(3) Share capital and control There are no restrictions on the transfer of shares in the Company other than as set out in the articles of association and: – certain restrictions which may from time to time be imposed by law and regulations (for example, insider trading laws); – pursuant to the uK listing Authority’s listing rules where directors and certain employees of the Company require the approval of the Company to deal in the Company’s shares; and
Information regarding significant direct or indirect holdings of shares in the Company can be found on page 75.
Issued in relation to the settlement of coupons on certain hybrid capital securities1 279 123 –
During 2013 the Group issued new ordinary shares for a consideration of £350 million (2012: £170 million; 2011: £nil) in relation to payment of coupons on certain hybrid capital securities that are non-cumulative.
Foreign currency gains (losses) on net investment hedges (tax: £nil) 149 55 (26)
Note 49: Ordinary dividends no dividends were paid on ordinary shares during 2011, 2012 or 2013 and the directors do not propose to pay a final dividend in respect of 2013.
The trustees of the following holdings of lloyds Banking Group plc shares in relation to employee share schemes retain the right to receive dividends but have chosen to waive their entitlement to the dividends on those shares as indicated: the lloyds Banking Group Share Incentive Plan (holding at 31 December 2013: 16,857,069 shares, 31 December 2012: 12,040,715 shares, waived rights to all dividends), the lloyds TSB Group employee Share Ownership Trust (holding at 31 December 2013: 52,150,441 shares, 31 December 2012: 73,007,743
During the year ended 31 December 2013 the Group operated the following share-based payment schemes, all of which are equity settled.
no options were exercised during 2013 or 2012. The weighted average remaining contractual life of options outstanding at the end of the year was 0.8 years (2012: 1.9 years). The fair values of the executive share options have been determined using a standard Black-Scholes model.
For the HBOS sharesave plan, no options were exercised during 2013 or 2012. The options outstanding at 31 December 2013 had an exercise price of £1.8066 (2012: £1.8066) and a weighted average remaining contractual life of 1.1 years (2012: 2.1 years).
The fair values of the majority of options granted have been determined using a standard Black-Scholes model. The fair values of the remaining options have been determined by Monte Carlo simulation.
Lloyds Banking Group Long-Term Incentive Plan The long-Term Incentive Plan (lTIP) introduced in 2006 is aimed at delivering shareholder value by linking the receipt of shares to an improvement in the performance of the Group over a three year period. Awards are made within limits set by the rules of the Plan, with the limits determining the maximum number of shares that can be awarded equating to three times annual salary. In exceptional circumstances this may increase to four times annual salary.
The performance conditions for awards made in March and September 2011 are as follows: (i) EPS: relevant to 50 per cent of the award. The performance target is based on 2013 adjusted ePS outcome.
If adjusted ePS reaches 7.8p, 100 per cent of this element will vest.
For awards made to executive Directors, a third performance condition was set, relating to Absolute Total Shareholder Return, relevant to one third of the award. Performance will be measured based on the annualised Absolute Total Shareholder Return over the three year performance period. If the annualised Absolute Total Shareholder Return at the end of the performance period is less than 8 per cent, none of this element of the award will vest. If the Absolute Total Shareholder Return is 8 per cent, 25 per cent of this element of the award, being the threshold, will vest. If the Absolute Total Shareholder Return is 14 per cent or higher, 100 per cent of this element will vest. Vesting between threshold and maximum will be on a straight line basis. The ePS and eP performance conditions will each relate to 33.3 per cent of the total award.
The performance conditions for awards made in March and September 2012 are as follows: (i) EP: relevant to 30 per cent of the award. The performance target is based on 2014 adjusted eP outcome.
If non-core assets amount to £95 billion or less, 25 per cent of this element of the award, being the threshold, will vest.
If a run rate of net Simplification benefits of £1.8 billion is achieved, 100 per cent of this element will vest.
(vi) Customer satisfaction: relevant to 10 per cent of the award. Performance will be measured by reference to the total number of FSA reportable complaints per 1,000 customers over the three year period to 31 December 2014.
The performance conditions for awards made in March and October 2013 are as follows: (i) EP: relevant to 35 per cent of the award. The performance target is based on 2015 adjusted eP outcome.
If the adjusted eP reaches £1,254 million, 25 per cent of this element of the award, being the threshold, will vest.
If non-core assets amount to £37 billion or less, 25 per cent of this element of the award, being the threshold, will vest.
