TIDM68FF TIDMLLOY
RNS Number : 9312G
HBOS PLC
29 July 2021
HBOS plc
2021 Half-Year Results
29 July 2021
Member of the Lloyds Banking Group
CONTENTS
Page
Review of performance 1
Principal risks and uncertainties 4
Condensed consolidated half-year financial statements 6
Consolidated income statement 7
Consolidated statement of comprehensive income 8
Consolidated balance sheet 9
Consolidated statement of changes in equity 12
Consolidated cash flow statement 16
Notes to the condensed consolidated half-year financial
statements 17
Statement of directors' responsibilities 49
Forward looking statements 50
Contacts 52
REVIEW OF PERFORMANCE
Principal activities
HBOS plc (the Company) and its subsidiaries (together, the
Group) provide a wide range of banking and financial services. The
Group's revenue is earned through interest and fees on a broad
range of financial services products including current and savings
accounts, personal loans, credit cards and mortgages within the
retail market and loans and other products to commercial and
corporate customers.
Income statement
The Group's profit before tax for the half-year to 30 June 2021
was GBP1,444 million, whilst total profit for the period was
GBP1,479 million, both benefiting from solid business momentum and
a net impairment credit in the context of the UK's improved
macroeconomic outlook and robust credit performance. The Group's
total profit for the period included a benefit of GBP420 million
from the revaluation of deferred tax assets as a result of the
revised corporation tax rate effective from 1 April 2023,
substantively enacted in the second quarter.
Total income of GBP2,760 million was down 5 per cent on the
first half of 2020, with slightly lower net interest income and
significantly reduced other income.
Net interest income of GBP2,614 million was down 2 per cent
compared to the first half of 2020, impacted by a reduction in net
interest margins which more than offset the effects of higher
average interest-earning assets. Net interest margins fell
reflecting the lower rate environment. Average interest-earning
assets were up on the first half of 2020, driven by strong growth
in the Group's mortgage book.
Other income of GBP146 million was 39 per cent lower than the
first half of 2020, driven by significant reductions in both net
trading income and other operating income whilst net fee and
commission income remained stable on the prior year. Net trading
income for the period was a loss of GBP7 million compared to a gain
of GBP56 million in the first half of 2020, largely impacted by
foreign exchange movements. Other operating income in the period of
GBP13 million was down GBP29 million largely due to the
non-recurrence of a gain on disposal of business during the first
half of 2020.
Operating expenses of GBP1,567 million were 13 per cent higher
than in the first half of 2020, due to a higher regulatory
provision charge and increased other operating expenses in the
period. The charge for regulatory provisions increased to GBP235
million, driven by charges in respect of HBOS Reading as well as
litigation costs and charges in relation to other ongoing legacy
programmes. With respect to HBOS Reading, GBP150 million was
incurred in the first half of 2021, including operational costs to
provide for the likelihood of activities spanning across 2022 as
well as the outcome to date of decisions from the independent panel
re-review on direct and consequential losses. Further significant
charges over 2021 and 2022 could be required as more panel
decisions are published, but at this stage it is not possible to
reliably estimate the potential impact or timings. Other operating
costs in the period were up GBP44 million as reductions in staff,
premises and equipment and depreciation and amortisation costs were
more than offset by increases in amounts recharged by fellow Lloyds
Banking Group undertakings.
The impairment charge in the first half of the year was a net
credit of GBP251 million, compared to a net charge of GBP1,454
million in the first half of 2020. The net credit in the period was
driven by a release of expected credit loss (ECL) allowances
resulting from the UK's improved macroeconomic outlook. This was
partially offset by a low run-rate impairment charge reflecting the
continued benign credit environment. Observed credit performance
remained robust in the period, with the flow of assets into
arrears, defaults and write-offs remaining at low levels. The
Group's ECL allowance reduced in the first half of the year by
GBP431 million to GBP2,899 million.
The Group recognised a net tax credit of GBP35 million in the
period compared to a net credit of GBP160 million in the first six
months of 2020. In March 2021, the UK Government announced its
intention to increase the rate of corporation tax from 19 per cent
to 25 per cent with effect from 1 April 2023 and this was
substantively enacted on 24 May 2021. As a result of this change in
tax rate, the Group has recognised a GBP420 million deferred tax
credit in the income statement and a GBP58 million debit within
other comprehensive income, increasing the Group's net deferred tax
asset by GBP362 million. Excluding the effects of the deferred tax
uplift, the Group's effective tax rate was 27 per cent.
REVIEW OF PERFORMANCE (continued)
Balance sheet
The Group's balance sheet reflects healthy franchise growth.
Total assets of GBP308,318 million were up 2 per cent compared to
GBP301,864 million at 31 December 2020 driven by an increase in
loans and advances to customers which was partly offset by
reductions in amounts due from fellow Lloyds Banking Group
undertakings. Loans and advances to customers were 5 per cent
higher at GBP275,932 million compared to GBP263,766 million at 31
December 2020 driven by strong growth in the Group's mortgage book.
Amounts due from fellow Lloyds Banking Group undertakings reduced
by GBP4,120 million from GBP19,852 million at 31 December 2020 due
to increased settlement activity in the period.
Total liabilities of GBP292,922 million were up 2 per cent
compared to GBP287,998 million at 31 December 2020 driven by
increased customer deposits and amounts due to fellow Lloyds
Banking Group undertakings, which were partially offset by lower
deposits from banks. Customer deposits of GBP169,941 million have
increased by GBP6,940 million since the end of 2020, with continued
inflows into the Group's trusted brands and significant growth seen
in personal current accounts and savings balances since 2019.
Amounts due to fellow Lloyds Banking Group undertakings have
increased by GBP6,749 million in the period, funding the Group's
growth in net customer lending since 31 December 2020.
Total equity increased by GBP1,530 million from GBP13,866
million at 31 December 2020 to GBP15,396 million at 30 June 2021
with total comprehensive income for the period of GBP1,569 million
and capital contributions received of GBP15 million, partially
offset by distributions to non-controlling interests of GBP54
million.
Capital
Neither the Company nor the Group are regulated from a capital
perspective. Regulatory capital is instead managed in the Company's
principal banking subsidiary, Bank of Scotland plc.
PRINCIPAL RISKS AND UNCERTAINTIES
The significant risks faced by the Group are detailed below.
There has been no change to the definition of these risks from
those disclosed in the Group's 2020 Annual Report and Accounts.
The external risks faced by the Group may also impact the
success of delivering against the Group's long-term strategic
objectives. They include, but are not limited to the coronavirus
pandemic, global macro-economic conditions and regulatory
developments.
The coronavirus pandemic has had an impact on all risk types and
continues to be a major area of focus. The Group responded quickly
to the challenges faced, putting in place risk mitigation
strategies and refining investment and strategic plans. Transition
planning remains a key focus in ensuring that the Group continues
to protect colleagues and services to customers as the situation
continues to evolve and in ensuring that the lessons learned from
the pandemic are embedded into future working practices.
The Lloyds Banking Group is participating in the 2021 Bank of
England Biennial Exploratory Scenario on Climate (CBES) for
delivery in October. The scope covers credit losses over a thirty
year horizon, and how the Lloyds Banking Group would change its
lending strategy to mitigate climate risk, under three different
temperature scenarios. The CBES may be used to inform FPC and PRA
supervision but will not be used to set capital requirements.
The Group's principal risks and uncertainties are reviewed and
reported regularly to the Board of the Lloyds Banking Group in
alignment with the Lloyds Banking Group's Enterprise Risk
Management Framework.
Climate - The risk that the Group experiences losses and/or
reputational damage as a result of climate change, either directly
or through its customers. These losses may be realised from
physical events, the required adaptation in transitioning to a low
carbon economy, or as a consequence of the responses to managing
these changes.
Market - The risk that the Group's capital or earnings profile
is affected by adverse market rates or prices, in particular
interest rates and credit spreads in the Banking business and
credit spreads in the Group's defined benefit pension schemes.
Credit - The risk that parties with whom the Group has
contracted fail to meet their financial obligations (both on and
off- balance sheet).
Funding and liquidity - Funding risk is defined as the risk that
the Group does not have sufficiently stable and diverse sources of
funding or the funding structure is inefficient. Liquidity risk is
defined as the risk that the Group has insufficient financial
resources to meet its commitments as they fall due, or can only
secure them at excessive cost.
Capital - The risk that the Group has a sub-optimal quantity or
quality of capital or that capital is inefficiently deployed across
the Lloyds Banking Group.
Change/execution - The risk that, in delivering its change
agenda, the Group fails to ensure compliance with laws and
regulation, maintain effective customer service and availability
and/or operation within the risk appetite of the Lloyds Banking
Group.
Conduct - The risk of customer detriment across the customer
lifecycle including: failures in product management, distribution
and servicing activities; from other risks materialising, or other
activities which could undermine the integrity of the market or
distort competition, leading to unfair customer outcomes,
regulatory censure, reputational damage or financial loss.
Data - The risk of the Group failing to effectively govern,
manage and control its data (including data processed by third
party suppliers), leading to unethical decisions, poor customer
outcomes, loss of value to the Group and mistrust.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Governance - The risk that the Group's organisational
infrastructure fails to provide robust oversight of decision-making
and the control mechanisms to ensure strategies and management
instructions are implemented effectively.
People - The risk that the Group fails to provide an appropriate
colleague and customer-centric culture, supported by robust reward
and wellbeing policies and processes, effective leadership to
manage colleague resources, effective talent and succession
management and robust control to ensure all colleague-related
requirements are met.
Operational resilience - The risk that the Group fails to design
resilience into business operations, underlying infrastructure and
controls (people, process, technology) so that it is able to
withstand external or internal events which could impact the
continuation of operations and fails to respond in a way which
meets customer and stakeholder expectations and needs when the
continuity of operations is compromised.
Operational - The risk of loss resulting from inadequate or
failed internal processes, people and systems or from external
events.
Model - The risk of financial loss, regulatory censure,
reputational damage or customer detriment, as a result of
deficiencies in the development, application or ongoing operation
of models and rating systems.
Regulatory and legal - The risk of financial penalties,
regulatory censure, criminal or civil enforcement action or
customer detriment as a result of failure to identify, assess,
correctly interpret, comply with, or manage regulatory and/or legal
requirements.
