during the first half of 2012 there was an increase in the volume of complaints being received and, although the level of complaints has declined during the second half of 2012, they are higher than had been anticipated at 31 december 2011. As a consequence, the Group believes that it is appropriate to increase its provision by a further £3,575 million at 31 december 2012. This increases the total estimated cost of redress, including administration expenses, to £6,775 million; redress payments made and expenses incurred on the 1.15 million claims paid to the end of december 2012 amounted to £4,344 million. However, there are still a number of uncertainties as to the eventual redress costs, in particular the total number of complaints and the activities of claims management companies and regulatory bodies.
Lloyds Banking Group Annual Report and Accounts 2012280 note 45: Subordinated liabilities (continued)
Preferred securities 6.90% Perpetual capital securities (us$1,000 million) b 214 247 6.85% non-cumulative Perpetual Preferred securities (us$1,000 million) b 238 316 8.117% non-cumulative Perpetual Preferred securities (class A) (£250 million) b, c 262 260 7.627% Fixed to Floating Rate Guaranteed non-voting non-cumulative Preferred securities (e415 million) b, d, e 50 340 7.375% Euro step-up non-voting non-cumulative Preferred securities callable 2012 (e430 million) a – 16 6.35% step-up Perpetual capital securities callable 2013 (e500 million) 226 239 6.071% non-cumulative Perpetual Preferred securities (us$750 million) 382 389 7.834% sterling step-up non-voting non-cumulative Preferred securities callable 2015 (£250 million) a 5 5 4.939% non-voting non-cumulative Perpetual Preferred securities (e750 million) a 23 20 7.286% Perpetual Regulatory Tier One securities (series A) (£150 million) 128 112 4.385% step-up Perpetual capital securities callable 2017 (e750 million) a 83 88 6.461% Guaranteed non-voting non-cumulative Perpetual Preferred securities (£600 million) 439 444 13% step-up Perpetual capital securities callable 2019 (£785 million) a 8 12 13% step-up Perpetual capital securities callable 2019 (e532 million) a 48 47 7.754% non-cumulative Perpetual Preferred securities (class B) (£150 million) 98 104 12% Fixed to Floating Rate Perpetual Tier 1 capital securities callable 2024 (us$2,000 million) 1,239 1,301 7.281% Perpetual Regulatory Tier One securities (series B) (£150 million) 95 113 13% step-up Perpetual capital securities callable 2029 (£700 million) a 629 612 7.881% Guaranteed non-voting non-cumulative Preferred securities (£245 million) 227 228
Lloyds Banking Group Annual Report and Accounts 2012282 note 45: Subordinated liabilities (continued)
Floating Rate undated subordinated step-up notes (e300 million) b 13 10 6.05% Fixed to Floating Rate undated subordinated notes (e500 million) b, d 5 4 5.375% undated Fixed to Floating Rate subordinated notes (us$1,000 million) a 9 12 8.625% Perpetual subordinated notes (£200 million) a 22 24 4.875% undated subordinated Fixed to Floating Rate instruments (e750 million) a 70 75
Floating Rate undated subordinated notes (e500 million) a 44 45 4.25% Perpetual Fixed to Floating Rate Reset subordinated Guaranteed notes (e750 million) (clerical Medical Finance plc) 261 231 10.25% subordinated undated instruments (£100 million) a 1 1 5.125% step-up Perpetual subordinated notes callable 2015 (£560 million) (scottish Widows plc) 556 554 5.125% undated subordinated Fixed to Floating notes (e750 million) a 45 52 7.5% undated subordinated step-up notes (£300 million) 4 5 5.125% undated subordinated step-up notes callable 2016 (£500 million) a 2 2 6.5% undated subordinated step-up notes callable 2019 (£270 million) a 1 –
6% undated subordinated step-up Guaranteed Bonds callable 2032 (£500 million) a 10 11
Floating Rate Enhanced capital notes due 2020 (e53 million) a 37 38 7.875% Enhanced capital notes due 2020 (us$408 million) 267 313 11.04% Enhanced capital notes due 2020 (£736 million) 847 861 7.5884% Enhanced capital notes due 2020 (£732 million) 703 681 6.385% Enhanced capital notes due 2020 (e662 million) 493 503 6.439% Enhanced capital notes due 2020 (e711 million) 542 548 8% Fixed to Floating Rate undated Enhanced capital notes callable 2020 (us$1,259 million) b 662 687 9.125% Enhanced capital notes due 2020 (£148 million) 157 157 12.75% Enhanced capital notes due 2020 (£57 million) 73 73 7.869% Enhanced capital notes due 2020 (£597 million) 591 588 7.625% Enhanced capital notes due 2020 (e226 million) 181 184 7.875% Enhanced capital notes due 2020 (us$986 million) 608 629 11.125% Enhanced capital notes due 2020 (£39 million) 44 44 8.5% undated Enhanced capital notes callable 2021 (us$277 million) b 147 153 14.5% Enhanced capital notes due 2022 (£79 million) 113 114 9.875% Enhanced capital notes due 2023 (£57 million) 66 63 11.25% Enhanced capital notes due 2023 (£95 million) 113 106 10.5% Enhanced capital notes due 2023 (£69 million) 76 67 11.875% Enhanced capital notes due 2024 (£35 million) 45 45 7.975% Enhanced capital notes due 2024 (£102 million) 99 96 16.125% Enhanced capital notes due 2024 (£61 million) 95 97 15% Enhanced capital notes due 2029 (£68 million) 108 108 9% Enhanced capital notes due 2029 (£107 million) 112 112 8.5% Enhanced capital notes due 2032 (£104 million) 105 105