If complaints per 1,000 customers average 1.05 per annum or less over three years, 25 per cent of this element of the award, being the threshold, will vest.
no award will be made where performance is below the threshold. Vesting between threshold and target and between target and maximum will be on a straight line basis.
At 31 December 2013 exercise price range executive schemes SAYe schemes Other share option plans
Matching shares The Group undertakes to match shares purchased by employees up to the value of £30 per month; these matching shares are held in trust for a mandatory period of three years on the employee’s behalf, during which period the employee is entitled to any dividends paid on such shares. The award is subject to a non-market based condition: if an employee leaves within this three year period for other than a ‘good’ reason, 100 per cent of the matching shares are forfeited. Similarly if the employees sell their purchased shares within three years, their matching shares are forfeited.
The fair value calculations at 31 December 2013 for grants made in the year, using Black-Scholes models and Monte Carlo simulation, are based on the following assumptions: Save-As-You-Earn
Weighted average exercise price £0.41 Nil Nil Nil expected volatility is a measure of the amount by which the Group’s shares are expected to fluctuate during the life of an option. The expected volatility is estimated based on the historical volatility of the closing daily share price over the most recent period that is commensurate with the expected life of the option. The historical volatility is compared to the implied volatility generated from market traded options in the Group’s shares to assess the reasonableness of the historical volatility and adjustments made where appropriate.
Deposits placed by key management personnel attracted interest rates of up to 2.9 per cent (2012: 3.8 per cent; 2011: 5 per cent).
At 31 December 2013, the Group did not provide any guarantees in respect of key management personnel (2012 and 2011: none).
From 1 January 2011, in accordance with IAS 24, uK Government-controlled entities became related parties of the Group. The Group regards the Bank of england and entities controlled by the uK Government, including The Royal Bank of Scotland Group plc, northern Rock (Asset Management) plc and Bradford & Bingley plc, as related parties.
Since 31 December 2011, the Group has had the following significant transactions with the uK Government or uK Government-related entities: During the year ended 31 December 2013, the Group participated in a number of schemes operated by the uK Government and central banks and made available to eligible banks and building societies.
Help to Buy On 7 October 2013, Bank of Scotland plc entered into an agreement with The Commissioners of Her Majesty’s Treasury by which it agreed that the Halifax Division of Bank of Scotland plc would participate in the Help to Buy Scheme with effect from 11 October 2013 and that lloyds Bank plc would participate from 3 January 2014. The Help to Buy Scheme is a scheme promoted by the Government and is aimed to encourage participating lenders to make mortgage loans available to customers who require higher loan-to-value mortgages. Halifax and lloyds are currently participating in the Scheme whereby customers borrow between 90 per cent and 95 per cent of the purchase price.
In return for the payment of a commercial fee, HM Treasury has agreed to provide a guarantee to the lender to cover a proportion of any loss made by the lender arising from a higher loan-to-value loan being made. By 31 December 2013, £79 million had been advanced under this scheme.
Sale of certain securitisation notes During the year ended 31 December 2013, the Group sold at fair value certain securitisation notes to lloyds Bank Pension Trust (no. 1) limited for a consideration of approximately £340 million. Following the sale, the Group deconsolidated the relevant securitisation entities recognising a profit of £236 million.
At 31 December 2013 there were loans and advances to customers of £4,448 million (2012: £3,424 million) outstanding and balances within customer deposits of £70 million (2012: £45 million) relating to other joint ventures and associates.
Financial Services Compensation Scheme The Financial Services Compensation Scheme (FSCS) is the uK’s independent statutory compensation fund of last resort for customers of authorised financial services firms and pays compensation if a firm is unable or likely to be unable to pay claims against it. The FSCS is funded by levies on the authorised financial services industry. each deposit-taking institution contributes towards the FSCS levies in proportion to their share of total protected deposits on 31 December of the year preceding the scheme year, which runs from 1 April to 31 March.
Investigation into Bank of Scotland and report on HBOS The FSA’s enforcement investigation into Bank of Scotland plc’s Corporate division between 2006 and 2008 concluded with the publication of a Final notice on 9 March 2012. no financial penalty was imposed on the Group or Bank of Scotland plc. On 12 September 2012 the FSA confirmed it was starting work on a public interest report on HBOS. That report is currently expected to be published in 2014.