Strategic - The risk which results from:
-- Incorrect assumptions about internal or external operating environments
-- Failure to respond or the inappropriate strategic response to
material changes in the external or internal operating
environments
-- Failure to understand the potential impact of strategic
responses and business plans on existing risk types
Credit risk
The economic outlook for the UK has improved as the country
begins to show signs of exiting the COVID-19 crisis. Observed
credit performance has seen the flow of assets into arrears,
defaults and write-offs remain at low levels, in part due to the
continued effectiveness of support schemes, including the
Coronavirus Job Retention Scheme, provision of loans under the
different government schemes, including the Bounce Back Loan Scheme
(BBLS), Coronavirus Business Interruption Loan Scheme (CBILS), and
payment holidays extended by the Group which have now largely
matured. There are a number of headwinds which have the potential
to further impact the Group's portfolios, including uncertainty
around future UK and global economic conditions with the risk of an
increase in unemployment and further business failures as the UK
Government schemes wind down. In the context of this uncertainty,
the Group's risk appetite and risk management approach continues to
help ensure that timely and proactive actions are taken.
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
Page
Consolidated income statement 7
Consolidated statement of comprehensive income 8
Consolidated balance sheet 9
Consolidated statement of changes in equity 12
Consolidated cash flow statement 16
Notes
1 Accounting policies 17
2 Critical accounting judgements and estimates 18
3 Net fee and commission income 25
4 Operating expenses 25
5 Impairment 26
6 Tax credit 27
7 Financial assets at amortised cost 28
8 Debt securities in issue 34
9 Retirement benefit obligations 35
10 Other provisions 36
11 Related party transactions 38
12 Contingent liabilities, commitments and guarantees 39
13 Fair values of financial assets and liabilities 42
14 Ultimate parent undertaking 48
15 Other information 48
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
Half-year Half-year
to 30 June to 30 June
2021 2020
Note GBPm GBPm
Interest income 3,502 3,939
Interest expense (888) (1,273)
----------- -----------
Net interest income 2,614 2,666
----------- -----------
Fee and commission income 280 253
Fee and commission expense (140) (110)
----------- -----------
Net fee and commission income 3 140 143
Net trading income (7) 56
Other operating income 13 42
----------- -----------
Other income 146 241
----------- -----------
Total income 2,760 2,907
Operating expenses 4 (1,567) (1,386)
Impairment 5 251 (1,454)
----------- -----------
Profit before tax 1,444 67
Tax credit 6 35 160
----------- -----------
Profit for the period 1,479 227
----------- -----------
Profit attributable to ordinary shareholders 1,425 147
Profit attributable to non-controlling interests 54 80
----------- -----------
Profit for the period 1,479 227
----------- -----------
The accompanying notes are an integral part of the condensed
consolidated half-year financial statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Half-year Half-year
to 30 June to 30 June
2021 2020
GBPm GBPm
Profit for the period 1,479 227
Other comprehensive income
Items that will not subsequently be reclassified
to profit or loss:
Post-retirement defined benefit scheme remeasurements
----------- -----------
Remeasurements before tax 178 435
Tax (95) (85)
----------- -----------
83 350
Items that may subsequently be reclassified to
profit or loss:
Movements in revaluation reserve in respect of
debt securities held at fair value through other
comprehensive income:
----------- -----------
Change in fair value (4) 18
Income statement transfers in respect of disposals (1) 2
Income statement transfers in respect of impairment - 1
Tax 12 (4)
----------- -----------
7 17
Movements in cash flow hedging reserve:
----------- -----------
Effective portion of changes in fair value taken
to other comprehensive income (16) 15
Net income statement transfers 6 3
Tax 7 (4)
----------- -----------
(3) 14
Movements in foreign currency translation reserve:
Currency translation differences (tax: GBPnil) 3 (9)
----------- -----------
Other comprehensive income for the period, net
of tax 90 372
----------- -----------
Total comprehensive income for the period 1,569 599
----------- -----------
Total comprehensive income attributable to ordinary
shareholders 1,515 519
Total comprehensive income attributable to non-controlling
interests 54 80
----------- -----------
Total comprehensive income for the period 1,569 599
----------- -----------
CONSOLIDATED BALANCE SHEET
At At
30 June 31 Dec
2021 2020
(unaudited) (audited)
Note GBPm GBPm
Assets
Cash and balances at central banks 3,068 2,841
Items in the course of collection from banks 56 42
Financial assets at fair value through profit
or loss 400 477
Derivative financial instruments 4,701 7,310
----------- ---------
Loans and advances to banks 117 225
Loans and advances to customers 275,932 263,766
Due from fellow Lloyds Banking Group undertakings 15,732 19,852
----------- ---------
Financial assets at amortised cost 7 291,781 283,843
Financial assets at fair value through other
comprehensive income 2,306 2,525
Goodwill 325 325
Other intangible assets 269 224
Property, plant and equipment 1,166 1,230
Current tax recoverable 970 401
Deferred tax assets 1,784 1,582
Retirement benefit assets 9 1,143 674
Other assets 349 390
----------- ---------
Total assets 308,318 301,864
----------- ---------
Liabilities
Deposits from banks 9,368 14,695
Customer deposits 169,941 163,001
Due to fellow Lloyds Banking Group undertakings 93,703 86,954
Items in course of transmission to banks 84 98
Financial liabilities at fair value through
profit or loss 38 45
Derivative financial instruments 5,870 8,452
Notes in circulation 1,368 1,305
Debt securities in issue 8 7,586 8,297
Other liabilities 2,053 1,638
Retirement benefit obligations 9 131 139
Current tax liabilities 2 -
Other provisions 10 517 521
Subordinated liabilities 2,261 2,853
----------- ---------
Total liabilities 292,922 287,998
----------- ---------
Equity
----------- ---------
Share capital 3,763 3,763
Other reserves 10,179 10,172
Retained profits (769) (2,292)
----------- ---------
Shareholders' equity 13,173 11,643
Non-controlling interests 2,223 2,223
----------- ---------
Total equity 15,396 13,866
----------- ---------
Total equity and liabilities 308,318 301,864
----------- ---------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
Attributable to ordinary
shareholders
-------------------------------------
Non-
Share Other Retained controlling
capital reserves profits Total interests Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 3,763 10,172 (2,292) 11,643 2,223 13,866
Comprehensive income
Profit for the period - - 1,425 1,425 54 1,479
Other comprehensive
income
-------- --------- -------- ------ ------------ ------
Post-retirement defined
benefit
scheme remeasurements,
net
of tax - - 83 83 - 83
Movements in
revaluation
reserve in respect of
debt
securities held at
fair value
through other
comprehensive
income, net of tax - 7 - 7 - 7
Movements in cash flow
hedging
reserve, net of tax - (3) - (3) - (3)
Movements in foreign
currency
translation reserve,
net
of tax - 3 - 3 - 3
-------- --------- -------- ------ ------------ ------
Total other
comprehensive
income - 7 83 90 - 90
-------- --------- -------- ------ ------------ ------
Total comprehensive
income(1) - 7 1,508 1,515 54 1,569
-------- --------- -------- ------ ------------ ------
Transactions with
owners
Distributions to
non-controlling
interests - - - - (54) (54)
Capital contributions
received - - 15 15 - 15
-------- --------- -------- ------ ------------ ------
Total transactions with
owners - - 15 15 (54) (39)
-------- --------- -------- ------ ------------ ------
At 30 June 2021(2) 3,763 10,179 (769) 13,173 2,223 15,396
-------- --------- -------- ------ ------------ ------
(1) Total comprehensive income attributable to owners of the
parent was GBP1,515 million.
(2) Total equity attributable to owners of the parent was
GBP13,173 million.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
(continued)
Attributable to ordinary
shareholders
-------------------------------------
Non-
Share Other Retained controlling
capital reserves profits Total interests Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 3,763 10,162 (3,503) 10,422 2,723 13,145
Comprehensive income
Profit for the period - - 147 147 80 227
Other comprehensive
income
-------- --------- -------- ------ ------------ ------
Post-retirement defined
benefit
scheme remeasurements,
net
of tax - - 350 350 - 350
Movements in
revaluation
reserve in respect of
debt
securities held at
fair value
through other
comprehensive
income, net of tax - 17 - 17 - 17
Movements in cash flow
hedging
reserve, net of tax - 14 - 14 - 14
Movements in foreign
currency
translation reserve,
net
of tax - (9) - (9) - (9)
-------- --------- -------- ------ ------------ ------
Total other
comprehensive
income - 22 350 372 - 372
-------- --------- -------- ------ ------------ ------
Total comprehensive
income(1) - 22 497 519 80 599
-------- --------- -------- ------ ------------ ------
Transactions with
owners
-------- --------- -------- ------ ------------ ------
Distributions to
non-controlling
interests - - - - (80) (80)
Capital contributions
received - - 22 22 - -
-------- --------- -------- ------ ------------ ------
Total transactions with
owners - - 22 22 (80) (80)
-------- --------- -------- ------ ------------ ------
At 30 June 2020(2) 3,763 10,184 (2,984) 10,963 2,723 13,686
-------- --------- -------- ------ ------------ ------
Comprehensive income
Profit for the period - - 874 874 84 958
Other comprehensive
income
-------- --------- -------- ------ ------------ ------
Post-retirement defined
benefit
scheme remeasurements,
net
of tax - - (193) (193) - (193)
Movements in
revaluation
reserve in respect of
debt
securities held at
fair value
through other
comprehensive
income, net of tax - 4 - 4 - 4
Movements in cash flow
hedging
reserve, net of tax - (18) - (18) - (18)
Movements in foreign
currency
translation reserve,
net
of tax - 2 - 2 - 2
-------- --------- -------- ------ ------------ ------
Total other
comprehensive
income - (12) (193) (205) - (205)
-------- --------- -------- ------ ------------ ------
Total comprehensive
income(1) - (12) 681 669 84 753
-------- --------- -------- ------ ------------ ------
Transactions with
owners
-------- --------- -------- ------ ------------ ------
Distributions to
non-controlling
interests - - - - (84) (84)
Changes in
non-controlling
interests - - - - (500) (500)
Capital contributions
received - - 11 11 - 11
-------- --------- -------- ------ ------------ ------
Total transactions with
owners - - 11 11 (584) (573)
-------- --------- -------- ------ ------------ ------
At 31 December 2020(2) 3,763 10,172 (2,292) 11,643 2,223 13,866
-------- --------- -------- ------ ------------ ------
(1) Total comprehensive income attributable to owners of the
parent for the half-year to 30 June 2020 was GBP519 million
(half-year to 31 December 2020: GBP669 million).
