Other government-related entities Other than the transactions referred to above, there were no other significant transactions with the uK Government and uK Government-controlled entities (including uK Government-controlled banks) during the period that were not made in the ordinary course of business or that were unusual in their nature or conditions.
Following the default of a number of deposit takers in 2008, the Fscs borrowed funds from HM Treasury to meet the compensation costs for customers of those firms. The interest rate on the borrowings with HM Treasury, which total circa £20 billion, increased from 12 month liBOR plus 30 basis points to 12 month liBOR plus 100 basis points on 1 April 2012. Each deposit-taking institution contributes towards the Fscs levies in proportion to their share of total protected deposits on 31 december of the year preceding the scheme year, which runs from 1 April to 31 March.
in determining an appropriate accrual in respect of the management expenses levy, certain assumptions have been made including the proportion of total protected deposits held by the Group, the level and timing of repayments to be made by the Fscs to HM Treasury and the interest rate to be charged by HM Treasury. For the year ended 31 december 2012, the Group has charged £87 million (2011: £179 million; 2010: £46 million) to the income statement in respect of the management expenses levy.
Operating lease commitments Where a Group company is the lessee the future minimum lease payments under non-cancellable premises operating leases are as follows: £m £m not later than 1 year 310 348 later than 1 year and not later than 5 years 987 1,187 later than 5 years 1,332 1,489
Operating lease payments represent rental payable by the Group for certain of its properties. some of these operating lease arrangements have renewal options and rent escalation clauses, although the effect of these is not material. no arrangements have been entered into for contingent rental payments.
Financial assets cash and balances at central banks – – – – – 80,298 – 80,298 items in the course of collection from banks – – – – – 1,256 – 1,256
Available-for-sale financial assets – – – 37,406 – – – 37,406
Trading and other financial liabilities at fair value through profit or loss – 19,616 5,339 – – – – 24,955 derivative financial instruments 7,246 50,966 – – – – – 58,212 notes in circulation – – – – – 1,145 – 1,145 debt securities in issue – – – – – 185,059 – 185,059 liabilities arising from insurance contracts and participating investment contracts – – – – – – 78,991 78,991 liabilities arising from non-participating investment contracts – – – – – – 49,636 49,636 unallocated surplus within insurance businesses – – – – – – 300 300
(2) Reclassification of financial assets during 2012 the Group has reviewed its holding of government securities classified as held-to-maturity. since it is no longer the Group’s intention to hold these to maturity, securities with a carrying amount of £10,811 million and a fair value of £11,979 million were reclassified as available-for-sale financial assets in december 2012. The difference between the carrying amount and the fair value has been recognised in equity.
in 2010, government securities with a fair value of £3,601 million were reclassified from available-for-sale financial assets to held-to-maturity investments reflecting the Group’s then positive intent and ability to hold them until maturity.
in 2008, in accordance with the amendment to iAs 39 that became applicable during that year, the Group reviewed the categorisation of its financial assets classified as held for trading and available-for-sale. On the basis that there was no longer an active market for some of those assets, which are therefore more appropriately managed as loans, with effect from 1 July 2008, the Group transferred £2,993 million of assets previously classified as held for trading into loans and receivables. With effect from 1 november 2008, the Group transferred £437 million of assets previously classified as available-for-sale financial assets into loans and receivables. At the time of these transfers, the Group had the
From held-to-maturity investments to available-for-sale financial assets 4,998 4,998 – – – – – – – –
loans and receivables The Group provides loans and advances to commercial, corporate and personal customers at both fixed and variable rates. The carrying value of certain variable rate loans, loans relating to lease financing and impaired lending is assumed to be fair value. For fixed rate lending, several different techniques are used to estimate fair value, as considered appropriate. These techniques take account of expected credit losses and changes in interest rates and expected future cash flows in establishing fair value. For commercial and personal customers, fair value is principally estimated by discounting anticipated cash flows (including interest at contractual rates) at market rates for similar loans offered by the Group and other financial institutions. The fair value for corporate loans is estimated by discounting anticipated cash flows at a rate which reflects the effects of interest rate changes, adjusted for changes in the counterparty’s credit risk. certain loans secured on residential properties are made at a fixed rate for a limited period, typically two to five years, after which the loans revert to the relevant variable rate. The fair value of such loans is estimated by reference to the market rates for similar loans of maturity equal to the remaining fixed interest rate period. The fair values of asset-backed securities and secondary loans, which were previously within assets held for trading and were reclassified to loans and receivables, are determined predominantly from lead manager quotes and, where these are not available, by alternative techniques including reference to credit spreads on similar assets with the same obligor, market standard consensus pricing services, broker quotes and other research data.
