a higher uphold rate as noted above. In turn
this reduces the number / percentage of cases likely to be overturned
by the FOS.
24. Provisions for liabilities and charges (continued)
Other regulatory provisions
Litigation in relation to insurance branch business in
Germany
Clerical Medical Investment Group Limited (CMIG) has received a
number of claims in the German courts, relating to policies issued
by CMIG but sold by independent intermediaries in Germany,
principally during the late 1990s and early 2000s. Following
decisions in July 2012 from the Federal Court of Justice (FCJ) in
Germany the Group recognised a further provision of GBP150 million
in its accounts for the year ended 31 December 2012 bringing the
total amount provided to GBP325 million. During the half-year to 30
June 2013 the Group has charged a further GBP75 million with
respect to this litigation increasing the total provision to GBP400
million. The remaining unutilised provision as at 31 December 2013
is GBP246 million.
However, there are still a number of uncertainties as to the
full impact of the FCJ's decisions, and the validity of any of the
claims facing CMIG will turn upon the facts and circumstances in
respect of each claim. As a result the ultimate financial effect,
which could be significantly different from the current provision,
will only be known once there is further clarity with respect to a
range of legal issues and factual determinations involved in these
claims and/or all relevant claims have been resolved.
Interest rate hedging products
In June 2012, a number of banks, including the Group, reached
agreement with the FSA (now FCA) to carry out a review of sales
made since 1 December 2001 of interest rate hedging products (IRHP)
to certain small and medium-sized businesses. As at 31 December
2013 the Group had identified 1,771 sales of IRHPs to customers
within scope of the agreement with the FCA which are being reviewed
and, where appropriate, redressed. The Group agreed that on
conclusion of this review it would provide redress to any in-scope
customers where appropriate.
The Group provided GBP400 million in its accounts for the year
ended 31 December 2012 for the estimated cost of redress and
related administration costs, based on a pilot review that had been
conducted at the time. In the final quarter of 2013, a significant
number of additional cases were reviewed, providing a larger and
more representative sample from which to estimate the total cost of
the review. As a result, an additional provision of GBP130 million
has been recognised. During the same period, the Group confirmed it
would pay any redress due to in-scope customers before any
consequential loss claims had been outlined and agreed with them.
At 31 December 2013, the total amount provided for the cost of
redress and related administration costs is GBP530 million of which
GBP162 million had been utilised. No provision has been recognised
in relation to claims from customers which are not covered by the
agreement with the FCA, or incremental claims from customers within
the scope of the review. These will be monitored and future
provisions will be recognised to the extent an obligation resulting
in a probable outflow is identified.
Other regulatory matters
In the course of its business, the Group is engaged in
discussions with the PRA, FCA and other UK and overseas regulators
and governmental authorities in relation to a range of matters; a
provision is held against the costs expected to be incurred as a
result of the conclusions reached. In 2013 the provision was
increased by a further GBP200 million, in respect of matters
affecting the Retail, Commercial, and Wealth and Asset Finance
businesses, bringing the total amount charged to GBP300 million of
which GBP75 million had been utilised at 31 December 2013. This
increase reflects the Group's assessment of a limited number of
matters under discussion, none of which currently is individually
considered financially material in the context of the Group.
25. Contingent liabilities and commitments
Interchange fees
On 24 May 2012, the General Court of the European Union (the
General Court) upheld the European Commission's 2007 decision that
an infringement of EU competition law had arisen from arrangements
whereby MasterCard issuers charged a uniform fallback multilateral
interchange fee (MIF) in respect of cross border transactions in
relation to the use of a MasterCard or Maestro branded payment
card.
MasterCard has appealed the General Court's judgment to the
Court of Justice of the European Union. MasterCard is supported by
several card issuers, including the Group. Judgment is not expected
until the summer of 2014 or later.
In parallel:
- the European Commission is also considering further action,
and has proposed legislation to regulate interchange fees,
following its 2012 Green Paper (Towards an integrated European
market for cards, internet and mobile payments) consultation;
- the European Commission has consulted on commitments proposed
by VISA to settle an investigation into whether arrangements
adopted by VISA for the levying of the MIF in respect of
cross-border credit card payment transactions also infringe
European Union competition laws. VISA has proposed inter alia to
reduce the level of interchange fees on cross-border credit card
transactions to the interim level (30 basis points) also agreed by
MasterCard. VISA has previously reached an agreement (which expires
in 2014) with the European Commission to reduce the level of
interchange fees for cross-border debit card transactions to the
interim levels agreed by MasterCard;
- the Office of Fair Trading (OFT) has placed on hold its
examination of whether the levels of interchange fees paid by
retailers in respect of MasterCard and VISA credit cards, debit
cards and charge cards in the UK infringe competition law. The OFT
has placed the investigation on hold pending the outcome of the
MasterCard appeal to the Court of Justice of the European Union;
and
- the UK Government held a consultation in 2013, Opening Up UK
Payments. The consultation included a proposal to legislate to
introduce a new economic regulator with responsibility for payment
systems, including three and four party card schemes, and a role in
setting or approving interchange fees.
The ultimate impact of the investigations and any regulatory or
legislative developments on the Group can only be known at the
conclusion of these investigations and any relevant appeal
proceedings and once regulatory or legislative proposals are more
certain.
Investigations and litigation relating to interbank offered
rates, and other reference rates
A number of government agencies in the UK, US and elsewhere,
including the UK Financial Conduct Authority, the Serious Fraud
Office, the US Commodity Futures Trading Commission, the US
Securities and Exchange Commission, the US Department of Justice
and a number of State Attorneys General, as well as the European
and Swiss Competition Commissions, are conducting investigations
into submissions made by panel members to the bodies that set
various interbank offered rates including the BBA London Interbank
Offered Rates (LIBOR) and the European Banking Federation's
Euribor, along with other reference rates. Certain Group companies
were (at the relevant times) and remain members of various panels
whose members make submissions to these bodies including the BBA
LIBOR panels. No Group company is or was a member of the Euribor
panel. Certain Group companies have received subpoenas and requests
for information from certain government agencies and the Group is
co-operating with their investigations.
