TIDM68FF TIDMLLOY
RNS Number : 6394U
HBOS PLC
30 July 2020
HBOS plc
2020 Half-Year Results
Member of the Lloyds Banking Group
FORWARD LOOKING STATEMENTS
This document contains certain forward looking statements within
the meaning of Section 21E of the US Securities Exchange Act of
1934, as amended, and section 27A of the US Securities Act of 1933,
as amended, with respect to the business, strategy, plans and/or
results of HBOS plc together with its subsidiaries (the Group) and
its current goals and expectations relating to its future financial
condition and performance. Statements that are not historical
facts, including statements about the Group's or its directors'
and/or management's beliefs and expectations, are forward looking
statements. Words such as 'believes', 'anticipates', 'estimates',
'expects', 'intends', 'aims', 'potential', 'will', 'would',
'could', 'considered', 'likely', 'estimate' and variations of these
words and similar future or conditional expressions are intended to
identify forward looking statements but are not the exclusive means
of identifying such statements. Examples of such forward looking
statements include, but are not limited to: projections or
expectations of the Group's future financial position including
profit attributable to shareholders, provisions, economic profit,
dividends, capital structure, portfolios, net interest margin,
capital ratios, liquidity, risk-weighted assets (RWAs),
expenditures or any other financial items or ratios; litigation,
regulatory and governmental investigations; the Group's future
financial performance; the level and extent of future impairments
and write-downs; statements of plans, objectives or goals of the
Group or its management including in respect of statements about
the future business and economic environments in the UK and
elsewhere including, but not limited to, future trends in interest
rates, foreign exchange rates, credit and equity market levels and
demographic developments; statements about competition, regulation,
disposals and consolidation or technological developments in the
financial services industry; and statements of assumptions
underlying such statements. By their nature, forward looking
statements involve risk and uncertainty because they relate to
events and depend upon circumstances that will or may occur in the
future. Factors that could cause actual business, strategy, plans
and/or results (including but not limited to the payment of
dividends) to differ materially from forward looking statements
made by the Group or on its behalf include, but are not limited to:
general economic and business conditions in the UK and
internationally; market related trends and developments;
fluctuations in interest rates, inflation, exchange rates, stock
markets and currencies; any impact of the transition from IBORs to
alternative reference rates; the ability to access sufficient
sources of capital, liquidity and funding when required; changes to
the credit ratings of the Group or any of the Group's immediate or
ultimate parent entities; the ability to derive cost savings and
other benefits including, but without limitation as a result of any
acquisitions, disposals and other strategic transactions; the
ability to achieve strategic objectives; changing customer
behaviour including consumer spending, saving and borrowing habits;
changes to borrower or counterparty credit quality; concentration
of financial exposure; management and monitoring of conduct risk;
instability in the global financial markets, including Eurozone
instability, instability as a result of uncertainty surrounding the
exit by the UK from the European Union (EU) and as a result of such
exit and the potential for other countries to exit the EU or the
Eurozone and the impact of any sovereign credit rating downgrade or
other sovereign financial issues; political instability including
as a result of any UK general election; technological changes and
risks to the security of IT and operational infrastructure,
systems, data and information resulting from increased threat of
cyber and other attacks; natural, pandemic (including but not
limited to the coronavirus disease (COVID-19) outbreak) and other
disasters, adverse weather and similar contingencies outside the
control of the Group or any of the Group's immediate or ultimate
parent entities; inadequate or failed internal or external
processes or systems; acts of war, other acts of hostility,
terrorist acts and responses to those acts, geopolitical, pandemic
or other such events; risks relating to climate change; changes in
laws, regulations, practices and accounting standards or taxation,
including as a result of the exit by the UK from the EU, or a
further possible referendum on Scottish independence; changes to
regulatory capital or liquidity requirements and similar
contingencies outside the control of the Group or any of the
Group's immediate or ultimate parent entities; the policies,
decisions and actions of governmental or regulatory authorities or
courts in the UK, the EU, the US or elsewhere including the
implementation and interpretation of key legislation and regulation
together with any resulting impact on the future structure of the
Group; the ability to attract and retain senior management and
other employees and meet its diversity objectives; actions or
omissions by the Group's directors, management or employees
including industrial action; changes to the Group's post-retirement
defined benefit scheme obligations; the extent of any future
impairment charges or write-downs caused by, but not limited to,
depressed asset valuations, market disruptions and illiquid
markets; the value and effectiveness of any credit protection
purchased by the Group; the inability to hedge certain risks
economically; the adequacy of loss reserves; the actions of
competitors, including non-bank financial services, lending
companies and digital innovators and disruptive technologies; and
exposure to regulatory or competition scrutiny, legal, regulatory
or competition proceedings, investigations or complaints. Please
refer to the latest Annual Report on Form 20-F filed by Lloyds
Banking Group plc with the US Securities and Exchange Commission
for a discussion of certain factors and risks together with
examples of forward looking statements. Lloyds Banking Group may
also make or disclose written and/or oral forward looking
statements in reports filed with or furnished to the US Securities
and Exchange Commission, Lloyds Banking Group annual reviews,
half-year announcements, proxy statements, offering circulars,
prospectuses, press releases and other written materials and in
oral statements made by the directors, officers or employees of
Lloyds Banking Group to third parties, including financial
analysts.
Except as required by any applicable law or regulation, the
forward looking statements contained in this document are made as
of today's date, and the Group expressly disclaims any obligation
or undertaking to release publicly any updates or revisions to any
forward looking statements contained in this document to reflect
any change in the Group's expectations with regard thereto or any
change in events, conditions or circumstances on which any such
statement is based. The information, statements and opinions
contained in this document do not constitute a public offer under
any applicable law or an offer to sell any securities or financial
instruments or any advice or recommendation with respect to such
securities or financial instruments.
CONTENTS
Page
Financial review 1
Principal risks and uncertainties 3
Condensed consolidated half-year financial statements 5
Consolidated income statement 5
Consolidated statement of comprehensive income 6
Consolidated balance sheet 7
Consolidated statement of changes in equity 9
Consolidated cash flow statement 12
Notes 13
Statement of directors' responsibilities 42
Independent review report 43
Contacts 45
FINANCIAL REVIEW
Principal activities
HBOS plc (the Company) and its subsidiaries (together, the
Group) provide a wide range of banking and financial services in
the UK and overseas.
The Group's revenue is earned through interest and fees on a
broad range of financial services products including current and
savings accounts, personal loans, credit cards and mortgages within
the retail market; loans and other products to commercial,
corporate and asset finance customers; and private banking.
Review of results
Income statement
The Group's profit before tax for the six months ended 30 June
2020 was GBP67 million, down from GBP1,107 million in the six
months to 30 June 2019 and profit for the period was GBP227
million, down from GBP746 million in the first half of 2019 with
both being impacted by a significantly increased impairment charge
in the period of GBP1,454 million.
In the challenging external environment total income fell by
GBP260 million, to GBP2,907 million in the six months to 30 June
2020 compared to GBP3,167 million in the six months to 30 June
2019, and was impacted by both lower net interest income and lower
other income.
Net interest income of GBP2,666 million in the half-year to 30
June 2020 was down 3 per cent on the half-year to 30 June 2019
reflecting the lower rate environment, actions taken to support
customers including free overdrafts and reduced levels of customer
demand during the coronavirus pandemic.
Other income of GBP241 million in the half-year to 30 June 2020
was GBP185 million lower compared to GBP426 million in the
half-year to 30 June 2019 as a result of lower customer activity
and a subdued demand during the coronavirus lockdown period.
Total operating expenses reduced by GBP462 million to GBP1,386
million in period compared to GBP1,848 million in the half-year to
30 June 2019 with a GBP234 million decrease in regulatory
provisions and a GBP228 million decrease in other operating
expenses. Regulatory provisions comprised GBP98 million for the six
months to 30 June 2020 relating to a number of items across
existing programmes; the GBP280 million charge for PPI in the first
half of 2019 was not repeated. Other operating expenses were GBP228
million lower at GBP1,288 million in the half-year to 30 June 2020
compared to GBP1,516 million in the half-year to 30 June 2020,
driven by continued cost discipline, efficiencies gained through
digitalisation and other process improvements and a reduction in
costs recharged to the Group by fellow Lloyds Banking Group
undertakings.
The impairment charge increased significantly in the first six
months of the year to GBP1,454 million compared to a charge in the
six months to 30 June 2019 of GBP212 million. The additional charge
was primarily driven by updates to the Group's economic outlook and
provisions taken on existing restructuring cases where recovery
strategies have been directly impacted by the coronavirus
outbreak.
The Group recognised a tax credit of GBP160 million in the
period, primarily as a result of an uplift in the value of deferred
tax assets of GBP182 million following the announcement by the UK
Government that it would maintain the corporation tax rate at 19
per cent, which was substantively enacted on 17 March 2020.
FINANCIAL REVIEW (continued)
Balance sheet
Total assets at 30 June 2020 were GBP2,369 million lower at
GBP367,307 million compared to GBP369,676 million at 31 December
2019 with increases in balances due from fellow Lloyds Banking
Group undertakings being more than offset by reductions in the
mortgage and credit card books as customer demand reduced during
the coronavirus lockdown as well as lower derivative assets.
Total liabilities were GBP2,910 million lower at GBP353,621
million at 30 June 2020 compared to GBP356,531 million at 31
December 2019 with increases in customer deposits which have been
driven by growth in current accounts as a result of reduced
consumer spending during the coronavirus lockdown period, being
more than offset by reductions in amounts owed to fellow Lloyds
Banking Group undertakings and lower derivative financial
liabilities.
Total equity has increased by GBP541 million from GBP13,145
million at 31 December 2019 to GBP13,686 million at 30 June 2020,
with total comprehensive income for the period of GBP599 million
and other movements more than offsetting distributions to
non-controlling interests of GBP80 million.
Capital
Following a change in approach the consolidated capital position
of the Group will no longer be presented. The capital position of
the Group ' s main banking subsidiary, Bank of Scotland plc, as at
30 June 2020 is presented in the Bank of Scotland plc 2020
Half-Year Results.