debt securities in issue and subordinated liabilities The fair value of short-term debt securities in issue is approximately equal to their carrying value. Fair value for other debt securities and for subordinated liabilities is estimated using quoted market prices. The difference between fair value and amortised cost is driven both by interest rates and the Group’s credit rating.
valuation of financial instruments carried at fair value The valuations of financial instruments have been classified into three levels according to the quality and reliability of information used to determine the fair values.
Trading and other financial assets at fair value through profit or loss loans and advances to customers – 13,632 – 13,632 loans and advances to banks – 919 – 919 debt securities: Other public sector securities – 1,056 – 1,056
Total trading and other financial assets at fair value through profit or loss 109,573 41,111 3,306 153,990
Total financial assets carried at fair value 136,158 99,525 6,231 241,914
Asset-backed securities: corporate and other debt securities 5,098 15,337 1,423 21,858
– A number of earnings multiples are used in valuing the portfolio including price earnings, earnings before interest and tax and earnings before interest, tax, depreciation and amortisation. The particular multiple selected being appropriate for the type of business being valued and is derived by reference to the current market-based multiple. consideration is given to the risk attributes, growth prospects and financial gearing of comparable businesses when selecting an appropriate multiple.
– Foreign exchange derivatives that do not contain options which are priced using rates available from publicly quoted sources.
Movements in level 3 portfolio The table below analyses movements in the level 3 financial assets portfolio.
Gains recognised in the income statement 139 78 672 889 losses recognised in other comprehensive income – (148) – (148)
losses recognised in other comprehensive income relating to those assets held at 31 december 2012 – (24) – (24)
Total financial liabilities £m £m £m losses recognised in the income statement 585 5 590
Derivative financial assets industry standard model/consensus pricing from market data provider
Prepayment rates, probability of default, loss given default and yield curves. Equity conversion feature spread
Derivative financial liabilities industry standard model/consensus pricing from market data provider
The cVA is sensitive to: – the current size of the mark-to-market position on the uncollateralised asset; – expectations of future market volatility of the underlying asset; and
The dVA is sensitive to: – the current size of the mark-to-market position on the uncollateralised liability; – expectations of future market volatility of the underlying liability; and
(ii) Uncollateralised derivative valuation adjustments – monoline counterparties The Group has no significant derivative exposures remaining against monoline counterparties.
debt securities shown in the table above are notes held in non-controlled securitisation vehicles representing the Group’s ongoing involvement in financial assets transferred into those securitisation vehicles in prior years. The debt securities, which benefit from significant credit enhancement, are classified as available-for-sale financial assets and are managed on a similar basis to the Group’s other non-traded asset-backed securities.
Trading and other financial assets at fair value through profit or loss 10,612 620
The Group has no obligation or option to repurchase any of the assets transferred.
Lloyds Banking Group Annual Report and Accounts 2012318 note 55: Financial risk management As a bancassurer, financial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with financial instruments represent a significant component of the risks faced by the Group.
Lloyds Banking Group Annual Report and Accounts 2012318 note 55: Financial risk management (continued)
us dollar: Gross exposure 316 341 net investment hedge (542) (122)
swiss franc: Gross exposure 6 15 net investment hedge (9) –
Australian dollar: Gross exposure 1,104 1,232 net investment hedge (1,077) (1,226)
Total structural foreign currency exposures, after net investment hedges (19) 167
A. Maximum credit exposure The maximum credit risk exposure of the Group in the event of other parties failing to perform their obligations is detailed below. no account is taken of any collateral held and the maximum exposure to loss, which includes amounts held to cover unit-linked and With Profits funds liabilities, is considered to be the balance sheet carrying amount or, for non-derivative off-balance sheet transactions and financial guarantees, their contractual nominal amounts.