Certain Group companies, together with other panel banks, have
also been named as defendants in private lawsuits, including
purported class action suits, in the US in connection with their
roles as panel banks contributing to the setting of US Dollar
LIBOR. The claims have been asserted by plaintiffs claiming to have
had an interest in various types of financial instruments linked to
US Dollar LIBOR. The allegations in these cases, the majority of
which have been coordinated for pre-trial purposes in
multi-district litigation proceedings (MDL) in the US District
Court for the Southern District of New York (the 'District Court'),
are substantially similar to each other. The lawsuits allege
violations of the Sherman Antitrust Act, the Racketeer Influenced
and Corrupt Organizations Act (RICO) and the Commodity Exchange Act
(CEA), as well as various state statutes and common law doctrines.
Certain of the plaintiffs' claims have been dismissed by the
District Court, various motions directed to the sufficiency of
their pleading of certain claims are still pending, and many of
these cases have been stayed by order of the District Court.
25. Contingent liabilities and commitments (continued)
The Group is also reviewing its activities in relation to the
setting of certain foreign exchange daily benchmark rates,
following the FCA's publicised initiation of an investigation into
other financial institutions in relation to this activity. In
addition, the Group, together with a number of other banks, has
been named as a defendant in several actions in the District Court,
in which the plaintiffs allege that the defendants manipulated
WM/Reuters foreign exchange rates in violation of US antitrust
laws. The time-frame for the Group and the other defendants to move
to dismiss these claims has not yet been set.
It is currently not possible to predict the scope and ultimate
outcome on the Group of the various regulatory investigations,
private lawsuits or any related challenges to the interpretation or
validity of any of the Group's contractual arrangements, including
their timing and scale.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS) is the UK's
independent statutory compensation fund of last resort for
customers of authorised financial services firms and pays
compensation if a firm is unable or likely to be unable to pay
claims against it. The FSCS is funded by levies on the authorised
financial services industry. Each deposit-taking institution
contributes towards the FSCS levies in proportion to their share of
total protected deposits on 31 December of the year preceding the
scheme year, which runs from 1 April to 31 March.
Following the default of a number of deposit takers in 2008, the
FSCS borrowed funds from HM Treasury to meet the compensation costs
for customers of those firms. Although the substantial majority of
this loan, which totalled approximately GBP17 billion at 31 March
2013, will be repaid from funds the FSCS receives from asset sales,
surplus cash flow or other recoveries in relation to the assets of
the firms that defaulted, any shortfall will be funded by
deposit-taking participants of the FSCS. In July 2013, the FSCS
confirmed that it expects to raise compensation costs levies of
approximately GBP1.1 billion on all deposit-taking participants
over a three year measurement period from 2012 to 2014 to enable it
to repay the balance of the HM Treasury loan which matures in 2016.
The Group has provided for its share of the 2012 and 2013 element
of the levy. The amount of future compensation costs levies payable
by the Group depends on a number of factors including participation
in the market at 31 December, the level of protected deposits and
the population of deposit-taking participants.
Investigation into Bank of Scotland and report on HBOS
The FSA's enforcement investigation into Bank of Scotland plc's
Corporate division between 2006 and 2008 concluded with the
publication of a Final Notice on 9 March 2012. No financial penalty
was imposed on the Group or Bank of Scotland plc. On 12 September
2012 the FSA confirmed it was starting work on a public interest
report on HBOS. That report is currently expected to be published
in 2014.
US shareholder litigation
In November 2011 the Group and two former members of the Group's
Board of Directors were named as defendants in a purported
securities class action filed in the United States District Court
for the Southern District of New York. The complaint asserted
claims under the Securities Exchange Act of 1934 in connection with
alleged material omissions from statements made in 2008 in
connection with the acquisition of HBOS. In October 2012 the court
dismissed the complaint. The plaintiffs' appeal against this
decision was dismissed on 19 September 2013 and the time limit for
further appeals expired in December 2013.
US-Swiss tax programme
The US Department of Justice (the DOJ) and the Swiss Federal
Department of Finance announced on 29 August 2013 a programme (the
Programme) for Swiss banks to obtain resolution concerning their
status in connection with on-going investigations by the DOJ into
individuals and entities that use foreign (i.e. non-U.S.) bank
accounts to evade U.S. taxes and reporting requirements, and
individuals and entities that facilitate or have facilitated the
evasion of such taxes and reporting requirements. Swiss banks that
choose to participate have to notify the DOJ of their election to
categorise their relevant banking operations according to one of a
number of defined categories under the Programme.
25. Contingent liabilities and commitments (continued)
The Group, which carried out private banking operations in
Switzerland prior to disposing of these operations in November
2013, has notified the DOJ of its elected categorisation on the
basis that while it believes it has operated in full compliance
with all US federal tax laws, there remains the possibility that
certain of its clients may not have declared their assets in
compliance with such laws. The Group will continue to co-operate
with the DOJ under the terms of the Programme. However, at this
time, it is not possible to predict the ultimate outcome of the
Group's participation in the Programme, including the timing and
scale of any fine finally payable to the DOJ.
Tax authorities
The Group provides for potential tax liabilities that may arise
on the basis of the amounts expected to be paid to tax authorities.
This includes open matters where Her Majesty's Revenue and Customs
('HMRC') adopt a different interpretation and application of tax
law which might lead to additional tax. The Group has an open
matter in relation to a claim for group relief of losses incurred
in its former Irish banking subsidiary, which ceased trading on 31
December 2010. In the second half of 2013 HMRC informed the Group
that their interpretation of the UK rules, permitting the offset of
such losses, denies the claim; if HMRC's position is found to be
correct management estimate that this would result in an increase
in current tax liabilities of approximately GBP600 million and a
reduction in the Group's deferred tax asset of approximately GBP400
million. The Group does not agree with HMRC's position and, having
taken appropriate advice, does not consider that this is a case
where additional tax will ultimately fall due.