6.5% dated subordinated notes 2020 (e1,500 million) 1,458 1,407 5.75% subordinated Fixed to Floating Rate notes 2025 callable 2020 (£350 million) 371 367 6.5% subordinated Fixed Rate notes 2020 (us$2,000 million) 1,345 1,360 subordinated Floating Rate notes 2020 (e100 million) 83 87 5.374% subordinated Fixed Rate notes 2021 (e160 million) 152 150 7.07% subordinated Fixed Rate notes 2023 (e175 million) 183 174 4.50% Fixed Rate step-up subordinated notes due 2030 (e750 million) 457 463 6% subordinated notes 2033 (us$750 million) 399 432 Total dated subordinated liabilities 17,439 17,946 a These securities are callable at specific dates as per the terms of the securities at the option of the issuer and with approval of the FsA. in november 2009, as part of the state aid restructuring plan, the Group agreed not to exercise any call options on these instruments for the two year period from 31 January 2010 to 31 January 2012.
b The floating interest rate payable on these securities reset during 2012.
Lloyds Banking Group Annual Report and Accounts 2012284 note 46: Share capital
Lloyds Banking Group Annual Report and Accounts 2012286 note 46: Share capital (continued)
– pursuant to the rules of some of the company’s employee share plans where certain restrictions may apply while the shares are subject to the plans.
Where, under an employee share plan operated by the company, participants are the beneficial owners of shares but not the registered owners, the voting rights are normally exercised by the registered owner at the direction of the participant. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions at that time.
information regarding significant direct or indirect holdings of shares in the company can be found on page 83.
Capital redemption reserve cancellation of deferred shares (note 46) – – 4,086
Lloyds Banking Group Annual Report and Accounts 2012288 note 48: Other reserves (continued)
in addition, the trustees of the following holdings of lloyds Banking Group plc shares in relation to employee share schemes retain the right to receive dividends but chose to waive their entitlement to the dividends on those shares as indicated: the lloyds Banking Group share incentive Plan (holding at 31 december 2012: 12,040,715 shares, 31 december 2011: 8,091,460 shares, waived rights to all dividends), the lloyds TsB Group Employee share Ownership Trust (holding at 31 december 2012: 73,007,743 shares, 31 december 2011: 120,085,543 shares, on which it waived rights to all dividends and holding at 31 december 2012: nil shares, 31 december 2011: 253,052 shares, on which it waived rights to all but a nominal amount of one penny in total), lloyds TsB Group Holdings (Jersey) limited (holding at 31 december 2012: 42,846 shares, 31 december 2011: 42,846 shares, waived rights to all but a nominal amount of one penny in total) and the lloyds TsB Qualifying Employee share Ownership Trust (holding at 31 december 2012: 1,398 shares, 31 december 2011: 1,398 shares, waived rights to all but a nominal amount of one penny in total).
Executive and sAYE plans: Options granted in the year 12 13 59
Save-As-you-earn schemes Eligible employees may enter into contracts through the save-As-You-Earn schemes to save up to £250 per month and, at the expiry of a fixed term of three, five or seven years, have the option to use these savings within six months of the expiry of the fixed term to acquire shares in the Group at a discounted price of no less than 80 per cent of the market price at the start of the invitation.
no options were exercised in 2012. The weighted average share price at the time that the options were exercised during 2011 was £0.54. The weighted average remaining contractual life of options outstanding at the end of the year was 0.8 years (2011: 1.7 years).
no sAYE options were granted in 2012 or 2011. The fair values of the sAYE options have been determined using a standard Black-scholes model.
Outstanding at 31 December 45,614,150 nil 53,000,069 nil exercisable at 31 December 3,065,531 nil 2,310,418 nil
Lloyds Banking Group Annual Report and Accounts 2012294 note 51: Share-based payments (continued)
Lloyds Banking Group Long-Term incentive Plan The long-Term incentive Plan (lTiP) introduced in 2006 is aimed at delivering shareholder value by linking the receipt of shares to an improvement in the performance of the Group over a three year period. Awards are made within limits set by the rules of the Plan, with the limits determining the maximum number of shares that can be awarded equating to three times annual salary. in exceptional circumstances this may increase to four times annual salary.
if the absolute improvement in adjusted EP reached 100 per cent, 25 per cent of this element of the award, being the threshold, would vest. if the absolute improvement in adjusted EP reached 202 per cent, 100 per cent of this element would vest.