Trading and other financial assets at fair value through profit or loss (excluding equity shares)3: loans and advances 14,551 11,121 debt securities, treasury and other bills 53,130 52,652 derivative assets: derivative assets, before offsetting under master netting arrangements 56,550 66,013
includes assets within the Group’s unit-linked funds for which credit risk is borne by the policyholders and assets within the Group’s With-Profits funds for which credit risk is largely borne by the policyholders. consequently, the Group has no significant exposure to credit risk for such assets which back related contract liabilities.
see note 53 – contingent liabilities and commitments for further information.
B. Credit quality of assets loans and receivables The disclosures in the table below and those on pages 321 and 322 are produced under the management basis used for the Group’s segmental reporting. The Group believes that, for reporting periods immediately following a significant acquisition such as the acquisition of HBOs in 2009, this management basis, which includes the allowance for loan losses at the acquisition date on a gross basis, more fairly reflects the underlying provisioning status of the loans. The remaining acquisition-related fair value adjustments in respect of this lending are therefore identified separately in this table.
Retail – other £m Wholesale £m Total £m neither past due nor impaired 29,386 319,613 41,223 117,613 478,449 14,551
At 31 december 2011 neither past due nor impaired 32,494 330,727 41,448 146,655 518,830 11,121
The table below sets out the reconciliation of the allowance for impairment losses of £15,250 million (2011: £18,732 million) shown in note 24 to the allowance for impairment losses on a management basis of £21,772 million (2011: £27,718 million) shown above: 2012 £m
Total loans and advances which are neither past due nor impaired 29,386 319,613 41,223 117,613 478,449 14,551
The definitions of good quality, satisfactory quality, lower quality and below standard, but not impaired applying to retail and wholesale are not the same, reflecting the different characteristics of these exposures and the way they are managed internally, and consequently totals are not provided. Wholesale lending has been classified using internal probability of default rating models mapped so that they are comparable to external credit ratings. Good quality lending comprises the lower assessed default probabilities, with other classifications reflecting progressively higher default risk. classifications of retail lending incorporate expected recovery levels for mortgages, as well as probabilities of default assessed using internal rating models. Further information about the Group’s internal probabilities of default rating models can be found on pages 132 and 133.
An analysis by credit rating of the Group’s debt securities classified as loans and receivables is provided below: AAA £m
Bank and building society certificates of deposit – 75 71 42 – – 188
Asset-backed securities: corporate and other debt securities 293 281 567 600 85 22 1,848
Asset-backed securities: corporate and other debt securities 1,609 856 2,351 341 – 88 5,245
Rated BB or lower £m not rated £m Total £m debt securities, treasury and other bills held at fair value through profit or loss An analysis of the Group’s trading and other financial assets at fair value through profit or loss is included in note 17. The credit quality of the Group’s debt securities, treasury and other bills held at fair value through profit or loss is set out below: AAA £m
Asset-backed securities: corporate and other debt securities 385 148 330 278 30 1 1,172
Total debt securities held as trading assets 4,117 2,631 1,319 356 30 1 8,454
Asset-backed securities: corporate and other debt securities 3,107 2,731 7,305 6,633 2,115 1,795 23,686
Debt securities, treasury and other bills held at fair value through profit or loss
derivative assets An analysis of derivative assets is given in note 18. 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 Group’s maximum credit risk relating to derivative assets of £18,392 million (2011: £19,395 million), cash collateral of £5,429 million (2011: £5,269 million) was held and a further £1,387 million was due from OEcd banks (2011: £7,875 million).
Financial guarantees and irrevocable loan commitments Financial guarantees represent undertakings that the Group will meet a customer’s obligation to third parties if the customer fails to do so. commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments, however, the likely amount of loss is expected to be significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards.
loans and advances to banks The Group may require collateral before entering into a credit commitment with another bank, depending on the type of financial product and the counterparty involved, and netting arrangements are obtained whenever possible and to the extent that such agreements are legally enforceable. collateral is held as part of reverse repurchase or securities borrowing transactions.