(2) Total equity attributable to owners of the parent at 30 June
2020 was GBP10,963 million (31 December 2020: GBP11,643
million).
(1)
CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
Half-year Half-year
to 30 June to 30 June
2021 2020
GBPm GBPm
Profit before tax 1,444 67
Adjustments for:
Change in operating assets (5,109) 3,173
Change in operating liabilities 5,527 (2,708)
Non-cash and other items (593) 1,115
Tax paid (818) (421)
----------- -----------
Net cash provided by operating activities 451 1,226
----------- -----------
Cash flows from investing activities
Purchase of financial assets (72) (1,178)
Proceeds from sale and maturity of financial assets 241 424
Purchase of fixed assets (93) (64)
Proceeds from sale of fixed assets 17 22
Net cash provided by (used in) investing activities 93 (796)
----------- -----------
Cash flows from financing activities
Distributions to non-controlling interests (54) (80)
Interest paid on subordinated liabilities (88) (126)
Repayment of subordinated liabilities (471) (280)
----------- -----------
Net cash used in financing activities (613) (486)
Effect of exchange rate changes on cash and cash
equivalents - 2
----------- -----------
Change in cash and cash equivalents (69) (54)
Cash and cash equivalents at beginning of period 865 789
----------- -----------
Cash and cash equivalents at end of period 796 735
----------- -----------
Cash and cash equivalents comprise cash and non-mandatory
balances with central banks and amounts due from banks with a
maturity of less than three months.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS
Note 1: Accounting policies
These condensed consolidated half-year financial statements as
at and for the period to 30 June 2021 have been prepared in
accordance with the Disclosure Guidance and Transparency Rules of
the Financial Conduct Authority (FCA) and with International
Accounting Standard 34 (IAS 34), Interim Financial Reporting as
adopted by the United Kingdom and comprise the results of HBOS plc
(the Company) together with its subsidiaries (the Group). They do
not include all of the information required for full annual
financial statements and should be read in conjunction with the
Group's consolidated financial statements as at and for the year
ended 31 December 2020 which complied with international accounting
standards in conformity with the requirements of the Companies Act
2006, were prepared in accordance with International Financial
Reporting Standards (IFRS) and were compliant with IFRS adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union. Copies of the 2020 Annual Report and Accounts are
available on the Group's website and are available upon request
from Investor Relations, Lloyds Banking Group plc, 25 Gresham
Street, London EC2V 7HN.
The directors consider that it is appropriate to continue to
adopt the going concern basis in preparing the condensed
consolidated half-year financial statements. In reaching this
assessment, the directors have taken into account the continuing
uncertainties affecting the UK economy post-pandemic and their
potential effects upon the Group's performance and projected
funding position; the impact of further stress scenarios has also
been considered. On this basis, the directors are satisfied that
the Group will maintain adequate levels of funding for the
foreseeable future.
Changes in accounting policy
The Group adopted the Interest Rate Benchmark Reform Phase 2
amendments from 1 January 2021. These amendments require that
changes to expected future cash flows that both arise as a direct
result of IBOR Reform and are economically equivalent to the
previous cash flows are accounted for as a change to the effective
interest rate with no adjustment to the asset or liability's
carrying amount; no immediate gain or loss is recognised. The new
requirements also provide relief from the requirement to
discontinue hedge accounting as a result of amending hedge
documentation if the changes are required solely as a result of the
IBOR Reform. The amendments do not have a material impact on the
Group's comparatives, which have not been restated.
Except for the change above, the Group's accounting policies are
consistent with those applied by the Group in its 2020 Annual
Report and Accounts and there have been no changes in the Group's
methods of computation.
Future accounting developments
The IASB has issued a number of minor amendments to IFRSs
effective 1 January 2022 and in later years (including IFRS 9
Financial Instruments and IAS 37 Provisions, Contingent Liabilities
and Contingent Assets). These amendments are not expected to have a
significant impact on the Group.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 2: Critical accounting judgements and estimates
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. The Group's significant
judgements, estimates and assumptions are unchanged compared to
those applied at 31 December 2020, except as detailed below.
Allowance for expected credit losses
The Group recognises an allowance for expected credit losses
(ECLs) for loans and advances to customers and banks, other
financial assets held at amortised cost, financial assets measured
at fair value through other comprehensive income and certain loan
commitment and financial guarantee contracts. At 30 June 2021 the
Group's expected credit loss allowance was GBP2,899 million (31
December 2020: GBP3,330 million), of which GBP2,795 million (31
December 2020: GBP3,201 million) was in respect of drawn
balances.
The calculation of the Group's expected credit loss allowances
and provisions against loan commitments and guarantees under IFRS 9
requires the Group to make a number of judgements, assumptions and
estimates. These are set out in detail in the Group's 2020 Annual
Report and Accounts. The principal changes made in the period ended
30 June 2021 are as follows:
Base Case and Economic Assumptions
The Group's base case economic scenario has been revised in
light of the continuing impact of the coronavirus pandemic in the
UK and globally. The scenario reflects judgements of the net effect
of government-mandated restrictions on economic activity,
large-scale government interventions and behavioural changes by
households and businesses that may persist beyond the rollout of
coronavirus vaccination programmes.
As large-scale vaccination efforts compete with the emergence of
new viral strains in the UK and globally, there remains
considerable uncertainty about the pace and eventual extent of the
post-pandemic recovery. The Group's updated base case scenario
builds in three key conditioning assumptions. First, that rising
infections in the UK's third COVID-19 wave do not lead to a
re-imposition of restrictions. Second, that the rollout of
vaccination programmes among the UK's trading partners will
reinforce an improving global backdrop. Third, that domestic policy
measures remain accommodative, with monetary policy looking through
a transient rise in inflation.
Conditioned on these assumptions and taking note of improvements
in economic indicators in the second quarter, the Group's base case
outlook continues to assume a rise in the unemployment rate as
furlough support ends alongside a deceleration in residential and
commercial property price growth. Risks around this base case
economic view lie in both directions and are partly captured by the
alternative economic scenarios generated. But uncertainties
relating to the key conditioning assumptions, including
epidemiological developments, the efficacy of vaccine rollouts
against emergent strains and the response of the economy in those
circumstances are not specifically captured by these scenarios.
These specific risks have been recognised outside the modelled
scenarios with a central adjustment.
The Group has incorporated the latest available information at
the reporting date in defining its base case scenario and
generating alternative economic scenarios. The scenarios include
forecasts for key variables in the second quarter of 2021, for
which actuals may have since emerged prior to publication.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 2: Critical accounting judgements and estimates
(continued)
Base case scenario by quarter(1)
First Second Third Fourth First Second Third Fourth
quarter quarter quarter quarter quarter quarter quarter quarter
2021 2021 2021 2021 2022 2022 2022 2022
At 30 June 2021 % % % % % % % %
Gross domestic product (1.5) 4.3 (0.3) 3.2 1.5 0.5 0.4 0.4
UK Bank Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Unemployment rate 4.8 5.0 5.4 6.6 6.4 6.2 6.1 5.9
House price growth 6.5 10.5 6.8 5.6 5.0 1.7 0.3 0.1
Commercial real estate
price growth (2.9) 1.3 1.5 0.4 (0.3) (0.5) 0.4 1.0
First Second Third Fourth First Second Third Fourth
quarter quarter quarter quarter quarter quarter quarter quarter
2020 2020 2020 2020 2021 2021 2021 2021
At 31 December 2020 % % % % % % % %
Gross domestic product (3.0) (18.8) 16.0 (1.9) (3.8) 5.6 3.6 1.5
UK Bank Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Unemployment rate 4.0 4.1 4.8 5.0 5.2 6.5 8.0 7.5
House price growth 2.8 2.6 7.2 5.9 5.5 4.7 (1.6) (3.8)
Commercial real estate
price growth (5.0) (7.8) (7.8) (7.0) (6.1) (2.9) (2.2) (1.7)
(1) Gross domestic product presented quarter on quarter, house
price growth and commercial real estate growth presented year on
year - i.e. from the equivalent quarter the previous year. UK Bank
Rate is presented end quarter.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 2: Critical accounting judgements and estimates
(continued)
Scenarios by year
Key annual assumptions made by the Group are shown below. Gross
domestic product is presented as an annual change, house price
growth and commercial real estate price growth are presented as the
growth in the respective indices within the period. UK Bank Rate
and unemployment rate are averages for the period. The upside, base
case and downside scenarios are weighted at 30 per cent each, with
the severe downside scenario weighted at 10 per cent.