For awards made to Executive directors, a third performance condition was set, relating to Absolute share Price, relevant to 28 per cent of the award. Performance will be measured based on the Absolute share Price on 26 March 2013, being the third anniversary of the award date. if the share price at the end of the performance period is 75 pence or less, none of this element of the award will vest. if the share price is 114 pence or higher, 100 per cent of this element will vest. Vesting between threshold and maximum will be on a straight line basis, provided that shares comprised in the Absolute share Price element may only be released if both the EPs and EP performance measures have been satisfied at the threshold level or above. The EPs and EP performance conditions each relate to 36 per cent of the total award.
if the adjusted EP reaches £160 million, 25 per cent of this element of the award, being the threshold, will vest.
(ii) Absolute Total Shareholder Return (ATSR): relevant to 30 per cent of the award. Performance will be measured against the annualised return over the three year period ending 31 december 2014.
if the ATsR reaches 12 per cent per annum, 25 per cent of this element of the award, being the threshold, will vest.
Lloyds Banking Group Annual Report and Accounts 2012296 note 51: Share-based payments (continued)
(iv) non-core assets at the end of 2014: relevant to 10 per cent of the award. Performance will be measured by reference to balance sheet non-core assets at 31 december 2014.
if a run rate of net simplification benefits of £1.8 billion is achieved, 100 per cent of this element will vest.
Scottish Widows investment Partnership Long-Term incentive Plan The scottish Widows investment Partnership (sWiP) long-Term incentive Plan applicable to senior executives and employees of sWiP, which had previously been a cash-only scheme, was amended in May 2012 for awards granted on or after that date. The amendment introduced the receipt of shares in lloyds Banking Group plc as an element of the total award. The other element will continue to be cash based, with the split between cash based and share based determined by the Remuneration committee. The amendment is aimed at delivering shareholder value by linking the receipt of shares to an improvement in the performance of sWiP over a three year period. Awards are made within limits set by the rules of the Plan, with the maximum limits for combined cash and shares awarded equating to 3.5 times annual salary. in exceptional circumstances this may increase to 4 times annual salary.
(ii) investment performance: relevant to 40 per cent of the award. The performance target is based on the percentage of sWiP funds achieving at or above benchmark performance (on a competitor median or index basis) over the 3 year period. if 50 per cent of funds exceed benchmark performance, 25 per cent of this element of the award, being the threshold, will vest. if 55 per cent of funds exceed benchmark performance, 100 per cent of this element, being the target, will vest. if 70 per cent of funds exceed benchmark performance, 200 per cent of this element of the award, being the maximum, will vest.
Free shares An award of shares may be made annually to employees based on a percentage of each employee’s salary in the preceding year up to a maximum of £3,000. The percentage is normally announced concurrently with the Group’s annual results and the price of the shares awarded is announced at the time of award. 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.
Matching shares The Group undertakes to match shares purchased by employees up to the value of £30 per month; these matching shares are held in trust for a mandatory period of three years on the employee’s behalf, during which period the employee is entitled to any dividends paid on such shares. The award is subject to a non-market based condition: if an employee leaves within this three year period for other than a ‘good’ reason, 100 per cent of the matching shares are forfeited. similarly if the employees sell their purchased shares within three years, their matching shares are forfeited.
The tables below detail, on an aggregated basis, balances outstanding at the year end and related income and expense, together with information relating to other transactions between the Group and its key management personnel: £m £m £m
deposits placed by key management personnel attracted interest rates of up to 3.8 per cent (2011: 5 per cent; 2010: 4.25 per cent).
Subsidiaries details of the principal subsidiaries are given in note 9 to the parent company financial statements. in accordance with iAs 27 Consolidated and separate financial statements, transactions and balances with subsidiaries have been eliminated on consolidation.
Big Society Capital in January 2012 the Group agreed, together with The Royal Bank of scotland plc (and two other non-related parties), to commit up to £50 million each of equity investment into the Big society capital Fund. The Fund, which was created as part of the Project Merlin arrangements, is a uK social investment fund. The Fund was officially launched on 3 April 2012 and the Group invested £12 million in the Fund during 2012.
Central bank facilities in the ordinary course of business, the Group may from time to time access market-wide facilities provided by central banks.
interbank offered rate setting investigations A number of government agencies in the uK, us and elsewhere, including the uK Financial services Authority, the us commodity Futures Trading commission, the us securities and Exchange commission, the us department of Justice and a number of state Attorneys General, as well as the European commission, are conducting investigations into submissions made by panel members to the bodies that set various interbank offered rates including the BBA london interbank Offered Rates (liBOR) and the European Banking Federation’s Euribor. certain Group companies were (at the relevant times) and remain members of various panels whose members make submissions to these bodies including the BBA liBOR panels. no Group company is or was a member of the Euribor panel. certain Group companies have received subpoenas and requests for information from certain government agencies and the Group is co-operating with their investigations. in addition certain Group companies, together with other panel banks, have been named as defendants in private lawsuits, including purported class action suits in the us with regard to the setting of liBOR. it is currently not possible to predict the scope and ultimate outcome of the various regulatory investigations or private lawsuits, including the timing and scale of the potential impact of any investigations and private lawsuits on the Group.