PRINCIPAL RISKS AND UNCERTAINTIES
The significant risks faced by the Group are detailed below.
There has been no change to the description of these risks since
disclosed in the Group ' s 2019 Annual Report and Accounts.
The external risks faced by the Group may also impact the
success of delivering against the Group ' s long-term strategic
objectives. They include, but are not limited to the coronavirus
pandemic, global macro-economic conditions, regulatory developments
and the exit of the UK from the European Union.
Through the coronavirus pandemic, the Group has offered help and
support to customers with a range of measures, for example with
payment holidays and government lending schemes, and continues to
actively monitor the outcomes to ensure fair customer treatment.
Support has been prioritised for those customers in the most
vulnerable situations and those who need help urgently. The Group
has also been required to take a series of unprecedented actions to
protect colleagues, and has been proactive in limiting the impact
with a number of mitigating actions to support colleagues ' safety
and wellbeing. Transition planning, including continued engagement
with colleagues, remains a key focus in ensuring that the Group
continues to protect colleagues and services to customers as the
situation continues to evolve, and any lessons learned from the
pandemic can be embedded into our future working practices.
The Group ' s key cyber controls have continued to operate
effectively during the coronavirus pandemic. During this period,
the Group has also enhanced monitoring of key suppliers to protect
the services received by Group and its ability to protect and
maintain service to customers. The Group continues to work with the
regulators constructively with regular engagement to ensure they
are aware of the impacts on, and mitigating actions taken by the
Group.
The Group ' s principal risks and uncertainties are reviewed and
reported regularly to the Board in alignment with Lloyds Banking
Group ' s Enterprise Risk Management Framework. Climate risk is
being proposed to be introduced as a principal risk category,
reflecting the focus in this key area, and work already undertaken
by the Group.
Change / Execution - The risk that, in delivering the change
agenda, the Group fails to ensure compliance with laws and
regulation, maintain effective customer service and availability,
and/or operate within the Group ' s approved risk appetite.
Data - The risk that the Group fails to effectively govern,
manage, and control data (including data processed by third party
suppliers) leading to unethical decisions, poor customer outcomes,
loss of value to the Group and mistrust.
Operational Resilience - The risk that the Group fails to design
resilience into business operations, underlying infrastructure and
controls (people, process, technology) so that it is able to
withstand external or internal events which could impact the
continuation of operations, and fails to respond in a way which
meets customer and stakeholder expectations and needs when the
continuity of operations is compromised.
Strategic - The risks which result from strategic plans which do
not adequately reflect trends in external factors, ineffective
business strategy execution, or failure to respond in a timely
manner to external environments or changes in stakeholder
behaviours and expectations.
Credit - The risk that parties with whom the Group has
contracted, fail to meet their financial obligations (both on and
off balance sheet). For example observed, anticipated or unexpected
changes in the economic environment could impact profitability due
to an increase in delinquency, defaults, write-downs and/or
expected credit losses.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Regulatory and Legal - The risk of financial penalties,
regulatory censure, criminal or civil enforcement action or
customer detriment as a result of failure to identify, assess,
correctly interpret, comply with, or manage regulatory and/or legal
requirements.
Conduct - The risk of customer detriment across the customer
lifecycle including: failures in product management, distribution
and servicing activities; from other risks materialising, or other
activities which could undermine the integrity of the market or
distort competition, leading to unfair customer outcomes,
regulatory censure, reputational damage or financial loss.
Operational - The risk of loss from inadequate or failed
internal processes, people and systems, or from external
events.
People - The risk that the Group fails to provide an appropriate
colleague and customer-centric culture, supported by robust reward
and wellbeing policies and processes; effective leadership to
manage colleague resources; effective talent and succession
management; and robust control to ensure all colleague-related
requirements are met.
Capital - The risk that the Group has a sub-optimal quantity or
quality of capital or that capital is inefficiently deployed across
Lloyds Banking Group.
Funding and Liquidity - Funding risk is the risk that the Group
does not have sufficiently stable and diverse sources of funding or
the funding structure is inefficient. Liquidity risk is the risk
that the Group does not have sufficient financial resources to meet
commitments when they fall due, or can only secure them at
excessive cost.
Governance - The risk that the organisational infrastructure
fails to provide robust oversight of decision making and the
control mechanisms to ensure strategies and management instructions
are implemented effectively.
Market - The risk that the Group ' s capital or earnings profile
is affected by adverse market rates, in particular interest rates
and credit spreads in the banking business, and credit spreads in
Lloyds Banking Group ' s defined benefit pension schemes.
Model - The risk of financial loss, regulatory censure,
reputational damage or customer detriment, as a result of
deficiencies in the development, application and ongoing operation
of models and rating systems.
Credit risk
Economic conditions have worsened in the first half of 2020 as
the coronavirus crisis impact is felt. Given the challenging
external environment and expectations of further economic
deterioration, the impairment charge has increased significantly
during the first half of 2020, predominantly driven by updates to
the Group ' s economic outlook as well as the impact on
restructuring cases and single name charges. As a result, expected
credit loss allowances increased. There are a number of headwinds
which have the potential to further impact the portfolios,
including uncertainty around future UK and global economic
conditions with a risk of an increase in unemployment and further
business failures as the various UK Government schemes wind down in
the third quarter, the risk of a second wave of the virus and
further, perhaps deeper, measures worsening the economy and the
financial health of customers. Outside of these, the possibility
still remains of a no-deal end to the transition period of the UK
exit from the European Union. In the context of the uncertainty,
the Group ' s risk appetite and risk management approach continues
to help ensure that the Group takes timely and proactive
actions.
CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
Half-year Half-year
to 30 June to 30 June
2020 2019
Note GBPm GBPm
Interest and similar income 3,939 4,268
Interest and similar expense (1,273) (1,527)
---------- ----------
Net interest income 2,666 2,741
---------- ----------
Fee and commission income 253 302
Fee and commission expense (110) (148)
---------- ----------
Net fee and commission income 2 143 154
Net trading income 56 202
Other operating income 42 70
---------- ----------
Other income 241 426
---------- ----------
Total income 2,907 3,167
---------- ----------
Regulatory provisions 11 (98) (332)
Other operating expenses (1,288) (1,516)
---------- ----------
Total operating expenses 3 (1,386) (1,848)
---------- ----------
Trading surplus 1,521 1,319
Impairment 4 (1,454) (212)
---------- ----------
Profit before tax 67 1,107
Tax credit (expense) 5 160 (361)
---------- ----------
Profit for the period 227 746
---------- ----------
Profit attributable to ordinary shareholders 147 696
Profit attributable to non-controlling interests 80 50
---------- ----------
Profit for the period 227 746
---------- ----------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Half-year Half-year
to 30 June to 30 June
2020 2019
GBPm GBPm
Profit for the period 227 746
Other comprehensive income
Items that will not subsequently be reclassified
to profit or loss:
Post-retirement defined benefit scheme remeasurements:
---------- ----------
Remeasurements before tax 435 (53)
Tax (85) 9
---------- ----------
350 (44)
Items that may subsequently be reclassified
to profit or loss:
Movement in revaluation reserve in respect
of debt securities held at fair value
through other comprehensive income:
---------- ----------
Change in fair value 18 11
Income statement transfers in respect of disposals 2 -
Impairment recognised in the income statement 1 -
Tax (4) (2)
---------- ----------
17 9
Movement in cash flow hedging reserve:
---------- ----------
Effective portion of changes in fair value 15 29
Net income statement transfers 3 19
Tax (4) (13)
---------- ----------
14 35
Currency translation differences (tax: nil) (9) (13)
---------- ----------
Other comprehensive income for the period,
net of tax 372 (13)
---------- ----------
Total comprehensive income for the period 599 733
---------- ----------
Total comprehensive income attributable to
ordinary shareholders 519 683
Total comprehensive income attributable to
non-controlling interests 80 50
---------- ----------
Total comprehensive income for the period 599 733
---------- ----------
CONSOLIDATED BALANCE SHEET
At At
30 June 31 Dec
2020 2019
(unaudited) (audited)
Note GBPm GBPm
Assets
Cash and balances at central banks 2,608 2,492
Items in course of collection from banks 58 40
Financial assets at fair value through profit
or loss 6 468 463
Derivative financial instruments 8,479 10,338
----------- ---------
Loans and advances to banks 459 343
Loans and advances to customers 254,114 258,315
Debt securities 19 -
Due from fellow Lloyds Banking Group undertakings 92,743 91,113
----------- ---------
Financial assets at amortised cost 7 347,335 349,771
Financial assets at fair value through other
comprehensive income 3,144 2,376
Goodwill 325 325
Other intangible assets 149 138
Property, plant and equipment 1,300 1,407
Current tax recoverable 591 118
Deferred tax assets 1,659 1,656
Retirement benefit assets 10 913 156
Other assets 278 396
----------- ---------
Total assets 367,307 369,676
----------- ---------
CONSOLIDATED BALANCE SHEET (continued)
At At
30 June 31 Dec
2020 2019
(unaudited) (audited)
Note GBPm GBPm
Equity and liabilities
Liabilities
Deposits from banks 16,118 16,472
Customer deposits 158,665 151,845
Due to fellow Lloyds Banking Group undertakings 152,104 157,998
Items in course of transmission to banks 108 143
Financial liabilities at fair value through
profit or loss 47 47
Derivative financial instruments 9,126 11,034
Notes in circulation 1,256 1,079
Debt securities in issue 9 9,839 11,204
Other liabilities 1,843 1,987
Retirement benefit obligations 10 143 134
Current tax liabilities 3 15
Other provisions 11 734 977
Subordinated liabilities 3,635 3,596
----------- ---------
Total liabilities 353,621 356,531
Equity
----------- ---------
Share capital 3,763 3,763
Other reserves 10,184 10,162
Retained profits (2,984) (3,503)
----------- ---------
Shareholders' equity 10,963 10,422
Non-controlling interests 2,723 2,723
----------- ---------
Total equity 13,686 13,145
----------- ---------
Total equity and liabilities 367,307 369,676
----------- ---------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
Attributable to equity shareholders
------------------------------------------------
Non-
Share Other Retained controlling
capital reserves profits Total interests Total
GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 January
2020 3,763 10,162 (3,503) 10,422 2,723 13,145
Comprehensive income
Profit for the period - - 147 147 80 227
Other comprehensive
income
-------------------- -------- -------- ------ ----------- ------
Post retirement defined
benefit scheme
remeasurements, net of
tax - - 350 350 - 350
Movements in
revaluation
reserve in respect of
debt securities held
at
fair value through
other
comprehensive income,
net of tax - 17 - 17 - 17
Movements in cash flow
hedging reserve, net
of
tax - 14 - 14 - 14
Currency translation
differences (tax: nil) - (9) - (9) - (9)
-------------------- -------- -------- ------ ------
Total other
comprehensive income - 22 350 372 - 372
-------------------- -------- -------- ------ ----------- ------
Total comprehensive
income (1) - 22 497 519 80 599
-------------------- -------- -------- ------ ----------- ------
Transactions with
owners
-------------------- -------- -------- ------ ----------- ------
Distributions to
non-controlling
interests - - - - (80) (80)
Capital contribution
received - - 22 22 - 22
-------------------- -------- -------- ------ ----------- ------
Total transactions with
owners - - 22 22 (80) (58)
-------------------- -------- -------- ------ ----------- ------
Balance at 30 June 2020 3,763 10,184 (2,984) 10,963 2,723 13,686
-------------------- -------- -------- ------ ----------- ------
Total comprehensive income attributable to owners of the parent
(1) for the half-year to 30 June 2020 was GBP519 million (half-year
to 30 June 2019: GBP683 million; half-year to 31 December 2019:
a deficit of GBP352 million).
