C. Collateral held as security for financial assets A general description of collateral held as security in respect of financial instruments is provided on page 136. The Group holds collateral against loans and receivables and irrevocable loan commitments; qualitative and, where appropriate, quantitative information is provided in respect of this collateral below. Collateral held as security for trading and other financial assets at fair value through profit or loss and for derivative assets is also shown below.
The Group credit risk disclosures for unimpaired non-mortgage retail lending report assets gross of collateral and therefore disclose the maximum loss exposure. The Group believes that this approach is appropriate. The value of collateral is reassessed if there is observable evidence of distress of the borrower. unimpaired non-mortgage retail lending, including any associated collateral, is managed on a customerby -customer basis rather than a portfolio basis. no aggregated collateral information for the entire unimpaired non-mortgage retail lending portfolio is provided to key management personnel.
Trading and other financial assets at fair value through profit or loss (excluding equity shares) In respect of trading and other financial assets at fair value through profit or loss, the fair value of collateral accepted under reverse repurchase transactions which are accounted for as collateralised loans that the Group is permitted by contract or custom to sell or repledge was £32,434 million (2012: £19,629 million). Of this, £8,195 million was sold or repledged (2012: £15,640 million).
lending decisions in respect of irrevocable loan commitments are based on the obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security provided. For wholesale commitments, it is the Group’s practice to request collateral whose value is commensurate with the nature of the commitment. For retail mortgage commitments, the majority are for mortgages with a loan-to-value ratio of less than 100 per cent. Aggregated collateral information covering the entire balance of irrevocable loan commitments over which security will be taken is not provided to key management personnel.
Forbearance identification and classification The Group has applied revised forbearance definitions based upon principles developed through the British Bankers’ Association. As a result of this, forbearance data for 2012 has been restated to reflect the new definitions. The restated data for 2012 shows overall forbearance balances to be higher than previous financial statements as the balances now include accounts which are no longer on a forbearance treatment, but where the exposure is known to be, or may still be, in financial difficulty.
Includes temporary interest only arrangements and short-term payment holidays granted in collections where the customer is currently benefitting from the treatment and where the concession has ended within the previous six months (temporary interest only) and previous 12 months (short-term payment holidays).
Unsecured retail lending – UK At 31 December 2013, uK retail unsecured loans and advances currently or recently subject to forbearance were 2.6 per cent (31 December 2012: 3.9 per cent) of total uK retail unsecured loans and advances of £21,566 million (31 December 2012: £22,698 million). Further analysis of the forborne loan balances is set out below: Total loans and advances which are currently or recently forborne
Total current and recent forborne loans and advances which are impaired1
Includes customers who had an arrangement to pay less than the contractual amount at 31 December or where an arrangement ended within the previous six months.
Collective impairment assessment of UK retail unsecured loans and advances subject to forbearance Credit risk provisioning for the uK retail unsecured portfolio is undertaken on a purely collective basis. The approach used is based on segmented cash flow models, divided into two primary streams for loans judged to be impaired and those that are not. Accounts subject to repayment plans and collections refinance loans are among those considered to be impaired.
Secured retail lending – Ireland At 31 December 2013, Irish secured loans and advances subject to current or recent forbearance were 12.2 per cent (31 December 2012: 12.3 per cent) of total Irish retail secured loans and advances. Further analysis of the forborne loan balances is set out below: Total loans and advances which are currently or recently forborne
Commercial customers Forbearance A key factor in determining whether the Group treats a commercial customer as forborne is the granting of a concession to a borrower who is in financial difficulty.
loans that have been renegotiated and/or restructured for solely commercial reasons, where there is no financial difficulty would not be treated as forborne. The Group does not believe the concept of forbearance attaches to the trading book where assets are marked to market daily.
Therefore the Group expects to have unimpaired forborne assets within its portfolios, although as noted below, these are specifically controlled and managed. unimpaired forborne assets are included in calculating the overall collective unimpaired provision, and which uses the historical observed default rate of the portfolio as a whole as part of its calculation.
The Group’s strategy and offer of forbearance is largely dependent on the individual situation and early identification, control and monitoring are key in order to support the customer and protect the Group. Concessions are often provided to help the customer with their day to day liquidity and working capital.