At 31 december 2012 there were loans and advances to customers of £3,424 million (2011: £5,185 million) outstanding and balances within customer deposits of £45 million (2011: £88 million) relating to other joint ventures and associates.
Mastercard has appealed the General court’s judgment to the court of Justice of the European union. Mastercard is supported by several card issuers, including lloyds Banking Group. Judgment is not expected until late 2013 or later.
– the Office of Fair Trading (OFT) may decide to renew its ongoing examination of whether the levels of interchange fees paid by retailers in respect of Mastercard and VisA credit cards, debit cards and charge cards in the uK infringe competition law. The OFT had placed the investigation on hold pending the outcome of the Mastercard appeal to the General court.
The ultimate impact of the investigations and any regulatory developments on the Group can only be known at the conclusion of these investigations and any relevant appeal proceedings and once regulatory proposals are more certain.
Other commitments 53,196 56,527 1 year or over original maturity 40,794 40,972
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £52,733 million (2011: £53,459 million) was irrevocable.
Trading and other financial assets at fair value through profit or loss – 23,345 130,645 – – – – 153,990 derivative financial instruments 11,571 44,979 – – – – – 56,550 loans and receivables: loans and advances to banks – – – – 29,417 – – 29,417 loans and advances to customers – – – – 517,225 – – 517,225
Financial liabilities deposits from banks – – – – – 38,405 – 38,405 customer deposits – – – – – 426,912 – 426,912 items in course of transmission to banks – – – – – 996 – 996
Lloyds Banking Group Annual Report and Accounts 2012304 note 54: Financial instruments (continued)
From available-for-sale financial assets to loans and receivables 162 203 217 219 313 340 394 422 454 402
Lloyds Banking Group Annual Report and Accounts 2012306 note 54: Financial instruments (continued)
From held for trading to loans and receivables: £m £m £m £m £m
Carrying value Fair value carrying value Fair value £m £m £m £m
Financial assets cash and balances at central banks 80,298 80,298 60,722 60,722 items in the course of collection from banks 1,256 1,256 1,408 1,408
Fair value of financial instruments carried at amortised cost cash and balances at central banks and items in the course of collection from banks The fair value approximates carrying value due to their short-term nature.
level 1 portfolios level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classified as level 1 predominantly comprise equity shares, treasury bills and other government securities.
level 2 portfolios level 2 valuations are those where quoted market prices are not available, for example where the instrument is traded in a market that is not considered to be active or valuation techniques are used to determine fair value and where these techniques use inputs that are based significantly on observable market data. Examples of such financial instruments include most over-the-counter derivatives, financial institution issued securities, certificates of deposit and certain asset-backed securities.
Lloyds Banking Group Annual Report and Accounts 2012310 note 54: Financial instruments (continued)
Available-for-sale financial assets debt securities: Other public sector securities 27 – – 27
Other asset-backed securities – 807 257 1,064 corporate and other debt securities 41 5,192 12 5,245
Trading liabilities: liabilities in respect of securities sold under repurchase agreements – 12,378 – 12,378 short positions in securities 3,168 533 – 3,701
Asset-backed securities Where there is no trading activity in asset-backed securities, valuation models, consensus pricing information from third party pricing services and broker or lead manager quotes are used to determine an appropriate valuation. Asset-backed securities are then classified as either level 2 or level 3 depending on whether there is more than one consistent independent source of data. if there is a single, uncorroborated market source for a significant valuation input or where there are materially inconsistent levels then the security is reported as level 3. Asset classes classified as level 3 mainly comprise certain collateralised loan obligations and collateralised debt obligations.
– discounted cash flow valuations use estimated future cash flows, usually based on management forecasts, with the application of appropriate exit yields or terminal multiples and discounted using rates appropriate to the specific investment, business sector or recent economic rates of return. Recent transactions involving the sale of similar businesses may sometimes be used as a frame of reference in deriving an appropriate multiple.
level 3 derivative assets also include £nil (2011: £14 million) in respect of credit default swaps written on level 3 negative basis asset-backed securities.
Asset-backed securities lead manager or broker quote/ consensus pricing from market data provider use of single pricing source
Earnings, net asset value, underlying asset values, property prices, forecast cash flows
derivative valuation adjustments derivative financial instruments which are carried in the balance sheet at fair value are adjusted where appropriate to reflect credit risk, market liquidity and other risks.
Lloyds Banking Group Annual Report and Accounts 2012316 note 54: Financial instruments (continued)
in circumstances where exposures to a counterparty become impaired, any associated derivative valuation adjustment is transferred and assessed for specific loss alongside other non-derivative assets and liabilities that the counterparty may have with the Group.
