Expected credit loss in respect of financial assets at fair value through other comprehensive income (memorandum item) : 1 – – – 1
Other items charged to the income statement (11) (20) (5) – (36)
Total financial assets at fair value through other comprehensive income 25,092 24,815
Note 22: Investments in joint ventures and associates The Group's share of results of, and investments in, equity accounted joint ventures and associates comprises: Joint ventures Associates Total 2019 £m £m 2017 £m 2019 £m £m 2017 £m 2019 £m £m 2017 £m
Share of total comprehensive income 7 17 2 (1) – 4 6 17 6
Movement in investments over the year: Exchange and other adjustments – – – 1 – 1
Following disposal of the 49.9 per cent interest, the Group accounts for its remaining 50.1 per cent interest in Scottish Widows Schroder Wealth Holdings Limited as a joint venture, which was recorded at a fair value upon initial recognition of £208 million.
The Group recognised a gain arising from these transactions of £244 million, net of a charge of £70 million for an onerous contract provision in relation to the services that it is now obligated to provide to the joint venture; this amount is recognised within other operating income.
The recoverable amount of the goodwill relating to Scottish Widows has been based on a value-in-use calculation. The calculation uses pre-tax projections of future cash flows based upon budgets and plans approved by management covering a three-year period, the related run-off of existing business in force and a discount rate of 8 per cent. The budgets and plans are based upon past experience adjusted to take into account anticipated changes in sales volumes, product mix and margins having regard to expected market conditions and competitor activity. The discount rate is determined with reference to internal measures and available industry information. New business cash flows beyond the three-year period have been extrapolated using a steady 2 per cent growth rate which does not exceed the long-term average growth rate for the life assurance market. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of Scottish Widows to fall below its balance sheet carrying value.
The table below shows the resulting range of yields and other key assumptions at 31 December: %
Note 25: Value of in-force business continued Movement in value of in-force business The movement in the value of in-force insurance and participating investment contracts over the year is as follows: 2019 £m 2018 £m
This breakdown shows the movement in the value of in-force business only, and does not represent the full contribution that each item in the breakdown makes to profit before tax. This will also contain changes in the other assets and liabilities, including the effects of changes in assumptions used to value the liabilities, of the relevant businesses. The presentation of economic variance includes the impact of financial market conditions being different at the end of the year from those included in assumptions used to calculate new and existing business returns.
Accumulated amortisation: Exchange and other adjustments – – – – 4 4
The purchased credit card relationships represent the benefit of recurring income generated from portfolios of credit cards purchased. The balance sheet amount at 31 December 2019 is expected to be amortised over its remaining useful life of eight years.
Adjustment on adoption of IFRS 16 (note 55) – – – – 1,716 1,716
Expenditure on investment properties (see below) 73 – – – – 73
Balance sheet amount at 31 December 2018 3,770 1,000 2,709 4,821 – 12,300 1 Primarily premises.
Expenditure on investment properties is comprised as follows: 2019 £m 2018 £m
Rental income of £191 million (2018: £197 million) and direct operating expenses arising from properties that generate rental income of £32 million (2018: £23 million) have been recognised in the income statement.
The Group has a number of covered bond programmes, for which limited liability partnerships have been established to ring-fence asset pools and guarantee the covered bonds issued by the Group. At the reporting date the Group had over-collateralised these programmes as set out in the table above to meet the terms of the programmes, to secure the rating of the covered bonds and to provide operational flexibility. From time-to-time, the obligations of the Group to provide collateral may increase due to the formal requirements of the programmes. The Group may also voluntarily contribute collateral to support the ratings of the covered bonds.
With-profit fund realistic liabilities (i) Business description Scottish Widows Limited has the only with-profit funds within the Group. The primary purpose of the conventional and unitised business written in the withprofit funds is to provide a smoothed investment vehicle to policyholders, protecting them against short-term market fluctuations. Payouts may be subject to a guaranteed minimum payout if certain policy conditions are met. With-profit policyholders are entitled to at least 90 per cent of the distributed profits, with the shareholders receiving the balance. The policyholders are also usually insured against death and the policy may carry a guaranteed annuity option at retirement.
(ii) Method of calculation of liabilities With-profit liabilities are stated at their realistic value, the main components of which are: – With-profit benefit reserve, the total asset shares for with-profit policies; – Cost of options and guarantees (including guaranteed annuity options) ; – Deductions levied against asset shares; – Planned enhancements to with-profits benefits reserve; and – Impact of the smoothing policy.