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
(continued)
Attributable to equity shareholders
-----------------------------------------
Non-
Share Other Retained controlling
capital reserves profits Total interests Total
GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 January 2019 3,763 10,115 (3,340) 10,538 1,537 12,075
Comprehensive income
Profit for the period - - 696 696 50 746
Other comprehensive income
--------- ---------- --------- ------- ----------- ------
Post retirement defined
benefit scheme
remeasurements, net of
tax - - (44) (44) - (44)
Movements in revaluation
reserve in respect of
debt securities held at
fair value through other
comprehensive income,
net of tax - 9 - 9 - 9
Movements in cash flow
hedging reserve, net of
tax - 35 - 35 - 35
Currency translation
differences (tax: nil) - (13) - (13) - (13)
--------- ---------- --------- ------- ------
Total other
comprehensive income - 31 (44) (13) - (13)
--------- ---------- --------- ------- ----------- ------
Total comprehensive
income - 31 652 683 50 733
--------- ---------- --------- ------- ----------- ------
Transactions with
owners
--------- ---------- --------- ------- ----------- ------
Dividends - - (500) (500) - (500)
Distributions to non-controlling
interests - - - - (50) (50)
Capital contribution received - - 27 27 - 27
Changes in non-controlling
interests - - - - (14) (14)
--------- ---------- --------- ------- ------
Total transactions with
owners - - (473) (473) (64) (537)
--------- ---------- --------- ------- ----------- ------
Balance at 30 June 2019 3,763 10,146 (3,161) 10,748 1,523 12,271
--------- ---------- --------- ------- ----------- ------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
(continued)
Attributable to equity
shareholders
-----------------------------------
Non-
Share Other Retained controlling
capital reserves profits Total interests Total
GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 July 2019 3,763 10,146 (3,161) 10,748 1,523 12,271
Comprehensive income
Profit for the period - - 73 73 51 124
Other comprehensive income
------- -------- -------- ------ ----------- ------
Post-retirement defined benefit
scheme remeasurements, net
of tax - - (441) (441) - (441)
Movements in revaluation reserve
in respect of debt securities
held at fair value through
other comprehensive income,
net of tax - (2) - (2) - (2)
Movements in cash flow hedging
reserve, net of tax - (6) - (6) - (6)
Currency translation differences
(tax: nil) - 24 - 24 - 24
------- -------- -------- ------ ----------- ------
Total other comprehensive
income - 16 (441) (425) - (425)
------- -------- -------- ------ ----------- ------
Total comprehensive income - 16 (368) (352) 51 (301)
------- -------- -------- ------ ----------- ------
Transactions with owners
------- -------- -------- ------ ----------- ------
Distributions to non-controlling
interests - - - - (51) (51)
Capital contribution received - - 26 26 - 26
Change in non-controlling
interests - - - - 1,200 1,200
Total transactions with owners - - 26 26 1,149 1,175
------- -------- -------- ------ ----------- ------
Balance at 31 December 2019 3,763 10,162 (3,503) 10,422 2,723 13,145
------- -------- -------- ------ ----------- ------
CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
Half-year Half-year
to 30 June to 30 June
2020 2019
GBPm GBPm
Profit before tax 67 1,107
Adjustments for:
Change in operating assets 3,173 (3,680)
Change in operating liabilities (2,708) 4,658
Non-cash and other items 1,115 (199)
Tax paid (421) (159)
---------- ----------
Net cash provided by operating activities 1,226 1,727
Cash flows from investing activities
---------- ----------
Purchase of financial assets (1,178) (1,173)
Proceeds from sale and maturity of financial
assets 424 184
Purchase of fixed assets (64) (129)
Proceeds from sale of fixed assets 22 55
---------- ----------
Net cash used in investing activities (796) (1,063)
Cash flows from financing activities
---------- ----------
Dividends paid to ordinary shareholders - (500)
Distributions to non-controlling interests (80) (50)
Interest paid on subordinated liabilities (126) (134)
Repayment of subordinated liabilities (280) (328)
---------- ----------
Net cash used in financing activities (486) (1,012)
---------- ----------
Effects of exchange rate changes on cash and
cash equivalents 2 -
---------- ----------
Change in cash and cash equivalents (54) (348)
Cash and cash equivalents at beginning of
period 789 1,019
---------- ----------
Cash and cash equivalents at end of period 735 671
---------- ----------
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 14
2 Net fee and commission income 20
3 Operating expenses 20
4 Impairment 20
5 Taxation 21
6 Financial assets at fair value through profit or loss 21
7 Financial assets at amortised cost 22
8 Allowance for impairment losses 25
9 Debt securities in issue 28
10 Post-retirement defined benefit schemes 29
11 Provisions for liabilities and charges 30
12 Contingent liabilities and commitments 31
13 Fair values of financial assets and liabilities 34
14 Related party transactions 40
15 Ultimate parent undertaking 41
16 Other information 41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting policies, presentation and estimates
These condensed consolidated half-year financial statements as
at and for the period to 30 June 2020 have been prepared in
accordance with the Disclosure Guidance and Transparency Rules of
the Financial Conduct Authority (FCA) and with International
Accounting Standard 34 (IAS 34), Interim Financial Reporting as
adopted by the European Union and comprise the results of HBOS plc
(the Company) together with its subsidiaries (the Group). They do
not include all of the information required for full annual
financial statements and should be read in conjunction with the
Group ' s consolidated financial statements as at and for the year
ended 31 December 2019 which were prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the European Union. Copies of the 2019 Annual Report and Accounts
are available on the Lloyds Banking Group ' s website and are
available upon request from Investor Relations, Lloyds Banking
Group plc, 25 Gresham Street, London EC2V 7HN.
The directors consider that it is appropriate to continue to
adopt the going concern basis in preparing the condensed
consolidated half-year financial statements. In reaching this
assessment, the directors have considered the implications of the
coronavirus pandemic upon the Group ' s performance and projected
funding and capital position and also taken into account the impact
of further stress scenarios. On this basis, the directors are
satisfied that the Group will maintain adequate levels of funding
and capital for the foreseeable future.
The accounting policies are consistent with those applied by the
Group in its 2019 Annual Report and Accounts.
Future accounting developments
The IASB has issued a number of minor amendments to IFRSs
effective 1 January 2021 and 1 January 2022 (including IFRS 9
Financial Instruments and IAS 37 Provisions, Contingent Liabilities
and Contingent Assets). These amendments are not expected to have a
significant impact on the Group.
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. The Group ' s significant
judgements, estimates and assumptions are unchanged, compared to
those applied at 31 December 2019, except as detailed below.
Allowance for impairment losses
At 30 June 2020 the Group's expected credit loss allowance (ECL)
was GBP3,348 million (31 December 2019: GBP2,147 million), of which
GBP3,215 million (31 December 2019: GBP2,091 million) was in
respect of drawn balances. The calculation of the Group's ECL
allowances and its provisions against loan commitments and
guarantees under IFRS 9 requires the Group to make a number of
judgements, assumptions and estimates.
Forward-looking information
The measurement of expected credit losses is required to reflect
an unbiased probability-weighted range of possible future outcomes.
In order to do this, the Group has developed an economic model to
project a wide range of key impairment drivers using information
derived mainly from external sources. These drivers include factors
such as the unemployment rate, the house price index, commercial
property prices and corporate credit spreads. The model-generated
economic scenarios for the six years beyond 2020 are mapped to
industry-wide historical loss data by portfolio. Combined losses
across portfolios are used to rank the scenarios by severity of
loss.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Accounting policies, presentation and estimates (continued)
Alongside a defined central economic scenario, reflecting the
Group's base case assumptions used for medium-term planning
purposes, three further economic scenarios are generated to
represent the range of future outcomes. The upside, downside and
severe downside scenarios are produced by averaging across a group
of constituent scenarios around the 15th, 75th and 95th percentiles
of the estimated loss distribution around the central case, with
the central case expected to lie in the vicinity of the 45th
percentile. These locations correspond to scenario weightings that
allow for the inclusion of a relatively unlikely severe downside
scenario associated with relatively large credit losses. At 31
December 2019 and 30 June 2020, the base case, upside and downside
scenarios each carry a 30 per cent weighting, while the severe
downside scenario is weighted at 10 per cent. The weights reflect
the location of the economic scenarios on the estimated loss
distribution.