Other legal actions and regulatory matters
In addition, during the ordinary course of business the Group is
subject to other threatened and actual legal proceedings (including
class or group action claims brought on behalf of customers,
shareholders or other third parties), and regulatory challenges,
investigations and enforcement actions, both in the UK and
overseas. All such material matters are periodically reassessed,
with the assistance of external professional advisers where
appropriate, to determine the likelihood of the Group incurring a
liability. In those instances where it is concluded that it is more
likely than not that a payment will be made, a provision is
established to management's best estimate of the amount required to
settle the obligation at the relevant balance sheet date. In some
cases it will not be possible to form a view, either because the
facts are unclear or because further time is needed properly to
assess the merits of the case and no provisions are held against
such matters. However the Group does not currently expect the final
outcome of any such case to have a material adverse effect on its
financial position, operations or cash flows.
25. Contingent liabilities and commitments (continued)
Contingent liabilities and commitments arising from the banking
business
At At
31 December 31 December
2013 2012
GBPm GBPm
Contingent liabilities
Acceptances and endorsements 204 107
Other:
------------ ------------
Other items serving as direct credit substitutes 710 523
Performance bonds and other transaction-related
contingencies 1,966 2,266
------------ ------------
2,676 2,789
------------ ------------
Total contingent liabilities 2,880 2,896
------------ ------------
Commitments
Documentary credits and other short-term trade-related
transactions 54 11
Forward asset purchases and forward deposits
placed 440 546
Undrawn formal standby facilities, credit lines
and other commitments to lend:
Less than 1 year original maturity:
------------ ------------
Mortgage offers made 9,559 7,404
Other commitments 55,002 53,196
------------ ------------
64,561 60,600
1 year or over original maturity 40,616 40,794
------------ ------------
Total commitments 105,671 101,951
------------ ------------
Of the amounts shown above in respect of undrawn formal standby
facilities, credit lines and other commitments to lend, GBP56,292
million (31 December 2012: GBP52,733 million) was irrevocable.
26. Fair values of financial assets and liabilities
The valuations of financial instruments have been classified
into three levels according to the quality and reliability of
information used to determine the fair values.
Level 1 portfolios
Level 1 fair value measurements are those derived from
unadjusted quoted prices in active markets for identical assets or
liabilities. Products classified as level 1 predominantly comprise
equity shares, treasury bills and other government securities.
Level 2 portfolios
Level 2 valuations are those where quoted market prices are not
available, for example where the instrument is traded in a market
that is not considered to be active or valuation techniques are
used to determine fair value and where these techniques use inputs
that are based significantly on observable market data. Examples of
such financial instruments include most over-the-counter
derivatives, financial institution issued securities, certificates
of deposit and certain
asset-backed securities.
26. Fair values of financial assets and liabilities (continued)
Level 3 portfolios
Level 3 portfolios are those where at least one input which
could have a significant effect on the instrument's valuation is
not based on observable market data. Such instruments would include
the Group's venture capital and unlisted equity investments which
are valued using various valuation techniques that require
significant management judgement in determining appropriate
assumptions, including earnings multiples and estimated future cash
flows. Certain of the Group's asset-backed securities and
derivatives, principally where there is no trading activity in such
securities, are also classified as level 3.
Valuation control framework
Key elements of the valuation control framework, which covers
processes for all levels in the fair value hierarchy including
level 3 portfolios, include model validation (incorporating
pre-trade and post-trade testing), product implementation review
and independent price verification. Formal committees meet
quarterly to discuss and approve valuations in more judgemental
areas.
Transfers into and out of level 3 portfolios
Transfers out of level 3 portfolios arise when inputs that could
have a significant impact on the instrument's valuation become
market observable; conversely, transfers into the portfolios arise
when consistent sources of data cease to
be available.
Valuation methodology
Loans and advances and debt securities measured at fair value
through profit or loss and classified as level 2 are valued by
discounting expected cash flows using an observable credit spread
applicable to the particular instrument. The fair value of
non-derivative liabilities measured at fair value through profit or
loss and classified as level 2 is calculated in a similar way.
For other level 2 and level 3 portfolios, there is no
significant change to what was disclosed in the Group's 2012 annual
report and accounts in respect of the valuation methodology
(techniques and inputs) applied to such portfolios.
26. Fair values of financial assets and liabilities (continued)
The table below summarises the carrying values of financial
assets and liabilities presented on the Group's balance sheet. The
fair values presented in the table are at a specific date and may
be significantly different from the amounts which will actually be
paid or received on the maturity or settlement date.
31 December 2013 31 December 2012(1)
------------------ ---------------------
Carrying Fair Carrying Fair
value value value value
GBPm GBPm GBPm GBPm
Financial assets
Cash and balances at central
banks 49,915 49,915 80,298 80,298
Items in the course of collection
from banks 1,007 1,007 1,256 1,256
Trading and other financial
assets at fair value through
profit or loss 142,683 142,683 160,620 160,620
Derivative financial instruments 33,125 33,125 56,557 56,557
Loans and receivables:
Loans and advances to banks 25,365 25,296 32,757 32,746
Loans and advances to customers 495,281 486,495 517,225 506,418
Debt securities 1,355 1,251 5,273 5,402
Available-for-sale financial
instruments 43,976 43,976 31,374 31,374
Financial liabilities
Deposits from banks 13,982 14,101 38,405 38,738
Customer deposits 441,311 441,855 426,912 428,749
Items in course of transmission
to banks 774 774 996 996
Trading and other financial
liabilities at fair value through
profit or loss 43,625 43,625 33,392 33,392
Derivative financial instruments 30,464 30,464 48,676 48,676
Notes in circulation 1,176 1,176 1,198 1,198
Debt securities in issue 87,102 90,803 117,253 122,847
Liabilities arising from non-participating
investment contracts 27,590 27,590 54,372 54,372
Financial guarantees 50 50 48 48
Subordinated liabilities 32,312 34,449 34,092 36,382
(1) Restated - see notes 1 and 28.
The Group manages valuation adjustments for its derivative
exposures on a net basis; the Group determines their fair values on
the basis of their net exposures. In all other cases, fair values
of financial assets and liabilities measured at fair value are
determined on the basis of their gross exposures.