The watchlist is further categorised depending on the current and expected credit risk attaching to the customer and the transaction. All watchlist names are reviewed by the Business and Risk at least once a month, and the classification is updated if required.
Any event that causes concern over future payments from the customer is likely to result in the asset being assessed for impairment and, if required, an impairment allowance recognised. If impairment is identified, the customer is immediately transferred to Business Support and the lending will be treated as an impaired asset. If no impairment is identified, the Risk Division will determine if the customer should remain in the good book (categorised as watchlist), or transfer to Business Support for more intensive monitoring.
Further analysis of the forborne loan balance is set out below: Total loans and advances which are forborne
The table below sets out the Group’s largest unimpaired forborne loans and advances to commercial customers (exposures over £5 million) as at 31 December 2013 by type of forbearance, together with a breakdown on which exposures are classified as Direct Real estate: Direct Real Estate £m
Type of unimpaired forbearance uK exposures1 > £5 million exposures < £5 million and other non-uK 2,878
The table below analyses assets and liabilities of the Group into relevant maturity groupings based on the remaining contractual period at the balance sheet date; balances with no fixed maturity are included in the over 5 years category. Certain balances, included in the table below on the basis of their residual maturity, are repayable on demand upon payment of a penalty.
Trading and other financial assets at fair value through profit or loss 15,874 6,966 5,868 3,892 2,630 5,601 2,989 98,863 142,683 loans and advances to banks 11,853 5,980 3,310 553 1,038 344 1,827 460 25,365 loans and advances to customers 35,006 6,720 9,699 10,269 11,886 25,191 56,156 340,354 495,281
Cash and balances at central banks 80,035 259 4 – – – – – 80,298
Available-for-sale financial assets 565 130 558 32 174 241 4,168 25,506 31,374
The Group’s financial guarantee contracts are accounted for as financial instruments and measured at fair value on the balance sheet. The majority of the Group’s financial guarantee contracts are callable on demand, were the guaranteed party to fail to meet its obligations. It is, however, expected that most guarantees will expire unused. The contractual nominal amounts of these guarantees totalled £8,591 million at 31 December 2013 (2012: £9,520 million) with £4,233 million expiring within one year; £837 million between one and three years; £2,039 million between three and five years; and £1,482 million over five years (2012: £4,865 million expiring within one year; £1,302 million between one and three years; £1,729 million between three and five years; and £1,624 million over five years).
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
Change in derivative financial instruments, trading and other financial assets at fair value through profit or loss (6,476) 524 5,867
net charge in respect of defined benefit schemes 503 110 408
Accretion of discounts and amortisation of premiums and issue costs 286 12 151
Share of post-tax results of associates and joint ventures (43) (28) (31)
These OeICs (Open-ended investment companies) are mutual funds which are consolidated if the Group manages the funds and also has a majority beneficial interest. The population of OeICs to be consolidated varies at each reporting date as external investors acquire and divest holdings in the various funds. The consolidation of these funds is effected by the inclusion of the fund investments and a matching liability to the unitholders; and changes in funds consolidated represent a non-cash movement on the balance sheet.
Included within cash and cash equivalents at 31 December 2013 is £14,058 million (2012: £17,889 million; 2011: £21,601 million) held within the Group’s life funds, which is not immediately available for use in the business.
Payments to former members of Scottish Widows Fund and life Assurance Society acquired during 2000 – – (3)
(F) Disposal and closure of group undertakings and businesses £m £m £m
liabilities arising from insurance contracts and participating investment contracts (451) – –
The following tables summarise the adjustments arising on the adoption of IAS 19R and IFRS 10 to the Group’s: – income statements, statements of comprehensive income and statements of cash flows for the year ended 31 December 2012 and the year ended 31 December 2011; and
– balance sheets at 31 December 2012, 31 December 2011 and 1 January 2011.
