TIDM68FF
RNS Number : 0992Y
HBOS PLC
24 February 2012
HBOS plc
Results Announcement
For the year ended 31 December 2011
Member of the Lloyds Banking Group
FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with
respect to the business, strategy and plans of HBOS plc, its
current goals and expectations relating to its future financial
condition and performance. Statements that are not historical
facts, including statements about the HBOS Group or the HBOS
Group's management's beliefs and expectations, are forward looking
statements. By their nature, forward looking statements involve
risk and uncertainty because they relate to events and depend on
circumstances that will occur in the future. The HBOS Group's
actual future business, strategy, plans and/or results may differ
materially from those expressed or implied in these forward looking
statements as a result of a variety of risks, uncertainties and
other factors, including, without limitation, UK domestic and
global economic and business conditions; the ability to derive cost
savings and other benefits, including, without limitation, as a
result of the integration of HBOS into the Lloyds Banking Group and
the Lloyds Banking Group's simplification programme; the ability to
access sufficient funding to meet the HBOS Group's liquidity needs;
changes to the HBOS plc's, Lloyds Banking Group plc's or Lloyds TSB
Bank plc's credit ratings; risks concerning borrower or
counterparty credit quality; instability in the global financial
markets including Eurozone instability; changing demographic and
market related trends; changes in customer preferences; changes to
regulation, accounting standards or taxation, including changes to
regulatory capital or liquidity requirements; the policies and
actions of governmental or regulatory authorities in the UK, the
European Union, or jurisdictions outside the UK, including other
European countries and the US; the ability to attract and retain
senior management and other employees; requirements or limitations
imposed on Lloyds Banking Group plc, Lloyds TSB Bank plc and the
HBOS Group as a result of HM Treasury's investment in Lloyds
Banking Group plc; the ability to complete satisfactorily the
disposal of certain assets as part of the Lloyds Banking Group's EU
state aid obligations; the extent of any future impairment charges
or write-downs caused by depressed asset valuations; exposure to
regulatory scrutiny, legal proceedings or complaints, actions of
competitors and other factors. Please refer to Lloyds Banking Group
plc's latest Annual Report on Form 20-F filed with the US
Securities and Exchange Commission for a discussion of certain
factors together with examples of forward looking statements. The
forward looking statements contained in this announcement are made
as at the date of this announcement, and the HBOS Group undertakes
no obligation to update any of its forward looking statements.
CONTENTS
Page
Financial review 1
Principal risks and uncertainties 3
Primary statements
Consolidated income statement 14
Consolidated statement of comprehensive income 15
Consolidated balance sheet 16
Consolidated statement of changes in equity 18
Consolidated cash flow statement 20
Notes 21
Contacts 40
FINANCIAL REVIEW
Principal activities
HBOS plc (the Company) and its subsidiaries (together, the
Group) provide a wide range of banking and financial services in
the UK and overseas.
During 2010, the Group earned revenue through interest and fees
on a broad range of financial services products including current
and savings accounts, personal loans, credit cards and mortgages
within the retail market; loans and capital market products to
commercial, corporate and asset finance customers; life, pensions
and investment products; general insurance; and private banking and
asset management.
However, following the restructuring of the Lloyds Banking
Group's insurance entities described below, with effect from July
2011 the Group no longer has any general insurance activities and
its life, pensions and investments activities are greatly
reduced.
Restructuring of Lloyds Banking Group's insurance entities
In July 2011, the Lloyds Banking Group completed a restructuring
of the legal ownership of its insurance businesses, as a result of
which the Group's subsidiary, HBOS Insurance & Investment Group
Limited, sold its wholly owned life, pensions and general insurance
subsidiaries to Lloyds TSB General Insurance Holdings Limited and
Scottish Widows Financial Services Holdings Limited, which are also
wholly owned by Lloyds TSB Bank plc. These transactions resulted in
a consolidated loss on disposal of GBP1,739 million.
Review of results
The Group's loss before tax increased by GBP1,843 million to
GBP3,894 million for 2011 from GBP2,051 million in 2010. This was
primarily due to a GBP1,155 million charge in respect of payment
protection insurance and a loss of GBP1,739 million on disposal of
the Group's wholly owned life, pensions and general insurance
subsidiaries.
The trading surplus decreased by GBP4,002 million, or 45 per
cent, from GBP8,925 million to GBP4,923 million, comprising a GBP28
million increase in net interest income, a GBP4,236 million
decrease in total income, net of insurance claims, and a GBP206
million reduction in operating expenses.
Net interest income increased by GBP28 million, from GBP8,370
million to GBP8,398 million. A reduction in margins, reflecting
increased funding costs, was offset by a lower income statement
charge relating to the amounts allocated to unit holders in the
Open-Ended Investment Companies included in the consolidated
results of the Group.
Other income declined by GBP12,866 million from GBP15,841
million in 2010 to GBP2,975 million in 2011, largely due to a
reduction in net trading income in the Group's life, pensions and
insurance subsidiaries arising as a result of the effect of market
conditions on policyholder assets. In addition, net trading income
in the Group's banking operations also reduced significantly as a
result of unfavourable market conditions.
Offsetting the decline in the life, pensions and insurance
subsidiaries' net trading income is a decrease in the insurance
claims expense from GBP9,605 million in 2010 to GBP975 million in
the current year, also reflecting the impact of adverse market
conditions.
FINANCIAL REVIEW(continued)
Total operating expenses decreased to GBP5,475 million in 2011,
compared to GBP5,681 million in 2010. The decrease reflects
integration savings, the non-recurrence of a provision of GBP500
million for customer goodwill payments in 2010 and lower
depreciation and amortisation charges, largely as a result of
reductions in operating lease assets, offset by a GBP1,155 million
charge in respect of payment protection insurance in 2011 and the
non-repetition of the pension curtailment gain of GBP316 million
arising in 2010.
A reduction of GBP3,774 million in impairment losses, from
GBP10,878 million in 2010 to GBP7,104 million in the current year,
reflects continued improving business quality and portfolio trends
resulting from the Group's prudent risk appetite, together with a
significant reduction in impairment losses incurred by the Group's
international businesses.
Total assets at 31 December 2011 were GBP567,999 million,
GBP73,753 million, or 11 per cent, lower compared to GBP641,752
million at 31 December 2010. The majority of the decrease reflects
disposal of the Group's wholly owned life, pensions and general
insurance subsidiaries, with the remainder resulting from the
continuing disposal of assets which are outside of the Group's risk
appetite, customer deleveraging and de-risking and subdued demand
in lending markets.
Debt securities in issue decreased by GBP25,303 million, or 25
per cent, to GBP75,457 million compared to GBP100,760 million at 31
December 2010 as funding requirements decreased in line with
reductions in asset balances, reflecting the strategy of disposing
of exposures outside of the Group's risk appetite.
Shareholders' equity decreased by GBP2,089 million, from
GBP25,860 million to GBP23,771 million at 31 December 2011,
reflecting the loss for the year, offset by gains on cash flow
hedges.
The Group's capital ratios at 31 December 2011 improved with a
total capital ratio of 16.0 per cent, compared to 14.1 per cent at
31 December 2010, and a tier 1 capital ratio of 12.3 per cent,
compared to 11.4 per cent at 31 December 2010. During the year,
risk-weighted assets were reduced by GBP53,289 million, or 21 per
cent, from GBP252,613 million to GBP199,324 million at 31 December
2011.
PRINCIPAL RISKS AND UNCERTAINTIES
Liquidity and funding
The principal risks and uncertainties facing the Group are:
Risk definition
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.
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.
Principal risks
Liquidity and funding continues to remain a key area of focus
for the Group and the industry as a whole. Like all major banks,
the Group is dependent on confidence in the short and long term
wholesale funding markets. Should the Group, due to exceptional
circumstances, be unable to continue to source sustainable funding,
its ability to fund its financial obligations could be
impacted.
The combination of right-sizing the Lloyds Banking Group balance
sheet and continued development of the retail deposit base has seen
the Lloyds Banking Group's wholesale funding requirement reduce in
the past year. The progress Lloyds Banking Group has made to date
in diversifying its funding sources has further strengthened its
funding base.
During the first half of 2011 the Lloyds Banking Group
accelerated term funding initiatives and the run down of certain
non-core asset portfolios allowing a further reduction in total
government and central bank facilities. Lloyds Banking Group repaid
its remaining drawings under the Bank of England SLS scheme in full
in June 2011. Outstandings under the Credit Guarantee Scheme
reduced in line with their contractual maturities, with GBP23.5
billion remaining at end December. The outstanding amount matures
during 2012.
The second half of 2011 has seen more difficult funding markets
as investor confidence was impacted by concerns over the US debt
ceiling and subsequent downgrade. This was followed by increased
fears over Eurozone sovereign debt levels, downgrades and possible
defaults and concerns are ongoing over the potential downside
effects from financial market volatility. Despite this Lloyds
Banking Group continued to fund adequately, maintaining a broadly
stable stock of primary liquid assets during the year and meeting
its regulatory liquidity ratio targets at all times.
Liquidity is managed at the aggregate Lloyds Banking Group
level, with active monitoring at both business unit and Group
level. Monitoring and control processes are in place to address
both internal and regulatory requirements. In a stress situation
the level of monitoring and reporting is increased commensurate
with the nature of the stress event.
The Lloyds Banking Group carries out stress testing of its
liquidity position against a range of scenarios, including those
prescribed by the FSA. Lloyds Banking Group's liquidity risk
appetite is also calibrated against a number of stressed liquidity
metrics.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Lloyds Banking Group's stress testing framework considers these
factors, including the impact of a range of economic and liquidity
stress scenarios over both short and longer term horizons. Internal
stress testing results at 31 December 2011 show that Lloyds Banking
Group has liquidity resources representing more than 130 per cent
of modelled outflows from all wholesale funding sources, corporate
deposits and rating dependent contracts under the Group's severe
liquidity stress scenario. In 2011, Lloyds Banking Group has
maintained its liquidity levels in excess of the ILG regulatory
minimum (FSA's Individual Liquidity Adequacy Standards) at all
times. Funding projections show Lloyds Banking Group will achieve
the proposed Basel lll liquidity and funding requirements in
advance of expected implementation dates.
Lloyds Banking Group's stress testing shows that further credit
rating downgrades may reduce investor appetite for some of the
Group's liability classes and therefore funding capacity. In the
fourth quarter of 2011, Lloyds Banking Group experienced downgrades
in its long-term rating of between one and two notches from three
of the major rating agencies. The impact that Lloyds Banking Group
experienced following the downgrades were consistent with the
Group's modelled outcomes based on the stress testing framework.