The following table provides an analysis of the financial assets
and liabilities of the Group that are carried at fair value in the
Group's consolidated balance sheet, grouped into levels 1 to 3
based on the degree to which the fair value
is observable.
26. Fair values of financial assets and liabilities (continued)
Valuation hierarchy
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 31 December 2013
Trading and other financial
assets at fair value
through profit or loss:
Loans and advances to customers - 21,110 - 21,110
Loans and advances to banks - 8,333 - 8,333
Debt securities:
------- ------- ------- -------
Government securities 20,191 498 - 20,689
Other public sector securities - 1,312 885 2,197
Bank and building society certificates
of deposit - 1,491 - 1,491
Asset-backed securities:
Mortgage-backed securities 30 768 - 798
Other asset-backed securities 171 756 - 927
Corporate and other debt securities 244 18,689 1,687 20,620
------- ------- ------- -------
20,636 23,514 2,572 46,722
Equity shares 64,690 53 1,660 66,403
Treasury and other bills 7 108 - 115
------- ------- ------- -------
Total trading and other financial
assets at fair value through
profit or loss 85,333 53,118 4,232 142,683
------- ------- ------- -------
Available-for-sale financial
assets:
Debt securities:
------- ------- ------- -------
Government securities 38,262 28 - 38,290
Bank and building society certificates
of deposit - 208 - 208
Asset-backed securities:
Mortgage-backed securities - 1,263 - 1,263
Other asset-backed securities - 841 74 915
Corporate and other debt securities 56 1,799 - 1,855
------- ------- ------- -------
38,318 4,139 74 42,531
Equity shares 48 147 375 570
Treasury and other bills 852 23 - 875
------- ------- ------- -------
Total available-for-sale financial
assets 39,218 4,309 449 43,976
------- ------- ------- -------
Derivative financial instruments 235 29,871 3,019 33,125
------- ------- ------- -------
Total financial assets carried
at fair value 124,786 87,298 7,700 219,784
------- ------- ------- -------
Trading and other financial
liabilities at fair value
through profit or loss
Liabilities held at fair value
through profit or loss
(debt securities) - 5,267 39 5,306
Trading liabilities:
------- ------- ------- -------
Liabilities in respect of securities
sold under repurchase agreements - 28,902 - 28,902
Short positions in securities 6,473 417 - 6,890
Other - 2,527 - 2,527
------- ------- ------- -------
6,473 31,846 - 38,319
------- ------- ------- -------
Total trading and other financial
liabilities at fair value through
profit or loss 6,473 37,113 39 43,625
------- ------- ------- -------
Derivative financial instruments 119 29,359 986 30,464
------- ------- ------- -------
Financial guarantees - - 50 50
------- ------- ------- -------
Total financial liabilities
carried at fair value 6,592 66,472 1,075 74,139
------- ------- ------- -------
There were no transfers between level 1 and level 2 during the
period.
26. Fair values of financial assets and liabilities (continued)
Movements in level 3 portfolio
The table below analyses movements in the level 3 financial
assets portfolio.
Trading
and other
financial Total
assets at financial
fair Available- assets
value through for-sale carried
profit financial Derivative at
or loss assets assets fair value
GBPm GBPm GBPm GBPm
At 1 January 2013 3,306 567 2,358 6,231
Exchange and other adjustments 21 15 2 38
Gains recognised in the income
statement within other income 296 - 144 440
Gains recognised in other comprehensive
income within the revaluation
reserve in respect of available-for-sale
financial assets - 40 - 40
Purchases 582 43 271 896
Sales (631) (224) (102) (957)
Transfers into the level 3
portfolio 995 12 354 1,361
Transfers out of the level
3 portfolio (337) (4) (8) (349)
-------------- ---------- ---------- -----------
At 31 December 2013 4,232 449 3,019 7,700
-------------- ---------- ---------- -----------
Gains recognised in the income
statement within other income
relating to those assets held
at 31 December 2013 70 5 159 234
The table below analyses movements in the level 3 financial
liabilities portfolio.
Trading
and other
financial Total
liabilities financial
at fair liabilities
value through carried
profit Derivative Financial at
or loss liabilities guarantees fair value
GBPm GBPm GBPm GBPm
At 1 January 2013 - 543 48 591
Exchange and other adjustments - 8 - 8
(Gains) losses recognised in
the income statement within
other income 10 (30) 3 (17)
Additions 29 262 - 291
Redemptions - (29) (1) (30)
Transfers into the level 3
portfolio - 233 - 233
Transfers out of the level
3 portfolio - (1) - (1)
-------------- ------------ ----------- ------------
At 31 December 2013 39 986 50 1,075
-------------- ------------ ----------- ------------
Gains (losses) recognised in
the income statement within
other income relating to those
liabilities held at 31 December
2013 10 (20) 3 (7)
26. Fair values of financial assets and liabilities (continued)
Sensitivity of level 3 valuations
Valuation techniques applied to many of the Group's level 3
instruments often involve the use of two or more inputs whose
relationship is interdependent. The calculation of the effect of
reasonably possible alternative assumptions included in the table
below reflects such relationships.
The following information relates to significant unobservable
inputs in respect of derivatives and debt investments shown in the
table that follows:
- Interest rates and inflation rates are referenced in some
derivatives where the payoff that the holder of the derivative
receives depends on the behaviour of those underlying references
through time.
- Credit spreads represent the premium above the benchmark
reference instrument required to compensate for lower credit
quality; higher spreads lead to a lower fair value.
- Volatility parameters represent key attributes of option
behaviour; higher volatilities typically denote a wider range of
possible outcomes.
The fair values of certain equity investments, mainly those in
the Group's venture capital businesses, are determined by
identifying the earnings multiple for comparable companies and
applying this multiple to the earnings of the entity whose value is
being estimated; a higher earnings multiple will result in a higher
fair value.
Reasonably possible alternative assumptions
The following information relates to reasonably possible
alternative assumptions shown in the table that follows.
Debt securities
Reasonably possible alternative assumptions have been determined
in respect of the Group's structured credit investment by flexing
credit spreads.
