In addition the Group has cash flow hedges which are primarily used to hedge the variability in the cost of funding within the commercial business. Note 17 shows when the hedged cash flows are expected to occur and when they will affect income for designated cash flow hedges. The notional principal of the interest rate swaps designated as cash flow hedges at 31 December 2018 was £556,945 million (2017: £549,099 million) with a net fair value liability of £486 million (2017: liability of £456 million) (note 17). In 2018, ineffectiveness recognised in the income statement that arises from cash flow hedges was a loss of £25 million (2017: loss of £21 million).
Note 52: Financial risk management continued (B) Concentrations of exposure The Group’s management of concentration risk includes single name, industry sector and country limits as well as controls over the Group’s overall exposure to certain products. Further information on the Group’s management of this risk is included within Credit risk mitigation, Risk management on page 115.
Following the reduction in the Group’s non‑UK activities, an analysis of credit risk exposures by geographical region has not been provided.
Total financial assets at fair value through other comprehensive income/available‑for‑sale financial assets 24,446 348 24,794 41,864 474 42,338 1 Credit ratings equal to or better than ‘BBB’.
Total other assets held at fair value through profit or loss 30,719 1,937 32,656 32,414 2,144 34,558
The Group holds collateral in respect of loans and advances to banks and customers as set out below. The Group does not hold collateral against debt securities, comprising asset‑backed securities and corporate and other debt securities, which are classified as financial assets held at amortised cost.
Loans and advances to banks There were reverse repurchase agreements which are accounted for as collateralised loans within loans and advances to banks with a carrying value of £461 million (2017: £771 million), against which the Group held collateral with a fair value of £481 million (2017: £796 million).
Stage 3 secured lending The value of collateral is re‑evaluated and its legal soundness re‑assessed if there is observable evidence of distress of the borrower; this evaluation is used to determine potential loss allowances and management’s strategy to try to either repair the business or recover the debt.
At 31 December 2018, Stage 3 secured commercial lending amounted to £658 million, net of an impairment allowance of £215 million (2017: impaired secured commercial lending amounted to £698 million, net of an impairment allowance of £242 million). The fair value of the collateral held in respect of impaired secured commercial lending was £590 million (2017: £797 million). In determining the fair value of collateral, no specific amounts have been attributed to the costs of realisation. For the purposes of determining the total collateral held by the Group in respect of impaired secured commercial lending, the value of collateral for each loan has been limited to the principal amount of the outstanding advance in order to eliminate the effects of any over‑collateralisation and to provide a clearer representation of the Group’s exposure.
Note 52: Financial risk management continued Stage 1 and Stage 2 secured lending For Stage 1 and Stage 2 secured commercial lending, the Group reports assets gross of collateral and therefore discloses the maximum loss exposure. The Group believes that this approach is appropriate as collateral values at origination and during a period of good performance may not be representative of the value of collateral if the obligor enters a distressed state.
Derivative assets, after offsetting of amounts under master netting arrangements The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly liquid securities. In respect of the net derivative assets after offsetting of amounts under master netting arrangements of £14,327 million (2017: £12,785 million), cash collateral of £6,039 million (2017: £5,419 million) was held.
Irrevocable loan commitments and other credit-related contingencies At 31 December 2018, the Group held irrevocable loan commitments and other credit‑related contingencies of £62,640 million (2017: £63,237 million). Collateral is held as security, in the event that lending is drawn down, on £10,661 million (2017: £10,956 million) of these balances.
Financial assets at fair value through profit or loss 11,473 13,345 4,858 2,781 1,056 2,655 5,341 121,369 162,878
Loans and advances to customers 28,297 15,953 13,585 11,881 10,482 29,340 70,967 291,993 472,498
Liabilities arising from non‑participating investment contracts 13,853 – – – – 13,853
Liabilities arising from non‑participating investment contracts 15,447 – – – – 15,447
Further information on the Group’s liquidity exposures is provided on pages 147 to 152.
Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows: Up to 1 month £m £m £m £m
Note 53: Consolidated cash flow statement continued (C) Non-cash and other items 2018 £m 2017 £m 2016 £m
Write‑off of allowance for loan losses, net of recoveries (1,025) (1,061) (1,272)
Impairment of financial assets at fair value through other comprehensive income (2017: available‑for‑sale financial assets) (14) 6 173
Net charge (credit) in respect of defined benefit schemes 405 369 287
Financial assets at fair value through profit or loss 162,878 13,130 − − 176,008
Items in course of transmission to banks 584 − − − 584
At 1 January 2018, the Group was required to reclassify certain assets from fair value through profit or loss to fair value through other comprehensive income; these assets were sold during the course of the year. If these assets had not been reclassified, the Group would have recognised a loss of £0.2 million in the period before being sold. The effective interest rate applied to these assets on 1 January 2018 was 1.97 per cent, and the interest revenue recognised prior to the sale was £20 million.
Note 55: Future accounting developments The following pronouncements are not applicable for the year ending 31 December 2018 and have not been applied in preparing these financial statements. Save as disclosed below, the impact of these accounting changes is still being assessed by the Group and reliable estimates cannot be made at this stage.
The Group’s accounting as a lessor will remain aligned to the current approach under IAS 17; however for lessee accounting there will no longer be a distinction between finance and operating leases. The transition approach adopted by the Group will result in the recognition of right of use assets and lease liabilities of approximately £1.8 billion in respect of leased properties previously accounted for as operating leases; there will be no impact on shareholders’ equity. As permitted by the transition options under IFRS 16, comparative figures for the prior year will not be restated. Going forward, the Group will recognise a finance charge on the lease liability and a depreciation charge on the right‑of‑use asset, whereas previously the Group included lease rentals within operating expenses. The Group intends to take advantage of a number of exemptions within IFRS 16, including the election not to recognise a lease liability and a right‑of‑use asset for leases for which the underlying asset is of low value.
Minor amendments to other accounting standards The IASB has issued a number of minor amendments to IFRSs effective 1 January 2019 and 1 January 2020 (including IAS 19 Employee Benefits, IAS 12 Income Taxes and IFRIC 23 Uncertainty over Income Tax Treatments). The Group will adopt the changes to IAS 12 Income Taxes with effect from 1 January 2019, resulting in the presentation of the tax benefit of distributions on other equity instruments in the Group’s income statement; these impacts are currently recognised directly in equity. Comparative information will be restated. For the comparative year ended 31 December 2018, this will result in the reclassification of a tax credit of £106 million (2017: £102 million). These changes will have no impact on the Group’s reported balance sheet or profit before tax. The amendments to other accounting standards are not expected to have a significant impact on the Group.
Financial assets at fair value through profit or loss 588 – –
Total equity and liabilities 72,904 61,531 61,533 2 The parent company recorded a profit after tax for the year of £4,022 million (2017: £2,399 million) .
The directors approved the parent company financial statements on 19 February 2019.
Other employee award schemes – – – 207 207 – 207 1 Total comprehensive income comprises only the profit (loss) for the year; no statement of comprehensive income has been shown for the parent company, as permitted by section 408 of the Companies Act 2006.
Fair value and exchange adjustments and other non‑cash items (715) 495 1,986
Note 4: Other reserves The merger reserve comprises the premium on shares issued on 13 January 2009 under the placing and open offer and shares issued on 16 January 2009 on the acquisition of HBOS plc, offset by adjustments on the redemption of preference shares. Substantially all of the Company’s merger reserve is available for distribution.
1 During the year ended 31 December 2016, the Company redeemed all of its outstanding 6.267% Non‑cumulative Fixed to Floating Rate Callable US Dollar Preference Shares at their combined sterling equivalent par value of £210 million. These preference shares had been accounted for as subordinated liabilities. On redemption an amount of £210 million was transferred from the distributable merger reserve to the share premium account.
The capital redemption reserve represents transfers from the merger reserve in accordance with companies’ legislation and amounts transferred from share capital following the cancellation of shares.