Lloyds Banking Group Annual Report and Accounts 2012326 note 55: Financial risk management (continued)
At 31 december 2012, impaired secured wholesale lending amounted to £17,257 million, net of an impairment allowance of £15,193 million (2011: £23,913 million, net of an impairment allowance of £20,675 million). The fair value of the collateral held in respect of impaired secured wholesale lending was £9,414 million (2011: £13,977 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 wholesale 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.
Unimpaired secured lending unimpaired secured wholesale lending amounted to £74,485 million (2011: £96,381 million). Wholesale lending decisions are predominantly based on an obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security provided. collateral values are rigorously assessed at the time of loan origination. The types of collateral taken and the frequency with which collateral is required at origination is dependent upon the size and structure of the borrower. For exposures to corporate customers and other large institutions, the Group will often require the collateral to include a first charge over land and buildings owned and occupied by the business, a mortgage debenture over the company’s undertaking and one or more of its assets, and keyman insurance. The Group maintains policies setting out acceptable collateral, maximum loan-to-value ratios and other criteria to be considered when reviewing a loan application. The decision as to whether or not collateral is required will be based upon the nature of the transaction and the credit worthiness of the customer. Other than for project finance, object finance and income producing real estate where charges over the subject assets are a basic requirement, the provision of collateral will not determine the outcome of a credit application. The fundamental business proposition must evidence the ability of the business to generate funds from normal business sources to repay debt.
irrevocable loan commitments and other credit-related contingencies At 31 december 2012, the Group held irrevocable loan commitments and other credit-related contingencies of £55,629 million (2011: £57,329 million). collateral is held as security, in the event that lending is drawn down, on £17,697 million (2011: £13,279 million) of these balances.
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.
The fair value of collateral pledged in respect of repurchase transactions, accounted for as secured borrowings, where the secured party is permitted by contract or custom to repledge was £48,077 million (2011: £39,679 million). in addition, the following financial assets on the balance sheet have been pledged as collateral as part of securities lending transactions: Assets pledged £m £m
Residential property 936 968 in respect of retail portfolios, the Group does not take physical possession of properties or other assets held as collateral and uses external agents to realise the value as soon as practicable, generally at auction, to settle indebtedness. Any surplus funds are returned to the borrower or are otherwise dealt with in accordance with appropriate insolvency regulations. in certain circumstances the Group takes physical possession of assets held as collateral against wholesale lending. in such cases, the assets are carried on the Group’s balance sheet and are classified according to the Group’s accounting policies.
Forbearance activities The Group classifies the treatments offered to retail customers who have experienced financial difficulty into the following categories: Reduced contractual monthly payment – Capital payment break These allow customers who are currently on a capital and interest repayment basis to temporarily transfer their loan onto an interest only basis in order to reduce their contractual monthly payment and help them through their period of financial difficulty. during this period, the Group regularly reviews the customer’s situation and works with them to try to restore their position and return them to a full capital and interest repayment basis. Prior to allowing the transfer, the Group undertakes a full financial review to confirm the customer’s financial difficulty and ability to maintain the revised level of payment. The transfers are initially for six months and are limited to a maximum of two years during the lifetime of the mortgage.
Lloyds Banking Group Annual Report and Accounts 2012330 note 55: Financial risk management (continued)
Financial distress – Arrangement to pay customers who are experiencing short-term financial difficulties may reach agreement with the Group to pay an amount differing from their normal contractual monthly payment for a specified period of time. This is agreed with the customer as being affordable and practical based on their individual circumstances. Arrangements to pay less than the contractual monthly payment can be granted for up to three months after which the customer’s circumstances will be reviewed.
The Group assesses whether a loan benefitting from a uK Government sponsored programme is impaired using the same accounting policies and practices as it does for loans not benefitting from such a programme. There is no direct impact on the impairment status of a loan benefitting from the Mortgage Rescue schemes, as these schemes involve the purchase, and eventual sale, of the property. The loans included within the income support for Mortgage interest scheme and the Homeowner Mortgage support scheme may be impaired, in accordance with the normal definition of impairment.