A one per cent rise in the cds spread would lead to an increase in the dVA of £113 million to £287 million.
The risk exposures that are used for the cVA and dVA calculations are strongly influenced by interest rates. due to the nature of the Group’s business the cVA/dVA exposures tend to be on average the same way around such that the valuation adjustments fall when interest rates rise. A one per cent rise in interest rates would lead to a £345 million fall in the overall valuation adjustment to £409 million. The cVA model used by the Group does not assume any correlation between the level of interest rates and default rates.
Own credit adjustments The carrying amount of issued notes that are designated under the iAs 39 fair value option is adjusted to reflect the effect of changes in own credit spreads. The resulting gain or loss is recognised in the income statement.
At 31 december 2012, the own credit adjustment arising from the fair valuation of £5,700 million (2011: £5,339 million) of the Group’s debt securities in issue designated at fair value through profit or loss resulted in a loss of £437 million (2011: gain of £194 million).
Securitisation programmes loans and receivables: loans and advances to customers1 118,183 28,0592 includes us residential mortgage-backed securities and associated liabilities whose carrying values were £185 million and £221 million respectively; the associated liabilities have recourse only to the securities transferred and, at 31 december 2012, the fair values of the securities and the associated liabilities were £244 million and £311 million respectively, a difference of £67 million.
Amounts recognised in the income statement in 2012 in respect of debt securities shown above, an amount of £2 million was recognised during the year (£5 million cumulatively since derecognition) within net interest income.
The table below sets out the carrying values of the transferred assets and the associated liabilities. For repurchase and securities lending transactions, the associated liabilities represent the Group’s obligation to repurchase the transferred assets. For securitisation programmes, the associated liabilities represent the external notes in issue (note 36). Except as otherwise noted below, none of the liabilities shown in the table below have recourse only to the transferred assets.
Available-for-sale financial assets 8,967 4,693 loans and receivables: loans and advances to customers 19,015 6,662 debt securities classified as loans and receivables 498 346
in respect of fund investments shown above, an amount of £3 million was recognised during the year (£55 million cumulatively since derecognition) within net trading income.
The Group hedges part of the currency translation risk of the net investment in certain foreign operations using currency borrowings. At 31 december 2012 the aggregate principal of these currency borrowings was £2,489 million (2011: £2,245 million). in 2012, an ineffectiveness loss of £1 million before and after tax (2011: ineffectiveness gain of £23 million before tax and £17 million after tax) was recognised in the income statement arising from net investment hedges.
Credit risk The Group’s credit risk exposure arises in respect of the instruments below and predominantly in the united Kingdom, the European union, Australia and the united states. credit risk appetite is set at Board level and is described and reported through a suite of metrics devised from a combination of accounting and credit portfolio performance measures, which include the use of various credit risk rating systems as inputs and measure the credit risk of loans and advances to customers and banks at a counterparty level using three components: (i) the probability of default by the counterparty on its contractual obligations; (ii) the current exposures to the counterparty and their likely future development, from which the Group derives the exposure at default; and (iii) the likely loss ratio on the defaulted obligations, the loss given default. The Group uses a range of approaches to mitigate credit risk, including internal control policies, obtaining collateral, using master netting agreements and other credit risk transfers, such as asset sales and credit derivative based transactions.
deposit amounts available for offset and amounts available for offset under master netting arrangements do not meet the criteria under iAs 32 to enable loans and advances and derivative assets respectively to be presented net of these balances in the financial statements.
The analysis of lending between retail and wholesale has been prepared based upon the type of exposure and not the business segment in which the exposure is recorded. included within retail are exposures to personal customers and small businesses, whilst included within wholesale are exposures to corporate customers and other large institutions.
Allowance for impairment losses on loans and advances to customers on a management basis 21,772 27,718 comprises an allowance held at 31 december 2008 of £10,693 million and a charge for the period from 1 January 2009 to 16 January 2009 of £454 million.
This represents the element of the charge on loans and advances to customers in HBOs’s results that was included within the Group’s fair value adjustments in respect of the acquisition of HBOs on 16 January 2009.
Available-for-sale financial assets (excluding equity shares) An analysis of the Group’s available-for-sale financial assets is included in note 25. The credit quality of the Group’s available-for-sale financial assets (excluding equity shares) is set out below: AAA £m
Total held as available-for-sale financial assets 20,698 8,137 820 851 318 22 30,846
Treasury bills and other bills 1,717 – 10 – – – 1,727
Held-to-maturity investments The Group no longer holds any held-to-maturity investments. An analysis of the credit quality of the Group’s held-to-maturity investments at 31 december 2011 is provided below: AAA £m
Trading assets: Bank and building society certificates of deposit – 2,182 907 77 – – 3,166
Total held as trading assets 4,487 2,635 1,319 356 30 1 8,828
Other assets held at fair value through profit or loss: Bank and building society certificates of deposit – 94 134 – – – 228
Total other assets held at fair value through profit or loss 18,896 5,114 8,786 7,492 2,132 1,882 44,302
Total held at fair value through profit or loss 23,383 7,749 10,105 7,848 2,162 1,883 53,130
Treasury bills and other bills 224 75 – – – – 299
C. Collateral held as security for financial assets A general description of collateral held as security in respect of financial instruments is provided on pages 134 and 135. 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.