US shareholder litigation In november 2011 the Group and two former members of the Group’s Board of Directors were named as defendants in a purported securities class action filed in the united States District Court for the Southern District of new York. The complaint asserted claims under the Securities exchange Act of 1934 in connection with alleged material omissions from statements made in 2008 in connection with the acquisition of HBOS. In October 2012 the court dismissed the complaint. The plaintiffs’ appeal against this decision was dismissed on 19 September 2013 and the time limit for further appeals expired in December 2013.
Items in course of transmission to banks – – – – – 774 – 774
Debt securities in issue – – – – – 87,102 – 87,102 liabilities arising from insurance contracts and participating investment contracts – – – – – – 82,777 82,777 liabilities arising from non-participating investment contracts – – – – – – 27,590 27,590 unallocated surplus within insurance businesses – – – – – – 391 391
In 2008, in accordance with the amendment to IAS 39 that became applicable during that year, the Group reviewed the categorisation of its financial assets classified as held for trading and available-for-sale. On the basis that there was no longer an active market for some of those assets, which are therefore more appropriately managed as loans, with effect from 1 July 2008, the Group transferred £2,993 million of assets previously classified as held for trading into loans and receivables. With effect from 1 november 2008, the Group transferred £437 million of assets previously classified as available-for-sale financial assets into loans and receivables. At the time of these transfers, the Group had the intention and ability to hold them for the foreseeable future or until maturity. As at the date of reclassification, the weighted average effective interest rate of the assets transferred was 6.3 per cent with the estimated recoverable cash flows of £3,524 million.
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.
(4) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
unless otherwise noted, the following disclosures are provided separately for assets and liabilities carried at fair value and those carried at amortised cost.
Valuation hierarchy The table below analyses the financial assets and liabilities of the Group which are carried at fair value. They are categorised into levels 1 to 3 based on the degree to which their fair value is observable. The fair value measurement approach is recurring in nature.
Trading and other financial assets at fair value through profit or loss loans and advances to customers – 13,632 – 13,632 loans and advances to banks – 919 – 919
Total trading and other financial assets at fair value through profit or loss 116,128 41,186 3,306 160,620
Total trading and other financial liabilities at fair value through profit or loss 1,865 31,527 – 33,392
Loans and advances and debt securities loans and advances and debt securities measured at fair value and classified as level 2 are valued by discounting expected cash flows using an observable credit spread applicable to the particular instrument.
– less complex interest rate and foreign exchange option products which are valued using volatility surfaces developed from publicly available interest rate cap, interest rate swaption and other option volatilities; option volatility skew information is derived from a market standard consensus pricing service. For more complex option products, the Group calibrates its models using observable at-the-money data; where necessary, the Group adjusts for out-of-the-money positions using a market standard consensus pricing service.
The Group’s level 3 derivative assets include £1,212 million (2012: £1,421 million) in respect of the value of the embedded equity conversion feature of the enhanced Capital notes issued in December 2009. The embedded equity conversion feature is valued by comparing the market price of the enhanced Capital notes with the market price of similar bonds without the conversion feature. The latter is calculated by discounting the expected enhanced Capital note cash flows in the absence of a conversion using prevailing market yields for similar capital securities without the conversion feature. The market price of the enhanced Capital notes was calculated with reference to multiple broker quotes.
Gains (losses) recognised in the income statement, within other income, relating to the change in fair value of those assets held at 31 December 2012 85 (33) (335) (283)
underlying asset/ net asset value (incl. property prices)4 unlisted equities and property partnerships in the life funds underlying asset/ net asset value (incl. property prices)4
unobservable inputs Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are as follows: – Interest rates and inflation rates are referenced in some derivatives where the payoff that the holder of the derivative receives depends on the behaviour of those underlying references through time.
Derivatives Reasonably possible alternative assumptions have been determined in respect of the Group’s derivative portfolios as follows: – In respect of the embedded equity conversion feature of the enhanced Capital notes, the sensitivity was based on the absolute difference between the actual price of the enhanced capital note and the closest, alternative broker quote available plus the impact of applying a 10 bps increase/decrease in the market yield used to derive a market price for similar bonds without the conversion feature. The effect of interdependency of the assumptions is not material to the effect of applying reasonably possible alternative assumptions to the valuations of derivative financial instruments.
– Swaptions are priced using industry standard option pricing models. Such models require interest rate volatilities which may be unobservable at longer maturities. To derive reasonably possible alternative valuations these volatilities have been flexed within a range of 3 per cent to 112 per cent (2012: 31 per cent and 79 per cent).