Treatments offered to irish retail secured customers in financial difficulty While the treatments offered to mortgage customers in financial difficulty in the uK and in ireland are broadly similar, the current period of economic distress in ireland and resultant regulatory code of conduct on Mortgage Arrears have resulted in an environment of ongoing assistance to customers, with greater flexibility within policy as to the duration and frequency of treatments. care is taken to keep customers informed of their position and their circumstances are reviewed at least every 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.
Lloyds Banking Group Annual Report and Accounts 2012332 note 55: Financial risk management (continued)
The Group’s forbearance actions for its commercial customers experiencing financial difficulties fall into the following categories: Amendments – Covenant resets and breach of covenant waivers These amend a clause in a loan agreement (or similar document) or waive a breach of an existing clause. The identification of a covenant breach will usually occur through the processing of audited or management accounts; contact from the customer during preparation of their compliance certificate; the receipt of customer information from which covenant compliance is calculated; or the receipt of a compliance certificate from a customer or agent.
Forbearance granted The tables below set out the Group’s forborne loans and advances to commercial customers at 31 december 2012.
All impaired assets are considered forborne. in Business support, £6,734 million of its unimpaired assets are also considered forborne as a result of proactive management of cases to help customers in financial difficulties. Risk is re-assessed on a regular basis and impairments marked as necessary.
Ireland wholesale At 31 december 2012, all loans and advances in ireland wholesale (whether impaired or unimpaired) are treated as forborne and all assets are managed in a Business support unit. Further analysis of these forborne loans are set out below: Total loans and advances which are forborne £m
Lloyds Banking Group Annual Report and Accounts 2012334 note 55: Financial risk management (continued)
Mortgage-backed securities: us residential mortgage-backed securities: sub-prime – – – – – – – –
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.
The above tables are provided on a contractual basis. The Group’s assets and liabilities may be repaid or otherwise mature earlier or later than implied by their contractual terms and readers are, therefore, advised to use caution when using this data to evaluate the Group’s liquidity position. in particular, amounts in respect of customer deposits are often contractually payable on demand or at short notice. However, in practice, these deposits are not usually withdrawn on their contractual maturity.
The majority of the Group’s non-participating investment contract liabilities are unit-linked. These unit-linked products are invested in accordance with unit fund mandates. clauses are included in policyholder contracts to permit the deferral of sales, where necessary, so that linked assets can be realised without being a forced seller.
Lloyds Banking Group Annual Report and Accounts 2012338 note 55: Financial risk management (continued)
insurance risk insurance risk is the risk of reductions in earnings, capital and/or value, through financial or reputational loss, due to fluctuations in the timing, frequency and severity of insured/underwritten events and to fluctuations in the timing and amount of claim settlements. This includes fluctuations in profits due to customer behaviour.
The Group’s appetite for solvency and earnings in insurance entities is reviewed and approved annually by the Board. insurance risks are measured using a variety of techniques including stress and scenario testing, and, where appropriate, stochastic modelling. Ongoing monitoring is in place to track the progression of insurance risks. This normally involves monitoring relevant experiences against expectations, as well as evaluating the effectiveness of controls put in place to manage insurance risk.
Lloyds Banking Group Annual Report and Accounts 2012338 note 56: Consolidated cash flow statement
(C) non-cash and other items £m £m £m depreciation and amortisation 2,126 2,175 2,432 impairment of tangible fixed assets – 65 202
Total non-cash items 6,004 1,035 11,825 contributions to defined benefit schemes (675) (838) (653)
A number of capital transactions entered into by the Group in 2010, 2011 and 2012 involved the exchange of existing securities for new issues and as a result there was no related cash flow.
Lloyds Banking Group Annual Report and Accounts 2012340 note 56: Consolidated cash flow statement (continued)
(D) Analysis of cash and cash equivalents as shown in the balance sheet £m £m £m cash and balances at central banks 80,298 60,722 38,115 less: mandatory reserve deposits1 (580) (1,070) (1,089)
Requires an entity to disclose information to enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on the entity’s balance sheet.