Loans and receivables The disclosures below 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 on a gross basis, more fairly reflects the underlying provisioning status of the loans.
At 31 December 2012 70 per cent to 80 per cent 61,677 1,962 846 64,485 80 per cent to 90 per cent 52,651 2,314 1,114 56,079 90 per cent to 100 per cent 36,428 2,092 1,133 39,653
The value of collateral is re-evaluated and its legal soundness re-assessed if there is observable evidence of distress of the borrower; this evaluation is used to determine potential loss allowances and management’s strategy to try to either repair the business or recover the debt.
in addition, securities held as collateral in the form of stock borrowed amounted to £38,040 million (2011: £10,438 million). Of this amount, £36,549 million (2011: £5,308 million) had been resold or repledged as collateral for the Group’s own transactions.
The Group’s own uK retail secured schemes have also shown signs of success with 86 per cent of customers who have accepted capital payment breaks having maintained or improved their arrears position over the twelve months after transfer. The Group believes that its mortgage payment arrangements continue to be an effective way to manage short-term affordability issues.
Forbearance granted The tables below set out the Group’s retail forborne loans at 31 december 2012.
Secured retail At 31 december 2012, uK and irish retail secured loans and advances subject to forbearance were 1.8 per cent (2011: 1.9 per cent) of total uK and irish retail secured loans of £330,485 million (2011: £339,121 million). Further analysis of the forborne loan balances are set out below: Total loans and advances which are forborne
Where the treatment involves a permanent change to the contractual basis of the customer’s account (i.e. capitalisation of arrears and term extensions), those commenced during the year and remaining as customers at the year-end are shown.
The performance of such models is monitored and challenged on an ongoing basis, in line with the Group’s model governance policies. The models are also regularly recalibrated to reflect up to date customer behaviour and market conditions. specifically, regular detailed analysis of modelled provision outputs is undertaken to demonstrate that the risk of forbearance or other similar activities is recognised, that the outcome period adequately captures the risk and that the underlying risk is appropriately reflected. Where this is not the case, additional provisions are applied to capture the risk.
Unsecured retail At 31 december 2012, uK retail unsecured loans and advances subject to reduced contractual monthly payment, financial distress and repair treatment were 2.1 per cent (2011: 3.2 per cent) of total uK retail unsecured loans and advances of £22,698 million (2011: £24,764 million). Further analysis of the forborne loan balances are set out below: Total loans and advances which are forborne
Extensions – Extension of facilities outside of agreed terms These allow customers to formally extend their facility term in order to reduce their contractual repayments or to improve their liquidity position.
Forgiveness – Debt for equity swaps This type of forbearance involves the Group writing off debt, either partially or in whole, in exchange for equity in the company, usually in the form of ordinary shares, warrants, options or other equity instruments. The primary goals of debt for equity swaps are to reduce the debt service (capital and interest) burden on the borrower, to encourage early repayment of outstanding loans to the Group, to protect the value of the residual debt provided, and to benefit from any future growth in value of the borrower. debt for equity swaps are typically used as a last resort. This type of forbearance will always give rise to an impairment.
Forgiveness – Partial debt write off An agreement to write off part of a contractual financial obligation in order to facilitate survival of a corporate entity on a going concern basis. Partial debt write-offs are typically used as a last resort. This type of forbearance will always give rise to an impairment.
Commercial Banking At 31 december 2012, commercial Banking loans and advances to customers subject to forbearance were 22.8 per cent of total commercial Banking loans of £144,770 million. Forborne loans managed in the Good Book were 1.6 per cent of total loans and advances. Further analysis of the forborne loan balances is set out below: Total loans and advances which are forborne £m
Whilst the material portfolios have been reviewed for forbearance, some portfolios within commercial Banking have not been reviewed on the basis that the level is relatively immaterial or because the concept of forbearance is not relevant.
At 31 December 2012 unimpaired – Business support unit 1,908 – –
Assets cash and balances at central banks 60,420 296 6 – – 60,722
Trading and other financial liabilities at fair value through profit or loss 11,622 4,720 10,454 6,931 3,764 37,491 liabilities arising from non-participating investment contracts 27,205 – – – 27,167 54,372
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 £9,520 million at 31 december 2012 (2011: £10,831 million) with £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 (2011: £4,989 million expiring within one year; £2,008 million between one and three years; £2,198 million between three and five years; and £1,636 million over five years).
Additionally an extensive series of stress analyses is undertaken during the year to determine the adequacy of the Group’s capital resources against the FsA minimum requirements in severe economic conditions.