Derivatives
(i) In respect of the embedded equity conversion feature of the
Enhanced Capital Notes, the sensitivity was based on the absolute
difference between the actual price of the Enhanced Capital Note
and the closest, alternative broker quote available plus the impact
of applying a 10 basis points increase/decrease in the market yield
used to derive a market price for similar bonds without the
conversion feature. The effect of interdependency of the
assumptions is not material to the effect of applying reasonably
possible alternative assumptions to the valuations of derivative
financial instruments.
(ii) Uncollateralised inflation swaps are valued using
appropriate discount spreads for such transactions. These spreads
are not generally observable for longer maturities. The reasonably
possible alternative valuations reflect flexing of the spreads for
the differing maturities to alternative values of between 62 basis
points and 192 basis points.
(iii) Swaptions are priced using industry standard option
pricing models. Such models require interest rate volatilities
which may be unobservable at longer maturities. To derive
reasonably possible alternative valuations these volatilities have
been flexed within a range of 3 per cent to 112 per cent.
Equity and venture capital investments
The valuation techniques used for unlisted equities and venture
capital investments vary depending on the nature of the investment.
Reasonably possible alternative valuations for these investments
have been calculated as follows:
- for valuations derived from earnings multiples, a 10 per cent
increase/decrease in the earnings multiple has been applied;
and
- for fund investment portfolios, the values of underlying
investments have been flexed in line with International Private
Equity and Venture Capital Guidelines.
26. Fair values of financial assets and liabilities (continued)
At 31 December 2013
---------------------------------------
Effect of reasonably
possible alternative
assumptions(2)
-----------------------------
Significant
Valuation unobservable Carrying Favourable Unfavourable
technique(s) inputs Range(1) value changes changes
GBPm GBPm GBPm
Trading and other financial assets at fair
value through profit or loss
Discounted Credit spreads
Debt securities cash flow (bps) n/a(3) 18 5 (2)
Equity and
venture capital
investments Market approach Earnings multiple 0.2/14.6 2,132 70 (70)
----------------- ------------------
Underlying
asset/net
asset value
(incl. property
prices)(4) n/a n/a 130 - -
----------------- ------------------------------------- -------- -------- --------------- ------------
Unlisted equities Underlying
and property asset/net
partnerships asset value
in the life (incl. property
funds prices)(4) n/a n/a 1,952 - -
------------------ ----------------- ------------------ -------- --------
4,232
--------
Available-for-sale financial assets
Lead manager
or broker
Asset-backed quote/consensus
securities pricing n/a n/a 74 - -
------------------ ----------------- ------------------ -------- -------- --------------- ------------
Underlying
asset/net
Equity and asset value
venture capital (incl. property
investments prices)(4) n/a n/a 375 28 (19)
------------------ ----------------- ------------------ -------- --------
449
--------
Derivative financial
assets
Embedded equity Lead manager Equity conversion
conversion or broker feature spread
feature quote (bps) 199/420 1,212 59 (58)
------------------ ----------------- ------------------ -------- -------- --------------- ------------
Inflation
swap rate
- funding
Interest rate Discounted component
derivatives cash flow (bps) 62/192 1,461 66 (39)
----------------- ------------------
Option pricing Interest rate
model volatility 3%/112% 346 6 (7)
----------------- ------------------------------------- -------- --------
3,019
--------
Financial assets carried at fair
value 7,700
--------
Trading and other financial
liabilities at fair
value through profit
or loss 39 1 (1)
-------- --------------- ------------
Derivative financial
liabilities
Inflation
swap rate
- funding
Interest rate Discounted component
derivatives cash flow (bps) 62/194 754 - -
----------------- ------------------
Option pricing Interest rate
model volatility 3%/112% 232 - -
--------
986
--------
Financial guarantees 50
--------
Financial liabilities carried at
fair value 1,075
--------
(1) The range represents the highest and lowest inputs used in the
level 3 valuations.
(2) Where the exposure to an unobservable input is managed on a net
basis, only the net impact is shown in the table.
(3) A single pricing source is used.
(4) Underlying asset/net asset values represent fair value.
27. Related party transactions
UK Government
In January 2009, the UK Government through HM Treasury became a
related party of the Company following its subscription for
ordinary shares issued under a placing and open offer. As at 31
December 2013, HM Treasury held a 32.7 per cent interest in the
Company's ordinary share capital and consequently HM Treasury
remained a related party of the Company during the year ended 31
December 2013; this percentage holding has reduced from 39.2 per
cent at 31 December 2012 following the UK Government's sale of
4,282 million shares on 17 September 2013 and the impact of issues
of ordinary shares.
In accordance with IAS 24, UK Government-controlled entities are
related parties of the Group. The Group regards the Bank of England
and entities controlled by the UK Government, including The Royal
Bank of Scotland Group plc,
Northern Rock (Asset Management) plc and Bradford & Bingley
plc, as related parties.
The Group has participated in a number of schemes operated by
the UK Government and central banks and made available to eligible
banks and building societies.
National Loan Guarantee Scheme
The Group has participated in the UK Government's National Loan
Guarantee Scheme, which was launched on 20 March 2012. Through the
scheme, the Group is providing eligible UK businesses with
discounted funding, subject to continuation of the scheme and its
financial benefits, and based on the Group's existing lending
criteria. Eligible businesses who have taken up the funding benefit
from a 1 per cent discount on their funding rate for a certain
period of time.
Business Growth Fund
In May 2011 the Group agreed, together with The Royal Bank of
Scotland plc (and three other non-related parties), to commit up to
GBP300 million of equity investment by subscribing for shares in
the Business Growth Fund plc which is the company created to fulfil
the role of the Business Growth Fund as set out in the British
Bankers' Association's Business Taskforce Report of October 2010.
At 31 December 2013, the Group had invested GBP64 million (31
December 2012: GBP50 million) in the Business Growth Fund and
carried the investment at a fair value of GBP52 million (31
December 2012: GBP44 million).
