REG - Lloyds Banking Group - Half-year results <Origin Href="QuoteRef">LLOY.L</Origin> - Part 3
06/09/2014 22:42
- Part 3: For the preceding part double click ID:nRSe8094Nb
(90)bp
Return on risk-weighted assets 5.20% 4.67% 53bp 4.30% 90bp
Key balance sheet items At 30 June At 31 Dec Change
2014 20131
£bn £bn %
Loans and advances to customers 19.9 19.1 4
Customer deposits 17.4 18.7 (7)
Operating lease assets 2.9 2.8 4
Total customer balances 40.2 40.6 (1)
Risk-weighted assets under rules prevailing on 1 January 2014 21.5 20.1 7
Risk-weighted assets under rules prevailing on 31 December 2013 20.1
1 Restated to reflect previously announced changes to the Group operating structure implemented from 1 January 2014.
INSURANCE
Insurance is a core part of Lloyds Banking Group and is focused on four key markets: Corporate Pensions, Protection,
Retirement and Home Insurance, to enable our customers to protect themselves today and prepare for a secure financial
future.
Progress against strategic initiatives
· In Corporate Pensions, where we are a market leader, we have supported almost 1,500 employers, representing more than
140,000 employees, through auto enrolment in the first half of 2014.
· Following the recent Budget announcements, we have extended the cooling off period for our annuity clients and as
anticipated, we have seen a reduction in demand. We will further develop our product range in the retirement market; with
access to over 24 million Retail customers and our broad product offerings, we are very well placed to support the
retirement planning of our customers.
· We are the largest writer of Home Insurance in the UK and we are progressing plans to increase our share of the
underwritten market through bringing a significant proportion of our annual £150 million direct broked business in house,
allowing all customers to access our strong claims service.
· Customers impacted by the storms and floods in January and February benefited from our high quality claims service
with 95 per cent of claims settled so far and more than a quarter of our displaced customers already back in their homes.
· We relaunched the Scottish Widows brand in February 2014 demonstrating our continued commitment to being a leader in
the life planning and retirement market.
· Despite increased investment in our strategic initiatives, overall costs reduced by 2 per cent reflecting ongoing
benefits from our Simplification programmes and centralisation of operations within the Group.
Financial performance
· Underlying profit was down 18 per cent to £461 million primarily reflecting the £100 million impact, on our existing
book, of the Department of Work and Pension's (DWP) proposed fee cap on corporate pensions.
· Excluding the immediate one-off DWP impact, both income and profits are in line with prior year with the benefits
arising from our acquisition of attractive, higher yielding assets coupled with improved economics offsetting increased
weather-related claims and lower new business income.
· The increase in general insurance claims and combined ratio reflects increased weather claims as almost 25,000 of our
customers were impacted by storms and floods in January and February.
· Operating cash generation has remained robust at £380 million, net of £153 million invested in new business.
· As expected Life, Pensions and Investments (LP&I) new business margin has been impacted by competitive pricing in the
annuities market and an increasing mix of auto enrolment business.
· Funds under management have increased by £1.5 billion, primarily reflecting net inflows on corporate pensions.
· As expected LP&I sales (PVNBP) reduced by 14 per cent relative to the significant spike in 2013 pensions volumes as a
result of the Retail Distribution Review, however the trend is improving with a strong auto enrolment performance driving
an increase relative to the second half of last year.
Capital
· The Insurance business has remitted £0.4 billion of dividends to the Group in 2014, in addition to the £0.3 billion
of Heidelberger Leben sale proceeds, whilst maintaining a strong capital base. This increased the total dividends paid to
the Group in the last 18 months to £2.9 billion.
· The estimated capital surplus for Pillar 1 is £2.5 billion (Scottish Widows plc, £2.7 billion for 2013) and for
Insurance Groups Directive is £2.7 billion (Insurance Group, £2.9 billion for 2013) with the decrease reflecting the
dividends paid over the period.