Note 32: Liabilities arising from insurance contracts and participating investment contracts continued
Widening of credit default spreads on corporate bonds8 0.25% addition (424) (352) (364) (303)
Later than 2 years and not later than 3 years 207 7
The most recent triennial funding valuation of the Group’s three main schemes, based on the position as at 31 December 2016, showed an aggregate funding deficit of £7.3 billion (a funding level of 85.6 per cent) compared to a £5.2 billion deficit (a funding level of 85.9 per cent) for the previous valuation as at 30 June 2014. In the light of this funding deficit, and in contemplation of the changes that the Group had made as a result of its Structural Reform Programme, the Group agreed a recovery plan with the trustees. Under the plan, deficit contributions of £618 million were paid during 2019, and these will rise to £798 million in 2020, £1,287 million in 2021 and £1,305 million per annum from 2022 to 2024. Contributions in the later years will be subject to review and renegotiation at subsequent funding valuations. The next funding valuation is due to be completed by March 2021 with an effective date of 31 December 2019. The deficit contributions are in addition to the regular contributions to meet benefits accruing over the year, and to cover the expenses of running the scheme. The Group currently expects to pay contributions of approximately £1,200 million to its defined benefit schemes in 2020.
During 2009, the Group made one-off contributions to the Lloyds Bank Pension Scheme No 1 and Lloyds Bank Pension Scheme No 2 in the form of interests in limited liability partnerships for each of the two schemes which hold assets to provide security for the Group’s obligations to the two schemes. At 31 December 2019, the limited liability partnerships held assets of approximately £6.7 billion. The limited liability partnerships are consolidated fully in the Group’s balance sheet.
The expense recognised in the income statement for the year ended 31 December comprises: 2019 £m 2018 £m 2017 £m
Debt instruments1: Fixed interest government bonds 8,893 – 8,893 7,449 – 7,449
Money market instruments, cash, derivatives and other assets and liabilities 204 (8,211) (8,007) (283) (6,843) (7,126)
2 At 31 December 2019, the assumed discount rate is 2.05 per cent (2018: 2.90 per cent) .
Duration of the defined benefit obligation 18 18 2019 £m 2018 £m
During the year ended 31 December 2019 the charge to the income statement in respect of defined contribution schemes was £287 million (2018: £300 million; 2017: £256 million) , representing the contributions payable by the employer in accordance with each scheme’s rules.
(Charge) credit to the income statement (167) (1) (83) (87) 4 149 174 (11)
(Charge) credit to other comprehensive income – – 74 116 – – – 190
Deferred tax not recognised Deferred tax of £24 million (2018: £90 million) has been recognised in respect of the future tax benefit of some expenses of the life assurance business carried forward. The deferred tax asset not recognised in respect of the remaining expenses is approximately £254 million (2018: £371 million) , and these expenses can be carried forward indefinitely. The unrecognised deferred tax asset has reduced in 2019, as a significant amount of brought forward expenses have been utilised in the last year.
For every one per cent increase in PIR conversion rate on the stock as at the industry deadline, the Group would expect an additional charge of approximately £100 million.
HBOS Reading – review The Group has now completed its compensation assessment for all 71 business customers within the customer review, with more than 98 per cent of these offers to individuals accepted. In total, more than £100 million in compensation has been offered to victims of the HBOS Reading fraud prior to the publication of Sir Ross Cranston’s independent quality assurance review of the customer review, of which £94 million has so far been accepted, in addition to £9 million for ex-gratia payments and £6 million for the re-imbursements of legal fees. Sir Ross’s 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. The Group has committed to implementing Sir Ross’s recommendations in full. In addition, further ex gratia payments of £35,000 have been made to 200 individuals in recognition of the additional delay which will be caused whilst the Group takes steps to implement Sir Ross’s recommendations. It is not possible to estimate at this stage what the financial impact will be.
The Group carries provisions of £118 million (2018: £122 million) for indemnities and other matters relating to legacy business disposals in prior years.
Note 39: Subordinated liabilities The movement in subordinated liabilities during the year was as follows: Preference shares £m
Dated subordinated liabilities £m 10.5% Subordinated Bonds callable 2018 150 6.75% Subordinated Fixed Rate Notes callable 2018 1,492
These securities 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, other than creditors whose claims rank equally with, or are junior to, the claims of the holders of the subordinated liabilities. The subordination of specific subordinated liabilities is determined in respect of the issuer and any guarantors of that liability. The claims of holders of preference shares and preferred securities are generally junior to those of the holders of undated subordinated liabilities, which in turn are junior to the claims of holders of the dated subordinated liabilities. The Group has not had any defaults of principal, interest or other breaches with respect to its subordinated liabilities during 2019 (2018: none) .
The Company has entered into deeds of covenant with the Foundations under the terms of which the Company makes annual donations. The deeds of covenant in effect as at 31 December 2019 provide that such annual donations will cease in certain circumstances, including the Company providing nine years’ notice. Such notice has been given to the Lloyds TSB Foundation for Scotland.