Lloyds Banking Group has materially reduced its wholesale funding
in recent years and operates a well diversified funding platform
which together lessen the impact of stress events.
Lloyds Banking Group's borrowing costs and issuance in the
capital markets are dependent on a number of factors, and increased
cost or reduction of capacity could materially adversely affect the
Group's results of operations, financial condition and prospects.
In particular, reduction in the credit rating of Lloyds Banking
Group or deterioration in the capital markets' perception of the
Group's financial resilience, could significantly increase its
borrowing costs and limit its issuance capacity in the capital
markets. The impact on the Lloyds Banking Group's funding cost is
subject to a number of assumptions and uncertainties and is
therefore impossible to quantify precisely.
The downgrades that Lloyds Banking Group experienced in the
fourth quarter of 2011, did not significantly change its borrowing
costs, reduce its issuance capacity or require significant
collateral posting. Lloyds Banking Group notes the recent
announcements from Moody's placing the ratings of 114 European
financial institutions, including Lloyds Banking Group, on review
for downgrade. Even in the case of a simultaneous two notch
downgrade from all rating agencies, the Group would remain
investment grade.
At 31 December 2011, Lloyds Banking Group had GBP202 billion of
highly liquid unencumbered assets in its liquidity portfolio which
are available to meet cash and collateral outflows. This liquidity
is available for deployment at immediate notice, subject to
complying with regulatory requirements, and is a key component of
the Group's liquidity management process.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Mitigating actions
The Group takes many mitigating actions with respect to this
principal risk, key examples include:
Lloyds Banking Group has maintained its liquidity levels in
excess of the ILG regulatory minimum (FSA's Individual Liquidity
Adequacy Standards) at all times. Funding projections show that
Lloyds Banking Group will achieve the proposed Basel lll liquidity
and funding metrics in advance of expected implementation dates.
The Liquidity Coverage Ratio (LCR) is due to be implemented on 1
January 2015 and the Net Stable Funding Ratio (NSFR) has a 1
January 2018 implementation date. The European Commission released
its proposal for implementing Basel lll into Europe (CRD lV) in
July 2011 and we note that discussions over the final detail are
ongoing.
The Group carries out monthly stress testing of its liquidity
position against a range of scenarios, including those prescribed
by the FSA. The Group's liquidity risk appetite is also calibrated
against a number of stressed liquidity metrics.
The key dependencies on successfully funding the Lloyds Banking
Group's balance sheet include the continued functioning of the
money and capital markets; successful right-sizing of Lloyds
Banking Group's balance sheet; the repayment of the government
Credit Guarantee Scheme facilities in accordance with the agreed
terms; no more than limited further deterioration in the UK's and
Lloyds Banking Group's credit rating; and no significant or sudden
withdrawal of deposits resulting in increased reliance on money
markets. Additionally, the Lloyds Banking Group has entered into a
number of EU state aid related obligations to achieve reductions in
certain parts of its balance sheet by the end of 2014. These are
assumed within Lloyds Banking Group's funding plan. The requirement
to meet this deadline may result in the Lloyds Banking Group having
to provide funding to support these asset reductions and/or
disposals and may also result in a lower price being achieved.
Credit
Risk definition
The risk of reductions in earnings and/or value, through
financial loss, as a result of the failure of the party with whom
the Group has contracted to meet its obligations (both on and off
balance sheet).
Principal risks
Arising in the Retail, Wholesale, Commercial and Wealth and
International operations, reflecting the risks inherent in the
Group's lending activities and, to a much lesser extent in the
Insurance operations in respect of investment of own funds. Adverse
changes in the credit quality of the Group's UK and/or
international borrowers and counterparties, or in their behaviour,
would be expected to reduce the value of the Group's assets and
materially increase the Group's write-downs and allowances for
impairment losses. Credit risk can be affected by a range of
factors, including, inter alia, increased unemployment, reduced
asset values, lower consumer spending, increased personal or
corporate insolvency levels, reduced corporate profits, increased
interest rates or higher tenant defaults. Over the last four years,
the global banking crisis and economic downturn has driven
cyclically high bad debt charges. These have arisen from the
Group's lending to:
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
- Wholesale customers (including those in Wealth and
International): where companies continue to face difficult business
conditions. Impairment levels have reduced materially since the
peak of the economic downturn and more aggressive risk appetite in
the HBOS businesses when elevated corporate default levels and
illiquid commercial property markets resulted in heightened
impairment charges. The reduction in public sector spending is
deepening and exports are failing to offset domestic weakness. The
possibility of further economic weakness remains. Financial market
instability represents an additional downside risk. The Group has
exposure in both the UK and internationally, including Europe,
Ireland, USA and Australia, particularly in commercial real estate
lending, where we have a high level of lending secured on secondary
and tertiary assets.
- Retail customers: This portfolio will remain strongly linked
to the economic environment, with inter alia house price falls,
unemployment increases, consumer over-indebtedness and rising
interest rates possible impacts to the secured and unsecured retail
exposures.
Mitigating actions
The Group takes many mitigating actions with respect to this
principal risk, key examples being that the Group follows a
relationship based business model with risk management processes,
appetites and experienced staff in place.
Regulatory
Risk definition
Regulatory risk is the risk of reductions in earnings and/ or
value, through financial or reputational loss, from failing to
comply with the applicable laws, regulations or codes.
Independent Commission on Banking
The Government appointed an independent Commission on Banking
(ICB) to review possible measures to reform the banking system and
promote stability and competition. The ICB published its final
report on September 2011 putting forward recommendations to require
ring-fencing of the retail activities of banks from their
investment banking activities and additional capital requirements
beyond those required under current drafts of the Capital
Requirements Directive IV. The Report also makes recommendations in
relation to the competitiveness of the UK banking market, including
enhancing the competition remit of the new Financial Conduct
Authority (FCA), implementing a new industry-wide switching
solution by September 2013, and improving transparency. The ICB,
which following the final report was disbanded, had the authority
only to make recommendations, which the Government could choose to
accept or reject.
The ICB specifically recommended in relation to Lloyds Banking
Group's EU mandated branch disposal (Project Verde), that, to
create a strong challenger in the UK banking market, the entity
which results from the divestiture should have a share of the
personal current account (PCA) market of at least 6 per cent
(although this does not need to arise solely from the current
accounts acquired from the Company) and a funding position at least
as strong as its peers. The ICB did not specify a definitive
timeframe for the divested entity to achieve a 6 per cent market
share of PCAs but recommended that a market investigation should be
carefully considered by competition authorities if 'a strong and
effective challenger' has not resulted from Lloyd Banking Group's
divestiture by 2015. The ICB did not recommend explicitly that
Lloyds Banking Group should increase the size of the Project Verde
disposal agreed with the European Commission but recommended that
the Government prioritise the emergence of a strong new challenger
over reducing market concentration through a 'substantially
enhanced' divestiture by Lloyds Banking Group.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
The Government published its response to the ICB recommendations
on 19 December 2011. The Government supported the recommendation
that an entity with a larger share of the PCA market than the 4.6
per cent originally proposed might produce a more effective
competitor. In relation to Lloyds Banking Group's announcement that
it was to pursue exclusive negotiations with the Co-operative
Group, the Government commented that such a transaction would
deliver a significant enhancement of the PCA market share, with the
share divested by Lloyds Banking Group combining with the
Co-operative Group's existing share to create a competitor with
approximately 7-8 per cent. The Government also stated that the
execution of the divestment is a commercial matter, and it has no
intention of using its shareholding to deliver an enhancement.
New regulatory regime
On 27 January 2012, the Government published the Financial
Services Bill. The proposed new UK regulatory architecture will see
the transition of regulatory and supervisory powers from the FSA to
the new Financial Conduct Authority (FCA) and Prudential Regulatory
Authority (PRA). The PRA will be responsible for supervising banks,
building societies and other large firms. The FCA will focus on
consumer protection and market regulation. The Bill is also
proposing new responsibilities and powers for the FCA. The most
noteworthy are the proposed greater powers for the FCA in relation
to competition and the proposal to widen its scope to include
consumer credit. The Bill is expected to take effect in early
2013.
In April 2011, the FSA commenced an internal reorganisation as a
first step in a process towards the formal transition of regulatory
and supervisory powers from the FSA to the new FCA and PRA in 2013.
Until this time the responsibility for regulating and supervising
the activities of the subsidiaries will remain with the FSA. On 2
April the FSA will introduce a new 'twin peaks' model and the
intention is to move the FSA as close as possible to the new style
of regulation outlined in the Bill. There will be two independent
groups of supervisors for banks, insurers and major investment
firms covering prudential and conduct. (All other firms (ie those
not dual regulated) will be solely supervised by the conduct
supervisors).
In addition, the European Banking Authority, the European
insurance and Occupational Pensions Authority and the European
securities and Markets Authority as new EU Supervisory Authorities
are likely to have greater influence on regulatory matters across
the EU.
Capital and liquidity
Evolving capital and liquidity requirements continue to be a
priority for Lloyds Banking Group. The Basel Committee on Banking
Supervision has put forward proposals for a reform package which
changes the regulatory capital and liquidity standards, the
definition of 'capital', introduces new definitions for the
calculation of counterparty credit risk and leverage ratios,
additional capital buffers and development of a global liquidity
standard. Implementation of these changes is expected to be phased
in between 2013 and 2018.
Anti bribery
The Bribery Act 2010 came fully into force on 1 July 2011. It
enhances previous laws on bribery and is supported by some detailed
guidance issued by the Ministry of Justice on the steps a business
needs to take to embed 'adequate procedures' to prevent bribery. A
company convicted of failing to have 'adequate procedures' to
prevent bribery could receive an unlimited fine. The Group operates
a group-wide Anti-Bribery Policy, applicable to all of its
businesses, operations and employees, which incorporates the
requirements of the UK Bribery Act 2010.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
US regulation
Significant regulatory initiatives from the US impacting the
Group include the Dodd-Frank Act (which imposes specific
requirements for systemic risk oversight, securities market conduct
and oversight, bank capital standards, arrangements for the
liquidation of failing systemically significant financial
institutions and restrictions to the ability of banks to engage in
proprietary trading activities known as the 'Volcker Rule'). The
Act will have both business and operational implications for the
Group within and beyond the US. In addition the Foreign Account Tax
Compliance Act (FATCA) requires non-US financial institutions to
enter into disclosure agreements with the US Treasury and all
non-financial non-US entities to report and or certify their
ownership of US assets in foreign accounts or be subject to 30 per
cent withholding tax.