2021-2025
2021 2022 2023 2024 2025 average
At 30 June 2021 % % % % % %
Upside
Gross domestic product 6.1 5.5 1.4 1.4 1.2 3.1
UK Bank Rate 0.52 1.27 1.09 1.32 1.58 1.16
Unemployment rate 4.7 4.9 4.4 4.2 4.1 4.5
House price growth 6.8 3.4 4.6 3.9 3.4 4.4
Commercial real estate
price growth 9.2 5.7 2.4 0.3 (0.3) 3.4
Base case
Gross domestic product 5.5 5.5 1.6 1.4 1.2 3.0
UK Bank Rate 0.10 0.10 0.25 0.50 0.75 0.34
Unemployment rate 5.4 6.1 5.4 5.0 4.8 5.4
House price growth 5.6 0.1 0.1 0.6 1.1 1.5
Commercial real estate
price growth 0.4 1.0 0.6 0.3 0.5 0.6
Downside
Gross domestic product 4.8 4.2 1.3 1.4 1.4 2.6
UK Bank Rate 0.09 0.05 0.06 0.11 0.20 0.10
Unemployment rate 6.0 7.8 7.1 6.5 6.0 6.7
House price growth 3.5 (6.2) (7.5) (4.9) (1.8) (3.5)
Commercial real estate
price growth (5.3) (5.3) (2.8) (1.5) 0.2 (3.0)
Severe downside
Gross domestic product 4.1 3.5 1.1 1.4 1.4 2.3
UK Bank Rate 0.06 0.00 0.01 0.02 0.03 0.02
Unemployment rate 7.0 9.9 9.1 8.3 7.6 8.4
House price growth 2.4 (11.0) (13.2) (9.6) (5.1) (7.5)
Commercial real estate
price growth (13.5) (13.5) (6.9) (2.3) 0.5 (7.3)
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 2: Critical accounting judgements and estimates
(continued)
2020-2024
2020 2021 2022 2023 2024 average
At 31 December 2020 % % % % % %
Upside
Gross domestic product (10.5) 3.7 5.7 1.7 1.5 0.3
UK Bank Rate 0.10 1.14 1.27 1.20 1.21 0.98
Unemployment rate 4.3 5.4 5.4 5.0 4.5 5.0
House price growth 6.3 (1.4) 5.2 6.0 5.0 4.2
Commercial real estate
price growth (4.6) 9.3 3.9 2.1 0.3 2.1
Base case
Gross domestic product (10.5) 3.0 6.0 1.7 1.4 0.1
UK Bank Rate 0.10 0.10 0.10 0.21 0.25 0.15
Unemployment rate 4.5 6.8 6.8 6.1 5.5 5.9
House price growth 5.9 (3.8) 0.5 1.5 1.5 1.1
Commercial real estate
price growth (7.0) (1.7) 1.6 1.1 0.6 (1.1)
Downside
Gross domestic product (10.6) 1.7 5.1 1.4 1.4 (0.4)
UK Bank Rate 0.10 0.06 0.02 0.02 0.03 0.05
Unemployment rate 4.6 7.9 8.4 7.8 7.0 7.1
House price growth 5.6 (8.4) (6.5) (4.7) (3.0) (3.5)
Commercial real estate
price growth (8.7) (10.6) (3.2) (0.8) (0.8) (4.9)
Severe downside
Gross domestic product (10.8) 0.3 4.8 1.3 1.2 (0.8)
UK Bank Rate 0.10 0.00 0.00 0.01 0.01 0.02
Unemployment rate 4.8 9.9 10.7 9.8 8.7 8.8
House price growth 5.3 (11.1) (12.5) (10.7) (7.6) (7.5)
Commercial real estate
price growth (11.0) (21.4) (9.8) (3.9) (0.8) (9.7)
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 2: Critical accounting judgements and estimates
(continued)
The table below shows the Group's ECL for the upside, base case,
downside and severe downside scenarios. The stage allocation for an
asset is based on the overall scenario probability-weighted PD and,
hence, the Stage 2 allocation is constant across all the scenarios.
ECL applied through individual assessments and post-model
adjustments is reported flat against each economic scenario,
reflecting the basis on which they are evaluated. Judgements
applied through changes to inputs are reflected in the scenario
sensitivities. It therefore shows the extent to which a higher ECL
allowance has been recognised to take account of multiple economic
scenarios from the probability-weighted view relative to the base
case. The uplift being GBP236 million as at 30 June 2021.
Probability- Severe
weighted Upside Base case Downside downside
ECL allowance GBPm GBPm GBPm GBPm GBPm
At 30 June 2021 2,899 2,482 2,663 3,135 4,148
The impact of changes in the UK unemployment rate and House
Price Index (HPI) have also been assessed. Although such changes
would not be observed in isolation, as economic indicators tend to
be correlated in a coherent scenario, this gives insight into the
sensitivity of the Group's ECL to gradual changes in these two
critical economic factors. The assessment has been made against the
base case with the reported staging unchanged.
The table below shows the estimated impact on the Group's ECL in
respect of UK mortgages resulting from a decrease/increase in loss
given default for a 10 percentage point (pp) increase or decrease
in the UK House Price Index (HPI). The increase/decrease is
presented based on the adjustment phased evenly over the first ten
quarters of the base case scenario.
At 30 June 2021
------------------------------
10pp increase 10pp decrease
in HPI in HPI
ECL impact, GBPm (162) 235
The table below shows the estimated impact on the Group's ECL
resulting from a 1 percentage point (pp) increase or decrease in
the UK unemployment rate. The increase or decrease is presented
based on the adjustment phased evenly over the first ten quarters
of the base case scenario. An immediate increase or decrease would
drive a more material ECL impact as it would be fully reflected in
both 12 month and lifetime PDs.
At 30 June 2021
------------------------------
1pp increase 1pp decrease
in in
unemployment unemployment
ECL impact, GBPm 59 (54)
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 2: Critical accounting judgements and estimates
(continued)
Application of judgement in adjustments to modelled ECL
Impairment models fall within the Lloyds Banking Group's Model
Risk framework with model monitoring, periodic validation and back
testing performed on model components (i.e. probability of default,
exposure at default and loss given default). Limitations in the
Group's impairment models or data inputs may be identified through
the ongoing assessment and validation of the output of the models.
In these circumstances, management make appropriate adjustments to
the Group's allowance for impairment losses to ensure that the
overall provision adequately reflects all material risks. These
adjustments are determined by considering the particular attributes
of exposures which have not been adequately captured by the
impairment models and range from changes to model inputs and
parameters, at account level, through to more qualitative
post-model overlays.
Judgements are not typically assessed under each distinct
economic scenario used to generate ECL, but instead are applied on
the basis of final modelled ECL which reflects the
probability-weighted view of all scenarios. All adjustments are
reviewed quarterly and are subject to internal review and
challenge, including by the Lloyds Banking Group Audit Committee,
to ensure that amounts are appropriately calculated and that there
are specific release criteria within a reasonable timeframe.
The coronavirus pandemic and the various support measures that
have been put in place have resulted in an economic environment
which differs significantly from the historical economic conditions
upon which the impairment models have been built. As a result there
is a greater need for management judgements to be applied, as seen
in the continued elevated levels. The nature and overall scale of
significant judgmental adjustments remain consistent with those
presented at 31 December 2020:
Management judgements in respect of COVID-19
Overlay in respect of economic uncertainty: GBP200 million
(2020: GBP200 million)
The Group's GBP200 million uncertainty overlay was added at year
end in recognition of the risks to the conditioning assumptions
around the base case scenario being markedly to the downside given
the potential for a material delay in the vaccination programme or
reduction in its effectiveness from further virus mutation and the
corresponding delayed withdrawal of restrictions on social
interaction or introduction of further lockdowns.
Although the outlook has improved in the first half, the Group
still considers that the conditioning assumptions within the base
case and associated scenarios do not necessarily capture the
unprecedented risks that remain. The vaccine roll out has
progressed well and has supported the planned easing of
restrictions to date, however the increasing infection rate and
hospitalisations from the Delta variant highlight the potential
risk from further virus mutation and the resulting response which
could be needed, potentially impacting on social and economic
activity. The scale of the uncertainty is expected to diminish once
the UK is fully vaccinated and infection levels have been sustained
at low levels, with restrictions reduced and associated Government
support wound down.
Recognition of impact of support measures on personal customers:
GBP198 million (2020: GBP109 million)
The use of payment holidays along with subdued levels of
consumer spending is judged to have temporarily reduced the flow of
accounts into arrears and default and to have also improved average
credit scores across portfolios. Management believes that the
resulting position does not fully reflect the underlying credit
risk in the portfolios. Adjustments have therefore been made to
increase expected future rates of default and remove the impact of
the observed improvement in average credit scores. An adjustment
has also been made to reflect an increase in the time assumed
between default and repossession as a result of the Group
temporarily suspending the repossession of properties to support
customers during the pandemic.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 2: Critical accounting judgements and estimates
(continued)
Other Management judgements
Adjustment to modelled forecast parameters: GBP207 million
(2020: GBP277 million)
Adjustments to the estimated defaults used within the ECL
calculation were introduced at year end following the adoption of
new default forecast models. Work has progressed through the period
with initial model changes identified which reduce the scale of
adjustment required. The scale of the adjustment has also reduced
as the impact of under-sensitivity lessens when applied to the
improved economic outlook.
End-of-term interest only: GBP212 million (2020: GBP225
million)
The current definition of default used in the UK mortgages
impairment model excludes past term interest only accounts that
continue to make interest payments but have missed their capital
payment upon maturity of the loan. This adjustment therefore
mitigates the risk that the model understates the credit losses
associated with interest-only accounts which have missed, or will
potentially miss, their final capital payment. For those accounts
that have reached end of term this adjustment manually overwrites
PDs to 70 per cent or 100 per cent, thereby moving them into Stage
2, or Stage 3, depending on whether they are deemed performing, or
non-performing respectively. For interest-only accounts with six
years or less to maturity an appropriate incremental PD uplift is
made to PDs based on the probability of missing a future capital
payment, assessed through segmentation of behaviour score,
debt-to-value and worst ever arrears status.
Long-term defaults: GBP132 million (2020: GBP145 million)
The Group suspended mortgage litigation activity between late
2014 and mid 2018 as changes were implemented to the treatment of
amounts in arrears, interrupting the natural flow of accounts to
possession. An adjustment is made to ensure adequate provision
coverage considering the resulting build-up of accounts in
long-term default. Coverage is uplifted to the equivalent levels of
those accounts already in repossession on an estimated shortfall of
balances expected to flow to possession. A further adjustment is
made to mitigate for the risk that credit model provision
understates the probability of possession for accounts which have
been in default for more than 24 months, with an arrears balance
increase in the last 6 months. These accounts have their
probability of possession set to 95 per cent based on observed
historical losses incurred on accounts that were of an equivalent
status.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 3: Net fee and commission income
Half-year Half-year
to 30 to 30
June June
2021 2020
GBPm GBPm
Fee and commission income:
Current accounts 104 101
Credit and debit card fees 105 89
Other fees and commissions 71 63
--------- ---------
Total fee and commission income 280 253
Fee and commission expense (140) (110)
--------- ---------
Net fee and commission income 140 143
--------- ---------
Note 4: Operating expenses
Half-year Half-year
to 30 to 30
June June
2021 2020
GBPm GBPm
Administrative expenses:
Staff costs 586 616
Premises and equipment 59 92
Amounts paid to fellow Lloyds Banking Group undertakings
and other expenses 579 463
--------- ---------
1,224 1,171
Depreciation and amortisation 108 117
Regulatory provisions (note 10) 235 98
--------- ---------
Total operating expenses 1,567 1,386
--------- ---------
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 5: Impairment
Half-year Half-year
to 30 to 30
June June
2021 2020
GBPm GBPm
Impact of transfers between stages 86 367
--------- ---------
Other changes in credit quality (220) 1,115
Additions (repayments) (119) (12)
Other items 2 (16)
--------- ---------
(337) 1,087
--------- ---------
Total impairment (credit) charge (251) 1,454
--------- ---------
In respect of:
--------- -----------
Loans and advances to customers (222) 1,285
Due from fellow Lloyds Banking Group undertakings (4) 91
--------- ---------
Financial assets held at amortised cost (226) 1,376
Loan commitments and financial guarantees (25) 77
Financial assets at fair value through other comprehensive
income - 1
--------- ---------
Total impairment (credit) charge (251) 1,454
--------- ---------
The Group's impairment charge comprises the following:
Impact of transfers between stages
The net impact on the impairment charge of transfers between
stages.
