Repair – Capitalisation of arrears Once customers have evidenced recovery from financial difficulty and re‑established a strong payment record, this treatment allows the repair of the customer’s financial position through the permanent capitalisation of arrears. Customers must demonstrate that they can meet the contractual terms of their loan by making six consecutive contractual monthly payments and must give their permission for the capitalisation. Arrears may not be capitalised more than twice in a five year period.
Customers receiving support from UK Government sponsored programmes The Group participates in a number of UK Government sponsored programmes designed to support households, which are described on page 133. Where these schemes provide borrowers with a state benefit that is used to service the loan, there is no change in the reported status of the loan which is managed and reported in accordance with its original terms.
UK and Irish retail secured loans and advances The amount of UK and Irish retail secured loans and advances subject to forbearance, financial distress and repair treatment at the period end is set out below: Total loans and advances receiving treatment
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.
Collective impairment assessment of retail secured loans subject to forbearance and similar treatments Loans which have received forbearance or similar treatments are grouped with other assets with similar risk characteristics and assessed collectively for impairment as described below. The loans are not considered as impaired loans unless they meet the standard definitions.
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.
Treatments offered to UK retail unsecured customers in financial difficulty Customers who are experiencing short‑term financial difficulties may reach agreement with the Group to pay an amount differing from their normal contractual payment for a specified period of time. This is agreed with the customer as being affordable and practical based on their individual circumstances. The terms of the arrangements and qualifying criteria depend on the unsecured product and on the assessment of the customer’s ability to return to making normal payments.
UK retail unsecured loans and advances UK retail unsecured loans and advances receiving forbearance and financial distress treatments at 31 December 2011 represent less than 2.5 per cent of the unsecured portfolios and, of that, over 90 per cent is already reported and provisioned for as impaired loans; in aggregate, impairment provisions as a percentage of impaired loans in collections represent 86.5 per cent.
For exposures that are judged to be impaired, provisions are determined through modelling the expected cure rates, write‑off propensity and cash flows. The segmentation is very granular with segments explicitly relating to repayment plans and refinance loans treatments. Payments of less than the monthly contractual amount are reflected in reduced cash flow forecasts when calculating the impairment allowance for these accounts.
The output of the models is monitored and challenged on an ongoing basis. The models are run monthly meaning that current market conditions and customer processes are reflected in the output. Where the risks identified are not captured in the underlying models, appropriate additional provisions are made.
Wholesale customers Wholesale credit facilities are reviewed on a regular basis and more frequently where required. When financial stress is exhibited, the customer is typically transferred at an early stage to the specialist Business Support Unit (BSU) and Customer Support teams. In order to support wholesale customers that encounter difficulties during the current economic downturn, the Group increased the size of its dedicated BSU to cover all its UK and International portfolios. The Group has detailed processes to identify customers in financial distress. These are designed to ensure that early warning signs are acted upon and the Group takes appropriate action and, where possible, works with each customer to try to resolve the issues, to restore the business to a financially viable position and to facilitate a business turnaround. The main types of forbearance for wholesale customers in financial distress are set out below.
A customer is not automatically classed as being in default as a result of a covenant breach, but an actual or projected breach will prompt a review of the customer’s circumstances and their facilities.
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. Term extensions are also granted as part of normal corporate activities.
G. Loans renegotiated during the year Loans and advances that were renegotiated during the year that would otherwise have been past due or impaired totalled £2,505 million at 31 December 2011 (2010: £5,475 million). Details of loans and advances renegotiated are provided below: Total loans and advances renegotiated during the year that would otherwise have been past due or impaired £m £m
The Group’s credit market exposures primarily relate to asset‑backed securities exposures held in Wholesale division. An analysis of the carrying value of these exposures, which are classified as loans and receivables (note 24), available‑for‑sale financial assets (note 26) or trading and other financial assets at fair value through profit or loss (note 18) depending on the nature of the investment, is set out below.
Non‑US residential mortgage‑backed securities 3,125 1,318 935 399 309 164 – –
Total uncovered asset‑backed securities 15,095 6,938 3,493 2,320 1,529 770 16 29
Debt securities held as loans and receivables 98 – 8 689 11,675 12,470
Liabilities arising from non‑participating investment contracts 12,944 91 265 1,743 36,320 51,363
In addition, the Group has a maximum credit risk exposure of £10,831 million (2010: £22,975 million) in respect of financial guarantees.
Cash and cash equivalents acquired, net of acquisition costs – – 16,341
Net cash (outflow) inflow arising from acquisitions in the year (10) (65) 16,262
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.
Note 59: Approval of financial statements The consolidated financial statements were approved by the directors of Lloyds Banking Group plc on 27 February 2012.
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 2011 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.
Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement on page 176, the directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
– certain disclosures of directors’ remuneration specified by law are not made; or
The directors approved the parent company financial statements on 27 February 2012.
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 2011. 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.
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.
Details of the Company’s dividends are as set out in note 51 to the consolidated financial statements.
Undated subordinated liabilities 6.0884% Undated Subordinated Notes callable 2015 (£732 million) 642 578 6.369% Undated Subordinated Notes callable 2015 (£597 million) 533 480 5.92% Undated Subordinated Notes callable 2015 (US$378 million) 188 164 6.267% Undated Subordinated Notes callable 2016 (US$466 million) 227 198 6.3673% Undated Subordinated Notes callable 2019 (£331 million) 291 266 6.475% Undated Subordinated Notes callable 2024 (£102 million) 87 80 6% Undated Subordinated Step-up Guaranteed Bonds callable 2032 (£500 million) b 11 11 6.413% Undated Subordinated Notes callable 2035 (US$375 million) 171 155 6.657% Undated Subordinated Notes callable 2037 (US$316 million) 143 130
As discussed in note 52 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.
Share dealing facilities Lloyds Banking Group offers shareholders a choice of two dealing services: Lloyds TSB Share Dealing – Internet dealing. Visit www.lloydstsbsharedealing.com
Asset Quality Ratio 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.
Buy-to-let mortgages Buy-to-let mortgages are those mortgages offered to customers purchasing residential property as a rental investment.
A security issued by a third party which references ABSs or other assets purchased by the issuer. Lloyds Banking Group has invested in instruments issued by other banking groups, including Collateralised Loan Obligations and Commercial Real Estate CDOs. Details of these investments are given in note 56.
A security backed by the repayments from a pool of commercial loans. CLOs are usually structured products with different tranches whereby senior classes of holder receive repayment before other tranches are repaid.
Commercial Paper Commercial paper is an unsecured promissory note issued to finance short-term credit needs. It specifies the face amount paid to investors on the maturity date. Commercial Paper can be issued as an unsecured obligation of the Group or, for example when issued by the Group’s conduits, as an asset-backed obligation. (in such case it is referred to as asset-backed commercial paper). Commercial Paper is usually issued for periods from as little as a week up to nine months.
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 22.
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.
Loan-to-value ratio (LTV) The loan-to-value ratio is a mathematical calculation which expresses the amount of a mortgage balance outstanding as a percentage of the total appraised value of the property. A high LTV indicates that there is less value to protect the lender against house price falls or increases in the loan if repayments are not made and interest is added to the outstanding balance of the loan.
Probability of default The likelihood that a customer will default on their obligation within the next year.
Head office 25 Gresham Street London EC2V 7HN Telephone +44 (0)20 7626 1500
Registered office The Mound Edinburgh EH1 1YZ Registered in Scotland no 95000