European regulation
At a European level, the pace of regulatory reform has increased
with a number of new directives or changes to existing directives
planned in the next 12 months including a revised Markets in
Financial Instruments Directive, Transparency Directive, Insurance
Mediation Directive and a Fifth Undertakings in Collective
Investments in Transferable Securities Directive as well as a
proposed Directive regulating Packaged Retail Investment
Products.
Mitigating actions
The Group takes many mitigating actions with respect to this
principal risk, key examples include:
Independent Commission on Banking
We continue to play a constructive role in the debate with the
government and other stakeholders on all issues under consideration
in relation to the ICB's recommendations.
New regulatory regime
Lloyds Banking Group continues to work closely with the
regulatory authorities and industry associations to ensure that it
is able to identify and respond to regulatory changes and mitigate
against risks to the Group and its stakeholders.
Capital and liquidity
Lloyds Banking Group is continuously assessing the impacts of
regulatory developments which could have a material effect on the
Group and is progressing its plans to implement regulatory changes
and directives through change management programmes.
Anti bribery
The Group has no appetite for bribery and explicitly prohibits
the payment, offer, acceptance or request of a bribe, including
'facilitation payments'.
The Group has enhanced its internal compliance processes
including those associated with payment screening, colleague
training and hospitality.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
US and European regulation
Lloyds Banking Group is continuously assessing the impacts of
regulatory developments which could have a material effect on the
Group and is progressing with its plans to implement regulatory
changes and directives through change management programmes. The
Group is also continuing to progress its plans to achieve Solvency
II compliance.
Market risk
Risk definition
The risk of reductions in earnings and/or value, through
financial or reputational loss, from unfavourable market moves;
including changes in, and increased volatility of, interest rates,
market-implied inflation rates, credit spreads, foreign exchange
rates, equity, property and commodity prices.
Principal risks
The Group has a number of Market risks, the principal ones
being:
- There is a risk to the Group's banking income arising from the
level of interest rates and the margin of interbank rates over
central bank rates. A further banking risk arises from competitive
pressures on product terms in existing loans and deposits, which
sometimes restrict the Group in its ability to change interest
rates applying to customers in response to changes in interbank and
central bank rates.
- Equity market movements and changes in credit spreads impact
the Group's results.
- The main equity market risks arise in the life assurance
companies and staff pension schemes.
- Credit spread risk arises in the life assurance companies,
pension schemes and banking businesses.
Continuing concerns about the fiscal position in Eurozone
countries resulted in increased credit spreads in the areas
affected, and fears of contagion affected the Euro and widened
spreads between central bank and interbank rates.
Mitigating actions
The Group takes many mitigating actions with respect to this
principal risk, key examples include:
Market risk is managed within a Lloyds Banking Board approved
framework using a range of metrics to monitor against stated
appetite and potential market conditions.
Market Risk is reported regularly to appropriate committees.
The Group's trading activity is small relative to our peers and
is not considered to be a principal risk.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Customer treatment
Risk definition
The risk of regulatory censure and/or a reduction in
earnings/value, through financial or reputational loss, from
inappropriate or poor customer treatment.
Principal risks
Customer treatment and how the Group manages its customer
relationships affect all aspects of the Group's operations and are
closely aligned with achievement of Lloyds Banking Group's
strategic vision to be the best bank for customers. As a provider
of a wide range of financial services products and numerous
distribution channels to an extremely broad and varied customer
base, we face significant conduct risks, such as: products or
services not meeting the needs of our customers; sales processes
which could result in selling products to customers which do not
meet their needs; failure to deal with a customer's complaint
effectively where we have got it wrong and not met customer
expectations.
There remains a high level of scrutiny regarding the treatment
of customers by financial institutions from regulatory bodies, the
press and politicians. The FSA in particular continues to drive
focus on conduct of business activities through its supervision
activity.
There is a risk that certain aspects of the Group's business may
be determined by regulatory bodies or the courts as not being
conducted in accordance with applicable laws or regulations, or
with what is fair and reasonable in their opinion. The Group may
also be liable for damages to third parties harmed by the conduct
of its business.
Mitigating actions
The Group takes many mitigating actions with respect to this
principal risk, key examples include:
Lloyds Banking Group's Conduct Risk Strategy and supporting
framework have been designed to support our vision and strategic
aim to put the customer at the heart of everything we do. We have
developed and implemented a framework to enable us to deliver for
our customers, which is supported by Policies and Standards in key
areas, including product governance, sales, responsible lending,
customers in financial difficulties, claims and complaints
handling.
Lloyds Banking Group actively engages with regulatory bodies and
other stakeholders in developing its understanding of current
customer treatment concerns.
People
Risk definition
The risk of reductions in earnings or value through financial or
reputational loss arising from ineffectively leading colleagues
responsibly and proficiently, managing people resource, supporting
and developing colleague talent, or meeting regulatory obligations
related to our people.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Principal risks
The quality and effectiveness of our people are fundamental to
its success. Consequently, the Group's management of material
people risks is critical to deliver against its long-term strategic
objectives. Over the next year the Group's ability to manage people
risks successfully may be affected by the following key
drivers:
- Lloyds Banking Group's continuing structural consolidation and
the sale of part of our branch network under Project Verde may
result in disruption to our ability to lead and manage our people
effectively.
- The continually changing, more rigorous regulatory environment
may impact people strategy, remuneration practices and
retention.
- Macroeconomic conditions and negative media attention on the
banking sector may impact retention, colleague sentiment and
engagement.
Mitigating actions
The Group takes many mitigating actions with respect to this
principal risk, key examples include:
- Strong focus on leadership and colleague engagement, through
delivery of strategies to attract, retain and develop high calibre
staff together with implementation of rigorous succession
planning.
- A continued focus on people risk management across the
Group.
- Ensuring compliance with regulatory requirements related to
Approved Persons and the FSA Remuneration Code, and embedding
compliant and appropriate colleague behaviours in line with Group
policies, values and people risk priorities.
- Strengthening risk management culture and capability across
the Group, together with further embedding of risk objectives in
the colleague performance and reward process.
Insurance risk
Risk definition
The risk of reductions in earnings and/or value, through
financial or reputational loss, due to fluctuations in the timing,
frequency and severity of insured/underwritten events and to
fluctuations in the timing and amount of claims settlements.
Principal risks
The major sources of insurance risk are within the insurance
businesses and the Group's defined benefit staff pension schemes
('pension schemes'). Insurance risk is inherent in the insurance
business and can be affected by customer behaviour. Insurance risks
accepted relate primarily to mortality, longevity, morbidity,
persistency, expenses, property and unemployment. The primary
insurance risk of the Group's pension schemes is related to
longevity.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Insurance risk within the insurance businesses has the potential
to significantly impact the earnings and capital position of the
Insurance Division of the Group. For the Group's pension schemes,
insurance risk could significantly increase the cost of pension
provision and impact the balance sheet of the Group.
Mitigating actions
The Group takes many mitigating actions with respect to this
principal risk, key examples include:
Insurance risk is reported regularly to appropriate committees
and boards.
Actuarial assumptions are reviewed in line with experience and
in-depth reviews are conducted regularly. Longevity assumptions for
the Group's pension schemes are reviewed annually together with
other IFRS assumptions. Expert judgement is required.
Insurance risk is controlled by robust processes including
underwriting, pricing-to-risk, claims management, reinsurance and
other risk mitigation techniques.
State funding and state aid
HM Treasury currently holds approximately 40.2 per cent of
Lloyds Banking Group plc's ordinary share capital. United Kingdom
Financial Investments Limited (UKFI) as manager of HM Treasury's
shareholding continues to operate in line with the framework
document between UKFI and HM Treasury managing the investment in
Lloyds Banking Group plc on a commercial basis without interference
in day-to-day management decisions. There is a risk that a change
in Government priorities could result in the framework agreement
currently in place being replaced leading to interference in the
operations of the Group, although there have been no indications
that the Government intends to change the existing operating
arrangements.
Lloyds Banking Group made a number of undertakings to HM
Treasury arising from the capital and funding support, including
the provision of additional lending to certain mortgage and
business sectors for the two years to 28 February 2011, and other
matters relating to corporate governance and colleague
remuneration. The lending commitments were subject to prudent
commercial lending and pricing criteria, the availability of
sufficient funding and sufficient demand from creditworthy
customers. These lending commitments were delivered in full in the
second year.
The subsequent agreement (known as 'Merlin') between five major
UK banks (including Lloyds Banking Group) and the Government in
relation to gross business lending capacity in the 2011 calendar
year was subject to a similar set of criteria. Lloyds Banking Group
delivered in full its share of the commitments by the five banks,
both in respect of lending to Small and Medium Sized Enterprises
(SMEs) and in respect of overall gross business lending. Lloyds
Banking Group has made a unilateral lending pledge for 2012 as part
of its publicly announced SME charter.
In addition, Lloyds Banking Group is subject to European state
aid obligations in line with the Restructuring Plan agreed with HM
Treasury and the EU College of Commissioners in November 2009,
which is designed to support the long-term viability of the Group
and remedy any distortion of competition and trade in the European
Union (EU) arising from the State aid given to Lloyds Banking
Group.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
This has placed a number of requirements on the Lloyds Banking
Group including an asset reductions target from a defined pool of
assets by the end of 2014 and the disposal of a certain portion of
its retail business by the end of November 2013. In June 2011
Lloyds Banking Group issued an Information Memorandum to potential
bidders of this retail banking business, which the European
Commission confirmed met the requirements to commence the formal
sale process for the sale no later than 30 November 2011. On 14
December 2011 Lloyds Banking Group announced that having reviewed
the formal offers made, its preferred option was for a direct sale
and that it was entering into exclusive discussions with The
Co-operative Group. Lloyds Banking Group is also continuing to
progress an Initial Public Offering (IPO) in parallel. Lloyds
Banking Group continues to work closely with the EU Commission, HM
Treasury and the Monitoring Trustee appointed by the EU Commission
to ensure the successful implementation of the Restructuring Plan
for the Retail banking business.