Other changes in credit quality
Changes in loss allowance as a result of movements in risk
parameters that reflect changes in customer credit quality, but
which have not resulted in a transfer to a different stage. This
also contains the impact on the impairment charge of write-offs and
recoveries, where the related loss allowances are reassessed to
reflect the view of credit quality at the balance sheet date and
therefore the ultimate realisable or recoverable value.
Additions (repayments)
Expected loss allowances are recognised on origination of new
loans or further drawdowns of existing facilities. Repayments
relate to the reduction of loss allowances resulting from the
repayment of outstanding balances that have been provided
against.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 6: Tax credit
In accordance with IAS 34, the Group's income tax credit for the
half-year to 30 June 2021 is based on the best estimate of the
weighted-average annual income tax rate expected for the full
financial year. The tax effects of one-off items are not included
in the weighted-average annual income tax rate, but are recognised
in the relevant period.
An explanation of the relationship between tax credit and
accounting profit is set out below:
Half-year Half-year
to 30 to 30
June June
2021 2020
GBPm GBPm
Profit before tax 1,444 67
--------- ---------
UK corporation tax thereon at 19 per cent (2020:
19 per cent) (274) (13)
Impact of surcharge on banking profits (107) (7)
Non-deductible costs: conduct charges (3) (3)
Other non-deductible costs (9) (28)
Non-taxable income 3 9
Tax relief on distributions to non-controlling interests 10 15
Remeasurement of deferred tax due to rate changes 420 182
Differences in overseas tax rates - 3
Adjustments in respect of prior years (5) 2
--------- ---------
Tax credit 35 160
--------- ---------
The Finance Act 2021, which was substantively enacted on 24 May
2021, increases the rate of corporation tax from 19 per cent to 25
per cent with effect from 1 April 2023. The impact of this rate
change is an increase in the Group's net deferred tax asset as at
30 June 2021 of GBP362 million, comprising a GBP420 million credit
included in the income statement and a GBP58 million charge
included in equity. The tax credit in the half-year to 30 June 2020
included an uplift in deferred tax assets following the
announcement by the UK Government that it would maintain the
corporation tax rate at 19 per cent.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 7: Financial assets at amortised cost
Half-year to 30 June 2021
Allowance for expected
Gross carrying amount credit losses
---------------------------------- ------------------------------
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Loans and advances
to banks 117 - - 117 - - - -
------ ------ ----- -----
Allowance for
impairment
losses - - - -
------- ------- ------- -------
Net carrying amount 117 - - 117
------- ------- ------- -------
Loans and advances
to customers
At 1 January 2021 226,746 34,437 5,775 266,958 486 1,146 1,560 3,192
Exchange and other
adjustments (17) - (31) (48) - - 66 66
------- ------- ------- ------- ------ ------ ----- -----
Transfers to Stage
1 4,371 (4,366) (5) - 111 (110) (1) -
Transfers to Stage
2 (5,934) 6,404 (470) - (23) 78 (55) -
Transfers to Stage
3 (122) (951) 1,073 - (4) (91) 95 -
------- ------- ------- -------
Impact of transfers
between stages (1,685) 1,087 598 - (78) 94 72 88
------ ------ ----- -----
6 (29) 111 88
Other changes in
credit
quality (23) (126) (49) (198)
Additions (repayments) 14,236 (1,809) (440) 11,987 (4) (57) (51) (112)
------ ------ ----- -----
(Credit) charge to
the income statement (21) (212) 11 (222)
Advances written off (203) (203) (203) (203)
Recoveries of advances
written off in
previous
years 28 28 28 28
Discount unwind (71) (71)
------- ------- ------- ------- ------ ------ ----- -----
At 30 June 2021 239,280 33,715 5,727 278,722 465 934 1,391 2,790
------ ------ ----- -----
Allowance for
impairment
losses (465) (934) (1,391) (2,790)
------- ------- ------- -------
Net carrying amount 238,815 32,781 4,336 275,932
------- ------- ------- -------
Due from fellow Lloyds
Banking Group undertakings 15,736 - - 15,736 4--4
Allowance for impairment
losses (4) - - (4)
------- ------ ----- -------
Net carrying amount 15,732 - - 15,732
------- ------ ----- -------
Total financial assets
at amortised cost 254,664 32,781 4,336 291,781
------- ------ ----- -------
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 7: Financial assets at amortised cost (continued)
Movements in allowance for expected credit losses in respect of
undrawn balances were as follows:
Allowance for expected
credit losses
-------------------------------
Stage Stage Stage
1 2 3 Total
GBPm GBPm GBPm GBPm
Undrawn balances
At 1 January 2021 54 69 6 129
Transfers to Stage 1 14 (14) - -
Transfers to Stage 2 (3) 3 - -
Transfers to Stage 3 - (1) 1 -
Impact of transfers between stages (11) 10 (1) (2)
------- ------ ----- -----
- (2) - (2)
Other items credited to the income statement (7) (11) (5) (23)
------- ------ ----- -----
Credit to the income statement (7) (13) (5) (25)
------- ------ ----- -----
At 30 June 2021 47 56 1 104
------- ------ ----- -----
The Group's total impairment allowances were as follows:
Allowance for expected
credit losses
--------------------------------
Stage Stage Stage
1 2 3 Total
GBPm GBPm GBPm GBPm
In respect of:
Loans and advances to customers 465 934 1,391 2,790
Debt securities - - 1 1
Due from fellow Lloyds Banking Group undertakings 4 - - 4
------- ----- ------ ------
Financial assets at amortised cost 469 934 1,392 2,795
Provisions in relation to loan commitments
and financial guarantees 47 56 1 104
------- ----- ------ ------
Total 516 990 1,393 2,899
------- ----- ------ ------
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 7: Financial assets at amortised cost (continued)
Year ended 31 December 2020
Allowance for expected
Gross carrying amount credit losses
--------------------------- --------------------------------
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Loans and advances
to banks 225 - - 225 - - - -
----- ---- ---- ----
Allowance for impairment
losses - - - -
----- ---- ---- ----
Net carrying amount 225 - - 225
----- ---- ---- ----
Loans and advances
to customers
At 1 January 2020 229,740 24,996 5,663 260,399 148 749 1,187 2,084
Exchange and other
adjustments 95 1 (2) 94 - 1 24 25
-------- ------- ------- ------- ---- ----- ----- -----
Transfers to Stage
1 3,011 (3,004) (7) - 52 (51) (1) -
Transfers to Stage
2 (15,009) 15,731 (722) - (63) 120 (57) -
Transfers to Stage
3 (401) (1,598) 1,999 - (6) (108) 114 -
-------- ------- ------- -------
Impact of transfers
between stages (12,399) 11,129 1,270 - (33) 372 197 536
---- ----- ----- -----
(50) 333 253 536
Other changes in credit
quality 366 88 587 1,041
Additions (repayments) 10,106 (1,665) (702) 7,739 22 (25) (28) (31)
---- ----- ----- -----
Charge to the income
statement 338 396 812 1,546
Disposal of business (796) (24) - (820) - - - -
Advances written off (552) (552) (552) (552)
Recoveries of advances
written off in previous
years 98 98 98 98
Discount unwind (9) (9)
-------- ------- ------- ------- ---- ----- ----- -----
At 31 December 2020 226,746 34,437 5,775 266,958 486 1,146 1,560 3,192
---- ----- ----- -----
Allowance for impairment
losses (486) (1,146) (1,560) (3,192)
-------- ------- ------- -------
Net carrying amount 226,260 33,291 4,215 263,766
-------- ------- ------- -------
Due from fellow Lloyds
Banking Group undertakings 19,860 - - 19,860 8--8
Allowance for impairment
losses (8) - - (8)
------- ------ ----- -------
Net carrying amount 19,852 - - 19,852
------- ------ ----- -------
Total financial assets
at amortised cost 246,337 33,291 4,215 283,843
------- ------ ----- -------
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 7: Financial assets at amortised cost (continued)
Movements in allowance for expected credit losses in respect of
undrawn balances were as follows:
Allowance for expected
credit losses
-------------------------------
Stage Stage Stage
1 2 3 Total
GBPm GBPm GBPm GBPm
Undrawn balances
At 1 January 2020 26 28 1 55
Exchange and other adjustments (1) - 1 -
-------- ----- ----- -----
Transfers to Stage 1 8 (8) - -
Transfers to Stage 2 (3) 3 - -
Transfers to Stage 3 - (3) 3 -
Impact of transfers between stages (4) 23 11 30
-------- ----- ----- -----
1 15 14 30
Other items charged to the income statement 28 26 (10) 44
-------- ----- ----- -----
Charge to the income statement 29 41 4 74
-------- ----- ----- -----
At 31 December 2020 54 69 6 129
-------- ----- ----- -----
The Group's total impairment allowances were as follows:
Allowance for expected
credit losses
------------------------------
Stage Stage Stage
1 2 3 Total
GBPm GBPm GBPm GBPm
In respect of:
Loans and advances to customers 486 1,146 1,560 3,192
Debt securities - - 1 1
Due from fellow Lloyds Banking Group undertakings 8 - - 8
------ ------ ----- -----
Financial assets at amortised cost 494 1,146 1,561 3,201
Provisions in relation to loan commitments
and financial guarantees 54 69 6 129
------ ------ ----- -----
Total 548 1,215 1,567 3,330
------ ------ ----- -----
The movement tables are compiled by comparing the position at
the reporting date to that at the beginning of the year.
Transfers between stages are deemed to have taken place at the
start of the reporting period, with all other movements shown in
the stage in which the asset is held at the period end.
Additions (repayments) comprise new loans originated and
repayments of outstanding balances throughout the reporting period.
Loans which are written off in the period are first transferred to
Stage 3 before acquiring a full allowance and subsequent
write-off.
Loans and advances to customers include advances securitised
under the Group's securitisation and covered bond programmes (see
note 8).