Revaluation reserve in respect of debt securities held at fair value through other comprehensive income 123 279
Foreign currency gains on net investment hedges (tax: £nil) – – (11)
Issue costs of other equity instruments (net of tax) (note 44) (3) (5) –
Other employee award schemes 165 207 332 1 Restated, see note 1.
2 Net of a credit in respect of unclaimed dividends written-back in accordance with the Company’s Articles of Association in 2017.
Retained profits are stated after deducting £575 million (2018: £499 million; 2017: £611 million) representing 902 million (2018: 909 million; 2017: 861 million) treasury shares held.
During the year ended 31 December 2019 the Group issued £500 million of sterling and £396 million (US$500 million) of US dollar Additional Tier 1 (AT1) securities; issue costs of £3 million, net of tax, were charged to retained profits.
On 27 June 2019 the Group redeemed, at par, £1,481 million of Additional Tier 1 securities at their first call date.
The principal terms of the AT1 securities are described below: – The securities rank behind the claims against Lloyds Banking Group plc of (a) unsubordinated creditors, (b) claims which are, or are expressed to be, subordinated to the claims of unsubordinated creditors of Lloyds Banking Group plc but not further or otherwise or (c) whose claims are, or are expressed to be, junior to the claims of other creditors of Lloyds Banking Group, whether subordinated or unsubordinated, other than those whose claims rank, or are expressed to rank, pari passu with, or junior to, the claims of the holders of the AT1 Securities in a winding-up occurring prior to a conversion event being triggered. – The securities bear a fixed rate of interest until the first call date. After the initial call date, in the event that they are not redeemed, the AT1 securities will bear interest at rates fixed periodically in advance for five year periods based on market rates. – Interest on the securities will be due and payable only at the sole discretion of Lloyds Banking Group plc, and Lloyds Banking Group plc may at any time elect to cancel any Interest Payment (or any part thereof) which would otherwise be payable on any Interest Payment Date. There are also certain restrictions on the payment of interest as specified in the terms. – The securities are undated and are repayable, at the option of Lloyds Banking Group plc, in whole at the first call date or period, or on any fifth anniversary after the first call date or period. In addition, the AT1 securities are repayable, at the option of Lloyds Banking Group plc, in whole for certain regulatory or tax reasons. Any repayments require the prior consent of the PRA. – The securities convert into ordinary shares of Lloyds Banking Group plc, at a pre-determined price, should the fully loaded Common Equity Tier 1 ratio of the Group fall below 7.0 per cent.
In May 2019 the Group announced that it will move to the payment of quarterly dividends in 2020, with the first quarterly dividend in respect of the first quarter of 2020 payable in June 2020. The new approach will be to adopt three equal interim ordinary dividend payments for the first three quarters of the year followed by, subject to performance, a larger final dividend for the fourth quarter of the year. The first three quarterly payments, payable in June, September and December will be 20 per cent of the previous year’s total ordinary dividend per share. The fourth quarter payment will be announced with the full year results. The final dividend will continue to be paid in May, following approval at the AGM. The Group believes that this approach will provide a more regular flow of dividend income to all shareholders whilst accelerating the receipt of payments.
Group Performance Share plan The Group operates a Group Performance Share plan that is equity settled. Bonuses in respect of employee performance in 2019 have been recognised in the charge in line with the proportion of the deferral period completed.
Awards in respect of the 2017 grant vested in 2020 at a rate of 49.7 per cent. For the 2017 grant, participants are entitled to any dividends paid during the vesting period. An amount equal in value to any dividends paid between the award date and the date the Remuneration Committee determine that the performance conditions were met, will be paid, based on the number of shares that vest. The Remuneration Committee can determine if any dividends are to be paid in cash or in shares. Details of the performance conditions for the plan are provided in the Directors’ remuneration report.
The weighted average fair value of awards granted in the year was £0.45 (2018: £0.48) .
Weighted average expected life 3.2 years 1.3 years 3.7 years 1.4 years
Share Incentive Plan Free Shares An award of shares may be made annually to employees up to a maximum of £3,600. The shares awarded 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 the Group within this three year period for other than a ‘good’ reason, all of the shares awarded will be forfeited.
Granted, including certain adjustments (includes entitlements of appointed key management personnel) – – –
At 31 December – – 1 2019 million 2018 million 2017 million
At 31 December 2019, the Group did not provide any guarantees in respect of key management personnel (2018 and 2017: none) .
LIBOR and other trading rates In July 2014, the Group announced that it had reached settlements totalling £217 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. 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.
Other commitments and guarantees 85,735 85,060 1 year or over original maturity 34,945 37,712
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £63,504 million (2018: £64,884 million) was irrevocable.
Capital commitments Excluding commitments in respect of investment property (note 27) , capital expenditure contracted but not provided for at 31 December 2019 amounted to £405 million (2018: £378 million) . Of this amount, £400 million (2018: £369 million) related to assets to be leased to customers under operating leases. The Group’s management is confident that future net revenues and funding will be sufficient to cover these commitments.