INSURANCE (continued)
Half-year to 30 June 2014 Half-year to 30 June 20131 Change Half-year to 31 Dec 20131 Change
£m £m % £m %
Net interest income (64) (49) (31) (58) (10)
Other income 1,029 1,093 (6) 1,127 (9)
Insurance claims (175) (148) (18) (208) 16
Total underlying income 790 896 (12) 861 (8)
Total costs (329) (337) 2 (332) 1
Underlying profit 461 559 (18) 529 (13)
Operating cash generation 380 377 1 305 25
UK LP&I IFRS new business margin 1.5% 3.0% (1.5)pp 2.0% (0.5)pp
UK LP&I sales (PVNBP)2 4,680 5,430 (14) 4,504 4
General Insurance total GWP 604 665 (9) 642 (6)
General Insurance combined ratio 80% 69% 11pp 77% 3pp
1 Restated to reflect previously announced changes to the Group operating structure implemented from 1 January 2014.
2 Present value of new business premiums.
Profit by product group
Half-year to 30 June 2014 Half-year to 30 June 2013 Half-year to 31 Dec 2013
Pensions & investments Protection & retirement1 General Insurance Other2 Total Total Total
£m £m £m £m £m £m £m
New business income 107 42 − 2 151 250 173
Existing business income 324 62 − 59 445 395 412
Assumption changes and experience variances (101) 102 − (6) (5) (2) 72
General Insurance income net of claims − − 199 − 199 253 204
Total underlying income 330 206 199 55 790 896 861
Total costs (183) (65) (69) (12) (329) (337) (332)
Underlying profit 147 141 130 43 461 559 529
Underlying profit 30 June 20133 198 186 175 − 559
1 Retirement assumption changes and experience variances include the benefit of acquiring from Commercial Banking, £785 million of infrastructure and social housing loans during 2014; bringing total social housing, infrastructure and education loans acquired to £3.1 billion.
2 'Other' includes the results of the European business in addition to income from return on free assets, interest expense and certain provisions.
3 Full 2013 comparator tables for the profit and cash disclosures can be found on the Lloyds Banking Group investor site.
The new business income reduction of £99 million includes a reduction in pensions new business income due to lower volumes
relative to the spike in 2013 sales, and lower margins which reflect the low initial contribution levels for auto enrolment
schemes. Future automatic increases in contribution levels for these schemes have not been allowed for in calculating our
new business income. In addition annuities new business income has reduced following enhancements of the rates offered to
customers and reduced volumes subsequent to the annuity changes announced in the 2014 Budget.
INSURANCE (continued)
Existing business income has increased by £50 million primarily reflecting returns on an increased value of assets and
higher yields following market movements.
Assumption changes and experience variances includes, within protection and retirement, the benefits arising from our
acquisition of attractive higher yielding assets to match long duration liabilities, primarily benefiting annuities. This
has been offset by the negative impact on our existing pensions and investments book of the DWP's recent announcement in
respect of corporate pensions which incorporated the proposed cap on annual management charges at 0.75 per cent.
General Insurance income has fallen by £54 million due to increased weather claims, the run-off of the closed creditor book
and our focus on maintaining margin, and a good quality risk portfolio in a competitive Home market.
Operating cash generation
Half-year to 30 June 2014 Half-year to 30 June 2013 Half-year to 31 Dec 2013
Pensions & investments Protection & retirement General Insurance Other Total Total Total
£m £m £m £m £m £m £m
Cash invested in new business (123) (24) − (6) (153) (137) (133)
Cash generated from existing business 266 60 − 77 403 339 316
Cash generated from General Insurance − − 130 − 130 175 122
Operating cash generation 143 36 130 71 380 377 305
Intangibles and other adjustments 4 105 − (28) 81 182 224
Underlying profit 147 141 130 43 461 559 529
Operating cash generation 30 June 2013 119 77 175 6 377
In line with industry practice we introduced an operating cash generation metric at 2013 year end reporting. Operating cash
generation is derived from IFRS underlying profit by removing the effect of movements in intangible (non-cash) items and
assumption changes. Intangible items include the value of in-force life business, deferred acquisition costs and deferred
income reserves.
The Insurance business generated £380 million of cash in the first half of 2014, £3 million higher than prior year. This
was due to the increased claims following the January and February storms being more than offset by higher cash from the
life existing business.