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 8: Debt securities in issue
At 30 June 2021 At 31 December 2020
--------------------------- --------------------------------
At fair At fair
value value
through At through
profit amortised profit At amortised
or loss cost Total or loss cost Total
GBPm GBPm GBPm GBPm GBPm GBPm
Medium-term notes issued - 1,933 1,933 - 2,065 2,065
Covered bonds - 3,057 3,057 - 3,243 3,243
Securitisation notes 38 2,596 2,634 45 2,989 3,034
-------- ---------- ----- --------- ------------ -----
38 7,586 7,624 45 8,297 8,342
-------- ---------- ----- --------- ------------ -----
The notes issued by the Group's securitisation and covered bond
programmes are held by external parties and by subsidiaries of the
Group.
Securitisation programmes
At 30 June 2021, external parties held GBP2,634 million (31
December 2020: GBP3,034 million) and the Group's subsidiaries held
GBP19,685 million (31 December 2020: GBP23,199 million) of total
securitisation notes in issue of GBP22,319 million (31 December
2020: GBP26,233 million). The notes are secured on loans and
advances to customers and debt securities held at amortised cost
amounting to GBP22,660 million (31 December 2020: GBP27,504
million), the majority of which have been sold by subsidiary
companies to bankruptcy remote structured entities. The structured
entities are consolidated fully and all of these loans are retained
on the Group's balance sheet.
Covered bond programmes
At 30 June 2021, external parties held GBP3,057 million (31
December 2020: GBP3,243 million) and the Group's subsidiaries held
GBPnil (31 December 2020: GBP100 million) of total covered bonds in
issue of GBP3,057 million (31 December 2020: GBP3,343 million). The
bonds are secured on certain loans and advances to customers
amounting to GBP3,638 million (31 December 2020: GBP4,056 million)
that have been assigned to bankruptcy remote limited liability
partnerships. These loans are retained on the Group's balance
sheet.
Cash deposits of GBP2,083 million (31 December 2020: GBP1,485
million) which support the debt securities issued by the structured
entities, the term advances related to covered bonds and other
legal obligations are held by the Group.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 9: Retirement benefit obligations
The Group's post-retirement defined benefit scheme obligations
are comprised as follows:
At At
30 June 31 Dec
2021 2020
GBPm GBPm
Defined benefit pension schemes:
Fair value of scheme assets 17,368 18,200
Present value of funded obligations (16,318) (17,624)
-------- --------
Net pension scheme asset 1,050 576
Other post-retirement schemes (38) (41)
-------- --------
Net retirement benefit asset 1,012 535
-------- --------
Recognised on the balance sheet as:
Retirement benefit assets 1,143 674
Retirement benefit obligations (131) (139)
-------- --------
Net retirement benefit asset 1,012 535
-------- --------
Movements in the Group's net post-retirement defined benefit
scheme asset during the period were as follows:
GBPm
Asset at 1 January 2021 535
Income statement charge (58)
Employer contributions 357
Remeasurement 178
-----
Asset at 30 June 2021 1,012
-----
The principal assumptions used in the valuations of the defined
benefit pension schemes were as follows:
At At
30 June 31 Dec
2021 2020
% %
Discount rate 1.93 1.44
Rate of inflation:
Retail Price Index 3.10 2.80
Consumer Price Index 2.70 2.41
Rate of salary increases 0.00 0.00
Weighted-average rate of increase for pensions in
payment 3.07 2.86
Note 10: Other provisions
Provisions
for financial
commitments Regulatory
and guarantees provisions Other Total
GBPm GBPm GBPm GBPm
At 1 January 2021 129 230 162 521
Provisions applied - (217) (10) (227)
Charge for the period (25) 235 13 223
---- ----------- ----- -----
At 30 June 2021 104 248 165 517
---- ----------- ----- -----
Regulatory provisions
In the course of its business, the Group is engaged in
discussions with the PRA, FCA and other UK and overseas regulators
and other governmental authorities on a range of matters. The Group
also receives complaints in connection with its past conduct and
claims brought by or on behalf of current and former employees,
customers, investors and other third parties and is subject to
legal proceedings and other legal actions. Where significant,
provisions are held against the costs expected to be incurred in
relation to these matters and matters arising from related internal
reviews. During the half-year to 30 June 2021 the Group charged a
further GBP235 million in respect of legal actions and other
regulatory matters.
The unutilised balance at 30 June 2021 was GBP248 million (31
December 2020: GBP230 million). The most significant items are as
follows.
Payment protection insurance
The Group has made provisions for PPI costs over a number of
years totalling GBP6,344 million. Good progress continues to be
made towards ensuring operational completeness, with the final
validation of information requests and complaints with third
parties at an advanced stage, ahead of an orderly programme
close.
In addition to the above provision, the Group continues to
challenge PPI litigation cases, with mainly administration costs
and some potential redress recognised within the first half
regulatory provisions.
HBOS Reading - review
The Group completed its compensation assessment for those within
the Customer Review in 2019 with more than GBP109 million of
compensation paid, in addition to GBP15 million for ex-gratia
payments and GBP6 million for the reimbursement of legal fees. The
Group is applying the recommendations from Sir Ross Cranston's
review, issued in December 2019, including a reassessment of direct
and consequential losses by an independent panel, an extension of
debt relief and a wider definition of de facto directors. Further
details of the panel were announced on 3 April 2020 and the panel's
full scope and methodology was published on 7 July 2020. The
panel's stated objective is to consider cases via a non-legalistic
and fair process and to make their decisions in a generous, fair
and common-sense manner. Details of an appeal process for the
further assessments of debt relief and de facto director status
have also been announced.
In 2020 a charge of GBP159 million was recorded, bringing the
lifetime cost to GBP435 million, covering both compensation
payments and operational costs.
In the half-year to 30 June 2021 the Group has continued to make
progress assessing further debt relief and de facto director status
claims and has now completed 99 per cent of preliminary
assessments. The independent panel has also started to issue its
first outcomes.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 10: Other provisions (continued)
The Group has charged GBP150 million in the half-year to 30 June
2021 for the independent panel and Dame Linda Dobbs review of the
Group's handling of HBOS Reading between January 2009 and January
2017. A significant part of this charge relates to the actual and
foreseeable future operational costs of these activities which are
both now expected to extend into 2022, in addition to awards from
the independent panel to date. The first half charge increases the
lifetime cost to GBP585 million. The panel is continuing its
assessment of awards which could result in further significant
charges over 2021 and 2022 but it is not possible to reliably
estimate the potential impact or timings at this stage. The Group
is committed to implementing Sir Ross's recommendations in
full.
Arrears handling related activities
To date the Group has provided a total of GBP676 million for
arrears handling activities; the unutilised balance at 30 June 2021
was GBP15 million.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 11: Related party transactions
Balances and transactions with fellow Lloyds Banking Group
undertakings
The Company and its subsidiaries have balances due to and from
the Company's ultimate parent company, Lloyds Banking Group plc,
and fellow Lloyds Banking Group undertakings. These are included on
the balance sheet as follows:
At At
30 June 31 Dec
2021 2020
GBPm GBPm
Assets, included within:
Financial assets at amortised cost: due from fellow
Lloyds Banking Group undertakings 15,732 19,852
Derivative financial instruments 2,682 4,707
Liabilities, included within:
Due to fellow Lloyds Banking Group undertakings 93,703 86,954
Derivative financial instruments 4,879 7,154
Debt securities in issue 1,186 1,215
Subordinated liabilities 1,061 1,062
During the half-year to 30 June 2021 the Group earned GBP18
million (half-year to 30 June 2020: GBP217 million) of interest
income and incurred GBP711 million (half-year to 30 June 2020:
GBP878 million) of interest expense on balances and transactions
with Lloyds Banking Group plc and fellow Group undertakings.
In addition, during the half-year to 30 June 2021 the Group
incurred expenditure of GBP18 million (half-year ended 30 June
2020: GBP19 million) on behalf of fellow Lloyds Banking Group
undertakings which was recharged to those undertakings; and fellow
Lloyds Banking Group undertakings incurred expenditure of GBP383
million (half-year ended 30 June 2020: GBP333 million) on behalf of
the Group which has been recharged to the Group.
Other related party transactions
Other related party transactions for the half-year to 30 June
2021 are similar in nature to those for the year ended 31 December
2020.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 12: Contingent liabilities, commitments and guarantees
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the Group
is not involved in the ongoing litigation which involves the card
schemes Visa and Mastercard (as described below). However, the
Group is a member/licensee of Visa and Mastercard and other card
schemes. The litigation in question is as follows:
-- litigation brought by retailers against both Visa and
Mastercard continues in the English Courts in which retailers are
seeking damages on grounds that Visa and Mastercard's MIFs breached
competition law (this includes a judgment of the Supreme Court in
June 2020 upholding the Court of Appeal's finding in 2018 that
historic interchange arrangements of Mastercard and Visa infringed
competition law); and
-- litigation brought on behalf of UK consumers in the English
Courts against Mastercard, which the Supreme Court has now
confirmed can proceed in the lower courts.
Any impact on the Group of the litigation against Visa and
Mastercard remains uncertain at this time, such that it is not
practicable for the Group to provide an estimate of any potential
financial effect. Insofar as Visa is required to pay damages to
retailers for interchange fees set prior to June 2016, contractual
arrangements to allocate liability have been agreed between various
UK banks (including the Lloyds Banking Group) and Visa Inc, as part
of Visa Inc's acquisition of Visa Europe in 2016. These
arrangements cap the maximum amount of liability to which the
Lloyds Banking Group may be subject and this cap is set at the cash
consideration received by the Lloyds Banking Group for the sale of
its stake in Visa Europe to Visa Inc in 2016. In 2016, the Lloyds
Banking Group received Visa preference stock as part of the
consideration for the sale of its shares in Visa Europe. In 2020,
some of these Visa preference shares were converted into Visa Inc
Class A common stock (in accordance with the provisions of the Visa
Europe sale documentation) and they were subsequently sold by the
Lloyds Banking Group. The sale had no impact on this contingent
liability.
LIBOR and other trading rates
Certain Lloyds Banking Group companies, together with other
panel banks, have been named as defendants in private lawsuits,
including purported class action suits, in the US in connection
with their roles as panel banks contributing to the setting of US
Dollar, Japanese Yen and Sterling London Interbank Offered Rate and
the Australian BBSW reference rate. Certain of the plaintiffs'
claims have been dismissed by the US Federal Court for the Southern
District of New York (subject to appeals).