(A) Asset-backed conduits In addition to the structured entities discussed in note 31, which are used for securitisation and covered bond programmes, the Group sponsors an active asset-backed conduit, Cancara, which invests in client receivables and debt securities. The total consolidated exposure of Cancara at 31 December 2019 was £3,735 million (2018: £5,122 million) , comprising £3,670 million of loans and advances (2018: £5,012 million) and £65 million of debt securities (2018: £110 million) .
The Group earns fees from managing the investments of these funds. The investment management fees that the Group earned from these entities, including those in which the Group held no ownership interest at 31 December 2019, are reported in note 6.
Financial assets at fair value through other comprehensive income – – – – 25,092 – – 25,092
Assets arising from reinsurance contracts held – – – – – – 23,567 23,567
Liabilities arising from insurance contracts and participating investment contracts – – – – – – 111,449 111,449
Liabilities arising from non-participating investment contracts – – – – – – 37,459 37,459
Assets arising from reinsurance contracts held – – – – – – 7,860 7,860
Note 50: Financial instruments continued (2) 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. It is a measure as at a specific date and may be significantly different from the amount which will actually be paid or received on maturity or settlement date.
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, assets arising from reinsurance contracts held, items in course of transmission to banks, notes in circulation and liabilities arising from non-participating investment contracts.
Fair value information is not provided for items that are not financial instruments or for other assets and liabilities which are not carried at fair value in the Group’s consolidated balance sheet. These items include intangible assets, such as the value of the Group’s branch network, the long-term relationships with depositors and credit card relationships; premises and equipment; and shareholders’ equity. These items are material and accordingly the Group believes that the fair value information presented does not represent the underlying value of the Group.
Model validation covers both qualitative and quantitative elements relating to new models. In respect of new products, a product implementation review is conducted pre- and post-trading. Pre-trade testing ensures that the new model is integrated into the Group’s systems and that the profit and loss and risk reporting are consistent throughout the trade life cycle. Post-trade testing examines the explanatory power of the implemented model, actively monitoring model parameters and comparing in-house pricing to external sources. Independent price verification procedures cover financial instruments carried at fair value. The frequency of the review is matched to the availability of independent data, monthly being the minimum. Valuation differences in breach of established thresholds are escalated to senior management. The results from independent pricing and valuation reserves are reviewed monthly by senior management.
Total financial assets at fair value through profit or loss 112,473 32,808 14,908 160,189
Gains (losses) recognised in the income statement, within other income, relating to the change in fair value of those assets held at 31 December 269 – 269 (104) – (104)
Liabilities held at fair value through profit or loss These principally comprise debt securities in issue which are classified as level 2 and their fair value is determined using techniques whose inputs are based on observable market data. The carrying amount of the securities is adjusted to reflect the effect of changes in own credit spreads and the resulting gain or loss is recognised in other comprehensive income.
(C) Derivatives All of the Group’s derivative assets and liabilities are carried at fair value. At 31 December 2019, such assets totalled £26,369 million (31 December 2018: £23,595 million) and liabilities totalled £25,779 million (31 December 2018: £21,373 million) . The table below analyses these derivative balances by valuation methodology (level 1, 2 or 3, as described on page 277) . The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and level 2 during the year.
Gains (losses) recognised in the income statement, within other income, relating to the change in fair value of those assets or liabilities held at 31 December (14) 18 (424) 82
A CVA is taken where the Group has a positive future uncollateralised exposure (asset) . A DVA is taken where the Group has a negative future uncollateralised exposure (liability) . These adjustments reflect interest rates and expectations of counterparty creditworthiness and the Group’s own credit spread respectively.
The combination of a one notch deterioration in the credit rating of derivative counterparties and a ten per cent increase in LGD increases the CVA by £60 million. Current market value is used to estimate the projected exposure for products not supported by the model, which are principally complex interest rate options that are traded in very low volumes. For these, the CVA is calculated on an add-on basis (although no such adjustment was required at 31 December 2019) .
Level 3 financial liabilities carried at fair value 1,415 727 1 Ranges are shown where appropriate and represent the highest and lowest inputs used in the level 3 valuations.
Loans and advances to customers: Stage 3 4,568 3,508 – – 3,508
Loans and advances to customers: purchased or originated credit-impaired 15,313 15,313 – – 15,313
Reverse repos included in above amounts: Loans and advances to customers 40,483 40,483 – 40,483 –
Related amounts where set off in the balance sheet not permitted3 Potential net amounts if offset of related amounts permitted £mAt 31 December 2019
Related amounts where set off in the balance sheet not permitted3 Potential net amounts if offset of related amounts permitted £mAt 31 December 2018
3 The Group enters into derivatives and repurchase and reverse repurchase agreements with various counterparties which are governed by industry standard master netting agreements. The Group holds and provides cash and securities collateral in respective of derivative transactions covered by these agreements. The right to set off balances under these master netting agreements or to set off cash and securities collateral only arises in the event of non-payment or default and, as a result, these arrangements do not qualify for offsetting under IAS 32.