RUN-OFF AND CENTRAL ITEMS
RUN-OFF
Half-year Half-year Change Half-year Change
to 30 June to 30 June to 31 Dec 20131
2014 20131
£m £m % £m %
Net interest income (67) 128 10
Other income 260 896 (71) 370 (30)
Total underlying income 193 1,024 (81) 380 (49)
Total underlying income excl. SJP 193 494 (61) 248 (22)
Total costs (169) (447) 62 (279) 39
Impairment (324) (828) 61 (561) 42
Underlying loss (300) (251) (20) (460) 35
Underlying loss excl. SJP (300) (737) 59 (592) 49
Key balance sheet items At At Change
30 June 31 Dec
2014 20131
£bn £bn %
Total assets 25.2 33.3 (24)
Risk-weighted assets under rules prevailing on 1 January 2014 24.2 30.6 (21)
Risk-weighted assets under rules prevailing on 31 December 2013 30.7
1 Restated to reflect previously announced changes to the Group operating structure implemented from 1 January 2014.
· Run-off includes certain assets previously classified as non-core and the results and gains on sale relating to
businesses disposed in 2013 and 2014.
· The reduction in total underlying income and costs primarily reflects the disposal of St. James's Place, Scottish
Widows Investment Partnership and a number of other assets.
· Impairments reduced by 61 per cent largely driven by lower new impairments and a number of releases in the corporate
real estate and specialist finance run-off portfolios. A breakdown of the charge is shown on page 41.
CENTRAL ITEMS
Half-year Half-year Half-year
to 30 June to 30 June to 31 Dec 20131
2014 20131
£m £m £m
Total underlying income (expense) 66 (132) (1)
Total costs (34) 5 (54)
Impairment − (2) (3)
Underlying profit (loss) 32 (129) (58)
1 Restated to reflect previously announced changes to the Group operating structure implemented from 1 January 2014
· Central items include income and expenditure not recharged to divisions, including the costs of certain central and
head office functions.
· Underlying income in the first half of 2014 includes the benefit relating to the reduction in interest payable
following the ECN exchange in the second quarter, which has not been passed on to the divisions.
ADDITIONAL INFORMATION
1. Reconciliation between statutory and underlying basis results
The tables below set out the reconciliation from the statutory results to the underlying basis results, the principles of
which are set out on the inside front cover.
Removal of:
Half-year to 30 June 2014 Lloyds Acquisition Volatility Insurance Legal and Fair value Underlying
Banking related and relating to the gross up regulatory unwind basis
Group other items1 insurance provisions2
statutory business
£m £m £m £m £m £m £m
Net interest income 5,262 (10) − 239 − 313 5,804
Other income, net of insurance claims 2,434 1,135 122 (314) − 71 3,448
Total underlying income 7,696 1,125 122 (75) − 384 9,252
Operating expenses3 (6,192) 321 − 75 1,100 21 (4,675)
Impairment (641) (27) − − − (90) (758)
Profit (loss) 863 1,419 122 − 1,100 315 3,819
Removal of:
Half-year to 30 June 2013 Lloyds Acquisition Volatility Insurance Legal and Fair value Underlying
Banking related and relating to the gross up regulatory unwind basis
Group other items4 insurance provisions2
statutory business
£m £m £m £m £m £m £m
Net interest income 3,270 (12) (7) 1,700 − 255 5,206
Other income, net of insurance claims 7,115 (558) (478) (1,821) − − 4,258
Total underlying income 10,385 (570) (485) (121) − 255 9,464
Operating expenses3 (6,568) 1,090 − 121 575 33 (4,749)
Impairment (1,683) 194 − − − (324) (1,813)
Profit (loss) 2,134 714 (485) − 575 (36) 2,902
Removal of:
Half-year to 31 December 2013 Lloyds Acquisition Volatility Insurance Legal and Fair value Underlying
Banking related and relating to the gross up regulatory unwind basis
Group other items5 insurance provisions2
statutory business
£m £m £m £m £m £m £m
Net interest income 4,068 (2) 7 1,230 − 376 5,679
Other income, net of insurance claims 4,025 1,018 (190) (1,253) − 62 3,662
Total underlying income 8,093 1,016 (183) (23) − 438 9,341
Operating expenses3 (8,754) 951 − 23 2,880 14 (4,886)
Impairment (1,058) 55 − − − (188) (1,191)
Profit (loss) (1,719) 2,022 (183) − 2,880 264 3,264
1 Comprises the effects of asset sales (gain of £94 million), volatile items (gain of £152 million), liability management (loss of £1,376 million), Simplification costs related to severance, IT and business costs of implementation (£519 million), TSB costs (£309 million), the past service pensions credit (£710 million) and the amortisation of purchased intangibles (£171 million).