Prescribes the accounting and disclosure by employers for employee benefits. The main change is that actuarial gains and losses (remeasurements) in respect of defined benefit pension schemes are no longer permitted to be deferred using the corridor approach and must be recognised immediately in other comprehensive income. in addition, revised iAs 19 also replaces interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). Had the Group adopted these changes in 2012, the loss for the year to 31 december 2012 would have been approximately £40 million higher and other comprehensive income net of tax some £1.6 billion lower. As at 31 december 2012, unrecognised actuarial losses of some £2.7 billion and deferred tax assets of £0.6 billion would have been recognised and shareholders’ equity would have been £2.1 billion lower.
inserts application guidance to address inconsistencies identified in applying the offsetting criteria used in the standard. some gross settlement systems may qualify for offsetting where they exhibit certain characteristics akin to net settlement.
Total equity 37,810 37,499 non-current liabilities: debt securities in issue 8 545 555 current liabilities: current tax liabilities 266 10
Sir Winfried Bischoff António Horta-Osório George Culmer chairman Group chief Executive Group Finance director at 31 december
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.
Cash flows from investing activities capital injection into lloyds TsB Bank plc – (2,340) –
Tax received (paid) 290 151 122 net cash provided by (used in) operating activities 1,040 3,109 (2,086)
net cash (used in) provided by financing activities (123) (39) 199 change in cash and cash equivalents 1,126 730 (2,462)
Cash and cash equivalents at end of year 2,231 1,105 375
Annual Report and Accounts 2012348 nOTEs TO THE PAREnT cOMPAnY FinAnciAl sTATEMEnTs note 1: Accounting policies The company has applied international Financial Reporting standards as adopted by the European union in its financial statements for the year ended 31 december 2012. 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 international Financial Reporting 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.
Lloyds Banking Group Annual Report and Accounts 2012348 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.
7.875% non-cumulative Preference shares callable 2013 (us$1,250 million) a 204 170 7.875% non-cumulative Preference shares callable 2013 (e500 million) a 105 83 6.0884% non-cumulative Fixed to Floating Rate Preference shares callable 2015 (£745 million) a 10 10 5.92% non-cumulative Fixed to Floating Rate Preference shares callable 2015 (us$750 million) a 119 124 6.267% non-cumulative Fixed to Floating Rate Preference shares callable 2016 (us$1,000 million) a 284 306 6.3673% non-cumulative Fixed to Floating Rate Preference shares callable 2019 (£335 million) a 2 2 6.475% non-cumulative Preference shares callable 2024 (£186 million) a 39 38 6.413% non-cumulative Fixed to Floating Rate Preference shares callable 2035 (us$750 million) a 107 114 6.657% non-cumulative Fixed to Floating Rate Preference shares callable 2037 (us$750 million) a 125 131 9.25% non-cumulative irredeemable Preference shares (£300 million) a 266 266 9.75% non-cumulative irredeemable Preference shares (£100 million) a 54 54
Total subordinated liabilities 4,349 4,308 a Further information regarding these issues can be found in note 45 to the consolidated financial statements.
b in certain circumstances, these bonds would acquire the characteristics of preference share capital. They are accounted for as liabilities as coupon payments are mandatory as a consequence of the terms of the 6 per cent non-cumulative redeemable preference shares. At the callable date the coupon on these bonds will be reset by reference to the applicable five year benchmark gilt rate. Further information regarding this can be found in note 45 to the consolidated financial statements.
note 9: Related party transactions in January 2009 HM Treasury became a related party of the company and has remained so during 2011 and 2012. From 1 January 2011, in accordance with iAs 24, uK Government-controlled entities also became related parties of the Group. Further information on the relationship and transactions with HM Treasury and uK Government-controlled entities is given in note 52 to the consolidated financial statements.