Big Society Capital
In January 2012 the Group agreed, together with The Royal Bank
of Scotland plc (and two other non-related parties), to commit up
to GBP50 million each of equity investment into the Big Society
Capital Fund. The Fund, which was created as part of the Project
Merlin arrangements, is a UK social investment fund. The Fund was
officially launched on 3 April 2012 and the Group had invested
GBP12 million in the Fund by 31 December 2012 and invested a
further GBP11 million during the year ended 31 December 2013.
Funding for Lending
In August 2012, the Group announced its support for the UK
Government's Funding for Lending Scheme and confirmed its intention
to participate in the scheme. The Funding for Lending Scheme
represents a further source of cost effective secured term funding
available to the Group. The initiative supports a broad range of UK
based customers, providing householders with more affordable
housing finance and businesses with cheaper finance to invest and
grow. In November 2013, the Group entered into extension letters
with the Bank of England to take part in the extension of the
Funding for Lending Scheme until the end of January 2015. The
extension of the Funding for Lending Scheme focuses on providing
businesses with cheaper finance to invest and grow. At 31 December
2013, the Group had drawn down GBP8.0 billion under the Funding for
Lending Scheme. A further GBP2.2 billion was drawn in January 2014,
which under the Funding for Lending rules counts as funding from
the 2013 scheme capacity.
27. Related party transactions (continued)
Help to Buy
On 7 October 2013, Bank of Scotland plc entered into an
agreement with The Commissioners of Her Majesty's Treasury by which
it agreed that the Halifax Division of Bank of Scotland plc would
participate in the Help to Buy Scheme with effect from 11 October
2013 and that Lloyds Bank plc would participate from 3 January
2014. The Help to Buy Scheme is a scheme promoted by the Government
and is aimed to encourage participating lenders to make mortgage
loans available to customers who require higher loan-to-value
mortgages. Halifax and Lloyds are currently participating in the
Scheme whereby customers borrow between 90 per cent and 95 per cent
of the purchase price.
In return for the payment of a commercial fee, HM Treasury has
agreed to provide a guarantee to the lender to cover a proportion
of any loss made by the lender arising from a higher loan-to-value
loan being made. By 31 December 2013, GBP79 million had been
advanced under this scheme.
Central bank facilities
In the ordinary course of business, the Group may from time to
time access market-wide facilities provided by central banks.
Other government-related entities
There were no significant transactions with other UK
Government-controlled entities (including UK Government-controlled
banks) during the year that were not made in the ordinary course of
business or that were unusual in their nature or conditions.
Other related party transactions
Sale of securitisation notes
During the year ended 31 December 2013, the Group sold at fair
value certain securitisation notes to Lloyds Bank Pension Trust
(No. 1) Limited for a consideration of approximately GBP340
million. Following the sale, the Group deconsolidated the relevant
securitisation entities recognising a profit of GBP236 million.
Subsequently, the Group entered into a commercially negotiated
agreement with Lloyds Bank Pension Trust (No.1) Limited to jointly
sell a portfolio of US Residential Mortgage-Backed Securities with
a book value of GBP3.5 billion. As a result of selling the
portfolio together a price premium was achieved compared to selling
the notes separately. Under the terms of the agreement the Group
and Lloyds Bank Pension Trust (No.1) Limited agreed to share any
price premium achieved above an agreed minimum threshold amount.
The joint sale resulted in the Group realising a total pre-tax gain
of approximately GBP538 million, of which GBP99 million related to
the premium sharing agreement.
St James's Place plc
In March 2013 the Group sold 102 million shares in St. James's
Place plc; fees totalling some GBP5 million in relation to the sale
were settled by St. James's Place plc.
Other related party transactions for the year ended 31 December
2013 are similar in nature to those for the year ended 31 December
2012.
28. Restatement of prior period information
As explained in note 1, the Group has adopted IFRS 10
Consolidated Financial Statements and Amendments to IAS 19 Employee
Benefits (IAS 19R) on 1 January 2013.
The Group has restated information for the preceding comparative
period.
The following tables summarise the adjustments arising on the
adoption of IAS 19R and IFRS 10 to the Group's:
- income statement, statement of comprehensive income and
statement of cash flows for the year ended 31 December 2012;
- balance sheet at 31 December 2012; and
- equity at 1 January 2012.
Consolidated income statement - year ended 31 December 2012
As previously IAS 19
reported IFRS 10 Revised Restated
GBPm GBPm GBPm GBPm
Interest and similar income 23,535 13 - 23,548
Interest and similar expense (14,460) (1,370) - (15,830)
------------- ------- --------- --------
Net interest income 9,075 (1,357) - 7,718
------------- ------- --------- --------
Fee and commission income 4,731 (81) - 4,650
Fee and commission expense (1,438) (6) - (1,444)
------------- ------- --------- --------
Net fee and commission income 3,293 (87) - 3,206
Net trading income 13,554 1,451 - 15,005
Insurance premium income 8,284 - - 8,284
Other operating income 4,700 - - 4,700
------------- ------- --------- --------
Other income 29,831 1,364 - 31,195
------------- ------- --------- --------
Total income 38,906 7 - 38,913
Insurance claims (18,396) - - (18,396)
------------- ------- --------- --------
Total income, net of insurance
claims 20,510 7 - 20,517
------------- ------- --------- --------
Regulatory provisions (4,175) - - (4,175)
Other operating expenses (11,756) (1) (42) (11,799)
------------- ------- --------- --------
Total operating expenses (15,931) (1) (42) (15,974)
------------- ------- --------- --------
Trading surplus 4,579 6 (42) 4,543
Impairment (5,149) - - (5,149)
---------
(Loss) profit before tax (570) 6 (42) (606)
Taxation (773) (6) (2) (781)
------------- ------- --------- --------
Loss for the year (1,343) - (44) (1,387)
------------- ------- --------- --------
Profit attributable to non-controlling
interests 84 - - 84
Loss attributable to equity
shareholders (1,427) - (44) (1,471)
------------- ------- --------- --------
Loss for the year (1,343) - (44) (1,387)
------------- ------- --------- --------
Basic loss per share (2.0)p (2.1)p
Diluted loss per share (2.0)p (2.1)p
28. Restatement of prior period information (continued)
Consolidated statement of comprehensive income - year ended 31
December 2012
As previously IAS 19
reported IFRS 10 Revised Restated
GBPm GBPm GBPm GBPm
Loss for the year (1,343) - (44) (1,387)
Other comprehensive income
Items that will not subsequently
be reclassified to profit or
loss:
Post-retirement defined benefit
scheme remeasurements:
------------- ------- -------- --------