Financial assets loans and receivables: loans and advances to customers – – 486,495 486,495 loans and advances to banks – – 25,296 25,296
The DVA is sensitive to: – the current size of the mark-to-market position on the uncollateralised liability; – expectations of future market volatility of the underlying liability; and
A one per cent rise in the CDS spread would lead to an increase in the DVA of £89 million to £211 million.
At 31 December 2013, the Group’s derivative trading business held mid to bid-offer valuation adjustments of £70 million (2012: £103 million).
Securitisation programmes loans and receivables: loans and advances to customers 80,878 18,6131 excludes securitisation notes held by the Group (£38,288 million).1
Includes uS residential mortgage-backed securities and associated liabilities whose carrying values were £185 million and £221 million respectively; the associated liabilities have recourse only to the securities transferred and, at 31 December 2012, the fair values of the securities and the associated liabilities were £244 million and £311 million respectively, a difference of £67 million.
Fund investments shown in the table above are equity and debt interests in an investment fund representing the Group’s ongoing involvement in financial assets transferred into the fund in a prior year. The fund investments were designated at fair value through profit or loss and are managed on a similar basis to the Group’s trading assets.
Trading and other financial assets at fair value through profit or loss¹ 113,395 – 113,395
Credit risk The Group’s credit risk exposure arises in respect of the instruments below and predominantly in the united Kingdom, the european union and the united States. Credit risk appetite is set at Board level and is described and reported through a suite of metrics devised from a combination of accounting and credit portfolio performance measures, which include the use of various credit risk rating systems as inputs and measure the credit risk of loans and advances to customers and banks at a counterparty level using three components: (i) the probability of default by the counterparty on its contractual obligations; (ii) the current exposures to the counterparty and their likely future development, from which the Group derives the exposure at default; and (iii) the likely loss ratio on the defaulted obligations, the loss given default. The Group uses a range of approaches to mitigate credit risk, including internal control policies, obtaining collateral, using master netting agreements and other credit risk transfers, such as asset sales and credit derivative based transactions.
Allowance for impairment losses on loans and advances to customers on an underlying basis 15,707 21,772
Total held as available-for-sale financial assets 34,189 8,197 376 481 144 19 43,406
Total held at fair value through profit or loss 12,891 14,777 9,995 6,756 666 1,752 46,837
Asset-backed securities: Corporate and other debt securities 3,198 2,836 8,021 7,647 2,866 1,819 26,387
Total held at fair value through profit or loss 24,135 7,847 10,910 8,882 2,941 1,907 56,622
There were reverse repurchase agreements which are accounted for as collateralised loans with a carrying value of £120 million (2012: £5,087 million), against which the Group held collateral with a fair value of £112 million (2012: £4,916 million), all of which the Group is able to repledge. Included in these amounts are collateral balances in the form of cash provided in respect of reverse repurchase agreements amounting to £49 million (2012: £2 million). These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.
Impaired secured wholesale lending and associated collateral relates to lending to property companies and to customers in the financial, business and other services; transport, distribution and hotels; and construction industries.
Unimpaired secured lending unimpaired secured wholesale lending amounted to £69,108 million (2012: £74,485 million). Wholesale lending decisions are predominantly based on an obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security provided. Collateral values are rigorously assessed at the time of loan origination. The types of collateral taken and the frequency with which collateral is required at origination is dependent upon the size and structure of the borrower. For exposures to corporate customers and other large institutions, the Group will often require the collateral to include a first charge over land and buildings owned and occupied by the business, a mortgage debenture over the company’s undertaking and one or more of its assets, and keyman insurance. The Group maintains policies setting out acceptable collateral, maximum loan-to-value ratios and other criteria to be considered when reviewing a loan application. The decision as to whether or not collateral is required will be based upon the nature of the transaction and the credit worthiness of the customer. Other than for project finance, object finance and income producing real estate where charges over the subject assets are a basic requirement, the provision of collateral will not determine the outcome of a credit application. The fundamental business proposition must evidence the ability of the business to generate funds from normal business sources to repay debt.
In addition, securities held as collateral in the form of stock borrowed amounted to £46,552 million (2012: £38,040 million). Of this amount, £45,277 million (2012: £36,549 million) had been resold or repledged as collateral for the Group’s own transactions.