Consolidated income statement – year ended 31 December 2012 As previously reported £m
Items that may subsequently be reclassified to profit or loss: Movements in revaluation reserve in respect of available-for-sale financial assets: Adjustments on transfers from held-to-maturity portfolio 1,168 – – 1,168
Movements in cash flow hedging reserve: effective portion of changes in fair value 116 – – 116 net income statement transfers (92) – – (92)
Proceeds from sale and maturity of financial assets 37,664 – – 37,664
Acquisition of businesses, net of cash acquired (11) – – (11)
Consolidated statement of comprehensive income – year ended 31 December 2011
IAS 19 Revised £m Restated £m loss for the year (2,714) (176) (2,890)
Change in non-controlling interests 8 – 8 net cash used in financing activities (3,242) – (3,242)
Cash and cash equivalents at end of year 85,889 – 85,889
Items in course of collection from banks 1,408 – – 1,408
Trading and other financial assets at fair value through profit or loss 139,510 9,104 – 148,614
Derivative financial instruments 66,013 60 – 66,073 loans and receivables: loans and advances to banks 32,606 271 – 32,877 loans and advances to customers 565,638 – – 565,638
Items in course of transmission to banks 844 – – 844
Other reserves 13,818 – – 13,818 non-controlling interests 674 – – 674
Derivative financial instruments 50,777 – – 50,777 loans and receivables: – –
Items in course of transmission to banks 802 – – 802
Trading and other financial liabilities at fair value through profit or loss 26,762 – – 26,762
IFRIC 21 Levies1 Clarifies that the obligating event that gives rise to a liability to pay a government levy is the activity that triggers the payment of the levy as set out in the relevant legislation. An entity does not have a constructive obligation to pay a levy that will be triggered by operating in a future period. This interpretation is not expected to have a significant impact on the Group.
As at 5 March 2014, these pronouncements are awaiting eu endorsement.
The directors approved the parent company financial statements on 5 March 2014.
Value of employee services: Share option schemes – – – 116 116
£ million £ million £ million loss before tax (1,090) (259) (202)
Fair value and exchange adjustments and other non-cash items 137 245 329
Net cash (used in) provided by investing activities (2,885) 209 (2,340)
Cash and cash equivalents at beginning of year 2,231 1,105 375
Cash and cash equivalents at end of year 511 2,231 1,105
Movements in other reserves were as follows: 2013 £m 2012 £m 2011 £m
Details of the Company’s dividends are as set out in note 49 to the consolidated financial statements.
Total subordinated liabilities 1,669 4,349 a Further information regarding these issues can be found in note 44 to the consolidated financial statements.
Key management personnel The key management personnel of the Group and the Company are the same. The relevant disclosures are given in note 51 to the consolidated financial statements.
Bank of Scotland plc Ordinary Scotland 100%1 Banking and financial services
A full list of subsidiaries will be included in the Company’s next annual return, the Company having made use of the exemption in section 410 of the Companies Act 2006.
In november 2009, as part of the restructuring plan that was a requirement for european Commission approval of state aid received by the Group, lloyds Banking Group agreed to suspend the payment of coupons and dividends on certain of the Group’s preference shares and preferred securities for the two year period from 31 January 2010 to 31 January 2012. The Group also agreed to temporarily suspend and/or waive dividend payments on certain preference shares which have been issued intra group. Consequently, in accordance with the terms of some of these instruments, subsidiaries could have been prevented from making dividend payments on ordinary shares during this period. In addition, certain subsidiary companies currently have insufficient distributable reserves to make dividend payments.
Financial liabilities: Debt securities in issue – – – 535 535
Financial assets: Cash and cash equivalents – – – 2,231 2,231
Financial liabilities: Debt securities in issue – – – 545 545
Total financial liabilities – – – 4,894 4,894 note 53 to the consolidated financial statements outlines the valuation hierarchy into which financial instruments measured at fair value are categorised.
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.
Valuation hierarchy The table below analyses the assets and liabilities of the Company. With the exception of derivatives all assets and liabilities are held at amortised cost. They are categorised into levels 1 to 3 based on the degree to which their fair value is observable.
There were no significant movements in level 3 assets carried at fair value in 2013 and 2012.
Derivative financial assets embedded equity conversion feature lead manager or broker quote equity conversion feature spread 1,421 63 –
Note 11: Approval of the financial statements and other information The parent company financial statements were approved by the directors of lloyds Banking Group plc on 5 March 2014.
Annual report and accounts, annual review or performance summary Mar ✔ ✔ ✔
To be published on the Group’s website by 1 July 2014 in accordance with the Capital Requirements (country-by-country) Regulations 2013.