CONSOLIDATED INCOME STATEMENT
2011 2010
Note GBP million GBP million
Interest and similar income 16,565 18,061
Interest and similar expense (8,167) (9,691)
----------- -----------
Net interest income 8,398 8,370
----------- -----------
Fee and commission income 1,814 1,934
Fee and commission expense (727) (964)
----------- -----------
Net fee and commission income(1) 1,087 970
Net trading income (894) 9,095
Insurance premium income 1,657 3,649
Other operating income 1,125 2,127
----------- -----------
Other income 2 2,975 15,841
----------- -----------
Total income 11,373 24,211
Insurance claims(1) (975) (9,605)
----------- -----------
Total income, net of insurance claims 10,398 14,606
----------- -----------
Payment protection insurance provision 15 (1,155) -
Other operating expenses (4,320) (5,681)
----------- -----------
Total operating expenses 3 (5,475) (5,681)
----------- -----------
Trading surplus 4,923 8,925
Impairment 4 (7,104) (10,878)
Share of results of joint ventures and
associates 26 (98)
Loss on disposal of businesses 5 (1,739) -
Loss before tax (3,894) (2,051)
Taxation 6 173 (264)
----------- -----------
Loss for the year (3,721) (2,315)
----------- -----------
Profit attributable to non-controlling
interests 42 36
Loss attributable to equity shareholders (3,763) (2,351)
----------- -----------
Loss for the year (3,721) (2,315)
----------- -----------
(1) See note 2.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
2011 2010
GBP million GBP million
Loss for the year (3,721) (2,315)
Other comprehensive income
Movements in revaluation reserve in respect of
available-for-sale financial assets:
Change in fair value (77) 205
Income statement transfers in respect of disposals (72) (52)
Income statement transfers in respect of impairment 749 641
Other income statement transfers (76) (62)
Taxation (128) (231)
----------- -----------
396 501
Movements in cash flow hedging reserve:
----------- -----------
Effective portion of changes in fair value 1,350 (781)
Net income statement transfers 373 1,378
Taxation (447) (174)
----------- -----------
1,276 423
Currency translation differences (tax: nil) (6) (204)
----------- -----------
Other comprehensive income for the year, net
of tax 1,666 720
----------- -----------
Total comprehensive income for the year (2,055) (1,595)
----------- -----------
Total comprehensive income attributable to non-controlling
interests 42 36
Total comprehensive income attributable to equity
shareholders (2,097) (1,631)
----------- -----------
Total comprehensive income for the year (2,055) (1,595)
----------- -----------
CONSOLIDATED BALANCE SHEET
As at As at
31 December 31 December
2011 2010
Note GBP million GBP million
Assets
Cash and balances at central banks 3,075 2,375
Items in course of collection from banks 379 319
Trading and other financial assets at fair
value through profit or loss 7 45,347 103,086
Derivative financial instruments 36,253 30,000
Loans and receivables:
------------ ------------
Loans and advances to banks 91,210 65,170
Loans and advances to customers 8 357,110 381,365
Debt securities 11,276 23,632
------------ ------------
459,596 470,167
Available-for-sale financial assets 10,498 13,843
Investment properties 1,686 3,356
Investments in joint ventures and associates 330 428
Goodwill 859 850
Value of in-force business 147 3,171
Other intangible assets 76 74
Tangible fixed assets 2,372 3,482
Current tax recoverable 338 64
Deferred tax assets 3,977 4,062
Retirement benefit assets 394 152
Other assets 2,672 6,323
------------ ------------
Total assets 567,999 641,752
------------ ------------
CONSOLIDATED BALANCE SHEET
As at As at
31 December 31 December
2011 2010
Note GBP million GBP million
Equity and liabilities
Liabilities
Deposits from banks 150,042 143,137
Customer deposits 217,048 216,404
Items in course of transmission to banks 332 251
Trading liabilities 20,805 18,786
Derivative financial instruments 33,385 25,075
Notes in circulation 1,145 1,074
Debt securities in issue 11 75,457 100,760
Liabilities arising from insurance contracts
and participating
investment contracts 385 40,076
Liabilities arising from non-participating
investment contracts 22,207 35,136
Unallocated surplus within insurance businesses - 321
Other liabilities 8,184 16,561
Retirement benefit obligations 107 100
Current tax liabilities 54 134
Deferred tax liabilities 1 47
Other provisions 1,064 806
Subordinated liabilities 12 13,613 16,674
------------ ------------
Total liabilities 543,829 615,342
Equity
------------ ------------
Share capital 13 3,763 3,763
Share premium account 14 18,655 18,655
Other reserves 14 10,523 8,857
Retained profits 14 (9,170) (5,415)
------------ ------------
Shareholders' equity 23,771 25,860
Non-controlling interests 399 550
------------ ------------
Total equity 24,170 26,410
------------ ------------
Total equity and liabilities 567,999 641,752
------------ ------------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
--------------------------------------------------
Share capital Non-
and Other Retained controlling
premium reserves profits Total interests Total
GBP million GBP million GBP million GBP million GBP million GBP million
Balance at 1 January
2011 22,418 8,857 (5,415) 25,860 550 26,410
Comprehensive income
(Loss) profit for the
year - - (3,763) (3,763) 42 (3,721)
Other comprehensive
income
----------- ----------- ----------- ----------- ------------ -----------
Movements in revaluation
reserve in respect of
available-for-sale financial
assets, net of tax - 396 - 396 - 396
Movements in cash flow
hedging reserve, net
of tax - 1,276 - 1,276 - 1,276
Currency translation
differences, net of
tax - (6) - (6) - (6)
----------- ----------- ----------- ----------- ------------ -----------
Total other comprehensive
income - 1,666 - 1,666 - 1,666
----------- ----------- ----------- ----------- ------------ -----------
Total comprehensive
income - 1,666 (3,763) (2,097) 42 (2,055)
----------- ----------- ----------- ----------- ------------ -----------
Transactions with owners
----------- ----------- ----------- ----------- ------------ -----------
Dividends - - - - (15) (15)
Value of employee services:
Share option schemes - - 8 8 - 8
Change in non-controlling
interests - - - - (178) (178)
----------- ----------- ----------- ----------- ------------ -----------
Total transactions with
owners - - 8 8 (193) (185)
----------- ----------- ----------- ----------- ------------ -----------
Balance at 31 December
2011 22,418 10,523 (9,170) 23,771 399 24,170
----------- ----------- ----------- ----------- ------------ -----------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Attributable to equity shareholders
--------------------------------------------------
Share capital Non-
and Other Retained controlling
premium reserves profits Total interests Total
GBP million GBP million GBP million GBP million GBP million GBP million
Balance at 1 January
2010 19,819 8,137 (3,071) 24,885 1,271 26,156
Comprehensive income
(Loss) profit for the
year - - (2,351) (2,351) 36 (2,315)
Other comprehensive
income
----------- ----------- ----------- ----------- ------------ -----------
Movements in revaluation
reserve in respect of
available-for-sale financial
assets, net of tax - 501 - 501 - 501
Movements in cash flow
hedging reserve, net
of tax - 423 - 423 - 423
Currency translation
differences, net of
tax - (204) - (204) - (204)
----------- ----------- ----------- ----------- ------------ -----------
Total other comprehensive
income - 720 - 720 - 720
----------- ----------- ----------- ----------- ------------ -----------
Total comprehensive
income - 720 (2,351) (1,631) 36 (1,595)
----------- ----------- ----------- ----------- ------------ -----------
Transactions with owners
----------- ----------- ----------- ----------- ------------ -----------
Dividends - - - - (24) (24)
Issue of ordinary shares 2,599 - - 2,599 - 2,599
Value of employee services:
Share option schemes - - 7 7 - 7
Change in non-controlling
interests - - - - (733) (733)
----------- ----------- ----------- ----------- ------------ -----------
Total transactions with
owners 2,599 - 7 2,606 (757) 1,849
----------- ----------- ----------- ----------- ------------ -----------
Balance at 31 December
2010 22,418 8,857 (5,415) 25,860 550 26,410
----------- ----------- ----------- ----------- ------------ -----------
CONSOLIDATED CASH FLOW STATEMENT
2011 2010
GBP million GBP million
Loss before tax (3,894) (2,051)
Adjustments for:
Change in operating assets 2,110 57,056
Change in operating liabilities (6,854) (70,686)
Non-cash and other items 2,128 5,624
Tax received 16 486
----------- -----------
Net cash used in operating activities (6,494) (9,571)
Cash flows from investing activities
Purchase of available-for-sale financial assets (6,747) (1,561)
Proceeds from sale and maturity of available-for-sale
financial assets 9,743 10,293
Purchase of fixed assets (593) (1,277)
Proceeds from sale of fixed assets 1,559 1,021
Acquisition of businesses, net of cash acquired (61) (65)
Disposal of businesses, net of cash disposed 3,145 2,783
----------- -----------
Net cash provided by investing activities 7,046 11,194
Cash flows from financing activities
----------- -----------
Dividends paid to non-controlling interests (15) (24)
Interest paid on subordinated liabilities (750) (809)
Repayment of subordinated liabilities (2,696) (331)
Change in non-controlling interests 7 -
----------- -----------
Net cash used in financing activities (3,454) (1,164)
Effects of exchange rate changes on cash and
cash equivalents 1 -
----------- -----------
Change in cash and cash equivalents (2,901) 459
Cash and cash equivalents at beginning of year 9,543 9,084
----------- -----------
Cash and cash equivalents at end of year 6,642 9,543
----------- -----------
Cash and cash equivalents comprise cash and balances at central
banks (excluding mandatory deposits) and amounts due from banks
with a maturity of less than three months.
NOTES
Page
1 Accounting policies, presentation and estimates 22
2 Other income 25
3 Operating expenses 25
4 Impairment 26
5 Loss on disposal of businesses 26
6 Taxation 26
7 Trading and other financial assets at fair value through 27
profit or loss
8 Loans and advances to customers 28
9 Allowance for impairment losses on loans and receivables 28
10 Securitisations and covered bonds 29
11 Debt securities in issue 30
12 Subordinated liabilities 30
13 Share capital 30
14 Reserves 30
15 Payment protection insurance 31
16 Contingent liabilities and commitments 32
17 Capital ratios 35
18 Related party transactions 36
19 Future accounting developments 38
20 Ultimate parent undertaking 39
21 Other information 39
1. Accounting policies, presentation and estimates
These financial statements as at and for the year to 31 December
2011 have been prepared in accordance with the Listing Rules of the
Financial Services Authority (FSA) relating to Preliminary Results.