Following review of the severe downside scenario generated by
the modelled approach described above, a judgement was made to
increase the severity of GDP and unemployment dispersion from the
base case. Whilst the modelled approach gives an unbiased method of
creating a loss distribution, it is built on historic experience
that does not yet fully capture the unprecedented complexities of
the current economic environment and the risk of inflated near-term
shocks. The impact of this change has been reflected as a central
overlay to reflect the incremental ECL estimated outside the core
ECL calculation process. The following economic assumptions include
both the modelled severe scenario - used in portfolio level ECL and
staging assessment, and the adjusted severe downside - used to
generate the final ECL through a central overlay in recognition of
more adverse economic outcomes.
The key UK economic assumptions made by the Group are shown
below. Compounded growth rates have been calculated on a geometric
average basis, they were previously calculated on an arithmetic
average basis:
Impact of economic assumptions
Modelled Adjusted
Base case Upside Downside severe severe
% % % % %
At 30 June 2020
GDP 0.4 0.8 0.3 (0.4) (0.8)
Interest rate 0.15 1.06 0.16 0.03 0.03
Unemployment rate 6.0 5.5 7.1 8.1 8.8
House price growth 0.4 4.7 (4.8) (9.6) (9.6)
Commercial real estate
price growth (0.6) 2.7 (3.5) (8.0) (8.0)
At 31 December 2019
GDP 1.4 1.7 1.2 0.5 n/a
Interest rate 1.25 2.04 0.49 0.11 n/a
Unemployment rate 4.3 3.9 5.8 7.2 n/a
House price growth 1.0 4.8 (3.2) (7.7) n/a
Commercial real estate
price growth 0.0 1.8 (3.8) (7.1) n/a
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Accounting policies, presentation and estimates (continued)
The five-year averages shown do not fully reveal the extent of
peaks and troughs in the stated assumptions over the period. The
tables below illustrate the variability of the assumptions from the
start of the scenario period to the peak and trough.
Economic assumptions - start to peak
Modelled Adjusted
Base case Upside Downside severe severe
% % % % %
At 30 June 2020
GDP 1.9 4.0 1.7 (1.8) (2.0)
Interest rate 0.25 1.50 0.21 0.10 0.10
Unemployment rate 9.0 8.6 9.2 9.7 12.5
House price growth 2.1 25.8 0.4 0.4 0.4
Commercial real estate
price growth (2.7) 14.8 (2.7) (2.7) (2.7)
At 31 December 2019
GDP 7.0 8.6 6.2 2.7 n/a
Interest rate 1.75 2.56 0.75 0.75 n/a
Unemployment rate 4.6 4.6 6.9 8.3 n/a
House price growth 5.2 26.3 (1.9) (2.3) n/a
Commercial real estate
price growth 0.1 10.4 (0.6) (1.1) n/a
Economic assumptions - start to trough
Modelled Adjusted
Base case Upside Downside severe severe
% % % % %
At 30 June 2020
GDP (19.7) (19.5) (19.8) (20.2) (26.1)
Interest rate 0.10 0.10 0.08 0.01 0.01
Unemployment rate 3.9 3.9 3.9 3.9 3.9
House price growth (6.1) (3.8) (21.6) (39.7) (39.7)
Commercial real estate
price growth (20.0) (11.5) (27.2) (42.3) (42.3)
At 31 December 2019
GDP 0.4 0.7 0.2 (2.7) n/a
Interest rate 0.75 0.75 0.35 0.01 n/a
Unemployment rate 3.8 3.4 3.9 3.9 n/a
House price growth (2.7) (0.8) (14.8) (33.1) n/a
Commercial real estate
price growth (0.9) 0.3 (17.5) (30.9) n/a
The Group ' s base case economic scenario has been materially
revised in light of the impact of the coronavirus pandemic in the
UK and globally. The estimated impact reflects judgements on the
net effect of restrictions on economic activity unprecedented in
peacetime, large-scale and previously untried government
interventions, and lasting behavioural changes by households and
businesses.
Although the UK economy has begun to recover as restrictions are
eased, there is considerable uncertainty about the pace and
eventual extent of the recovery. The Group ' s base case
assumptions reflect an expectation of some enduring scarring as the
economy works through the sharp contraction in economic activity in
2020. Consistent with this, and despite the support provided by the
Government ' s Coronavirus Job Retention Scheme and other income
and lending assistance, the base case outlook entails a rise in the
unemployment rate and weakness in residential and commercial
property prices. The Group considers that risks to its base case
economic view lie in both directions, reflecting both
epidemiological and other developments, including vis-à-vis the UK
' s transition to new trading arrangements with the European
Union.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Accounting policies, presentation and estimates (continued)
Scenarios by year
2020 2021 2022 2020-22
% % % %
Base Case
GDP (10.0) 6.0 3.0 (1.8)
Interest rate 0.10 0.10 0.10 0.10
Unemployment rate 7.2 7.0 5.7 6.7
House price growth (6.0) (0.1) 2.9 (3.3)
Commercial real estate price
growth (20.0) 10.0 4.0 (8.5)
Upside
GDP (9.5) 7.5 3.1 0.3
Interest rate 0.21 1.15 1.42 0.92
Unemployment rate 7.1 6.2 4.9 6.1
House price growth (3.7) 5.0 9.0 10.2
Commercial real estate price
growth (8.4) 18.6 3.4 12.4
Downside
GDP (10.2) 5.8 3.1 (2.0)
Interest rate 0.09 0.12 0.19 0.13
Unemployment rate 7.3 7.7 6.8 7.3
House price growth (8.0) (6.1) (4.5) (17.5)
Commercial real estate price
growth (27.2) 4.0 2.9 (22.1)
Severe downside - Modelled
GDP (10.9) 3.0 2.2 (6.2)
Interest rate 0.06 0.01 0.02 0.03
Unemployment rate 7.5 8.9 8.4 8.3
House price growth (9.5) (11.5) (11.7) (29.2)
Commercial real estate price
growth (36.2) (7.8) (1.4) (41.9)
Severe downside - Adjusted
GDP (17.2) 4.1 5.2 (9.4)
Interest rate 0.06 0.01 0.02 0.03
Unemployment rate 8.0 11.6 9.2 9.6
House price growth (9.5) (11.5) (11.7) (29.2)
Commercial real estate price
growth (36.2) (7.8) (1.4) (41.9)
Base Case Scenario by Quarter
2020 2020 2020 2020 2021 2021 2021 2021
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
% % % % % % % %
Base Case
GDP (1.6) (19.3) (10.9) (8.1) (4.7) 18.1 7.7 5.1
Interest rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Unemployment rate 3.9 7.5 8.5 9.0 8.0 7.4 6.6 6.2
House price growth 2.8 0.9 (2.4) (6.0) (6.3) (4.0) (1.1) (0.1)
Commercial real estate price
growth (5.0) (12.3) (19.9) (20.0) (14.4) (3.7) 7.7 10.0
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Accounting policies, presentation and estimates (continued)
Post-model adjustments
Limitations in the Group ' s impairment models or input data may
be identified through the on-going assessment and validation of the
output of the models. In these circumstances, management make
appropriate adjustments to the Group ' s allowance for impairment
losses to ensure the overall provision adequately reflects all
material risks. These adjustments are generally determined taking
into account the particular attributes of the exposure which have
not been adequately captured by the primary impairment models.
Significant increase in credit risk
An assessment of whether credit risk has increased significantly
since initial recognition considers the change in the risk of
default occurring over the remaining expected life of the financial
instrument. In determining whether there has been a significant
increase in credit risk, the Group uses quantitative tests based on
relative and absolute probability of default movements linked to
internal credit ratings together with qualitative indicators such
as watchlists and other indicators of historical delinquency,
credit weakness or financial difficulty. These quantitative tests
are carried out on both observed and forward-looking probabilities
of default (PDs) to determine whether a customer has triggered the
required deterioration appropriate for their PD at origination. For
each major product grouping, models have been developed which
utilise historical credit loss data to produce probabilities of
default for each scenario; and it is the overall weighted-average
forward-looking PD that is used to assist in determining the
staging of financial assets.
There have been no changes to the quantitative or qualitative
triggers used at 30 June 2020. The Group considers these to
continue to perform adequately under the current economic
conditions and notably with the widespread use of payment holidays.
The use of a payment holiday in itself has not been judged to
indicate a significant increase in credit risk, with the underlying
long-term credit risk deemed to be driven by economic conditions
and captured through the use of forward-looking models. These
portfolio level models are capturing the anticipated volume of
increased defaults and therefore an appropriate assessment of
staging and expected credit loss.
Definition of default
The probability of default (PD) of an exposure, both over a 12
month period and over its lifetime, is a key input to the
measurement of the ECL allowance. Default has occurred when there
is evidence that the customer is experiencing significant financial
difficulty which is likely to affect the ability to repay amounts
due. The Group uses a 90 day past due backstop for all of its
products except for UK mortgages where a backstop of 180 days past
due is in place. The use of payment holidays is not considered to
be an automatic trigger of regulatory default and therefore does
not automatically trigger Stage 3. Days past due will also not
accumulate on any accounts that have taken a payment holiday
including those already past due.
Loss given default
The calculation of the ECL allowance also requires an estimate
to be made of the loss that will be incurred in the event of a
default. The loss given default (LGD) is based on market recovery
rates and internal credit assessments. The LGD for customers
utilising government funding schemes incorporates an appropriate
level of recovery dependent upon the individual scheme and
corresponding level of guarantee being used. The use of forecast
collateral value indices in determining LGDs continues to be
effective despite the temporarily low volumes of transactions upon
which those indices are based.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Accounting policies, presentation and estimates (continued)
Financial instrument valuations
The Group categorises financial instruments carried on the
balance sheet at fair value using a three level hierarchy.
Financial instruments categorised as level 1 are valued using
quoted market prices and therefore minimal estimates are made in
determining fair value. The fair value of financial instruments
categorised as level 2 and, in particular, level 3 is determined
using valuation techniques which involve management judgement and
estimates the extent of which depends on the complexity of the
instrument and the availability of market observable
information.