Share dealing facilities We offer a choice of three 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
notice of annual general meeting and voting materials Apr ✔ ✔ ✔
Digital communications – Shareview by Equiniti Limited Shareview, the website provided by equiniti, allows shareholders to sign up to receive email communications and also provides the opportunity to self-manage your shareholding online. Shareholders can also access frequently asked questions, useful fact sheets, guidance notes, downloadable forms and a secure messaging system.
Halifax Share Dealing 08457 22 55 25 www.halifaxsharedealing.co.uk lloyds Bank Direct Investments 0845 60 60 560 www.lloydsbank.com/shares note: All internet services are available 24/7. Telephone dealing services are available between 8.00 am and 9.15 pm, Monday to Friday and 9.00 am to 1.00 pm on Saturday. To open a share dealing account with any of these services, you must be 18 years of age or over and be resident in the uK, Jersey, Guernsey or the Isle of Man.
American Depositary Receipts (ADRs) Our shares are traded in the uSA through a new York Stock exchange-listed sponsored ADR facility with The Bank of new York Mellon as the depositary. The ADRs are traded on the new York Stock exchange under the symbol lYG. The CuSIP number is 539439109 and the ratio of ADRs to ordinary shares is 1:4.
Analysis of shareholders At 31 December 2013 Shareholders Number of ordinary shares
Factors that could cause actual business, strategy, plans and/or results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the uK and internationally; inflation, deflation, interest rates and policies of the Bank of england, the european Central Bank and other G8 central banks; fluctuations in exchange rates, stock markets and currencies; the ability to access sufficient funding to meet the Group’s liquidity needs; changes to the Group’s credit ratings; the ability to derive cost savings and other benefits including, without limitation, as a result of the Group’s Simplification Programme; changing demographic developments including mortality and changing customer behaviour including consumer spending, saving and borrowing habits; changes in customer preferences; changes to borrower or counterparty credit quality; instability in the global financial markets, including eurozone instability and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes; natural and other disasters, adverse weather and similar contingencies outside the Group’s control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war or hostility and responses to those acts, geopolitical, pandemic or other such events; changes in laws, regulations, taxation, accounting standards or practices; regulatory capital or liquidity requirements and similar contingencies outside the Group’s control; the policies and actions of governmental or regulatory authorities in the uK, the european union (eu), the uS or elsewhere; the implementation of the draft eu crisis management framework directive and banking reform, following the recommendations made by the Independent Commission on Banking; the ability to attract and retain senior management and other employees; requirements or limitations imposed on the Group as a result of HM Treasury’s investment in the Group; the ability to complete satisfactorily the disposal of certain assets as part of the Group’s eu State Aid obligations; the extent of any future impairment charges or write-downs caused by depressed asset valuations, market disruptions and illiquid markets; market related trends and developments; exposure to regulatory scrutiny, legal proceedings, regulatory investigations or complaints; changes in competition and pricing environments; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and the success of the Group in managing the risks of the foregoing. Please refer to the latest Annual Report on Form 20-F filed with the uS Securities and exchange Commission for a discussion of certain factors, together with examples of forward looking statements.
lloyds Banking Group may also make or disclose written and/or oral forward looking statements in reports filed with or furnished to the uS Securities and exchange Commission, lloyds Banking Group annual reviews, half-year announcements, proxy statements, offering circulars, prospectuses, press releases and other written materials and in oral statements made by the directors, officers or employees of lloyds Banking Group to third parties, including financial analysts. except as required by any applicable law or regulation, the forward looking statements contained in this annual report are made as of the date hereof, and lloyds Banking Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this annual report to reflect any change in lloyds Banking Group’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Forward looking statements 380 Glossary 381 Abbreviations 387 Index to annual report 388
Basis point One hundredth of a per cent (0.01 per cent). 100 basis points is 1 per cent. used in quoting movements in interest rates or yields on securities.
Central Counterparty (CCP) An institution mediating between the buyer and the seller in a financial transaction, such as a derivative contract or repurchase agreement (repo). Where a CCP is used, a single bilateral contract between the buyer and the seller is replaced with two contracts, one between the buyer and the CCP and one between the CCP seller.