Certain Lloyds Banking Group companies are also named as
defendants in (i) UK based claims; and (ii) two Dutch class
actions, raising LIBOR manipulation allegations. A number of the
claims against the Lloyds Banking Group in the UK relate to the
alleged mis-sale of interest rate hedging products also include
allegations of LIBOR manipulation.
It is currently not possible to predict the scope and ultimate
outcome on the Group of any private lawsuits or any related
challenges to the interpretation or validity of any of the Group's
contractual arrangements, including their timing and scale. As
such, it is not practicable to provide an estimate of any potential
financial effect.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 12: Contingent liabilities, commitments and guarantees
(continued)
Tax authorities
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 2013, HMRC informed
the Group that its interpretation of the UK rules means that the
group relief is not available. In 2020, HMRC concluded their
enquiry into the matter and issued a closure notice. The Group's
interpretation of the UK rules has not changed and hence it has
appealed to the First Tier Tax Tribunal, with a hearing expected in
early 2022. If the final determination of the matter by the
judicial process is that HMRC's position is correct, management
estimate that this would result in an increase in current tax
liabilities of approximately GBP380 million (including interest).
The Group, having taken appropriate advice, does not consider that
this is a case where additional tax will ultimately fall due.
There are a number of other open matters on which the Lloyds
Banking Group is in discussions with HMRC (including the tax
treatment of certain costs arising from the divestment of TSB
Banking Group plc), none of which is expected to have a material
impact on the financial position of the Group.
Other legal actions and regulatory matters
In addition, during the ordinary course of business the Group is
subject to other complaints and threatened or actual legal
proceedings (including class or group action claims) brought by or
on behalf of current or former employees, customers, investors or
other third parties, as well as legal and regulatory reviews,
challenges, investigations and enforcement actions, both in the UK
and overseas. Where material, such matters are periodically
reassessed, with the assistance of external professional advisers
where appropriate, to determine the likelihood of the Group
incurring a liability. In those instances where it is concluded
that it is more likely than not that a payment will be made, a
provision is established to management's best estimate of the
amount required at the relevant balance sheet date. In some cases
it will not be possible to form a view, for example because the
facts are unclear or because further time is needed to properly
assess the merits of the case, and no provisions are held in
relation to such matters. In these circumstances, specific
disclosure in relation to a contingent liability will be made where
material. However the Group does not currently expect the final
outcome of any such case to have a material adverse effect on its
financial position, operations or cash flows. Where there is a
contingent liability related to an existing provision the relevant
disclosures are included within note 10.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 12: Contingent liabilities, commitments and guarantees
(continued)
Contingent liabilities, commitments and guarantees
At At
30 June 31 Dec
2021 2020
GBPm GBPm
Contingent liabilities
Items serving as direct credit substitutes 1 18
Performance bonds, including letters of credit, and
other transaction-related contingencies 198 189
Total contingent liabilities 199 207
-------- -------
Commitments and guarantees
Documentary credits and other short-term trade-related
transactions 1 1
Forward asset purchases and forward deposits placed 6 28
Undrawn formal standby facilities, credit lines and
other commitments to lend:
Less than 1 year original maturity:
-------- ---------
Mortgage offers made 15,029 17,828
Other commitments and guarantees 25,994 26,203
-------- -------
41,023 44,031
1 year or over original maturity 2,887 3,512
-------- -------
Total commitments and guarantees 43,917 47,572
-------- -------
Of the amounts shown above in respect of undrawn formal standby
facilities, credit lines and other commitments to lend, GBP18,127
million (31 December 2020: GBP20,919 million) was irrevocable.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 13: Fair values of financial assets and liabilities
The valuations of financial instruments have been classified
into three levels according to the quality and reliability of
information used to determine those fair values. Note 39 to the
Group's 2020 financial statements details the definitions of the
three levels in the fair value hierarchy.
Valuation control framework
Key elements of the valuation control framework, which covers
processes for all levels in the fair value hierarchy including
level 3 portfolios, include model validation (incorporating
pre-trade and post-trade testing), product implementation review
and independent price verification. Formal committees meet
quarterly to discuss and approve valuations in more judgemental
areas.
Transfers into and out of level 3 portfolios
Transfers out of level 3 portfolios arise when inputs that could
have a significant impact on the instrument's valuation become
market observable; conversely, transfers into the portfolios arise
when sources of data cease to be observable.
Valuation methodology
For level 2 and level 3 portfolios, there is no significant
change to the valuation methodology (techniques and inputs)
disclosed in the Group's 2020 Annual Report and Accounts applied to
these portfolios.
The table below summarises the carrying values of financial
assets and liabilities presented on the Group's balance sheet. The
fair values presented in the table are at a specific date and may
be significantly different from the amounts which will actually be
paid or received on the maturity or settlement date.
At 31 December
At 30 June 2021 2020
----------------- -------------------
Carrying Fair Carrying Fair
value value value value
GBPm GBPm GBPm GBPm
Financial assets at amortised cost
Loans and advances to banks 117 117 225 225
Loans and advances to customers 275,932 277,908 263,766 265,635
Due from fellow Lloyds Banking Group
undertakings 15,732 15,732 19,852 19,852
Financial liabilities at amortised
cost
Deposits from banks 9,368 9,368 14,695 14,695
Customer deposits 169,941 170,007 163,001 163,148
Due to fellow Lloyds Banking Group
undertakings 93,703 93,703 86,954 86,954
Debt securities in issue 7,586 7,721 8,297 8,622
Subordinated liabilities 2,261 2,479 2,853 3,096
Financial instruments classified as financial assets at fair
value through profit or loss, derivative financial instruments,
financial assets at fair value through other comprehensive income
and financial liabilities at fair value through profit or loss are
recognised at fair value.
The carrying amount of the following financial instruments is a
reasonable approximation of fair value: cash and balances at
central banks, items in the course of collection from banks, items
in course of transmission to banks and notes in circulation.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 13: Fair values of financial assets and liabilities
(continued)
The Group manages valuation adjustments for its derivative
exposures on a net basis; the Group determines their fair values on
the basis of their net exposures. In all other cases, fair values
of financial assets and liabilities measured at fair value are
determined on the basis of their gross exposures.
The following tables provide an analysis of the financial assets
and liabilities of the Group that are carried at fair value in the
Group's consolidated balance sheet, grouped into levels 1 to 3
based on the degree to which the fair value is observable. There
were no significant transfers between level 1 and level 2 during
the period.
Level Level Level
1 2 3 Total
Financial assets carried at fair value GBPm GBPm GBPm GBPm
At 30 June 2021
Loans and advances to customers at fair
value through profit or loss - - 400 400
Debt securities at fair value through
other comprehensive income 125 2,181 - 2,306
Derivative financial instruments - 4,690 11 4,701
At 31 December 2020
Loans and advances to customers at fair
value through profit or loss - - 477 477
Debt securities at fair value through
other comprehensive income 130 2,395 - 2,525
Derivative financial instruments - 7,298 12 7,310
Level Level Level
1 2 3 Total
Financial liabilities carried at fair
value GBPm GBPm GBPm GBPm
At 30 June 2021
Financial liabilities designated at
fair value through profit or loss - - 38 38
Derivative financial instruments - 5,664 206 5,870
At 31 December 2020
Financial liabilities designated at
fair value through profit or loss - - 45 45
Derivative financial instruments - 8,181 271 8,452
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 13: 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.
Financial
assets at
fair value Total financial
through profit Derivative assets carried
or loss assets at fair value
GBPm GBPm GBPm
At 1 January 2021 477 12 489
Losses recognised in the income statement
within other income (55) (1) (56)
Purchases/increases to customer loans 4 - 4
Sales/repayments of customer loans (26) - (26)
At 30 June 2021 400 11 411
--------------- ---------- ---------------
Losses recognised in the income statement,
within other income, relating to
the change in fair value of those
assets held at 30 June 2021 (52) (1) (53)
At 1 January 2020 463 - 463
Gains recognised in the income statement
within other income 18 2 20
Sales/repayments of customer loans (13) - (13)
Transfers into the level 3 portfolio - 11 11
--------------- ---------- ---------------
At 30 June 2020 468 13 481
--------------- ---------- ---------------
Gains recognised in the income statement,
within other income, relating to
the change in fair value of those
assets held at 30 June 2020 9 - 9
The table below analyses movements in the level 3 financial
liabilities portfolio.
Financial
liabilities Total financial
at fair value liabilities
through profit Derivative carried at
or loss liabilities fair value
GBPm GBPm GBPm
At 1 January 2021 45 271 316
Gains recognised in the income statement
within other income (2) (46) (48)
Redemptions (5) (19) (24)
At 30 June 2021 38 206 244
--------------- ------------ ---------------
Gains recognised in the income statement,
within other income, relating to
the change in fair value of those
liabilities held at 30 June 2021 (2) (42) (44)
At 1 January 2020 47 297 344
Losses recognised in the income statement
within other income 1 8 9
Redemptions (1) (8) (9)
--------------- ------------ ---------------
At 30 June 2020 47 297 344
--------------- ------------ ---------------
Gains recognised in the income statement,
within other income, relating to
the change in fair value of those
liabilities held at 30 June 2020 - - -
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 13: Fair values of financial assets and liabilities
(continued)
The tables below set out the effects of reasonably possible
alternative assumptions for categories of level 3 financial assets
and financial liabilities.
Effect of reasonably
possible alternative
assumptions(2)
-------------------------------
Significant
Valuation unobservable Favourable Unfavourable
At 30 June 2021 techniques inputs(1) changes changes
GBPm GBPm
Financial assets at fair value
through profit or loss
Interest rate
Loans and advances Discounted spreads
to customers cash flows (+/- 6%) 400 38 (35)
Derivative financial
assets
Option pricing Interest rate
Interest rate derivatives model volatility (28%/56%) 11 - -
---
Level 3 financial assets carried
at fair value 411
---
Financial liabilities at fair value through
profit or loss
Interest rate
Discounted spreads
Securitisation notes cash flows (+/- 50bps) 38 2 (1)
Derivative financial
liabilities
Market values
Shared appreciation - property
rights valuation HPI (+/- 1%) 206 25 (23)
---
Level 3 financial liabilities
carried at fair value 244
---
At 31 December 2020
Financial assets at fair value through profit
or loss
Interest rate
Loans and advances Discounted spreads
to customers cash flows (-50bps/+106bps) 477 36 (34)
Derivative financial
assets
Option pricing Interest rate
Interest rate derivatives model volatility (30%/60%) 12 - -
---
Level 3 financial assets carried at fair
value 489
---
Financial liabilities at fair value through
profit or loss
Interest rate
Discounted spreads
Securitisation notes cash flows (+/- 50bps) 45 1 (1)
Derivative financial
liabilities
Market values
Shared appreciation - property
rights valuation HPI (+/- 1%) 271 24 (22)
---
Level 3 financial liabilities carried at
fair value 316
---
(1) Ranges represent 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.