2 Comprises the payment protection insurance provision of £600 million (half-year to 30 June 2013: £500 million; half-year to 31 December 2013: £2,550 million) and other regulatory provisions of £500 million (half-year to 30 June 2013: £75 million; half-year to 31 December 2013: £330 million).
3 On an underlying basis, this is described as total costs.
4 Comprises the effects of asset sales (gain of £775 million), volatile items (loss of £302 million), liability management (loss of £97 million), Simplification costs related to severance, IT and business costs of implementation (£409 million), TSB costs (£377 million), the past service pensions charge (£104 million) and the amortisation of purchased intangibles (£200 million).
5 Comprises the effects of asset sales (loss of £675 million), volatile items (loss of £376 million), liability management (loss of £45 million), Simplification costs related to severance, IT and business costs of implementation (£421 million), TSB costs (£310 million) and the amortisation of purchased intangibles (£195 million).
ADDITIONAL INFORMATION (continued)
2. Banking net interest margin
Banking net interest margin is calculated by dividing banking net interest income by average interest-earning banking
assets. A reconciliation of banking net interest income to Group net interest income showing the items that are excluded in
determining banking net interest income follows:
Half-year to 30 June 2014 Half-year to 30 June 2013 Half-year to 31 Dec 2013
£m £m £m
Banking net interest income - underlying basis 5,826 5,153 5,688
Insurance division (64) (49) (58)
Other net interest income (including trading activity) 42 102 49
Group net interest income - underlying basis 5,804 5,206 5,679
Fair value unwind (313) (255) (376)
Banking volatility and liability management gains 10 12 2
Insurance gross up (239) (1,700) (1,230)
Volatility relating to the insurance business − 7 (7)
Group net interest income - statutory 5,262 3,270 4,068
Average interest-earning banking assets are calculated gross of related impairment allowances, and relate solely to
customer and product balances in the banking businesses on which interest is earned or paid.
3. Volatility relating to the insurance business
The Group's statutory result before tax is affected by insurance volatility caused by movements in financial markets, and
policyholder interests volatility, which primarily reflects the gross up of policyholder tax included in the Group tax
charge.
In the first half of 2014 the Group's statutory result before tax included negative volatility relating to the insurance
business totalling £122 million compared to positive volatility of £485 million in the first half of 2013.
Volatility comprises the following:
Half-year to 30 June 2014 Half-year to 30 June 2013
£m £m
Insurance volatility (133) 58
Policyholder interests volatility1 43 407
Total volatility (90) 465
Insurance hedging arrangements (32) 20
Total (122) 485
1 2013 includes volatility relating to the Group's interest in St. James's Place.
Insurance volatility
The Group's insurance business has policyholder liabilities that are supported by substantial holdings of investments,
including equities, property and fixed interest investments, all of which are subject to variations in their value. The
value of the liabilities does not move exactly in line with changes in the value of the investments, yet IFRS requires that
the changes in both the value of the liabilities and investments be reflected within the income statement. As these
investments are substantial and movements in their value can have a significant impact on the profitability of the Group,
management believes that it is appropriate to disclose the division's results on the basis of an expected return in
addition to results based on the actual return.
ADDITIONAL INFORMATION (continued)
3. Volatility relating to the insurance business (continued)
The annualised expected gross investment returns used to determine the normalised profit of the business, which are based
on prevailing market rates and published research into historical investment return differentials, are set out below:
United Kingdom Half-year to 30 June 2014 Half-year to 30 June 2013
% %
Investments backing annuity liabilities 4.51 3.76
Equities and property 6.48 5.58
UK Government bonds 3.48 2.58
Corporate bonds 4.08 3.18
A review of investment strategy in the Group's Insurance business has resulted in investment being made in a wider range of
assets. Expected investment returns include appropriate returns for these assets.
