during the arrangement period, there is no clearing down of arrears such that, unless the customer is paying more than their contractual monthly payment, arrears balances will remain and the loan will continue to be reported as impaired or past due. When customers come to the end of their arrangement period they will continue to be managed as a mainstream collections case, if still in arrears.
The contractual monthly payment is reset when the capitalisation is implemented to enable repayment over the original term. Any subsequent arrears will accrue based on this revised payment.
The Group’s approach is to ensure that provisioning models, supported by management judgement, appropriately reflect the underlying loss risk of exposures. The Group uses sophisticated behavioural scoring to assess customers’ credit risk. The underlying behavioural scorecards consider many different characteristics of customer behaviour, both static and dynamic, from internal sources and also from credit bureaux data, including characteristics that may identify when a customer has been in arrears on products held with other firms. Hence, these models take a range of potential indicators of customer financial distress into account.
Total forborne loans and advances which are impaired impairment allowance as % of loans and advances which are forborne
Asset Finance UK Asset Finance operates a number of retail portfolios. At 31 december 2012, Asset Finance retail loans and advances subject to forbearance were 9.6 per cent of total Asset Finance retail loans and advances of £4,644 million. Further analysis of the forborne loan balances is set out below: Total loans and advances which are forborne £m
Commercial customers Forbearance activities it is Group policy that where forbearance has been granted for a commercial customer it must be managed either within the Group’s good book watchlist classifications or within a Business support unit. Whilst the Group treats all impaired assets as having been granted some form of forbearance in the past, granting forbearance does not necessarily mean that it is expected that future cash flows will fall, or that the asset is impaired. depending on circumstances and within robust parameters and controls, the Group believes forbearance can help support the customer in the medium term.
Extensions – Capital repayment holidays 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 repayments 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.
The Group’s credit market exposures primarily relate to asset-backed securities exposures held in the commercial Banking division and at the Group’s centre. An analysis of the carrying value of these exposures, which are classified as loans and receivables (note 23), available-for-sale financial assets (note 25) or trading and other financial assets at fair value through profit or loss (note 17) depending on the nature of the investment, is set out below.
Loans and receivables Available-for-sale Trading net exposure at 31 December net exposure at 31 december £m £m £m £m £m
Mortgage-backed securities: collateralised debt obligations: Other – – – – 264
Total uncovered asset-backed securities 5,002 2,284 151 7,437 15,095 negative basis1 – – – – 186 negative basis means bonds held with separate matching credit default swap protection.
Lloyds Banking Group Annual Report and Accounts 2012336 note 55: Financial risk management (continued)
Total non-derivative financial liabilities 390,857 35,862 78,867 146,294 91,375 743,255 derivative financial liabilities: Gross settled derivatives – net flows 305 453 244 1,040 1,533 3,575
Total non-derivative financial liabilities 415,054 50,522 72,169 150,389 95,376 783,510 derivative financial liabilities: Gross settled derivatives – net flows 1,288 2,002 872 946 2,921 8,029
The principal amount for undated subordinated liabilities with no redemption option is included within the over five years column; interest of approximately £79 million (2011: £187 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond five years.
Further information on the Group’s liquidity exposures is provided on pages 177 to 184.
Total contingents and commitments 67,605 15,155 17,663 4,424 104,847 Within 1 year £m years £m years £m
Payments in respect of customer goodwill payments provision – (497) –
Payments in respect of payment protection insurance provision (3,299) (1,045) –
When considering the movement on each line of the balance sheet, the impact of foreign exchange rate movements is removed in order to show the underlying cash impact.
(F) Disposal and closure of group undertakings and businesses £m £m £m loans and advances to customers 15 – –
iFRs 13 Fair Value Measurement defines fair value, sets out a framework for measuring fair value and requires disclosures about fair value measurements. it applies to iFRss that require or permit fair value measurements or disclosures about fair value measurements.