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt
securities and derivatives are unchanged from those described in
the Group's 2020 financial statements.
Reasonably possible alternative assumptions
Valuation techniques applied to many of the Group's level 3
instruments often involve the use of two or more inputs whose
relationship is interdependent. The calculation of the effect of
reasonably possible alternative assumptions included in the table
above reflects such relationships and are unchanged from those
described in note 39 to the Group's 2020 financial statements.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL
STATEMENTS (continued)
Note 14: Ultimate parent undertaking
HBOS plc's ultimate parent undertaking and controlling party is
Lloyds Banking Group plc which is incorporated in Scotland. Lloyds
Banking Group plc has published consolidated accounts for the year
to 31 December 2020 and copies may be obtained from Investor
Relations, Lloyds Banking Group, 25 Gresham Street, London EC2V 7HN
and available for download from www.lloydsbankinggroup.com.
Note 15: Other information
The financial information contained in this document does not
constitute statutory accounts within the meaning of section 434 of
the Companies Act 2006 (the Act). The statutory accounts for the
year ended 31 December 2020 were approved by the directors on 11
March 2021 and were delivered to the Registrar of Companies on 28
April 2021. The auditors' report on those accounts was unqualified
and did not include a statement under sections 498(2) (accounting
records or returns inadequate or accounts not agreeing with records
and returns) or 498(3) (failure to obtain necessary information and
explanations) of the Act.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors listed below (being all the directors of HBOS plc)
confirm that to the best of their knowledge these condensed
consolidated half-year financial statements have been prepared in
accordance with UK adopted International Accounting Standard 34,
Interim Financial Reporting, and that the half-year management
report herein includes a fair review of the information required by
DTR 4.2.7R and DTR 4.2.8R, namely:
-- an indication of important events that have occurred during
the six months ended 30 June 2021 and their impact on the condensed
consolidated half-year financial statements, and a description of
the principal risks and uncertainties for the remaining six months
of the financial year; and
-- material related party transactions in the six months ended
30 June 2021 and any material changes in the related party
transactions described in the last annual report.
Signed on behalf of the Board by
William Chalmers
Interim Group Chief Executive
28 July 2021
HBOS plc Board of directors:
Executive director:
William Chalmers (Interim Group Chief Executive and Chief
Financial Officer)
Non-executive directors:
Robin Budenberg CBE (Chair)
Alan Dickinson (Deputy Chair)
Sarah Legg
Lord Lupton CBE
Amanda Mackenzie OBE
Nicholas Prettejohn
Stuart Sinclair
Catherine Woods
FORWARD LOOKING STATEMENTS
This document contains certain forward looking statements within
the meaning of Section 21E of the US Securities Exchange Act of
1934, as amended, and section 27A of the US Securities Act of 1933,
as amended, with respect to the business, strategy, plans and/or
results of HBOS plc together with its subsidiaries (the Group) and
its current goals and expectations relating to its future financial
condition and performance. Statements that are not historical or
current facts, including statements about the Group's or its
directors' and/or management's beliefs and expectations, are
forward looking statements. Words such as 'believes', 'achieves',
'anticipates', 'estimates', 'expects', 'targets', 'should',
'intends', 'aims', 'projects', 'plans', 'potential', 'will',
'would', 'could', 'considered', 'likely', 'may', 'seek',
'estimate', 'probability', 'goal', 'objective', 'endeavour',
'prospects', 'optimistic' and variations of these words and similar
future or conditional expressions are intended to identify forward
looking statements but are not the exclusive means of identifying
such statements. Examples of such forward looking statements
include, but are not limited to, statements or guidance relating
to: projections or expectations of the Group's future financial
position including profit attributable to shareholders, provisions,
economic profit, dividends, capital structure, portfolios, net
interest margin, capital ratios, liquidity, risk-weighted assets
(RWAs), expenditures or any other financial items or ratios;
litigation, regulatory and governmental investigations; the Group's
future financial performance; the level and extent of future
impairments and write-downs; the Group's ESG targets and/or
commitments; statements of plans, objectives or goals of the Group
or its management including in respect of statements about the
future business and economic environments in the UK and elsewhere
including, but not limited to, future trends in interest rates,
foreign exchange rates, credit and equity market levels and
demographic developments; statements about competition, regulation,
disposals and consolidation or technological developments in the
financial services industry; and statements of assumptions
underlying such statements. By their nature, forward looking
statements involve risk and uncertainty because they relate to
events and depend upon circumstances that will or may occur in the
future. Factors that could cause actual business, strategy, plans
and/or results (including but not limited to the payment of
dividends) to differ materially from forward looking statements
made by the Group or on its behalf include, but are not limited to:
general economic and business conditions in the UK and
internationally; market related trends and developments;
fluctuations in interest rates, inflation, exchange rates, stock
markets and currencies; any impact of the transition from IBORs to
alternative reference rates; the ability to access sufficient
sources of capital, liquidity and funding when required; changes to
the credit ratings of the Group or any of the Group's immediate or
ultimate parent entities (if applicable); the ability to derive
cost savings and other benefits including, but without limitation
as a result of any acquisitions, disposals and other strategic
transactions; potential changes in dividend policy; the ability to
achieve strategic objectives; changing customer behaviour including
consumer spending, saving and borrowing habits; changes to borrower
or counterparty credit quality impacting the recoverability and
value of balance sheet assets; concentration of financial exposure;
management and monitoring of conduct risk; exposure to counterparty
risk (including but not limited to third parties conducting illegal
activities without the Group's knowledge); instability in the
global financial markets, including Eurozone instability,
instability as a result of uncertainty surrounding the exit by the
UK from the European Union (EU) and the EU-UK Trade and Cooperation
Agreement, instability as a result of the potential for other
countries to exit the EU or the Eurozone and the impact of any
sovereign credit rating downgrade or other sovereign financial
issues; political instability including as a result of any UK
general election and any further possible referendum on Scottish
independence; technological changes and risks to the security of IT
and operational infrastructure, systems, data and information
resulting from increased threat of cyber and other attacks;
natural, pandemic (including but not limited to the COVID-19
pandemic) and other disasters, adverse weather and similar
contingencies outside the control of the Group or any of the
Group's immediate or ultimate parent entities (if applicable);
inadequate or failed internal or external processes or systems;
acts of war, other acts of hostility, terrorist acts and responses
to those acts, or other such events; geopolitical unpredictability;
risks relating to sustainability and climate change, including the
Group's ability along with the government and other stakeholders to
manage and mitigate the impacts of climate change effectively;
changes in laws, regulations, practices and accounting standards or
taxation, including as a result of the UK's exit from the EU;
changes to regulatory capital or liquidity requirements (including
regulatory measures to restrict distributions to address potential
capital and liquidity stress) and similar contingencies outside the
control of the Group or any of the Group's immediate or ultimate
parent entities (if applicable); the policies, decisions and
actions of governmental or regulatory authorities or courts in the
UK, the EU, the US or elsewhere including the implementation and
interpretation of key laws, legislation and regulation together
with any resulting impact on the future structure of the Group; the
ability to attract and retain senior management and other employees
and meet its diversity objectives; actions or omissions by the
Group's directors, management or employees including industrial
action; changes in the Group's ability to develop sustainable
finance products and the Group's capacity to measure the ESG impact
from its financing activity, which may affect the Group's ability
to achieve its climate ambition; changes to the Group's
post-retirement defined benefit scheme obligations; the extent of
any future impairment charges or write-downs caused by, but not
limited to,
depressed asset valuations, market disruptions and illiquid
markets; the value and effectiveness of any credit protection
purchased by the Group; the inability to hedge certain risks
economically; the adequacy of loss reserves; the actions of
competitors, including non-bank financial services, lending
companies and digital innovators and disruptive technologies; and
exposure to regulatory or competition scrutiny, legal, regulatory
or competition proceedings, investigations or complaints. Please
refer to the latest Annual Report on Form 20-F filed by Lloyds Bank
plc with the US Securities and Exchange Commission (the SEC), which
is available on the SEC's website at www.sec.gov, for a discussion
of certain factors and risks. Lloyds Banking Group plc may also
make or disclose written and/or oral forward looking statements in
reports filed with or furnished to the SEC, Lloyds Banking Group
plc annual reviews, half-year announcements, proxy statements,
offering circulars, prospectuses, press releases and other written
materials and in oral statements made by the directors, officers or
employees of Lloyds Banking Group plc to third parties, including
financial analysts. Except as required by any applicable law or
regulation, the forward looking statements contained in this
document are made as of today's date, and the Group expressly
disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward looking statements contained in
this document to reflect any change in the Group's expectations
with regard thereto or any change in events, conditions or
circumstances on which any such statement is based. The
information, statements and opinions contained in this document do
not constitute a public offer under any applicable law or an offer
to sell any securities or financial instruments or any advice or
recommendation with respect to such securities or financial
instruments.
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Douglas Radcliffe
Group Investor Relations Director
020 7356 1571
douglas.radcliffe@lloydsbanking.com
Edward Sands
Director of Investor Relations
020 7356 1585
edward.sands@lloydsbanking.com
Eileen Khoo
Director of Investor Relations
07385 376435
eileen.khoo@lloydsbanking.com
Nora Thoden
Director of Investor Relations - ESG
020 7356 2334
nora.thoden@lloydsbanking.com
CORPORATE AFFAIRS
Grant Ringshaw
External Relations Director
020 7356 2362
grant.ringshaw@lloydsbanking.com
Matt Smith
Head of Media Relations
020 7356 3522
matt.smith@lloydsbanking.com
Copies of this News Release may be obtained from:
Investor Relations, Lloyds Banking Group plc, 25 Gresham Street,
London EC2V 7HN
The statement can also be found on the Group's website -
www.lloydsbankinggroup.com
Registered office: HBOS plc, The Mound, Edinburgh EH1 1YZ
Registered in Scotland No. SC218813
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END
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