In addition the Company carries out banking activities through its subsidiary, Lloyds Bank plc. At 31 December 2018, the Company held deposits of £55 million with Lloyds Bank plc (2017: £272 million) . Given the volume of transactions flowing through the account, it is not meaningful to provide gross inflow and outflow information. Included within other liabilities is £51 million (2017: £2,168 million) due to subsidiary undertakings. In addition, at 31 December 2018 the Company had interest rate and currency swaps with Lloyds Bank plc and Lloyds Bank Corporate Markets plc with an aggregate notional principal amount of £1,379 million and a net positive fair value of £47 million (2017: notional principal amount of £8,068 million and a net negative fair value of £62 million) . Of this amount an aggregate notional principal amount of £1,275 million and a net positive fair value of £150 million (2017: notional principal amount of £4,455 million and a net positive fair value of £246 million) were designated as fair value hedges to manage the Company’s issuance of subordinated liabilities.
Credit risk The majority of the Company’s credit risk arises from amounts due from its wholly owned subsidiary, Lloyds Bank plc, and subsidiaries of that company.
Up to 1 month £m 1-3 months £m 3-12 months £m 1-5 years £m
Annual general meeting (AGM) The AGM will be held at the Edinburgh International Conference Centre, The Exchange, Edinburgh EH3 8EE on Thursday 16 May 2019 at 11am. Further details about the meeting, including the proposed resolutions and where shareholders can stream the meeting live, can be found in our Notice of AGM which will be available shortly on our website at www.lloydsbankinggroup.com
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 at www.lloydsbankinggroup.com, where our statutory reports and shareholder communications are available. A summary of the scheduled reports and communications to be issued in 2019 is set out below: Available format
Individual Savings Accounts (ISAs) There are a number of options for investing in Lloyds Banking Group shares through an ISA. For details of services and products provided by the Group please contact Bank of Scotland Share Dealing, Halifax Share Dealing or Lloyds Bank Direct Investments using the contact details above.
Shareholder information help.shareview.co.uk (from here you will be able to email your query securely)
4 For 2016 and previous years, this figure excluded the limited voting ordinary shares owned by the Lloyds Bank Foundations. The limited voting ordinary shares were redesignated as ordinary shares on 1 July 2017.
7 The cost:income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims) .
Gross asset quality ratio The underlying impairment charge for the period (on an annualised basis) in respect of loans and advances to customers before releases and write-backs, expressed as a percentage of average gross loans and advances to customers for the period.
Underlying, or above the line, profit Statutory profit adjusted for certain items as detailed on page 43.
Underlying return on tangible equity Underlying profit after tax at the standard UK corporation tax rate adjusted to add back amortisation of intangible assets and to deduct profit attributable to non-controlling interests and other equity holders, divided by average tangible net assets.
In compliance with Section 409 of the Companies Act 2006, the following comprises a list of all related undertakings of the Group, as at 31 December 2018. The list includes each undertaking’s registered office and the percentage of the class(es) of shares held by the Group. All shares held are ordinary shares unless indicated otherwise in the notes.