They do not include all of the information required for full annual
financial statements. The Group's consolidated financial statements
as at and for the year ended 31 December 2011 have been prepared in
accordance with International Financial Reporting Standards (IFRS)
as adopted by the European Union. Copies of the 2011 annual report
and accounts will be published on the Lloyds Banking Group's
website and will be available upon request from Investor Relations,
Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN, in
March 2012.
The directors consider that it is appropriate to continue to
adopt the going concern basis in preparing the Group's financial
statements. In reaching this assessment, the directors have
considered projections for the Group's capital and funding position
and have had regard to the factors set out in Principal risks and
uncertainties: Liquidity and funding on pages 3 to 5.
In previous years the Group has included annual management
charges on non-participating investment contracts within insurance
claims. In light of developing industry practice, these amounts
(2011: GBP444 million; 2010: GBP454 million) are now included
within net fee and commission income.
Accounting policies
The accounting policies are consistent with those applied by the
Group in its 2010 annual report and accounts.
Critical accounting estimates and judgements
The preparation of the Group's financial statements requires
management to make judgements, estimates and assumptions that
impact the application of accounting policies and the reported
amounts of assets, liabilities, income and expenses. Due to the
inherent uncertainty in making estimates, actual results reported
in future periods may include amounts which differ from those
estimates. Estimates, judgements and assumptions are continually
evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be
reasonable under the circumstances. Save for the estimates detailed
below, there have been no significant changes in the basis upon
which estimates have been determined, compared to that applied at
31 December 2010.
Payment protection insurance
The Group has charged a provision of GBP1,155 million in respect
of payment protection insurance (PPI) policies as a result of
discussions with the FSA and a judgment handed down by the UK High
Court (see note 14 for more information). The provision represents
management's best estimate of the anticipated costs of related
customer contact and/or redress, including administration expenses.
However, there are still a number of uncertainties as to the
eventual costs from any such contact and/or redress given the
inherent difficulties of assessing the impact of detailed
implementation of the FSA Policy Statement of 10 August 2010 for
all PPI complaints, uncertainties around the ultimate emergence
period for complaints, the availability of supporting evidence and
the activities of claims management companies, all of which will
significantly affect complaints volumes, uphold rates and redress
costs.
1. Accounting policies, presentation and estimates (continued)
The provision requires significant judgement by management in
determining appropriate assumptions, which include the level of
complaints, uphold rates, proactive contact and response rates,
Financial Ombudsman Service referral and uphold rates as well as
redress costs for each of the many different populations of
customers identified by the Group in its analyses used to determine
the best estimate of the anticipated costs of redress. If the level
of complaints was one percentage point higher (lower) than
estimated for all policies open within the last six years then the
provision made in 2011 would increase (decrease) by approximately
GBP25 million. However, it should be noted that there are a large
number of inter-dependent assumptions under-pinning the provision;
this sensitivity assumes that all assumptions, other than the level
of complaints, remain constant.
The Group re-evaluates the assumptions underlying its analysis
at each reporting date as more information becomes available. As
noted above, there is inherent uncertainty in making estimates;
actual results in future periods may differ from the amount
provided.
Recoverability of deferred tax assets
At 31 December 2011 the Group carried deferred tax assets on its
balance sheet of GBP3,977 million (2010: GBP4,062 million) and
deferred tax liabilities of GBP1 million (2010: GBP47 million).
This presentation takes into account the ability of the Group to
net deferred tax assets and liabilities only where there is a
legally enforceable right of offset. The largest category of
deferred tax asset relates to tax losses carried forward.
The recoverability of the Group's deferred tax assets in respect
of carry forward losses is based on an assessment of future levels
of taxable profit expected to arise that can be offset against
these losses. The Group's expectations as to the level of future
taxable profits take into account the Group's long-term financial
and strategic plan, and anticipated future tax adjusting items.
In making this assessment account is taken of, business plans,
the five year board approved operating plan and the following
future risk factors:
-- The expected future economic outlook as set out in the Group
Chief Executive's statement contained in the Annual Report of
Lloyds Banking Group.
-- The retail banking business disposal as required by the European Commission; and
-- Future regulatory change.
The Group's total deferred tax asset includes GBP3,568 million
(2010 GBP3,899 million) in respect of trading losses carried
forward. The tax losses have arisen in individual legal entities
and will be used as future taxable profits arise in those legal
entities, though substantially all of the unused tax losses for
which a deferred tax asset has been recognised arise in Bank of
Scotland plc. The deferred tax asset will be utilised over
different time periods in each of the entities in which the tax
losses arise. The Group's assessment is that these tax losses will
be fully used within eight years.
Under current UK tax law there is no expiry date for unused tax
losses.
Deferred tax assets totalling GBP571 million (2010: GBP597
million) have not been recognised in respect of certain capital
losses carried forward, trading losses carried forward (mainly in
certain overseas companies) and unrelieved foreign tax credits as
there are no predicted future capital or taxable profits against
which these losses can be recognised.
1. Accounting policies, presentation and estimates (continued)
New accounting pronouncements
The Group has adopted the following new standards and amendments
to standards which became effective for financial years beginning
on or after 1 January 2011. None of these standards or amendments
have had a material impact on these condensed interim financial
statements.
(i) Amendment to IAS 32 Financial Instruments: Presentation -
'Classification of Rights Issues'. Requires rights issues
denominated in a currency other than the functional currency of the
issuer to be classified as equity regardless of the currency in
which the exercise price is denominated.
(ii) IFRIC 19 Extinguishing Financial Liabilities with Equity
Instruments. Clarifies that when an entity renegotiates the terms
of its debt with the result that the liability is extinguished by
the debtor issuing its own equity instruments to the creditor, a
gain or loss is recognised in the income statement representing the
difference between the carrying value of the financial liability
and the fair value of the equity instruments issued; the fair value
of the financial liability is used to measure the gain or loss
where the fair value of the equity instruments cannot be reliably
measured.
(iii) Improvements to IFRSs (issued May 2010). Amends IFRS 7
Financial instruments: Disclosure to require further disclosures in
respect of collateral held by the Group as security for financial
assets and sets out minor amendments to other standards as part of
the annual improvements process.
(iv) Amendment to IFRIC 14 Prepayments of a Minimum Funding
Requirement. Applies when an entity is subject to minimum funding
requirements and makes an early payment of contributions to cover
those requirements and permits such an entity to treat the benefit
of such an early payment as an asset.
(v) IAS 24 Related Party Disclosures (Revised). Simplifies the
definition of a related party and provides a partial exemption from
the requirement to disclose transactions and outstanding balances
with the government and government-related entities. The Group has
taken advantage of an exemption in respect of government and
government-related transactions that permits an entity to disclose
only transactions that are individually or collectively
significant. Details of related party transactions are disclosed in
note 17.
Details of those IFRS pronouncements which will be relevant to
the Group but which were not effective at 31 December 2011 and
which have not been applied in preparing these financial statements
are given in note 18.
The ultimate parent undertaking, Lloyds Banking Group plc,
produces consolidated accounts which set out the basis of the
segments through which it manages performance and allocates
resources across the consolidated Lloyds Banking Group.
2. Other income
2011 2010
GBPm GBPm
Fee and commission income:
----- ------
Current account fees 357 343
Credit and debit card fees 214 203
Other fees and commissions(1) 1,243 1,388
----- ------
1,814 1,934
Fee and commission expense (727) (964)
----- ------
Net fee and commission income 1,087 970
Net trading income (894) 9,095
Insurance premium income 1,657 3,649
Gains on capital transactions(2) 610 359
Other 515 1,768
----- ------
Other operating income 1,125 2,127
Total other income 2,975 15,841
----- ------
(1) In previous years the Group has included annual management charges
on non-participating investment contracts within insurance claims.
In light of developing industry practice, these amounts (2011:
GBP444 million; 2010: GBP454 million) are now included within net
fee and commission income.
(2) During December 2011, the Lloyds Banking Group completed the exchange
of certain subordinated debt securities issued by Lloyds TSB Bank
plc and the Company for new subordinated debt securities issued
by Lloyds TSB Bank plc by undertaking an exchange offer on certain
securities which were eligible for call before 31 December 2012.
This exchange resulted in a gain for the Group on extinguishment
of the existing securities of GBP610 million being the difference
between the carrying amount of the securities extinguished and
the fair value of the new securities issued together with related
fees and costs.
During 2010, as part of the Lloyds Banking Group's management of
capital, the Group had exchanged certain existing subordinated
debt securities for new securities and ordinary shares. These exchanges
resulted in a gain on extinguishment of the existing liabilities
of GBP359 million in the year ended 31 December 2010.
3. Operating expenses
2011 2010(1)
GBPm GBPm
Administrative expenses:
Staff costs excluding pension curtailment gain 2,219 2,632
Pension curtailment gain(2) - (316)
----- -------
Total staff costs 2,219 2,316
Premises and equipment 460 473
Customer goodwill payments provision - 500
Other expenses 1,221 1,462
----- -------
3,900 4,751
Depreciation and amortisation 355 878
Impairment of tangible fixed assets 65 52
----- -------
Total operating expenses, excluding payment protection
insurance provision 4,320 5,861
Payment protection insurance provision (note
14) 1,155 -
Total operating expenses 5,475 5,861
----- -------
(1) During 2011, the Group has reviewed the analysis of certain cost
items and as a result has reclassified certain items of expenditure;
comparatives for 2010 have been restated accordingly.
(2) Following changes by the Group to the terms of its UK defined
benefit pension schemes in 2010, all future increases to pensionable
salary are capped each year at the lower of: Retail Prices Index
inflation; each employee's actual percentage increase in pay;
and 2 per cent of pensionable pay. In addition to this, during
the second half of 2010 there was a change in commutation factors
in certain defined benefit schemes. These changes led to a net
curtailment gain of GBP316 million recognised in the income statement
in 2010.
4. Impairment
2011 2010
GBPm GBPm
Impairment losses on loans and receivables:
----- ------
Loans and advances to customers 6,961 10,786
Debt securities classified as loans and receivables 60 (19)
----- ------
Impairment losses on loans and receivables (note
9) 7,021 10,767
Impairment of available-for-sale financial assets 78 100
Other credit risk provisions 5 11
----- ------
Total impairment charged to the income statement 7,104 10,878
----- ------
5. Disposal of businesses
In July 2011, the Lloyds Banking Group completed a restructuring
of the legal ownership of its insurance businesses, as a result of
which the Group's subsidiary, HBOS Insurance & Investment Group
Limited, sold its wholly owned life, pensions and general insurance
subsidiaries to Lloyds TSB General Insurance Holdings Limited and
Scottish Widows Financial Services Holdings Limited, which are also
wholly owned by Lloyds TSB Bank plc for a total consideration of
GBP3,013 million.