The Group establishes hedge accounting relationships for interest rate risk using cash flow hedges and fair value hedges. The Group is exposed to cash flow interest rate risk on its variable rate loans and deposits together with its floating rate subordinated debt. The derivatives used to manage the structural hedge may be designated into cash flow hedges to manage income statement volatility. The economic items related to the structural hedge, for example current accounts, are not eligible hedged items under IAS 39 for inclusion into accounting hedge relationships. The Group is exposed to fair value interest rate risk on its fixed rate customer loans, its fixed rate customer deposits and the majority of its subordinated debt, and to cash flow interest rate risk on its variable rate loans and deposits together with its floating rate subordinated debt. The Group applies netting between similar risks before applying hedge accounting.
The Group’s most significant hedge accounting relationships are exposed to the following interest rate benchmarks: Sterling LIBOR, US Dollar LIBOR and Euro LIBOR. The notional of the hedged items that the Group has designated into cash-flow hedge relationships that is directly affected by the interest rate benchmark reform is £29,202 million, of which £25,438 million relates to Sterling LIBOR. These are principally loans and advances to customers in Commercial Banking. In addition, the interest rate benchmark reforms affect assets designated in fair value hedges with a notional of £102,969 million, of which £98,278 million is in respect of sterling LIBOR, and liabilities designated in fair value hedges with a notional of £62,295 million, of which £9,186 million is in respect of sterling LIBOR. These fair value hedges principally relate to mortgages in Retail and debt securities in issue.
Loans and advances to customers, net1 494,988 (2,792) 492,196 484,858 (3,241) 481,617
Assets arising from reinsurance contracts held 23,567 – 23,567 7,860 – 7,860
Performance bonds and other transaction-related contingencies 2,454 – 2,454 2,425 – 2,425 1 Amounts shown net of related impairment allowances.
Expected credit losses in respect of drawn exposures (continued) PD range £m £m £m
In respect of: Total loans and advances to customers 675 995 1,447 142 3,259
In respect of: Total loans and advances to customers 129,634 3,741 99 79 133,553
In respect of: Total loans and advances to customers 441,531 25,345 5,741 15,391 488,008
In respect of: Total loans and advances to customers 525 994 1,553 78 3,150
In respect of: Total loans and advances to customers 131,846 3,112 50 90 135,098
Total debt securities held at amortised cost 5,544 5,238 1 Credit ratings equal to or better than ‘BBB’.
2 Other comprises sub-investment grade (31 December 2019: £nil; 31 December 2018: £6 million) and not rated (31 December 2019: £14 million; 31 December 2018: £36 million) .
2 Other comprises sub-investment grade (31 December 2019: £89 million; 31 December 2018: £85 million) and not rated (31 December 2019: £nil; 31 December 2018: £263 million) .
Total held at fair value through profit or loss 38,828 2,097 40,925 38,212 1,956 40,168 1 Credit ratings equal to or better than ‘BBB’.
(D) Collateral held as security for financial assets A general description of collateral held as security in respect of financial instruments is provided on page 142. The Group holds collateral against loans and advances and irrevocable loan commitments; qualitative and, where appropriate, quantitative information is provided in respect of this collateral below. Collateral held as security for financial assets at fair value through profit or loss and for derivative assets is also shown below.
Mortgages An analysis by loan-to-value ratio of the Group's residential mortgage lending is provided below. The value of collateral used in determining the loan-to-value ratios has been estimated based upon the last actual valuation, adjusted to take into account subsequent movements in house prices, after making allowances for indexation error and dilapidations.
Expected credit losses on drawn balances 70 per cent to 80 per cent 7 75 29 38 149 11 51 24 12 98 80 per cent to 90 per cent 7 58 25 23 113 14 47 27 16 104 90 per cent to 100 per cent 2 17 12 10 41 4 16 14 9 43
Other The majority of non-mortgage retail lending is unsecured. At 31 December 2019, Stage 3 non-mortgage lending amounted to £610 million, net of an impairment allowance of £368 million (2018: £631 million, net of an impairment allowance of £366 million) .
In addition, securities held as collateral in the form of stock borrowed amounted to £32,888 million (2018: £51,202 million) . Of this amount, £30,594 million (2018: £49,233 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 2019, the Group held irrevocable loan commitments and other credit-related contingencies of £66,398 million (2018: £68,135 million) . Collateral is held as security, in the event that lending is drawn down, on £12,391 million (2018: £10,661 million) of these balances.