Remeasurements before taxation - - (2,136) (2,136)
Taxation - - 491 491
------------- ------- -------- --------
- - (1,645) (1,645)
Items that may subsequently
be reclassified to profit or
loss:
Movements in revaluation reserve
in respect of available-for-sale
financial assets:
------------- ------- -------- --------
Adjustment on transfer from
held-to maturity portfolio 1,168 - - 1,168
Change in fair value 900 - - 900
Income statement transfers
in respect of disposals (3,547) - - (3,547)
Income statement transfers
in respect of impairment 42 - - 42
Other income statement transfers 169 - - 169
Taxation 339 - - 339
------------- ------- -------- --------
(929) - - (929)
Movements in cash flow hedging
reserve:
------------- ------- -------- --------
Effective portion of changes
in fair value 116 - - 116
Net income statement transfers (92) - - (92)
Taxation 1 - - 1
------------- ------- -------- --------
25 - - 25
Currency translation differences
(tax: nil) (14) - - (14)
------------- ------- -------- --------
Other comprehensive income
for the year,
net of tax (918) - (1,645) (2,563)
------------- ------- -------- --------
Total comprehensive income
for the year (2,261) - (1,689) (3,950)
------------- ------- -------- --------
Total comprehensive income
attributable to non-controlling
interests 82 - - 82
Total comprehensive income
attributable to equity shareholders (2,343) - (1,689) (4,032)
------------- ------- -------- --------
Total comprehensive income
for the year (2,261) - (1,689) (3,950)
------------- ------- -------- --------
28. Restatement of prior period information (continued)
Consolidated cash flow statement - year ended 31 December
2012
As previously IAS 19
reported IFRS 10 Revised Restated
GBPm GBPm GBPm GBPm
(Loss) profit before tax (570) 6 (42) (606)
Adjustments for:
Change in operating assets 48,333 (528) - 47,805
Change in operating liabilities (46,681) 528 - (46,153)
Non-cash and other items 2,045 (6) 42 2,081
Tax paid (78) - - (78)
------------- ------- --------- --------
Net cash used in operating
activities 3,049 - - 3,049
Cash flows from investing activities
------------- ------- --------- --------
Purchase of financial assets (22,050) - - (22,050)
Proceeds from sale and maturity
of financial assets 37,664 - - 37,664
Purchase of fixed assets (3,003) - - (3,003)
Proceeds from sale of fixed
assets 2,595 - - 2,595
Acquisition of businesses,
net of cash acquired (11) - - (11)
Disposal of businesses, net
of cash disposed 37 - - 37
------------- ------- --------- --------
Net cash provided by investing
activities 15,232 - - 15,232
Cash flows from financing activities
------------- ------- --------- --------
Dividends paid to non-controlling
interests (56) - - (56)
Interest paid on subordinated
liabilities (2,577) - - (2,577)
Proceeds from issue of ordinary
shares 170 - - 170
Repayment of subordinated liabilities (664) - - (664)
Change in non-controlling interests 23 - - 23
------------- ------- --------- --------
Net cash used in financing
activities (3,104) - - (3,104)
Effects of exchange rate changes
on cash and cash equivalents (8) - - (8)
------------- ------- --------- --------
Change in cash and cash equivalents 15,169 - - 15,169
Cash and cash equivalents at
beginning of year 85,889 - - 85,889
------------- ------- --------- --------
Cash and cash equivalents at
end of year 101,058 - - 101,058
------------- ------- --------- --------
28. Restatement of prior period information (continued)
Consolidated balance sheet at 31 December 2012
As previously IAS 19
reported IFRS 10 Revised Restated
Assets GBPm GBPm GBPm GBPm
Cash and balances at central
banks 80,298 - - 80,298
Items in course of collection
from banks 1,256 - - 1,256
Trading and other financial
assets at fair value through
profit or loss 153,990 6,630 - 160,620
Derivative financial instruments 56,550 7 - 56,557
Loans and receivables:
------------- ------- --------- --------
Loans and advances to banks 29,417 3,340 - 32,757
Loans and advances to customers 517,225 - - 517,225
Debt securities 5,273 - - 5,273
------------- ------- --------- --------
551,915 3,340 - 555,255
Available-for-sale financial
assets 31,374 - - 31,374
Investment properties 5,405 - - 5,405
Goodwill 2,016 - - 2,016
Value of in-force business 6,800 - - 6,800
Other intangible assets 2,792 - - 2,792
Tangible fixed assets 7,342 - - 7,342
Current tax recoverable 354 - - 354
Deferred tax assets 4,285 - 628 4,913
Retirement benefit assets 1,867 - (1,126) 741
Other assets 18,308 190 - 18,498
------------- ------- --------- --------
Total assets 924,552 10,167 (498) 934,221
------------- ------- --------- --------
28. Restatement of prior period information (continued)
Consolidated balance sheet at 31 December 2012 (continued)
As previously IAS 19
reported IFRS 10 Revised Restated
GBPm GBPm GBPm GBPm
Equity and liabilities
Liabilities
Deposits from banks 38,405 - - 38,405
Customer deposits 426,912 - - 426,912
Items in course of transmission
to banks 996 - - 996
Trading and other financial
liabilities at fair value through
profit or loss 35,972 (2,580) - 33,392
Derivative financial instruments 48,665 11 - 48,676
Notes in circulation 1,198 - - 1,198
Debt securities in issue 117,369 (116) - 117,253
Liabilities arising from insurance
contracts and
participating investment contracts 82,953 - - 82,953
Liabilities arising from non-participating
investment contracts 54,372 - - 54,372
Unallocated surplus within
insurance businesses 267 - - 267
Other liabilities 33,941 12,852 - 46,793
Retirement benefit obligations 300 - 1,605 1,905
Current tax liabilities 138 - - 138
Deferred tax liabilities 327 - - 327
Other provisions 3,961 - - 3,961
Subordinated liabilities 34,092 - - 34,092
------------- ------- --------- --------
Total liabilities 879,868 10,167 1,605 891,640
Equity
------------- ------- --------- --------
Share capital 7,042 - - 7,042
Share premium account 16,872 - - 16,872
Other reserves 12,902 - - 12,902
Retained profits 7,183 - (2,103) 5,080
------------- ------- --------- --------
Shareholders' equity 43,999 - (2,103) 41,896
Non-controlling interests 685 - - 685
------------- ------- --------- --------
Total equity 44,684 - (2,103) 42,581
------------- ------- --------- --------
Total equity and liabilities 924,552 10,167 (498) 934,221
------------- ------- --------- --------
Equity at 1 January 2012
As previously IAS 19
reported IFRS 10 Revised Restated
GBPm GBPm GBPm GBPm
Share capital 6,881 - - 6,881
Share premium account 16,541 - - 16,541
Other reserves 13,818 - - 13,818
Retained profits 8,680 - (414) 8,266
------------- ------- --------- --------
Shareholders' equity 45,920 - (414) 45,506
Non-controlling interests 674 - - 674
------------- ------- --------- --------
Total equity 46,594 - (414) 46,180
------------- ------- --------- --------
29. Future accounting developments
The following pronouncements may have a significant effect on
the Group's financial statements but are not applicable for the
year ending 31 December 2013 and have not been applied in preparing
these financial statements. Save as disclosed below, the full
impact of these accounting changes is being assessed by the
Group.