A security issued by a third party which references ABSs or other assets purchased by the issuer. lloyds Banking Group has invested in instruments issued by other banking groups, including Collateralised loan Obligations and Commercial Real estate CDOs.
A security backed by the repayments from a pool of commercial loans. ClOs are usually structured products with different tranches whereby senior classes of holder receive repayment before other tranches are repaid.
Commercial Mortgage-Backed Securities are securities that represent interests in a pool of commercial mortgages. Investors in these securities have the right to cash received from mortgage repayments of interest and principal.
Commercial Real Estate Commercial real estate includes office buildings, industrial property, medical centres, hotels, malls, retail stores, shopping centres, farm land, multifamily housing buildings, warehouses, garages, and industrial properties.
Covered mortgage bonds A bond backed by a pool of mortgage loans. The mortgages remain on the issuer’s balance sheet. The issuing bank can change the make-up of the loan pool or the terms of the loans to preserve credit quality.
Credit risk The risk that parties with whom the Group has contracted fail to meet their obligations (both on and off-balance sheet).
Enterprise Risk Management As defined by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) enterprise Risk Management is a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.
Equity risk The financial risk involved in holding equity in a particular investment.
The Group’s own assessment, based on Basel II requirements, of the levels of capital that it needs to hold in respect of its regulatory capital requirements (for credit, market and operational risks) and for other risks including stress events as they apply on a solo level and on a consolidated level.
Liquidity Coverage Ratio (LCR) The ratio of the stock of high quality liquid assets to expected net cash outflows over the following 30 days. High quality liquid assets should be unencumbered, liquid in markets during a time of stress and ideally, be central bank eligible.
Master netting agreement An agreement between two counterparties that have multiple derivative contracts with each other that provides for the net settlement of all contracts through a single payment, in a single currency, in the event of default on, or termination of, any one contract.
Negative basis bonds ABS held with a separately purchased matching credit default swaps to protect against the risk of default of the security. The Group refers to ABS without the benefit of CDS protection as Uncovered ABS.
Risk-weighted assets A measure of a bank’s assets adjusted for their associated risks. Risk weightings are established in accordance with the Basel Capital Accord as implemented by the PRA.
Sovereign exposures exposures to central governments and central government departments, central banks and entities owned or guaranteed by the aforementioned.
Standardised Approach In relation to credit risk, a method for calculating credit risk capital requirements using external Credit Assessment Institutions (eCAI) ratings of obligors (where available) and supervisory risk weights. In relation to operational risk, a method of calculating the operational risk capital requirement by the application of a supervisory defined percentage charge to the gross income of specified business lines.
Sub-prime Sub-prime is defined as loans to borrowers typically having weakened credit histories that include payment delinquencies and potentially more severe problems such as court judgements and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, high debt-to-income ratios, or other criteria indicating heightened risk of default.
Uncovered ABS ABS held without the benefit of separately purchased matching credit default swaps to protect against the risk of default of the security. Details of the Group’s uncovered ABS are given in note 54.
O th er in fo rm at io n Shareholder information 378
Accounting policy 215 notes to the consolidated financial statements 245, 262
Financial information calculated on a ‘realistic’ basis 187 liabilities arising from insurance contracts and participating investment contracts 262 liabilities arising from non-participating investment contracts 270 life insurance sensitivity analysis 269
Critical accounting estimates and judgements 225 notes to the consolidated financial statements 271
Risk Governance and risk management strategies/business model 5 Summarise prominently the bank’s risk management organisation, processes and key functions. 129-132 6 Describe risk culture and how procedures and strategies are applied to support the culture. 124 7 Describe the key risks that arise from the bank’s business models and activities, the bank’s risk appetite in the context of its business models and how the bank manages such risks.
10 Main components of capital and a reconciliation of the accounting balance sheet to the regulatory balance sheet. 180, Pillar 3 11 Flow statement of movements since the prior reporting date in regulatory capital, including changes in common equity tier 1, tier 1 and tier 2 capital.
Liquidity 18 Describe how the bank manages its potential liquidity needs. 171-173, 176-177
21 Discuss the bank’s funding strategy, including key sources and any funding concentrations. 173-176
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