Collateral repossessed During the year, £413 million of collateral was repossessed (2018: £245 million) , consisting primarily of residential property.
(E) Collateral pledged as security The Group pledges assets primarily for repurchase agreements and securities lending transactions which are generally conducted under terms that are usual and customary for standard securitised borrowing contracts.
Deposits from banks Included in deposits from banks are balances arising from repurchase transactions of £18,105 million (2018: £21,170 million) ; the fair value of the collateral provided under these agreements at 31 December 2019 was £17,545 million (2018: £19,615 million) .
Customer deposits Included in customer deposits are balances arising from repurchase transactions of £9,530 million (2018: £1,818 million) ; the fair value of the collateral provided under these agreements at 31 December 2019 was £9,221 million (2018: £1,710 million) .
Securities lending transactions The following on balance sheet financial assets have been lent to counterparties under securities lending transactions: 2019 £m 2018 £m
Securitisations and covered bonds 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 note 31.
Liabilities arising from insurance and investment contracts 1,213 1,658 2,370 2,348 2,882 9,028 24,870 104,539 148,908
Financial assets at fair value through profit or loss 10,686 8,826 8,492 5,133 2,587 2,090 5,467 115,248 158,529
Debt securities held as at amortised cost 7 – – 521 – – 2,262 2,448 5,238
Financial assets at fair value through other comprehensive income 166 453 249 800 1,685 2,536 11,496 7,430 24,815
Derivative financial instruments and financial liabilities at fair value through profit or loss 5,160 11,877 5,048 1,663 522 1,104 4,108 22,438 51,920
Liabilities arising from non-participating investment contracts 13,853 – – – – 13,853
Change in derivative financial instruments and liabilities at fair value through profit or loss (5,078) (24,606) (12,481)
Write-off of allowance for loan losses, net of recoveries (1,458) (1,025) (1,061)
Net charge (credit) in respect of defined benefit schemes 245 405 369
Share of post-tax results of associates and joint ventures (6) (9) (6)
Net cash outflow from acquisitions in the year 21 49 1,923 1 Upon acquisition in 2017, the funding of MBNA was assumed by Lloyds Bank plc.
In applying IFRS 16 for the first time, the Group has used a number of practical expedients permitted by the standard; the most significant of which were the use of a single discount rate to a portfolio of leases with reasonably similar characteristics; reliance on previous assessments of whether a lease is onerous; and the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease. The Group has also elected not to apply IFRS 16 to contracts that were not identified as containing a lease under IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease.
Parent company balance sheet at 31 December 318 Lloyds Banking Group Annual Report and Accounts 2019
Financial assets at fair value through profit or loss 2 12,516 588
Total equity and liabilities 77,573 72,904 1 The parent company recorded a profit after tax for the year of £5,415 million (2018: £4,104 million, restated – see note 1) .
Distributions on other equity instruments1 – – – (415) (415) – (415)
Value of employee services: Share option schemes, net of tax – – – 82 82 – 82
Issue of other equity instruments – – – (5) (5) 896 891
Parent company cash flow statement for the year ended 31 December 320 Lloyds Banking Group Annual Report and Accounts 2019
Note 1: Basis of preparation and accounting policies Lloyds Banking Group plc (the Company) has applied International Financial Reporting Standards as adopted by the European Union in its financial statements for the year ended 31 December 2019. IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board and those prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the IFRS Interpretations Committee and its predecessor body. The EU endorsed version of IAS 39 Financial Instruments: Recognition and Measurement relaxes some of the hedge accounting requirements; the Company has not taken advantage of this relaxation, and therefore there is no difference in application to the Company between IFRS as adopted by the EU and IFRS as issued by the IASB.
Fees payable to the Company’s auditors by the Group are set out in note 12 to the consolidated financial statements.
Note 5: 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.
Movements in the merger reserve were as follows: 2019 £m 2018 £m 2017 £m
2 Details of the Company’s dividends are as set out in note 45 to the consolidated financial statements.
Financial assets: Cash and cash equivalents – – – – 29 29
Financial assets: Cash and cash equivalents – – – – 57 57
Credit risk The majority of the Company’s credit risk arises from amounts due from its wholly owned subsidiaries, Lloyds Bank plc, and subsidiaries of that company.
Note 11: Financial instruments continued The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest of approximately £1 million (2018: £1 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.
The carrying amount of cash and cash equivalents (2019: £29 million; 2018: £57 million) is a reasonable approximation of fair value.
Note 12: Other information 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 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 2020 is set out below: Available format
Share dealing facilities We offer a choice of four share dealing services for our UK shareholders and customers. To see the full range of services available for each, please use the contact details below: Service Provider Telephone Dealing Internet Dealing
Shareholder helpline 0371 384 2990* from within the UK +44 121 415 7066 from outside the UK * Lines are open from 8.30 am to 5.30 pm Monday to Friday, excluding English and Welsh public holidays.