Pronouncement Nature of change IASB effective
date
------------------------------- --------------------------------------------- --------------
Amendments to IAS Inserts application guidance to address Annual periods
32 Financial Instruments: inconsistencies identified in applying beginning on
Presentation - 'Offsetting the offsetting criteria used in the or after 1
Financial Assets and standard. Some gross settlement systems January 2014
Financial Liabilities' may qualify for offsetting where
they exhibit certain characteristics
akin to net settlement. This amendment
is not expected to have a significant
impact on the Group.
------------------------------- --------------------------------------------- --------------
Amendments to IAS Provides relief from discontinuing Annual periods
39 Financial Instruments: hedge accounting in circumstances beginning on
Recognition and Measurement where a derivative designated as or after 1
- 'Novation of Derivatives a hedging instrument is novated to January 2014
and Continuation of a central counterparty as a consequence
Hedge Accounting' or introduction of laws or regulations.
These amendments are not expected
to have a significant impact on the
Group.
------------------------------- --------------------------------------------- --------------
IFRIC 21 Levies(1) Clarifies that the obligating event Annual periods
that gives rise to a liability to beginning on
pay a government levy is the activity or after 1
that triggers the payment of the January 2014
levy as set out in the relevant legislation.
An entity does not have a constructive
obligation to pay a levy that will
be triggered by operating in a future
period. This interpretation is not
expected to have a significant impact
on the Group.
------------------------------- --------------------------------------------- --------------
IFRS 9 Financial Instruments(1, Replaces those parts of IAS 39 Financial Date yet to
2) Instruments: Recognition and Measurement be determined
relating to the classification, measurement
and derecognition of financial assets
and liabilities and hedge accounting.
IFRS 9 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 instruments and eliminates
the available-for-sale financial
asset and held-to-maturity investment
categories in IAS 39. The requirements
for derecognition are broadly unchanged
from IAS 39. The standard also retains
most of the IAS 39 requirements for
financial liabilities except for
those designated at fair value through
profit or loss whereby that part
of the fair value change attributable
to the entity's own credit risk is
recorded in other comprehensive income.
The hedge accounting requirements
are more closely aligned with risk
management practices and follow a
more principle-based approach.
------------------------------- --------------------------------------------- --------------
(1) As at 13 February 2014, these pronouncements are awaiting EU endorsement.
(2) IFRS 9 is the standard which will replace IAS 39. Further changes
to IFRS 9 are expected dealing with impairment of financial assets
measured at amortised cost, which will be based on expected rather
than incurred credit losses, and limited amendments to classification
and measurement which include the introduction of a third measurement
category, fair value through other comprehensive income. Until
the standard is complete, it is not possible to determine the overall
impact of the standard on the financial statements.
30. Other information
In accordance with the Listing Rules of the UK Listing
Authority, these preliminary annual results have been agreed with
the Company's auditors, PricewaterhouseCoopers LLP, and the
Directors have not been made aware of any likely modification to
the auditors' report to be included with the annual report and
accounts for the year ended 31 December 2013. The financial
information in these financial statements, which was approved by
the Directors on 12 February 2014, does not constitute statutory
accounts within the meaning of section 434 of the Companies Act
2006.
Statutory accounts for the year ended 31 December 2012 have been
delivered to the Registrar of Companies. The auditors' report on
those accounts was unqualified, did not include an emphasis of
matter paragraph and did not include a statement under section 498
of the Companies Act 2006.
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Charles King
Investor Relations Director
020 7356 3537
charles.king@finance.lloydsbanking.com
Douglas Radcliffe
Head of Operations and Reporting
020 7356 1571
douglas.radcliffe@finance.lloydsbanking.com
CORPORATE AFFAIRS
Matthew Young
Group Corporate Affairs Director
020 7356 2231
matt.young@lloydsbanking.com
Ed Petter
Group Media Relations Director
020 8936 5655
ed.petter@lloydsbanking.com
Copies of this news release may be obtained from Investor
Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V
7HN. The full news release can also be found on the Group's website
- www.lloydsbankinggroup.com.
Registered office: Lloyds Banking Group plc, The Mound,
Edinburgh, EH1 1YZ
Registered in Scotland no. 95000
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR QKBDQNBKBOBD
Lloyds Banking (LSE:LLOY)
Historical Stock Chart
From Apr 2024 to May 2024
Lloyds Banking (LSE:LLOY)
Historical Stock Chart
From May 2023 to May 2024