The impact on the results due to the actual return on these investments differing from the expected return (based upon
economic assumptions made at the beginning of the year, adjusted for significant changes in asset mix) is included within
insurance volatility. Changes in market variables also affect the realistic valuation of the guarantees and options
embedded within the with-profits funds, the value of the in-force business and the value of shareholders' funds.
The negative insurance volatility during the period ended 30 June 2014 of £133 million, primarily reflects an adverse
performance on equity and cash investments in the period relative to expected return.
Policyholder interests volatility
The application of accounting standards results in the introduction of other sources of significant volatility into the
pre-tax profits of the life, pensions and investments business. In order to provide a clearer representation of the
performance of the business, and consistent with the way in which it is managed, adjustments are made to remove this
volatility from underlying profits. The effect of these adjustments is separately disclosed as policyholder interests
volatility.
The most significant of these additional sources of volatility is policyholder tax. Accounting standards require that tax
on policyholder investment returns should be included in the Group's tax charge rather than being offset against the
related income. The result is, therefore, to either increase or decrease profit before tax with a related change in the tax
charge. Timing and measurement differences exist between provisions for tax and charges made to policyholders. Consistent
with the normalised approach taken in respect of insurance volatility, differences in the expected levels of the
policyholder tax provision and policyholder charges are adjusted through policyholder interests volatility.
In the first half of 2014, the statutory results before tax included a credit to other income which relates to policyholder
interests volatility totalling £43 million (first half of 2013: £407 million) relating to the relatively small movements in
market investment returns in the period.
Insurance hedging arrangements
To protect against deterioration in equity market conditions, and the consequent negative impact on the value of in-force
business on the Group balance sheet, the Group purchased equity protection using put options in 2013, financed by selling
some upside potential from equity market movements. These expired in 2014 and the charge booked on these contracts was £2
million. New protection was acquired in 2014 to replace the expired contracts. On a mark-to-market basis a loss of £30
million was recognised in relation to the new contracts in the first half of 2014. This is offset by positive underlying
profit from equity exposure in the insurance business.
ADDITIONAL INFORMATION (continued)
4. Number of employees (full-time equivalent)
At 30 June 2014 At 31 Dec 2013
Retail 38,066 38,845
Commercial Banking 6,691 6,787
Consumer Finance 3,494 3,404
Insurance 2,009 2,373
Run-off and Central items 32,429 32,766
TSB 7,571 7,140
90,260 91,315
Agency staff (full-time equivalent) (2,602) (2,338)
Interns/Scholars/Career Academies (304) −
Total number of employees (full-time equivalent) 87,354 88,977
5. TSB
The financial results for TSB are presented on a Lloyds Banking Group basis and differ to those reported by TSB for the
reasons shown below. Investors in TSB should only rely on financial information published by TSB.
Half-year to 30 June 2014 Half-year to 30 June 2013 Half-year to 31 Dec 2013
Profit before tax: £m £m £m
On a Lloyds Banking Group reporting basis (underlying profit) 226 60 46
Recognition of product transfers1 (9) (122) (78)
Cost allocation2 − 105 112
TSB dual running costs3 (138) − −
Volatile items4 (14) − (46)
Defined benefit pension scheme settlement gain5 64 − −
FSCS levy adjustment6 − (3) 13
Other − (4) 2
Reported in the TSB results RNS 129 36 49
1 On the Lloyds Banking Group reporting basis, all product transfers to TSB are assumed to have occurred on 1 January 2013.
2 In 2013, TSB was allocated costs on the same basis as the other business segments. In 2014, costs have been charged to TSB in accordance with the Transitional Service Agreement and the costs that were previously allocated to TSB have been charged to the other business segments.
3 This represents corporate head office and similar costs incurred by TSB. The Group has excluded these from underlying profit to provide a more meaningful view of underlying business costs as they represent the duplicated costs of running two corporate head offices. These costs form part of the continuing TSB cost base and are reflected in the Group's statutory profit before tax.