Net asset value per ordinary share 59.5p 61.0p 60.5p 60.2p 57.9p
3 The Group adopted IFRS 9 and IFRS 15 with effect from 1 January 2018; in accordance with the transition requirements of the two standards, comparative information for preceding years was not restated.
6 For 2016 and 2015, 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.
8 Total dividend for the year divided by earnings attributable to ordinary shareholders adjusted for tax relief on distributions to other equity holders.
9 The cost:income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims) .
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 Lloyds Banking Group 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.
Underlying, or above the line, profit Statutory profit adjusted for certain items as detailed on page 56.
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 2019. 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 (in liquidation)
HBOS Investment Fund Managers Ltd 4 i HBOS plc 5 iv vi HBOS Social Housing Covered Bonds LLP 2 * HBOS UK Ltd 5 Heidi Finance Holdings (UK) Ltd 1 Hill Samuel Bank Ltd 1 Hill Samuel Finance Ltd 1 iv vi Hill Samuel Leasing Co. Ltd 1 Home Shopping Personal Finance Ltd 4 Horizon Capital 2000 Ltd 5 Housing Growth Partnership GP LLP 1 * Housing Growth Partnership LP 1 * # Housing Growth Partnership Ltd 1 i ii Housing Growth Partnership Manager Ltd 1 HSDL Nominees Ltd 4 HVF Ltd 2 Hyundai Car Finance Ltd 7 i ii IBOS Finance Ltd 2 ICC Enterprise Partners Ltd (In liquidation) 32 ICC Equity Partners Ltd (In liquidation) 32 ICC Holdings Unlimited Company 16 Inchcape Financial Services Ltd (in liquidation) 13 i ii # Intelligent Finance Financial Services Ltd 4 Intelligent Finance Software Ltd 4 International Motors Finance Ltd 2 i ii # Kanaalstraat Funding C.V. 35 * Katrine Leasing Ltd (in liquidation) 39 LB Healthcare Trustee Ltd 1 LB Motorent Ltd (in liquidation) 13 LB Quest Ltd (in liquidation) 13 LB Share Schemes Trustees Ltd 1 LBCF Ltd 9 LBG Brasil Administração LTDA 38 LBG Capital Holdings Ltd 1 ̂ LBG Equity Investments Ltd 1 ̂
St Andrew’s Insurance plc 20 St Andrew’s Life Assurance plc 20 St. Mary’s Court Investments 1 Standard Property Investment (1987) Ltd 5 i ii Standard Property Investment Ltd 57 # Sussex County Homes Ltd 4 Suzuki Financial Services Ltd 50 i ii # SW Funding plc 3 # SW No.1 Ltd 3 SWAMF (GP) Ltd (in liquidation) 13 SWAMF Nominee (1) Ltd (in liquidation) 13 SWAMF Nominee (2) Ltd (in liquidation) 13 The Agricultural Mortgage Corporation plc 45 The British Linen Company Ltd 5 The Mortgage Business plc 4 Thistle Leasing + * Three Copthall Avenue Ltd (in liquidation) 13 Tower Hill Property Investments (7) Ltd 47 # Tower Hill Property Investments (10) Ltd 47 # Tranquility Leasing Ltd 1 Uberior (Moorfield) Ltd 5 Uberior Co-Investments Ltd 5 Uberior ENA Ltd 5 Uberior Equity Ltd 5 Uberior Europe Ltd 5 Uberior Fund Investments Ltd 5 Uberior Infrastructure Investments Ltd 5 Uberior Infrastructure Investments (No.2) Ltd 1 Uberior Investments Ltd 5 Uberior Nominees Ltd 5 * Uberior Trading Ltd 5 Uberior Trustees Ltd 5 * Uberior Ventures Australia Pty Ltd 8 Uberior Ventures Ltd 5 UDT Budget Leasing Ltd (in liquidation) 13 UDT Sales Finance Ltd (In liquidation) 13 United Dominions Leasing Ltd 1 United Dominions Trust Ltd 1 Universe, The CMI Global Network Fund 70 * Upsaala Ltd 16 Vine Street IX LP 41 Ward Nominees (Abingdon) Ltd 1 Ward Nominees (Birmingham) Ltd 1 Ward Nominees (Bristol) Ltd 1 Ward Nominees Ltd 1 Waverley – Fund II Investor LLC 24 Waverley – Fund III Investor LLC 24 Waymark Asset Investments Ltd 1 i ii WCS Ltd (in liquidation) 60 West Craigs Ltd 5 Wood Street Leasing Ltd 1