(B) Change in operating liabilities £m £m £m change in deposits from banks (1,325) (10,480) (32,162)
change in derivative financial instruments, trading and other liabilities at fair value through profit or loss 1,521 14,249 160 change in investment contract liabilities 7,421 793 8,161 change in other operating liabilities (743) (139) (2,938)
impairment of available-for-sale financial assets 37 80 106 change in insurance contract liabilities 3,929 (2,081) 4,021 customer goodwill payments provision – – 500
loans and advances to banks 29,417 32,606 30,272 less: amounts with a maturity of three months or more (8,077) (6,369) (4,998)
Other net assets and liabilities 29 319 742 loss on sale of businesses (7) (21) (314)
Amendments to iAs 1 Presentation of Financial Statements – ‘Presentation of Items of Other Comprehensive Income’
Opinion on financial statements in our opinion the parent company financial statements: – give a true and fair view of the state of the company’s affairs at 31 december 2012 and of its cash flows for the year then ended; – have been properly prepared in accordance with iFRss as adopted by the European union and as applied in accordance with the provisions of the companies Act 2006; and
– the information given in the directors’ Report for the financial year for which the parent company financial statements are prepared is consistent with the parent company financial statements.
Lloyds Banking Group Annual Report and Accounts 2012344 note £ million £ million
Amounts due from subsidiaries 3 147 212 cash and cash equivalents 2,231 1,105
issue of ordinary shares 2,237 – – – 2,237 cancellation of deferred shares (4,086) – 4,086 – –
Value of employee services: share option schemes – – – 143 143
£ million £ million £ million loss before tax (259) (202) (961)
note 3: Amounts due from subsidiaries These comprise short-term lending to subsidiaries, repayable on demand. The fair values of amounts owed by subsidiaries are equal to their carrying amounts. no provisions have been recognised in respect of amounts owed by subsidiaries.
Movements in other reserves were as follows: 2012 £m 2011 £m 2010 £m
Undated subordinated liabilities 6.0884% undated subordinated notes callable 2015 (£732 million) 668 642 6.369% undated subordinated notes callable 2015 (£597 million) 551 533 5.92% undated subordinated notes callable 2015 (us$378 million) 200 188 6.267% undated subordinated notes callable 2016 (us$466 million) 237 227 6.3673% undated subordinated notes callable 2019 (£331 million) 296 291 6.475% undated subordinated notes callable 2024 (£102 million) 88 87 6% undated subordinated step-up Guaranteed Bonds callable 2032 (£500 million) b 10 11 6.413% undated subordinated notes callable 2035 (us$375 million) 172 171 6.657% undated subordinated notes callable 2037 (us$316 million) 143 143
As discussed in note 51 to the consolidated financial statements, the Group provides share-based compensation to employees through a number of schemes; these are all in relation to shares in the company and the cost of providing those benefits is recharged to the employing companies in the Group on a cash basis.
Percentage of equity share capital and voting rights held nature of business lloyds TsB Bank plc Ordinary England 100% Banking and financial services scottish Widows plc Ordinary scotland 100%1 life assurance
Bank of scotland plc Ordinary scotland 100%1 Banking and financial services st. Andrew’s insurance plc Ordinary England 100%1 General insurance clerical Medical investment Group limited Ordinary England 100%1 life assurance clerical Medical Managed Funds limited Ordinary England 100%1 life assurance indirect interest.
in addition the company carries out banking activities through its subsidiary, lloyds TsB Bank plc. At 31 december 2012, the company held deposits of £2,231 million with lloyds TsB Bank plc (2011: £1,105 million). Given the volume of transactions flowing through the account, it is not meaningful to provide gross inflow and outflow information. included within subordinated liabilities is £2,355 million (2011: £2,287 million) and within other liabilities is £10,630 million (2011: £10,261 million) due to subsidiary undertakings. in addition, at 31 december 2012 the company had interest rate and currency swaps with lloyds TsB Bank plc with an aggregate notional principal amount of £2,338 million and a net positive fair value of £1,693 million (2011: notional principal amount of £2,338 million and a net positive fair value of £1,660 million), of which contracts with an aggregate notional principal amount of £2,338 million and a net positive fair value of £272 million (2011: notional principal amount of £1,349 million and a net positive fair value of £314 million) were designated as fair value hedges to manage the company’s issuance of subordinated liabilities and debt securities in issue.
Other related party transactions Related party information in respect of other related party transactions is given in note 52 to the consolidated financial statements.
Lloyds Banking Group Annual Report and Accounts 2012352 note 10: Financial instruments
As discussed in note 9, the company has entered into interest rate and currency swaps with its subsidiary, lloyds TsB Bank plc, to manage these risks.
Fair values of financial assets and liabilities The valuation techniques for the company’s financial instruments are as discussed in note 54 to the consolidated financial statements.
Financial liabilities: debt securities in issue 545 545 555 555 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 1 March 2013.
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.
