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

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