The principal judgements made by the Group in determining the
fair value of its financial assets and liabilities classified as
level 3 are primarily related to interest rate spreads and interest
rate volatility. Further details on the valuation of level 3 assets
and liabilities, including significant unobservable inputs used in
the valuation models, together with the effects of reasonably
possible alternative assumptions, are given in note 13.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Net fee and commission income
Half-year Half-year
to 30 to 30
June June
2020 2019
GBPm GBPm
Fee and commission income:
--------- ---------
Current accounts 101 103
Credit and debit card fees 89 110
Other 63 89
--------- ---------
Total fee and commission income 253 302
Fee and commission expense (110) (148)
--------- ---------
Net fee and commission income 143 154
--------- ---------
3. Operating expenses
Half-year Half-year
to 30 June to 30 June
2020 2019
GBPm GBPm
Administrative expenses:
Staff costs 616 645
Premises and equipment 92 87
Other expenses 463 666
---------- ----------
1,171 1,398
Depreciation and amortisation 117 118
---------- ----------
Total operating expenses, excluding regulatory
provisions 1,288 1,516
Regulatory provisions:
---------- ----------
Payment protection insurance provision (note
11) - 280
Other regulatory provisions (note 11) 98 52
---------- ----------
98 332
---------- ----------
Total operating expenses 1,386 1,848
---------- ----------
4. Impairment
Half-year Half-year
to to
30 June 30 June
2020 2019
GBPm GBPm
Impairment charge on drawn balances 1,376 208
Loan commitments and financial guarantees 77 4
Financial assets at fair value through
other comprehensive income 1 -
Total impairment charge 1,454 212
--------- ---------
The Group's impairment charge in the half-year to 30 June 2020
included GBP80 million (half-year to 30 June 2019: GBP6 million) in
respect of amounts due from fellow Lloyds Banking Group
undertakings.
In the half-year to 30 June 2020 the Group's impairment charge
included a central adjustment to the severe scenario of GBP100
million.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Taxation
In accordance with IAS 34, the Group's income tax expense for
the half-year to 30 June 2020 is based on the best estimate of the
weighted-average annual income tax rate expected for the full
financial year. The tax effects of one-off items are not included
in the weighted-average annual income tax rate, but are recognised
in the relevant period.
An explanation of the relationship between tax expense and
accounting profit is set out below:
Half-year Half-year
to 30 to 30
June June
2020 2019
GBPm GBPm
Profit before tax 67 1,107
---------- ---------
UK corporation tax thereon at 19 per cent
(2019: 19 per cent) (13) (210)
Impact of surcharge on banking profits (7) (95)
Non-deductible costs: conduct charges (3) (54)
Other non-deductible costs (28) (16)
Non-taxable income 9 1
Tax relief on distributions to non-controlling
interests 15 10
Remeasurement of deferred tax due to rate
changes 182 -
Differences in overseas tax rates 3 -
Tax-exempt gains on disposals - 3
Adjustments in respect of prior years 2 -
---------- ---------
Tax credit (expense) 160 (361)
---------- ---------
6. Financial assets at fair value through profit or loss
At At
30 June 31 Dec
2020 2019
GBPm GBPm
Loans and advances to customers 468 463
-------- ------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Financial assets at amortised cost
Half-year to 30 June 2020
Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
Loans and advances to banks
At 1 January 2020 343 - - 343
Exchange and other
movements 18 - - 18
Additions
(repayments) 98 - - 98
--------- ------- ------- ---------
At 30 June 2020 459 - - 459
Allowance for impairment losses - - - -
--------- ------- ------- ---------
Total loans and advances to banks 459 - - 459
--------- ------- ------- ---------
Loans and advances
to
customers
At 1 January 2020 229,740 24,996 5,663 260,399
Exchange and other movements 164 1 (2) 163
Additions (repayments) (536) (1,248) (473) (2,257)
---------- -------- ------- --------
Transfers to Stage 1 1,620 (1,614) (6) -
Transfers to Stage 2 (19,209) 19,637 (428) -
Transfers to Stage 3 (162) (1,220) 1,382 -
---------- -------- ------- --------
(17,751) 16,803 948 -
Recoveries 40 40
Disposal of businesses (796) (6) - (802)
Financial assets that have been
written off (300) (300)
---------- -------- ------- --------
At 30 June 2020 210,821 40,546 5,876 257,243
Allowance for impairment losses (425) (1,154) (1,550) (3,129)
---------- -------- ------- --------
Total loans and advances to
customers 210,396 39,392 4,326 254,114
---------- -------- ------- --------
Debt securities
At 1 January 2020 - - 1 1
Additions (repayments) 19 - - 19
Financial assets that have - -
been written off
--- ---
At 30 June 2020 19 - 1 20
Allowance for impairment
losses - -(1) (1)
--- ---
Total debt securities 19 - - 19
--- ---
Due from fellow Lloyds Banking Group undertakings
At 30 June 2020 92,829 - - 92,829
Allowance for impairment losses (86) - - (86)
-------- ------------- ----- ---------
Total due from fellow Lloyds Banking
Group
undertakings 92,743 - - 92,743
-------- ------------- ----- ---------
Total financial assets
at amortised cost 303,617 39,392 4,326 347,335
-------- ------- ------ --------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Financial assets at amortised cost (continued)
Year ended 31 December 2019
Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
Loans and advances to banks
At 1 January 2019 486 - - 486
Exchange and other
movements (20) - - (20)
Additions (repayments) (123) - - (123)
-------- ------- ------- ---------
At 31 December 2019 343 - - 343
Allowance for impairment losses - - - -
-------- ------- ------- ---------
Total loans and advances to banks 343 - - 343
-------- ------- ------- ---------
Loans and advances to
customers
At 1 January 2019 232,951 25,345 6,143 264,439
Exchange and other movements (266) (15) 25 (256)
Additions (repayments) 7,162 (2,583) (1,102) 3,477
--------- -------- ------- --------
Transfers to Stage 1 4,524 (4,515) (9) -
Transfers to Stage 2 (7,591) 8,502 (911) -
Transfers to Stage 3 (677) (1,378) 2,055 -
--------- -------- ------- --------
(3,744) 2,609 1,135 -
Recoveries 169 169
Disposal of businesses (6,363) (360) (42) (6,765)
Financial assets that have been
written off (665) (665)
--------- -------- ------- --------
At 31 December 2019 229,740 24,996 5,663 260,399
Allowance for impairment losses (148) (749) (1,187) (2,084)
--------- -------- ------- --------
Total loans and advances to
customers 229,592 24,247 4,476 258,315
--------- -------- ------- --------
Debt securities
At 1 January 2019 -- 13 13
Financial assets that have
been written off (12) (12)
---- ----
At 31 December 2019 -- 1 1
Allowance for impairment
losses -- (1) (1)
---- ----
Total debt securities -- - -
---- ----
Due from fellow Lloyds Banking Group undertakings
At 31 December 2019 91,120 - - 91,120
Allowance for impairment losses (7) - - (7)
-------- ------------- ----- ---------
Total due from fellow Lloyds Banking
Group
undertakings 91,113 - - 91,113
-------- ------------- ----- ---------
Total financial assets
at amortised cost 321,048 24,247 4,476 349,771
-------- ------- ------ --------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Financial assets at amortised cost (continued)
The movement tables are compiled by comparing the position at
the reporting date to that at the beginning of the year.
Transfers between stages are deemed to have taken place at the
start of the reporting period, with all other movements shown in
the stage in which the asset is held at the period end.
Additions (repayments) comprise new loans originated and
repayments of outstanding balances throughout the reporting period.
Loans which are written off in the period are first transferred to
Stage 3 before acquiring a full allowance and subsequent
write-off.