This resulted in a consolidated loss on disposal of GBP1,739
million.
6. Taxation
A reconciliation of the tax credit that would result from
applying the standard UK corporation tax rate to the loss before
tax to the actual tax credit is given below:
2011 2010
GBPm GBPm
Loss before tax (3,894) (2,051)
------- -------
Tax credit thereon at UK corporation tax rate of
26.5 per cent (2010: 28 per cent) 1,032 574
Factors affecting tax credit:
UK corporation tax rate change (332) (119)
Disallowed and non-taxable items 23 48
Overseas tax rate differences (12) 109
Gains exempted or covered by capital losses (459) 54
Policyholder interests 140 (109)
Tax losses surrendered for no payment (1) (421)
Tax losses where no deferred tax provided (246) (526)
Deferred tax on tax losses not previously recognised 40 -
Adjustments in respect of previous years (3) 112
Effect of profit (loss) in joint ventures and
associates 7 (27)
Other items (16) 41
------- -------
Tax credit (charge) 173 (264)
------- -------
6. Taxation (continued)
On 23 March 2011, the Government announced that the corporation
tax rate applicable from 1 April 2011 would be 26 per cent. This
change passed into legislation on 29 March 2011. The enacted
reduction in the main rate of corporation tax from 28 per cent to
27 per cent with effect from 1 April 2011 had been incorporated in
the Group's deferred tax calculations as at 31 December 2010. In
addition, the Finance Act 2011, which passed into law on 19 July
2011, included legislation to reduce the main rate of corporation
tax from 26 per cent to 25 per cent with effect from 1 April 2012.
The change in the main rate of corporation tax from 27 per cent to
25 per cent has resulted in a reduction in the Group's net deferred
tax asset at 31 December 2011 of GBP325 million, comprising the
GBP332 million charge included in the income statement and a GBP7
million credit included in equity.
The proposed further reductions in the rate of corporation tax
by 1 per cent per annum to 23 per cent by 1 April 2014 are expected
to be enacted separately each year. The effect of these further
changes upon the Group's deferred tax balances and leasing business
cannot be reliably quantified at this stage.
7. Trading and other financial assets at fair value through profit or loss
2011 2010
GBPm GBPm
Trading assets 21,840 23,751
Other financial assets at fair value through
profit or loss:
------ -------
Loans and advances to customers 54 -
Debt securities 4,300 18,560
Equity shares 19,153 60,775
------ -------
23,507 79,335
------ -------
Total trading and other financial assets at fair
value through profit or loss 45,347 103,086
------ -------
Included in the above is GBP23,474 million (31 December 2010:
GBP81,013 million) of assets relating to the insurance
businesses.
8. Loans and advances to customers
2011 2010
GBPm GBPm
Agriculture, forestry and fishing 588 602
Energy and water supply 1,670 1,145
Manufacturing 2,946 3,881
Construction 6,818 6,983
Transport, distribution and hotels 20,135 23,232
Postal and communications 357 1,032
Property companies 42,418 58,092
Financial, business and other services 33,077 32,029
Personal:
Mortgages 243,222 246,690
Other 12,920 16,974
Lease financing 3,840 4,458
Hire purchase 772 1,358
Due from fellow Group undertakings 11,698 10,205
Total loans and advances to customers before allowance
for impairment losses 380,461 406,681
Allowance for impairment losses on loans and
advances (note 9) (23,351) (25,316)
-------- --------
Total loans and advances to customers 357,110 381,365
-------- --------
Loans and advances to customers include advances securitised
under the Group's securitisation and covered bond programmes.
Further details are given in note 10.
9. Allowance for impairment losses on loans and receivables
2011 2010
GBPm GBPm
Balance at 1 January 26,607 23,272
Exchange and other adjustments (374) 411
Disposal of subsidiary undertakings - (149)
Advances written off (8,650) (7,376)
Recoveries of advances written off in previous
years 66 57
Unwinding of discount (171) (375)
Charge to the income statement (note 4) 7,021 10,767
Balance at 31 December 24,499 26,607
------- -------
In respect of:
Loans and advances to customers (note 8) 23,351 25,316
Debt securities 1,148 1,291
------- -------
Balance at 31 December 24,499 26,607
------- -------
10. Securitisation and covered bonds
The Group's principal securitisation and covered bond
programmes, together with the balances of the loans subject to
these arrangements and the carrying value of the notes in issue at
31 December, are listed in the table below.
2011 2010
---------------------- ----------------------
Loans and Loans and
advances Notes in advances Notes in
securitised issue securitised issue
GBPm GBPm GBPm GBPm
Securitisation programmes
------------ -------- ------------ --------
UK residential mortgages 91,246 68,425 102,801 83,367
US residential mortgage-backed
securities 4,659 6,351 7,197 7,221
Irish residential mortgages 5,531 5,661 6,061 6,191
Credit card receivables 6,792 4,810 7,372 3,856
Dutch residential mortgages 4,960 4,817 4,551 4,415
Personal loans - - 3,012 2,011
Commercial loans 680 631 667 633
Motor vehicle loans 1,573 1,341 926 975
------------ ------------
115,441 92,036 132,587 108,669
------------ ------------
Less held by the Group (65,118) (78,686)
-------- --------
Total securitisation programmes
(note 11) 26,918 29,983
-------- --------
Covered bond programmes
Residential mortgage-backed 48,521 38,882 55,032 44,271
Social housing loan-backed 3,370 2,605 3,377 2,400
------------ -------- ------------ --------
51,891 41,487 58,409 46,671
------------ ------------
Less held by the Group (13,515) (17,239)
-------- --------
Total covered bond programmes
(note 11) 27,972 29,432
-------- --------
Total securitisation and covered bond
programmes 54,890 59,415
-------- --------
Securitisation programmes
Loans and advances to customers and debt securities classified
as loans and receivables include loans securitised under the
Group's securitisation programmes, the majority of which have been
sold by subsidiary companies to bankruptcy remote special purpose
entities (SPEs). As the SPEs are funded by the issue of debt on
terms whereby the majority of the risks and rewards of the
portfolio are retained by the subsidiary, the SPEs are consolidated
fully and all of these loans are retained on the Group's balance
sheet, with the related notes in issue included within debt
securities in issue. In addition to the SPEs detailed above, the
Group sponsors a conduit programme, Grampian.
Covered bond programmes
Certain loans and advances to customers have been assigned to
bankruptcy remote limited liability partnerships to provide
security to issues of covered bonds by the Group. The Group retains
all of the risks and rewards associated with these loans and the
partnerships are consolidated fully with the loans retained on the
Group's balance sheet, and the related covered bonds in issue
included within debt securities in issue.
Cash deposits of GBP13,381 million (2010: GBP25,139 million)
held by the Group are restricted in use to repayment of the debt
securities issued by the SPEs and other legal obligations.
11. Debt securities in issue
2011 2010
GBPm GBPm
Medium-term notes issued 12,489 24,426
Covered bonds (note 10) 27,972 29,432
Certificates of deposit 350 3,062
Securitisation notes (note 10) 26,918 29,983
Commercial paper 6,169 11,320
------ -------
73,898 98,223
Amounts due to fellow Group undertakings 1,559 2,537
Total debt securities in issue 75,457 100,760
------ -------
12. Subordinated liabilities
The movement in subordinated liabilities during the year was as
follows:
GBPm
At 1 January 2011 16,674
Repurchases and redemptions during the year (2,696)
Foreign exchange and other movements (365)
-------
At 31 December 2011 13,613
-------
13. Share capital
Ordinary share capital in issue is as follows:
Number
of shares
Ordinary shares of 25 pence each (millions) GBPm
At 1 January and 31 December 2011 15,053 3,763
----------- -----
14. Reserves
Other reserves
-----------------------------------------
Share Available- Cash flow Merger Retained
premium for-sale hedging and other Total profits
GBPm GBPm GBPm GBPm GBPm GBPm
---------- --------- ----------
At 1 January
2011 18,655 (894) (417) 10,168 8,857 (5,415)
Loss for the
year - - - - - (3,763)
Value of employee
services - - - - - 8
Change in fair
value of available-for-sale
assets (net of
tax) - (31) - - (31) -
Change in fair
value of hedging
derivatives
(net of tax) - - 996 - 996 -
Transfers to
income statement
(net of tax) - 427 280 - 707 -
Exchange and
other adjustments - - - (6) (6) -
---------- --------- ---------- ------
At 31 December
2011 18,655 (498) 859 10,162 10,523 (9,170)
-------- ---------- --------- ---------- ------ --------
15. Payment protection insurance
There has been extensive scrutiny of the payment protection
insurance (PPI) market in recent years.
In October 2010, the UK Competition Commission confirmed its
decision to prohibit the active sale of PPI by a distributor to a
customer within seven days of a sale of credit. This followed the
completion of its formal investigation into the supply of PPI
services (other than store card PPI) to non-business customers in
the UK in January 2009 and a referral of the proposed prohibition
to the Competition Appeal Tribunal. The Competition Commission
consulted on the wording of a draft Order to implement its findings
from October 2010, and published the final Order on 24 March 2011
which became effective on 6 April 2011. Following an earlier
decision to stop selling single premium PPI products, the Group
ceased to offer PPI products to its customers in July 2010.
On 29 September 2009 the FSA announced that several firms had
agreed to carry out reviews of past sales of single premium loan
protection insurance. Lloyds Banking Group agreed in principle that
it would undertake a review in relation to sales of single premium
loan protection insurance made through its branch network since 1
July 2007. That review will now form part of the ongoing PPI work
referred to below.
On 1 July 2008, the Financial Ombudsman Service (FOS) referred
concerns regarding the handling of PPI complaints to the Financial
Services Authority (FSA) as an issue of wider implication. On 29
September 2009 and 9 March 2010, the FSA issued consultation papers
on PPI complaints handling. The FSA published its Policy Statement
on 10 August 2010, setting out evidential provisions and guidance
on the fair assessment of a complaint and the calculation of
redress, as well as a requirement for firms to reassess
historically rejected complaints which had to be implemented by 1
December 2010.