Irrevocable loan commitments and other credit-related contingencies At 31 December 2013, the Group held irrevocable loan commitments and other credit-related contingencies of £59,172 million (2012: £55,629 million). Collateral is held as security, in the event that lending is drawn down, on £19,123 million (2012: £17,697 million) of these balances.
Trading and other financial assets at fair value through profit or loss 9,928 10,000 loans and advances to customers 14,927 11,603
In addition to the assets detailed above, the Group also holds assets that are encumbered through the Group’s asset-backed conduits and its securitisation and covered bond programmes. Further details of these assets are provided in notes 21 and 22.
The Group operates a number of schemes to assist borrowers who are experiencing financial stress. The material elements of these schemes are described in the Risk Management report on pages 137 and 138 and further details relating to those cases where the Group has granted a concession, whether temporarily or permanently, are set out below.
Retail customers Forbearance activities The Group classifies the treatments offered to retail customers who have experienced financial difficulty into the following categories: – Reduced contractual monthly payment: a temporary account change to assist customers through periods of financial difficulty where arrears do not accrue at the original contractual payments, for example temporary interest only arrangements and short-term payment holidays granted in collections. Any arrears existing at the commencement of the arrangement are retained; – Reduced payment arrangements: a temporary arrangement for customers in financial distress where arrears accrue at the contractual payment, for example short-term arrangements to pay; – Term extensions: a permanent account change for customers in financial distress where the overall term of the mortgage is extended resulting in a lower contractual monthly payment; and
– Repair: a permanent account change used to repair a customer’s position where they have emerged from financial difficulty, for example capitalisation of arrears.
Customers receiving support from uK Government sponsored programmes The Group participates in a number of uK Government sponsored programmes designed to support households, which are described on page 137. Where these schemes provide borrowers with a state benefit that is used to service the loan, there is no change in the reported status of the loan which is managed and reported in accordance with its original terms.
The Income Support for Mortgage Interest scheme remains the most successful of the Government backed schemes. It is the longest-running, is the most widely known and provides both the customer and the Group with an assurance as to the maintenance of at least two years’ worth of interest payments. The Group estimates that customers representing approximately £2.6 billion of its mortgage exposures are receiving this benefit. This includes those who are also receiving other treatments for financial difficulty.
Customers in financial difficulty receiving support under other schemes The Group measures the success of a forbearance scheme based upon the proportion of customers maintaining or improving their arrears position over the 12 months following the exit from a forbearance treatment. For temporary treatments, 87 per cent of customers who have accepted temporary interest-only concessions and 75 per cent of customers accepting reduced payment arrangements have maintained or improved their arrears position. For permanent treatments, 77 per cent of customers who have accepted capitalisations of arrears and 40 per cent of customers who have accepted term extensions have maintained or improved their arrears position.
For exposures that are judged to be impaired, provisions are determined through modelling the expected cure rates, write-off propensity and cash flows with segments explicitly relating to repayment plans and refinance loans treatments. Payments of less than the monthly contractual amount are reflected in reduced cash flow forecasts when calculating the impairment allowance for these accounts.
Impairment provisions as % of loans and advances which are currently or recently forborne £m
Included in the total above: Temporary arrangements currently on treatment 224 300 43 32 13.9 30.1
The 2012 numbers have been restated to reflect the change in forbearance probation periods. Previously only temporary arrangements in place at the year end and permanent changes commenced during the year were shown.
Depending on circumstances and when operated within robust parameters and controls, the Group believes forbearance can help support the customer in the short to medium-term.
Types of forbearance Forbearance treatments may include changes to: – Contractual payment terms (for example loan extensions, or changes to debt servicing terms), and
The four main types of forbearance concessions to commercial customers in financial difficulty are set out below: – Covenants: This includes temporary and permanent waivers, amendment or resetting of non-payment contractual covenants (including lTV and interest cover). The granting of this type of concession in itself would not result in the loan being classified as impaired; – extensions/Alterations: This includes extension and/or alteration of repayment terms to a level outside of market or the Group’s risk appetite due to the customer’s inability to make existing contractual repayment terms; amendments to an interest rate to a level considered outside of market or the Group’s risk appetite, or other amendments such as changes to debt servicing arrangements; – Forgiveness: This includes debt for equity swaps or partial debt forgiveness. This type of forbearance will always give rise to impairment; and
– Multiple type of forbearance (a mixture of the above three). Where a concession is granted to a customer that is not in financial difficulty or the risk profile is considered within current risk appetite, the concession would not be considered to be an act of forbearance.