Loans and advances to customers include advances securitised
under the Group's securitisation and covered bond programmes (see
note 9).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Allowance for impairment losses
Half-year to 30 June 2020
Stage Stage Stage
1 2 3 Total
GBPm GBPm GBPm GBPm
In respect of drawn balances
At 1 January 2020 155 749 1,188 2,092
Exchange and other movements - - 16 16
Transfers to Stage 1 39 (38) (1) -
Transfers to Stage 2 (19) 58 (39) -
Transfers to Stage 3 (3) (88) 91 -
Impact of transfers between stages (23) 254 114 345
----- ----- ----- -----
(6) 186 165 345
Other items charged to the income
statement 362 220 449 1,031
----- ----- ----- -----
Charge to the income statement
(note 4) 356 406 614 1,376
Advances written off (300) (300)
Disposal of businesses - (1) - (1)
Recoveries of advances written
off in previous years 40 40
Discount unwind (7) (7)
----- ----- ----- -----
At 30 June 2020 511 1,154 1,551 3,216
----- ----- ----- -----
In respect of undrawn balances
At 1 January 2020 26 28 1 55
Transfers to Stage 1 3 (3) - -
Transfers to Stage 2 (1) 1 - -
Transfers to Stage 3 - (3) 3 -
Impact of transfers between stages (1) 12 11 22
----- ----- ----- -----
1 7 14 22
Other items charged to the income
statement 34 22 (1) 55
----- ----- ----- -----
Charge to the income statement
(note 4) 35 29 13 77
At 30 June 2020 61 57 14 132
----- ----- ----- -----
Total allowance for impairment
losses 572 1,211 1,565 3,348
----- ----- ----- -----
In respect of:
----- ----- ----- -----
Loans and advances to customers 425 1,154 1,550 3,129
Debt securities - - 1 1
Amounts due from fellow Lloyds
Banking
Group undertakings 86 - - 86
----- ----- ----- -----
Financial assets at amortised
cost 511 1,154 1,551 3,216
Provisions in relation to loan
commitments and
financial guarantees 61 57 14 132
----- ----- ----- -----
Total allowance for impairment
losses 572 1,211 1,565 3,348
----- ----- ----- -----
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Allowance for impairment losses (continued)
Year ended 31 December 2019
Stage Stage Stage
1 2 3 Total
GBPm GBPm GBPm GBPm
In respect of drawn balances
At 1 January 2019 158 858 1,121 2,137
Exchange and other movements - (7) 64 57
Transfers to Stage 1 80 (76) (4) -
Transfers to Stage 2 (22) 115 (93) -
Transfers to Stage 3 (10) (118) 128 -
Impact of transfers between stages (65) 129 130 194
----- ----- ----- -----
(17) 50 161 194
Other items charged to the income
statement 20 (143) 375 252
----- ----- ----- -----
Charge to the income statement 3 (93) 536 446
Advances written off (677) (677)
Disposal of businesses (6) (9) (14) (29)
Recoveries of advances written
off in previous years 169 169
Discount unwind (11) (11)
----- ----- ----- -----
At 31 December 2019 155 749 1,188 2,092
----- ----- ----- -----
In respect of undrawn balances
At 1 January 2019 24 23 3 50
Transfers to Stage 1 5 (5) - -
Transfers to Stage 2 (1) 1 - -
Transfers to Stage 3 - (1) 1 -
Impact of transfers between stages (4) 6 (1) 1
----- ----- ----- -----
- 1 - 1
Other items charged to the income
statement 2 4 (2) 4
----- ----- ----- -----
Charge to the income statement 2 5 (2) 5
At 31 December 2019 26 28 1 55
----- ----- ----- -----
Total allowance for impairment
losses 181 777 1,189 2,147
----- ----- ----- -----
In respect of:
----- ----- ----- -----
Loans and advances to customers 148 749 1,187 2,084
Debt securities - - 1 1
Amounts due from fellow Lloyds
Banking Group undertakings 7 - - 7
----- ----- ----- -----
Financial assets at amortised
cost 155 749 1,188 2,092
Provisions in relation to loan
commitments and
financial guarantees 26 28 1 55
----- ----- ----- -----
Total allowance for impairment
losses 181 777 1,189 2,147
----- ----- ----- -----
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Allowance for impairment losses (continued)
The Group ' s income statement charge comprises:
Half-year
to 30 Year ended
June 31 Dec
2020 2019
GBPm GBPm
Drawn balances 1,376 446
Undrawn balances 77 5
Financial assets at fair value
through other comprehensive
income 1 -
---------
Total 1,454 451
--------- ----------
Transfers between stages are deemed to have taken place at the
start of the reporting period, with all other movements shown in
the stage in which the asset is held at the period end. As assets
are transferred between stages, the resulting change in expected
credit loss of GBP345 million for drawn balances, and GBP22 million
for undrawn balances, is presented separately as Impact of
transfers between stages, in the stage in which the expected credit
loss is recognised at the end of the reporting period.
Other items charged to the income statement include the
movements in the expected credit loss as a result of new loans
originated and repayments of outstanding balances throughout the
reporting period. Loans which are written off in the period are
first transferred to Stage 3 before acquiring a full allowance and
subsequent write-off. Consequently, recoveries on assets previously
written-off also occur in Stage 3 only.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Debt securities in issue
At 30 June 2020 At 31 December 2019
------------------------- ------------------------------------
At fair At fair
value value
through At through At
profit amortised profit amortised
or or
loss cost Total loss cost Total
GBPm GBPm GBPm GBPm GBPm GBPm
Medium-term notes issued - 2,188 2,188 - 1,106 1,106
Covered bonds - 3,356 3,356 - 4,529 4,529
Securitisation notes 47 4,295 4,342 47 5,569 5,616
------- --------- ----- ----------- --------- --------
Total debt securities
in issue 47 9,839 9,886 47 11,204 11,251
------- --------- ----- ----------- --------- --------
The notes issued by the Group's securitisation and covered bond
programmes are held by external parties and by subsidiaries of the
Group.
Securitisation programmes
At 30 June 2020, external parties held GBP4,342 million (31
December 2019: GBP5,616 million) and the Group's subsidiaries held
GBP23,413 million (31 December 2019: GBP23,632 million) of total
securitisation notes in issue of GBP27,755 million (31 December
2019: GBP29,248 million). The notes are secured on loans and
advances to customers and debt securities classified at amortised
cost amounting to GBP28,494 million (31 December 2019: GBP30,417
million), the majority of which have been sold by subsidiary
companies to bankruptcy remote structured entities. The structured
entities are consolidated fully and all of these loans are retained
on the Group's balance sheet.
Covered bond programmes
At 30 June 2020, external parties held GBP3,356 million (31
December 2019: GBP4,529 million) and the Group's subsidiaries held
GBP100 million (31 December 2019: GBP100 million) of total covered
bonds in issue of GBP3,456 million (31 December 2019: GBP4,629
million). The bonds are secured on certain loans and advances to
customers amounting to GBP6,006 million (31 December 2019: GBP6,758
million) that have been assigned to bankruptcy remote limited
liability partnerships. These loans are retained on the Group's
balance sheet.
Cash deposits of GBP 1,757 million (31 December 2019: GBP2,000
million) which support the debt securities issued by the structured
entities, the term advances related to covered bonds and other
legal obligations are held by the Group.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Post-retirement defined benefit schemes
The Group's post-retirement defined benefit scheme obligations
are comprised as follows:
At At
30 June 31 Dec
2020 2019
GBPm GBPm
Defined benefit pension schemes:
Fair value of scheme assets 18,070 15,980
Present value of funded obligations (17,255) (15,915)
-------- --------
Net pension scheme asset 815 65
Other post-retirement schemes (45) (43)
-------- --------
Net retirement benefit asset 770 22
-------- --------
Recognised on the balance sheet as:
Retirement benefit assets 913 156
Retirement benefit obligations (143) (134)
-------- --------
Net retirement benefit asset 770 22
-------- --------
The movement in the Group's net post-retirement defined benefit
scheme asset during the period was as follows:
GBPm
Asset at 1 January 2020 22
Income statement charge (58)
Employer contributions 371
Remeasurement 435
-----
Asset at 30 June 2020 770
-----
The principal assumptions used in the valuations of the defined
benefit pension schemes were as follows:
At At
30 June 31 Dec
2020 2019
% %
Discount rate 1.54 2.05
Rate of inflation:
Retail prices index 2.85 2.94
Consumer prices index 1.90 1.99
Rate of salary increases 0.00 0.00
Weighted-average rate of increase for pensions
in payment 2.52 2.87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Provisions for liabilities and charges
Provisions Payment Other
for protection regulatory
commitments insurance provisions Other Total
GBPm GBPm GBPm GBPm GBPm
At 31 December
2019 55 596 232 94 977
Exchange and other
movements - - - 1 1
Provisions applied - (279) (153) (22) (454)
Charge for the
period 77 - 98 35 210
------------- ------------ ------------ ------ ------
At 30 June 2020 132 317 177 108 734
------------- ------------ ------------ ------ ------
Payment protection insurance
The Group has made provisions for PPI costs totalling GBP6,421
million, no additional charge has been made in the first half of
2020. Good progress has been made with the review of PPI
information requests received and the conversion rate remains low
and consistent with the provision assumption of around 10 per cent,
albeit operations have been impacted by the coronavirus pandemic in
the second quarter.
At 30 June 2020, a provision of GBP317 million remained
unutilised relating to complaints and associated administration
costs. Total cash payments were GBP279 million during the six
months to 30 June 2020.
The total amount provided for PPI represents the Group's best
estimate of the likely future cost. A number of risks and
uncertainties remain including processing the remaining outstanding
complaints. These may also be impacted by any further regulatory
changes. The cost could therefore differ from the Group's estimates
and the assumptions underpinning them, and could result in a
further provision being required.
For every 1 per cent increase in PIR conversion rate on the
stock as at the industry deadline, the Group would expect an
additional charge of approximately GBP40 million.
Other provisions for legal actions and regulatory matters
In the course of its business, the Group is engaged in
discussions with the PRA, FCA and other UK and overseas regulators
and other governmental authorities on a range of matters. The Group
also receives complaints in connection with its past conduct and
claims brought by or on behalf of current and former employees,
customers, investors and other third parties and is subject to
legal proceedings and other legal actions. Where significant,
provisions are held against the costs expected to be incurred in
relation to these matters and matters arising from related internal
reviews. During the six months to 30 June 2020 the Group charged a
further GBP98 million in respect of legal actions and other
regulatory matters, and the unutilised balance at 30 June 2020 was
GBP177 million (31 December 2019: GBP232 million). The most
significant items are as follows.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Provisions for liabilities and charges (continued)
Arrears handling related activities
The Group has provided an additional GBP19 million during the
half-year to 30 June 2020 for arrears handling related activities,
bringing the total provided to date to GBP649 million the
unutilised balance at 30 June 2020 was GBP45 million.
HBOS Reading - review
The Group completed its compensation assessment for all 71
business customers within the customer review in the fourth quarter
of 2019. In total more than GBP109 million of compensation has been
accepted by victims of the HBOS Reading fraud, in addition to GBP14
million for ex-gratia payments and GBP6 million for the
re-imbursements of legal fees. Sir Ross Cranston's Quality
Assurance review was concluded on 10 December 2019 and made a
number of recommendations, including a re-assessment of direct and
consequential losses by an independent panel, an extension of debt
relief, and a wider definition of de facto directors. Details of
the panel were announced on 3 April 2020 and the panel's full scope
and methodology was published on 7 July 2020. Details of an appeal
process for the further assessments of debt relief and de facto
director status have also been announced. The Group has begun its
assessment of customer claims for further debt relief and de facto
director status. The Group has committed to implementing Sir Ross's
recommendations in full. It is not possible to estimate at this
stage what the financial impact will be.
12. Contingent liabilities, commitments and guarantees
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the
Lloyds Banking Group is not involved in the ongoing litigation
which involves card schemes such as Visa and Mastercard (as
described below). However, the Lloyds Banking Group is a member /
licensee of Visa and Mastercard and other card schemes. The
litigation in question is as follows:
-- litigation brought by retailers against both Visa and
Mastercard which continues in the English Courts (this includes a
judgment of the Supreme Court in June 2020 upholding the Court of
Appeal's finding in 2018 that historic interchange arrangements of
Mastercard and Visa infringed competition law); and
-- litigation brought on behalf of UK consumers in the English
Courts against Mastercard (judgment is awaited from the Supreme
Court on whether the collective proceedings may be
permissible).