Telephone lines are open 8.30 am to 5.30 pm, Monday to Friday.
calls to 0871 numbers are charged at 8p per minute plus network extras. calls from outside the united Kingdom are charged at applicable international rates. The call prices we have quoted were correct in February 2013.
individual Savings Accounts (iSAs) The company provides a number of options for investing in lloyds Banking Group shares through an isA. For details contact: Bank of scotland share dealing, Halifax share dealing or lloyds TsB share dealing.
if you are concerned that you may have been targeted by such a scheme, please contact the FsA consumer Helpline on 0845 606 1234, www.fsa.gov.uk or Action Fraud on 0300 123 2040, www.actionfraud.org.uk for further advice.
This annual report contains certain forward looking statements within the meaning of the safe harbor provisions of the us Private securities litigation Reform Act of 1995 with respect to the business, strategy and plans of lloyds Banking Group and its current goals and expectations relating to its future financial condition and performance. statements that are not historical facts, including statements about lloyds Banking Group 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. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future.
Examples of such forward looking statements include, but are not limited to: projections or expectations of the Group’s future financial position including profit attributable to shareholders, provisions, economic profit, dividends, capital structure, expenditures or any other financial items or ratios; statements of plans, objectives or goals of the Group or its management including in respect of certain synergy targets; statements about the future business and economic environments in the united Kingdom (uK) and elsewhere including, but not limited to, future trends in interest rates, foreign exchange rates, credit and equity market levels and demographic developments; statements about competition, regulation, disposals and consolidation or technological developments in the financial services industry; and statements of assumptions underlying such statements.
Alt-A Alt-A are mortgage loans regarded as lower risk than sub-prime, but they share higher risk characteristics than lending under normal criteria. Further information on the Group’s exposure to Alt-A investments is given in note 55.
Arrears A customer is in arrears when they are behind in fulfilling their obligations with the result that an outstanding loan is unpaid or overdue. such a customer is also said to be in a state of delinquency. When a customer is in arrears, the entire outstanding balance is said to be delinquent, meaning that delinquent balances are the total outstanding loans on which payments are overdue.
Asset-Backed Securities (ABS) Asset-backed securities are securities that represent an interest in an underlying pool of referenced assets. The referenced pool can comprise any assets which attract a set of associated cash flows but are commonly pools of residential or commercial mortgages but could also include leases, credit card receivables, motor vehicles, student loans. Further information on the Group’s investments in ABs is given in note 55.
Basel ii The capital adequacy framework issued by the Basel committee on Banking supervision in June 2006 in the form of the ‘international convergence of capital Measurement and capital standards’.
Contractual maturities contractual maturity refers to the final payment date of a loan or other financial instrument, at which point all the remaining outstanding principal will be repaid and interest is due to be paid.
Debt restructuring This is when the terms and provisions of outstanding debt agreements are changed. This is often done in order to improve cash flow and the ability of the borrower to repay the debt. it can involve altering the repayment schedule as well as reducing the debt or interest charged on the loan.
enhanced Capital notes (eCns) The Group’s Ecns are subordinated notes issued by the Group that contain an embedded equity conversion feature. Further details of these are given in note 45.
Fair value adjustment Fair value adjustments arise on acquisition when assets and liabilities are acquired at fair values that are different from the carrying values in the acquired company. in respect of the Group’s acquisition of HBOs the principal adjustments were write-downs in respect of loans and advances to customers and debt issued.
Forbearance A term generally applied to concessions provided to support borrowers experiencing financial stress. such concessions include reduced or nil payments, term extensions, transfers to interest only and the capitalisation of arrears, and can be granted on a temporary or permanent basis.
A standardised contract developed by the isdA which is used as an umbrella contract for bilateral derivative contracts.
Loss emergence period The loss emergence period is the estimated period between impairment occurring and the loss being specifically identified and evidenced by the establishment of an appropriate impairment allowance.
Loss Given Default The estimated loss that will arise if a customer defaults. it is calculated after taking account of credit risk mitigation and includes the cost of recovery.
negative equity Mortgages negative equity occurs when the value of the property purchased using the mortgage is below the balance outstanding on the loan. negative equity is the value of the asset less the outstanding balance on the loan.
net interest margin net interest margin is net interest income as a percentage of average interest-earning assets. details of the Group’s banking net interest margin are given on page 75.
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 FsA.
Tier 1 capital A measure of a bank’s financial strength defined by the FsA. it captures core tier 1 capital plus other tier 1 securities in issue, but is subject to a deduction in respect of material holdings in financial companies. Further details are given in the capital Risk section on page 187.
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 55.
Cash flow statement consolidated 213 notes to the consolidated financial statements 339
Remuneration policy 100 service agreements 104 statement of directors’ responsibilities 84
Accounting policy 216 notes to the consolidated financial statements 246, 262
Accounting policy 222 critical accounting estimates and judgements 227 notes to the consolidated financial statements 271
Risk management framework capital risk 187 conduct risk 169 credit risk 132
Management basis segmental analysis 51 notes to the consolidated financial statements 229
Head office 25 Gresham street london Ec2V 7Hn Telephone +44 (0)20 7626 1500