4 Banking volatility reported below underlying profit in the Lloyds Banking Group results.
5 Following the transfer of employees from employment with Lloyds Banking Group companies to TSB Bank, the defined benefit scheme assets and liabilities have been derecognised from the TSB Bank balance sheet and settled with nil cash consideration, resulting in a one off gain of £64 million. This is deconsolidated at Lloyds Banking Group level.
6 Adjustment to reflect the change in timing of the FSCS charge.
RISK MANAGEMENT
Page
Principal risks and uncertainties 38
Credit risk portfolio 41
Funding and liquidity management 56
Capital management 61
The income statement numbers in this section are presented on an underlying basis.
PRINCIPAL RISKS AND UNCERTAINTIES
The most significant risks faced by the Group which could impact the success of delivering against the Group's long-term
strategic objectives together with key mitigating actions are outlined below.
Credit risk
Principal risks
As a provider of credit facilities to personal and commercial customers, together with financial institutions and
Sovereigns, any adverse changes in the economic and market environment we operate in, or the credit quality and/or
behaviour of our borrowers and counterparties would reduce the value of our assets and increase our write-downs and
allowances for impairment losses, adversely impacting profitability.
Mitigating actions
· Credit policy incorporating prudent lending criteria aligned with the Board approved risk appetite to effectively
manage credit risk.
· Clearly defined levels of authority ensure we lend appropriately and responsibly with separation of origination and
sanctioning activities.
· Robust credit processes and controls including well-established committees to ensure distressed and impaired loans
are identified early, considered and controlled with independent credit risk assurance.
Conduct risk
Principal risks
As a major financial services provider we face significant conduct risk, including selling products to customers which do
not meet their needs; failing to deal with customers' complaints effectively; not meeting customer expectations; and
exhibiting behaviours which do not meet market or regulatory standards.
Mitigating actions
· Customer focused conduct strategy implemented to ensure customers are at the heart of everything we do.
· Product approval, review process and outcome testing supported by conduct management information.
· Clearer customer accountabilities for colleagues, including rewards with customer-centric metrics.
· Learn from past mistakes, including root-cause analysis.
Market risk
Principal risks
We face a number of key market risks including credit spreads and interest rate risk across the Banking and Insurance
businesses. However, our most significant market risk is from the Defined Benefit Pension Schemes where asset and liability
movements impact on our capital position.
Mitigating actions
· A rates hedging programme is in place to reduce liability risk.
· Board approved pensions risk appetite covering interest rate, credit spreads and equity risks.
· Credit assets and alternative assets are being purchased by the schemes as the equities are sold.
· Stress and scenario testing.
Operational risk
Principal risks
We face a number of key operational risks including fraud losses and failings in our customer processes. The availability,
resilience and security of our core IT systems is the most significant.
Mitigating actions
· Regularly review IT system architecture to ensure systems are resilient, readily available for our customers and
secure from cyber attack.
· Continue to implement actions from IT resilience review conducted in 2013 to reflect enhanced demands on IT both in
terms of customer and regulator expectations.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
Funding and liquidity
Principal risks
Our funding and liquidity position is supported by a significant and stable customer deposit base. However, a deterioration
in either our or the UK's credit rating affecting the Group's wholesale funding capacity or a sudden and significant
withdrawal of customer deposits could adversely impact our funding and liquidity position.
Mitigating actions
· At 30 June 2014 the Group had £92.3 billion of unencumbered primary liquid assets and the Group maintains a further
large pool of secondary assets that can be used to access Central Bank liquidity facilities.
· The Group carries out daily monitoring against a number of market and Group specific early warning indicators and
regularly stress tests its liquidity position against a range of scenarios.
· The Group has a contingency funding plan embedded within the liquidity policy which is designed to identify emerging
liquidity concerns at an early stage.
Capital risk
Principal risks
Our future capital position is potentially at risk from adverse financial performance and the introduction of higher
capital requirements for distinct risks, sectors or as a consequence of specific UK regulatory requirements. For example in
2013, the PRA introduced significant additional capital requirements on an adjusted basis that major UK banks are required
to meet.