Credit Card Securitisation Europe Ltd 63 Deva Financing Holdings Ltd 44 Deva Financing plc 44 Deva One Ltd 63 Deva Three Ltd 63 Deva Two Ltd 63 Edgbaston RMBS 2010-1 plc 44 Edgbaston RMBS Holdings Ltd 44 Elland RMBS 2018 plc 44 Elland RMBS Holdings Ltd 44 Fontwell Securities 2016 Ltd 61
Station Road, High Bentham, Near Lancaster, LA2 7NA xvii xvi &
Jubilee Buildings, Victoria Street, Douglas IM1 2SH Isle of Man xvii iv Aqualisa Holdings (International) Ltd 76.12%
Westerham Trade Centre, The Flyers Way, Westerham, TN16 1DE xvii xxi & Asset Solutions Group Ltd 89.25% Osprey House Crayfields Business Park, New Mills Road, Orpington, Kent, BR5 3QJ, United Kingdom xvii & Babble Cloud Holdings Ltd 89.25% Bury House, 31 Bury Street, London, EC3A 5AR i & Bacchus Newco Ltd 89.25% Park Lane Industrial Estates, Park Lane Off Wigan Road, Ashton in Makerfield, Wigan, WN4 0BZ,United
One Eleven, Edmund Street, Birmingham, England, B3 2HJ i ii & KITE Topco Ltd 89.25% Winchester House, Oxford Science Park, Heatley Road, Oxford, OX4 4GE xvi & LF (Holdco) Ltd 99% Price House, 37 Stoney Street, Nottingham NG1 1LS i & Linley & Simpson Holdings Ltd 89.25% 3 Greengate Cardale Park, Harrogate, North Yorkshire, HG3 1GY, United Kingdom i & London Topco Ltd 62.82% Gloucester Road, Cheltenham, Gloucester, GL51 8NR i & Mableford Ltd 50% Lindum Business Park Station Road, North Hykeham, Lincoln, LN6 3QX, United Kingdom i Magicard Holdings Ltd 89.25%
3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 4FJ i & iv Onapp (Topco) Ltd 82.5%
Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU xvii & xvi Paladone Holdings Ltd 89.25% Apex House, Dolphin Way, Shoreham-by-Sea, West Sussex, BN43 6NZ, United Kingdom i & Panther Partners Ltd 89%
6 Queens Road, Aberdeen, Scotland, AB15 4ZT xv xi xviii &
SOLO Topco Ltd 99% Onecom House, 4400 Parkway, Whiteley, Fareham, Hampshire, PO15 7FJ i Specialist People Services Group Ltd 82.5%
ABERDEEN INVESTMENTS ICVC II 8 Aberdeen Global Corporate Bond Tracker Fund 99%
INVESCO AMERICAN INVESTMENT SERIES 12 Invesco US Equity Fund (UK) 21%
Cautious Solution 32% Discovery Solution 41% Strategic Solution 53% Dynamic Solution 55% Defensive Solution 70% Adventurous Solution 76%
RUSSELL INVESTMENT COMPANY PLC 15 Russell Euro Fixed Income Fund 32% Russell US Bond Fund 54% Russell Sterling Bond Fund 42%
European (ex UK) Equity Fund 96% Asia Pacific (ex Japan) Equity Fund 99% Japan Equities Fund 87% US Equities Fund 100% Fundamental Index UK Equity Fund 88% Fundamental Index Global Equity Fund 96% Fundamental Index Emerging Markets Equity Fund 95% Fundamental Low Volatility Index Global Equity 98% Fundamental Low Volatility Index Emerging Markets Equity 96% Fundamental Low Volatility Index UK Equity 93%
Global Growth Fund 55% European Growth Fund 89% American Growth Fund 84% Pacific Growth Fund 76% Japan Growth Fund 94%
(2) 15 Dalkeith Road Edinburgh EH16 5WL (3) 39/40 Upper Mount Street, Dublin, Ireland (4) 20 Churchill Place, Canary Wharf, London E14 5HJ (5) BNP Paribas InstiCash, 10, Rue Edward Steichen, L-2540 Luxembourg (6) Lemanik Asset Management S.A 106 route d’Arlon, L-8210 Mamer Luxembourg (7) 35a avenue John F. Kennedy, L-1855, Luxembourg (8) Aberdeen Asset Managers Ltd, 1 Bread Street, Bow Bells House, London, EC4M 9HH (9) BlackRock Fund Managers Ltd, 12 Throgmorton Avenue, London EC2N 2DL (10) BNY Mellon Investment Funds, BNY Mellon Centre, 160 Queen Victoria Street, London,
Australia (9) 1 Brookhill Way, Banbury, Oxon, OX16 3EL (10) Sanne Group, 13 Castle Street, St. Helier, Jersey, JE4 5UT (11) T he Corporation Trust Company, Corporation Trust Center, 1209 Orange Street,