Financial assets: cash and cash equivalents – – – 2,231 2,231 derivative financial instruments 272 1,421 – – 1,693 loans to subsidiaries – – 8,123 – 8,123
Financial assets: cash and cash equivalents – – – 1,105 1,105 derivative financial instruments 314 1,346 – – 1,660 loans to subsidiaries – – 8,286 – 8,286
interest rate risk and currency risk The company is exposed to interest rate risk and currency risk on its debt securities in issue and its subordinated debt.
Credit risk The majority of the company’s credit risk arises from amounts due from its wholly owned subsidiary, lloyds TsB Bank plc, and subsidiaries of that company.
Liquidity risk The table below analyses financial instrument liabilities of the company, on an undiscounted future cash flow basis according to contractual maturity, into relevant maturity groupings based on the remaining period at the balance sheet date; balances with no fixed maturity are included in the over 5 years category.
At 31 December 2012 debt securities in issue 10 – 31 616 – 657
Annual general meeting The annual general meeting will be held at 11.00 am on Thursday 16 May 2013 at the Edinburgh international conference centre, The Exchange, Edinburgh, EH3 8EE. Further details about the meeting, including the proposed resolutions, can be found in our notice of annual general meeting which is sent to all shareholders who have requested paper copy documents. it is also available on our website www.lloydsbankinggroup.com
American Depositary Receipts (ADRs) lloyds Banking Group 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.
The impairment charge for the year in respect of loans and advances to customers expressed as a percentage of average loans and advances to customers.
Basel iii The capital reforms and introduction of a global liquidity standard proposed by the Basel committee on Banking supervision in 2010 and due to be phased in from 1 January 2013 onwards.
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. Further information on the Group’s investment in cMBs is given in note 55.
Core tier 1 ratio core tier 1 capital as a percentage of risk weighted assets.
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. covered bonds thus have a higher risk weighting than mortgage-backed securities because the holder is exposed to both the non-payment of the mortgages and the financial health of the issuer. The Group issues covered bonds as part of its funding activities. Further details are provided in note 21.
Credit Default Swap A credit default swap is also referred to as a credit derivative. it is an arrangement whereby the credit risk of an asset (the reference asset) is transferred from the buyer to the seller of protection. A credit default swap is a contract where the protection seller receives premium or interest-related payments in return for contracting to make payments to the protection buyer upon a defined credit event. credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency.
An embedded equity conversion feature is a derivative contained within the terms and conditions of a debt instrument that enables or requires the instrument to be converted into equity under a particular set of circumstances. The Group’s Enhanced capital notes (Ecns) contain such a feature whereby these notes convert to ordinary shares in the event that the consolidated core tier 1 ratio of the Group falls below 5 per cent.
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.
impaired loans impaired loans are loans where the Group does not expect to collect all the contractual cash flows or to collect them when they are contractually due.
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.
investment grade This refers to the highest range of credit ratings, from ‘AAA’ to ‘BBB’ as measured by external credit rating agencies.
Level 1 fair value measurements level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities.
Liquidity and Credit enhancements credit enhancement facilities are used to enhance the creditworthiness of financial obligations and cover losses due to asset default. Two general types of credit enhancement are third-party loan guarantees (such as guaranteed mortgages) and self-enhancement through over collateralisation (in the case of covered mortgage bonds). liquidity enhancement makes funds available if required, for other reasons than asset default, eg to ensure timely repayment of maturing commercial paper.
net asset value per ordinary share shareholders' equity divided by the number of ordinary shares and limited voting ordinary shares in issue, adjusted to exclude shares held under certain employee share ownership plans.
net interest income The difference between interest received on assets and interest paid on liabilities.
Prime mortgages Prime mortgages are those granted to the most creditworthy category of borrower.
Specialist mortgages specialist mortgages include those mortgage loans provided to customers who have self-certified their income (normally as a consequence of being self-employed) or who are otherwise regarded as a subprime credit risk. new mortgage lending of this type has not been offered by the Group since early 2009.
Student loan related assets Assets which are referenced to underlying student loans (see note 55).
Tier 2 capital A component of regulatory capital defined by the FsA, mainly comprising qualifying subordinated loan capital, certain non-controlling interests and eligible collective impairment allowances. Further details are given in the capital Risk section on page 187.
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