Mitigating actions
· Close monitoring of actual capital ratios to ensure that we comply with current regulatory capital requirements and
are well positioned to meet future requirements.
· Internal stress testing results to evidence sufficient levels of capital adequacy for the Group under various
scenarios.
· We can accumulate additional capital in a variety of ways including raising equity via a rights issue or debt
exchange and by raising tier 1 and tier 2 capital.
Regulatory risk
Principal risks
Due to the nature of the industry we operate in we have to comply with a complex and demanding regulatory change agenda.
Regulatory initiatives we have been working on in the first six months of 2014 include CRD IV, the new FCA Consumer Credit
regime and the Dodd-Frank and Foreign Account Tax Compliance Act 2010. The sanctions for failing to comply far outweigh the
costs of implementation. We also face the implications of the Banking Reform Act and potential outcomes of the proposed CMA
review of Retail current accounts and SME Banking.
Mitigating actions
· The Legal, Regulatory and Mandatory Change Committee ensures we drive forward activity to develop plans for
regulatory changes and tracks progress against those plans.
· Continued investment in our people, processes and IT systems is enabling us to meet our regulatory commitments.
· Engagement with the regulatory authorities on forthcoming regulatory changes and market reviews.
PRINCIPAL RISKS AND UNCERTAINTIES (continued)
State aid
Principal risks
HM Treasury currently holds 24.9 per cent of the Group's share capital. We continue to operate without government
interference in the day-to-day management decisions, however there is a risk that a change in government priorities could
result in the current framework agreement being replaced, leading to interference in the operations of the Group. Failure
to meet the EU State aid commitments arising from this government support could lead to sanctions.
Mitigating actions
· Most EU State aid commitments now met with the completion of the divestment of TSB Bank outstanding.
· Divestment of the TSB business through the Initial Public Offering (IPO) in June 2014 and subsequent sales of its
residual holding by the divestment deadline of end December 2015. There is provision for a further date extension to the
divestment deadline, depending on market conditions.
· 38.5 per cent of the existing Ordinary Shares in TSB Bank have been sold to date, with an initial 35.0 per cent sold
on 20 June 2014 and the over-allotment option of a further 3.5 per cent taken up on 18 July 2014.
Scottish Independence
Principal risks
The impact of a 'Yes' vote in favour of Scottish Independence is uncertain. The outcome could have a significant impact on
the legal, regulatory, currency and tax regime to which the Group is currently subject and could also result in Lloyds
Banking Group becoming subject to a new regulatory, currency and tax regime in Scotland. The effect of this could be to
increase compliance, operational and funding costs for the Group in addition to any transition costs.
Mitigating actions
· Monitoring and assessment of the potential impact on customers and the Group's business of a vote in favour of
Scottish Independence with appropriate contingency planning.
CREDIT RISK PORTFOLIO
· The impairment charge decreased by 58 per cent to £758 million in the first half of 2014 compared to the same period
in 2013. The impairment charge has decreased across all divisions.
· The impairment charge as a percentage of average loans and advances to customers improved to 0.30 per cent compared
to 0.69 per cent during the first half of 2013.
· Impaired loans as a percentage of closing advances reduced to 5.0 per cent at 30 June 2014, from 6.3 per cent at 31
December 2013, mainly driven by improvements in Retail, Commercial Banking and Run-off divisions.
Group impairment charge by division
Half-year to 30 June 2014 Half-year to 30 June 2013 Change since 30 June 2013 Half-year to 31 Dec 2013
£m £m % £m
Retail:
Secured 94 188 50 61
Loans and overdrafts 165 253 35 225
Other 17 21 19 12
276 462 40 298
Commercial Banking:
SME 5 72 93 90
Other 24 213 89 23
29 285 90 113
Consumer Finance:
Credit Cards 69 138 50 136
Asset Finance 8 32 75 20
Netherlands 1 7 86 10
78 177 56 166
Run-off:
Ireland retail 13 21 38 (47)
Ireland commercial real estate 56 183 69 36
Ireland corporate 182 181 (1) 234
Corporate real estate and other corporate 92 317 71 205
Specialist finance 30 233 87 112
Other (49) (107) (54) 21
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