A number of options are available to the Group where a customer is facing financial difficulty, and each case is treated depending on its own specific circumstances.
exit from forbearance classification A customer where forbearance has been granted will remain treated and recorded as forborne until it evidences acceptable performance over a period of time. This period will depend on a number of factors such as whether the customer is trading in line with its revised plan, it is operating within the new terms and conditions (including observation to revised covenants and contractual payments), its financial performance is stable or improving, and there are no undue concerns over its future performance. As a minimum, this period is currently expected to be at least 12 months following a forbearance event (during 2014, the minimum cure period will be reviewed again in conjunction with regulatory requirements). However, notwithstanding this, the overriding requirement is that the financial difficulty previously seen has been removed, and the performance has stabilised.
Liquidity risk liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost. The Group carries out monthly stress testing of its liquidity position against a range of scenarios, including those prescribed by the PRA. The Group’s liquidity risk appetite is also calibrated against a number of stressed liquidity metrics.
Derivative financial instruments, trading and other financial liabilities at fair value through profit or loss 12,818 5,556 8,005 2,875 1,963 4,630 15,534 30,687 82,068 liabilities arising from insurance and investment contracts 27,230 1,469 1,789 1,707 1,774 5,983 14,693 82,947 137,592
Trading and other financial liabilities at fair value through profit or loss 18,811 9,906 4,416 7,382 3,616 44,131 liabilities arising from non-participating investment contracts 27,590 – – – – 27,590
A number of capital transactions entered into by the Group in 2011 and 2012 involved the exchange of existing securities for new issues and as a result there was no related cash flow.
(D) Analysis of cash and cash equivalents as shown in the balance sheet £m £m £m
IAS 19 Revised £m Restated £m loss for the year (1,343) – (44) (1,387)
Disposal of businesses, net of cash disposed 37 – – 37 net cash provided by investing activities 15,232 – – 15,232
Trading and other financial liabilities at fair value through profit or loss 35,972 (2,580) – 33,392 notes in circulation 1,198 – – 1,198
net fee and commission income 3,544 – 3,544 net trading income (368) – (368)
Disposal of businesses, net of cash disposed 298 – 298 net cash provided by (used in) investing activities 6,932 – 6,932
Debt securities in issue 185,059 (95) – 184,964 liabilities arising from insurance contracts and participating investment contracts 78,991 – – 78,991 liabilities arising from non-participating investment contracts 49,636 – – 49,636 unallocated surplus within insurance businesses 300 – – 300
Derivative financial instruments 42,158 – – 42,158 notes in circulation 1,074 – – 1,074
Amendment to IAS 32 Financial Instruments: Presentation – ‘Offsetting Financial Assets and Financial Liabilities’
Amendments to IAS 39 Financial Instruments: Recognition and Measurement – ‘Novation of Derivatives and Continuation of Hedge Accounting’
IFRS 9 Financial Instruments1,2 Replaces those parts of IAS 39 Financial Instruments: Recognition and Measurement relating to the classification, measurement and derecognition of financial assets and liabilities. IFRS 9 requires financial assets to be classified into two measurement categories, fair value and amortised cost, on the basis of the objectives of the entity’s business model for managing its financial assets and the contractual cash flow characteristics of the instruments and eliminates the available-for-sale financial asset and held-to-maturity investment categories in IAS 39. The requirements for derecognition are broadly unchanged from IAS 39. The standard also retains most of the IAS 39 requirements for financial liabilities except for those designated at fair value through profit or loss whereby that part of the fair value change attributable to the entity’s own credit risk is recorded in other comprehensive income. The hedge accounting requirements are more closely aligned with risk management practices and follow a more principle-based approach.
Note 7: Subordinated liabilities These liabilities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer. Any repayments of subordinated liabilities require the consent of the Prudential Regulatory Authority.