On 8 October 2010, the British Bankers' Association (BBA), the
principal trade association for the UK banking and financial
services sector, filed an application for permission to seek
judicial review against the FSA and the FOS. The BBA sought an
order quashing the FSA Policy Statement and an order quashing the
decision of the FOS to determine PPI sales in accordance with the
guidance published on its website in November 2008.
The Judicial Review hearing was held in late January 2011 and on
20 April 2011 judgment was handed down by the High Court dismissing
the BBA's application. On 9 May 2011, the BBA confirmed that the
banks and the BBA did not intend to appeal the judgment.
After publication of the judgment, the Group entered into
discussions with the FSA with a view to seeking clarity around the
detailed implementation of the Policy Statement. As a result, and
given the initial analysis that the Group has conducted of
compliance with applicable sales standards, which is continuing,
the Group concluded that there are certain circumstances where
customer contact and/or redress will be appropriate. Accordingly
the Group made a provision in its income statement for the year
ended 31 December 2011 of GBP1,155 million in respect of the
anticipated costs of such contact and/or redress, including
administration expenses. During 2011, the Group made redress
payments of GBP375 million to customers. The Group anticipated that
all claims will be settled by 2015. However, there are still a
number of uncertainties as to the eventual costs from any such
contact and/or redress given the inherent difficulties of assessing
the impact of detailed implementation of the Policy Statement for
all PPI complaints, uncertainties around the ultimate emergence
period for complaints, the availability of supporting evidence and
the activities of claims management companies, all of which will
significantly affect complaints volumes, uphold rates and redress
costs.
16. Contingent liabilities and commitments
Interchange fees
The European Commission has adopted a formal decision finding
that an infringement of European Commission competition laws has
arisen from arrangements whereby MasterCard set a uniform
Multilateral Interchange Fee (MIF) in respect of cross-border
transactions in relation to the use of a MasterCard or Maestro
branded payment card. The European Commission has required that the
MIF be reduced to zero for relevant cross-border transactions
within the European Economic Area. This decision has been appealed
to the General Court of the European Union (the General Court).
Lloyds TSB Bank plc and Bank of Scotland plc (along with certain
other MasterCard issuers) have successfully applied to intervene in
the appeal in support of MasterCard's position that the
arrangements for the charging of the MIF are compatible with
European Union competition laws. The UK Government has also
intervened in the General Court appeal supporting the European
Commission position. An oral hearing took place on 8 July 2011 but
judgment is not expected for six to twelve months. MasterCard has
reached an understanding with the European Commission on a new
methodology for calculating intra-European Economic Area MIF on an
interim basis pending the outcome of the appeal.
Meanwhile, the European Commission is pursuing an investigation
with a view to deciding whether arrangements adopted by Visa for
the levying of the MIF in respect of cross-border payment
transactions also infringe European Union competition laws. In this
regard Visa reached an agreement with the European Commission to
reduce the level of interchange for cross-border debit card
transactions to the interim levels agreed by MasterCard. The UK's
Office of Fair Trading has also commenced similar investigations
relating to the MIF in respect of domestic transactions in relation
to both the MasterCard and Visa payment schemes. The ultimate
impact of the investigations on the Group can only be known at the
conclusion of these investigations and any relevant appeal
proceedings.
Interbank offered rate setting investigations
Several government agencies in the UK, US and overseas,
including the US Commodity Futures Trading Commission, the US SEC,
the US Department of Justice and the FSA as well as the European
Commission, are conducting investigations into submissions made by
panel members to the bodies that set various interbank offered
rates. The Group, and/or its subsidiaries, were (at the relevant
time) and remain members of various panels that submit data to
these bodies. The Group has received requests from some government
agencies for information and is co-operating with their
investigations. In addition, recently the Group has been named in
private lawsuits, including purported class action suits in the US
with regard to the setting of London interbank offered rates
(LIBOR). It is currently not possible to predict the scope and
ultimate outcome of the various regulatory investigations or
private lawsuits, including the timing and scale of the potential
impact of any investigations and private lawsuits on the Group.
Financial Services Compensation Scheme (FSCS)
The FSCS is the UK's independent statutory compensation fund for
customers of authorised financial services firms and pays
compensation if a firm is unable to pay claims against it. The FSCS
is funded by levies on the industry (and recoveries and borrowings
where appropriate). The levies raised comprise both management
expenses levies and, where necessary, compensation levies on
authorised firms.
Following the default of a number of deposit takers in 2008, the
FSCS borrowed funds from HM Treasury to meet the compensation costs
for customers of those firms. The borrowings with HM Treasury,
which total circa GBP20 billion, are on an interest-only basis
until 31 March 2012 and the FSCS and HM Treasury are currently
discussing the terms for refinancing these borrowings to take
effect from 1 April 2012. Each deposit-taking institution
contributes towards the management expenses levies in proportion to
their share of total protected deposits on 31 December of the year
preceding the scheme year, which runs from 1 April to 31 March. In
determining an appropriate accrual in respect of the management
expenses levy, certain assumptions have been
16. Contingent liabilities and commitments (continued)
made including the proportion of total protected deposits held
by the Group, the level and timing of repayments to be made by the
FSCS to HM Treasury and the interest rate to be charged by HM
Treasury. For the year ended 31 December 2011, the Group has
charged GBP86 million (2010: GBP28 million) to the income statement
in respect of the costs of the FSCS.
Whilst it is expected that the substantial majority of the
principal will be repaid from funds the FSCS receives from asset
sales, surplus cash flow or other recoveries in relation to the
assets of the firms that defaulted, to the extent that there
remains a shortfall, the FSCS will raise compensation levies on all
deposit-taking participants. The amount of any future compensation
levies also depends on a number of factors including the level of
protected deposits and the population of deposit-taking
participants and will be determined at a later date. As such,
although the Group's share of such compensation levies could be
material, the Group has not recognised a provision in respect of
them in these financial statements.
Shareholder complaints
Lloyds Banking Group plc and two former members of its Board of
Directors have been named as defendants in a purported securities
class action pending in the United States District Court for the
Southern District of New York. The complaint, dated 23 November
2011, asserts claims under the Securities Exchange Act of 1934 in
connection with alleged material omissions from statements made in
2008 in connection with the acquisition of HBOS. No quantum is
specified.
In addition, a UK-based shareholder action group has threatened
multi-claimant claims on a similar basis against Lloyds Banking
Group plc and two former directors in the UK. No claim has yet been
issued.
Lloyds Banking Group plc considers that the claims are without
merit and will defend them vigorously. The claims have not been
quantified and it is not possible to estimate the ultimate
financial impact on the Group at this early stage.
FSA investigation into Bank of Scotland
As previously disclosed, in 2009 the FSA commenced a supervisory
review into HBOS. The supervisory review has now been superseded as
the FSA has commenced enforcement proceedings against Bank of
Scotland plc in relation to its Corporate division pre 2009. The
proceedings are ongoing and the Group is co-operating fully. It is
too early to predict the outcome or estimate reliably any potential
financial effects of the enforcement proceedings but they are not
currently expected to be material.
Regulatory matters
In the course of its business, the Group is engaged in
discussions with the FSA in relation to a range of conduct of
business matters, including complaints handling, packaged bank
accounts, savings accounts, product terms and conditions,
interest-only mortgages, sales processes and remuneration schemes.
The Group is keen to ensure that any regulatory concerns are
understood and addressed. The ultimate impact on the Group of these
discussions can only be known at the conclusion of such
discussions.
Other legal actions and regulatory matters
In addition, during the ordinary course of business the Group is
subject to other threatened and actual legal proceedings (which may
include class action lawsuits brought on behalf of customers,
shareholders or other third parties), regulatory investigations,
regulatory challenges and enforcement actions, both in the UK and
overseas. All such material matters are periodically reassessed,
with the assistance of external professional advisers where
appropriate, to determine the likelihood of the Group incurring a
liability.
16. Contingent liabilities and commitments (continued)
In those instances where it is concluded that it is more likely
than not that a payment will be made, a provision is established to
management's best estimate of the amount required to settle the
obligation at the relevant balance sheet date. In some cases it
will not be possible to form a view, either because the facts are
unclear or because further time is needed properly to assess the
merits of the case and no provisions are held against such matters.
However the Group does not currently expect the final outcome of
any such case to have a material adverse effect on its financial
position.
Contingent liabilities and commitments arising from the banking
business
2011 2010
GBPm GBPm
Contingent liabilities
Acceptances and endorsements 3 1
Other:
------ ------
Other items serving as direct credit substitutes 110 103
Performance bonds and other transaction-related
contingencies 674 568
------ ------
784 671
------ ------
Total contingent liabilities 787 672
------ ------
Commitments
Documentary credits and other short-term trade-related
transactions 8 2
Undrawn formal standby facilities, credit lines
and other commitments to lend:
Less than 1 year original maturity:
------ ------
Mortgage offers made 6,311 6,875
Other commitments 22,851 32,144
------ ------
29,162 39,019
1 year or over original maturity 16,442 17,323
------ ------
Total commitments 45,612 56,344
------ ------
17. Capital ratios
As at 31 As at 31
December December
Capital resources 2011 2010
GBPm GBPm
Core tier 1
Shareholders' equity per balance sheet 23,771 25,860
Non-controlling interests per balance sheet 399 550
Regulatory adjustments to non-controlling interests (333) (270)
Regulatory adjustments:
Defined benefit pension adjustment (296) (583)
Unrealised reserve on available-for-sale debt
securities 840 1,237
Unrealised reserve on available-for-sale equity
investments (342) (343)
Cash flow hedging reserve (859) 417
Other items (16) -
23,164 26,868
Less: deductions from core tier 1
Goodwill (883) (875)
Intangible assets (76) (74)
50 per cent excess of expected losses over impairment (684) -
50 per cent of securitisation positions (84) (132)
Core tier 1 capital 21,437 25,787
Preferred securities(1) 3,070 3,057
Less: deductions from tier 1
50 per cent of material holdings (80) (25)
Total tier 1 capital 24,427 28,819
--------- ---------
Tier 2
Undated subordinated debt 664 731
Dated subordinated debt 6,602 9,550
Unrealised gains on available-for-sale equity
investments 342 343
Eligible provisions 1,203 1,776
Less: deductions from tier 2
50 per cent excess of expected losses over impairment (684) -
50 per cent of securitisation positions (84) (132)
50 per cent of material holdings (80) (25)
--------- ---------
Total tier 2 capital 7,963 12,243
--------- ---------
Supervisory deductions
Unconsolidated investments - life (359) (4,344)
- general insurance and other (101) (1,091)
--------- ---------
Total supervisory deductions (460) (5,435)
--------- ---------
Total capital resources 31,930 35,627
--------- ---------
Risk-weighted assets 199,324 252,613
Core tier 1 capital ratio 10.8% 10.2%
Tier 1 capital ratio 12.3% 11.4%
Total capital ratio 16.0% 14.1%
(1) Covered by grandfathering provisions issued by FSA.