Amendments to iAs 32 Financial Instruments: Presentation – ‘Offsetting Financial Assets and Financial Liabilities’
Lloyds Banking Group Annual Report and Accounts 2012342 note 57: Future accounting developments (continued)
Pronouncement nature of change iASB effective date iFRs 9 Financial Instruments1,2 Replaces those parts of iAs 39 Financial Instruments: Recognition and Measurement relating to the classification, measurement and derecognition of financial assets and liabilities. iFRs 9 requires financial assets to be classified into two measurement categories, fair value and amortised cost, on the basis of the objectives of the entity’s business model for managing its financial assets and the contractual cash flow characteristics of the instruments and eliminates the available-for-sale financial asset and held-to-maturity investment categories in iAs 39. The requirements for derecognition are broadly unchanged from iAs 39. The standard also retains most of the iAs 39 requirements for financial liabilities except for those designated at fair value through profit or loss whereby that part of the fair value change attributable to an entity’s own credit risk is recorded in other comprehensive income.
As at 1 March 2013, this pronouncement is awaiting Eu endorsement.
iFRs 9 is the initial stage of the project to replace iAs 39. Future stages are expected to result in amendments to iFRs 9 to deal with changes to the impairment of financial assets measured at amortised cost and hedge accounting, as well as a reconsideration of classification and measurement. until all stages of the replacement project are complete, it is not possible to determine the overall impact on the financial statements of the replacement of iAs 39.
REPORT OF THE indEPEndEnT AudiTORs On THE PAREnT cOMPAnY FinAnciAl sTATEMEnTs independent auditors’ report to the members of Lloyds Banking Group plc We have audited the parent company financial statements of lloyds Banking Group plc for the year ended 31 december 2012 which comprise the parent company balance sheet, the parent company statement of changes in equity, the parent company cash flow statement and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and international Financial Reporting standards (iFRss) as adopted by the European union and as applied in accordance with the provisions of the companies Act 2006.
– the parent company financial statements and the part of the directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or
Assets non-current assets: investment in subsidiaries 9 40,534 40,534 loans to subsidiaries 9 8,123 8,286 deferred tax asset 2 9 8 current assets: derivative financial instruments 1,693 1,660
Total assets 53,711 52,685 equity and liabilities capital and reserves: share premium account 4 16,872 16,541 capital redemption reserve 5 4,115 4,115
Lloyds Banking Group Annual Report and Accounts 2012346 £ million £ million £ million loss before tax (259) (202) (961)
Fair value and exchange adjustments 245 329 198 change in other assets 14 255 1,021 change in other liabilities and other items 750 2,576 (2,466)
Redemption of loans to subsidiaries 209 – 850 net cash used in investing activities 209 (2,340) (575)
cash and cash equivalents at beginning of year 1,105 375 2,837
The accounting policies of the company are the same as those of the Group which are set out in note 2 to the consolidated financial statements, except that it has no policy in respect of consolidation and investments in subsidiaries are carried at historical cost, less any provisions for impairment.
Redemption of preference shares1 – – 3 cancellation of deferred shares – – 4,086 in January 2010, the company repurchased and cancelled certain preference shares amounting to £14 million. This resulted in a transfer of £3 million from the merger reserve to the capital redemption reserve and a transfer of £11 million from the merger reserve to the share premium account. details of the preference shares redeemed are set out in note 46 to the consolidated financial statements.
Other employee award schemes 256 details of the company’s dividends are as set out in note 50 to the consolidated financial statements.
Lloyds Banking Group Annual Report and Accounts 2012350 note 7: Subordinated liabilities These liabilities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer. Any repayments of subordinated liabilities require the consent of the Financial services Authority.
investment in subsidiaries £m £m capital injections into lloyds TsB Bank plc – 2,340
The principal area of operation for each of the above subsidiaries is the united Kingdom.
Lloyds Banking Group Annual Report and Accounts 2012352 note 9: Related party transactions (continued)
Guarantees The company guarantees certain of its subsidiaries’ liabilities to the Bank of England.
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest of approximately £296 million (2011: £303 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond 5 years. 10 Financial instruments
Shareholder enquiries The company’s share register and the lloyds Banking Group shareholder Account are maintained by Equiniti limited. contact them using the details below if you have enquiries about your shareholding, including: – change of name or address; – loss of share certificate; and
– dividend information, including loss of dividend warrant or tax voucher.
Equiniti limited Aspect House spencer Road lancing West sussex Bn99 6dA
Halifax Share Dealing – internet dealing. Visit www.halifaxsharedealing.co.uk shareholders in the lloyds Banking Group shareholder Account can only trade by telephone through the Halifax share dealing service.
Share price information shareholders can access both the latest and historical share prices via our website, www.lloydsbankinggroup.com, as well as listings in most national newspapers. For a real time buying or selling price, you will need to contact a stockbroker, or you can contact the sharedealing providers detailed above.