Bank of Wales Ltd 2 Barents Leasing Ltd 1 Barnwood Mortgages Ltd 12 Birchcrown Finance Ltd 1 iv vi Birmingham Midshires Financial Services Ltd 4 Birmingham Midshires Land Development Ltd 4 Birmingham Midshires Mortgage Services Ltd 4 Black Horse (TRF) Ltd 1 Black Horse Executive Mortgages Ltd 1 Black Horse Finance Holdings Ltd 1 i ii Black Horse Finance Management Ltd 1 Black Horse Group Ltd 1 iv Black Horse Ltd 1 Black Horse Offshore Ltd 58 Black Horse Property Services Ltd 1 Boltro Nominees Ltd 1 BOS (Ireland) Property Services 2 Ltd 16 BOS (Ireland) Property Services Ltd 16 BOS (Shared Appreciation Mortgages
ii Eurolead Services Holdings Ltd 9 Exclusive Finance No. 1 Ltd (In liquidation) 13 i Financial Consultants LB Ltd (In liquidation) 13 First Retail Finance (Chester) Ltd 4 Flexifly Ltd (In liquidation) 73 Fontview Ltd (In liquidation) 13 Forthright Finance Ltd 2 France Industrial Premises Holding Company 28 Freeway Ltd (In liquidation) 13 General Leasing (No. 4) Ltd (In liquidation) 13 General Leasing (No. 12) Ltd 1 General Reversionary and Investment Company 20 Glosstrips Ltd (In liquidation) 73 Godfrey Davis (Contract Hire) Ltd (In liquidation) 13 Gresham Nominee 1 Ltd 1 Gresham Nominee 2 Ltd 1 Halifax Credit Card Ltd 4 i ii vii
HBOS Investment Fund Managers Ltd 4 i HBOS plc 5 iv vi
LDC VIII LP 40 * Leasing (No. 2) Ltd (In liquidation) 13 Legacy Renewal Company Ltd 5 Lex Autolease (CH) Ltd 1 Lex Autolease (FMS) Ltd (In liquidation) 13 Lex Autolease (Shrewsbury) Ltd (In liquidation) 13 iv v
Lloyds Bank Asset Finance Ltd 1 Lloyds Bank Commercial Finance Ltd 9 Lloyds Bank Commercial Finance Scotland Ltd 43 Lloyds Bank Corporate Asset Finance (HP) Ltd 1 Lloyds Bank Corporate Asset Finance (No.1) Ltd 1 Lloyds Bank Corporate Asset Finance (No. 2) Ltd 1 Lloyds Bank Corporate Asset Finance (No.3) Ltd 1 Lloyds Bank Corporate Asset Finance (No.4) Ltd 1 Lloyds Bank Corporate Markets plc 1̂ Lloyds Bank Covered Bonds LLP 44 * Lloyds Bank Equipment Leasing (No. 1) Ltd 1 Lloyds Bank Equipment Leasing (No. 7) Ltd 1 Lloyds Bank Equipment Leasing (No. 9) Ltd 1 Lloyds Bank Equipment Leasing (No. 10) Ltd
Lloyds Bank Hill Samuel Holding Company Ltd 1 Lloyds Bank Insurance Services (Direct) Ltd
Nominees (Jersey) Ltd 58 Nordic Leasing Ltd 1 NWS Trust Ltd 5 Ocean Leasing (July) Ltd (In liquidation) 13 Ocean Leasing (No 2) Ltd (In liquidation) 13 Oystercatcher Nominees Ltd 20 Oystercatcher Residential Ltd 20 Pacific Leasing Ltd 1 Pensions Management (S.W.F.) Ltd 54 * Peony Eastern Leasing Ltd (In liquidation) 13 Peony Leasing Ltd (In liquidation) 13 Peony Western Leasing Ltd (In liquidation) 13 Perry Nominees Ltd 1 PIPS Asset Investments Ltd 1 i ii Prestonfield Investments Ltd 5 Proton Finance Ltd 7 i #
ii R.F. Spencer And Company Ltd 2 Ranelagh Nominees Ltd 1 Red Box ACD Ltd 1 Red Box Holdco Ltd 1 Red Box Opco Ltd 1 Retail Revival (Burgess Hill) Investments Ltd 1 Saint Michel Holding Company No1 28 Saint Michel Investment Property 28 Saint Witz 2 Holding Company No1 28 Saint Witz 2 Investment Property 28
Scottish Widows Industrial Properties Europe B.V. 18 Scottish Widows Ltd 1 Scottish Widows Pension Trustees Ltd 3 Scottish Widows Property Management Ltd 54 Scottish Widows Services Ltd 3 Scottish Widows Trustees Ltd 54 Scottish Widows Unit Funds Ltd 3 Scottish Widows Unit Trust Managers Ltd 45 Seabreeze Leasing Ltd 1 Seaforth Maritime (Highlander) Ltd (In liquidation) 73 Seaforth Maritime (Jarl) Ltd (In liquidation) 73 Seaspirit Leasing Ltd 1 Seaspray Leasing Ltd (In liquidation) 13 Share Dealing Nominees Ltd 4 Shogun Finance Ltd 7 i #