Any impact on the Lloyds Banking Group of the litigation against
Visa and Mastercard remains uncertain at this time. Insofar as Visa
is required to pay damages to retailers for interchange fees set
prior to June 2016, contractual arrangements to allocate liability
have been agreed between various UK banks (including the Lloyds
Banking Group) and Visa Inc, as part of Visa Inc's acquisition of
Visa Europe in 2016. These arrangements cap the maximum amount of
liability to which the Lloyds Banking Group may be subject, and
this cap is set at the cash consideration received by the Lloyds
Banking Group for the sale of its stake in Visa Europe to Visa Inc
in 2016.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Contingent liabilities, commitments and guarantees (continued)
LIBOR and other trading rates
In July 2014, the Lloyds Banking Group announced that it had
reached settlements totalling GBP217 million (at 30 June 2014
exchange rates) to resolve with UK and US federal authorities
legacy issues regarding the manipulation several years ago of Group
companies' submissions to the British Bankers' Association (BBA)
London Interbank Offered Rate (LIBOR) and Sterling Repo Rate. The
Swiss Competition Commission concluded its investigation against
Lloyds Bank plc in June 2019. However, the Group continues to
cooperate with various other government and regulatory authorities,
including a number of US State Attorneys General, in conjunction
with their investigations into submissions made by panel members to
the bodies that set LIBOR and various other interbank offered
rates.
Certain Lloyds Banking Group companies, together with other
panel banks, have also been named as defendants in private
lawsuits, including purported class action suits, in the US in
connection with their roles as panel banks contributing to the
setting of US Dollar, Japanese Yen and Sterling LIBOR and the
Australian BBSW Reference Rate. Certain of the plaintiffs' claims
have been dismissed by the US Federal Court for Southern District
of New York (subject to appeals).
Certain Lloyds Banking Group companies are also named as
defendants in (i) UK based claims; and (ii) two Dutch class
actions, raising LIBOR manipulation allegations. A number of the
claims against the Lloyds Banking Group in relation to the alleged
mis-sale of interest rate hedging products also include allegations
of LIBOR manipulation.
It is currently not possible to predict the scope and ultimate
outcome on the Group of the various outstanding regulatory
investigations not encompassed by the settlements, any private
lawsuits or any related challenges to the interpretation or
validity of any of the Lloyds Banking Group's contractual
arrangements, including their timing and scale.
Tax authorities
The Lloyds Banking Group has an open matter in relation to a
claim for group relief of losses incurred in its former Irish
banking subsidiary, which ceased trading on 31 December 2010. In
2013 HMRC informed the Lloyds Banking Group that their
interpretation of the UK rules which allow the offset of such
losses denies the claim for group relief of losses. If HMRC's
position is found to be correct, management estimate that this
would result in an increase in the Group's current tax liabilities
of approximately GBP375 million (including interest). The Lloyds
Banking Group does not agree with HMRC's position and, having taken
appropriate advice, does not consider that this is a case where
additional tax will ultimately fall due.
Other legal actions and regulatory matters
In addition, during the ordinary course of business the Group is
subject to other complaints and threatened or actual legal
proceedings (including class or group action claims) brought by or
on behalf of current or former employees, customers, investors or
other third parties, as well as legal and regulatory reviews,
challenges, investigations and enforcement actions, both in the UK
and overseas. All such material matters are periodically
reassessed, with the assistance of external professional advisers
where appropriate, to determine the likelihood of the Group
incurring a liability. In those instances where it is concluded
that it is more likely than not that a payment will be made, a
provision is established to management's best estimate of the
amount required at the relevant balance sheet date. In some cases
it will not be possible to form a view, for example because the
facts are unclear or because further time is needed to assess
properly the merits of the case, and no provisions are held in
relation to such matters. In these circumstances, specific
disclosure in relation to a contingent liability will be made where
material. However the Group does not currently expect the final
outcome of any such case to have a material adverse effect on its
financial position, operations or cash flows.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Contingent liabilities, commitments and guarantees
(continued)
Contingent liabilities, commitments and guarantees arising from
the banking business
At At
30 June 31 Dec
2020 2019
GBPm GBPm
Contingent liabilities
Acceptances and endorsements - 1
Other:
------- ------
Other items serving as direct credit substitutes 32 20
Performance bonds and other transaction-related
contingencies 175 199
------- ------
207 219
------- ------
Total contingent liabilities 207 220
------- ------
Commitments and guarantees
Documentary credits and other short-term trade-related
transactions 1 -
Forward asset purchases and forward deposits
placed 55 14
Undrawn formal standby facilities, credit
lines and other commitments to lend:
Less than 1 year original maturity:
------- ------
Mortgage offers made 12,550 11,271
Other commitments and guarantees 25,216 24,217
------- ------
37,766 35,488
1 year or over original maturity 2,225 2,410
------- ------
Total commitments and guarantees 40,047 37,912
------- ------
Of the amounts shown above in respect of undrawn formal standby
facilities, credit lines and other commitments to lend, GBP15,345
million (31 December 2019: GBP14,478 million) was irrevocable.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Fair values of financial assets and liabilities
The valuations of financial instruments have been classified
into three levels according to the quality and reliability of
information used to determine those fair values. Note 40 to the
Group's 2019 financial statements describes the definitions of the
three levels in the fair value hierarchy.
Valuation control framework
Key elements of the valuation control framework, which covers
processes for all levels in the fair value hierarchy including
level 3 portfolios, include model validation (incorporating
pre-trade and post-trade testing), product implementation review
and independent price verification. Formal committees meet
quarterly to discuss and approve valuations in more judgemental
areas.
Transfers into and out of level 3 portfolios
Transfers out of level 3 portfolios arise when inputs that could
have a significant impact on the instrument's valuation become
market observable; conversely, transfers into the portfolios arise
when sources of data cease to be observable.
Valuation methodology
For level 2 and level 3 portfolios, there is no significant
change to the valuation methodology (techniques and inputs)
disclosed in the Group's 2019 Annual Report and Accounts applied to
these portfolios.
The table below summarises the carrying values of financial
assets and liabilities presented on the Group's balance sheet. The
fair values presented in the table are at a specific date and may
be significantly different from the amounts which will actually be
paid or received on the maturity or settlement date.
At 31 December
At 30 June 2020 2019
----------------- -----------------
Carrying Fair Carrying Fair
value value value value
GBPm GBPm GBPm GBPm
Financial assets
Financial assets at fair value through
profit or loss 468 468 463 463
Derivative financial instruments 8,479 8,479 10,338 10,338
-------- ------- -------- -------
Loans and advances to banks 459 460 343 343
Loans and advances to customers 254,114 257,178 258,315 261,438
Debt securities 19 19 - -
Due from fellow Lloyds Banking Group
undertakings 92,743 92,743 91,113 91,113
-------- ------- -------- -------
Financial assets at amortised cost: 347,335 350,400 349,771 352,894
Financial assets at fair value through
other
comprehensive income 3,144 3,144 2,376 2,376
Financial liabilities
Deposits from banks 16,118 16,118 16,472 16,472
Customer deposits 158,665 158,836 151,845 152,038
Due to fellow Lloyds Banking Group
undertakings 152,104 152,104 157,998 157,998
Financial liabilities at fair value
through profit or loss 47 47 47 47
Derivative financial instruments 9,126 9,126 11,034 11,034
Debt securities in issue 9,839 10,162 11,204 11,146
Subordinated liabilities 3,635 5,303 3,596 3,628
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Fair values of financial assets and liabilities (continued)
The carrying amount of the following financial instruments is a
reasonable approximation of fair value: cash and balances at
central banks, items in the course of collection from banks, items
in course of transmission to banks and notes in circulation.
The Group manages valuation adjustments for its derivative
exposures on a net basis; the Group determines their fair values on
the basis of their net exposures. In all other cases, fair values
of financial assets and liabilities measured at fair value are
determined on the basis of their gross exposures.
The following tables provide an analysis of the financial assets
and liabilities of the Group that are carried at fair value in the
Group's consolidated balance sheet, grouped into levels 1 to 3
based on the degree to which the fair value is observable.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Fair values of financial assets and liabilities (continued)
Financial assets
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 30 June 2020
Loans and advances to customers
at fair value through profit
or loss - - 468 468
Debt securities at fair value
through other comprehensive
income - 3,144 - 3,144
Derivative financial instruments - 8,466 13 8,479
------- ------- ------- ------
Total financial assets carried
at fair value - 11,610 481 12,091
------- ------- ------- ------
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 31 December 2019
Loans and advances to customers
at fair value through profit
or loss - - 463 463
Debt securities at fair value
through other comprehensive
income 123 2,253 - 2,376
Derivative financial instruments - 10,338 - 10,338
------- ------- ------- ------
Total financial assets carried
at fair value 123 12,591 463 13,177
------- ------- ------- ------
Financial liabilities
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 30 June 2020
Financial liabilities designated
at fair value through profit
or loss - - 47 47
Derivative financial instruments - 8,829 297 9,126
------- ------- ------- -----
Total financial liabilities
carried at fair value - 8,829 344 9,173
------- ------- ------- -----
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
At 31 December 2019
Financial liabilities designated
at fair value through profit
or loss - - 47 47
Derivative financial instruments - 10,737 297 11,034
------- ------- ------- ------
Total financial liabilities
carried at fair value - 10,737 344 11,081
------- ------- ------- ------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Fair values of financial assets and liabilities (continued)
Movements in level 3 portfolio
The tables below analyse movements in the level 3 financial
assets portfolio.