Share sale fraud lloyds Banking Group has been made aware of an increasing number of share sale frauds being reported by listed companies. This involves bogus stockbrokers, usually based overseas, cold calling people to: – pressure them into buying shares that promise high returns; or
in reality, the shares or secret information are either worthless or non-existent and if you receive such a call, we strongly recommend that you seek independent investment advice from an FsA authorised adviser before you take any action.
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 integration of HBOs and the Group’s simplification Programme; changing demographic developments including mortality and changing customer behaviour including consumer spending, saving and borrowing habits; 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.
Credit valuation adjustments These are adjustments to the fair values of derivative assets to reflect the creditworthiness of the counterparty. Further details are given in note 54.
Debt securities debt securities are assets held by the Group representing certificates of indebtedness of credit institutions, public bodies or other undertakings, excluding those issued by central Banks.
exposure at Default An estimate of the amount expected to be owed by a customer at the time of the customer’s default.
The Financial services compensation scheme (Fscs) is the uK’s independent statutory compensation fund for customers of authorised financial services firms and pays compensation if a firm is unable to pay claims against it. The Fscs is funded by management expenses levies and, where necessary, compensation levies on authorised firms.
impairment losses An impairment loss is the reduction in value that arises following an impairment review of an asset that determines that the asset’s value is lower than it’s carrying value. For impaired financial assets measured at amortised cost, impairment losses are the difference between the carrying value and the present value of estimated future cash flows, discounted at the asset’s original effective interest rate. impairment losses can be difficult to assess and the critical accounting estimates and judgements in note 3 detail the key assessments made when determining impairment losses.
individually/Collectively Assessed impairment is measured individually for assets that are individually significant, and collectively where a portfolio comprises homogenous assets and where appropriate statistical techniques are available.
individually assessed loan impairment provisions impairment loss provisions for individually significant impaired loans are assessed on a case-by-case basis, taking into account the financial condition of the counterparty, any guarantor and the realisable value of any collateral held.
Loans past due loans are past due when a counterparty has failed to make a payment when contractually due.
Market risk The risk that unfavourable market moves (including changes in and increased volatility of interest rates, market-implied inflation rates, credit spreads and prices for bonds, foreign exchange rates, equity, property and commodity prices and other instruments) lead to reductions in earnings and/ or value.
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.
Renegotiated loans loans and advances are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. in the latter case renegotiation can result in an extension of the due date of payment or repayment plans under which the Group offers a concessionary rate of interest to genuinely distressed borrowers. This will result in the asset continuing to be overdue and will be impaired where the renegotiated payments of interest and principal will not recover the original carrying amount of the asset. in other cases, renegotiation will lead to a new agreement, which is treated as a new loan.
short-term funding agreements which allow a borrower to sell a financial asset, such as ABs or Government bonds as collateral for cash. As part of the agreement the borrower agrees to repurchase the security at some later date, usually less than 30 days, repaying the proceeds of the loan.
Residential Mortgage-Backed securities are a category of ABS. They are securities that represent interests in a group of residential mortgages. investors in these securities have the right to cash received from future mortgage payments (interest and/or principal).
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.
Subordinated liabilities liabilities which, in the event of insolvency or liquidation of the issuer, are subordinated to the claims of depositors and other creditors of the issuer. details of the Group’s subordinated liabilities are set out in note 45.
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.
value-at-Risk Value-at-Risk is an estimate of the potential loss in earnings which might arise from market movements under normal market conditions, if the current positions were to be held unchanged for one business day, measured to a confidence level of 95 per cent.
HMRC Her Majesty’s Revenue & customs iAS international Accounting standard iASB international Accounting standards Board iCG individual capital Guidance iFRiC international Financial Reporting interpretations committee iFRS international Financial Reporting standards iSA individual savings Account
Wealth, Asset Finance and international 59 earnings per share 245 employees diversity and inclusion 37 colleagues 34
Financial risk management capital risk 187, 338 currency risk 318, 353 insurance risk 185, 338 interest rate risk 318, 353
Volatility arising in insurance businesses 74 insurance claims 239 insurance premium income 237 intangible assets
Loans and advances loans and advances to banks 250 loans and advances to customers 251
Registered office The Mound Edinburgh EH1 1YZ Registered in scotland no sc95000 internet www.lloydsbankinggroup.com