7.875% non-Cumulative Preference Shares callable 2013 (uS$1,250 million) a – 204 7.875% non-Cumulative Preference Shares callable 2013 (e500 million) a – 105 6.0884% non-Cumulative Fixed to Floating Rate Preference Shares callable 2015 (£745 million) a 10 10 5.92% non-Cumulative Fixed to Floating Rate Preference Shares callable 2015 (uS$750 million) a 123 119 6.267% non-Cumulative Fixed to Floating Rate Preference Shares callable 2016 (uS$1,000 million) a 274 284 6.3673% non-Cumulative Fixed to Floating Rate Preference Shares callable 2019 (£335 million) a 2 2 6.475% non-Cumulative Preference Shares callable 2024 (£186 million) a 39 39 6.413% non-Cumulative Fixed to Floating Rate Preference Shares callable 2035 (uS$750 million) a 108 107 6.657% non-Cumulative Fixed to Floating Rate Preference Shares callable 2037 (uS$750 million) a 125 125 9.25% non-Cumulative Irredeemable Preference Shares (£300 million) a 266 266 9.75% non-Cumulative Irredeemable Preference Shares (£100 million) a 54 54
b In certain circumstances, these bonds would acquire the characteristics of preference share capital. They are accounted for as liabilities as coupon payments are mandatory as a consequence of the terms of the 6 per cent non-cumulative redeemable preference shares. At the callable date the coupon on these bonds will be reset by reference to the applicable five year benchmark gilt rate. Further information regarding this can be found in note 44 to the consolidated financial statements.
Note 8: Debt securities in issue These comprise uS$862.5 million 7.75% Public Income notes due 2050 issued by the Company in July 2010.
As discussed in note 2 to the consolidated financial statements, the Group provides share-based compensation to employees through a number of schemes; these are all in relation to shares in the Company and the cost of providing those benefits is recharged to the employing companies in the Group on a cash basis.
TSB Bank plc (formerly lloyds TSB Scotland plc) Ordinary Scotland 100%1 Banking and financial services
Guarantees The Company guarantees certain of its subsidiaries’ liabilities to the Bank of england.
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest of approximately £1 million (2012: £296 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond 5 years. 10 Financial instruments
Derivative financial instruments – 240 1,212 1,452 loans to subsidiaries – 11,043 – 11,043
lloyds Banking Group plc was incorporated as a public limited company and registered in Scotland under the uK Companies Act 1985 on 21 October 1985 with the registered number 95000. lloyds Banking Group plc’s registered office is The Mound, edinburgh eH1 1YZ, Scotland, and its principal executive offices in the uK are located at 25 Gresham Street, london eC2V 7Hn.
Reports and communications The Group issues regulatory announcements through the Regulatory news Service (RnS); shareholders can subscribe for free via the ‘Investors & Performance’ section of our website www.lloydsbankinggroup.com where you can also find our statutory reports and shareholder communications. A summary of these are listed below: Available format
Share price information Shareholders can access both the latest and historical share prices via our website www.lloydsbankinggroup.com as well as listings in most national newspapers. For a real time buying or selling price, you will need to contact a stockbroker, or you can contact the share dealing providers detailed on the previous page.
If you are concerned that you may have been targeted by such a scheme, please contact the FCA Consumer Helpline on 0800 111 6768 or use the online ‘Share Fraud Reporting Form’ available from their website (see above). We would also recommend that you contact the Police through Action Fraud on 0300 123 2040 or see www.actionfraud.org.uk for further information.
Arrears A customer is in arrears when they are behind in fulfilling their obligations with the result that an outstanding loan is unpaid or overdue. Such a customer is also said to be in a state of delinquency and the entire outstanding balance is delinquent.
Asset-Backed Securities (ABS) Asset-backed securities are securities that represent an interest in an underlying pool of referenced assets. The referenced pool can comprise any assets which attract a set of associated cash flows but are commonly pools of residential or commercial mortgages but could also include leases, credit card receivables, motor vehicles, student loans. Further information on the Group’s investments in ABS is given in note 54.
The highest quality form of regulatory capital under CRD IV that comprises common shares issued and related share premium, retained earnings and other reserves excluding the cash flow hedging reserve, less specified regulatory adjustments.
Core tier 1 ratio Core tier 1 capital as a percentage of risk-weighted assets.
Cost:Income ratio Operating expenses compared to total income net of insurance claims. The Group calculates this ratio using the ‘underlying basis’ which is the basis on which financial information is reported internally to management.
The credit spread is the yield spread between securities with the same currency and maturity structure but with different associated credit risks, with the yield spread rising as the credit rating worsens. It is the premium over the benchmark or risk-free rate required by the market to take on a lower credit quality.
Level 2 fair value measurements level 2 fair value measurements are those where quoted market prices are not available, for example where the instrument is traded in a market that is not considered to be active, or where valuation techniques are used to determine fair value and where these techniques use inputs that are based significantly on observable market data.