18. Related party transactions
Balances and transactions with Lloyds Banking Group plc and
fellow 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 Group undertakings. These are included on the balance
sheet as follows:
2011 2010
GBPm GBPm
Assets
Derivative financial instruments 4,196 1,437
Loans and advances to banks 85,800 55,053
Loans and advances to customers 11,698 10,205
Trading and other financial assets as fair value
through profit or loss 7,515 3,475
Other 2,681 766
Liabilities
Deposits from banks 144,502 131,133
Customer deposits 16,460 16,489
Derivative financial instruments 6,703 1,853
Trading liabilities 6,690 3,294
Debt securities in issue 1,559 2,537
Subordinated liabilities 272 312
During the year ended 31 December 2011 the Group earned GBP920
million (2010: GBP658 million) of interest income and incurred
GBP1,974 million (2010: GBP1,249 million) of interest expense on
balances and transactions with Lloyds Banking Group plc and fellow
Group undertakings.
UK Government
In January 2009, the UK Government through HM Treasury became a
related party of Lloyds Banking Group plc, the Company's ultimate
parent company, following its subscription for ordinary shares
issued under a placing and open offer. As at 31 December 2011, HM
Treasury held a 40.2 per cent (31 December 2010: 40.6 per cent)
interest in Lloyds Banking Group plc's ordinary share capital and
consequently HM Treasury remained a related party of Lloyds Banking
Group plc, and therefore of the Group, during the year ended 31
December 2011.
From 1 January 2011, in accordance with IAS 24 (Revised), UK
Government-controlled entities became related parties of the Group.
The Group regards the Bank of England and banks controlled by the
UK Government, comprising The Royal Bank of Scotland Group plc,
Northern Rock (Asset Management) plc and Bradford & Bingley
plc, as related parties.
Since 31 December 2010, the Group has had the following
significant transactions with the UK Government or UK
Government-related entities:
Government and central bank facilities
During the year ended 31 December 2011, the Lloyds Banking Group
participated in a number of schemes operated by the UK Government
and central banks and made available to eligible banks and building
societies.
18. Related party transactions (continued)
Special liquidity scheme and credit guarantee scheme
The Bank of England's UK Special Liquidity Scheme was launched
in April 2008 to allow financial institutions to swap temporarily
illiquid assets for treasury bills, with fees charged based on the
spread between 3-month LIBOR
and the 3-month gilt repo rate. The scheme will operate for up
to three years after the end of the drawdown period (30 January
2009) at the Bank of England's discretion. The Lloyds Banking Group
did not utilise the Special Liquidity Scheme at 31 December
2011.
HM Treasury launched the Credit Guarantee Scheme in October 2008
as part of a range of measures announced by the UK Government
intended to ease the turbulence in the UK banking system. It
charged a commercial fee for the guarantee of new short and medium
term debt issuance. The fee payable to HM treasury on guaranteed
issues was based on a per annum rate of 50 basis points plus the
median five-year credit default swap spread. The drawdown window
for the Credit Guarantee Scheme closed for new issuance at the end
of February 2010. At 31 December 2011, the Lloyds Banking Group had
GBP23.5 billion of debt in issue under the Credit Guarantee Scheme
(31 December 2010: GBP45.4 billion). During the year, fees of GBP28
million paid to HM Treasury in respect of guaranteed funding were
included in the Lloyds Banking Group's income statement.
Lending commitments
The formal lending commitments entered into in connection with
the Lloyds Banking Group's proposed participation in the Government
Asset Protection Scheme have now expired and in February 2011,
Lloyds Banking Group plc (together with Barclays, Royal Bank of
Scotland, HSBC and Santander) announced, as part of the 'Project
Merlin' agreement with HM Treasury, its capacity and willingness to
increase business lending (including to small and medium-sized
enterprises) during 2011.
Business Growth Fund
In May 2011 the Group agreed, together with The Royal Bank of
Scotland plc (and three other non-related parties), to subscribe
for shares in the Business Growth Fund plc which is the company
created to fulfil the role of the Business Growth Fund as set out
in the British Bankers' Association's Business Taskforce Report of
October 2010. During 2011, the Lloyds Banking Group has incurred
sunk costs of GBP4 million which have been written off. As at 31
December 2011, the Lloyds Banking Group's investment in the
Business Growth Fund was GBP20 million.
Other government-related entities
Other than the transactions referred to above, there were no
other significant transactions with the UK Government and UK
Government-controlled entities (including UK Government-controlled
banks) during the period that were not made in the ordinary course
of business or that were unusual in their nature or conditions.
Other related party transactions
During 2011, the Group sold at fair value certain non-government
bonds, equities and alternative assets to Lloyds TSB Group Pension
Scheme No.1 for GBP79 million and to Lloyds TSB Group Pension
Scheme No.2 for GBP43 million.
Except as noted above, other related party transactions for the
year ended 31 December 2011 are similar in nature to those for the
year ended 31 December 2010.
19. Future accounting developments
The following pronouncements may have a significant effect on
the Group's financial statements but are not applicable for the
year ending 31 December 2011 and have not been applied in preparing
these financial statements. Save as disclosed, the full impact of
these accounting changes is being assessed by the Group.
Pronouncement Nature of change IASB effective
date
------------------------ -------------------------------------------- ------------------------
Amendments to Requires an entity to disclose information Annual and interim
IFRS 7 Financial to enable users of its financial periods beginning
Instruments: statements to evaluate the effect on or after 1 January
Disclosures - or potential effect of netting arrangements 2013.
'Disclosures-Offsetting on the entity's balance sheet.
Financial Assets
and Financial
Liabilities'
------------------------ -------------------------------------------- ------------------------
IFRS 10 Consolidated Supersedes IAS 27 Consolidated and Annual periods beginning
Financial Statements Separate Financial Statements and on or after 1 January
SIC-12 Consolidation - Special Purpose 2013.
Entities and establishes principles
for the preparation of consolidated
financial statements when an entity
controls one or more entities.
------------------------ -------------------------------------------- ------------------------
IFRS 12 Disclosure Requires an entity to disclose information Annual periods beginning
of Interests that enables users of financial on or after 1 January
in Other Entities statements to evaluate the nature 2013.
of, and risks associated with, its
interests in other entities and
the effects of those interests on
its financial position, financial
performance and cash flows.
------------------------ -------------------------------------------- ------------------------
IFRS 13 Fair The standard defines fair value, Annual periods beginning
Value Measurement sets out a framework for measuring on or after 1 January
fair value and requires disclosures 2013.
about fair value measurements. It
applies to IFRSs that require or
permit fair value measurements or
disclosures about fair value measurements.
------------------------ -------------------------------------------- ------------------------
IAS 19 Employee Prescribes the accounting and disclosure Annual periods beginning
Benefits by employers for employee benefits. on or after 1 January
Actuarial gains and losses (remeasurements) 2013.
in respect of defined benefit pension
schemes can no longer be deferred
using the corridor approach and
must be recognised immediately in
other comprehensive income. At 31
December 2011, unrecognised actuarial
gains were GBP532 million. The income
statement charge for 2011 would
have been approximately GBP50 million
lower under the revised standard.
------------------------ -------------------------------------------- ------------------------
Amendments to Inserts application guidance to Annual periods beginning
IAS 32 Financial address inconsistencies identified on or after 1 January
Instruments: in applying the offsetting criteria 2014.
Presentation used in the standard. Some gross
- 'Offsetting settlement systems may qualify for
Financial Assets offsetting where they exhibit certain
and Financial characteristics akin to net settlement.
Liabilities'
------------------------ -------------------------------------------- ------------------------
IFRS 9 Financial Replaces those parts of IAS 39 Financial Annual periods beginning
Instruments(1) Instruments: Recognition and Measurement on or after 1 January
relating to the classification, 2015.
measurement and derecognition of
financial assets and liabilities.
Requires financial assets to be
classified into two measurement
categories, fair value and amortised
cost, on the basis of the objectives
of the entity's business model for
managing its financial assets and
the contractual cash flow characteristics
of the instruments. The available-for-sale
financial asset and held-to-maturity
investment categories in IAS 39
will be eliminated. The requirements
for financial liabilities and derecognition
are broadly unchanged from IAS 39.
------------------------ -------------------------------------------- ------------------------
(1) IFRS 9 is the initial stage of the project to replace IAS 39. Future
stages are expected to result in amendments to IFRS 9 to deal with
changes to the impairment of financial assets measured at amortised
cost and hedge accounting. Until all stages of the replacement
project are complete, it is not possible to determine the overall
impact on the financial statements of the replacement of IAS 39.
As at 23 February 2012, these pronouncements were awaiting EU
endorsement.
20. 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 will produce consolidated accounts for the year
to 31 December 2010; these will be published in March 2012, and
copies will be obtainable from Investor Relations, Lloyds Banking
Group, 25 Gresham Street, London EC2V 7HN and available for
download from www.lloydsbankinggroup.com.
21. Other information
The financial information included in these financial statements
does not constitute statutory accounts within the meaning of
section 434 of the Companies Act 2006. Statutory accounts for the
year ended 31 December 2011 were approved by the directors on 23
February 2012 and will be delivered to the Registrar of Companies
following publication in March 2012. 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 Companies
Act 2006.
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Kate O'Neill
Managing Director, Investor Relations
020 7356 3520
kate.o'neill@ltsb-finance.co.uk
Charles King
Director of Investor Relations
020 7356 3537
charles.king@ltsb-finance.co.uk
CORPORATE AFFAIRS
Matthew Young
Group Corporate Affairs Director
020 7356 2231
matt.young@lloydsbanking.com
Ed Petter Group Media Relations Director
020 8936 5655
ed.petter@lloydsbanking.com
Registered office: HBOS plc, The Mound, Edinburgh EH1 1YZ
Registered in Scotland no. SC218813
This information is provided by RNS
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FR USOORUVAUUAR
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