Celsius European Lux 2 SARL 72 Cheltenham Securities 2017 Limited 61 Chepstow Blue Holdings Ltd 44 Chepstow Blue plc 44 Chester Asset Options No.2 Limited 69 Chester Asset Options No.3 Limited 74 Chester Asset Receivables Dealings Issuer Limited 63 Chester Asset Securitisation Holdings Limited 69 Chester Asset Securitisation Holdings No.2 Limited 63 Clerical Medical Non Sterling Arts FSA 65 Clerical Medical Non Sterling Arts LSA 65 Clerical Medical Non Sterling Guadalix Hold Co BV 66 Clerical Medical Non Sterling Guadalix Spanish
Paladone Holdings Ltd 89.25% Apex House, Dolphin Way, Shoreham-by-Sea, West Sussex, BN43 6NZ, United Kingdom i & Panther Partners Ltd 89% 16 Kirby Street, London, EC1N 8TS xx & 89% xxi Patrick Parsons Holdings Limited 89.25% Fourth Floor Central Square, Forth Street, Newcastle upon Tyne NE1 3PJ xx & Paw Topco Ltd 89.25% Birkbecks, Water Street, Skipton, North Yorkshire, BD23 1PB xx & 89.25% xxi Pertemps Network Group Ltd 96.28% Meriden Hall, Main Road, Meriden, Coventry ii & Personal Touch Holdings Limited 49.9% Trinity 3, Trinity Park, Solihull, West Midlands, B37 7ES xvii & PIHL Equity Administration Ltd 100% Cavendish House, 18 Cavendish Square, London, W1G 0PJ ii PIMCO (Holdings) Ltd 82.5% Four Brindleyplace, Birmingham, B1 2HZ, United Kingdom i & 42.8% ii 30.58% vii
Right Choice Holdings Limited 89.25% St James House, 27-43 Eastern Road, Romford, Essex, United Kingdon, RM1 3NH i & Rocket Science Holdings Ltd 99% Level 1, Devonshire House, Mayfair Place, London, England, W1J 8AJ x & Rolls Development UK Ltd (In Liquidation) 50% 4th Floor , 4 Victoria Square, St Albans, Hertfordhsire, AL1 3TF, United Kingdom ii Rush Hair Group Limited 89.25% 23 George Street, Croydon, Surrey, CR0 1LA i & Scenic Topco Limited 89.25% One Central Square, Cardiff, CF10 1FS i & Seahawk Bidco Ltd 89.25% Unit 2 Springfield Court, Summerfield Road, Bolton, BL3 2NT, United Kingdom xx & Seaspray Unincorporated JV n/a Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia * SHOO 788AA Ltd 89.25% 21-22 Balena Close, Poole, Dorset, BH17 7DX xx & SHOO 802AA Ltd 89.25% Burleighfield House, London Road, Loudwater, Bucks, HP10 9RF xx & Specialist People Services Group Ltd 82.5% 7 Bradford Business Park, Kingsgate, Bradford, BD1 4SJ xx & 82.5% iii 82.5% iv 82.5% xxi
ABERDEEN INVESTMENTS ICVC II 8 Aberdeen Global Corporate Bond Tracker Fund 100%
ABERDEEN LIQUIDITY FUND (LUX) 7 Aberdeen Liquidity Fund (Lux) – Sterling Fund 25% Aberdeen Liquidity Fund (Lux) – Ultra Short Duration
HBOS INTERNATIONAL INVESTMENT FUNDS ICVC 1 North American Fund 96% Far Eastern Fund 81% European Fund 94% International Growth Fund 53% Japanese Fund 95%
International Equity Tracker Fund 76% Balanced Portfolio Fund 82% Progressive Portfolio Fund 72% Cautious Portfolio Fund 60% Cash Fund 99% Opportunities Portfolio Fund 92%
Registered office addresses (1) 25 Gresham Street, London, EC2V 7HN (2) Charterhall House, Charterhall Drive, Chester, CH88 3AN (3) Port Hamilton, 69 Morrison Street, Edinburgh, EH3 8YF (4) Trinity Road, Halifax, HX1 2RG (5) The Mound, Edinburgh, EH1 1YZ (6) 4th Floor, Victoria House, Victoria Road, Chelmsford, CM1 1JR, United Kingdom (7) 116 Cockfosters Road, Barnet, Hertfordshire, EN4 0DY (8) Minter Ellison, Governor Macquire Tower, Level 40, 1 Farrer Place, Sydney, NSW 2000,