Level 3 fair value measurements level 3 fair value measurements are those where at least one input which could have a significant effect on the instrument’s valuation is not based on observable market data.
Leverage finance Funding provided for entities with higher than average indebtedness, which typically arises from sub-investment grade acquisitions or event-driven financing.
Credit enhancement facilities are used to enhance the creditworthiness of financial obligations and cover losses due to asset default. Two general types of credit enhancement are third-party loan guarantees (such as guaranteed mortgages) and self-enhancement through over collateralisation (in the case of covered mortgage bonds). liquidity enhancement makes funds available if required, for other reasons than asset default, eg to ensure timely repayment of maturing commercial paper.
Negative equity mortgages negative equity occurs when the value of the property purchased using the mortgage is below the balance outstanding on the loan. negative equity is the value of the asset less the outstanding balance on the loan.
Securitisation Securitisation is a process by which a group of assets, usually loans, are aggregated into a pool, which is used to back the issuance of new securities. Securitisation is the process by which ABS are created. A company sells assets to a special purpose entity which then issues securities backed by the assets. This allows the credit quality of the assets to be separated from the credit rating of the original company and transfers risk to external investors. Assets used in securitisations include mortgages to create mortgage-backed securities or Residential Mortgage-Backed Securities as well as Commercial Mortgage-Backed Securities. The Group has established several securitisation structures as part of its funding and capital management activities. These generally use mortgages, corporate loans and credit cards as asset pools. A listing of these programmes by type with the amounts secured and associated funding raised is given in note 21.
Specialist mortgages Specialist mortgages include those mortgage loans provided to customers who have self-certified their income (normally as a consequence of being self-employed) or who are otherwise regarded as a sub-prime credit risk. new mortgage lending of this type has not been offered by the Group since early 2009.
Structured entities (SEs) Ses are entities that have been designed so that voting or similar rights are not the dominant factor in determining who controls the entity, such as when voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. Ses often have specific restrictions around their ongoing activities and are created to accomplish a narrow and well-defined objective.
Subordinated liabilities liabilities which, in the event of insolvency or liquidation of the issuer, are subordinated to the claims of depositors and other creditors of the issuer. Details of the Group’s subordinated liabilities are set out in note 44.
Tier 1 capital A measure of a bank’s financial strength defined by the PRA. It captures core tier 1 capital plus other tier 1 securities in issue, but is subject to a deduction in respect of material holdings in financial companies. Further details are given in the Capital Risk section on page 178.
Value-at-Risk Value-at-Risk is an estimate of the potential loss in earnings which might arise from market movements under normal market conditions, if the current positions were to be held unchanged for one business day. It is measured to specified level of confidence, often 95 per cent or 99 per cent.
Loans and advances loans and advances to banks 249 loans and advances to customers 250
Capital adequacy and risk-weighted assets 9 Pillar 1 capital requirements and the application of counter-cyclical and capital conservation buffers or the minimum internal ratio established by management.
13 explain how risk-weighted assets (RWAs) relate to business activities and related risks. 125, 182-183, Pillar 3 14 Present a table showing the capital requirements for each method used for calculating RWAs for each Basel asset class. Pillar 3 15 Tabulate credit risk for Basel asset classes. Pillar 3 16 Present a flow statement that reconciles movements in RWAs for the period for each RWA risk type. 182 17 Provide narrative putting Basel Pillar 3 back-testing requirements into context. Pillar 3
Funding 19 encumbered assets. 176 20 Tabulate consolidated total assets, liabilities and off-balance sheet commitments by remaining contractual maturity at the balance sheet date.
Market risk 22 Describe linkages between line items in the balance sheet with positions included in the traded and non-traded market risk disclosures. 164 23 Provide breakdowns of significant trading and non trading market risk factors. 164-165 24 Describe significant market risk measurement model limitations, assumptions and validation procedures. 165-167, Pillar 3 25 Describe the primary risk management techniques employed to measure and assess the risk of loss beyond reported risk measures and parameters, such as VaR, earnings or economic value scenario results.
27 Describe the policies for identifying impaired or non-performing loans, defining impaired or non-performing, restructured and returned-to-performing (cured) loans as well as explanations of loan forbearance policies.
29 Provide analysis of the bank’s counterparty credit risk that arises from its derivatives transactions. 143, 336 30 Discuss credit risk mitigation, including collateral held for all sources of credit risk. 134-136, 336-339