Financial Total
assets at financial
fair assets
value through carried
profit or Derivative at
loss assets fair value
GBPm GBPm GBPm
At 1 January 2020 463 - 463
Gains recognised in the income statement
within other income 18 2 20
Sales (13) - (13)
Transfers into the level 3 portfolio - 11 11
At 30 June 2020 468 13 481
-------------- ---------- -----------
Gains recognised in the income statement
within other income relating to those
assets held at 30 June 2020 9 - 9
Financial Total
assets at financial
fair assets
value through carried
profit or Derivative at
loss assets fair value
GBPm GBPm GBPm
At 1 January 2019 110 - 110
(Losses) gains recognised in the income
statement within other income (1) 1 -
Additions - 1 1
Sales (8) - (8)
Transfers into the level 3 portfolio 399 11 410
At 30 June 2019 500 13 513
-------------- ---------- -----------
Gains recognised in the income statement
within other income relating to those
assets held at 30 June 2019 - - -
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Fair values of financial assets and liabilities (continued)
Movements in level 3 portfolio
The tables below analyse movements in the level 3 financial
liabilities portfolio.
Financial
liabilities Total
at financial
fair value liabilities
through carried
profit Derivative at
or loss liabilities fair value
GBPm GBPm GBPm
At 1 January 2020 47 297 344
Losses recognised in the income statement
within other income 1 8 9
Redemptions (1) (8) (9)
------------ ------------ ------------
At 30 June 2020 47 297 344
------------ ------------ ------------
Gains recognised in the income statement
within other income relating to those
liabilities held at 30 June 2020 - - -
Financial Total
liabilities financial
at liabilities
fair value carried
through at
profit Derivative fair
or loss liabilities value
GBPm GBPm GBPm
At 1 January 2019 - - -
Redemptions (1) (12) (13)
Transfers into the level 3 portfolio 53 344 397
------------- ------------ -------------
At 30 June 2019 52 332 384
------------- ------------ -------------
Gains recognised in the income statement
within other income relating to those
liabilities held at 30 June 2019 - - -
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Fair values of financial assets and liabilities (continued)
The tables below set out the effects of reasonably possible
alternative assumptions for categories of level 3 financial assets
and financial liabilities.
At 30 June 2020
---------------------------------------
Effect of reasonably
possible alternative
assumptions(1)
-----------------------------
Significant
Valuation unobservable Carrying Favourable Unfavourable
technique(s) inputs Range(2) value changes changes
GBPm GBPm GBPm
Financial assets at fair value through
profit or loss:
Interest rate Option pricing Interest rate 32% /
derivatives model volatility 58% 13 - -
Loans and 50 bps
advances to Discounted Interest rate /
customers cash flows spreads 103 bps 468 22 (22)
Financial assets carried at fair
value 481
--------
Financial liabilities at fair value through
profit or loss:
Debt securities Discounted Interest rate +/- 50
in issue cash flows spreads bps 47 1 (1)
Derivative financial liabilities:
Market values
Interest rate - property +/- 5
derivatives valuation HPI bps 297 17 (17)
--------
Financial liabilities carried at
fair value 344
--------
(1) Where the exposure to an unobservable input is managed on a net
basis, only the net impact is shown in the table.
(2) The range represents the highest and lowest inputs used in the
level 3 valuations.
At 31 December 2019
---------------------------------------
Effect of reasonably
possible alternative
assumptions(1)
-----------------------------
Significant
Valuation unobservable Carrying Favourable Unfavourable
technique(s) inputs Range(2) value changes changes
GBPm GBPm GBPm
Financial assets at fair value through
profit or loss:
Loans and 50bps
advances to Discounted Interest rate /
customers cash flows spreads 102bps 463 22 (22)
Financial assets carried at fair
value 463
--------
Financial liabilities at fair value through
profit or loss:
Debt securities Discounted Interest rate +/- 50
in issue cash flows spreads bps 47 1 (1)
Derivative financial liabilities:
Market values
Interest rate - property +/- 5
derivatives valuation HPI bps 297 17 (17)
--------
Financial liabilities carried at
fair value 344
--------
(1) Where the exposure to an unobservable input is managed on a net
basis, only the net impact is shown in the table.
(2) The range represents the highest and lowest inputs used in the
level 3 valuations.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Fair values of financial assets and liabilities (continued)
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt
securities, unlisted equity investments and derivatives are
unchanged from those described in the Group's 2019 financial
statements.
Reasonably possible alternative assumptions
Valuation techniques applied to many of the Group's level 3
instruments often involve the use of two or more inputs whose
relationship is interdependent. The calculation of the effect of
reasonably possible alternative assumptions included in the table
above reflects such relationships and are unchanged from those
described in the Group's 2019 financial statements.
14. Related party transactions
Balances and transactions with Lloyds Banking Group plc and
fellow Lloyds Banking Group undertakings
The Company and its subsidiaries have balances due to and from
the Company's ultimate parent company, Lloyds Banking Group plc,
and fellow Lloyds Banking Group undertakings. These are included on
the balance sheet as follows:
At At
30 June 31 Dec
2020 2019
GBPm GBPm
Assets
Derivative financial instruments 4,751 7,026
Due from fellow Lloyds Banking Group undertakings 92,743 91,113
Liabilities
Due to fellow Lloyds Banking Group undertakings 152,104 157,998
Derivative financial instruments 7,108 8,788
Debt securities in issue 1,224 45
Subordinated liabilities 80 83
During the half-year to 30 June 2020 the Group earned GBP 217
million (half-year ended 30 June 2019: GBP229 million) of interest
income and incurred GBP878 million (half-year ended 30 June 2019:
GBP959 million) of interest expense on balances and transactions
with Lloyds Banking Group plc and fellow Lloyds Banking Group
undertakings.
In addition, during the half-year to 30 June 2020 the Group
incurred expenditure of GBP 19 million (half-year ended 30 June
2019: GBP27 million) on behalf of fellow Lloyds Banking Group
undertakings which was recharged to those undertakings; and fellow
Lloyds Banking Group undertakings incurred expenditure of GBP333
million (half-year ended 30 June 2019: GBP448 million) on behalf of
the Group which has been recharged to the Group.
Other related party transactions
Other related party transactions for the half-year to 30 June
2020 are similar in nature to those for the year ended 31 December
2019.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Ultimate parent undertaking
HBOS plc's ultimate parent undertaking and controlling party is
Lloyds Banking Group plc which is incorporated in Scotland. Lloyds
Banking Group plc has published consolidated accounts for the year
ended 31 December 2019 and copies may be obtained from Investor
Relations, Lloyds Banking Group, 25 Gresham Street, London EC2V 7HN
and are available for download from www.lloydsbankinggroup.com
.
16. Other information
The financial information included in these condensed
consolidated half-year financial statements does not constitute
statutory accounts within the meaning of section 434 of the
Companies Act 2006. Statutory accounts for the year ended 31
December 2019 have been delivered to the Registrar of Companies.
The auditors' report on those accounts was unqualified, did not
include an emphasis of matter paragraph and did not include a
statement under section 498 of the Companies Act 2006.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors listed below (being all the directors of HBOS plc)
confirm that to the best of their knowledge these condensed
consolidated half-year financial statements have been prepared in
accordance with International Accounting Standard 34, Interim
Financial Reporting, as adopted by the European Union, and that the
half-year results herein includes a fair review of the information
required by DTR 4.2.7R and DTR 4.2.8R, namely:
-- an indication of important events that have occurred during
the six months ended 30 June 2020 and their impact on the condensed
consolidated half-year financial statements, and a description of
the principal risks and uncertainties for the remaining six months
of the financial year; and
-- material related party transactions in the six months ended
30 June 2020 and any material changes in the related party
transactions described in the last annual report.
Signed on behalf of the board by
António Horta-Osório
Group Chief Executive
29 July 2020
HBOS plc board of directors:
António Horta-Osório ( Executive Director and Group Chief
Executive)
William Chalmers (Executive Director and Chief Financial
Officer)
Juan Colombás (Executive Director and Chief Operating
Officer)
Lord Blackwell (Chairman)
Alan Dickinson (Deputy Chairman and Senior Independent
Director)
Simon Henry
Sarah Legg
Lord Lupton CBE
Amanda Mackenzie OBE
Nicholas Prettejohn
Stuart Sinclair
Sara Weller CBE
Catherine Woods
INDEPENT REVIEW REPORT TO HBOS PLC
Report on the condensed consolidated half-year financial
statements
Our conclusion
We have reviewed HBOS plc's condensed consolidated half-year
financial statements (the 'interim financial statements') in the
2020 Half-Year Results of HBOS plc (the 'Company') for the six
month period ended 30 June 2020. Based on our review, nothing has
come to our attention that causes us to believe that the interim
financial statements are not prepared, in all material respects, in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated balance sheet as at 30 June 2020;
-- the consolidated income statement and consolidated statement
of comprehensive income for the period then ended;
-- the consolidated cash flow statement for the period then ended;
-- the consolidated statement of changes in equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the 2020 Half-Year
Results have been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting', as adopted
by the European Union and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
As disclosed in note 1 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The 2020 Half-Year Results, including the interim financial
statements, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the 2020
Half-Year Results in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the 2020 Half-Year Results based on our
review. This report, including the conclusion, has been prepared
for and only for the Company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the 2020
Half-Year Results and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
29 July 2020
CONTACTS
For further information please contact:
INVESTORS AND ANALYSTS
Douglas Radcliffe
Group Investor Relations Director
020 7356 1571
douglas.radcliffe@lloydsbanking.com
Edward Sands
Director of Investor Relations
020 7356 1585
edward.sands@lloydsbanking.com
Nora Thoden
Director of Investor Relations - ESG
020 7356 2334
nora.thoden@lloydsbanking.com
CORPORATE AFFAIRS
Grant Ringshaw
External Relations Director
020 7356 2362
grant.ringshaw@lloydsbanking.com
Matt Smith
Head of Media Relations
020 7356 3522
matt.smith@lloydsbanking.com
Copies of this news release may be obtained from Investor
Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V
7HN. The full news release can also be found on the Group's website
- www.lloydsbankinggroup.com .
Registered office: HBOS plc, The Mound, Edinburgh EH1 1YZ
Registered in Scotland no. SC218813
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR FBLFXBDLBBBX
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July 30, 2020 07:12 ET (11:12 GMT)
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